Q1 2024 PrairieSky Royalty Ltd Earnings Call

Okay.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to PrairieSky Royalty as we announce our first quarter 2024 financial results.

Speaker Change: Ladies and gentlemen, thank you for standing by welcome to Prairie Sky royalty announces first quarter 'twenty 'twenty four financial results at this time all participants are in a listen only mode.

Operator: At this time, all participants are in a listen-only mode. 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 that 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 like now to turn the conference over to Andrew Phillips, President and Chief Executive Officer. Please go ahead.

Speaker Change: 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 telephone you wouldn't hear an automated message of bites in your hand, it's true.

Speaker Change: Your question. Please press Star one again, please be advised that today's conference is being recorded I would like now to turn the conference over to Andrew Phillips, President and Chief Executive Officer. Please go ahead.

Andrew M. Phillips: Thank you very much, operator, and good morning, everyone. Thank you for dialing into the PrairieSky Q1 2024 conference call. On the call from PrairieSky are Pam Kazeil, Dan Bertram, Mike Murphy, and myself, Andrew Phillips. Before we begin, there is certain forward-looking information in my commentary today, so I would ask investors to review the forward-looking statements qualifier in our press release at MDA. The first quarter of 2024 saw PrairieSky receive 13,142 barrels of Royalty Oil Volumes, a record for the company. Natural gas and NGL volumes remain steady.

Andrew M. Phillips: Thank you very much off operator, and good morning, everyone.

Andrew M. Phillips: Thank you for dialing into the praised Sky Q1, 2020 for a conference call on the call from Prairie Sky or Pam because L. Dan Bertram, Mike Murphy and myself Andrew Phillips.

Andrew M. Phillips: Before we begin there are 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.

Andrew M. Phillips: First quarter of 2020 for soft praised Sky received 13142 barrels of royalty oil volumes a record for the company.

Andrew M. Phillips: Gas and NGL volumes remained steady.

Andrew M. Phillips: 50 new leases with 42 counterparties marked another strong quarter for leasing and generated $4.2 million in bonus revenue. Two notable developments took place during the first quarter. Firstly, our largest royalty pair added two new polymer and water floods and commercialized and went to the development of secondary recovery in its two core areas. The significance of this from a royalty owner is a potential doubling of the recoverable oil per section at no additional capital for our business. These are now in the money call option.

New leases with 42, Counterparties marked another strong quarter for leasing and generated $4 2 million in bonus revenue.

Andrew M. Phillips: Two notable developments took place over the first quarter.

Andrew M. Phillips: Firstly, our large royalty our largest royalty payer added two new polymer and waterflood and commercialize went to development of a secondary recovery and its two core areas.

The significance of this from a royalty owner is a potential doubling up the recoverable oil per section and no additional capital for our business.

Andrew M. Phillips: These are now in the money call options.

Andrew M. Phillips: Secondly, new discoveries in a variety of Manville heavy oil stack zones grew our inventory of royalty development wealth. For context, from 1994 to 2014, approximately 1,500 cold flow heavy wells were drilled per year. This kept production steady around 350,000 barrels per day. However, from 2014 to today, less than 250 wells per year were drilled, and production dropped to 150,000 barrels per day. Given the stacked pay, the lack of bottom water, individual well economics, and total oil in place, the area should be able to grow back to its previous highs and possibly surpass them.

Andrew M. Phillips: Secondly, new discoveries in a variety of manville heavy oil stack zones grew our inventory of royalty development wells.

Andrew M. Phillips: For context from 1994 to 2014, approximately 1500 cold flow heavy wells were drilled per year.

Andrew M. Phillips: This kept production steady around 350000 barrels per day.

Andrew M. Phillips: From 2014 to today less than 250 wells per year were drilled and production dropped to 150000 barrels per day.

Andrew M. Phillips: Given the stacked pay lockup bottom water individual well economics and total oil in place the area should be able to grow back to its previous highs and potentially surpass them.

Andrew M. Phillips: PrairieSky shareholders are now positioned with the largest royalty position in the region. Our 2025 investor day will provide a deep dive into this play and also highlight all of the active water and polymer floods across our asset base. These are important assets as they lower our base declines and enhance the durability of our asset base. I will now pass the call to Pam to walk through the financial results.

Gray sky shareholders, and our position with the largest royalty position in the region.

Andrew M. Phillips: Our 2025 Investor day, we'll provide a deep dive into this play and also highlight all of the active water and polymer floods across our asset base.

Andrew M. Phillips: These are important assets as they lower our base declines and enhance the durability of our asset base.

Andrew M. Phillips: I will now pass the call to Pam to walk through the financial results.

