Q3 2023 PrairieSky Royalty Ltd Earnings Call
Speaker 1: Ladies and gentlemen, thank you for standing by. Prairie Sky Royalty LTD announces their third quarter 2023 financial results.
Ladies and gentlemen, thank you for standing by Prairie Sky royalty L. T D announces their third quarter 2023 financial results.
Speaker 1: After the speaker's presentation, there will be a question and answer session.
After the speaker's presentation, there will be a question and answer session to ask a question. During this session you will need to press star one on your tablet.
Speaker 1: To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Andrew Phillips, President and Chief Executive Officer. Please go over here.
You will then hear an automated message advising your hands raised.
Your question. Please press Star one one again, please be advised that today's conference is being recorded.
I'd now like to turn the conference over to Andrew Phillips, President and Chief Executive Officer. Please go ahead.
Speaker 2: Thank you, Michelle. And good morning, everyone. And thank you for dialing into the Prairie Sky Q3 2023 earnings call. On the call from PSK are Pam Cazelle, CFO , Dan Bertram, CCO, and myself, Andrew Phillips.
Okay.
Thank you Michelle and good morning, everyone and thank you for dialing into the Prairie Sky Q3, 2023 earnings call on the call from P. S. K.
Pam because all CFO .
Dan Bertram CTO and myself Andrew Phillips.
Speaker 2: There's certain forward-looking information in my commentary today, so I would ask investors to review the forward-looking statements qualifier in our press release in MDA.
Certain forward looking information in my commentary today, So I would ask investors to review the forward looking statements qualifier in our press release an M D. A.
Speaker 2: Prairie Sky achieved its highest total production in the third quarter since our IPO at 25,469 P.O.E. per day.
Prairie Sky achieved its highest total production in the third quarter since our IPO at 25469 Boe per day.
Speaker 2: This included 12,084 barrels per day of crude oil royalties, up 6% from the same quarter in 2022. Natural gas volumes were positively impacted by the return of shut-in volumes from wildfires and a significant well pad at Wembley placed on Crockett.
This included 12084 barrels per day of crude oil royalties up 6% from the same quarter in 2022.
Natural gas volumes were positively impacted by the return of shut in volumes from wildfires and a significant well pad at Wembley placed on production.
Speaker 2: 246 spuds occurred on Prairie Sky land over Q3 at an average royalty rate of 7.1%.
246, spuds occurred on Prairie Sky Labs over Q3 at an average royalty rate of seven 1%.
Speaker 2: Forty-five of these were Clearwater oil wells, and ninety-two of the total were Viking oil wells.
45 of these were Clearwater oil wells and 92 of the total where Viking wells.
Speaker 2: 35 Manville stack, multilateral and fishbone wells were drilled, which is on pace with our record 37 wells in Q3 2022.
35, Mandel stack multilateral on Fishbone wells were drilled which is on pace with a record 37 wells.
Q3 2022.
Speaker 2: Leasing activity remains very strong as it has for the last two years, and we entered into 46 new leasing arrangements with 40 different counterparties.
Leasing activity remains very strong as it has for the last two years and we entered into 46, new leasing arrangements with 40 different counterparties.
Speaker 2: Leasing was spread across the entire basin with a focus on oil. Our team executed on $15.6 million in acquisitions throughout the quarter, focused on the Manville stock play in the heavy oil fairway.
Leasing was spread across the entire basin with a focus on oil.
Our team executed on $15 6 million in acquisitions throughout the quarter focused on the Manville stack play and the heavy oil fairway.
Speaker 2: These lands will see immediate activity and provide strong returns, allowing us to compound at a faster rate.
These lands will see immediate activity and provide strong returns, allowing us to compound at a fast rate.
Speaker 2: Given our fee mineral title, seismic, and relationships with top tier developers, we expect to remain active adding to this opportunity set.
Giving given our fee mineral title seismic and relationships with top tier developers, we expect to remain active adding to this opportunity set.
Speaker 2: These lands will provide decades of inventory to an already industry-leading opportunity set.
Lance will provide decades of inventory to an already industry leading opportunity set.
Speaker 2: Praise Guy will review its capital allocation priorities in February and make its decision on the dividend at that time.
Pre Sky will review its capital allocation priorities in February and make a decision on the dividend at that time using.
Speaker 2: using strip pricing will be in a net cash position in 18 months.
Using strip pricing will be in a net cash position in 18 months.
Speaker 2: After achieving 22% oil growth in 2022 and 6% year to date, we are confident that our strong organic growth rates will continue in this pricing environment.
After achieving 22% of oil growth in 2022, 6% year to date, we are confident that our strong organic growth rates will continue in this pricing environment.
Speaker 2: The transformation of the primary heavy oil region in Western Canada with new drilling techniques will benefit our shareholders for years to come. I will now turn the call over to Pam.
The transformation of the primary heavy oil region in Western Canada, with new drilling techniques will benefit our shareholders for years to come.
I will now turn the call over to Pam to walk through the financials.
Speaker 3: Thank you, Andrew. Good morning everyone. There's 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 for Q3 2023. As Andrew mentioned, this was a record Q3 for Prairie Sky Royalty volumes, which totaled 25,000.
Thank you Andrew Good morning, everyone. There are certain forward looking information in the market today, So I would remind investors to review the forward looking statements qualifier in our press release and MD&A for Q3 2023.
As Andrew mentioned this was a record Q3 for gray Sky royalty volumes, which totaled 24469 Boe per day.
