Ladies and gentlemen, thank you for standing by. Welcome to PrairieSky Royalty Second Quarter 2024 financial results. 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 would need to press star one one on your telephone. You would then hear an automated message advising your hand is raised. To withdraw your question, please press *11 again. 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 Krizan, CFO, Dan Bertram, CCO, and Michael Murphy, VP Capital Markets, as well as myself. Before we begin, there's certain forward-looking information in my commentary today, so I'd ask investors review the forward-looking statements qualifier in our press release in 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 are still in the very early innings of development, further efficiencies will be recognized. PrairieSky has decades of economic inventory for heavy oil.
Approximately one-third of the wells drilled on our lands 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.
Yeah. 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. I'll now pass it over to Pam to discuss the financials.
Thank you, Mike. Good morning, everyone. PrairieSky's total production volumes averaged 25,300 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 CAD 91.75 per barrel increased approximately CAD 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 $1 change in the heavy oil differential adds approximately CAD 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 CAD 3.5 million. Royalty production revenue totaled CAD 125.5 million in Q2, and other revenues generated an incremental CAD 10.1 million, including CAD 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 plays.
Cash administrative expenses in the quarter totaled CAD 6.8 million, or CAD 2.95 per BOE, and included CAD 700,000 of deferred share unit payments related to a director retirement. We continue to forecast 2024 cash administrative expense to be in the range of CAD 35 million-CAD 40 million. Current income tax expense totaled CAD 19 million in Q2. Entering the year, PrairieSky has CAD 1.4 billion in tax pools to offset future taxable income, mostly deductible at 10% per year. For 2024, that means the first CAD 140 million of pre-tax cash flow is tax-free, with incremental cash flow taxed at 23.6%. Funds from operations totaled CAD 106.1 million, or CAD 0.44 per share in the quarter. This was 16% or approximately CAD 15 million ahead of Q2 2023.
PrairieSky declared a dividend of CAD 59.7 million, or CAD 0.25 per share in the quarter, with a resulting payout ratio of 56%. PrairieSky's net debt at June 30 totaled CAD 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.
... Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment for our first question. The first question comes from Adam Schwartz with Black Bear Partners. Your line is now open.
Hi, good morning. Thank you for taking my question.
Morning, Adam.
Two questions kind of interrelated. Could you comment on maybe short, medium, long-term views of what the impact of the Trans Mountain pipeline is going to have on your, you know, on your operators and on the overall market? Like, how you think, I know it's... I'm not looking for a firm prediction, but just generally speaking, how you think it's going to to impact your operators and then by extension your business. And then secondly, you know, there's some talk about, you know, the government, you know, being at times friendly and at times hostile to the industry. And I guess, how do you think when you look out five or 10 years, how do you think that that's going to translate the industry into your business? More opinion than obviously prediction. Thank you.
No problem. Yeah, so on the first question, Adam, short, medium, and long term, the Trans Mountain Pipeline adds 590,000 barrels of capacity to the West Coast, and what we believe will be the result in both the short, medium, and long term is just compressed differentials. 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 resource. There's 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-$13 differential off WCS 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 those, on that heavy oil resource. So I think it's important. And you know, when you look at some of the first shipments that have come from Trans Mountain, some of them have 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 3 fills 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 basin, and that, in general, is a huge positive for the conventional heavy conventional oil resources in general. And then your second question on the government. Yeah, I mean, Prairie Sky is a unique business. This business goes back to 1886. CP Rail owned it for 100 years, so they... It goes decades and decades. So we're gonna have to work with all sorts of governments. So we work with whatever government's in place at the time and don't get too fussed.
There's good policy and bad policy, and again, I think we've probably had some weaker policy over the last 8, 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's 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 less supportive government. So hopefully that answered your questions. I don't know if you had it, 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 and public statements to appease, you know, those who want to make sure they're tuned in? Do they appreciate... I mean, it seems like they appreciate the economics of the, of the pipeline, so it's important for the, to, you know, for the country's financial well-being. So do they understand and appreciate that, or is it, you know, I think you know where I'm getting at. I'm not, I'm not coming up with-
Yeah
... a question, but.
Yeah, and I think, look, I think that 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 CAD 2.3 trillion a year economy in Canada, and it's a very, very significant portion. So I think there is a... 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 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. It's not even that significant 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.
You know, you've continued to pay down debt with your free cash flow. And you know, you've heard me harp on it before, but, you know, is the plan - does the plan remain to, you know, get that debt down to zero or close to zero? And if rates, and I'm not a predictor of interest rates, but if interest rates were to decline and you found it more favorable to, you know, rates to borrow at... Would you consider keeping some debt outstanding and buying in the stock, given, you know, it just seems very cheap relative to the margins and the growth and kind of what I would call conservative assumptions to arrive at those numbers?
