Q2 2022 Prairiesky Royalty Ltd Earnings Call

Okay.

Good day and thank you for standing by welcome to today's conference call first got royalty announces their second quarter 2022 financial results.

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

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

Ask a question during the session you'll need to press star one on your telephone please.

Be advised that today's conference is being recorded.

I would now like to hand, the conference over to your Speaker today, Andrew Phillips, President and CEO . Please go ahead.

Good morning, everyone and thank you for dialing into the pre Sky royalties Q2, 2022 earnings call on the call from Prairie Sky or Cam Proctor, COO, Pam because I'll CFO and myself Andrew Phillips.

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 and MD&A.

Before turning the call over to Pam to walk through the financials I will provide an operational update.

Great Guy achieved its third consecutive quarter of strong organic production growth realizing the benefits of an $18 5 million acre royalty footprint across the western Canadian sedimentary basin.

Our investments in low F&D cost oil royalties and mineral title lands are the primary contributors to the strong volume growth.

Clearwater volumes reached a record 500 Boe per day of total royalty production and will continue to grow for the remainder of the year and in future periods.

Viking oil Viking oil volumes also grew approximately 10% over the quarter, we expect to have over 300 Viking wells drilled on our acreage this year.

Sky has over 10000 Viking development wells can be drilled over the next few decades audits fee title and royalty land base.

On Monday, there were 206 rigs operating in the basin compared to 150 rigs in the previous year on the same day as a reminder, price I also saw volume growth in 2021, and a lower activity environment.

Our natural gas volumes increased as new liquids rich wells came on production and solution gas associated with oil drilling contributed to growth.

Natural gas revenue alone now covers the entire dividend.

Activity was noted across the entire western Canadian sedimentary basin, which has not been observed since 2014.

Leasing activity remains strong with 54 leasing arrangements entered into with over 45 different companies.

This resulted in $3 8 million of bonus consideration.

Year to date, we have entered into a 106 leasing arrangements versus 67 in the first half of 2021.

The advancements and multilateral drilling techniques and better drilling fluid systems has structurally changed the value approach guys heavy oil royalty portfolio.

Prairie Sky has acquired the largest heavy oil.

Title royalty portfolio in Canada through the acquisitions of Canadian natural resources royalties in 2015 and through the heritage acquisition, which closed in December 2021.

Take heavy oil reservoirs with low recovery factors can be exploited using these drilling techniques pioneered in the Clearwater and will result in decades of new drilling activity for heavy oil on Prairie Sky lines at no additional cost to our shareholders.

Our unique fee title royalty model allows <unk> to capitalize on cyclicality and counter cyclicality in the lower cycles, we can use our strong balance sheet to execute on our organic.

Opportunities and then the high commodity environments, we can lease our large undeveloped land base to qualified industry participant.

The <unk> royalty model provides high margins inflation protection and strong growth rates, which will lead to a strong dividend growth in the coming years.

From an ESG perspective, we have now published our most recent sustainability report, which can be found on our website.

Since publishing the report we have received an updated MSCI ESG ranking and achieve the highest possible rating of AAA I will now turn the call over to Pam to walk through the financials.

Thank you Andrew good morning, everyone.

As Andrew mentioned, there are certain forward looking information in the notes today, So I would remind investors to review the forward looking statements qualifier in our press release and MD&A for Q2 2022.

This was pre sky's third quarter consecutive quarter of organic royalty production growth and a record quarter for oil production.

Production growth and strong commodity pricing for oil Ngls and natural gas combined to generate record quarterly funds from operations of $159 6 million or <unk> 67 cents per share more than double Q2 of last year and 52% above Q1 2022.

Royalty production totaled 25992 Boe per day, which was 58% liquids and generated $190 2 million and royalty production revenue the highest quarter in our history.

Oil royalty production grew to 12220 barrels per day in Q2, which was up over 1000 barrels per day compared to Q1 and over 5192 barrels per day over Q2 2021.

Backing out all acquisitions pre Skype oil royalty production grew organically, 9% over the first quarter and 33, 33% over Q2.

Gray Sky anticipated the increase in royalty production, given our active leasing program and the number of spots across our acreage in late 2021, and first half of 2022.

Hello royalty revenues grew to $135 $6 million in the quarter.

Natural gas royalty volumes averaged 66 million a day up 9% over both Q1 2022 in Q2 2021.

Volumes included $1 9 million today from the acquisition closed in the quarter as well as the return of 1 million a day of volumes that were shut in due to cold weather in Q1.

The remaining incremental volumes from new wells on stream and Workovers and re completions.

With strong eco pricing natural gas royalty revenue totaled $36 8 million.

