Good morning, and thank you for standing by. Welcome to the PrairieSky Royalty announces their first quarter 2022 financial results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during this session, you'll need to press star one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Andrew Phillips, President and CEO. Please go ahead.
Thank you, Catherine, and good morning, everyone, and thank you for dialing into the PrairieSky First Quarter 2022 Earnings Call. On the call from PrairieSky are Cam Proctor, COO, Pamela Kazeil, CFO, and myself, Andrew Phillips. Before we start, there's certain forward-looking information in my notes today, so I'd ask investors to review the forward-looking statements qualifier in our press release and MD&A for Q1 2022. The basin-wide resurgence in activity levels that resulted in strong Q4 2021 per share liquids growth continued into the first quarter of 2022. Excluding acquired royalty barrels from 2021, the company achieved 13% oil royalty growth when compared with the quarter one year ago.
Combined with an almost double-digit free cash flow yield and some of the strongest growth rates in industry, PrairieSky provides a strong total return proposition at a very low risk. Two new major oil discoveries were announced subsequent to quarter end on our undeveloped Clearwater acreage. These include Utikuma Lake and McLeod Lake. This further highlights the optionality associated with large undeveloped land bases. That is a differentiating factor when owning PrairieSky shares. On that front, we received CAD 3.5 million in lease issuance bonus and entered into 52 different leasing arrangements with 43 different companies. Leasing activity on the newly acquired Heritage fee title was particularly active, with one leasing transaction covering numerous sections of land targeting a Clearwater opportunity using low-cost multilateral technology. In 2022, we will have exploration wells drilled for both helium and lithium carbonate.
Both opportunities are on PrairieSky fee title lands. Our large-scale CCUS project in Meadowbrook received initial approval from the Alberta government, and we look forward to continuing to advance this opportunity with our project partners. Q1 drilling activity remains strong, with 194 wells spud on royalty acreage, almost double last year's Q1 total. Private operators represented approximately 50% of the spuds. Spuds were broadly distributed across the basin and included both oil and natural gas targets. A notable increase in workover activity was also evident across our already drilled 43,000-well portfolio. A notable increase in new oil and gas startup companies was observed over the last six months as M&A activities have picked up.
PrairieSky offers newly capitalized entities, consolidated undeveloped lands, and a significant high-quality seismic database that can allow them to shorten cycle times and lower upfront cap costs, which can help them accelerate activity to take advantage of the strong pricing environment. Existing clients of PrairieSky are also looking to expand their inventory in their existing core areas and uncover new plays. Along with our 33% dividend increase in February, debt levels are dropping faster than anticipated, which will allow both stronger dividend increases in the future and the ability to execute on accretive M&A, provided it improves the quality of our business on a per-share basis. We are seeing the benefits of an inflationary activity environment and an unhedged energy portfolio with 98% operating margins. I will now turn the call over to Pam to summarize the financial results.
Thank you, Andrew. Good morning, everyone. As Andrew mentioned, there are certain forward-looking information in the notes today, so I would remind investors to review the forward-looking statements qualifier in our press release and MD&A for Q1 2022. PrairieSky generated record funds from operations again in Q1 of CAD 105 million or CAD 0.44 per common share. More than double Q1 of last year and about 3% above Q4 2021, which included a CAD 12.4 million tax recovery. The increase was driven by our 23,892 BOE per day of royalty production and strong commodity pricing, which combined to generate CAD 134.7 million of royalty revenues. This is CAD 78 million above Q1 and CAD 40 million ahead of Q4.
PrairieSky's oil royalty production grew to 11,188 bpd in Q1 2022, 54% above Q1 last year and 35% above Q4. Backing out all acquisitions made in 2021, organic growth totaled 13% over Q1 and 6% over Q4. PrairieSky anticipated strong organic growth given our active leasing program and the number of spuds across our acreage in the second half of 2021 and into Q1 2022. Natural gas royalty volumes averaged 60.5 million a day, up 5% over Q1 and in line with Q4. Natural gas royalty revenue totaled CAD 22.9 million, driven primarily by strong AECO pricing, which averaged CAD 4.67 per Mcf in the quarter.
PrairieSky's 10,000 BOE per day of natural gas is unhedged, and we will benefit from the improvement in AECO pricing, which is currently over CAD 7 per Mcf. NGL royalty volumes averaged 2,621 bpd , which was up 5% over Q1 and 29% over Q4, when volumes were negatively impacted by ethane rejection. NGL royalty revenue totaled CAD 13.1 million in Q1, driven by strong benchmark pricing and increased NGL volumes. There were 1,433 BOE per day of prior period adjustments in the quarter, of which 1,078 BOE a day, or 75%, were from new wells on stream and better well performance. There was an additional 355 BOE per day from compliance activities. Overall, PPAs were 58% liquids.
