Q3 2021 Prairiesky Royalty Ltd Earnings Call

Okay.

Good day, and thank you for standing by welcome to the Prelease Sky royalty L. T D announced yesterday for each quarter 2021 financial results conference call.

At this time, all participants are in listen only mode.

After the speaker's presentation, there will be a question and answer session.

Can I ask a question during the session you will need to Brad Star one on your telephone.

If you require further assistance please press star zero.

I would now like to hand, the conference over to THB <unk>, Mr. Andrew Phillips, President and CEO. Please go ahead.

Thank you Ed.

Good morning, everyone and thank you for dialing into the P. S. K Q3 conference call on the call from Prairie Sky or 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 financials.

Before we start I will preface our comments by reminding investors to review our forward looking statements qualifier in our press release and MBA for Q3 of 2021.

We've achieved excellent financial results this quarter, including the highest product revenue since Q3 2014, more importantly activity continues to climb across the entire basin Gray skies saw a 193 wells spud on its acreage in the quarter activity was spread broadly across the entire western Canadian sedimentary basin.

I like to include 51, Clearwater wells from six distinct operators and 84 Viking light oil wells recent success in the Duvernay light oil shale play in Central Alberta saw operators that five new wells on GSK labs.

Natural gas volumes of $58 4 million cubic feet per day contributed $50 6 million in revenues volumes were impacted by two large turnarounds at facilities.

The majority of the Clearwater biking programs drilled in Q3 will come on stream shortly or just started producing.

Strong industry cash flows have spurred operators made capital plans at higher levels for 2022.

The benefit for shareholders of having $16 3 million acres of royalty lands is starting to be observed in an inflationary capital cycle.

On Friday, there were 173 rigs operating in Western Canada are 100% higher than the previous year on October 20, <unk> at 86 routes.

In addition to our previously announced Marten Hills Clearwater acquisition in July at the end of August we added 264000 acres of predominantly fee title lands and 200 BOE per day, our first one section lease on the acquired lands will be closed shortly and could add 50% of the royalty production of this asset and as developmental in nature.

The full benefit of this acquisition will be recorded in our Q4 financials.

A significant differentiation between PFS candidates appears as our very low payout ratio.

This allows us to make acquisitions such as the one I just described and pay it often months without issuing equity.

Should provide shareholders with strong per share growth stronger per share growth than our peers and industry, leading dividend growth as we look into the future.

Our early investments in the Clearwater undeveloped lands are also starting to show significant potential there are now multiple discoveries and extensions that will provide growth in royalty oil volumes well into the future and active exploration campaign. This winter could uncover future development opportunities.

In the more mature areas of this play operators continue to work on secondary recovery opportunities as a reminder, <unk> key owners will get their share of the increased recovery factors at no additional cost.

The Viking light oil play is starting to see increased licensing and spud.

And is providing operators with quick cycle low cost light oil and strong recycle ratios.

We believe that the strong underlying economics of this play will encourage stronger 2022 activity on our acreage in both Saskatchewan and Alberta.

There are numerous small startups that have been recently capitalized or have plans to raise capital. This is encouraging as these are the groups that explore <unk> dominant existing assets with fresh eyes on our lines.

Lastly on the operational front, we're seeing strong service rig activity in the field as operators look to optimize our existing assets.

Pass the call over now for Pam to walk through the financials and then we will open up to Q&A.

Thank you Andrew and good morning, everyone.

It was another strong quarter for Prairie Sky. Our total revenues grew to $78 1 million, which was made up primarily of royalty production revenue of $76 million generated from average production volumes of 19871 Boe per day.

With our low cost structure and no maintenance capital, we were able to once again convert 85% of revenue into free cash flow.

We generated funds from operations of $66 2 million or <unk> 30 per share in the quarter, which was up 17% from Q2 2021 and 75.

5% above Q3 2020.

Oil royalty revenue totaled $50 3 million, 17% above Q2, 2021 and more than double Q3 2020.

Increase was due to strong that hei benchmark pricing and increased oil volumes, which averaged 7535 barrels per day and represented an increase of 7% from Q2 and 15% of our Q3 2020.

We added 429 barrels a day of incremental production from acquisition and particularly the Marten Hills Clearwater acquisition with remaining volumes from organic growth offsetting declines.

This is very encouraging for oil production growth in Q4 and into Q1 as Q3 is generally our lowest production quarter at $10 per acre.

Natural gas revenue totaled $15 6 million, which was 14% above Q2, and 79% above Q3, 2020, due primarily to strong <unk> benchmark pricing.

Natural gas volumes totaled $58 4 million, a day, which was 3% above Q2 and flat with Q3 2020 as third party downtime impacted volumes by 2 million a day.

NGL royalty revenue was $10 1 million was up 22% from Q2 due to strong benchmark pricing and flat average NGL royalty production volumes of 2603 barrels per day NGL.

NGL Grouchy revenue was up 106% from Q3 2020 due to a.

5% increase in volume combined with strong pricing.

There were 1040 BOE a day of prior period adjustments, which were 52% liquids and included 276 BOE a day from compliance activities and an additional 764 Boe per day of other prior period adjustments related to new wells on stream and better well performance.

The compliance group recovered missed an incorrect royalties through forensic accounting collecting $900000 in the quarter.

