Q4 2020 Prairiesky Royalty Ltd Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Prairie Sky royalty L. T D announces their annual and fourth quarter 'twenty 'twenty financial results. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

You ask a question you will need to press star one on your telephone keypad.

If you require any further assistance. Please press star zero I would now like to hand, the conference over to Andrew Phillips. Thank you. Please go ahead Sir.

Thank you very much Natalia and good morning, everyone and thank you for dialing into the price Sky royalty year end 2020 earnings call on the call from P. S. K R. Cam Proctor COO, Pam because all CFO and myself Andrew Phillips.

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

2020 was an active year for the Prairie Sky team, we canceled $9 8 million shares for $91 million and actively leased on developed plans, including 25, new leases in Q4 with 22 distinct counterparty for just under $1 million in bonus consideration.

We expect leasing activity to improve in 2021 as commodity prices have normalized.

The compliance team was very active and brought in $5 8 million over 2020, but more importantly brought back quality labs into our inventory.

This will add to the leasing opportunities for the company over the next five years.

We've had numerous inquiries for the Duvernay shale and that are expiring in early 2022, where there have been a series of impressive discoveries.

This highlights the optionality of owning fee title lands.

Numerous polymer and waterflood spin initiated across price got labs. During 2020. This will increase the recovery factors of all their oil pools on our land and decrease the base decline of our assets enhancing the sustainability of our business for <unk>.

<unk> base decline that we're projecting in 2021, and 2022 will mean that less capital is required to offset the declines on our land, allowing for growth in the assets over the next three to five years.

The ultra efficient Clearwater.

Drilling which declined at a lower rate than the Frac Horizontals will also aid in our sustainability.

The Viking oil play with high Netback light oil quick individual well pellets and short cycle times will typically be one of the first place to see increased activity with higher oil pricing.

Numerous water floods in this zone have extended the life of existing pools on our royalty lands.

<unk> has over 20 years of economic drilling development drilling inventory on display at current prices and activity levels.

The board of directors has approved a dividend increase of 8%.

This represents a cash outlay of $58 million annually or $6.05 paid quarterly. This is $2 6 million lessen would've been lost share as we have approximately $10 million of fewer shares outstanding.

This continued low payout ratio will allow the company to further compound the business with buybacks and accretive acquisitions and allow us to be a leading dividend growth company over the next three five and 10 year period.

Subsequent to year end price Guy entered into a definitive agreement to acquire 650 royalty barrels per day 640000, net acres of royalty lands, including 170000 acres of fee mineral title.

And an extensive seismic database for cash consideration of $45 million.

Management anticipates that we can grow this asset over the next 10 years through active leasing and management.

This is what we do well.

In addition to this week, we have completed numerous smaller acquisitions totaling in the range of $3 million in Q4 of 2020.

We continue to evaluate opportunities that will enhance the per share returns of our business.

Cash administration administration expense for 2020 was $2 49 per barrel the lowest since inception, and 7% below 2019 levels in spite of having lower total production levels.

This is a credit to our hard working dedicated employees, who are all shareholders for the corporation.

Price Guy entered 2020 with $45 8 million barrels of reserves.

Our reserves include only drilled wells.

We produced $7 2 million barrels of these royalty reserves throughout the year did minimal acquisitions and entered 2021 with over 48 million barrels.

Industry did an excellent and efficient job of drilling and optimizing to achieve this result for us while we spend zero capital. This is the portion of our business that is often misunderstood over the long term, we do not have maintenance capital.

Price Sky received top scores from sub several globally recognized rating agencies, including CDP and sustained Olympics for demonstrating outstanding performance and environmental stewardship, social responsibility and governance and once again achieved net zero scope, one and two greenhouse gas emissions.

Our ESG scores are excellent and we also have a 98% operating margin business Unreplicable perpetual fee title lands and long duration cash flow stream flow to no leverage and a large basket of call options on price new discoveries new technologies and enhanced recovery I will now turn the call over to Pam to walk through the financials.

Thank you Andrew and good morning, everyone before I get started I will be including certain forward looking information in my remarks today as such I would refer all participants on this call to please reference the forward looking information section of our MD&A for the year end.