The compliance group recovered missed and incorrect royalties through forensic accounting, collecting CAD 1.5 million in the quarter. There were 194 wells spud in Q1, which were 87% oil. The Viking was the most active play with 68 wells spud, followed by the Clearwater with 35 wells, and the Mannville with 22 wells spud. Additional oil-focused activity took place across the portfolio, including wells spud in the Cardium, Devonian, Duvernay, Mississippian, Montney, and Nisku. There were also 26 natural gas wells spud in the Montney, Mannville, and Cardium. Activity in the quarter was well above Q1 2021, when there were 100 wells spud, and higher than Q4 2021, when there were 166 wells spud.
Other revenue totaled CAD 5.2 million and included CAD 1.2 million of lease rentals, CAD 500,000 of other income, and CAD 3.5 million of bonus consideration for entering into 52 new leases with 43 different counterparties. New leasing is a leading indicator of field activity, and we anticipate near-term drilling on many of these new leases. As mentioned on our year-end conference call, PrairieSky is forecasting other revenue in the range of CAD 20 million in 2022, including lease rentals, bonus consideration, and other revenue. Compliance recoveries will be incremental to this amount. Cash administrative expenses totaled CAD 10.3 million, or CAD 4.79 per BOE in Q1. As in prior years, Q1 is always the highest quarter as long-term incentives vest and are paid in this quarter.
We expect cash administrative expenses to be below CAD 3 per BOE again in 2022. PrairieSky recorded a current tax expense of CAD 18 million in Q1 due to our record royalty production revenue. Entering into 2022, PrairieSky had CAD 1.75 billion of tax pools to offset future taxable income. In 2022, the first CAD 175 million of cash flow is tax-free, with the remainder taxed at a statutory tax rate of approximately 23.5%. During the quarter, PrairieSky declared dividends of CAD 28.7 million, or CAD 0.12 per share, with a resulting payout ratio of 27%. Excess funds from operations above the dividends were used primarily to repay bank debt.
Net debt at March 31st, 2022 was CAD 568.9 million, down CAD 66.1 million in three months. We will apply to the TSX to renew our NCIB, which we may use opportunistically. As previously communicated, PrairieSky's current focus is retiring the bank debt used in connection with the acquisition of the Heritage Royalty asset in December 2021. Since IPO, PrairieSky has generated approximately CAD 1.8 billion in funds from operations and returned CAD 1.5 billion to shareholders through dividends and buybacks. We will now turn it over to the moderator to proceed with the Q&A.
Thank you. As a reminder, to ask a question, you'll need to press star one on your telephone. To withdraw your question, press the pound key. Again, if you would like to ask a question, press the star, then the one key on your touch tone telephone. Our first question comes from Jeremy McCrea with Raymond James. Your line is open.
Yeah, hi, guys. Quick question on the Heritage properties. Are you seeing lease activity higher than expected, in line with what you guys expecting? And maybe just some thoughts just on what you kind of see on that line, just given where oil prices are here over the next six months here.
Yeah. Thanks for the question, Jeremy. You know, one of the things that was, I guess, not unexpected, but we did identify a pretty significant sized play for this multilateral technology, and we did one large lease, which is probably one of the more impactful things we've done as a business from a pure leasing perspective in a number of years. But I think the current oil price environment has really stimulated a lot of smaller leasing activity. With oil, of course, you can drill sometimes eight to 16 wells per section. There's been a lot of smaller leasing people adding onto their current portfolios or plays. We've seen leasing all the way from Southeast Saskatchewan, where we acquired the most significant position in the Southeast Saskatchewan Bakken Viewfield pool.
There's been some follow-on leasing there from a couple of different operators, as well as in the kinda Mississippian stack. When you jump to Provost and the Lloydminster, there's been quite a bit of heavy oil leasing given the narrow differentials and high WTI prices.
Thanks, Andrew.
Thanks, Jeremy. Have a good day.
Again, if you would like to ask a question, press star one. Our next question comes from Aaron Bilkoski with TD Securities. Your line is open.
Hey, good morning, guys. I know you don't provide corporate production guidance, but I'd be curious to know your thoughts on the pace of development of the private operators operating on your land. What are they telling you they're expecting to grow over the next 12-24 months?
They all differ. Actually, private operators, Aaron, have made up a bigger proportion of our spuds. I know. I mentioned in my notes that it's 50% of current well spuds. I know our largest royalty payer, currently Spur, is targeting about 30% production growth. You know, everything in between. Probably the most positive thing on the private side, I guess, would be all the new startups, and they're pure growth companies with just cash and some lands. They'll probably grow at the highest rate. I think some of the publics on the margin are probably looking to grow a little more. I guess, you know, we were pretty positively surprised by Q1, just given the very strong liquids growth rates we saw in Q4.
We would have been even happy after Q4 of just a flat production profile. To see growth off of that already increased base we saw in Q4 was quite encouraging.
