Q2 2021 Prairiesky Royalty Ltd Earnings Call
Yeah.
Good morning, ladies and gentlemen, and welcome to the Prairie Sky Royalty Ltd announces their second quarter 2021 financial results Conference call. At this time, all participants are in a listen only mode.
We will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your Touchtone telephone as a reminder of this conference call is being recorded.
I'd now like to hand, the conference over to your host Mr. Andrew Phillips, President and CEO. Thank you Sir Please go ahead.
Thank you Whitney and good morning, and thank you for dialing into the price of royalty Q2 earnings call on the call from Prairie Sky or Cam Proctor COO, Pam because all the CFO and myself Andrew Phillips.
While Q2 represents the traditionally slow activity quarter on the field due to spring breakup. Our team has been very busy in the office.
Leasing remains strong as we entered into 34, new leases with 32 different counterparties.
This generated $2.3 million of bonus consideration for both natural gas and oil opportunities.
We also executed on our largest acquisition since 2017.
We stood in the Batter's box for 3 years, and finally saw the perfect pitch.
This asset is the quickest payout lowest cost oil assets in the basin.
The currently produces 10000 barrels per day and will double by 2024 without the need for external capital.
Individual wells per months.
Produced a 100% owned and operated battery and our pipeline connected.
Secondary recovery initiatives are planned on this asset.
The addition of this asset we will see US Act of 2021 at over 1000 barrels per day of the Clearwater production.
This was funded with our bank line and we will write off the interest and can take leverage to zero at the end of 2022 with cash flow on top of the recently increased dividend.
The 38% dividend increase reward shareholders that have allowed us to make capital allocation decisions based on what is best for long term shareholders.
The industry low payout ratio has allowed us to cancel the 5% of the outstanding shares below $10 per share over the last 18 months.
Execute on the acquisition that will be 5% of our production in a few years and become the dominant Clearwater royalty company in terms of both production and undeveloped land, which will provide future growth at no cost of Prairie Sky.
The new dividend will still be a payout ratio below 50% in 2022 at $50 of WTS.
This will allow us to continue to pursue acquisitions that improve our business.
And cancel shares below intrinsic value, giving owners a bigger share of the company.
Price guys, the best way to profit from increasing capital spending in the Western Canadian sedimentary basin and will continue to work hard on leasing land controlling costs, ensuring compliance, making quality acquisitions, improving our ESG scores, which will continue to differentiate our business.
I will now pass the call the Pam to walk through the financials.
Thank you Andrew good morning, everyone.
<unk> generated funds from operations of $56.5 million or 25 cents per share on the corner of 16% from Q1 royalty production revenue totaled $64.9 million generated from average production volumes of 19723 Boe per day.
Oil royalty revenue totaled $42.9 million, an 8% increase over Q1, primarily due to strong double UTI benchmark pricing and narrow of light and heavy oil differential.
Revenue was generated from the oil volumes at 7028 pounds per day, which were down 3% from Q1 as new wells brought on stream and incremental production from the acquisition in Q1, only partially offset natural declines and downtime of onion Lake due to the turnaround.
Natural gas revenue totaled $13.7 million, which was 8% above Q1 due to increased production combined with strong eco on station to benchmark pricing.
Natural gas volumes totaled $60.5 million of day up 5% due to incremental volumes from the Q1 beat based on acquisition and the resumption of production that was shut in during Q1 day, the cold weather for your thoughts.
NGL royalty revenue increased 11% from Q1 feet of strong benchmark pricing and 4% increase in royalty production volumes of 2000 and 612 barrels per day.
NGL volume increased due to production from new wells on stream and incremental volume from the acquisition.
There were 919 BLE per day of prior period adjustments, which were 38% liquids and included the 163 Boe per day from compliance activities and an additional 756 Boe per day on other prior period adjustments related to new wells on stream and better well performance.
The compliance group continues to recover missed and incorrect royalties to of forensic accounting and collected $1.1 million in the quarter.
There were 89 wells spud, which were 98% oil.
The Viking with the most active with 47 wells Spud and in addition, there were 13 Mississippian 7 Lindbergh. Thank the oilwell 7 Clearwater oil wells, 3 Cardium and <unk> Duvernay oil wells spud in the quarter.
Other revenue totaled $4.9 million and included $2.3 million of bonus consideration. It was an active quarter and the enter 34, new leases with 32 different Counterparties. We also earned $2.3 million in lease rentals and <unk> 3 million of other income.
Cash administrative expenses totaled $4.8 million of our $2.67 per Boe.
Cash administrative expense was 16% lower than Q1, which included the annual long term incentive expense of 700000 that was paid to staff.
There will be no incremental staff required to manage the new Martin Hillsboro out the acquisition of Andrew discussed from the additional production will reduce G&A per BOE go forward.
During Q2 price guidance declared dividends of $14.5 million with the resulting payout ratio of 26%.
Year to date price that has generated.
The $105.3 million in funds from operations, which were used to fund dividends of $29 million, we purchase shares of $13.2 million make acquisitions totaling $51.7 million and repaid debt of $8.8 million at June 32021 price guys Bank debt was $34.1 million.
