Q3 2020 Prairiesky Royalty Ltd Earnings Call

Tom a participant lines on a listen only mode.

After the speaker's presentation, there will be a question and answer session. That's the question during the session you'll need to press star one on your telephone if you're acquiring further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today, Andrew. Thank you. Please go ahead Sir.

Thank you and good morning, and thank you everyone for dialing into the price pair royalty Q3 2020 earnings call.

On the call with me from pre fire camp rocker COO.

<unk> CFO.

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

During Q3 price by introducing 15, new leasing arrangements with 15 different counterparties, resulting elite tissue was born in the $1.8 million. This was a significant improvement from the prior quarter as many industry participants turned their attention to future opportunities following spring breakup and easing of restrictions due to colder at 19.

Among the leasing transactions were larger bonuses.

Larger bonuses were from Nashville resource play.

In a short term duvernay leaves with leasing activity picking up across the number of plays and regions.

Drilling activity to improve and 2021 provide a commodity prices remain stable.

On the M&A side, we've bid on a number of small packages and one medium sized opportunity I've returns exceeding our cost of capital.

One of the bids were accepted we.

We were successful however in acquiring accounts like 4% of the outstanding shares of the company using excess cash flow and a modest amount of leverage that will be retired over the next three fiscal quarters.

This provides us further flexibility to make acquisitions and or cancel deferral shares below intrinsic value.

Just over 5% of oil volumes are currently curtailed remain shut in and will return as pricing improves and as curtailments were eased on Friday.

Now I forgot funds remained stable recent results in the Dewbre named Clearwater plays both show lower drilling and completion costs as well as stronger type curves we.

We expect our industry, leading land position on both plays will provide shareholders with long term growth without capital where dilution.

Gifting maintained its focus on cost control through the quarter core pillar of our strategy since inception, with caffeine eight totaling $3.5 million for $2.03 per Boe.

Compliance recoveries over the quarter totaled $1 million.

Our accounting and royalty compliance groups have been extraordinarily busy over the past two fiscal quarters.

Focusing on collections as well as working closely with our land department dealing with a high volume of requests for lease relaxation and production shut ins.

Throw Q3, our team worked diligently to lift these relaxation does pricing improved which also resulted in several new leasing arrangement in order to reactivate existing oil and natural gas wells and return undeveloped zones towards leasing inventory, particularly those perspective for natural gas and NGL price.

Great guys are long duration on hedge natural gas royalty stream, which is currently benefiting from strong regional pricing environment, we have seen at Aimco and station too.

As the pricing environment for natural gas improve many of our high gas oil ratio plays have seen enhance economics, which we expect to translate into more robust activity levels throughout the balance of 2029 to 2021.

Great Guy continues to work with its industry partners to find efficiencies and highlight the world class U.S.G. profiled counted as energy industry Dream.

Drink 2020, an important milestone was achieved.

Alberta by a private operator, which has now sequestering C O two into a depleted oil unit in central Alberta, which includes gray skyline great.

Great Guy has a small royalty on this unit and Atlanta across Western Canada with analogous reservoirs.

In addition to permanently sequestering greenhouse gases from industrial meters across the province.

The equivalent of taking it is the equivalent of taking over 300000 cars off the road.

And the previously traded oil reserves will be produced at some of the lowest scope one two and three emissions in the world.

Product is a great example of Canadian E.S.G. leadership ingenuity and collaboration across industries.

As we look towards 2021 organization is working hard on the third praised by royalty playbook.

Of our Investor day in May as well as our fourth annual Yes, you report.

We expect both of these documents to highlight the unique attributes of our long duration capital free high margin business model, which was recently recognized by sustained Olympics as a number one rank company in their oil and gas PSG rankings.

I will now turn the call over to Pam to walk through the financials.

Thank you Andrew Good morning, everyone before I get started including certain forward looking information in my remarks today as such I would refer all participants on this call. Please reference the forward looking information section of our Mdna as at September Thirtyth 2020, that's why <unk> press release issued on October 26 2020.

Funds from operations totaled 37.9 million or 16 cents per share in the quarter generated primarily from royalty production revenue of 38.4 million on production volumes of 18745 be are we pretty well.

Overall production volumes were up modestly from Q2 2020 as increases in oil production volumes were offset by decreases in natural gas and NGL rich.

We saw increased activity in western Canada during the quarter as compared to Q2 and on Craig's guidelines, where we had 44 wells, but these.

These wells were primarily oil wells in the Viking and the Clearwater.

Oil royalty production volumes told totaled 6572 barrels per day, a 9% increase from Q2, a third party operator started to bring on previously shut in production throughout the quarter.

Natural gas volumes totaled 58.2 million a day in the quarter and were down due to a decline and reduced solution gas volumes from shutting oil production now.

Natural gas royalty revenue totaled 8.7 million up 14% from Q2 due to strong April pricing.

NGL volumes generated an additional 4.9 million in product revenue up 20% from Q2 due to improved benchmark pricing.

During Q3 and precise production volumes increased 780 barrels a day of prior period adjustments, which grew 27% liquids and included 371 B a day from compliance activity and an additional 409 daily a day of other prior period adjustments related to new wells on stream and better well performance.

