Q1 2022 Prairiesky Royalty Ltd Earnings Call
Good morning, and thank you for Sandy by welcome to the Prairie Sky royalties announces their first quarter 2020 financial results. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one.
<unk> on your telephone please be advised that today's conference is being recorded I would now like turn the conference over to your Speaker today, Andrew Phillips, President and CEO . Please go ahead.
Thank you Catherine and good morning, everyone and thank you for dialing into the Prairie Sky first quarter 2022 earnings call on.
On the call from Prairie Sky, or Cam Proctor, COO, Pam <unk>, CFO and myself, Andrew Phillips before we start there are certain forward looking information in my notes today. So I would ask investors to review the forward looking statements qualifier in our press release press release and MD&A for Q1 2022.
The basin the basin wide resurgence in activity levels that resulted in strong Q4 2021 per share of liquids growth continued into the first quarter of 2022.
Excluding the acquired royalty barrels from 2021, the company achieved 13% oil royalty growth when compared with the quarter one year ago.
Combined with an almost double digit free cash flow yield and some of the strongest growth rates and industry praise Sky provides a strong total return proposition at a very low risk.
Two new major oil discoveries were announced subsequent to quarter end on our undeveloped Clearwater acreage.
These include New Tech I'm awake and Mcleod Lake.
This further further highlights the optionality associated with large undeveloped land basis.
That is a differentiating factor when owning prairie sky shares.
On that front, we received $3 5 million in lease issuance bonus and entered into 52 different leasing arrangements with 43 different companies.
Leasing activity on the newly acquired Heritage B title was particularly active with one leasing transaction covering numerous sections of land targeting at Clearwater opportunity using low cost multilateral technology.
In 2022.
We will have exploration wells drilled for both helium in lithium carbonate both opportunities arent Prairie Sky fee title lands are large scale <unk> projects and Meadowbrook received initial approval from the Alberta government and we look forward to the continued to continuing to advance this opportunity with our project partners.
Q1 drilling activity remained strong with 194 wells spud on royalty acreage almost double last year's Q1 total.
Private operators represented approximately 50% of the spuds.
Spuds were broadly distributed across the basin and included both oil and natural gas targets. A notable increase in Workover activity was also evident across our already drilled 43000 well portfolio.
A notable increase in new oil and gas startup companies was observed over the last six months as M&A activities have picked up pretty sky offers newly capitalized entities consolidated undeveloped lands.
And a significant high quality seismic database that can allow them to shorten cycle times and lower upfront cost, which can help them accelerate activity to take advantage of the strong pricing environment.
Existing client the Prairie Sky are also looking to expand their inventory.
In our existing core areas and uncover new place.
Along with our 33% dividend increase in February debt levels are dropping faster than anticipated, which will allow both stronger dividend increases in the future and the ability to execute on accretive M&A provided it improves the quality of our business on a per share basis.
We are seeing the benefits of an inflationary activity environment, and an unhedged energy portfolio with 98% operating margins.
I will now turn the call over to Pam to summarize the financial results.
Thank you Andrew and good morning, everyone.
Andrew mentioned there are certain forward looking information in the notes today, so I'd like to remind investors to review the forward looking statements qualifier in our press release.
For Q1 2022.
Chris that generated record funds from operations again in Q1 of $105 million on 45 cents per common share.
Double Q1 of last year, and about 3% above Q4, 2021, which included a $12 $4 million tax recovery.
The increase was driven by a 23892 Boe per day of <unk> production and strong commodity pricing, which combined to generate $134 7 million from royalty revenues.
This is $78 million above Q1.
In Q4.
Great. Thanks, Glen Brown field production grew to 11188 barrels per day in Q1, 2019, 54% of Q1 last year and 35% about Q4.
Backing out all acquisitions made in 2021 organic growth totaled 13% over Q1 and 6% over Q4.
First I anticipated strong organic growth given our active leasing program and then there's spots across our acreage in the second half of 2021.
And into Q1 2022.
Natural gas royalty revenue.
Gas processing volumes averaged $60 5 million a day at 5% over Q1 and in line with Q4.
Natural gas royalty revenue totaled $22 9 million driven primarily by strong April pricing, which averaged $4 67 per mcf in the quarter.
<unk> 10000 Boe per day of natural gas is unchanged and we will benefit from the improvements in April pricing, which is currently over $7 per Mcf.
NGL royalty volumes averaged 2621 barrels per day, which was up 5% over Q1 and 29% over Q4 when volumes were negatively impacted by ethane curtailment.
NGL royalty revenue totaled $13 1 million in Q1, driven by strong benchmark pricing and increased NGL volumes.
There were 1433 BOE per day of prior period adjustments in the quarter of which 1078 Boe per day.
475% were from new wells on stream and better well performance. There was an additional 355 Boe per day from compliance activities.
