Q3 2022 Prairiesky Royalty Ltd Earnings Call
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Good day, and thank you for standing by and welcome to the Prairie Sky.
Ltd third quarter 2020 financial results conference call 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 this session you will need to press star one on your telephone you will then hear an automated message washing your hands raised please be advised.
Today's conference is being recorded.
Now like to hand, the conference at which your Speaker today, Andrew Phillips, President and Chief Executive Officer. Please go ahead Sir.
Thank you Rick and thank you very much and good morning, everyone and welcome to the Prairie Sky royalty Q3, 2022 earnings call on the call from Prairie Sky Cam Proctor, COO, Pam <unk>, CFO and myself Andrew Phillips.
Certain forward looking information in my commentary today, So I'd ask investors to review the forward looking statements qualifier in our press release and MD&A.
Before passing the call over to Pam to walk through the financials I will provide an operational update.
Strong third quarter activity of 286 spuds at an average royalty of eight 9% should result in a strong finish to an already excellent year and a tailwind for 2023.
Activity was spread across the base and the numerous wells were exploratory testing new concepts and play ideas.
Third quarter leasing was very strong as we entered into 58 leasing arrangements with 46 different companies, resulting in lease issuance bonus of $5 9 million throughout the quarter.
The compliance group also had a productive quarter and brought in $3 3 million in compliance revenue.
Given the confidence in our organic growth profile, our low payout ratio and the pace at which the debt incurred for the acquisitions in 2021. Its been retired the board of directors has made the decision to double the current 12 10 per quarter dividend to <unk> 24 cents or <unk> 96 per share per year.
This will be effective for the Q4 2022 dividend for holders on record on December 32022.
Given our continued low payout ratio and organic growth opportunities investors can expect ratable annual dividend increases in future years.
Low payout ratio will allow us to retire the current debt and have significant liquidity available for opportunistic acquisitions share or share repurchases whichever provides the best long term return for shareholders.
The significant investment that we've made in a large heavy oil in place accumulations across the western Canadian sedimentary basin at the inflection point of a new technology used to significantly increase recovery factors will provide our owners with per share reserve growth over the next 510 or 15 years.
Or once every two year Investor day is scheduled for the morning of May 17, 2023 at the Royal York Hotel in Toronto, where we look forward to publishing our asset Handbook, and providing shareholders with a range of outcomes over the medium and longer term for the business.
Thank you to our owners and staff for patiently, allowing us to improve our business over the last five years 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 our commentary today, So I'd remind investors to review the forward looking statements qualifier in our press release and Danny for Q3 2022.
Royalty production averaged 24986 Boe per day in Q3 and generated another strong quarter of funds from operations, which totaled $123 5 million or.
<unk> 52 cents per share.
Oil royalty production averaged 11376 barrels per day in Q3 excuse.
Excluding all acquisition oil royalty volumes increased 20% over Q3 2021 due to strong third party drilling activity across our land base.
Bio royalty revenue totaled $176 million for the quarter as we realized $102 80 per barrel, which is up approximately $30 per barrel of Q3 2021.
As expected oil royalty volumes were lower in Q2 2022, following seasonal breakup with third party sales activity slowed down and fewer and fewer new wells are drilled and brought on stream.
However, LTE revenue last Q2, primarily as a result of lower WTS benchmark pricing and wider light and heavy oil differential.
Partially offset by a stronger U S dollar.
We anticipate higher oil royalty volumes into Q4, and 2023 due to the level of activity on our lands in the quarter with 268 oil wells were spud, including 100, 719, well cardiac Clearwater wells and 49 light and heavy mantle of oil well.
Natural gas royalty revenue totaled $24 2 million in the quarter, which was up 55% over Q3 2021 as royalty production volumes averaged $65 7 million a day and benchmark pricing improved.
Volumes increased due to acquisition volumes as well as 5% organic growth.
Natural gas production volumes remain flat with Q2, but natural gas revenue declined 34% due to lower Ecu <unk> to benchmark pricing.
During the quarter, there were 18 natural gas wells spud on our royalty lands, including five Spirit River Wells Informatica World.
NGL royalty revenue totaled $14 2 million, which was up 41% from Q3 2021 due to strong benchmark pricing and flat average NGL production volumes of 2660 barrels per day.
NGL royalty revenue decreased 20% from Q2, primarily due to lower benchmark pricing.
Prior period adjustments totaled 1257 Boe per day in the quarter with 798 Boe per day related to new wells on stream and 459 Boe per day related to compliance activity.
Overall ppas for 40% liquids.
Compliance group recover missed and incorrect royalties through forensic accounting collecting $3 $3 million in the quarter.
