PrairieSky Royalty Ltd. (PSK) Earnings Call Transcript & Summary

Welcome to the Annual Shareholder Meeting for PrairieSky Royalty. My name is Jim Estey, and I am the Chairman of the Board. In accordance with the bylaws of the company, I will act as Chairman of the meeting, and the meeting will now come to order. During the first portion of the meeting, we will deal with the formal business, followed by a brief corporate presentation and remarks by PrairieSky's CEO, Andrew Phillips. Before we begin, I would like to welcome other members of the Board who are online with us. Jane Gavin; Margaret McKenzie; Bob Robotti; Myron Stadnyk, Sheldon Steeves, Grant Zawalsky and Andrew Phillips. Officers online with us today are Andrew Phillips, President and Chief Executive Officer; Cam Proctor, Chief Operating Officer; Pam Kazeil, Chief Financial Officer. As everyone is aware, this meeting is being held virtually given the widespread closures related to COVID-19 health crisis. Before we commence the formal portion of the meeting, I would like to take a moment to address our staff, our shareholders and our many industry, business and community partners. This has been a difficult time for our industry as well as our communities and our families. And on behalf of the Board of Directors, I would like to wish all of you the best and hope you stay safe and healthy during these challenging times. At PrairieSky, we have a very dedicated team of executive and employees, all who have been working from home for 6 weeks. The Board greatly appreciates all of your efforts. And we look forward to a time when we can welcome our shareholders, employees, business partners and other stakeholders in person to our annual meeting. In order to attempt to deal with the formal portion of the meeting as effectively as possible, we have prearranged and designated shareholders to move and second motions. This is in no way intended to discourage any questions by registered shareholders or duly appointed proxy holders on any motion. Only shareholders of record at the close of business on March 3, 2020, are entitled to vote at this meeting. If you've already sent in your proxy, your vote has already been counted and you do not need to vote at this meeting. Questions can be submitted by registered shareholders and duly appointed proxy holders electronically on the virtual platform by following the instructions on the platform. The company's Corporate Secretary will assist me in reviewing and responding to any questions. Questions will be answered in relation to each item of business and the order they are received. Cam Proctor will act as Secretary of the meeting, and a representative of our transfer agent will act as scrutineer. I have received a declaration of the mailing from our transfer agent confirming that the proxy material and financial statements have been duly mailed to shareholders. This declaration will be kept by the secretary with the minutes of the meeting. The reading of the notice of meeting will be dispensed with. In accordance with the bylaws of the company, business may be transacted at the meeting if there are not less than 2 persons present or represented by proxy, not less than 25% of the shares entitled to vote at the meeting. The scrutineer's report has been received and it shows a quorum is present. I now declare that the meeting is called and properly constituted for the transaction of business. To my knowledge, each resolution considered today will be passed by the proxies deposited in advance of the meeting. We will conduct voting by electronic ballot on all matters. Voting will be open for all resolutions at the same time, which will allow you to choose to vote on each resolution immediately or wait until the conclusion of the discussion on each resolution prior to casting your vote. To vote simply click on for or withhold or against as applicable. You will see confirmation immediately above the voting buttons once you have submitted your choice. There will be an opportunity to ask questions on each resolution in turn. Once discussions on all business items have been concluded, voting will be closed on all resolutions. The results will be tallied by the scrutineer once the voting is completed and will be provided at the end of the formal portion of the meeting. The polls are now open on all resolutions. The first item of business is the presentation of the audited financial statements for the year ended December 31, 2019. A copy of those materials have been mailed to each registered shareholder and is available on our website and on SEDAR. The next item of business is the election of directors. As noted in the company's information circular, our bylaws contain advanced notice provisions, which provide a procedure to be followed for the nomination of directors at the meeting of shareholders of the company. In accordance with the advanced notice provision, the only individuals entitled to be nominated as directors at this meeting are the persons named as nominees in the company's information circular. James Estey; Jane Gavan; Margaret McKenzie; Andrew Phillips, Robert Robotti, Myron Stadnyk, Sheldon Steeves and Grant Zawalsky, are hereby nominated as directors of the company to hold office until the next annual election of directors or until their successors are elected or appointed, subject to the provisions of the Business Corporations Act and the bylaws of the company. In accordance with our majority voting policy, the election of directors will be conducted by allowing registered shareholders and proxy holders to electronically register votes for or to be withheld for each individual Director. Mr. Secretary, have we have any questions received on this motion?

Mr. Chairman, there are no questions at this time.

Thank you, Cam. Please vote for each individual director now if you have not already done so. [Voting]

The next item of business is the appointment of auditors.

Mr. Chairman, I move that KPMG LLP Chartered Professional Accountants, be appointed auditors of the company until the next annual meeting or until their successors are appointed, and that their remuneration as such be fixed by the Board of Directors.

