Q2 2020 Prairiesky Royalty Ltd Earnings Call

Welcome to today's conference call various kind of royalty analysis, there second quarter 2020 financial results.

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The speakers presentation, there will be a question and answer session.

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I'd like to have the conference over to your hosts today Mr., Andrew Phillips, President and Chief Executive Officer. Please go ahead Sir.

Thank you and good morning, and thank you for dialing into the Q2 2020 praise Guy earnings call on the call from prescribed 'cause LTL count Proctor Seo and myself.

I will provide an operational update then turn the call over to Pam walk through the financials.

We completed a 6 million dollar acquisition in the northeast British Columbia Monty play.

Were two new high rate wells indistinct zones now provide over 100 barrels per day of net royalty oil production and gas production.

[music] appraised Guy now has royalty interests in 100 contiguous sections.

Traffic rights in this particular part of the money fairway and is well positioned for the continued development of this plan.

During the second quarter, we evaluated numerous acquisition opportunities and submitted seven different bids on varying sizes of packages, but none were successful.

We continue to look for expansion opportunities for the business, where we can achieve near and long term accretion on free cash flow for sure.

These opportunities have to compete with buying praise guy shares for cancellation at an unlevered, 7% free cash flow yield with large contiguous track of undeveloped land on the best parts do well cost curve.

This is difficult to do but we have the benefit of being able to allocate our excess cash flow on top of the dividend to the M.T. I'd be and give our owners a larger share in a wonderful business.

Craig I entered into 19, new lease arrangements with 17, Counterparties and received zero point Sevenmillion elite issuance bonus the leasing was primarily for oil targets across Alberta, Saskatchewan and included some natural gas leasing.

Kashi in April $2.35 per BOE you.

Royalty compliance collected $2.2 million, taking the annual totaled 4 million.

As we haven't previous downturns praise Guy management, we'll work hard to take advantage of this challenging environment to improve the business on a per share basis.

Given the significant amount of free cash flow business will generate over the next 12 months in access of the dividend.

We're well positioned to do this.

We appreciate the support of our shareholders and our employees had managed the business well from a variety of work environments.

I'll now pass the call to pound to discuss the financials.

Thank you Andrew good morning, everyone.

I get started I will be including certain forward looking information in my remarks today.

Such evident for all participants on this call. Please reference the forward looking information section of our Mdna.

At June Thirtyth 2020, as well as our press release issued on July 20 2020.

During the second quarter price that generate a bunch of operations of 21.3 million or nine cents per share.

Royalty production revenue totaled 25.1 million on average production volumes of 18671 Boe per day.

Production volumes were down from about Q1 2020 in Q2 2019, due primarily to the impact on global old enough to covert 19 and instability in global oil benchmark pricing.

Third party operators reacted to market uncertainty, reducing capital budgets for 2020.

Changes along the spring breakup meant that there was limited exploration and development activity across Western Canada in the quarter.

Production was comprised of oil volumes of 6035 barrels per day NGL volumes, a 2586 barrels per day and natural gas volumes 60.3 million today.

Well volumes were impacted by shut ins across all burdens just catch one as operators reacted to the dramatic decrease in W.P.I. benchmark pricing.

During the quarter average oil royalty volumes of approximately 2600 barrels a day where shiny.

As pricing has started to improve certain operators have started to bring production volumes back on.

At current <unk> pricing differentials, we expect to see shut in volumes on light oil company to return over the summer.

<unk> heavier volumes, including our thermal production will take longer to return.

The combined impact of shut in volumes and lower benchmark pricing resulted in oil royalty revenues of 13.4 million, 74% decrease as compared to Q2 2019.

Natural gas volumes totaled 60.3 million a day in the quarter natural gas volumes were impacted by old production shut in which reduced which reduced solution gas volumes as well as decline due to limited activity.

Stabilized eco pricing through Q2 versus the prior year generated 7.6 million in revenue, 69% increase over Q2 2019.

NGL volumes generated an additional 4.1 million and product revenue down 37% from Q2 2019 due to lower benchmark pricing.

Precise production volumes in the quarter included 1245 BOE a day appropriate adjustments.

Which were 52% liquids and included 528 BOE a day from compliance activity and an additional 717 be aware they have other prior period adjustments related to new wells on stream and better well performance.

The compliance group continues to recover missed an incredible royalties your forensic accounting question 2.2 million in the quarter.

Other revenue totaled 3.1 billion, including 2.2 million and lease rentals point 2 million in other income and point 7 million in bonus consideration on entering into 19 leasing arrangements with 17 different counterparty.

As mentioned on our Q1 2020 conference call in April given the impact of coping 19 on the global economy and on the energy industry. We expect the outlook for other revenues to be in the range of $15 million to $17 million, primarily as a result have lower anticipated leasing activity.

This concludes our estimate for compliance revenue.

We continue to monitor our controllable costs and cash administrative expenses totaled $4 million or $2 into <unk> or be OE in the quarter.

Current tax for the quarter was $3 million, which reflects an improved cash flow outlook for 2020 at June thirtyth as compared to March 31st.

During Q2 prescribed declare dividends of six cents per share or $13.9 million and repurchased 470000 common shares for 4.1 million at June Thirtyth preschool I had a modest working capital deficiency of 8.7 million and no long term debt.

Its IPO cruise Guy has generated approximately 1.3 billion in funds from operations and returned 1.2 billion to shareholders through approximately 1.1 billion a dividend and the repurchase of 6.2 million common shares.

We'll now turn it over to the moderator to proceed with acuity.

As a reminder, ladies and gentlemen to ask a question you will need to press Star then one on your telephone keypad.

To withdraw your question press the pound key.

Please standby, we compile the acuity roster.

Yeah.