Speaker 3: Oil royalty production volumes averaged 12,084 barrels per day, a decrease from Q2 2023, which was expected as fewer new wells come on stream following spring break.
Our royalty production volumes averaged 12084 barrels per day, a decrease from Q2 to 2023, which was expected as fewer new wells come on stream following spring breakup.
Speaker 3: Oil royalty production increased 6% over Q3 2022 with strong production growth in the clear water and mantle stack. We anticipate higher oil royalty volumes into Q4 and 2024 due to the level of activity on our land.
Royalty production increased 6% over Q3 2022 with strong production growth in the Clearwater and amount of stock.
Anticipate higher oil royalty volumes up to Q4 of 2024 due to the level of activity on Iran.
Speaker 3: ProSky generated $102.8 million of oil royalty revenue in the quarter at a realized price of $92.
<unk> generated $102 $8 million of oil royalty revenue in the quarter at a realized price of $92 53 per barrel.
Speaker 3: Natural gas royalty volumes averaged 64.1 million a day and NGL royalty volumes averaged 2,702 barrels.
Natural gas royalty volumes averaged $64 1 million a day and NGL royalty volumes averaged 2702 barrels per day of shut in volumes related to Q2 wildfires and operational downtime came back on production. The overpayment recognized in Q2 was not repeated in the quarter and new Montney wells came on stream.
Speaker 3: shut in volumes related to Q2 wildfires and operational downtime came back on production. The overpayment recognized in Q2 was not repeated in the quarter and new Montany Wells came on stream.
Speaker 3: Prairie Sky generated $11.6 million of natural gas revenue and $13 million of NGL revenue.
Great Guy generated $11 $6 million with natural gas revenue and $13 million of NGL revenue in the quarter, bringing total royalty production revenue to $127 4 million.
Speaker 3: bringing total royalty production revenue to 127.4 million.
Speaker 3: Other revenue totaled $5.7 million and included $3.6 million of bonus consideration for entering into 46 new leases with 40 different counterparties.
Other revenue totaled $5 7 million and included $3 6 million of bonus consideration for entering into 2006, new leases with 40 different counterparties.
Speaker 3: one million in leaf rentals and 1.1 million of other in
In addition.
With $1 million and lease rental and $1 1 million of other income.
Speaker 3: Cash administrative expenses totaled $17.9 million in the quarter and included a $13.3 million one-
Cash administrative expenses totaled $17 9 million in the quarter and included a $13 3 million onetime payment.
Speaker 3: This was a cash outflow for the period that had a lesser impact on net income as $10.5 million of the payment had been accrued over the past four years until payout.
This was a cash outflow for the period, but had a lesser impact on net income of $10 $5 million of the payments had been accrued over the past four years until payout primarily stock based compensation.
Speaker 3: Prairie Sky recorded a current tax expense of 14.9 million in the quarter. Entering the year, Prairie Sky had 1.55 billion of tax pools to offset future taxable income. So in 2023, the first 155 million of cash flow is tax-free with remainder tax that are statutory tax rate of approximately 20...
Gray Sky recorded a current tax expense of $14 9 million in the quarter entering the year price go ahead 155 billion of tax pools to offset future taxable income. So in 2023, the first $155 million of cash flow is tax rate with remainder taxed at our statutory tax rate of approximately 23, 5%.
Speaker 3: Per sky generated quarterly funds from operations of 93.8 million or 39 cents per common share and declared dividends of 57.3 million or 24 cents per share with the resulting payout ratio of 61.
Chris got generated quarterly funds from operations of $93 8 million or <unk> 39 per common share and declared dividends of $57 3 million or 24 cents per share with a resulting payout ratio of 61%.
Speaker 3: Access funds from operations above the dividend and our 15.6 million in acquisitions were used to retire Bay Debt. Net debt at September 30th, 2023, was $253.7 million, a decrease of 19% since December 31st, 20.
Funds from operations above the dividend and a $15 6 million in acquisition were used to retire bank debt net debt at September 32023, with $253 7 million a decrease of 19% since December 31 2022.
Speaker 3: Prey skies generated approximately 2.5B in funds from operations and return 1.8B to shareholders through dividends and buybacks. I've access our IPO, we will now turn it over to the moderator to proceed.
Great guys generated approximately $2 5 billion in funds from operations and returned $1 8 billion to shareholders through dividends and buybacks buybacks since our IPO, we will now turn it over to the moderator to proceed with the Q&A.
Speaker 1: As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again please.
Speaker 1: Please stand by while we compile the Q&A roster.
Please standby, while we compile the Q&A roster.
Speaker 1: The first question comes from Aaron Bilcoski with TDCo, and your line is open.
The first question comes from Erin <unk> with TV Cowen Your line is open.
Speaker 4: Good morning, I would be interested to know who the most active drillers are on your stack acreage. And I guess a follow up question to that is where do you see industry activity at industry activity levels on your land specifically in the Mandel stack next year.
Good morning.
I would be interested to know who the most active drillers are on your mandal stack acreage and I guess a follow up question to that is where do you see industry activity industry activity levels on your land.
Specifically in the Mendoza next year.
Speaker 2: Yeah, thanks for the question, good morning, Aaron. The two most active drillers on our lands are Canadian natural resources in Keltex Trilogy, which is a newly formed private company. It was formed actually about a year and a half ago, but they've been quite active.
Yes, thanks for the question and good morning on the two most active drillers on our lands are Canadian natural resources, and Caltech trilogy, which is newly formed private company. It was formed actually about a year and a half ago, but they've been quite active.
