Q4 2024 PrairieSky Royalty Ltd Earnings Call
Good day and thank you for standing by. Welcome to Prairie Sky Royalty announces their fourth quarter 2024 financial results conference call.
At this time, all participants are in a listen-only mode.
After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one one on your telephone. You will then hear an automated message device when your hand is raised.
Speaker Change: To withdraw your question, please press star 1 1 again. Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaker today. Andrew Phillips, President and CEO, please begin.
Speaker Change: Good morning and thank you for dialing into the Prairie Sky 2024 Q4 and Year-End Earnings Call. On the call from Prairie Sky are Pam Kazeil, SVP and CFO, Dan Bertram, Chief Commercial Officer Mike Murphy, Vice President Geosciences and Capital Markets, and myself, Andrew Phillips.
Speaker Change: 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 in MD&A.
Speaker Change: In 2024, Prairie Sky organically grew its oil production by 6% or 7% per debt-adjusted share. This is the third consecutive year of high single-digit organic growth rates.
in oil per debt adjusted share.
Speaker Change: $30.8 million of lease issuance bonus was received by entering into 219 leases with over 100 counterparties.
Speaker Change: Over the last 10 years, we have positioned the company in the fastest growing oil plays in the basin, the Clearwater, Manville Stack, and the West Shale DuVernay. This will allow us to continue our material organic oil royalty growth rates into the future.
Speaker Change: Over the past four years, virtually all reserves were replaced organically by industries.
Speaker Change: With decades of economic inventory, our hurdle rates for any organic opportunity are high.
Speaker Change: We successfully closed on four acquisitions totaling $73 million that will generate just under 20% IRRs and can show growth as we work on the assets. Included in these packages is one of the largest collections of GRTs as well as the Petro-Canada feed mineral title in southeast Saskatchewan.
Speaker Change: Rig count in Western Canada is 258 this morning and was 241 rigs a year ago, so we're seeing a positive start to the year in Canada. For reference, the USA rig count is down 37 at the end of January.
to $1.04 per common share to be paid quarterly.
Speaker Change: The first quarterly dividend of $0.26 per share will be effective for the March 31, 2025 record date. I will now turn the call over to Mike.
Mike Murphy: Thanks, Andrew. The fourth quarter saw a continuing trend of elevated multilateral drilling activity with 77 wells, but bring the total number of multilateral wells drilled in 2024 to 268.
Mike Murphy: Multilaterals accounted for 36% of all drilling activity in 2024, which is up from the 31% we saw in 2023.
Mike Murphy: With increased productivity and recovery per well, multilaterals contributed to the strong growth in corporate oil royalty production and reserves in 2024 despite a reduction in the overall spud count year-over-year.
Mike Murphy: Separately, our DuVernay royalty production volumes were up over 50% in 2024, driven by strong activity levels with 33 wells spied in the year.
Mike Murphy: Third party operators have recently seen a step change improvement in initial well rates in the oil window of the West Shale Basin Duvernay Where Prairie Sky has a significant fee position
Mike Murphy: We look forward to active capital programs planned in the Pembina and Williston green areas this year, which is expected to drive high net back light oil growth for Prairie Sky in 2025 and beyond. I'll now pass the call over to Pam to discuss the financials. Thank you, Mike. Good morning, everyone.
Pam Kazeil: Closeout 2024 with another strong quarter with Q4 oil royalty production averaging 13,317 barrels a day.
Pam Kazeil: bringing annual oil royalty production to 13,125 barrels a day, a 6% increase over 2023. We continue to see strong growth in the Clearwater and Mamble stack plays, which now represent 21% of our oil royalty production, up from 17% in 2022.
Pam Kazeil: We did see a decline in natural gas and NGL volumes this quarter and year over year in response to weak natural gas pricing.
Pam Kazeil: Oil royalties represented 87% of total royalty revenue earned in both quarter and full year.
Pam Kazeil: Looking forward, Prairie Sky's 2025 Annual Pricing Sensitivities, which are all net of G&A and taxes, are as follows.
Pam Kazeil: A $5 per barrel change in U.S. Dollar WTI would increase or decrease funds from operations by approximately $23.5 million.
Pam Kazeil: A U.S. $1 change in the light or heavy oil differential would increase or decrease funds from operations approximately $2.75 million.
Pam Kazeil: A $0.25 change per MCF in ACO would increase or decrease funds from operations approximately $4 million. And a $0.01 change in the U.S. to Canadian dollar FX rate would increase or decrease funds from operations approximately $5 million.
Pam Kazeil: Funds from operations total $99 million or 41 cents per share in the quarter and $380.5 million or $1.59 per share for 2024, which was in line with the prior year.