Perfect. Thanks.
Thanks for your question, Aaron.
Thank you. Our next question comes from Harshit Gupta with Accountability. Your line is open.
Good morning, everyone. Congrats on another strong quarter. I just wanted to first ask about the hedging strategy. Do you guys still want to go unhedged looking at the commodity prices where they are? Or, you know, you're looking at some strategy over there to hedge some of the production in the coming quarters?
Yeah. Thanks for the question, Harshit. I think you know, we're very consistent with hedging. We've never hedged since our IPO, and we're not protecting capital programs because they're zero. Our debt's coming down at a very quick pace, and ultimately, we view it as speculating with investors' capital. I think you know, longer term, we are one of the few companies that gives pure exposure to unhedged, unlevered oil and gas in Western Canada with no operational leverage. We'll plan to keep it that way.
Sure. Makes sense. I see some of the companies are actually rolling off hedges now. On the cash operating expenses, I see you know, significant increase, and you mentioned that you're still looking at below CAD 3 for the year. Is that increase related to the acquisition one-time kind? You know, what led to this one, like CAD 4.80 almost?
It's a good question. I think the management's last two years have received zero on their performance share units because of the poor performance of the share price, they were paid out this year. There was higher payouts to the entire staff as well, just as a result of the increased share or the share appreciation over the year. There were some moderate costs with the Heritage acquisition. One of the places we're fortunate with the Heritage acquisition is we do most of the work on those acquisitions internally. We don't hire consultants. We kinda do it all ourselves, so they were moderated. Because of some of the improvements we've made in the efficiencies of the business, the G&A will trend down significantly throughout the year.
It's always the highest in terms of cash G&A is Q1, and that'll trend down materially, and it'll be below CAD 3 per barrel in cash G&A for the year.
The CAD 3 guidance is including these expenses, right?
That's correct. Including all expenses. That's correct.
Perfect.
We report a cash number because that's what we actually pay out. The other number can bounce around a fair bit with share price. We just report what we actually pay out and track that, and it's come down from CAD 4.50 in 2014 down below CAD 3 per barrel last year, and we expect that again this year.
All right. That's it for me. Thank you very much.
Thanks for the question, Harshit.
Thank you. Our next question comes from Jamie Kubik with CIBC. Your line is open.
Yeah. Good morning, and thanks for taking my question here. With respect to the CCUS project at Meadowbrook that you announced, can you offer any additional details on that project? Can you talk a little bit more about future exposure to CCUS that you see possible on your acreage?
Yeah. Thanks for the question, Jamie. We're excited about that one. That's been about two years in the making, and it's a great operator and really good project partners there. It's a multi-client approach west of Edmonton, and I think there'll be more in the future. Again, in that whole area where you generate the most carbon dioxide between Edmonton and Calgary, where the railways sit, where the QE2 sits. You've got all checkerboard PrairieSky acreage as well as one of the largest seismic databases in Western Canada. So we've got a great technical knowledge and understanding of where you can inject carbon dioxide. I expect that ultimately, over the next three, five, and 10-year period, we'll be involved in more projects going forward. We're pretty excited about the Meadowbrook project.
It's kinda unique 'cause it's west of Edmonton. It's in kind of a unique geographic area where we think we've got some opportunities to bring in multi-clients there.
Okay, thanks. Maybe with respect to the Heritage acquisition and the 52 lease agreements you announced in the quarter, can you talk a bit about how we should think about future leasing on this acreage and the pace that you've seen thus far compared to your expectations on the Heritage asset?
Yeah. I think, you know, one of the things that gets us most excited about the pace of leasing on the Heritage is the amount of different counterparties throughout the acreage. It's not. You know, in the past, if you went back to 2017, our leasing programs were very concentrated amongst a handful of operators. Today we're leasing to new startups right through to the big incumbents who haven't been leasing land for years. I think it's on the oil side in particular. I think people always gotta look at acreage on gas and acreage with oil. There's a lot more resource density with oil. And again, you can have a 1,000 bpd gross project on a single section of land.
These smaller leasing opportunities on the oil side can be quite impactful. Given it's such a broad group of operators, we're pretty excited about the potential over the next few years, just given the activity. I think, again, it is the biggest heavy oil region in Canada, where we acquired our acreage. Just given the narrow differentials and the high WTI price, we expect that to continue.
Okay, great. That's it for me. Thank you.
Thanks, Jim.
Our next question comes from Patrick O'Rourke with ATB Capital Markets. Your line is open.
Hey, guys. Good morning. Thanks for taking my question. Just wanted to ask, in terms of the return of capital focus here and debt repayment, obviously, commodity price continues to strengthen here. Wondering if there's any changes to that strategy. You did have the dividend bump last quarter. I know that, the NCIB renewal was just mentioned, now. Then, in terms of the pay down of the debt, any sort of update in terms of when you would hit, that target there?