Speaker 2: They did a large lease arrangement with us on our fee and then have added lands in between throughout that period. But I think there are just over 2,000 barrels a day and likely accident close to 5,000. So it's a pretty substantial growth rate. And then Canadian Natural through their Devon Canada acquisition acquired the largest position in the area. So they were our incumbent largest role.
They did a large lease arrangement with us on our fee and then about it lands and between throughout that period, but.
They are just over 2000 barrels a day and likely exited close to 5000.
Pretty substantial growth rate and then Canadian natural through there Devon, Canada acquisition acquired the largest position in the area. So they were our incumbent largest royalty payer.
Speaker 2: going into this new technological advancement.
Going into this new technological advancement.
Speaker 2: in the play and then 10 to your second question in terms of activity. We expect that there will be a significant uplift in activity on this.
In the play and then to answer your second question in terms of activity, we expect that there'll be a significant uplift in activity on this kind of manville stock play next year.
Speaker 2: kind of man-built stock play next year. I'm not sure that it will outpace the Clearwater next year, but it'll be, it's going to start to get close just given all the leasing arrangements we've entered into in the play and it's very good economics into these prices.
I'm not sure that it will outpace the Clearwater next year, but it'll be.
To start to get close just given all the leasing arrangements we've entered into in the play and it's very good economics into these prices.
Speaker 4: Thanks Andrew. I also have a follow up question for, I guess probably Pan's best suited to answer this.
Thanks, Andrew.
I also have a follow up question for I guess, probably best suited to answer this.
Speaker 4: How should I be thinking about G&A in the first half of 2024, given the long-term incentive, plan payments in Q1, and potentially DSUs held by the retiring board members coming in Q2?
Should I be thinking about G&A in the first half of 2024, given long term incentive plan payments in Q1 and potentially DSC is held by the retiring board members coming in Q2.
Speaker 3: Yeah, so thanks for the question, Erin. In Q1, we will give guidance, I guess, in February , with our year-end call. But we would expect just given the increase in our share price compared to when some of the long-term incentives.
Yes.
Thanks for the question Eric.
In Q1, we will give guidance I guess in February .
With our year end call, but we would expect just given the increase in our share price compared to win some of the long term incentive grants were.
Speaker 3: granted to the executive to be higher than Q1 of last year. And then with retiring board members, all of the deferred share units for all of our board members sit in a isolation going on.
Granted to the executive to be higher than Q1 of last year.
And then with retiring board members all of the deferred share units for all of our board members sit in accounts payables. So they are in our net debt.
Speaker 3: So we would anticipate paying out some of those next year. But of course, directors do have the opportunity to hold on.
So we would anticipate paying out some of those next year.
But of course directors do have the opportunity to hold on to their <unk> or 18 months following departure.
Speaker 5: 18 months following departure. So, you know, the timing of those payments will be dependent upon when the directors decide to exercise those DSU's.
So the timing of those payments will be dependent upon when the directors.
Two exercise of Psus.
That's very helpful. Thanks Pam.
Please standby for our next question.
Speaker 1: The next question comes from Jamie Cubic with CIBC. Your line is open.
Okay.
The next question comes from Jamie Kubik with CIBC. Your line is open.
Speaker 6: Yep, good morning and thanks for taking my question here. It did have a smaller acquisition in the quarter, but...
Yes, good morning, and thanks for taking my question here.
It did have a smaller acquisition in the quarter, but.
Speaker 6: indicators indicated it was on producing and non-producing properties. Can you just talk a little bit more about what that acquisition entails?
In the disclosures indicated was on producing and non producing properties can you just talk a little bit more about what that acquisition.
<unk> and how we should think about it going forward.
Speaker 2: You bet, Jamie. Thanks for the question. And it entails over 50 sections of oil sands, right? So it's primarily undeveloped, almost exclusively undeveloped. There's a small producing property that the operator.
You bet, Jamie Thanks for the question and it entails over 50 sections of oil sands right. So it's primarily undeveloped almost exclusively on about there is a small producing property that the operator.
Speaker 2: will take along with it, but that's a very minor royalty. We do expect immediate activity on it, on the one acquisition that totaled $10 million. They're right now acquiring surface leases and they expect to run a rig all of next year on those lands. So should be a pretty significant IRR for the company, just given the immediate activity.
We will take along with it but thats a very minor royalty, we do expect immediate activity on it on the one acquisition that totaled $10 million.
They are right now acquiring surface leases and they expect to run a rig all of next year on those lands so should be a pretty significant IRR for the company just given the immediate activity and the multi zone nature.
Speaker 2: and the multi-zone nature of the land. So it's again, it's a unique area because it's within that oil and tenure. So you get 15 years on the leases and then upon reaching a minimum amount of production, it's held in perpetuity effectively. So we're expecting immediate activity on those lands and should be some positive growth rates on those newly acquired lands in 2020.
The land so it's again, it's a unique area because it's within that oil sands tenure. So you get 15 years on the leases and then upon reaching a minimum amount of production it's held in perpetuity effectively so.
We're expecting immediate activity on those lines and it should be.
Some positive growth rates on those newly acquired lands in 2024.
Speaker 6: Okay, great. And then in your remarks, did talk about
Okay, Great and then in your remarks did talk about.
Looking at the dividend in 2024.
Speaker 6: Can you just talk about capital allocation, how you're thinking about the NCIB and...
Can you just talk about capital allocation, how youre thinking about the NCI be and what you would need to see for.
