Q4 2022 Prairiesky Royalty Ltd Earnings Call

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Good day, and thank you for standing by welcome to the Prairie Sky royalty limited announces fourth quarter 2022 financial results Conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

A question during the session you will need to press star one on your telephone you will then hear an automated message.

Right.

Your question. Please press Star one one again, please be advised but 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.

Thank you Tanya and good morning, everyone and thank you for dialing into the Prairie Sky royalty Q4, and year end 2022 conference call.

On the call from Prairie Sky, or Cam Proctor, COO, Pam because all 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.

I'll provide an operational update and then hand, the call to Pam to walk through the financial results.

2022 was a strong.

With strong across the entire western Canadian sedimentary basin Prairie Sky saw 850 wells spud on its royalty land throughout the year.

This allowed our company to achieve double digit organic growth over the year, well ahead of any Canadian or U S peer.

The benefit of undeveloped land is clear in a strong capital cycle.

Our major investments since the IPO all in downturns include Canadian natural Resources' P mineral title in 2015.

Synovus is royalty lands from heritage in 2021.

Large clearwater land base beginning in 2016.

<unk> mineral title lands acquired represent Canada's largest land position in the heavy oil fairway.

These were acquired prior to the multilateral drilling techniques being exported from the Clearwater to other areas of the basin in a meaningful way.

Our company's WCS exposure is now significant and represents 50% of current oil volumes and is our fastest growing commodity.

This is in advance of the Trans Mountain line fill in the back half of 2023 early 2024.

New export pipeline to the West coast to access Asian markets represents 590000 barrels a day capacity.

Structurally lower WCS differentials should result over the medium to long term.

In the fourth quarter, we entered into 64, new leases with 53 different producers.

Which contributed to a record year in 2022 as far as the number of leasing transactions and a record number of Counterparties many of whom are newly capitalized teams with new play ideas exclusively on price got land.

Strong leasing momentum continues into 2023.

Currently in the base and 250 rigs are active versus 225, one year ago, numerous new startup companies have been recently capitalized leading to incremental activity in the basin.

Clearwater production exited the year at approximately 600 barrels per day.

Significant new discoveries and step outs made last winter in the play will see first development activity in 2022, which should lead to new growth in the play.

In addition secondary recovery in the more mature areas of Nicosia, Martin Helzer showing promising early response.

Great guys in a unique position in this play.

<unk> already of our $1 3 million acres in the play are undeveloped.

This will provide a decade or more of organic growth for our shareholders without incremental capital.

Great guys.

To receive some of the strongest ESG ratings in all sectors of the North American economy, including top 1% as ranked by sustain Olympics.

Personally I will have its biannual investor day in Toronto on May 17th at nine a M at the Royal York Hotel.

Concurrent with the presentation from management, we will publish our 2023 asset Handbook.

Tailoring the book value of the current development locations that exist on <unk> lands directly offsetting non production.

Focus of this at Investor day will be the Clearwater and the differentiation that Prairie Sky has with its significant undeveloped land inventory.

We will also provide a range of outcomes for the business over the medium to longer term.

Hope our investors are now available to attend either virtually or in person I will now pass the call over to Pam to discuss the financial result.

Thank you Andy and good morning, everyone.

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 Q4, and the year ended December 31st 2022.

Great Guy had a very strong Q4, which closed out an exceptional year, where we generated record annual oil royalty production record annual royalty revenue and record annual funds from operation.

Q4, 2022 funds from operations totaled $119 5 million or 50 cents per share, bringing annual funds from operations to $507 6 million or $2 12 per share diluted.

Strong funds from operations were a result of increased royalty production volumes from organic growth as well.

Acquisition volumes for 2021.

Annual production averaged 25914 Boe per day in Q4, sorry in Q4 and generated royalty production revenue of $144 8 million annual production averaged 25206 Boe per day, and combined with strong commodity pricing to generate annual royalty production revenue of $615 seven.

Okay.

Chris does oil royalty production grew to 12166.