For December 31, 2020, net wells have press release issued on February eight 2021.

<unk> delivered a strong fourth quarter generating funds from operations for $41 1 million or <unk> 18 per share.

<unk> from operations are up 8% from the third quarter generated primarily from royalty production revenue of $43 6 million on volumes of 19281 Boe per day, which were 50% liquids.

Sure.

Oil royalty volumes increased 11% from Q3 average 7313 barrel per day in the quarter due to new drilling on price lands and shut in volume being brought back on production.

Oil royalty revenue totaled $28 million up 13% from Q3, primarily due to the increase in volumes as Edmonton par pricing remained relatively flat.

Natural gas volumes of $58 1 million a day were flat with Q3 as new wells on stream offset natural decline.

Natural gas revenue of 10 million a day increased 15% from Q3 due to increased Acorn station to benchmark natural gas pricing.

NGL royalty production volume totaled 2285 barrels per day down 8% from Q3 due to fewer compliance recoveries NGA.

NGL volumes generated $5 6 million in revenue up 14% from Q3 due to stronger propane and WG I'd benchmark pricing offsetting lower production volumes.

During Q4 2020 price does production volume included 938 Boe per day of prior period adjustments, which for 48% liquids and included 128 Boe per day from compliance activities and an additional 810 Boe per day of other prior credit adjustments related to new wells on stream shut in production coming back on.

And better well performance.

The compliance group continues to recover missed any crack royalties from forensic accounting.

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800000 in the quarter and $5 8 million for the year. This brings compliance recoveries to $63 million since IPO.

Annually <unk> funds from operations totaled $146 8 million or <unk> 64 per share generated primarily from oil royalty revenue of $99 2 million natural gas royalty revenue of $35 4 million and NGL royalty revenue of $21 6 million.

Annual royalty volume totaled 19712 Boe per day.

We saw increased activity in western Canada during the quarter compared to Q3, and I am Prairie Sky lands, where we had 74 wells spud 65 oil and non natural gas oil.

Wells Spud were primarily in the Viking and the Clearwater and natural gas spuds were in the Montney Cardium and Spirit River.

This brings total wells spud in 2020 to 288 wells as compared to 661 wells in 2019.

Gross capital spending on price Sky lands totaled $476 million $27 million net.

Looking forward price by 2021 annual pricing sensitivities are as follows.

A $5 per barrel increase or decrease in U S. Dollar Wty would result in a $12 million $12 million increase or decrease in funds from operations. This is net of cash taxes and administrative expenses.

<unk> 25 per Mcf increase or decrease in April, resulting in a $4 million increase or decrease in funds from operations net of taxes, and G&A and a one cent change in the U S. Canadian FX rate results in a $1 $5 million change in funds from operations net of cash taxes and admin expenses.

<unk> generated $3 4 million and other revenue in Q4 comprised of $1 8 million in lease rentals.

700000 in other income.

900000 in bonus consideration on entering into 25 leasing arrangements with 22 different counterparties.

For 2020 other revenue totaled $15 2 million made up of $5 9 million in lease rentals for $3 $5 million in other revenue and $5 8 million in bonus consideration on entering 85 leasing transactions with 51 different counterparties.

<unk> anticipates other revenue in the range of $15 million to $20 million in 2021, including lease rentals bonus consideration and other revenue.

Compliance recover recoveries will be in addition to this total.

Price Guy is a high margin low cost business model price guide generated $47 million of revenue in the quarter and had total cash expenses of $5 9 million, resulting in an 87% cash operating margin in the quarter.

For the full year, the cash operating margin was 86% with annual production and mineral taxes totaling $2 $5 million per 35 <unk> per Boe.

Annual cash administrative expenses totaling $18 million or $2 49 per Boe, our lowest cash per Boe since IPO.

Cash administrative expense is expected to be below $3 per Boe again in 2021.

Current tax expense for the quarter totaled $1 million, bringing annual cash taxes to $2 7 million for the year at.

At year end price had approximately $1 2 billion in tax pools available to shelter future income in 2021. These pools will provide tax shelter of approximately $120 million.

