Q2 2023 PrairieSky Royalty Ltd Earnings Call

Okay.

Good day and welcome to Purge Guy Royalty Ltd announced our second quarter 2023 financial results at this time, all participants I listen only mode.

After the Speakers' presentation there'll be a question answer session.

This will be given at that time.

As a reminder, this call is being recorded I would now.

I hand, the call over to Andrew Phillips, President and CEO you may begin.

Okay.

Yes.

Good morning, and thanks for dialing in to the appraised by Q2 2023 earnings call.

A call from Prairie Sky or Cam Proctor, COO, Pam because all CFO and myself Andrew Phillips.

Theres 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 walked through the operations report and then turn the call over to Pam to summarize the financials.

Q2 was another solid quarter for Prairie Sky operationally and financially oil royalty volumes grew organically to 12607 barrels per day and are now 6% higher over the first six months of 2023, when compared with the first six months of 2022.

There were 148 wells spud in Q2, which were 92% oil although activity in the quarter was moderated by seasonal breakup.

Brooke wells drilled was up 21% from 122 wells spud in Q2 2022.

The biking was the most actively drove play with 43 wells spud followed by the Clearwater with $33.

32 light and heavy meet Mandela oil wells and five Manville wells at Lindbergh.

Additional oil activity.

Took place across the portfolio, including well spud in the Duvernay and Mississippian.

There were also 11 Montney natural gas wells spud the average royalty rate for wells spud in the quarter was five 8%.

Leasing activity remains robust and the company received $5 7 million in bonus revenue and entered into 39, new leases with 37 Counterparties.

A number of large leasing arrangements are part of this total including significant including a significant light oil arrangement with ball commitments word inflection and recent well results had been noted.

We really we leased 167 sections of land this quarter versus 82 sections a quarter ago as companies are looking to expand their inventory and numerous startups have been active on the leasing front.

$15 million was spent on undeveloped land in the mental stack play.

There's large oil in place on the lands and multilateral drilling we'll see this play continues to expand.

With narrow differentials and pick pay packages there is significant potential on both our fee title and newly acquired lands.

As profitability of Canadian oil producers continues to grow and producer balance sheets remain healthy we see growing capital expenditures in the western Canadian sedimentary basin over the next five years.

Thank you and I'll turn the call over to Pam to walk through the financials.

Thank you Andrew and 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 your press release and MD&A for Q2.

Great oil royalty production volumes grew to a record 12607 barrels per day in the quarter and drove 83% of our royalty revenues.

The 3% increase in production of our Q1 was predominantly from oil finds in the banking manville heavy oil and Clearwater. Please.

And offset natural decline and the negative impact of the Alberta, wildfires, which we estimate lowered average royalty production.

For oil by 135 barrels per day and revenue by $900000 in the quarter.

<unk> realized price was $78 per barrel, which combined with our record oil production generated oil royalty revenues of $89 6 million.

Natural gas royalty revenues averaged $53 8 million a day below Q1 2023, as a result of operational downtime due to the wildfires, which we estimate reduced volumes by $2 5 million a day and revenue by 400000 and the impact of a one time prior period adjustment, which reduced quarterly volumes by $4 5 million a day.

Reduced revenue by 400000.

Great guys realized natural gas price was $2 23 per Mcf and generated natural gas revenue of $10 9 million.

NGL royalty volumes averaged 1943 barrels per day.

In the quarter NGL royalty volumes were lower due to the wildfires, which we estimate reduced volumes by 200 barrels per day in the quarter and revenue by 500000 to.

The one time prior period adjustment I discussed for natural gas lowered NGL royalty volumes by 370 barrels per day in revenue by $1 6 million. After accounting for these adjustments NGL royalty revenue totaled $7 9 million with a realized price of $44 77 per barrel.

Total royalty production averaged 23517 Boe per day and generated $108 4 million of royalty production revenue.

We anticipate that the wild wildfire volumes will be back on production for Q3.

Also the prior period adjustment I described how the onetime impact on revenue and volumes.

During the quarter. The compliance group also collected $2 million in underpayments, which offset the full revenue impact of the prior period overpayment.

Other revenue totaled $9 million and included $2 6 million in lease rentals $700000 of other income, including $600000 of potash revenue and $5 7 million of bonus consideration for entering into 39, new leases with 37 different counterparties.

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

Cash expenses in the quarter, where production and mineral taxes of $1 4 million and cash administrative expenses, which totaled $7 2 million or $3 36 per Boe cash.

Administrative expense was higher than Q2 of last year due to the payment of deferred share units two retiring director.

<unk> recorded a cash tax expense of $13 million in the quarter entering the year, we had $1 5 billion of tax pools to offset future taxable income. So in 2023, the first $155 million of cash flow is tax rates with the remainder tax at our statutory tax rate of approximately 23%.

Scott generated quarterly funds from operations of $91 3 million or <unk> 38 cents per common share.