During Q3 other revenue totaled $8 7 million and included $1 6 million in lease rentals $1 2 million of other income and $5 7 million of bonus consideration.
Year to date, we have entered into a 164, new leases as compared to 91 basis in the first nine months of 2021.
New leasing is a leading indicator of field activity and we anticipate near term drilling on many of these new leases.
Cash administrative expenses totaled $4 9 million or $2 13 per Boe in the quarter, we anticipate cash administrative expenses will be well below $3 per Boe critical year.
Current tax expense totaled $20 4 million in Q3 entering the year Gray Sky has $1 $75 billion from textbooks to offset future taxable income. So in 2022, the first $175 million of cash flow tax rates and the remainder will be taxed at our statutory tax rate of approximately 23, 5%.
During the quarter price got declared dividends of $28 7 million or 12 cents per share with a payout ratio of 23% excess funds from operations above the dividend and our $2 5 million of acquisitions with used to repay bank debt net debt at September 30 was $364 2 million.
<unk> guidance has reduced net debt by 43% or $270 8 million since December 31 2021.
We are pleased to announce a 100% increase in our quarterly dividend to <unk> 24 per share or <unk> 96 per share annualized effective for the December 32022 record date.
Since IPO <unk> has generated approximately 2 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 you will need to press star one on your telephone. Please wait for your name to be announced please standby, while we compile the Q&A roster.
Yes.
One moment for your first question.
Our first question comes from Patrick O'rourke with <unk>.
<unk> financial your line is now open.
Yeah.
Hey, guys good morning.
Pleasant surprise on doubling.
The dividend here.
Just curious in terms of timing and sort of cadence in terms of our view of the dividend policy going forward here, we had sort of been thinking about it as being an annual event.
And with the Q4 reporting in the February timeframe is this.
Still the right way to be thinking about it and sort of what was it.
Sort of milestone or motivation for this move here.
Yes. Thanks for the question Patrick It will be an annual benefits in the future that typically in the February timeframe. We're just well ahead of our estimates.
When we made the acquisitions in terms of debt repayment.
And growth profile, so we're comfortable rewarding shareholders shareholders, just one quarter earlier.
Okay, Great and then one of the key milestones I think for the business does extinguishing the debt that was taken on with the heritage acquisition.
Taking this into account and current strip prices.
When do you forecast today that milestone happening.
Yes, it'd be in late 2020 for early 2025, depending on.
Depending on the pricing we achieved over that period of time, but it'll be at very low levels in a pretty short period of time, just given the payout ratio still remains quite low.
Okay, and then final question more on the operational Brian obviously leasing has been very strong as well.
How much of that is sort of being driven by that heritage acquisition, and then wondering what youre seeing in terms of the new technology.
Ploy meant multilateral wells on that land.
Yes no.
Operationally actually the leasing has been across the entire basin right from some original praise guidelines, we had in southwest Manitoba, all the way to the deep basin. So it's been pretty pretty widely distributed across the Western Canadian Basin, and then from an operational standpoint.
<unk> seen numerous kind of stacked heavy oil opportunities, where you have really good grant size.
<unk> drilled multilaterally in some pretty significant discoveries made across some of those heritage line. So theres been some bright spots there and we've even seen light oil opportunity where.
The multilateral technology was tried.
Formation, where typically the fracture stimulated almost every well in the pool.
Pretty interesting dispersion of this technology across the base and then we look forward to the next year, it's going to be a record number of wells. We should have net capital spent on our lands.
Greater than the last two years combined this year so it's up.
We're seeing a lot of new new wells drilled and not just development walls. Some exploration wells, so should be a fun year to watch the technological advancements on this.
Primarily the heavy oil play.
Thank you very much.
One moment for our next question please.
Our next question comes from Matthew Weekes with IAA capital. Your line is now open.
Good morning, Thanks for taking my question I'm, just interested in the opportunity on the carbon capture royalty side I know its something thats been discussed before I'm wondering if you.
Kind of looked internally and estimated what the opportunity could be for carbon capture royalties on your lines in terms of.
Tonnage amount sort of annually over the long term.
Yes, it's an important part of our business that we're working towards expanding we've been approved for another project in southern Alberta I think.
Huge opportunity, particularly between.
We're kind of Edmonton and Calgary, just where a lot of the pollution corridor is but thats, where a lot of our old depleted reservoirs are as well. So I think and there you can really quantify exactly of the volumes of cotwo can be sequestered into those reservoirs.
So we need a little more clarity from the from the government on.
On incentives to try and align them more with what the U S has but there is definitely a huge opportunity we don't quantify that.