Yeah. Thanks for the questions, Patrick. In terms of capital allocation, I know we increased the dividend in February by 33%, and the debt repayment's happening at a faster pace just due to the strong pricing and the growing production volumes underlying that. You know, our priority is paying down the debt. We view on the NCIB, we effectively, for the first time in our history, made an acquisition using leverage. We used two-thirds leverage for that acquisition, CAD 500 million in pretty low cost debt. I think, you know, our priority is paying that down, and we view that as effectively pre-funding the buyback. That was effectively NCIB, and now we're paying it down by retiring the leverage.
I think when you look into the next time we review the dividends, early next year, there's gonna be, you know, continued strong cash flows. The debt targets will be, we'll be retiring debt at a faster pace, and there'll be the opportunity for a significant increase at that point on the dividend.
Okay. I think you might have mentioned update in terms of Clearwater exploration success. Are you able to provide any further color on that?
Yeah. Utikuma Lake was a two-leg lateral. It's public data, so it could be viewed on AccuMap or geoSCOUT. Pretty strong rates on that two-leg lateral. It's an exploration play, so it's with eight-leg lateral or six-leg laterals. The new fluid systems people are using, we think that's a very significant accumulation. There's actually another sand there that hasn't been tested as well. That was a pretty significant discovery. McLeod Lake is an interesting one. A lot of people would know it as North Duvernay. It's on some of the exploration lands we bought in early 2017 when we made the first large Clearwater acquisition before it was kinda known as a significant play.
This is the second winter where there's been exploration done on this play, and it's confirmed and expanded the resource opportunity there. Both plays should see significant developments this upcoming winter season and should be significant contributors to both production and cash flow in the future. I think, again, the part of the reason we highlighted those is it's the difference between owning just a discounted cash flow stream over time, but also owning the undeveloped land, you know, without any future acquisitions. PrairieSky shareholders will see growth in these types of environments just because we've already pre-funded the future with the undeveloped land piece.
Okay. Thank you very much.
Thanks for the questions, Patrick.
Thank you. Our next question comes from Matthew Weekes with iA Capital Markets. Your line is open.
Hi. Thanks for taking my question. I think I just wanted to ask in terms of the Heritage Royalty integration, you know, how is that going so far? I was just wondering if you could provide an update on progress around that.
For sure. Yeah. It's a big job, Matthew, and I appreciate the question, and it's gonna be a huge amount of administration. Everyone's working very hard here. In addition to Heritage, of course, we bought another 1 million acres last year as well, primarily the Paramount fee, which was the old Apache fee title land in kind of west-central Alberta in the Deep Basin. So we continue to be very active in putting all of the different leases in properly into our system. The one place we're fortunate with Heritage is that it was broken up originally from the same asset base we IPOed with. So, because of that, we understand the leases quite well. It's work in progress.
We're quite active on it, but it's definitely gonna be a busy year from an integration perspective, and we're just doing it slowly and pragmatically to ensure everything's entered in correctly.
Okay, thanks. I appreciate that. Just my last question, you know, looking at the organic growth outlook here, it looks like it's pretty solid, you know, some indicators as far as the amount of wells being spud as far as leasing activity. Just thinking about alternative minerals like lithium, and I know you have the one lease that was announced with the quarter, and maybe not necessarily material by itself yet, but as you look at that optionality going forward, do you think that it'll increase, given the federal government's budget and wanting to develop a critical mineral strategy where we do more exploitation of these minerals such as lithium going forward?
Yeah. I do think it'll be a bigger focus of industry, and a lot of the core competencies of the E&P business can be transferred over for exploration for things like lithium and helium. So we do think it'll be a bigger asset 10 years from now. It's not gonna be a major contributor. Having said that, we did receive just under CAD 1 million in lease issuance bonus to lease those lithium lands. So we are again. We think it's a great opportunity set for investors. These are some of these resources we didn't even know we owned a few years ago, and now we're receiving bonus and exploration's being done on them.
There's also resources like helium, where Canada has fifth-largest reserves in the world of helium, and it's the exact same core competency for natural gas. I think people can take those skills and explore for helium as well. There's been some recent notable expansions from some of the potash companies in Southeast Saskatchewan. We already collect potash royalties as part of our other income stream, and that's likely to grow over the next period of time as well. Other minerals, again, while not significant in the large amount of EBITDA that we're gonna generate this year, I think in the future they'll have some significance.
Okay, thanks. Appreciate the answers. I'll turn the call back.
Thanks, Matthew.
Thank you. I'm showing no other questions in the queue. I'd like to turn the call back to Andrew Phillips for closing remarks.
Thank you very much, and thanks everyone for taking the time to dial into our call. I hope everyone had a good Easter, and I look forward to a great year in 2022. Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.