During Q4 price guidance declared dividends of <unk> <unk> per share or $13 $4 million, resulting in a 33% dividend payout ratio excess funds from operations for used to reduce bank debt over 35% to $42 9 million at December 31.

For the full year price guidance declared dividends of $86 $1 million with the resulting payout ratio of 59% and repurchased and canceled $9 8 million common shares since.

Since IPO price guidance generated $1 4 billion in funds from operations of which we've returned 96% or over $1 1 billion to shareholders in form of dividends and $224 million of share repurchases. We will now turn it over to the moderator to proceed with the Q&A.

Ladies and gentlemen at this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad again Thats Star one.

To withdraw your question price per pound key.

We'll pause for just a moment to compile the Q&A roster.

Yeah.

Your first question is from the line of Jeremy Mccrea with Raymond James.

Hi, guys. Two questions. Just first question is just how do you guys balance excess cash flow share over the next couple of years in terms of buying back shares future dividend increases or just building up.

Cash for acquisitions, just curious how you look at the different parameters and how you determine what gets more waiting.

Just on that and then the second question is just more on the M&A market.

Are you guys seen more deals come through our the cost of deals coming down can we expect more later this year here. Thanks guys.

Yes.

Thanks for the question Jeremy.

Obviously, we'll have some excess cash flow on top of paying down the moderate amount of leverage for us.

And on top of the dividend as well so we'll have to really balance out over the year and I think when we're thinking about M&A versus buying back stock. We always just compare the two and what provides a better long term IRR for shareholders than last year clearly it was the buyback.

And then this year, we are hopeful will fund continued opportunities, but when you think about that excess cash over the longer term I think the dividend should have the ability to grow over the long term Jeremy and then I think in addition in this still challenging times and there are still some good opportunities out there.

Should see some accretive M&A opportunities throughout the year, but again.

Without that we still have the opportunity to buy back stock well below intrinsic value and we will highlight that at our Investor day in May.

And then the second question on the M&A market, Yes, yes, and I think we're seeing we're seeing some opportunities on the M&A market, we actually added some clearwater land that we haven't put in our presentation, yet will will show those probably at Investor day. So we're seeing some of that undeveloped land opportunity.

On to other areas of the base net you see with this acquisition, but again, we're always we're always around and we always have a good balance sheet. When these opportunities come available and we're ready to execute on them and ready to work hard on them. So we're hopeful that things come along but if they don't again, we've got that buyback in place.

Okay perfect. Thanks, Andrew.

Thanks, Jeremy.

Your next question is from the line of Jamie Kubik with CIBC.

Yes.

Yes. Good morning, guys in your in your opening remarks, Andrew you talked about some of the upcoming Duvernay expires, just wondering if you might be able to.

Enlighten us a little bit on the percentage of land that could come available in 2022 on that front.

Yes, you bet.

Jamie and we have in the range of 200000 acres expiring.

There is a long term eight year lease on that we entered into at the IPO with the vendor of our original asset base and it was the area that <unk>.

For vendor Encana I believed was the premium part of the Duvernay at the time, it's worked out to be actually an exceptional area technically theres been a number of new discoveries from the north part in pigeon like all the way down to Williston Green and 39 five was five so there has been some great results as <unk> gone over 50, the paybacks are actually starting to look.

Pretty reasonable and it's again, it's 40 plus degree light oil with significant solution gas in a very thick pay package of shale. So we do think that there is opportunities to do some continued leasing on those lines and more importantly see.

See some continued activity there is two recent wells that for some of the top walls and all of Alberta.

A month ago that we reported on our lands and again Theyre pretty.

Very good results in over 1000 barrel Ips for Mylan have well. So I think there's probably still some technical technological advancements that could take the play to advance the play further.

In terms of cost, but again those the cost of those.

Wells that were drilled all the way from the south for the North came down pretty significantly.

So hopefully that helps answer your question and then happy to show you amount sometime.

Sure. That's good thanks for the color I'll I'll turn it back.

Again to ask a question. Please press star one on your telephone keypad again that is star one.

And there are no further questions.

Great well, thanks, very much for everyone, who dialed into the queue for year end conference call for price guidance. Please call Pam or myself, if you have any further questions.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

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