Speaker 6: see for potential dividend increase, just things around that nature.
Potential dividend increase.
Things around that nature, Andrew in time.
Speaker 2: You bet. So right now that it ends, $229 million annually or 96 cents per share per year, we obviously are seeing organic growth in the business. And...
You bet, so right now the dividend of $229 million annually or <unk> 96 per share per year. We obviously are seeing organic growth in the business.
And.
Speaker 2: You know, when we look into February , there's a good opportunity, I think, for a dividend increase, but I think we look out over the next 10 years we should be able to increase it annually more rateably alongside the growth of the business and install a lot of excess free cash flow. So given that the business will be in a debt free position within the next 18 months, I think it's reasonable to expect a dividend increase, but we'll evaluate it in February when we look at strip pricing, current activity levels on the land. And the opportunity.
When we look into February there is a good opportunity I think for a dividend increase.
I think when we look out over the next 10 years, we should be able to increase it annually more ratably alongside the growth of the business installed a lot of excess free cash flow. So given that the business will be in a debt preposition.
Within the next 18 months I think it's reasonable to expect a dividend increase but.
But we will evaluate it in February when we look at.
Strip pricing current activity levels on the land.
And the opportunity set in front of us.
Speaker 6: Okay, thanks. And maybe last one from me. Can you just talk about the M&A environment? You know, Perkz has been...
Okay. Thanks, and maybe last one from me can you just talk about the M&A environment parish guys spin.
Speaker 6: fairly quiet on this side. Last little while, can you talk about how your UNM and A opportunities?
It's fairly quiet on this side over the last little while can you talk about how your view of M&A opportunities.
Things of that nature.
Speaker 2: Yeah, you bet. I think the interesting thing is that $90 crude, we're typically fairly inactive. Almost all the M&A we've done over the last decade has been.
Yes, you bet I think.
The interesting thing is that $90 crude we are typically fairly inactive almost all the M&A. We've done over the last decade has been in kind of 40% to $60 price environment. So we're.
Speaker 2: in kind of 40 to $60 price environments. So we're typically inactive on the larger assets at this part of the cycle. Where we've been fortunate is unlike a few other times when there was really good pricing like 2014 or...
We're typically inactive on the larger assets at this part of the cycle, where we've been fortunate is unlike a few other times. When there is really good pricing like 2014 or 2017, we've been able to find these kind of large undeveloped land packages that have significant IRR for the company and long term resource potential.
Speaker 2: 2017 we've been able to find these kind of large undeveloped land packages that have significant IRRs for the company and long-term resource potential on this new manville stack play, which is very similar to the clear water in terms of IPs and resource in place. So we've been fortunate that we've been able to add a significant land position in that play. Land prices have gone up almost fivefold.
On on this new medical stack play, which is very similar to the Clearwater in terms of Ips and resource in place so.
We've been fortunate that we've been able to add a significant land position in that play.
Land prices have gone up almost fivefold since we.
Speaker 2: even over the last year and almost 20 fold since we first started acquiring land in there. So we may be priced out of that play completely now, but we've got a very large land position that'll give us decades of drilling inventory. So we're quite pleased with that. It looks like...
Even over the last year and almost 20 fold since we first started acquiring land in there. So we may be priced out of that play completely now, but we've got a very large land position that will give us decades of drilling inventory. So we're quite pleased with that it looks like.
But it'll be a significant growth play similar to the Clearwater.
And so again with the strong organic growth rates within the business, it's challenging to find something that's growing at a faster pace than your existing business. So for now we're quite comfortable with the portfolio. We have and will continue to focus on land leasing at this higher part of the cycle.
Unknown Executive: and ladies and gentlemen, thank you for standing by PrairieSky Royalty Ltd, announces their third quarter 2023 financial results. After the speaker's presentation there will be a question and answer session. To ask a question during the session you will need to press star 11 on your telephone, you will then hear an automated message advising your hand is raised. To withdraw your question please press star 11 again. Please be advised that today's conference is being recorded.
Okay. Thanks for the color I'll turn it back.
Please standby for earn next question.
The next question comes from Jeremy Mccrea with Raymond James Your line is open.
Unknown Executive: I would now like to turn the conference over to Andrew Phillips, President and Chief Executive Officer. Please go ahead.
Okay.
Hi, guys. This is a bit of jamie's question here too.
You talk about a lot about the Clearwater and the manville growth.
What would be like the other kind of place to watch here that could surprise us next year.
Andrew Phillips: Thank you Michelle, thank you morning everyone and thank you for dialing into the PrairieSky Q3 2023 earnings call. On the call from PSK, our Pam Kazeil, CFO, Dan Bertram, CTO, and myself, Andrew Phillips.
I'm, just saying like is there anything in the Duvernay and the Montney.
That could surprise us in terms of additional production growth.
The other place and then those.
Andrew Phillips: There's certain forward-looking information in my commentary today, so I would ask investors to review the forward-looking statements qualified in our press release in MDA. PrairieSky achieved its highest total production in a third quarter since our IPO at 25,469 BoE per day. This included 12,084 barrels per day of crude oil royalties up to 6% from the same quarter in 2022. Natural gas volumes were positively impacted by the return of shut-in volumes from wildfires and a significant well-padded Wembley play thumb production.
Yes.
Thanks for the question I think.
In the Duvernay niche L. Duvernay, we do expect some growth there.
In the double digits don't know exactly where to land and then in the Montney. We've seen some significant licensing on some of our core Lance obviously, we had a big <unk>.
