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

Ladies and gentlemen, thank you for standing by. Welcome to PrairieSky Royalty Second Quarter 2024 Financial Results. [Operator Instructions] 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.

Thank you, Michelle, and good morning, everyone, and thank you for dialing into the PrairieSky Q2 2024 Earnings Call. On the call from PrairieSky are: Pam Kazeil, CFO; Dan Bertram, CCO; and Michael Murphy, VP, Capital Markets; as well as myself. Before we begin, there are certain forward-looking information in my commentary today, so I'd ask investors to review the forward-looking statements qualifier in our press release and MD&A. Oil royalty volumes of 13,312 barrels per day are the result of strong operator drilling efficiencies across our vast land base. Continued improvements in fluid systems, drilling orientations and geo steering have resulted in better 90-day IPs and anticipated oil recoveries. Given we're still in the very early innings of development, further efficiencies will be recognized. PrairieSky has decades of economic inventory for heavy oil. Approximately 1/3 of the wells drilled on our land this year will be unstimulated. These wells have lower decline rates than stimulated wellbores. Water and polymer flood implementation across our lands will have the benefit of both lowering our annual decline rate and significantly enhancing the ultimate recovery of oil volumes. In some cases, operators will recover more than double the oil than can be achieved with primary drilling. Selecting the right partners who share a long-term vision is important. Leasing remains at record levels with 55 new leasing arrangements with 46 distinct oil companies. We have a lean staff at PrairieSky, who are able to efficiently handle these large volumes of contracts and continue to execute. All of our employees are shareholders and get the benefit of their great execution. Our data room continues to be busy and our technical group has developed some new play concepts that we believe have great economics. I will now turn the call over to Mike.

Thanks, Andrew. In terms of activity, well spuds were down quarter-over-quarter due to the seasonality of spring breakup with a total of 115 wells spud on PrairieSky acreage in Q2 2024. Although spuds were down relative to the same period in 2023, this was offset by a higher average royalty rate of 6.6% and improved well productivity driven by an increase in contribution from multilateral drilling. In the quarter, multilateral wells accounted for approximately 43% of drilling activity on PrairieSky lands, which is up from 30% in the second quarter of 2023 and 17% in the second quarter of 2022. We saw a significant increase in Clearwater spuds quarter-over-quarter, and we anticipate robust activity to continue through the remainder of the year in this play as well as the Mannville stack, driving strong oil royalty production volumes. And I'll now pass it over to Pam to discuss the financials.

Thank you, Mike. Good morning, everyone. PrairieSky's total production volumes averaged 25,320 BOE per day in the quarter. Oil royalty volumes reached a record 13,312 barrels per day, up 6% over Q2 2023. Year-to-date, oil royalty volumes are up 7% with growth generated primarily in the Clearwater and Mannville stack plays. This quarter, oil generated 89% of our royalty revenue due to the combination of increased production and strong pricing. Our realized oil price of $91.75 per barrel increased approximately $14 over Q1 2024 with stronger WTI pricing and a tighter WCS heavy oil differential as a result of the Trans Mountain Pipeline coming online. As noted in our year-end conference call, a USD 1 change in the heavy oil differential adds approximately $2.5 million to annualized cash flow after tax. So the improved differential post-Trans Mountain has a meaningful impact to PrairieSky's oil revenues. This quarter, the differential tightened by just under $6 per barrel from Q1, increasing our oil revenues by approximately $3.5 million. Royalty production revenue totaled $125.5 million in Q2, and other revenues generated an incremental $10.1 million, including $6.7 million of bonus consideration. Year-to-date, our leasing is on pace with 2022 and 2023, our most active leasing years. We issued leases across our land base with the Duvernay and Mannville being our most active play. Cash administrative expenses in the quarter totaled $6.8 million or $2.95 per BOE and included $700,000 of deferred share unit payments related to a direct to retirement. We continue to forecast 2024 cash administrative expense to be in the range of $35 million to $40 million. Current income tax expense totaled $19 million in Q2. Entering the year, PrairieSky has $1.4 billion of tax pools to offset future taxable income, mostly deductible at 10% per year. For 2024, that means the first $140 million of pretax cash flow is tax-free with incremental cash flow tax at 23.6%. Funds from operations totaled $106.1 million or $0.44 per share in the quarter. This was 16% or approximately $50 million ahead of Q2 2023. PrairieSky declared a dividend of $59.7 million or $0.25 per share in the quarter with the resulting payout ratio of 56%. PrairieSky's net debt at June 30 totaled $174.6 million, a decrease of 21% from year-end. We will now turn it over to the moderator to proceed with the Q&A.