Barrels per day at 22% increase over Q4, 2021, excluding acquisition volumes and 7% over Q.

Q3 2022.

Annual oil royalty production totaled 11739 barrels per day, 56% above 2021, and representing 23% organic growth.

Growth in volumes and strong benchmark prices combined to generate oil royalty revenue of $98 9 million for the quarter.

We are very encouraged by the organic growth from third party drilling already seen in our oil royalty volumes and by the continued listing of our land.

At current commodity pricing, we anticipate another active year third party drilling across our royalty properties in 2023.

Natural gas royalty volume averaged $66 4 million, a day or 11% over Q4 2021 and in line with Q3.

Higher royalty production volumes and strong benchmark pricing generated natural gas royalty revenue of $32 4 million, 46% ahead of Q4, 2021, and 34% over Q3 2022.

Natural gas royalty volumes averaged $64 7 million a day for the year, 9% ahead of 2021.

Natural gas royalty revenue totaled $116 $3 million for the year and 81% increase over 2021.

NGL royalty volumes averaged 2681 barrels per day in line with Q3, 2022 and up 32% over Q4 when volumes were negatively impacted by ethane curtailments.

Benchmark pricing per Sky generated NGL royalty revenue was $13 5 million, an increase of 5% over Q3 and 26% over Q4 2021.

NGL royalty production volumes averaged 2684 barrels per day for the year, 10% above 2021, and generated $58 $6 million of NGL royalty revenue.

There were 248 wells spud in our lines in Q4, which were 85% oil. This is up from Q4 2021, when 194 wells were spud.

The manville, what's the most active play with 48 heavy and light oil wells spud followed by the <unk> team with 46 wells Spud and Clearwater with 43 well.

An additional 73 wells were spud across the basin in the Mississippian Cardium Bakken and a number of other oil plays.

There are also 38 natural gas wells spud in the quarter, including 20 shallow gas wells, seven montney wells and format as well.

An active Q4 brought total spuds for the year to 850 wells as compared to 548 wells from 2021.

The Sky estimates at $1 5 billion of growth capital and $84 million of net capital was spent on <unk> nice royalty lands in 2022.

Net capital increased 127% year over year, which led to pretty strong production growth.

Looking forward <unk> 2023 annual pricing sensitivities, which are all net of taxes are as follows.

$5 per barrel change in U S dollar <unk> would increase or decrease funds from operations approximately $21 5 million.

25 per Mcf change in April with increased or decreased funds from operations approximately $4 5 million.

One cent change in the U S. Canadian dollar FX rate with increased or decreased funds from operations approximately $4 5 million.

Other revenue totaled $5 8 million in the quarter and included $2 1 million in lease rentals 700000 of other income and $3 million for bonus consideration for entering into 64, new leases with 53 different counterparties.

This brings the annual other revenues to $27 6 million.

In 2022, we entered a record 228, new leasing arrangements with 119 different counterparties.

From 139 leases with 85 different Counterparties in 2021. This is an increase of 34, new counterparties year over year.

New leasing is typically a precursor to increased field activity and is another reason, we anticipate drilling on our lands to remain strong through 2023.

<unk> for testing other revenue in the range of $25 million to $30 million in 2023, including lease rentals bonus consideration and other revenue.

Compliance recoveries will be incremental to this amount and included in royalty revenue.

Cash administrative expenses totaled $5 1 million or $2 14 per Boe in the quarter. The sprint annual cash administrative expenses to $25 5 million or $2 77 per Boe.

We expect 2023 cash admitted administrative expense to be around $30 million.

Due to strong stock performance positively impacting share based compensation.

Current income tax expense totaled $20 2 million in Q4, and this brings 2022 current tax to $85 6 million.

Entering into 2023 Prescott has 155 billion of tax pools to offset future taxable income income, mostly deductible at 10% per year.

For 2023 that means the first 155 million of pretax cash flow and tax free with incremental cash flow tax at 23, 5%.