And from large pad that went on in Wembley This previous quarter, but we have seen some license subsequent to the quarter end. So we do expect growth there and then and then probably the other one that is kind of more under the radar is in southern Alberta light.
Light oil play in the basal manville, that's starting to gain some momentum we have a huge land position in southern Alberta, and some of the top wells as I know you've noted Jeremy have come out of that region. So thats a light oil play with liquids rich solution gas and we're starting to see licensing pick up there significantly and if you break out the manville drew.
Andrew Phillips: 246 spuds occurred on PrairieSky lands over Q3 at an average royalty rate of 7.1%. 45 of these were clear water oil wells and 92 of the total were biking well wells. 35 Mandelstack, multilateral and fishbone wells were drilled, which is on pace with our record 37 wells in Q3 2022. Leasing activity remains very strong as it has for the last two years and we entered into 46 new leasing arrangements with 40 different counter parties.
Drilling actually in Q3, there is double digits over 10 wells drilled in the on that light oil play. So that's one that's kind of under the radar that could provide some light oil growth as well.
And when do you say to leasing that youre seeing from different operators.
Andrew Phillips: Leasing was spread across the entire basin with focus on oil. Our team executed on 15.6 million in acquisitions throughout the quarter focus on the Mandelstack play in the heavy oil fairway. These lands will see immediate activity and provide strong returns allowing us to compound it a faster rate. Given our fee mineral title, seismic and relationships with top tier developers, we expect to remain active adding to this opportunity set. These lands will provide decades of inventory to an already industry leading opportunity set.
That we saw for Q3.
And what are you kind of maybe seen so far like in the first month of October here like is it is it picking up more aggressively than what you saw last year, even though oil prices are down or is it the same as it.
Like when you sign these new leases are they for more multiple wells or are they just for single well then I'm just trying to get a better sense of the.
Leasing activity numbers that were reported.
Yes.
The agreement from that yes.
No for sure.
Andrew Phillips: PrairieSky will review its capital allocation priorities in February and make a decision on the dividend at that time. Using strip pricing will be in a net cash position in 18 months. After achieving 22 percent oil growth in 2022 and 6 percent year to date, we are confident that our strong organic growth rates will continue in this pricing environment. The transformation of the primary heavy oil region in western Canada with new drilling techniques will benefit our shareholders for years to come.
One of the interesting things, we're seeing that's different from last year. If you look at the.
40 different companies at least from us in this quarter, it's similar leasing activity levels similar land.
That releasing and similar.
Total acreage numbers, what's unique is its a lot more different companies. So theres been a lot of new capital formation in the basin. This year. There are two private companies both that heavily to arrangements with us that we're out doing financings.
A week ago that Bert.
Pamela Kazeil: I will now turn the call over to Pam to walk through the financials. Thank you, Andrew.
They've leased what we consider some excellent land. So there's just a lot more different companies, but similar levels of leasing in terms of total acreage Jeremy.
Pamela Kazeil: Good morning, everyone.
Pamela Kazeil: There are certain forward looking information in the notes today, so I would remind investors to review the forward looking statement's qualifier in our press release in MDNA for 23 2023. As Andrew mentioned, this was a record queues read for PrairieSky royalty volume, which totaled 24,469 B.O.E, per day. Royalty production volumes averaged 12,084 barrels per day, a decrease from Q2 2023, which was expected as fewer new wells come on stream following spring break up.
Okay.
Okay perfect. Thanks, guys.
As a reminder to ask a question. Please press star one one on your telephone keypad and wait for your name to be announced.
Our next question comes from Patrick O'rourke with ATB capital markets. Your line is open.
Pamela Kazeil: Royalty production increased 6% over Q3 2022 with strong production growth in the clear water and mantle stack. We anticipate higher Royalty volumes into Q4 and 2024 due to the level of activity on our lands. PrairieSky generated $102.8 million of oil royalty revenue in the quarter at a realized price of $92.53 per barrel. Natural gas royalty volumes averaged 64.1 million a day and NGO royalty volumes averaged 2,702 barrels per day as shut in volumes related to Q2 wildfires and operational downtime came back on production.
Hey, good morning, guys.
Hopefully I'm not flogging a bit of a dead horse here, because we've talked a lot about the manville, so far but I'm, just kind of curious and got a bit into the.
Leasing activity.
Or do you think you are in terms of the leasing cycle in terms of asset quality. That's left I know <unk> had well capitalized and comments you mentioned new capital formation Juniors there guys have been working.
This fairway and it's become extremely competitive so what sort of diamonds are left in the rough and how does this sort of play out over the next couple of years or does it start to kind of tail off or taper off.
Pamela Kazeil: The overpayment recognized in Q2 was not repeated in the quarter and new mountain wells came on stream. PrairieSky generated $11.6 million of natural gas revenue and $13 million of NGL revenue in the quarter, bringing total royalty production revenue to 127.4 million. Other revenue total 5.7 million included 3.6 million of bonus consideration for entering into 46 new leases with 40 different counter parties. In addition, one million in lease rentals and 1.1 million of other income.
Yes, it's a good question and thanks for the question Patrick one of the interesting things about it is.
Okay.
The original play with kind of a sparky and then now we have to seek the rack. The Cummings there is PS.
Trying kind of a fan wells or Fishbone wells in less consolidated reservoirs. So as you move into the Saskatchewan side, there's actually quite a significant resource there as well and we've actually just started to do some leasing on the Saskatchewan side for similar type players. So I think what's unique is the mandel, obviously, the biggest producing formation in Alberta.