Pamela P. Kazeil: Thank you, Andrew. Good morning, everyone.

Pam: Thank you Andrew good morning, everyone.

Pamela P. Kazeil: As Andrew mentioned, there is certain forward-looking information in the notes today, so I would remind investors to review the forward-looking statements qualifier in our press release in MD&A for the three-month end of March 31st, 2021. PrairieSky delivered another record quarter of oil royalty production, which averaged 13,142 barrels per day. This represents an 8% increase in oil royalty volumes over Q1 2023 and demonstrates a strong level of activity across our land base.

You 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 the three months ended March 31 2024.

Pam: Prescribed delivered another record quarter of oil royalty production, which averaged 13142 barrels per day. This represents an 8% increase in oil royalty volumes of our Q1 2023 and demonstrates the strong level of activity across our land base.

Pamela P. Kazeil: NGL royalty volumes averaged 2,535 barrels per day, and natural gas averaged 62.1 million per day, bringing total royalty volumes to 26,027 BOE per day, up 5% over Q1 2023. However, we did see lower spuds in the quarter as compared to the prior year.

Pam: NGL royalty volumes averaged 2535 barrels per day, and natural gas averaged $62 1 million a day, bringing total royalty volumes to 26000 in 2007 Boe per day up 5% of our Q1 2023.

Pam: We did see lower spreads in the quarter as compared to the prior year based on licensing commodity pricing and current third party capital budgets in the main building Clearwater, we anticipate drilling activity on our oil assets to remain robust in 2024.

Pamela P. Kazeil: Based on licensing, commodity pricing, and the current third-party capital budget in Manville and Clearwater, we anticipate drilling activity on our oil assets to remain robust in 2024. However, oil royalty production volumes in Q2 will be negatively impacted by the unplanned outage at a third-party gas plant, which is impacting producers in the Nipissi area. The estimated net impact on PrairieSky is 500 barrels per day. The current timing of a restart of the plant is unknown, and our key producer in the area is reviewing alternatives to bring production back online.

Pam: Oil royalty production volumes in Q2 will be negatively impacted by the unplanned outage at a third party gas plant, which is impacting producers in the nipple Sea area.

Pam: Estimated net impact of price guide is 500 barrels per day. The current timing of the restart of the plant is unknown and our key producer in the area is reviewing alternatives to bring production back online.

Pamela P. Kazeil: Royalty production revenue totaled $113.2 million, which was 91% from liquids. Other revenue totaled $7.5 million in the quarter and included $4.2 million of bonus consideration from entering into 50 new leases with 42 different counterparties. Leasing was primarily focused in the DuVernay Light Oil and Manville Heavy Oil regions.

Pam: Royalty production revenue totaled $113 2 million, which was 91% from liquids other revenue totaled $7 5 million in the quarter and accreted $4 2 million in bonus consideration from entering into 15, new leases with 42 different counterparties.

Pam: Leasing was primarily focused in the Duvernay light oil and manville heavy oil regions.

Pamela P. Kazeil: PrairieSky is forecasting other revenue in the range of $25 to $30 million in 2024, including lease rentals, bonus consideration, and other revenue. Cash administrative administrative expenses in the quarter included annual employee officer, and director payments for the year. As mentioned on our year-end call, we expect 2024 cash administrative expenses to be in the range of 35 to 40 million due to strong stock performance impacting share-based compensation. With retirements from our Board of Directors this year and last year, we anticipate certain payments under the Deferred Share Unit Plan, which are incorporated into our estimate. Directors that retired at the AGM yesterday have until December 15, 2025 to redeem their DSUs.

Pam: This guy is forecasting other revenue in the range of $25 million to $30 million in 2024, including lease rentals bonus consideration and other revenue.

Pam: Cash administrative administrative expenses in the quarter included annual employee officer, and director payments for the year as mentioned on our year end call. We expect 2024 cash administrative expenses to be in the range of $35 million to $40 million due to strong stock performance impacting share based compensation.

Pam: With retirement from our board of directors this year and last year, we anticipate certain payments under the deferred share unit plan, which are incorporated into our estimate.

Pam: Directors that retired at the AGM yesterday have until December 15th 2025 to redeem their DSP.

Pamela P. Kazeil: Current income tax expense totaled $14.7 million in Q1. Entering into 2024, PrairieSky has $1.4 billion of tax pools to offset future taxable income, deductible at 10% per year. For 2024, that means the first $140 million of pre-tax cash flow is tax-free, with incremental cash flow tax at 23.6%. During the quarter, PrairieSky's funds from operations totaled $83 million, and we declared dividends of $59.7 million, or $0.25 per share. PrairieSky's net debt at March 31st 2024 totaled $208.3 million, a decrease of 6% from December 31st 2023, when net debt totaled $222.1 million. We will now turn it over to the moderator to proceed with the Q&A. Thanks.