During the quarter <unk> declared dividends for 57, 3 million or <unk> 20 per share with a resulting payout ratio of 63%.

Funds from operations above the dividend and a $15 2 million in acquisition was used to retire bank debt net debt at June 32023, with $275 9 million.

Chris guys generated approximately $2 4 billion in funds from operations and returned $1 7 billion to shareholders through dividends and buybacks since our IPO nine years ago.

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

Thank you if you would like to ask a question. Please press star one one if your question has been answered and we like to remove yourself from the queue. Please press star one again.

Our first question comes from Patrick O'rourke with ATB capital markets. Your line is open.

Oh, Hey, guys good morning.

Just a quick question with respect to the acquisition here sort of undeveloped manville.

Primarily our GOR interest here is there any sort of.

Synergies with respect to your fee simple lands.

Do you expect kind of co development between Gore in fee simple and then are there any capital commitments with respect to this acquisition.

Yes, good morning, Patrick.

Yes, so to answer the last part of the question there are capital commitments related to the acquisition.

They are primarily 15 year oil sands leases at night and upon achieving a certain amount of production. They can be continued to perpetuity.

And what we liked about it is there's multi multi zone paid within the area that can be developed with both multilateral and we think with the Fishbone design, where it's more on consolidated.

And a lot of it it's not it's not real exploration and it's been proven up on the fee mineral title offsetting in certain cases so.

We're quite confident in the development profile of the asset.

It's got some excellent economics, that's sub one year payouts and significant oil in place.

Okay.

Is there any overlap with any existing fee simple land.

As the operator Thomas shared between Gore in fee simple lands at all.

Yes so.

We do have the checkerboard fee mineral title within the area some of at least some of it.

Some of it's leased from old leasing arrangements from over 10 years ago, primarily to Devon, Canada, which now is general and then Theres been a lot of new leasing recently in the areas.

So there is there are some synergies for sure both from a surface land perspective, but also a road perspective at a development perspective.

Okay, great. Thank you very much.

Thanks for your question.

Thank you. Our next question comes from Mike Dunn with Stifel Firstenergy. Your line is open.

Thanks, Good morning, Andrew can you.

Provide any more color on the light oil commitments you mentioned earlier.

What's the inflection in well results would play in one area.

Yes so.

It's been kind of western Alberta, Cardium, it's in lock and interestingly enough. If you look at two of the top three wells in the Cardium in all of Canada.

In may they were in that area, they're kind of 1000 barrel a day IP.

We have slightly higher royalties are 18% just given the competitive nature of the area.

So we have a multi year agreement with an operator in the area.

Well commitments.

And with that well result has been exceptional and may continue to improve.

Theres also liquids rich listening solution gas that comes along with the 40 degree crude.

And so I think again.

<unk> seen an inflection in.

Quality of the wallets with more modern fracking.

Thanks, Andrew that's all from me.

Thanks, Mike.

As a reminder to ask a question. Please press star one one.

Our next question comes from Jamie Kubik with CIBC. Your line is open.

Yes, thanks for taking my question.

I have two questions can can you. The first one can you talk a little bit about our royalty rate on new wells drilled during the quarter.

It was around five 8% down a bit from last year and.

What drove that reduction and where you expect that to trend in the back half of 2023 based on what youre seeing from activity.

You bet.

Your first question and I'll get you that question in a second the.

The royalty rate of five 8%, but part of it was so there is a lower amount of drilling activity just because it was the breakup quarter a lot of the drills that were.

They were in Q2 would've been in that kind of deep base and winter access only so more growers and in addition, there is a number of Montney wells that were drilled that just touched our sections with higher royalties, but of course, the average royalty on that ended up being less than 1%, which kind of drag the number down so just in terms of XP.

Patients in the back half of the year, we expect significantly higher average royalty rates and again, we've always said, we will always have quarters, where it will be below six modestly, but then what we're seeing in general is the 800 plus wells the controlled any year significantly higher royalties than we'd seen in the past.

And we expect that to continue in Q3 Q4.

Okay. Thanks.

Second question here can appreciate the gas volumes are lower on the quarter too.

A few one time charges that hit you there but.

How do you think gas volumes trend for the balance of the year based on the drilling that you've seen so far in the deep basin Montney.

Yes, it's a good question. So in terms of the PPA you can basically add that back and then in terms of the fire volumes you can just add those back so that takes you back to a more reasonable level and then in addition, we.

We had a number of high rate Montney wells come on in Q2, So those should help the back half of the year in terms of gasoline. So I don't know exactly where to land of course, we don't give guidance but.

It should get back to more normalized levels for the rest of the year.

Okay. That's all for me thank you.

Thanks for your question.

Questions. Thank you there are no further questions at this time I'd like to turn the call back over to Andrew Phillips for any closing remarks.

Thank you very much for dialing in and hope everybody has a great summer.

Thank you. This concludes the program you may now disconnect everyone have a great day.

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