Yeah, and for sure, that's a big, that's the biggest thing that we work with, is how to allocate capital properly over the different cycles. And I know we were fortunate in the last two big downturns to go in with CAD 1 billion of liquidity in both times. The first time, we were able to buy CNRL, the second time, we were able to buy back a bunch of stock in COVID, and then proceed to buy Ontario Teachers' Pension Plan's big asset, as well as a number of other assets, kind of discounting $50-$60 crude. I think, you know, going forward, we'll be debt-free sometime in middle of next year to third quarter of next year, and that'll give us a lot of flexibility.
And I do think, you know, when you really step back and say, "Okay, over the next 10 years, how much cash is this business going to generate?" It's somewhere in the range of CAD 4.5 billion after tax, after G&A. Right now, with the dividend at CAD 1 per share per year, that's, two hundred and forty million dollars annually. So there's a lot of excess free cash, and I think any acquisition we do, it has to have a better IRR than the existing business and have the, the same optionality. So that's getting more and more difficult to do. So buybacks will certainly be a, a significant part of the returns over the next 3, 5, and 10-year period. Just don't know the exact timing of the, of it as of yet.
But even having built some cash, it's not a lazy part of your capital structure right now. You can earn pretty good income on your cash in the bank and for the next downturn.
Yeah, you don't need to... programmatic buybacks are not something I'd ever encourage. So you guys are thinking about it the right way and running the business great. So I appreciate taking my questions. Thank you.
Thanks. Thanks for the questions. Have a good day.
One moment for the next question. Our next question comes from Jamie Kubik with CIBC. Your line is open.
Yeah, good morning, guys, and thanks for taking my question. I have a couple here, I guess. I'm just curious if you can talk about some of the dynamics in the Viking this quarter that saw activity moderate in that particular play, in Q2. Thanks.
Yeah. So, we definitely saw lower spuds in Q2, in the Viking. We do expect, as per usual, the seasonality of the Viking, where you've got kind of late Q3 or late Q4 drilling, where they don't have to run a boiler and the single rigs aren't up in the oil sand. So I think we do expect a busy quarter for the Viking coming up. But again, the spuds were down for sure. They're more than replaced, clearly, if you look at the production volumes, and that's also with an outage at Nipisi. They were replaced by very, very efficient drilling in the Mannville Stack and the Clearwater, so we're definitely insulated by that.
But, again, the nice thing for us is, on any given individual play, of the 30 plays we have in our portfolio, we never get too fussed by, spuds quarter over quarter. We know, as per the playbook, that we have over 8,000 drilling locations in the Viking that are development locations, and pace at which they get drilled, we can never control. But the economics are very, very good and, the... Probably the best operator from a, IP and EUR standpoint, bought a significant asset in Saskatchewan, and, we expect Whitecap to get active on that asset, given some of their really good results in their last program. So, so again, I think, they do ebb and flow, for sure, but, the economics are quite good now.
That's light oil, they're receiving $112 a barrel, so they're getting pretty quick payouts on those wells.
Great. Thank you. And then I'm also just curious on a point that you made in your remarks, Andrew. You did mention that your team is busy leasing land and did have some new play concepts. Can you just talk a little bit about maybe new plays that you might have, you might be able to share some details on? Thanks.
Yeah, for sure. So I think, you know, the one interesting thing, when you just look at the basin in general, these multilateral plays are still in the early innings, even around Cold Lake, where there's, over 10 rigs running right now. People are continuously tweaking the fluid systems and the drilling orientations and, in each of the individual zones, and finding different successes with each zone. And then if you further expand that, when you own 18.3 million acres across the entire Western Canadian basin, there's a lot of different zones across the basin that look, like they have similar reservoir characteristics. Maybe slightly tighter rock, but lighter oil, where we think these multilateral plays could be, implemented.
And then further to that, you know, where Tourmaline bought out Bonavista in the Deep Basin, the overpressured Glauc play that exists around kind of Olds-Garrington, we're seeing some extensions to that, that we've mapped out, that we think are very economic and have very strong IPs. And so we've worked out some of those multi-stage rock plays as well. So we're always kind of working on plays on our acreage and have a huge amount of seismic to augment the technical work. So, yeah, I think we'll, we should have some success leasing those. And that's one of the nice things about an environment where there's new capital formation and quite a bit of cash flow and good balance sheets amongst the producers. There's a lot of people looking for drilling inventory.
We've had some success recently leasing out plays, and I think, hopefully, we can continue that.
Okay, great. That's it for me. Thank you.
Thanks for the questions, Jamie.
As a reminder, to ask a question, please press star one one on your telephone keypad. I show no further questions at this time. I would now like to turn the call back to Andrew for closing remarks.
Thank you, Michelle, and thank you everyone for joining our call today. If you have any further questions, please feel free to reach out to one of the four of us. Have a great day.
This concludes today's conference call. Thank you for participating. You may now disconnect.