Pamela Kazeil: Cash administrative expenses totaled $17.9 million in the quarter and included a $13.3 million dollar one time payment. This was a cash outflow for the period that had a lesser impact on net income as $10.5 million of the payment had been accrued over the past four years until pay-o, primarily a stock-based compensation. PrairieSky recorded a current tax expense of $14.9 million in the quarter. Entry in the year, PrairieSky had $1.55 billion of tax pools to offset future taxable income.
The world's fourth largest oil producer.
Massive resource and people are testing this play.
A number of different zones, so I think because of zone all we.
We believe there'll be still a few years ahead of people uncovering new opportunities in different places, where it will work and we've actually seen some leasing on our light oil play for similar.
Type of technology, where theyre going to try multilateral. So so again I do think there is still years ahead.
Pamela Kazeil: So in 2023, the first $155 million of cash flow is tax-free with remainder tax that are statutory tax rate of approximately $23.5%. PrairieSky generated quarterly funds from operations of $93.8 million or $39.9 for common share and declared dividends of $57.3 million or $24 cents per share with the resulting pay-out ratio of 61%. Excess funds from operations above the dividend and our $15.6 million in acquisition were used to retire bank debt. Net debt at September 30th, 2023, was $253.7 million, a decrease of 19 percent since December 31st, 2022.
Opportunities in.
There was one operator.
With de tax, which made a discovery and they announce it called more and bill that's about 1000 meters. So everyone's kind of targeted between.
400, 600 meters in that whole fairways pretty active but they jumped a little further west than it seemed to work there, sometimes we get slightly better oil quality you can handle smaller grain size. So.
We believe there is some pretty significant potential between 601000 meters as well so it's a pretty significant formation, Alberta, and we think.
This technology can unlock quite a bit more oil potential.
Pamela Kazeil: PrairieSky's generated approximately $2.5 billion in funds from operations and returned $1.8 billion to shareholders through dividends and buy-packs since our IPO.
So hopefully that answers.
Yes, no that's terrific and then sort of just moving over.
Unknown Executive: We will now turn it over to the moderator to proceed with the Q&A. As a reminder to ask a question, please press store 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press store 1-1 again. Please stand by while we compile the Q&A roster.
Theres been a little bit of volatility in terms of the oil and NGL.
Gas oil ratios gas liquids ratios over the last couple of quarters, you have wildfires here.
Most of the almost all of the new drilling that Youre seeing on your land is targeting oil formations just wondering sort of how you envision the rate of change in that gas oil ratio over the next couple of years.
Yes, we do just given the significant.
Erin DeCosky: The first question comes from Erin DeCosky with T.D. Cohen, your line is open. Good morning.
Oil drilling we do expect the oil drilling to continue to become a bigger part of the mix I think if you go all the way back to our IPO, which is almost a decade ago, we were 40% oil and liquids and 60% natural gas today, it's completely reverse were 60% oil and liquids and 40% natural gas.
Andrew Phillips: I would be interested to know who the most active growers are on your Mendelstack acreage, and I guess a follow-up question to that is where do you see industry activity levels on your land, specifically in the Mendelstack next year? Yeah, thanks for the question, good morning Aaron. The two most active growers on our lands are Canadian natural resources in Keltex Trilogy, which is a newly formed private company. It was formed actually about a year and a half ago, but they've been quite active.
The one thing we have accumulated as a basket of options in the deep basin.
And in the Montney. So you see situations like this last quarter, where one single well pad can significantly impact the natural gas volumes. So just given you don't need a huge amount of drilling to impact gas volumes sips.
Andrew Phillips: They did a large leasing arrangement with us on our feet, and then about it lands in between throughout that period, but I think they're just over 2000 barrels a day, and likely actually close to 5,000, so it's a pretty substantial growth rate, and then Canadian natural through their Devon Canada acquisition acquired the largest position in the area. So they were our incumbent largest royalty pair going into this new technological advancement in the play, and then to answer your second question in terms of activity, we expect that there'll be a significant uplift in activity on this kind of Mendelstack play next year.
Sure.
It'll be Lumpier as you mentioned, but again the oil volumes, we expect to continue to grow just given the strong leasing activity, but there'll always be volatility in terms of in the short term spike in the quarters, because <unk> got 42800 wallboard as youre collecting royalties on monthly and then another 850 or so wells get drilled on an annual basis.
The pace at which they come on really impacts the quarterly volumes, but if you look out.
If you look out on an annual basis, it smooths out pretty well.
Okay. Thank you.
And the one other just follow up just to your question a lot of the gasoline as we've seen over the last two years have been associated gas. So.
Andrew Phillips: I'm not sure that it'll outpace the clear water next year, but it'll be it's going to start to get close just given all the leasing arrangements we've entered into in the play, and it's very good economic since these prices. Thanks, Andrew.
Third of our gas volumes are now just associated with gas with oil drilling. So a lot of that oil drilling is actually giving us a bit of a gas based as well.
Erin DeCosky: I also have a follow-up question for, I guess, probably Pan especially to answer this.
Thank you.
I show no further questions at this time I would now like to turn the call back over to Andrew for closing remarks.
Pamela Kazeil: How should I be thinking about GNA in the first half of 2024, given the long-term incentive plan payments in Q1, and potentially DSU's held by the retiring board members coming in Q2? Yeah, so thanks for the question, Aaron. In Q1, we will give guidance, I guess in February, with our year end call, but we would expect just given the increase in our share price compared to when some of the long-term incentives grants were granted to the executive to be higher than Q1 of last year.