To fund the Marten Hills acquisition, we increased our revolving credit facility by $50 million using the permitted increase under our current agreement debt.
Debt upon closing of the acquisition was approximately $190 million.
The IPO price Sky has generated approximately $1.5 million of funds from operations and returned $1.4 billion to shareholders through dividends and buybacks.
We will now turn it over to the moderator to proceed with the Q&A.
Ladies and gentlemen, if you have a question at this time. Please press the star and then the number 1 key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Please hold.
Okay.
Your first question is from the line of Erin <unk> with TD Securities.
Thanks, Good morning, everyone. I guess my first question comes on the on your growth expectations of the acquired property I guess my question is.
The deal Backstopped by a capital commitment or of well commitment and if not what are you using to underpin your growth assumptions.
Yes, that's a good question there there is no capital commitment on the deal. We structured these are the cost of <unk>. This is the best payout play in North America, the wallet payout multiple times in a single year at $50 of USW Ti. So we're very comfortable that the.
Capital will be spent and they've got.
On a pretty conservative drilling program and have been very conservative in the way they've grown the asset today. So we're very comfortable with the 10 to 20000 barrel of growth profile. We actually didn't include any improvements in type curves and we've seen pretty significant increases in the <unk> and initial production.
<unk> of the wells with the new drilling fluids.
Drilling methods, so I think we probably actually see.
A better growth trajectory than that and then of lower decline as well assuming some of the waterflood initiatives are successful we didn't factor any of that into the acquisition. So that's part of the Optionality part of the the acquisition.
Great. Thanks, if I could follow up with another question I'd be curious your thoughts on what the pipeline on slide 4 and potentially more Canadian deals with high growth.
Double digit annual growth on a comparable metrics do you think this was the 1 off people, obviously waited a long time.
To do something like this or are more of these opportunities emerging.
Yeah I mean.
It's pretty rare to find.
It's the.
When you look across the entire base and there is it's pretty rare to find the oil growth opportunities. This is 1 of the plays that can grow at $45 oil and they can grow even faster at 70. So this was this is very unique I think there are the number of other smaller opportunities potentially out there, but this was very very <unk>.
The asset it was 1 of the 1 of the few that exists out there.
The other piece.
Very very good is just to the south of the Canadian natural has the very similar thickness similar payout asset.
It's unlikely that they would do something like this.
Thanks final question.
You talked about the ability to pay down debt to zero by year end 2022.
Does this include the continuation of the NPI the at the current pace or if you continue the in CIB at the.
Sort of on historical run rate would that reacquired exiting 2022 with some debt.
Yes, so on the NCI b it definitely gets taken down to a lower level as we repay the.
Bank line I think kits structurally we've never wanted to run the business with permanent debt. We do we are comfortable using it its a very low interest rates of course were taxable. So we can write off the interest.
That was more of just to show the of the.
Period of time of which we could pay that off the well will.
We'll have a lot of flexibility to execute on other acquisitions of <unk> continue along with the buyback, but I think the buyback.
Globally sits on the back seat to the debt repayment over the next 18 months here.
Perfect. Thanks.
Thanks, guys I appreciate it.
Thanks for the questions.
Again to ask a question. Please press Star then the number of 1 on your telephone keypad.
Yes.
The next question is from the line of Luke Davis with the RBC.
Hey, Thanks, Good morning, just wondering what.
Total Clearwater production is now on your line between spring the other operators and roughly where you expect that to grow to over the next couple of years.
You bet. Thanks for the question look so our Clearwater exited last year at about 250 barrels per day, we expected that to grow on a 100% CAGR. So that was going to exit this year at about 500, and then this the Marten Hills acquisition will be in the range of 600 plus barrels per day of the net royalty of all practice will be over.
1000 barrels per day total we expect over the next 5 years for this asset to grow.
By about double 2.
Somewhere in the range of 2000 plus barrels per day, and we think the ultimate productive capacity on the Clearwater is north of 3000 barrels per day, the pace at which it gets to that level will be determined by oil price and availability of capital. The 1 unique thing about this play and part of the reason we've been so active in this play since 2017.
Is it because of the self funding doesn't require external equity or debt and thats, what really differentiate that because you can.
You can be very comfortable with the growth profiles. When you look out 5 kind of 15 years and a variety of different environments.
Okay.
That's great Super helpful. Thanks.
Thanks for the question Luke.
Your next question is from the line of Jamie Kubik with CIBC.
Yeah. Good morning, guys and thanks for taking my question here just curious if you can talk about how much downtime impacted your oil volumes in the quarter.
And how do you think or the volumes trend from here given the drilling through Q2 and additional licensing youre seeing on your line is respecting that you don't give guidance friction yet can you give us a sense of Directionally, how you think of oil volumes move from here.
You bet, Jamie I'll, let Pam talked a little bit about the downtime in Q2, and then I can just talk about a little bit although we don't give guidance a little bit about what we're seeing from a leasing and licensing perspective.
Yes for downtime.