Amount of carbon dioxide that can be sequestered, but it's a pretty significant amount across the basin, obviously and I think a lot of people are pursuing that which is great and I think it'll be good for the Canadian energy sector to show the developments on this front.
Matthew.
Okay. Thank you and yes, I agree with that last point and then just a second question on the Clearwater It looks like activity.
That is pretty strong I'm, just wondering if you could comment.
Generally the trend on the Clearwater royalties.
That might be performing initial.
Initial expectation.
Yeah no. Thanks for the question I think.
It's interesting because nipper C and Martin Currie.
The majority of our 15 600 barrels per day of net royalty production. There has been a significant new discoveries made up of size across the land base and Thats one of the benefits of having that big early land base. We put together in 2016 2017, and those discoveries are going to start to see some development. This year. So we should see.
<unk>.
We should see some pretty significant growth probably in the 50% range growth year over year over the next 12 months.
And then in terms of performance expectations to things that are positively surprised the 90 day IP has.
Been a positive surprise across all the plays and then the second surprise has been the success of some of the water and polymer opportunities across the land base. So I think the.
Recovery factors will probably be a little higher than we initially anticipated.
Okay. That's great commentary. Thank you ill turn it back thanks, Doug.
One moment for our next question please.
Okay.
And our next question comes from Jeremy Mccrea with Raymond James Your line is now open.
Yeah, Hi, guys, just a couple of questions here.
In terms of you guys bumping the dividend here is this a bit of.
I'm curious what you think of the M&A market here going forward.
We feel confident that you can from dividend, but do you feel like there's enough cash if you wanted to make an acquisition out there.
What does the M&A market look like here going forward into 2023.
Yes, and I guess.
Thanks for the question Jeremy I think when you think about the M&A market.
We did a review of all the M&A, we've conducted since 2014, when we IPO Ed and it's all been between $46 oil. So we are quite disciplined on that front and typically try and buy out those parts of the cycle.
One of the interesting things that we bought last year discounting $65 crude was something that was for sale six years prior to that so if you're patient and discipline. All the best assets will end up in the hands of the low cost royalty operators. So we're we just maintained discipline on that front, the extent to which royalty opportunities available we have significant liquidity.
And still a continued low payout ratio to enable us to.
Execute on those opportunities as they come I think.
The one comment on the Canadian energy sector that is flush with cash and a lot of the companies that are going to that zero in a shorter period of time. So that's great news for us because of the healthy operator to help the Prairie Sky and that's one of the reasons, we're seeing a lot of new exploration plays developed in a lot of new leasing on new opportunities.
But I think probably there is a more it will be a little more muted on M&A and we certainly.
Would have trouble discount of $100 oil in an acquisition opportunity.
Okay.
And then just lastly.
The new leases that you guys signed here how will they breakdown would you say is because the way the crown royalty is now just quite a bit higher than what Eric whereas ever been where guys are just saying.
Interested in paying 35% crown in Morris and paying 18% on Prairie skies on like how much of this new leasing activity is because you guys have a more favorable royalty right now versus the crown.
Sure.
Yeah, and I think I think well.
Well I guess two two answers that one would be the majority of the really strong leasing is just from strong oil gas and NGL pricing.
Across the basin and I think it's strong it's been in a long time, all three commodities, so that would probably be the.
Major driver and number two would be the financial health, but I think for sure. There is a recognition that a lot of plays where theyre getting pretty quick payout.
MPV on Appraise guide section for an operator is actually quite a bit higher than it is on the crown right now just because the well.
Post ceased are jumping to a higher royalty so that definitely has a benefit it's hard to know because the operators. We have 330 different operators underlines and they don't tell us specifically why they are leasing, but I think that would be a driver in certain place for sure Jeremy.
And.
With the higher royalty rate that you guys were seeing from the new wells here is that something we could expect going forward or does that just does that drop back down to more of a long term normalized rate closer to that 6%.
Yes, it's interesting so our average royalty on FY 2500, Wellbore portfolio at 6%. We obviously saw a very strong number in terms of average royalties for the walls of respond are aligned this quarter. A couple of drivers that one is the seasonal biking activity and typically the Viking wells get drilled in Q3 and early in Q4.
The bid offer on a boiler on the single rigs theyre not competing with any oil sands core hole drilling.
And in addition, when Theyre fracking the wells they don't have to heat the water up significantly from a lower ambient temperature. So a lot of the bike activity happened and those are typically one mile lateral so does it beyond 17, 5% price got leases, so that kind of drive the average royalty higher but there is one structural change that should affect that over the next three five and 10 years is.
The heritage acquisition, all the heavy oil opportunities that exist.