Thank you everyone for dialing into the Prairie Sky Q3 conference call and please feel free to call myself or Dan. If you have any further questions have a great day.
Thank you for participating this concludes today's conference call you may now disconnect.
Pamela Kazeil: And then with retiring board members, all of the deferred share units for all of our board members sit in accounts payable so they are in our next December, so we're going to anticipate paying out some of those next year, but of course directors do have the opportunity to hold on to their DSUs for 18 months following departure, so the timing of those payments will be dependent upon when the directors decide to exercise those DSUs.
Okay.
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Okay.
Thanks.
Okay.
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Erin DeCosky: That was very helpful. Thanks, Bob.
Unknown Executive: Please stand by for our next question.
Jamie Cubic: The next question comes from Jamie Cubic with CIBC. Your line is open. Yep, good morning and thanks for taking my question here. You did have a smaller acquisition in the quarter, but in the disclosures indicated it was on producing and non-producing properties. Can you just talk a little bit more about what that acquisition entails and how we should think about it going forward? You bet, Jamie. Thanks for the question. And it entails over 50 sections of oil sands, right?
Okay.
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Jamie Cubic: So it's primarily undeveloped, almost exclusively undeveloped. There's a small producing property that the operator will take along with it, but that's a very minor royalty. We do expect immediate activity on it on the one acquisition, the total $10 million. They're right now acquiring surface leases and they expect to run a rig all of next year on those lands, so it should be a pretty significant IRR for the company, just given immediate activity and the multi-zone nature of the land.
Jamie Cubic: So it's again, it's a unique area because it's within that oil and tenure. So you get 15 years on the leases and then upon reaching a minimum amount of production, it's held in perpetuity effectively. So we're expecting immediate activity on those lands and should be some positive growth rates on those newly acquired lands in 2021, for it.
Jamie Cubic: Okay, great.
Jamie Cubic: And then in your remarks did talk about, you know, looking at the dividend in 2024.
Andrew Phillips: Can you just talk about capital allocation, how you're thinking about the NCIB and what you would need to see for a potential dividend increase, just things around that nature, Andrew and Pam? You bet. So right now, the dividends, $229 million, annually or 96 cents per share per year, we obviously are seeing organic growth in the business. And you know, when we look into February, there's a good opportunity, I think, for a dividend increase, but I think we look out over the next 10 years, we should be able to increase it annually, more rateably, alongside the growth of the business, and still a lot of excess free cash flow.
Andrew Phillips: So given that the business will be in a debt pre-position within the next 18 months, I think it's reasonable to expect a dividend increase, but we'll evaluate it in February when we look at strip pricing, current activity levels on the land, and the opportunity set in front of us. Okay, thanks.
Andrew Phillips: And maybe last one from me. Can you just talk about the M&A environment, you know, PrairieSky's been fairly quiet on this side? Or last little while, can you talk about your M&A opportunities and things of that nature? Yeah, you bet. I think, you know, the interesting thing is that $90 crude, we're typically fairly inactive, almost all the M&A we've done over the last decade has been in kind of 40 to 60 dollar price environments.
Andrew Phillips: So we're typically in active on the larger assets at this part of the cycle, where it's unfortunate is unlike a few other times when there was really good pricing like 2014 or 2017, we've been able to find these kind of large undeveloped land packages that have significant IRRs for the company and long-term resource potential on this new mammal stack play, which is very similar to the clear water in terms of IPs and resource in place. So we've unfortunate that we've been able to add a significant land position in that play.
Andrew Phillips: Land prices have gone up almost fivefold since we even over the last year and almost 20fold since we first started acquiring land in there, so we may be priced out of that play completely now, but we've got a very large land position that'll give us decades of drilling inventory. So we're quite pleased with that. It looks like that it'll be a significant growth place similar to the clear water. And so again with the strong organic growth rates within the business, it's challenging to find something that's growing at a faster pace than your existing business.
Andrew Phillips: So for now, we're quite comfortable with it portfolio we have and we'll continue to focus on land leasing at this higher part of the cycle. Okay, thanks for the color. I'll turn it back. Please stand by for our next question.
Jeremy McRae: The next question comes from Jeremy McRae with Raymond James. Your line is open. Hi guys, this is a bit of a Jamie's question here too. When we talk about a lot about the clear water and the manville growth, is what would be like this the other kind of place to watch here that could surprise us next year? I'm just thinking like is there anything in the duperny and the mottony that could surprise us in terms of additional production growth or other places than those?
Jeremy McRae: Yeah, no, thanks for the question. I think the, you know, in the Duvernay, the shale Duvernay, we do expect some growth there in the double digits, don't know exactly where it'll land. And then in the morning, we've seen some significant well licensing on some of our core lands. Obviously, we had a big tailwind from a large pad that went on in Wembley, this previous quarter, but we have seen some life and subsequent to the quarter end.
Jeremy McRae: So we do expect growth there. And then, and then probably the other one that's kind of more under the radar is in Southern Alberta. There's a light oil play in the basal mandal that started to gain some momentum. We have a huge land position in Southern Alberta, and it's some of the top wells is, I know you've noted, Jeremy, have come out of that region. So that's a light oil play with liquid-rich solution gas and we're starting to see licensing pick up there significantly.