Overall PPA for 58% liquids.
The compliance group recovered mezzanine correct per ounce Easter forensic accounting collecting $1 5 million in the quarter.
There were 194 wells spud in Q1, which were 87% oil.
Devices with the most active play with 68 wells followed by the Clearwater and 35.
With 35 wells and Amanda was 22 well spent.
Additional oil focused activity took place across the portfolio, including well spend in the Cardium Devonian Duvernay, Mississippian Montney and miscue.
Were also 26 natural gas wells spud in the Montney methylene cardiac <unk>.
Activity in the quarter was well above Q1 2021, when they were 100 wells spud and higher than Q4 of 2021, when there were 166 12 months.
Other revenue totaled $5 2 million and included $1 2 million in lease rental half a million dollars of other income and $3 5 million in bonus consideration for entering into 52, new leases with 43 different counterparties.
New leasing is a leading indicator of sales activity and we anticipate near term drilling on many of these new leases.
As mentioned on our year end conference call, Chris guys forecasting other revenue in the range of $20 million from 2018, including lease rentals bonus consideration and other revenue compliance with recoveries will be incremental to this amount.
Cash administrative expenses totaled $10 3 million or $4 79 per Boe in Q1 as in prior years Q1 is always the highest quarter as long term incentive best and are paid in this quarter we.
We expect cash administrative expenses to be below $3 per Boe again in 2022.
<unk> recorded a current tax expense of $18 million from Q1 due to our record royalty production revenue entry.
Entering into 2022, and <unk> had $1 $75 billion of tactical up to offset future taxable income so.
So in 2022, the first $175 million of cash flow and tax free with the remainder tasks that our statutory tax rate of approximately 23, 5%.
During the quarter price Guy declared dividends of $28 7 million or <unk> 12 per share with a resulting payout ratio of 27%.
Funds from operations about the dividend we used to primarily.
Primarily to repay bank debt net debt at March 31, 2022 was $568 9 million down $66 1 million in three months.
We will apply to the TSA extra renew our ncnb, which we may use opportunistically as previously communicated price that prime focus is retiring the bank debt used in connection with the acquisition of the heritage royalty asset in December 2021.
Since IPO <unk> has generated approximately $1 8 billion in funds from operations and returned $1 5 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 Youll need to press star one on your telephone to withdraw your question press the pound key.
Again, if you would like to ask a question press. The Star then the one key on your Touchtone telephone.
Our first question comes from Jeremy Mccrea with Raymond James Your line is open.
And I guess quickly.
Quick question on the heritage.
Our properties are you seeing leasing activity.
Higher than expected in line with what you guys are expecting.
And maybe just some thoughts just on what you can see on that line, just given where oil prices are here over the next six months here.
Yes, thanks for the question Jeremy.
One of the things that was I guess not unexpected, but we did identify a pretty significant sized clay.
For this multilateral technology and we did one large lease which is probably one of the more impactful things we've done as a business from a pure leasing perspective, and a number of years, but I think the current oil price environment has really stimulated a lot of smaller leasing activity and with oil of course, you can drill sometimes eight to 16 wells per section. So theres been a lot of smaller leasing people.
Adding on to their current portfolios or plays we've seen leasing all the way from southeast Saskatchewan, where we acquired the most significant.
Physician in the southeast Saskatchewan, Bakken Newfield pool, so theres been some follow on leasing there from a couple of different operators.
As well as in the kind of Mississippian stack and then when you jumped a provost and kind of help point load minutes or theres been quite a bit of heavy oil leasing given the narrow differentials on.
<unk> prices.
Thanks, Andrew.
Thanks, Jeremy have good day.
Yes.
Again, if you would like to ask a question Press Star One our next question comes from Aaron <unk>.
Askey with TD Securities. Your line is open.
Hey, good morning, guys.
I know you don't provide corporate production guidance, but I'd be curious to know your thoughts on that.
And the pace of development for the private operators offering on your land what are they telling you they're expecting to grow over the next 12 months to 24 months.
Yes, so they all have different actually private operators are and have made up a bigger proportion of our spuds I know, it's I mentioned in my notes that it's 50% of current well spuds I know our largest royalty payer currently spur is targeting about 30%.
Growth in <unk>.
And everything in between there has been probably the most positive thing on the private side I guess it would be all the new startups in their peer growth companies with just cash and some land.
So they will probably grow at the highest rate and I think some of the public's on the margin are probably looking to grow a little little.
Little more I guess.
What was were pretty positively surprised by Q1, just given the very strong liquids growth rates, we saw in Q4.
We would have been even happy after Q4 of just a flat production profile so to see growth off of that already increased base. We saw in Q4 was quite encouraging.
Perfect. Thanks.
Thanks for your question here.
Okay.
Thank you our next question comes from.