Those lands from there with Sika Sparky GP racks, all the way down to the comings those are typically 75% leases and so theyre Clearwater type potential results for significantly higher royalties, so that could help bring the average royalty up.
And bringing the net cap as well okay perfect. Thanks, guys.
Thank you next question one.
One moment for our next question.
Yes.
And our next question comes from Jamie Kubik with CIBC. Your line is open.
Yes. Good morning, Thanks for taking my question.
Just a quick question on capital allocation, how should we think about the CIB for Prairie Sky and when that could be utilized.
Can you just outline a little bit capital allocation framework that you're thinking about here.
Okay.
For sure.
Good morning, Jamie I think on the NCI would be.
If you look historically at what we've done we've bought back a record $1 billion worth of stock I think an average price of just over $14 per share we've issued at an average of around 25%. So.
We've done it okay in the past.
We have HIV thats out there right now.
I think we will use it opportunistically obviously the number one priority right now is paying the debt down to a low level, which gives you optionality on any any opportunity that might come available whether it's buying back the stock or maybe there's a better per share return to be achieved with an acquisition if natural gas prices get week or something like that so we just want that option.
Already.
This is why were not active with it right now, but the debt repayments and a broad priority today.
Got it Okay, and then on the new dividend rate can you talk.
A bit about maybe.
What commodity price do you think that that is defensible down too.
Yes, it'd be defensible down to $40 oil or.
For $50 oil and $0 gas or something like that but again, we will have when you think about the business over the next 12 months the debt level is going to get very very low on our $800 million Bank line.
And so even if it got anywhere near that it would actually provide great opportunities for our business because it will be virtually debt free and one of the few that can sustain it at $40 oil environment.
Okay, Great and then last question for me a lot of activity you'd noted in the quarter across our <unk>.
Number of different plays the Duvernay was absent in our commentary, though can you talk a bit about maybe the leasing opportunity that you have remaining there and.
And any new activity that we should be looking for in the coming quarters.
For sure, Yes, I think.
We should see a couple we have two of our three kind of primary operators in the duvernay have some pads planned on Craig's got lands and even some licensing that's already in place and then we are working on some significant leasing arrangement a little further west with a number of different operators. So there's a bit of.
A bit of an increase in activity there in terms of the leasing opportunity and I do think certainly west the homeland Rimbey reef and kind of Williston Green to the North Division Lake is a great opportunity there there's been some pretty interesting discoveries made in.
Full scale development of that could be a very significant operating asset for prairie sky could be in the range of one to 2000 net royalty barrels per day from a very low level today, which would be 350 barrels yes.
Okay. That's great. Thank you that's it for me.
Thank you as a reminder to ask a question Thats Star one one.
One moment for our next question.
Our next question comes from Mitch Kantor with Mountain Lake investment Your line is open.
Okay.
Good morning, guys.
On.
I guess, Andrew I noted in your opening comments that.
You talked about optimism and the trend in reserves per share on a 510, even 15 year basis.
Some of the factors contributing that you probably touched on but I am wondering.
What else you are looking at when you think about.
That opportunity.
Yeah no. Thanks for the question, Mitch and what's interesting in <unk>.
And if you reference our royalty Playbooks, our asset Handbook that we've released in the previous three cycle. So over the last six years typically on a lot of these heavy oil reservoirs.
Have a 5% to 7% recovery factor may be slightly higher if there's water polymer flood opportunity on it but what's happening with these multilateral does youre, achieving five far higher recovery factors and probably having a far more optimal watermark water polymer flood in the future. So what is basically done at the same this is anything about technology and the great.
<unk> Optionality that you have when you own a royalty asset bases. We've owned a lot of this stuff for almost a decade now and we've always said, okay well. The total recovery is going to be 100000 barrels on this section and Lo and Behold you could probably get another million barrels out of it with the new technology.
That's kind of the major change in the multilateral technology is kind of advance this specifically on that heavy oil reserves that the company owns so it just gives us confidence that that should continue to grow as more of these different zones within the manville stock are developed.
With horizontal multilateral.
Interesting so it's the existing technology, just rolling out in a sense through the accounting in the portfolio.
Precisely yes.
And having said that there are some new discoveries as well that are completely brand new discoveries, but a lot of this heavy oil resource had been known.
Don't accumulations over the last 50 years, there just hasnt been a way to exploit it until until this technology of volte in a low cost manner.
Great. Thank you.
Thank you for your question.
And I'm currently showing no further questions at this time I'd like to hand, the conference back over to Mr. Phillips for any closing remarks.
Alright, Thank you everyone for dialing into the <unk> Guide Q3 conference call in.
At any time, please call either Pam or myself, if you have any follow up questions.
Good day.
This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Okay.
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