The compliance group continues to recover missed an incorrect royalties to forensic accounting collecting 1 million in the quarter.

Prairie Sky generated 5.1 million other revenue comprised of 1.2 million in lease rental 2.1 million in other income and 1.8 million in bonus consideration on entering into 15 leasing arrangements with 15 different counterparties.

Great Guy is a hard high margin low cost business model total cash expenses during the quarter were 5.6 million on 43.5 million of revenue, resulting in an 87% cash operating margin cash.

Cash expenses included income taxes of 1.1 million in cash administrative expenses of 3.5 million or $2 or three cents could be a week.

Looking forward, we expect cash administrative expense or be a week to be well below $3 per 2020.

During Q3 2020 prescribed declared dividend of six cents per share were $13.4 million, resulting in a 35% payout ratio.

Under the M.C.I.D., we repurchased and canceled 8.9 million common shares for $81.8 million in the quarter.

At September Thirtyth first I had a working capital deficit of 66.2 million, including bank that 67 million, which we expect to repay in less than nine months.

Since IPO, Chris Guy has generated 1.4 billion in funds from operations of which we have returned 96% or over 1.3 billion to shareholders in the form of dividends and share repurchases.

This equates to returning over 65% of our current market capitalization to shareholders interest over six years.

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

And thank you.

As a reminder to ask the question you'll need to press star one on your telephone to withdraw your question press. The pound key please standby will be compiled the culinary roster. Once again that is star one if you would like to ask a question.

One moment for questions.

And again, ladies and gentlemen, if youd like to ask a question that is star one.

And I'm still and our first question comes from Mike Dunn from Stifel. Your.

Your line is now open.

Oh. Thank you good morning, everyone I just.

Wondered I know, obviously, you folks don't give guidance historically Q3's, a busy drilling drilling period on on your lands producer and the biking, and do you see a bump and.

Volumes in Q4 with all the puts and takes of I guess curtailments.

Oh voluntary or otherwise.

So I'm just wondering if if.

If you could talk to what what do you think Q4 might be shaping up well.

For you guys on the west side or <unk>. So maybe just a general terms relative to Q3.

Sure Mike No. Thanks for the question and no. We don't give guidance of course, but just directionally. We do obviously thought some curtailed and shut in oil volumes, which had been coming back at the back half of Q3. So those would represent a full quarter in Q4 as well as some of the ones that come back on as well, obviously not a bad.

Reactive Viking quarter like we typically have in Q3.

But there was some activity that will translate into some volume side trickling into Q4, I guess, probably the most impactful one would be the most efficient play on our lands, which was we had two rigs running.

Through the back half of Q3 on the Clearwater play and it's our most capital efficient play per dollar spent at the most capital efficient play we have been in the business and it also has the lowest base declines so big.

Speaking of Q4, <unk> again, we do expect some some growth on the oil volume side and then the gas should remain fairly stable but.

We don't they cant give exact numbers on that and then into 2021, we do have some more active drilling programs that are.

Starting to be shown to us from industry. So I think we should see an improvement in 2021 in terms of activity and of course, the last piece I'll talk about is obviously our business is based on two things and the sustainability of that as the declines of the capital spend so just one comment on the declines.

Or declines have gone down from on the oil side in the high Twentys to the low twentys or in the range, 20% and gases in mid to low teens, so because our lower base declines as a company we have less capital required to keep those production one slot and then the last piece to that is the people who are drilling right now are the most typically drilling their best prospects and.

The most capital efficient producers with the best.

Opportunity set so the capital we are seeing centers very efficient so should require less capital to maintain production or potentially grow production in the future. So hopefully that answers your question.

Thanks, Andrew Yeah that helps.

So for me.

Thank you and again, ladies and gentlemen that star one if youd like to ask a question. Our next question comes from Mark from Clinton from Alberta Energy. Your line is now open.

Hi, there if you could give it.

Incurred are banned the use of bank debt.

Fannie and Freddie is it something you can see yourself doing more in the future or is this more of just taking the venture onetime dislocations.

Yeah. That's good question, Mark and I think you know the Npis. He is also always been kind of a pillar of our return strategy to shareholders and we're an interesting business because we generate a lot of cash and we don't spend any so in order to return to shareholders. We have three ways. One is through acquisitions number two is through obviously dividends in which we paid in the range of one point.

$2 billion in dividends and the third is through buybacks and just given where our shares trade, which we think is way below the intrinsic value of the business. It's a great way, we think to or.

Enhance the compounding potential this business were currently at 8% free cash flow yield and we think we have a terminal growth rate somewhere in the range of 3% to 5% over the long term. So we just think it's a great way to take advantage of its if the dislocation in price versus intrinsic value, but also over the long term. It is a way to return capital to shareholders. It's not just something we do.

For a short period of time, it's been something we've been doing for years.

I agree thank so much how could they.

Okay and budget. Thank you.

And I'm showing no further questions I would now like to turn the call back over to Andrew Phillips for further remarks.

Thank you everyone for taking the time to dial into our call and a great day.

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

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