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

Good day, and welcome to PrairieSky Royalty Ltd. Announced the Second Quarter 2023 Financial Results. [Operator Instructions] As a reminder, this call is being recorded. I would now like to hand the call over to Andrew Phillips, President and CEO. You may begin.

Thank you, and good morning, and thanks for dialing into the PrairieSky Q2 2023 Earnings Call. On the call from PrairieSky are Cam Proctor, COO; Pam Kazeil, CFO; and myself, Andrew Phillips. There's certain forward-looking information in my commentary today. So I'd ask investors to review the forward-looking statements qualified in our press release and MD&A. I'll walk through the operations report, and then turn the call over to Pam to summarize the financials. Q2 is another solid quarter for PrairieSky operationally and financially. Oil royalty volumes grew organically to 12,607 barrels per day and are now 6% higher over the first 6 months of 2023 when compared with the first 6 months of 2022. There were 148 wells spud in Q2, which were 92% oil. Although activity in the quarter was moderated by seasonal break-up, the number of wells drilled was up 21% from 122 wells spud in Q2 2022. The Viking was the most actively drilled play with 43 wells spud, followed by the Clearwater with 33 wells, 32 light and heavy Mannville oil wells and 5 Mannville wells at Lindbergh. Additional oil activity took place across the portfolio, including wells spud in the Duvernay and Mississippian. There were also 11 Montney natural gas wells spud. The average royalty rates for wells spud in the quarter was 5.8%. Leasing activity remains robust, and the company received $5.7 million in bonus revenue and entered into 39 new leases with 37 counterparties. A number of large leasing arrangements are part of this total, including a significant light oil arrangement with well commitments, where an inflection in recent well results have been noted. We leased 167 sections of land this quarter versus 82 sections a quarter ago, as companies are looking to expand their inventory and numerous new start-ups have been active on the leasing front. $15 million was spent on undeveloped land in the Mannville Stack play. There is large oil in plays on the lands, and multilateral drilling will see this play continue to expand. With narrow differentials and thick pay packages, there is significant potential on both our fee title and newly acquired lands. As profitability of Canadian oil producers continues to grow and producer balance sheets remain healthy, we see growing capital expenditures in the Western Canadian Sedimentary Basin over the next 5 years. Thank you, and I'll turn the call over to Pam to walk through the financials.

Thank you, Andrew. Good morning, everyone. As Andrew mentioned, there are certain forward-looking information on the notes today, so I would remind investors to review the forward-looking statements qualifier in our press release and MD&A for Q2 2023. PrairieSky's oil royalty production volumes grew to a record 12,607 barrels per day in the quarter and drove 83% of our royalty revenues. This 3% increase in production over Q1 was predominantly from oil volumes in the Viking, Mannville heavy oil and Clearwater plays, which more than offset natural declines and the negative impacts of the Alberta wildfires, which we estimate lowered average royalty production for oil by 135 barrels per day and revenue by $900,000 in the quarter. PrairieSky's realized price was $78.05 per barrel, which, combined with our record oil production, generated oil royalty revenues of $89.6 million. Natural gas royalty revenues averaged $53.8 million a day, below Q1 2023, as a result of operational downtime due to the wildfires, which we estimate reduced volumes by 2.5 million a day and revenue by $400,000; and the impact of a onetime prior period adjustment, which reduced quarterly volumes by 4.5 million a day and reduced revenue by $400,000. PrairieSky's realized natural gas price was $2.23 per Mcf and generated natural gas revenue of $10.9 million. NGL royalty volumes averaged 1,943 barrels per day in the quarter, NGL royalty volumes were lower due to the wildfires, which we estimate reduced volumes by 200 barrels per day in the quarter and revenue by $500,000. The onetime prior period adjustment I discussed for natural gas lowered NGL royalty volumes by 370 barrels per day and revenue by $1.6 million. After accounting for these adjustments, NGL royalty revenue totaled $7.9 million with a realized price of $44.77 per barrel. Total royalty production averaged 23,517 BOE per day and generated $108.4 million of royalty production revenue. We anticipate that the wildfire volumes will be back on production for Q3. Also, the prior period adjustment I described has a onetime impact on revenue and volumes. During the quarter, the compliance group also collected $2 million in underpayments, which offset the full revenue impact of the prior period overpayment. Other revenue totaled $9 million and included $2.6 million in lease rentals; $700,000 of other income, including $600,000 of Potash revenue; and $5.7 million of bonus consideration for entering into 39 new leases with 37 different counterparties. New leasing is a leading indicator of future field activity, and we anticipate near-term drilling on many of these new leases. Cash expenses in the quarter were production and mineral taxes of $1.4 million and cash administrative expenses, which totaled $7.2 million or $3.36 per BOE. Cash administrative expense was higher than Q2 of last year, due to the payment of its deferred share units to retiring director. PrairieSky recorded a cash tax expense of $13 million in the quarter. Entering the year, we 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 the remainder tax at our statutory tax rate of approximately 23.5%. PrairieSky generated quarterly funds from operations of $91.3 million or $0.38 per common share. During the quarter, PrairieSky declared dividends of $57.3 million or $0.24 per share with a resulting payout ratio of 63%. The excess funds from operations above the dividend and our $15.2 million in acquisitions was used to retire bank debt. Net debt at June 30, 2023, was $275.9 million. PrairieSky has generated approximately $2.4 billion in funds from operations and returned $1.7 billion to shareholders through dividends and buybacks since our IPO 9 years ago. We will now turn it over to the moderator to proceed with the Q&A.

[Operator Instructions] Our first question comes from Patrick O'Rourke with ATB Capital Markets.

Just a quick question with respect to the acquisition here, sort of undeveloped Mannville, primarily a GORR interest here. Is there any sort of synergies with respect to your fee simple land? Do you expect kind of co-development between GORR and fee simple? And then are there any capital commitments with respect to this acquisition?

Yes, Patrick. And yes, so to answer the last part of the question, there are capital commitments related to the acquisition. They're primarily 15-year oil sands leases. And then upon achieving a certain amount of production, they can be continued in perpetuity. And what we like about it is there's multi-zone pay within the area that can be developed with both multilaterals and we think with the fishbone design where it's more unconsolidated. And a lot of this, it's not real exploration. It's been proven up on the fee mineral title offsetting in certain cases. So we're quite confident in the development profile of the asset. And I think it's got some excellent economics, sub 1-year payouts and significant oil plays.

Okay. And is there any overlap with any existing fee simple land? Or is the operator time shared between GORR and fee simple lands at all?

Yes. So we do have the checkerboard fee mineral title within the area. Some of it's leased from old leasing arrangements from over 10 years ago, primarily to Devon Canada, which is now CNRL. And then there's been a lot of new leasing recently in the areas. So there is -- there are some synergies, for sure, both from a surface land perspective but also a road perspective and a development perspective.

Our next question comes from Mike Dunn with Stifel First Energy.

Andrew, can you provide any more color on the light oil that you mentioned earlier with the inflection in well results? What play and what area?