<unk> Gupta with Accountability Your line is open.
Good morning, everyone. Congrats on another strong quarter.
Wanted to first ask about the hedging strategy do you guys still wanted to go unhedged looking at the commodity prices where they are.
Or you think youre looking at some strategy over there to hedge some of the production in the coming quarters.
Yes, thanks for the question <unk> I think.
We're very consistent with hedging we've never hedged since our IPO and we're not protecting capital programs because they are zero.
Our debt is coming down at a very quick pace and ultimately we view it as speculating with investors capital and I think.
Longer term, we are one of the few companies that gives pure exposure to unhedged unlevered.
Oil and gas in Western Canada with no operational leverage so we'll plan to keep it that way.
Sure makes sense I see some of the things are actually rolling off hedges.
But.
And on the on the cash operating.
Operating expenses I E.
Significant increase and you mentioned that Youre still looking at.
Below $3 for the year.
Is that increase related to the acquisition one time kind are.
What led to this one like 480 almost.
Yes, so it's a good question I think for the so the management's last two years.
<unk> received zero on their performance share units because of the poor performance of the share price. So they were paid out this year.
There was higher payouts to the entire staff as well as just as a result of the.
The increase share or the share appreciation over the year and then there were some some moderate cost with the heritage acquisition one of the places we're fortunate with the heritage acquisition as we do most of the work on those acquisitions internally, we don't hire consultants, we kind of do it all ourselves so they were moderated but.
Because of some of the improvements we've made and the efficiencies of the business. The G&A will trend down significantly throughout the year. So it's always the highest in terms of cash G&A as Q1, and that will trend down materially and it'll be below $3 per barrel and cash G&A for the year.
So the $3 guidance, including these expenses.
That's correct, including all expenses Thats correct.
We reported cash number because thats, what we actually pay out.
The other number can bounce around a fair bit with share price. So we just report what we actually pay out and track the heart and it's come down from $4 50.
2014 down below $3 per barrel last year, and we expect that again this year.
Alright, that's it for me thank you very much.
Thanks for the question I appreciate it.
Thank you. Our next question comes from Jamie Kubik with CIBC. Your line is open.
Yes, good morning, and thanks for taking my question here.
With respect to the Ccs projects at better book that you announced can you offer any additional details on that project could you talk a little bit more about future exposure to TCE U S that you see possible on your acreage.
Yes. Thanks for the question Jami, we're excited about that one that's been about two years in the making and it's a great operator and really good project partners that it's a multi client approach west of Edmonton and I think there'll be more in the future. We again in that whole area, where you generate the most.
Carbon dioxide between Edmonton, and Calgary, where the railway sit where the QE. Two sets you have got all checkerboard presque acreage as well as one of the largest seismic databases in western Canada. So we've got a great technical knowledge and understanding.
Where you can inject carbon dioxide and I expect that ultimately over the next three five and 10 year period will be involved in more projects going forward, but we're pretty excited about the metal rock project and it's kind of unique because its west of Edmonton. It's in kind of a unique geographic area, where we think we're we've got some opportunities to bring <unk>.
Multi clients there.
Okay. Thanks.
And maybe with respect to the heritage acquisition and 52 lease agreements you announced in the quarter can you talk a bit about how we should think about future leasing on this acreage and the pace that you've seen thus far compared to your expectations.
Eric Joseph.
Yes, and I think one of the things that gets us most excited about the pace of leasing on the heritages.
The amount of different counterparties throughout the acreage so it is not.
In the past you went back to 2017, our leasing was leasing programs are very concentrated amongst a handful of operators but.
Today, we are leasing to new startups right through to the big incumbents, who havent been leasing land for years. So I think it's.
On the oil side in particular.
I think people always got to look at acreage on gas in the acreage with oil there is a lot more resource density with oil and again you can have 1000 barrel a day gross project on a single section of land. So these smaller leasing opportunities on the oil side can be quite impactful and given it's such a broad group of operators were pretty excited about.
Potential over the next few years, just given the activity.
Again it is.
It is the biggest heavier oil region in Canada, where we acquired our acreage. So just given the narrow differentials in the <unk> price, we expect that to continue.
Okay, Great and Thats It for me. Thank you.
Thanks, Jamie.
Our next question comes from Patrick O'rourke with ATB capital markets. Your line is open.
Hey, guys. Good morning, Thanks for taking my question I just wanted to ask in terms of the return of capital focus here and debt repayment obviously.
Commodity price continues to strengthen here I'm wondering if there's any changes to that strategy the dividend bump last quarter I know that the <unk>.
CIB renewal was just mentioned now and then.
In terms of the Paydown of the debt.
Any sort of update in terms of when you would hit.
That target there.