NGL royalty volumes averaged 2772 barrels per day, which was up 6% over both Q1 2022 in Q2, 2021, and a credit to 50 barrels per day of incremental production from the acquisition closed in the quarter and incremental volumes from new liquids rich natural gas wells that came on production.

NGL royalty revenue totaled $17 8 million in Q2, driven by strong benchmark pricing.

There were 1670 BOE per day of prior period adjustments in the quarter related to new wells on stream as a result of a very active first quarter trailing with an additional 232 Boe per day related to compliance activity.

Overall, ppas or 60% liquids.

The compliance group recovered missed an incorrect royalties through forensic accounting collecting $1 $6 million in the quarter.

Compliance revenue since IPO now totals over $70 million.

There were 122 wells spud in Q2, which were 94% oil.

It was the most active play with 42 wells spud followed by the Manville with 19, heavy and light oil wells and the Clearwater with 14 well.

Additional oil focused activity took place across the portfolio and putting wells spud in the Cardium Duvernay Mississippian and six wells at Lindbergh.

There are also seven natural gas wells spud and creating wealth in the Montney the spirit River and Manville.

Although activity in the quarter was moderated by seasonal breakup the number of wells drilled was up 37% from 89 wells Spud in Q2 2021.

Other revenue included $7 9 million and included $2 9 million in lease rentals, $1 2 million of other income, including $900000 of potash revenue and $3 $8 million of bonus consideration for entering into 54, new leases with 45 different counterparties.

New leasing is a leading indicator of field activity and we anticipate near term drilling on many of these new leases.

Given the level of leasing activity. We now expect other revenues in the range of $25 million to $30 million. In 2022. This is up from our original estimate of $20 million.

Compliance recoveries will be incremental to this amount.

Cash administrative expenses totaled $5 2 million or $2 20 per Boe in Q2, we anticipate cash administrative expense to be well below $3 per Boe for the full year.

At June 32022 price guys total outstanding diluted were 0.6%.

<unk> recorded a current tax expense of $27 million in Q2 due to our record royalty royalty production revenue.

Entering the year pre sky had $175 billion of tax credits to offset future taxable income. So in 2022, the first $170 million of cash flow is tax free with the remainder of tasks that our statutory tax rate of approximately 23, 5%.

During the quarter Prairie Sky declared dividends of $28 7 million or 12 cents per share with a resulting payout ratio of 18% excess funds from operations above the dividend and a $15 $6 million of acquisitions was used to repay bank debt.

Net debt at June 30, with $453 9 million.

Scott has reduced net debt by 29% or $181 1 million in the first six months of 2022.

Since IPO <unk> has generated $1 9 billion in funds from operations and returned $1 5 billion to shareholders through dividends and buybacks.

I will now turn it over to the moderator to proceed with the Q&A.

As a reminder to ask a question you will need to press star one on your telephone.

Again that is star then one to ask a question.

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

Our first question comes from Aaron Berg Husky with TD Securities.

Good morning, everyone.

Good morning.

You guys talked about declaring one growing and then they go to 25% year to date 250 BOE a day I was curious if you could provide a bit more color about the other top players that are driving the growth.

Sure.

So.

On the gas side, it was primarily liquids rich drilling in the <unk>.

<unk> bought kinetic that created some of the growth on the 10% growth on the.

<unk> portfolio as well as associated gas from oil drilling and then <unk> actually grew by 10% as well. So what was unique about this quarter erinn as it was kind of broad based growth we saw growth in the.

Mississippian in southeast Saskatchewan, we saw growth in Manitoba, we all the way to the Alberta BC border. So almost every place.

<unk> growth with strong activity both in terms of the drilling but also on the re completion and reactivation activity.

Perfect. Thanks could I ask you guys. Another question.

Sure.

Is there an absolute debt level you would like.

I guess, if you'd like to reach before reinstating, our buyback or revisiting the dividend.

Yes, typically we revisit the dividend annually in February .

<unk>.

Payout ratio is quite low right now, but but again I think we used we effectively viewed the financing that we did.

By only financing it with one third equity and two thirds that we viewed it as pre pre funding the buyback at 30 40 effectively.

So.

Our goal is to pay the debt down we believe having net capture.

Zero debt balance sheet is optionality in our business, so we'd like to get there, but we'd certainly.

There's certainly lots of room for a dividend increase while still paying paying down a lot of that in a short period of time.

Thanks, Andrew.

Thanks for your question Sir.

Thank you.

Our next question comes from Matthew Weekes with <unk> capital markets.

Hi, Good morning, Thanks for taking my question just trying to understand the production growth in the quarter a little bit in terms of the dynamic with with the PPA volumes that came on.