Pam Kazeil: Prairie Sky declared dividends of $239 million, which resulted in a payout ratio of 63%.
Pam Kazeil: Access cash flow was allocated to the repayment of debt and acquisitions of $57.3 million.
Pam Kazeil: At December 31st, 2024, ProSci had net debt of $134.9 million.
Pam Kazeil: Subsequent to year-end, Prairie Sky acquired Sea Lens, Lesser Interest, and Gore Interest for $50 million.
Pam Kazeil: The transaction will add 350 BOE per day of production and closed on January 10th. So we'll see approximately two and a half months of production in our Q1 2025 results.
Pam Kazeil: This is in addition to the acquisitions we closed in late December, which will add approximately 50 BOE per day of production.
Pam Kazeil: Coming into 2025, we have tax pools of 1.3 billion to shelter future taxability at approximately 10% per year. This means in 2025, the first $130 million of cash flow is tax free, with incremental cash flow taxed at 23.5%.
Pam Kazeil: We've prepared our 2024 US tax information and our 2024 dividends will be a 36% return of capital for US investors.
This information can be found on our website.
Speaker Change: We will now turn it over to the moderator to proceed with the Q&A.
Speaker Change: Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star 11 on your telephone. If your question has been answered, you've assumed yourself from the queue, please press star 11 again. We'll pause for a moment while we compile our Q&A roster.
Speaker Change: Our first question comes from Jeremy McCray with BMO Capital Markets. Your line is open.
Jeremy McCray: Yeah, I guess I know you guys don't give guidance, but how do you see feel about the outlook today versus the coming year? And, you know, how does that compare from how you felt last year? Basically, I'm just trying to understand where there may be some surprise wins for the upcoming year here.
Jeremy McCray: Yeah, good morning. Thanks, Jeremy. Yeah, I think with the rig count up pretty significantly year over year.
Jeremy McCray: we're expecting kind of higher activity levels across the entire base and I think
Jeremy McCray: you know, with the East Shield DuVernay or the sorry, the West Shield DuVernay seeing increased activity and pretty, pretty good ramp and budgets. And then of course, the all the discoveries have been made in the bamboo stack should be a positive year and should be
Jeremy McCray: Better than last year from what we know today, but again, we're only through January and we have to see what tariffs bring
Thank you for watching.
Jeremy McCray: So I guess I don't think we'll see a lot of those this year. But if we do, that's great, because if you can get kind of high teens IRRs
Jeremy McCray: when your corporate returns in the kind of the mid-teens and you can grow that asset. I think there are things that we like to do and what we do well here.
Jeremy McCray: When you think about those assets, I think they were kind of under-managed over the last 10 years, certainly on the mineral title side.
Jeremy McCray: and the Petro-Canada fee is just over 20% lease. So I think when our teams get their hands on it, we'll not only do a lot of compliance, but also get a lot of leasing done in Southeast.
Jeremy McCray: and their new upper Frobisher play that looks promising and multilaterals can access it quite economically. So I think we'll, we'll be able to do some good things with those assets over the next couple of years. Get some leasing done.
Perfect. Thanks, Andrew.
Speaker Change: Thanks for your questions, Jeremy. One moment for our next question.
Speaker Change: Our next question comes from Dustin Biesel with TD Cowen. Your line is open.
Dustin Biesel: Morning, guys. Thanks. Can you provide some more color on why the average royalty rate for 2023 was so high? Why you saw that contract to a more normalized level in 2024? I'd also be a bit interested in learning about the letter of credit you provided to a counterparty. Is this a one off or do you guys see more of this in the future? Thanks.
Dustin Biesel: You bet. Thanks for the question, Dustin. So, yeah, number one on the royalty rate.
You know, we had a lot of high world people.
Dustin Biesel: High Net Royalty Wells Drilled in 2023. In 2024, we saw a lot of unit wells drilled, which kind of had a lower average royalty, so it kind of skewed it a little bit lower. I think in 2025, based on what we're seeing for capital programs, and where we're expecting the drilling to be, that royalty rate should be up.
Dustin Biesel: And then number two on the letter credit. I think that was a unique situation. We effectively took a royalty that we had on
Dustin Biesel: Net Royalty on the entire company and provide that letter of credit again to just backs up their Financial plans over the next couple of years, but but again, I think it's not something that we would do all over the basin, but
Dustin Biesel: That was kind of a unique circumstance to enable us to get more resource and bring PV forward on that asset.
Great.
Thanks for your questions. One moment for our next question.
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Speaker Change: Our next question comes from Adam Schwartz with Black Bear Value Partners. Your line is open.
Hey, good morning, guys, since you're taking my questions.
Good morning, Adam.