Yes, thanks for the questions Patrick in terms of capital allocation I know, we increased the dividend in February by 33% in the debt repayments happening at a faster pace just due to the strong pricing and the growing production volumes underlying that.
We our priority is paying down the debt we view on the NCI D. We effectively for the first time in our history made an acquisition using leverage.
And we used two thirds leveraged for that acquisition $500 million and pretty low cost debt and so I think our priority is paying that down and we view that as effectively pre funding the buyback. So that was effectively in CIB. It now we're paying it down by returning the leverage so I think when you look into the next time, we review the dividend early next year.
There is going to be continued strong cash flows the debt targets will be.
He will be retiring debt at a faster pace than to be the opportunity for a significant increase at that point.
On the dividend.
Okay.
Okay.
And then I think you might have mentioned an update in terms of Clearwater exploration success.
Are you able to provide any further color on that.
Yes, so I can see you took them a lake was.
Too late lateral public data. So it can be viewed on an act math for Geo scope and.
Pretty strong.
Pretty strong rates on that to lag lateral and again, it's an exploration play so it's.
With a leg lateral or six lake laterals.
The.
New fluid systems people are using where we think thats a very significant accumulation is actually another sand there that hasnt been tested as well so that was a pretty significant discovery and then Mcleod Lake is an interesting one it's a lot of people would know it is northeast set it's on some of the exploration lands. We bought in 2000 early 2017, when we made the first large group.
Our acquisition before it was kind of known as a significant play and this is the second winter where theres been exploration done on this play and it's confirmed and expanded the resource opportunity there. So.
<unk> should see significant development this upcoming winter season, and should be significant contributors to both production and cash flow in the future.
Again, the part of the reason we highlighted those as it's the difference between owning just a discounted cash flow.
Stream over time, but also owning the undeveloped land without any acquisitions without any future acquisitions Prairie Sky shareholders will see growth in these types of environments, just because we've already pre funded the future with the undeveloped land piece.
Okay. Thank you very much.
Thanks for the question Patrick.
Thank you again, if you would like to ask a question press. The Star then the one key on your Touchtone telephone.
Question comes from Matthew Weekes with <unk> capital markets. Your line is open.
Hi, Thanks for taking my question I think I just wanted to ask in terms of.
The heritage royalty integration.
Is that going so far I'm just wondering if you could provide an update on progress around that.
For sure, yes, it's a big job Matthew and I. Appreciate the question and it's going to be a huge amount of administration everyone's working very hard here and in addition, the heritage of course, we bought another 1 million acres last year as well, primarily the Paramount fee, which was the old Apache fee title and in kind of Western Alberta, and the deep basin. So we continue to be very.
Active in putting all of the different leases in properly into our system. The one place. We're fortunate with heritage is it's it was broken up originally from the same asset base, we IPO Ed So.
Because of that we understand and leaves us quite well and.
It's a work in progress we're quite active on it but it's definitely going to be a busy year from an integration perspective, and we're just doing it slowly and pragmatically to make sure to ensure everything is entered in correctly.
Okay. Thanks, I appreciate that and just my last question.
Looking at the organic growth outlook here it looks like it's pretty solid you know some some indicators as far as that the amount of wells being spud as far as leasing activity just thinking about alternative minerals like lithium and I know you had the one that was announced.
Announced with the quarter and maybe not necessarily material by itself yet, but as you look at that Optionality going forward or do you think that it'll increase give.
Given the federal government's budget and wanting to develop a critical minerals strategy, where we do more.
Exploitation of these minerals, such as lithium going forward.
Yes, I do think it'll be a bigger focus of industry and a lot of the core competencies of the E&P business can be transferred over for exploration for things like lithium and helium.
So we do think there'll be it'll be a bigger asset 10 years from now now it's not going to be a major contributor now having said that we did receive just under $1 million in lease issuance bonus.
Lithium lance.
So we are.
Again, we think.
It's a great opportunity set for investors, who these are some of these resources. We didn't even know we owned a few years ago and now we're receiving bonus and exploration is being done on them and there's also resources like helium, where CAD fifth largest resources.
Reserves in the world of helium and it's the exact same core competency for natural gas. So I think people can take those skills and explore for helium as well and there's been some recent notable expansions from some of the potash companies in southeast Saskatchewan, we already collect potash royalties as.
As part of our other income stream and that's likely to grow over the next period of time as well so.
Other minerals again, while not significant in the.
A large amount of EBITDA that we're going to generate this year I think in the future there'll be perhaps some significance.
Okay. Thanks, I appreciate the answers I'll I'll turn the call back.
Thanks Matthew.
Thank you and I'm showing no other questions in the queue I would like to turn the call back to Andrew Phillips for closing remarks.
Okay.
Thank you very much and thanks, everyone for taking the time to dial into our call and nope, everyone had a good Easter and.
Look forward to a great year in 2020.
Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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