On Lake that was approximately just under 50 barrels a day that impacted the quarter, which really offset the acquisition volume that were included in the quarter and then we have estimated about another 50 barrels a day that were shutting so in aggregate about 100 barrels a day for the quarter with the impact of turnaround from downtown.
Yes.
When you think about Q3 traditionally Q2s, a little slower just because of the breakup there were a few pad drilling sites on our lands, where they drill right through breakup, which is starting to happen more and more we're seeing on the western Canadian basin, but I think of course, there is downtime both in terms of.
Individual well batteries, where they couldn't haul oil of those sorts of things. So you should see modest recovery on that front, but I think the bigger impact is just the kind of.
The overall leasing and we're seeing it on every play and were seeing drilling not just on a concentrated number of plays but in places like the Banff and the new SKU, we're seeing drilling activity come back in the belly River. So I think we're likely to see a more broad array of drilling in the back half of the year and it should start to.
Excluding this new acquisition should start to positively impact oil volumes in the <unk>.
Half of the year as we've talked about a little bit and certainly.
Excluding this acquisition saw some single digit growth over the next 18 months.
Okay, that's great.
2 of the bit of another question are you seeing increased <unk>.
Activity coming through the private operators on your acreage or is it mostly a public center of increasing activity at this point.
Yes, it's a great question I think the privates of seen far more substantial uptick in activity than the publics have.
A lot of the privates that are operators on our land.
In certain situations, we have land funds with a more of done a bunch of leasing with them.
Came into the debt locked downturn of into Covid with the zero data of very low debt levels. So they are incremental cash flow thats coming in they're typically using it in the field to grow sort of 1 private operator that drilled 2 wells on our line last year has plans for 30. This year on our royalty lands. They are already licensed 'twenty..2 so I think the privates are seeing a much.
Bigger uptick I saw the chart yesterday.
On the U S and the U S of seeing a similar similar phenomenon, where the privates are increasing capital at a faster rate than the publics for a number of different reasons and public market the reasons as well.
Okay. Thanks for the color I'll turn it back to you guys.
Thanks, Jamie.
The next question is from the line of Elias <unk> with Industrial Alliance.
Good morning, and thanks for taking my question.
First of all forgive me. If this is the basic 101 type question, but ill ask it anyway, given the acquisition.
And I believe you have no history of hedging would you consider some headwind.
Right now.
Yes, it's a good question Elliot and I think when we look at hedging because we don't have any structural bank debt or bank debt, that's going to be permanently on our balance sheet and our capital program is zero over the next couple of years, we're very comfortable with the repayment of that so I think we will continue with our strategy of.
No hedging policy going forward.
I think our belief in hedging because we have very low debt levels, because we don't have capital that we'd rather not speculate with investors' money and just take the <unk>.
On the spot market, which has been excellent this year its excellent right now for both Ngls and natural gas and.
And oil.
But certainly if we were protecting capital programs that would be of different discussion, but because we don't have those we're comfortable being unhedged.
Got it thanks, maybe another question too.
Today's call is being focused on clear water is there any other area that we.
In the basin that we might et cetera sites too.
The U K might be another focus area directly impact the directly impacts from sky.
Yes, that's of Great question I appreciate that question because there are kind of 3 other areas that we're seeing substantial uptick and I think we will they will positively impact the business over 3 and 5 year period and certainly in the back half of the year, we should start to see the impact of them. So 1 of the Viking of course, it's our largest part of the royalty land base, we have the 20 year.
Inventory.
The 300, plus wells per year, and that's all of just pure development inventory in the 1 change we've seen in the Viking is theres a lot of people pursuing secondary recovery initiatives. So waterflood, the et cetera, and I think of lot of those of showing pretty good success and they've moderated the decline rates and improve the recovery factors. So the Vikings starting to.
<unk> the second part of the portfolio, that's becoming more active and we've actually been active leasing land on is the heavy oil portfolio, which has been very inactive over the last 5 years, we've been leasing in both western Saskatchewan in eastern Alberta for a lot of heavy oil opportunities and I think we're going to see the drilling coming in the next 6 to 9 months.
On some of those leases and it's that's the.
Part of the portfolio, that's been very important and traditionally and I think the last part as well.
We're seeing a lot of companies go after some of these older reservoirs for secondary and tertiary recovery schemes and I think 1 of the things that people have found and I think investors of caught on to this as part of the reason theater on all can pay so many dividends paid on so much data because they have the 11% corporate decline and a lot of these <unk>.
Assets are very conducive to returning capital to shareholders, because you need of very low amount of maintenance capital to maintain those assets. So we're seeing quite of bit of activity on on that front and that'll.
That will likely be a focus of our next investor day 2 years from now I know, we just had 1 but it is a very important part of the portfolio and I think it's something that more and more companies are starting to pursue because it gives you a more sustainable business.
Great. Thanks, very much for that extra color the patch.
Is it from me for now I'll turn it back to the queue.
Thank you Louis.
Okay.
And at this time there are no further questions.
Great well, thank you everyone very much.
For calling into the price got conference call and hope everyone has a great week.
Okay, Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may all disconnect.