Wondering how you often often expect these why you can sort of act going forward.

Is there ever a reversal sort of that happens a little bit after that or is it really just due to the timing of it.

Sort of wells being brought on and and compliance in the quarter and I was just wondering if you could share any sort of expectations going forward.

Yes, certainly.

Matt So the way that Ppas work is so in Q2, if there were new wells that were brought on.

In March of the first quarter. For example, we don't have that information so we're making an estimate.

The production so what ends up happening is if new wells come on in there.

Producing more than we would've expected, we will incur a PPA adjustment to our production, but when youre looking at Q2, what you need to do with back out the Q1, PPA and add into Q2 PPA. So you have a net amount that you're adjusting your production floor. So it is a rolling item and we would expect to see at ppas than ever.

Quarter.

Just because we are estimating what production will be yes.

Yes.

Sorry, and I'll just ask the compliance activity that can range that can be.

200 barrels as it as it was this quarter.

But that will depend on what we collect during that period.

So effectively because two to three months or accrual. It's a two to three months or accruals were effectively taking all of these new wells in wild, but 800 drilled this year on Atlanta, we'll take them and conservatively estimate them. So that's what results in deposit PVA. So thats real production just from the trailing quarter.

Okay. Thanks that makes sense and you talked about sort of part of it coming from.

Production and there may be some production coming off from new wells tends to be a bit better.

Better than you think are you tending to see sort of better well results in your portfolio than you'd anticipated.

At this point in the year.

Yes, we are actually we're seeing quite a substantial improvement in type curves when we take a pretty conservative approach even in our asset Handbook that we put out once every two years, we used five year trailing type curve, but in these cases, we kind of use the lower end of the type curve.

Seen some very strong results across the basin, particularly in the Clearwater Ips are significantly above where we anticipated them to be in and we're also seeing technological advancements even in the Viking we're seeing better better Ips. So it's.

Pretty strong across the basin.

Alright Thats helpful. Thank you I'll turn the call back.

Thanks for your question Matt.

Thank you.

Our next question comes from Jamie Kubik with CIBC.

Good morning, everybody and thanks for taking my question here, maybe just a little bit on further on Aaron's question there on capital allocation.

Curious if you could talk about what youre seeing on the M&A side of things right now.

The opportunity set sort of send out a little bit with the improvement in operator balance sheets over the last.

A couple of quarters and year.

Yes, it's definitely I think expectations were pretty high I think the need for capital is pretty low right. Now just amongst producer universe are generating a huge amount of cash which is great for our business and we are again I kind of mentioned on the call. The one nice thing is in the downturn with our strong balance sheet, we can execute on this accretive M&A and acquire.

High quality royalty packages, including the fee title factory acquired at the end of last year, but then the really good times. We can just lease are big undeveloped land based industry and that's what we've been really active.

We were successful on one piece of M&A, you probably saw in the quarter there and this was.

It was a royalty package, we've been trying to buy for about eight years. It's in the deep basin, we think theres a lot of upside, it's mostly verticals in the spirit River et cetera that could be horizontally drilled and we think it will over time. So it was.

Again, the quality roads backups that we knew about for a long time and had done a lot of work on so theres little ones like that but I think for the most part.

There is a little less out there right now.

Okay and then maybe next question for me is just <unk>.

Strong Q2 production wise.

Really provide guidance but.

Can you can you talk a little bit about how we should think about the second half of 2022, given how strong this update was in.

Some of the rig activity that Youre seeing currently how does that set you up for the back half of this year.

Yes for sure and I think.

Q3 is obviously, our breakup quarter, because thats trailing quarter. So it all kind of represent the Q2 activity, which was only a 112 spuds. So as is normal with all our previous eight quarters, you have lower lower Ppas and.

And then there is people who can haul oil et cetera. During the road bans and breakup. So thats typically your Q3 bad activity right now in Q3 remains very strong which.

Should represent a very strong back half of the year 206 rigs versus $1 50 last year, we grew last year with 150 running.

And we are seeing drilling on some of the most efficient place.

On our lines as well so I think it should be strong back half of the year as well, but without giving guidance.

Sure exactly what that looks like Jamie.

Okay. That's good that's it for me thank you.

Thanks for question.

Thank you as a reminder, if you'd like to ask a question at this time that is star then one.

I'm showing no further questions in queue at this time I'd like to turn the call back to Andrew Phillips for closing remarks.

Thank you everyone for dialing into the <unk> Guide Q2, 2022 conference call and please feel free to call Pam or myself. If you have any further questions.

Great day.

Yes.

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

The conference will begin shortly to raise your hand during Q&A you can dial stolen.

[music].