Pam: Current income tax expense totaled $14 7 million in Q1 entering into 2024, I pray Sky has $1 4 billion of tax pools to offset future taxable income deductible at 10% per year for 2024 that means the first $140 million of pre tax cash flow is tax free with incremental cash flow tax at 23.

Pam: 6%.

Pam: During the quarter price guys funds from operations totaled $83 million, and we declared dividends of $59 7 million or <unk> 25 per share price.

Pam: <unk> net debt at March 31, 2024 totaled $208 3 million a decrease of 6% from December 31, 2023, when net debt totaled $222 1 million, we will now turn it over to the moderator to proceed with the Q&A.

Operator: Thank you. 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. Please stand by while we compile the Q&A list. Our first question comes from Patrick O'Rourke with ATB Capital Markets. Your line is open.

Speaker Change: Thank you <unk>.

Speaker Change: 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 again.

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

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

Patrick O'rourke: Okay, guys, good morning. I'm just curious about the lease bonus payments that you guys are seeing here. You do provide the number that you sign on a quarterly basis and the number of offset operators. I'm wondering if you could provide maybe a little bit more color on that in terms of that makeup. And then, of course, how the actual per acre valuations of those have been trending over the last couple of years.

Patrick O'rourke: Oh, Hey, guys good morning.

Im just curious in terms of the lease bonus payments that you guys are seeing here.

Would you provide the number that you sign on a quarterly basis and the number of offset operators I'm wondering if you could provide maybe a little bit more color on that in terms of that makeup.

Patrick O'rourke: And then the second element to that would be of course how.

Patrick O'rourke: How is the actual per acre.

Patrick O'rourke: Sort of valuations of those have been trending over the last couple of years.

Andrew M. Phillips: You bet. No, thanks for the question, Patrick.

Speaker Change: You bet. Thanks for the question Patrick.

Andrew M. Phillips: And yeah, leasing's been the highest in the company's history for the last two years, and it does vary from quarter to quarter and can be lumpy. Like we saw in Q4, we had a very large lease issuance bonus, and that was longer-term leases for the DuVernay Shale play in the West Shale Basin. And then this quarter, we're kind of back to the run rate or what you can expect quarter to quarter from the company.

Leasing has been.

Patrick O'rourke: Highest in the company's history over the last two years.

Speaker Change: And it does vary from quarter to quarter. It can be lumpy like we saw in Q4, we had a very large lease issuance bonus and that was.

Speaker Change: Longer term leases for the Duvernay shale play.

Speaker Change: The West Shale Basin, and then this quarter, we're kind of back to the more run rate or what you can expect quarter to quarter for from the company. One of the interesting things just to talk about the composition of it a little bit as most of the leasing we've done over the last two years operators had near term plans for land. So they were shorter term leases and in a lot of cases.

Andrew M. Phillips: One of the interesting things, just to talk about the composition of it a little bit, is that in most of the leasing we've done over the last two years, operators had near-term plans for the land, so they were shorter-term leases. And in a lot of cases, you know, a year or two goes by fairly quickly. So we've been doing a lot of releasing the same lands just a couple of years later. And the price on a per acre basis, to answer the second part of your question, has been trending slightly higher along with the offsetting.

Speaker Change: A year or two goes by fairly quickly. So we've been doing a lot of re leasing of the same plans just a couple of years later.

Speaker Change: And the price on a per acre basis.

Speaker Change: The second part of your question has been trending.

Speaker Change: Slightly higher along with the offsetting crown lines.

Patrick O'rourke: Okay, thanks. And then maybe just to switch gears, and I know you guys get poked on this almost every quarter, but in terms of the return of capital policy, one thing that struck me yesterday at the AGM was that you, you know, obviously, have held the Texas Pacific Land Trust as sort of the gold standard in the energy royalty business, and that a lot of their return of capital policy has been focused on the NCIB.

Speaker Change: Okay. Thanks, and then maybe just to switch gears and I know you guys get poked on this almost every quarter, but in terms of the return of capital policy.

Speaker Change: One thing that struck me yesterday at the AGM was that you obviously, you've held the Texas specific land trusts as sort of a gold standard in the energy royalty business and not a lot of their return of capital policy has been focused on the CIP.