Jeremy McRae: And if you break out the mandal drilling actually in Q3, there's double digits, or over 10 wells drilled in the on that light oil play. So that's one that's kind of under the radar that could provide some light oil growth as well. And would you say, the only thing that you're seeing from different operators that we saw for Q3? And what you've kind of maybe seen so far, like in the first month of October here, is it picking up more aggressively than what you saw last year, even though oil prices are down, or is it the same, is it, like when you find these new leases, are they for more multiple wells, or are they just for single wells?
Jeremy McRae: I'm just trying to get a better sense of the leasing activity numbers that were reported. Yeah, and you can go like agreements in that, yeah. No, for sure. And it's one of the interesting things we're seeing that different from last year. If you look at the 40 different companies, at least from us in this quarter, it's similarly thing activity levels, similar land that we're leasing, and similar, I guess, total acre chumbers.
Jeremy McRae: What's unique is it's a lot more different company. So there's been a lot of new capital formation in the base in this year. There's two private companies, both that have leased arrangements with us that we're out doing financings. A week ago, they've leased what we consider some maximum land. So there's just a lot more different companies, but similar levels of leasing in terms of total acre chum. Okay. Okay, perfect. Thanks, guys. As a reminder to ask a question, please press star 11 on your telephone keypad and wait for your name to be announced.
Patrick O'rourke: Our next question comes from Patrick O'Rourke with ATB Capital Market. Your line is open. Hey, good morning, guys.
Patrick O'rourke: Hopefully I'm not plugging a bit of a dead horse here because we've talked a lot about the manville so far, but I'm just kind of curious and got a bit into the leasing activity. Like, where do you think you are in terms of the leasing cycle, in terms of the asset quality that's left? I know you've had well capitalized incumbents. You mentioned new capital formation in juniors there. Guys have been working this fairway and it's become extremely competitive.
Patrick O'rourke: So what sort of diamonds are left in the rough? And how does this sort of play out over the next couple of years? Or does it start to kind of tail off or taper off? Yes, it's a good question. Thanks for the question, Patrick. One of the interesting things about it is, you know, the original play was kind of a sparky, and then now we have the Oseka, the Rax, the Cummings, there's people trying kind of the fan wells or fishbone wells in less consolidated reservoirs.
Patrick O'rourke: So as you move into the scotchland side, there's actually quite a significant resource there as well. And we actually just started to do some leasing on the Saskatchewan side for a similar type of play. So I think what's unique is the man, obviously the biggest producing formation, you know, Berda, the Rolls-Portlargest Oil producer, it's a massive resource, and people are testing this play in a number of different zones. So I think because it's zonal, we believe there'll be still a few years ahead of people uncovering new opportunities in different places where it'll work.
Patrick O'rourke: And we've actually seen some leasing on a light oil play for a similar type of technology where they're going to try multilateral. So again, I do think there's still years ahead of opportunities, and there was one operator that was the ATECS, which made a discovery and they announced it called Morinville. That's about a thousand meters. So everyone's kind of targeted between 400 and 600 meters, and that whole fairway is pretty active, but they jumped a little further west and it seemed to work there.
Patrick O'rourke: Sometimes we're absolutely better oil quality. You can handle smaller grain size. So we believe there's some pretty significant potential between 600 and a thousand meters as well. So it's pretty significant information, Alberta, and we think this technology can unlock quite a bit more oil potential. So hopefully that answers your question.
Patrick O'rourke: Yeah, no, that's terrific.
Patrick O'rourke: And then, you know, sort of just moving over. There's been a little bit of volatility in terms of the oil and NGL gas oil ratios, gas liquids ratios over the last couple of quarters.
Andrew Phillips: You have wildfires here. Most of the, or almost all of the new drilling that you're seeing on your land is targeting oil formations, just wondering sort of how you envision the rate of change in that gas oil ratio over the next couple of years. Yeah, we do just given the significant amount of oil drilling, we do expect the oil drilling to continue to become a bigger part of the mix. Think you could go all the way back to our IPO, which is almost decade ago.
Andrew Phillips: We were 40% oil and liquids and 60% natural gas. Today, it's completely reversed. We're 60% oil and liquids and 40% natural gas. The one thing we have accumulated is a basket of options in the deep basin and in the morning. So you see situations like this last quarter where one single well pad can significantly impact the natural gas volumes. So just given, you don't need a huge amount of drilling to impact gas volumes, it's, it'll be lumpier as you mentioned.
Andrew Phillips: But again, the oil volumes we expect to continue grow, just given the strong leasing activity. But there will always be volatility in terms of, in the short terms, like in the quarters, because you've got 42,800 well, where is your collecting royalties on monthly, and then another 850 or so while the get drilled on an annual basis, and the pace of which they come on really impacts the quarterly volumes. But if you look out, if you look out on an annual basis, it smooths out pretty well.
Andrew Phillips: Okay, thank you. And the one other just follow up just to your question. A lot of the gas volumes we've seen over the last two years have been associated gas. So a third of our gas volumes are now just associated with gas or with oil drilling. So a lot of that oil drilling is actually giving us a bit of a gas boost as well.
Unknown Executive: I show no for the questions at this time.
Andrew Phillips: I would now like to turn the call back over to Andrew for closing remarks. Thank you everyone for dialing into the PrairieSky Q3 conference call and please feel free to call Pam myself or Dan if you have any further questions.
Unknown Executive: Have a great day. Thank you for participating.
Unknown Executive: This concludes today's conference call.
Unknown Executive: You may now disconnect.