There were 193 wells spud in Q3, which were 98% oil wells the <unk> team with the most active play with 84 wells Spud followed by the Clearwater with 51 spot additional activity took place across the basin with well spuds in the Duvernay Cardium charter like Nashville, Mississippian Miscue Bakken in Spirit River.

Other revenue totaled $2 1 million and included 700000 of bonus consideration for entering into two new leases with 20 different counterparties.

We also earned $1 1 million in lease rental and 300000 of other income.

Cash administrative expenses totaled $4 3 million or $2 <unk> per Boe.

Cash administrative expense was 10% lower than Q2 and is expected to be well below $3 per Boe for 2021.

In July <unk> completed the macro hills acquisition for cash consideration of $155 million and in late August we closed the acquisition of our royalty portfolio in central Alberta for cash consideration of $34 8 million.

On September 29, 2021, <unk> expanded our credit facility from 225 million to $425 million with the permitted increased to $500 million and we extended the maturity date to February 28 2025.

We believe this additional capacity provided current sky with liquidity for business opportunity and financial flexibility.

In addition, the credit facility now incorporates a pricing mechanism, which may increase or decrease pricing based on our environmental social and governance performance, creating a sustainability linked loan.

Our ESG performance will be measured by the third party ratings agency sustainability.

During the quarter <unk> declared dividends of $20 million, our NAV per share our second increase this year and a cumulative 50% increase over the Q3 2020 dividend.

The resulting payout ratio for Q3 was approximately 30%.

Year to date <unk> has generated $171 6 million in funds from operation, which were used to fund the dividend of 49 million repurchased shares of $21 2 million with remaining cash flow towards acquisition.

At September 32021, <unk> had net debt of $187 7 million, which at current commodity prices can be paid within one year.

Since IPO <unk> has generated approximately $1 6 billion in 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.

Thank you.

As a reminder to ask a question. Please press star one on your telephone keypad.

Thats Star one to ask a question please.

Please standby, while we compile the Q&A roster.

Your first question comes from Hereon Zuchowski from TD Securities. Your line is open.

Thanks, Good morning, everyone. I guess my first question is on the drilling side of the wells drilled in the quarter did you have any sense are you able to share many of them would be driven by private operators versus public operators and I guess, what im getting at is how should we think about the pace of development of the private operators public operators going forward.

Yes, thanks for the question Eric.

There are two very different.

Paces the development I think the privates have really ramped up at a far faster pace than the public's hub.

It's over 40% of the spuds in the quarter were.

Conducted by private operators. If you go back five years, it would have been less than 25%. So it is a big bump up and actually we've seen the biggest increases in capital budgets. This year as well as into 2022 from the private operators as well so that number could could even go higher than a lot of them don't require.

Equity.

Given their strong cash flows so they are able to self fund and not have the requirement to go public.

Thanks, Andrew if I could ask a different question on the balance sheet. So under your prize prior credit facility you had the capacity to add smartphones, a turn of leverage to the balance sheet. If you wanted to use it to make acquisitions.

Our revised credit facility that can.

Can obviously go higher I guess my question is how much debt would you be comfortable adding to the balance sheet on a temporary basis to make acquisitions.

Yes, I don't know that I'd give an absolute number I guess, we'd always look at it erinn in the sense that we could pay it off in a reasonable amount of time and unlike most e&ps are companies that have significant capital requirements.

Big chunk of their cash flow.

Look out into 2022 for example, with $79 million in total capital requirements for the dividend you have a huge amount of excess cash flow. So you can.

Pay these numbers often a very short period of time, so we're fortunate to have the <unk>.

Excess liquidity to help us with acquisition opportunities without having to issue outsized amount of shares. So it's a great way to compound the business for us without giving an absolute number. It's just definitely something that we can pay off large chunks of it in a single year with our low payout ratio.

Yes, thanks for the questions here.

Yes.

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

Your next question comes from Elas fiscal loss from Industrial Alliance. Your line is open.

Good morning, and thanks for taking my question.

I'm going to focus on opportunities sort of beyond the drill that.

About a week and a half ago, the Canadian chartered Bank signed up signed off on <unk> 26, I understand the credit facility for you has increased but are you seeing a reluctance maybe amongst the public producers to tap into credit facilities and will that create some expanding opportunities do you see that or.

Is that just way too early to tell.

Yes, it's a great question Allison I think we've.

Without getting too deep into what we're seeing with <unk>.

The public and private operators I think one of the unique things about this cycle is theirs given gas oil and Ngls are all at very high prices as they are generating a huge amount of excess cash and actually are paying down a lot of these facilities.

They're not requiring excess capacity so.

The sustainability linked loan its really interesting piece of business for us because if you look into Europe, I think 60% of the corporates in Europe had the sustainability linked loans. It helps the lenders lend to you because there is a tie to your ESG performance and so I do think it's something that's important going forward, but we think about the producer.

First to answer your first question.

They have a lot of excess liquidity right now so I don't know that there is a requirement for large amounts of.

Of that leverage right now on their side.

Okay.

That's it for me thanks very much.

For the question.

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

There is no further question at this time you may continue.

Thank you everyone for dialing into the Prairie Sky Q3, 2021 conference call and please feel free to call either Pam or myself, if you have any additional questions.

Okay.

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

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