Patrick O'rourke: You know, I look at it, we model it out, you're probably hitting, you know, net debt repayment mid-year 2025 on our numbers, and you guys can corroborate that, if you will. But, you know, how are you thinking about the potential to execute on an NCIB here? Would it happen ahead of hitting that payout, or do you have to start sort of, you know, fully getting to zero debt before we'll see any true NCIB execution?

Speaker Change: Look at it we model it out youre, probably heading net debt payout midyear 2025 on our numbers and you guys can corroborate that if you will.

Speaker Change: But.

Speaker Change: How are you thinking about the potential to execute on our end.

AIB: AIB here would it happen ahead of hitting a payout or do you have to start sort of fully get to zero debt before we'll see any true NTV execution.

Andrew M. Phillips: Capital piece, we obviously have the dividend, which is $239 million annually. So any excess cash flow right now is just going towards paying off the debt. I think if you look at how we did it historically, we weren't seeing good M&A opportunities in 2017, 2018, 2019. For the most part, we saw better value in buying back stock, better long-term returns for shareholders, and buying a PrairieSky share. And we're unique in that we always have that option.

Speaker Change: Yeah, and just to talk a little bit about thanks for the question and then I think on the return of capital piece.

Speaker Change: Obviously, the dividend, which is $239 million annually. So any excess cash flow right. Now is just going towards paying off the debt I think if you look at how we did it historically, we werent seeing good M&A opportunities in 2000 17000 between 2019 for the most part we saw better value in buying back stock better long term returns for shareholders and buying appraise guys sure.

Speaker Change: We're unique in that we always have that option. So we bought back about $40 million a year of stock each consecutive year and then during COVID-19 when things got dislocated, we bought back $100 million in August of 2020, and right now our cost of debt has gone up materially we borrowed.

Andrew M. Phillips: So we bought back about $40 million a year of stock each consecutive year. And then, during COVID, when things got dislocated, we bought back $100 million in August of 2020. And right now, our cost of debt has gone up materially; we borrowed $728,000 to execute on the heritage acquisition, which we closed in December 2021. We borrowed $728,000, and that's been repaid for the most part. As you mentioned, it'll be somewhere in the middle of next year before it's completely repaid.

Speaker Change: To execute on the Heritage acquisition, which we closed December 2021, we borrowed $728 million that's been repaid for the most part as you mentioned it'll be somewhere in the middle of next year, where it's completely repaid.

Andrew M. Phillips: And so as we're moving towards that, we've got to start thinking about excess cash. And I think there is an opportunity to even build up some cash in this environment. I think you just want to have those options going forward to either make a great acquisition, which has a high return on invested capital, or, conversely, buy back more shares. And I think if you look at where the business sits today for the next 10 years versus the last 10, we IPO'd with 5.2 million acres and 130 million shares.

Speaker Change: And so as we're moving towards that we've got to start thinking about the excess cash and I think there is an opportunity to even build some cash in this environment.

Speaker Change: I think you just wanted to have those options going forward.

Speaker Change: Either make a great acquisition, which has a high return on invested capital or Conversely buyback more shares and I think if you look at where the business sits today for the next 10 years versus last 10, we IPO the $5 2 million acres and 130 million shares today, we have 239 million shares and we have $18 three.

Andrew M. Phillips: Today we have 239 million shares, and we have 18.3 million acres, and some of the highest quality acreage, some of the faster growing parts of the basin. You don't want to dilute that great asset base, so I think it'll definitely be a return to shareholders. We won't have a defined plan, we'll just do it. We'll do what makes the most sense when we sit as a board and discuss it, but buybacks will start to come into play sometime in the next few years, so we'll start to think about how to implement those. So sorry, that's probably too long, too long an answer for you, but

Speaker Change: 3 million acres in some of the highest quality acreage some of the faster growing parts of the basin.

You don't want to dilute that great asset base.

Speaker Change: I think.

Speaker Change: It will definitely be a return to shareholders. We wont have a defined plan. We'll just do it we will do what makes the most sense when we sit as a board and discuss it but the buybacks will start to come into play sometime in the next year or so we'll start to think about how to implement those.

Speaker Change: So sorry that was probably too long too long an answer for you but.

Patrick O'rourke: I think you spoke for about as long as I framed the question, so that was perfect. Thanks.

Speaker Change: I think you spoke to provide as long as I can frame the question for us So that was perfect. Thanks.

Operator: Thanks for the questions, Patrick. Please stand by for our next question.

Speaker Change: Thanks for the questions Patrick.

Speaker Change: Please standby for next question.

Speaker Change: Okay.

Speaker Change: Okay.

Operator: Our next question comes from Jeremy McCrea with BMO. Your line is open.