Again, ladies and gentlemen that is star then one to ask a question.

We have a question from lineup Jamie cubic with RBC. Your line is now open.

Hi, good morning, everybody and thanks for taking my question here can you talk a little bit about counterparty risk in the current environment and helpers goes matters not.

Yes so.

Counterparty risk is something that we always are reviewing a as a business. So you know through through the quarter. One of the things that we focused on was where counterparties I wish to shut in production. We did compliance reviews and collected any outstanding amounts we take production in kind, a where we perceive that there.

<unk> be some counterparty risk and here, where we were entering into leasing arrangements were always looking at our counterparties out too as you know evaluate their their balance sheets and their ability to to meet their commitment.

You know.

A one of the things that Weve tried to focus on out with our counterparties and ensuring that were picking out counterparties, who are able to tend to commit capital I'm too to develop their place. So that's always been a priority for praise Guy Yeah, and just a follow up on that Jamie word praise got the owner the resorts. So if people if a rich.

Steve or thoughts paying or counterparty stops paying we have the ability to remove them from our land. So that's the that's a super secured nature of owning piece of land you actually on the resource and of course, we see the whole spectrum, because we have 325 different royalty pairs. So we see everything from the really a financially stable companies down to the weaker ones.

But again, we've got this is a process has been ongoing for six years and.

I would have done a really get patter team have done a really good job of ensuring we're taking production in kind for some of the stress producers.

Okay understood and then maybe just another quick question here you mentioned in your.

Remarks, you know the management and a person or plays Gonna worked hard to take advantage of this environment to improve the business.

And when we look out you know obviously commodity prices are better off for the second after 2020 than what they look like they were for.

Q2, obviously, how should we think about you know your allocations of free cash flow like as a dividend increase a possibility and the next six months given what we're seeing on price on pricing or is it more likely that you repurchased stock and look to M&A.

Yes, it's great question and I think again, we'll continue to review the dividend in every February I think the dividend, we will grow overtime with the growth in the free cash flow the business, but I think where we sit today, we see tremendous value and find the stock below intrinsic value here.

And that's a that's a primary allocation for the excess free cash flow on top the dividend we'd be keen to do acquisitions that improve our business. We're working hard on a number of them, but again I think the there is definitely a value gap. There. So again, we'll continue to capital shares are down here and.

Look for opportunistic acquisition fighting the dividend will.

Have the opportunity to grow overtime, and I think it's a wonderful dividend paying company of trees in the three years prior we'd get $185 million each each of those years ought to free cash flow and had another 40 million left over to cancel shares the.

Those are kind of better times in terms of pricing and then activity. So in this environment without a quite a bit of excess free cash flow will utilize it to improve the business.

Okay and then maybe final question here for me is if we think about you know Q2, you obviously had a 30% drop in oil volumes.

But much less activity over the second quarter as well you know how should we think about oil volumes for Q3 Q4 here given you know shut ins are likely returning as you mentioned, but activity certainly lower so those two offset one another or should we expect orange to lift and respecting that you don't provide for guidance, but anyway.

Whose numbers that you can provide on that side would probably be helpful.

Yeah for sure and I again, we had the 30% shut in so we do anticipate for sure the light well I mentioned on the called the light oil volumes have already come back on or in the process is coming back on some of the waterflood cool take a little longer before they reach peak production the 14% of our volumes come from the thermal oil those are going.

Take a as long as December till they're <unk> back up to their full a full production and then the heavy oil it really depends on people, where they send the cost curve, but also it depends on their their individual hedging situations I know a number of or have you all producers Crystallizer hedges took the cash and left the volume.

But in for slightly better pricing, so again, it'll it'll take a bit of time, but I would assume oil volumes to be up from Q3, obviously with even without the even with the low activity over the back half the year, but again its TV is extremely anemic in the base and certainly on the oil side I know there is a pretty long period of time, where there was zero rigs running and Scott.

That's one and only to oil rigs running in Alberta, it's hard to drill a new all when you've got oil production curtailed. So I do think we will see an improvement in the back up there.

Okay. That's it for me, but you guys.

As a reminder, ladies and gentlemen that is star then one to ask a question.

Our next question comes from a line of Jeremy Mcgrady with Raymond James Your line is now open.

Hi, it's.

Just a bit on my follow up question there or.

Andrew.

In terms of activity I know a lot of companies haven't said they are spending capex budgets, but just with commodity prices really send to move up here in the last couple of weeks.

Have you heard any indications for me companies are doing your line that is thinking about getting back to work in maybe not I'm thinking on special but they're asking more.

Licensing type questions or more anytime indication that activity is starting to come back here and just on what that is there any indications or numbers a good fourth how many wells were actually drilled on your lines here for for Q2.

Yeah. So for sure. So in Q2, there were zero spot on our land and talking to a lot of the bigger producers on our lines and some of the top 10 royalty players. There's a lot of planning for kind of a Q4 program, which kinda dovetails into their 2021 program. So I think with improvement in pricing.

The narrow differentials have actually probably been the biggest improve the biggest factor and people, making these decisions.

We are starting to see some programs trickle into Q4 late Q3 early Q4. So I think people are setting up their 2021. So we do expect a greater activity than we would have two months ago had we tried it and so again I don't know that that'll show in effect for us in the back half this year, but it certainly will improve 2021.

Okay, Alright, thanks, Andrew.

Thanks, Jeremy.

Our next question comes from Harsha with Accountability Research. Your line is now open.

Hi, Good morning, my questions actually are being answered. Thank you very much.

Thank you.

I'm showing no further questions in queue at this time I'd like to turn the call back to Mr. Phillips for closing remarks.

Well, thank thank everyone for calling into the price Guide Q2 earnings call and if you have any further follow up questions. Please call power myself.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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