During the quarter price guys funds from operations totaled $119 5 million and we declared dividends of $57 3 million or <unk> 24 per share with a resulting payout ratio of 48%.

Annually <unk> got generated $507 6 million in funds for operations, which were used to pay dividends of $143 3 million with remaining cash flow primarily used to reduce bank debt.

Net debt at December 31, 2022 totaled $315 1 million a decrease of 50% from December 31, 2021, when net debt totaled 635 million. Once again in 2023 Pro Scheible received the full pricing reduction related to our sustainable credit facility as we further improved our sustainability ESG Ray.

<unk> and are now ranked number 51 and sustained <unk> global universe of over 15 telephone company.

Since IPO price guys generated approximately $2 2 billion of funds from operations and returned $1 6 billion to shareholders through dividends and buybacks. We will now turn it over to the moderator to proceed with Q&A.

As a reminder.

Yes.

As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again.

Great.

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

One moment for our first question.

Our first question comes from the line of Jeremy Mccrea from Raymond James.

Yes, I guess.

This conference call I can't remember the last time, you guys were talking about how many lease agreements that are going on your lines here can you walk through what these new lease agreements look like this time versus may they may.

B, how they differed from a couple of years ago or are there more while licenses with the agreements more commitments a higher royalty rates.

Claims that these new lease agreements are chasing.

And then just my second question here would you be willing just reminding us what are the two fastest growing plays.

On your lines and just kind of your expectations of where those may go here.

Yes for sure Jeremy Thanks for the question and the leasing arrangements. It was an interesting year last year, because we are leasing everywhere from Manitoba, all the way to northwestern Alberta.

Extremely active across the entire basin for all commodity types.

Throughout 2022, I guess it was.

At certain focus on kind of new multilateral opportunities within the mass adult stack have you all regions and Thats, where we thought that a number of new discoveries in a number of different zones, including those seek other sparky.

Upper and lower coming so it's pretty interesting.

New developments there.

And in terms of the fastest growing plays with WCS exposure to the banned all stock is obviously one of them. The Clearwater at 600 barrels a day growing somewhere in the range of 50% this year again.

Is another very important one and even the Viking last year actually grew from 2000.

Start the year and ended at 2400 barrels per day of net oil production, so a 20% increase.

In that play where we have 9000 drilling locations. So we've got kind of a 20 year inventory of development locations I think that focus there was.

WCS did have a bit of a blood in the back half of the year, but light oil ended up still trading over $100. So the paths for very quick and those place. So we did see some growth in the bike.

Okay.

Thanks, Andrew.

Thanks for the question Jami.

Thank you one moment for your next question.

Your next question comes from the line of Erin.

Bill Koski from TD Securities.

Thanks. Good morning. This is Marvin nitpicky modeling question, but I don't know the answer so I figured I would ask what portion of that $1 $5 billion of grocery industry spending that landed on your royalty lands would've been gastric like.

Specifically gas targeted versus oil targeted.

Yes good.

Question, So 20% of the capital spend was actually on the gas side Erin.

Was actually the highest number we've seen in about five years back in 2014. It was almost 50% was spent on natural gas plants, but 20% with a high number for us.

Thanks, and maybe a question for Pam you talked about cash flow sensitivities and maybe I missed it but what would your cash flow sensitivity to western Canadian select.

Yes, it's about $2 million for $1 change.

Perfect, Yes, no good question.

Yes.

SG&A and then probably the bigger.

<unk> WCS the bigger impact. It has is on leasing and then of course growth in that part of the basin because I think.

It has a pretty strong effect on producer economics, So I think a narrowing of the differential should see the.

The growth rates increased pretty substantially for us.

In those places.

Thank you very much.

Thanks Sarah.

Thank you one moment for your next question.

Your next question comes from the line of Matthew Weekes from I Eh GTO.

Good morning, Thanks for taking my question I think you just mentioned.

And the upcoming.

Investor Day.

Highlighting and talking about media sort of long term opportunities in the land base I'm. Just wondering if you could sort of touch on ongoing now.

At this time and what you do kind of see in its future.