Speaker Change: So I had two unrelated questions. Sorry. So the first question is,
Speaker Change: Capital allocation, like what the are with respect to the debt, you know, debt pay down and whether the whether the debt pay down is going to be continued through the end of the year. And if you think like, the goal is to get it to basically flat, you know, you know, zero net debt position.
Speaker Change: and then the second question really has more to do with the any color.
Speaker Change: of your E&P partners, and if they're commenting at all about, you know, their plans or what how they're planning on handling various tariff risks and what they're thinking about the capital programs for this year and next.
Speaker Change: So again, we get a nice cash flow stream with high IRR, but then we actually think we can manage that, get some leasing done, and grow that. So if we can find those things, that's obviously a great way to help compound the business.
Speaker Change: But in the meantime, we'll just continue to pay down debt and absence any of those opportunities will take that down to closer to zero, but somewhere closer to zero or sub $100 million of debt will likely layer in some kind of buyback along the way. Because again, I think when you think about our business with kind of 6% free cash flow yield,
Speaker Change: What our business is doing right now. So again, that's probably more what we'll see over the over the next year. And then your second question was with regards to our EMP partners and what their plans are.
Speaker Change: You know, it's interesting with a tariff, if you think about a 10% tariff, and then you see what's happened with the FX, the Canadian FX, you're almost neutral on cash flows. So I think plans are kind of unchanged, even in the event of
of a tariff coming in but
Donald Brings in about a couple weeks here.
Speaker Change: Thanks. Yeah, I would say that, you know, you've heard me harp on it before, but...
It's a mid-teens, you know, turn on capital for
and extremely.
Speaker Change: what will be a low, no debt, high, you know, extraordinarily high margin business. So that seems unusually cheap. So that's my two cents.
Speaker Change: Great work. Thank you. We agree. Yeah. Thank you. Thanks for your questions. One moment for our next question.
Thank you.
Speaker Change: Our next question comes from Jamie Kubik with CIBC. Your line is open.
Jamie Kubik: Yeah, good morning, and thanks for taking my question. Can you talk just a bit more about the bonus issuance during the quarter? What drove the large increase versus prior quarters? And can you touch on a little bit further the polymer EOR gore that you received as well? Thanks.
Speaker Change: You bet yeah, so the overall the we've been really active on the leasing side leased over a hundred companies over the year And then in q4 we had some kind of larger deals that we entered into
Thank you.
Speaker Change: and one of which was the man built deal. What was interesting on that man built deal, Jamie, is we'd actually these are lands we actually leased two years ago, but we because we've gone to zonal leasing.
Speaker Change: That same company that did very, very well on those lands, wanted to lease some of the other Manville zones. So that's where approximately an $8 million bonus is what we were looking for, for a five year lease.
Speaker Change: and they had this polymer, it's a line drive polymer flood in the Wabascot B that they're planning.
a little further north. And so rather than
Speaker Change: take the $8 million cash, we did a swap for a royalty on that line drive polymer flood that they're planning. And so again, I think it was great for the operator, because they didn't have to put up the cash. And it was great for us because we effectively get a royalty on what we believe is going to be a very good project.
Speaker Change: In exchange for a five-year lease and what's interesting about that is
Speaker Change: You know, depending on how active they are within five years, we're going to be releasing a lot of those plans. That's just how
Speaker Change: It's been it's been quite active throughout the entire base and then we're again this year starting this year. We've From January till today. We've signed a lease every business day. So again, we're still on that same very active pace
Speaker Change: That's great. And maybe just last question for me. You do highlight good activity in the DuVernay over the year.
Speaker Change: Can you talk a little bit more about what you're seeing on licensing activity?
Speaker Change: up to 700 barrels. So a very significant increase. And that was just from five well pad that was put on our lands in late last year. So again, there's really good gearing given we have mineral title there. So it's higher average royalties.
Speaker Change: 50 and 100% volume growth year over year. Don't know exactly where it lands. And of course, it'll be we don't know when the wells come on. So it will be a little bit lumpy, for sure. But those barrels are that's 40 degree API oil. So we're receiving a net pack that's
Speaker Change: 60 to 70 percent higher than our heavy barrels, which is where a lot of the growth in our portfolio has been. So should help on the free cash flow for sure as well, Jamie.
Okay, great. That's all for me. Thank you.
Speaker Change: And I'm not showing any further questions at this time. I'd like to turn the call back over to Andrew for any further remarks.
Speaker Change: Well, thank you very much. And thank you to our employees for another great year of execution and to our shareholders for their support. We hope everyone's able to attend our investor day on May 14th in Calgary, where we'll release our 2025 asset handbook and provide investors with a range of outcomes for the business over the next 10 years.
Speaker Change: Have a great day. Thank you ladies and gentlemen. This does conclude today's presentation. You may now disconnect and have a wonderful day.