Jeremy McCrea: Our next question comes from Jeremy Mccrea with BMO. Your line is open.

Jeremy McCrea: Hi Andrew. I wonder if you can describe the type of wells that are coming on now, just with the amount of wells that were split this quarter versus where we were in Q1 of 2023. Are the well IP rates getting higher? Are you seeing less decline with the more conventional types of wells? Are they more oily or just any kind of indication of how the wells this quarter are comparing to the wells that we saw in Q1 of 2023?

Jeremy McCrea: Yeah, Hi, Andrew.

Jeremy McCrea: I was wondering if you can describe the type of wells that are coming on now.

Jeremy McCrea: The amount of wells that were spud this quarter versus where we were Q1 of 2023.

Jeremy McCrea: Are the wells IP rates getting higher or are you seeing less decline with the more conventional type of wells are the more oily or just any kind of indication of how the wells. This quarter are comparing two wells that we saw in Q1 of 2023.

Andrew M. Phillips: Yeah, it's a good question, and the composition of the wells in terms of how many more conventional wells versus multi-stage frac wells is reasonably similar. I think the one difference is that every year there seems to be more refinements in production techniques and drilling techniques and better fluid systems. So we are seeing slightly better IP90s from the wells. And, in addition, a lot of these wells are now getting drilled in already pressurized water flood areas. So the first year declines on those are a little more muted, so I think that's kind of benefiting the company a little bit from the total production.

Speaker Change: Yes, it's a good question and the composition of the wells in terms of how many more conventional wells versus multi stage Frac wells is reasonably similar I think the one difference is.

Speaker Change: There is every year. It seems there is more refinements in production techniques and drilling techniques and better fluid systems and so we are seeing slightly better IP ninety's from the wells and in addition, a lot of these wells now are getting drilled and already pressurized waterflood areas. So the first.

Speaker Change: Declines on those are a little more muted so I think thats kind of benefiting the company a little bit from the total production standpoint.

Jeremy McCrea: And then I think just a question we always kind of want to ask, in terms of M&A, is there opportunity out there? Is there anything more interesting, less interesting?

Speaker Change: Okay, and then I think just.

Speaker Change: A question, we always kind of wanted to ask.

Speaker Change: In terms of M&A is there opportunity out there is it anything more interesting less interesting.

Andrew M. Phillips: Just maybe just a quick comment on that. Sure. Yeah. And I mean, we're

Speaker Change: Just maybe just a quick comment on that.

Andrew M. Phillips: Sure. Yeah.

Speaker Change: Sure, Yes, I mean, we're we actually had a good slide at the AGM that just showed.

Andrew M. Phillips: And I mean, we actually had a good slide at the AGM that just showed how we've been public for 10 years, and when we did our M&A, and on the y-axis was WTI price, and it was typically $40 to $60 crude when we executed on our acquisitions. That's usually when we went in with net cash. I think today you're in an environment where you're at $110 Canadian light, narrow heavy oil differentials. There's a lot of capital sloshing around, and businesses are typically flush with cash. So it's, I think it's more of an environment where there are fewer quality opportunities that exist out there.

Speaker Change: Over the last we've been public for 10 years and when we did our M&A.

Speaker Change: <unk>.

Speaker Change: On the Y axis was wty price and it was typically 40% to $60 crude when we <unk>.

Speaker Change: Executed on our acquisitions.

Speaker Change: Usually when we went in with net cash I think today, you're in an environment, where your 110 dollar Canadian light.

Speaker Change: Net narrow heavy oil differentials.

Speaker Change: Theres a lot of capital sloshing around.

Speaker Change: The businesses are typically flushed with cash so it's I think it's more of an environment where.

Speaker Change: There's there's less quality opportunities that exist out there.

Speaker Change: Okay. Thanks.

Speaker Change: Thanks, Andrew.

Speaker Change: Thanks for your question.

Operator: I have no further questions at this time. I would now like to hand the call back to Andrew for closing remarks.

Speaker Change: I show no further questions at this time I would now like to hand, the call back to Andrew for closing remarks.

Andrew M. Phillips: Thank you very much, everyone, for dialing into the PrairieSky Earnings Call, and I hope everybody has a great day.

Andrew M. Phillips: Well, thank you very much everyone for.

Andrew M. Phillips: For dialing into the Prairie Sky earnings call and hope everybody has a great Q2.

Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.

Speaker Change: This concludes today's conference call. Thank you for your participation you may now disconnect.

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Yes.

Speaker Change: [music].

Speaker Change: Yeah.

Speaker Change: Okay.

Speaker Change: Hum.

Speaker Change: [music].