Potential opportunities over the medium and long term. Thanks.

Yes. Thanks for the question Matthew So one of the things we highlighted at Investor Day is we have our kind of proven.

Proven reserves, which would be the 40 plus thousand wallboard is just being blown down not a couple of billion dollar value. We don't book any proven undeveloped locations. So the development locations directly offsetting those wells that are proven and so what we do with the asset Handbook is trying to give investors a feel for what book value looks like in today's commodity.

<unk>.

With today's technology, no new discoveries no new technological advancements et cetera, and it's still well above our current share price. So we're just kind of it's almost highlighted the intrinsic value of the business or the book value of the business. In addition to that we'll provide some outcomes for investors over the next 510 and 15 years for the business in terms of potential returns.

In a variety of different capital spend in <unk>.

Pricing environment.

Each investor day, as a highlight and it.

Kind of a focus play and I think that the Clearwater will be the focus of the upcoming Investor day, and I would suggest that in two years' time, when we have our next investor day, it'll probably be on secondary recovery.

Waterflood polymer floods et cetera, because that's starting to become a big theme across a lot of our oil acreage on our more mature pools has a lot of activity on the upfront to lengthen the duration of those assets.

Okay. Thank you I appreciate the comment I'll turn it back.

Thanks for your question.

Thank you one moment for our next question.

Our next question comes from the line of Adam Schwartz from Black Bear Fund.

Hi, good morning, Thanks for taking my question.

I was wondering if you could comment on capital allocation going forward and your thoughts on buybacks versus dividends and in general the balance sheet. How much of that you are comfortable holding at that given.

Given where the stock's trading things seem pretty cheap. So just curious how you're thinking about overall balance sheet and what your plans are for the cash from a kind of rolling forward basis. Thank you.

Yes, so on capital allocation. Thanks for the question Adam.

We've obviously got the dividend, which is about $229 million commitment cash flow significantly higher.

We over the next year want to take that levels down to very low levels. Ultimately, we want zero debt on the balance sheet.

But buybacks will start to become part of the capital allocation sometime in the next next couple of years I think.

Sure.

Business that trades, well below intrinsic value because we got very little value for the 10 million acres of undeveloped land that currently doesn't generate cash flow.

But theres been a number of discoveries on those lands that have kind of proven some of the potential on those.

On those undeveloped acreage pieces, so I think.

The buyback definitely it is an important part of the return over the long term for our business I think we had a buyback in place for a long time, when we had net cash.

We chipped away at it very programmatically and then drink Covid when things got dislocated, we bought back 10 million shares at $9 30, a share. So we always like to have available liquidity when things get challenging for both acquisitions or potential buybacks, which we view as like an acquisition as well.

So hopefully that answers your question.

Dividend, we expect ratable increases over the next decade.

Got it parallel to the growth in free cash flow per share.

Yes that answers that.

My only comment or just be.

Perhaps contemplate.

Some.

Allocation between debt reduction and share buybacks, given you never know where the shares are going to trade in the future and they are certainly seem pretty cheap now and you guys have been very healthy.

High margin business, so maybe could operate with a little bit of debt just keep chipping away at it.

Yes.

Yes, no I appreciate the comment I know.

It's interesting when we when we bought heritage we closed out December 31, 2021, and we are borrowing at two 1%.

We rolled over the Bas last week at 631% at over 200 or 300% increase in cost of debt. So.

A good time to be retiring the debt and we have one of the lowest cost of borrowing in the entire business because of our 90.

98% operating margin so it's definitely something we want to.

Get lower.

In the near term.

Youre doing a terrific job so thank you.

Yes.

Comment.

Thank you I would now like to turn the conference back over to Andrew Phillips, President and CEO for closing remarks.

Just thank you very much to all our shareholders for their support over the year, we're going to work for it very hard for you in 2023 to continue to lease land and grow the business and thank you to all the staff who have been exceptionally busy over the last year and continue to be end of this year. So have a great day.

Sure.

Take care.

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

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