Do we have a seconder?

I second the motion.

Thank you very much. Mr. Secretary? Have any questions been received on this motion?

Mr. Chairman, there's no questions at this time.

Thank you. Thank you, Cam. Please vote on the motion now if you have not already done so. [Voting]

The next item of business is the advisory vote on executive compensation, which is described in detail in our information circular.

Mr. Chairman, I move that the ordinary resolution in respect of the Advisory Board on executive compensation as described in detail in the information circular relating to the meeting be approved.

I second the motion.

Mr. Secretary, have any questions been received on this motion?

Mr. Chairman, there's no questions on this motion.

Thank you, Cam. Please vote on this motion now if you have not already done so. [Voting]

As there are no further motions, voting on all motions is now closed. We will pause for a moment while the results are tabulated. I have been advised by the scrutineers that the results are more than 50% in favor of each director and in accordance with legal requirements and our majority voting policy, those nominated are duly elected as directors. I have also been advised by the scrutineers that all other motions have been carried. That concludes the formal portion of the meeting, and I direct that the scrutineer's report be kept by the secretary with the minutes of the meeting. The chair would entertain a motion that the meeting be terminated.

Mr. Chairman, I move that the meeting be terminated.

I second the motion.

I declare the meeting terminated. We will now move to a brief presentation by Mr. Phillips, which should be available through our portal. Thank you.

Thank you, Jim. My name is Andrew Phillips, the President and CEO of PrairieSky Royalty Limited. Before I get started with the presentation, I would just like to thank our employees for their dedication, work ethic, report [Audio Gap] $1.25 billion all out of free cash flow. PrairieSky is a simple capital structure with no long-term debt and 98% operating margins. Next slide, please. PrairieSky collects 50% of its royalty production from oil and liquids. [Audio Gap] 3 on our fee land. This is my favorite slide that shows all gross production on PrairieSky lands over the last 60 years. This is a clear demonstration of the duration of the asset that you all own as shareholders of PrairieSky. When you look at 2014 on the x-axis of your chart, which is the date of our IPO, you have received $1.25 billion in real cash returns after tax and after G&A in this short period of time. From 2020 and into the future, with our 98% operating margins, we will continue to generate industry-leading free cash flow and real returns to shareholders. Next slide, please. This slide highlights the PrairieSky lands on the Alberta and Saskatchewan Viking play. PrairieSky has approximately 3,000 net royalty oil barrels coming from the quick payout Viking [ Land ] oil play. At the pace of development over the past 2 years, PrairieSky has over 15 years of drilling inventory on directly offsetting acreage. This is the benefit of having not only a high-margin cash flow stream but also a large undeveloped land base for the future. Next slide, please. The map on the left shows the 900,000 acres of royalty lands, which are over 95% fee lands that PrairieSky owns in the Duvernay. This is a thick, overpressured light oil shale play in Central Alberta. With less than 1% of our lands currently developed, this play has grown at 100% per annum since 2016 to 350 barrels of oil per day equivalent of net royalty production today. This play has the potential to be a major contributor to free cash flow over the next 3, 5 and 10 years for PrairieSky with no additional capital spend. Next slide, please. The map on this slide shows PrairieSky lands in the Clearwater oil fairway. The Clearwater Oil resource play has been the fastest-growing oil play in Canada. PrairieSky has acquired over 850,000 acres of land on this play over the past 2 years. Although production in the first quarter was under 200 royalty barrels per day from 0, 2 years ago. We expect it to be over 10% of our total royalty oil volumes within the next 5 to 10 years. What makes this play unique is that it does not require fracture stimulation and first year declines approximate only 33%. Next slide, please. This slide shows the reserve replacement history of PrairieSky since 2015. Proved reserves have been essentially flat each year since 2015. This is after net royalty production annually of 8 million barrels, all the while returning $1.1 billion to shareholders over this same time period, as you can see on the right side of the chart. This is the rinse, repeat nature of our capital-light business. Next slide, please. Finally, I will finish by outlining the free cash flow over the next 10 years. At the bottom end, with $30 oil for a decade and declining oil production, PrairieSky will generate $1 billion of free cash flow or half of our current market capitalization. On the higher end with 2% growth over a decade and $60 average oil price, PrairieSky will generate $2.4 billion of free cash flow or 20% higher than today's market capitalization. We believe that this will provide shareholders with North American leading and industry-leading returns while maintaining a debt-free balance sheet. I would like to thank all our shareholders and stakeholders, and I will now open the line to questions. Since there are no questions at this time, I would like to thank you all for attending the PrairieSky Annual Meeting. And I'd like to wish everyone our best wishes and stay healthy and stay safe. And please contact Pam or myself if you have any questions regarding the outlook for the future.