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

Hello, and welcome to the PrairieSky Annual Meeting. Please note that today's meeting is being recorded. If you have already voted by proxy and you vote again in the online ballot portion of this meeting, your online vote during this meeting will revoke your previously submitted proxy. If you have already voted by proxy and you do not wish to revoke your previously submitted proxy, there is no need to vote during the meeting. During this meeting, you will have a question-and-answer session. If you have logged in with a control number, you will be able to submit questions or comments at any time by clicking on the Ask A Question icon located toward the top of the information page in the Lumi app. It is now my pleasure to turn today's meeting over to Chairman, Mr. Jim Estey. Mr. Estey, the floor is yours.

Welcome to the Annual Shareholder Meeting for PrairieSky Royalty. My name is Jim Estey, and I'm the Chairman of the Board. In accordance with the bylaws of the company, I will act as Chairman of the meeting. 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 the other members of the Board who are online with us today. Jane Gavan, Margaret McKenzie, Bob Robotti, Myron Stadnyk, Sheldon Steeves, Grant Zawalsky and Andrew Phillips. The officers online with us today are Andrew Phillips, President and Chief Executive Officer; Cam Proctor, Chief Operating Officer; and Pam Kazeil, Chief Financial Officer. As everyone is aware, this meeting is being held virtually given the ongoing closures and travel restrictions related to COVID-19. Before we commence the formal portion of the meeting, I would like to take a moment to address the PrairieSky staff. At PrairieSky, we have had a very dedicated team of professionals. Substantially, all of whom have been working from home for over a year. During this time, PrairieSky team has seamlessly advanced the company's strategy, including completing several significant transactions while working under challenging conditions due in part to the global pandemic. The Board greatly appreciates all 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 portions of the meeting as efficiently as possible, we have prearranged with designated shareholders to move and second motions. This is not 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 the third of March 2021, are entitled to vote at this meeting. If you have 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 or duly appointed proxy holders electronically on the virtual platform, 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 relationship to each item of business in 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 the declaration of mailing from our transfer agent, confirming that the proxy materials and financial statements have been duly mailed to the stakeholders. This decoration will be kept by the secretary with the minutes of the meeting. The reading of the notice of the minutes of the meeting will be dispensed with. In accordance with the bylaws of the company, the business may be transacted at the meeting. If there are not less than 2 persons present or representing 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 that 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 a voting by electronic ballot on all matters. Voting will be open for all resolutions at the same time, which allows 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 for or withhold or against as applicable. You will see a confirmation immediately above the voting button once you have submitted your choice. There will be an opportunity to ask questions on each resolution in turn. Once discussion on all items of business has been concluded, voting will be closed on all resolutions. The results will be tallied by the Scrutineer once voting is completed and it will be Friday at the end of the formal portion of the meeting. The polls are now open to all resolutions. The first item of business is the presentation of the audited financial statements for the year ended December 31, 2021. A copy of those materials has been mailed to each registered shareholder and are available on our website and on SEDAR. The next item a business is the election of directors. As noted in the company information circular, our bylaws contained advanced notice provisions, which provide a procedure to be followed for the nomination of directors at meetings 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 provision of the business Corporation 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 any questions that have been received on this motion?

Mr. Chairman, there's 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.

I second the motion.

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

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

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

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

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

I second the motion.

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

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

Thank you. 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 now 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 Scrutineers report be kept by the secretary with the minutes of the meeting. The Chairman would entertain a motion that the formal portion of the meeting be terminated.

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

I second the motion.

Thank you. The motion to terminate is carried. I declare this meeting terminated. We will now move to a brief presentation by Mr. Phillips, which should be available through our virtual portal. Andrew?

Thank you, Jim, and good morning, everyone. Just a quick note that I'd just like to thank the Board of Directors. We have quite a diverse board of Directors, with all different skill sets covered and appreciate their guidance as are met on behalf of our management team over the past year. Next slide, please. This is an overview of PrairieSky Royalty. PrairieSky is the largest royalty owner in Canada with over 16 million acres. Over the last 7 years, we've generated between $150 million and $300 million of free cash flow annually, all available to distribute as dividends, cancel shares and make acquisitions. It is a unique capital-light compounding business with a low-risk profile and excellent ESG attributes. Next slide, please. This map shows all of the PrairieSky acreage in the Western Canadian Sedimentary basin. The Orange lands are the recently acquired lands located primarily in the deep basin of Alberta. The land totaled 640,000 acres with leasing potential, compliance opportunities and multiple economic emerging plays. Lastly, the acquired royalties share the low decline attributes of our existing royalty asset base. Next slide, please. This slide is a close up of the recently acquired acreage. With active management of this acreage, our goal is to grow the royalty production on this asset in the mid-single digits annually for the next 10 years. The acquired seismic database will add value to existing PrairieSky acreage and create new leasing opportunities as well. Next slide, please. As owners ourselves, the per share metrics are a key focus for us. The production per million shares has become oilier since IPO, but it has dropped alongside activity in the basin. We have utilized the downturn in our strong balance sheet to dramatically increase our acres per share, which will positively impact production per share in the future as capital returns to the basin. Lastly, the acquired acres per share are a better part of the cost curve than our existing asset base, as we're always working to improve our already great business. Next slide, please. When you take out acquisitions, our reserves over the last few years have stayed roughly flat this is in spite of royalty production annually between 7 million and 9 million barrels. This chart drives home the difference between producers and royalty companies with large undeveloped land bases. Producers over the long-term have to spend the majority of their cash flow to maintain their businesses. PrairieSky can return the cash flow to owners, while external capital maintains our business and our assets. Next slide, please. This is how we've been able to return over $1.3 billion to shareholders, with WTI down 36% and AECO down 32%. Our business cannot be recreated or replicated as our fee simple lands date back to the [ 1800s ]. With the PrairieSky share, you get a high-margin cash flow stream, but also a large industry-leading basket of call options. Next slide, please. Our business not only converts revenue to free cash flow at industry leading levels, but is also amongst the best investments from an ESG perspective that an institution can make. Sustainalytics ranks PrairieSky #1 for global energy companies, but also in the sixth percentile for all industries globally. We will continue to improve PrairieSky's commitment to positive environmental change, societal impacts and strong governance, which we believe will ultimately impact shareholder returns positively. Next slide, please. The Saskatchewan Viking where PrairieSky holds decades of economic inventory at current pricing. We'll continue to see activity, new secondary recovery initiatives and generate quick payouts for industry and free cash flow for our owners. Next slide, please. The Duvernay shale play in Alberta hit a record production level of 500 barrels per day net to PrairieSky. This is in spite of lower gross capital expenditures on the play as industry has improved the capital efficiencies of this play. Next slide, please. The land rush and the Duvernay generated over $60 million of lease issuance bonus, all of which was invested in a little known play called the Clearwater. This single play is expected to be PrairieSky's largest producing asset within a decade, all without any future capital outlays. Next slide, please. To close off, I wanted to highlight the 10-year after tax and G&A, cash flow generating ability of our business. We will generate somewhere between $1.5 billion and $2.5 billion in free cash flow over the next 10 years. This is a large portion of our current market capitalization. Most of our peers would not even retire their debt in the same period of time with excess free cash flow. Next slide, please. On behalf of our management and Board, I would like to thank all the shareholders for their support over the past year. I would also like to thank all of the employees for their diligent work on executing on our business plan, and we will continue to work hard at building the shareholder value for all owners of the business. Thank you for attending the virtual PrairieSky AGM, and we look forward to a positive year in terms of activity levels in the basin. Thank you.

Thank you, everyone, for attending the virtual meeting. You are now safe to disconnect.