[Operator Instructions] The first question comes from Adam Schwartz with Black Bear Partners.

Two questions kind of interrelated. Could you comment on maybe short-, medium-, long-term views of what the impact of the Trans Mountain Pipeline's going to have on your operators on the overall market? I'm not looking for a firm prediction, but just generally speaking, how you think it's going to impact your operators and then by extension, your business? And then secondly, there's some talk about the government being at times friendly and at times hostile to the industry. And I guess how do you think when you look out 5 or 10 years, how do you think that that's going to translate to the industry and to your business more opinion than obviously prediction?

No problem. Yes. So on the first question, Adam, short, medium and long term. The Trans Mountain Pipeline adds 590,000 barrels of capacity to West Coast, and what we believe will be the result in both the short, medium and long term is just compressed differentials. And Canada is unique, we have the largest heavy oil resource in the world, which is well known. It's well delineated. And with some of the new technologies like multilateral drilling, it's really unlocked a huge amount of resources, billions of barrels that are recoverable. And now all of a sudden you can get them to market and receive only, in some cases, $12 to $13 differential off WTI. So it really, I think, structurally changes the economics for the producer of heavy oil, which, therefore, changes the economics for us. And we see a lot more activity and far superior economics on that heavy oil resource. So I think it's important. And when you look at some of the first shipments that have come from Trans Mountain, some of them gone to Asia but a lot of them have actually gone to the West Coast refineries, which we didn't have access to before. So you're just kind of forcing the refining complexes in the Southern United States to bid for our crude. So definitely, it's a huge positive and that was a very important pipeline. And then Line 3 replacement, actually, which is now a couple of years old, I think line fill is in 2021. That added another just under 400,000 barrels of capacity. So again, it's been the first time in about a decade where we've had excess pipeline capacity out of the base. And then that, in general, is a huge positive for the conventional oil resources, in general. And then your second question on the government. Yes, I mean, PrairieSky is a unique business. This business goes back to 1886. CP Rail owner for 100 years. So it goes decades and decades. So we're going to have to work with all sorts of governments. So we work with whatever government is in place at the time and don't get too fast. There's good policy and bad policy. And again, I think we've probably had some weaker policy over the last 8, 9 years, federally, but there's definitely some pushback on that, and that seems to be starting to change. So maybe there's some positive tailwinds there, but again, we work with whoever is in place. I know the local governments, both in Saskatchewan and Alberta have been very, very supportive of energy. So you have provincially, a supportive government; and then federally, a less supportive government. So hopefully, that answers your questions. I don't know if I didn't get them all there?

No, you got them. I mean, do you find that the government, like especially at the more national level, is it more -- I don't want to use the term window dressing, but is it more speeches in public statements to appease those who want to make sure they're tuned in? Do they appreciate -- I mean it seems like they appreciate the economics of the pipeline. So it's important for the country's financial well-being. And so do they understand and appreciate that? Or is it -- I think you know what I'm getting at. I'm not coming up with a final question, but...

Yes. Yes. And I think -- and look, I think it's very clear to the federal government that the oil and gas industry and the materials business is a massive part of the economy here. We're only a $2.3 trillion year economy in Canada, and it's a very, very significant portion. So I think there is -- they clearly understand the importance of it from a tax revenue standpoint. I think that is clear when you see the Trans Mountain Pipeline being built by the federal government, they understand the importance of it. So I think the -- everyone understands the importance of this business in Canada. And I think it's easier in other jurisdictions like in Britain to be hard on it because oil production there has gone from 2.2 million barrels a day to 1.1 million. It's not even that significant of a business anymore as a function of their GDP. So in Canada, it is a very important industry, and I think they recognize that.

Okay. Can I sneak one last one in?

No problem.