Good day, and thank you for standing by. Welcome to PrairieSky Royalty announces their fourth quarter 2024 financial results conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised today's conference is being recorded. I would now like to hand the call over to your speaker today, Andrew Phillips, President and CEO. Please begin.
Good morning, and thank you for dialing into the PrairieSky 2024 Q4 and Year-end Earnings Call. On the call from PrairieSky are Pam Kazeil, SVP and CFO; Dan Bertram, Chief Commercial Officer; Mike Murphy, Vice President, Geo sciences and Capital Markets; and myself, Andrew Phillips. Before we begin, there is certain forward-looking information in my commentary today, so I would ask investors to review the forward-looking statements qualifier in our press release and MD&A. In 2024, PrairieSky organically grew its oil production by 6% or 7% per debt-adjusted share. This is the third consecutive year of high single-digit organic growth rates in oil per debt-adjusted share. CAD 30.8 million of lease issuance bonus was received by entering into 219 leases with over 100 counterparties. Over the last 10 years, we have positioned the company in the fastest-growing oil plays in the basin: the Clearwater, Mannville Stack, and the West Shale Duvernay.
This will allow us to continue our material organic oil royalty growth rates into the future. After a production of 9.32 million barrels of royalty production over the year, which generated CAD 380.5 million of free cash flow, the oil reserves were more than replaced, up 3.5%, and gas was down modestly due to economic impacts of lower pricing. Over the past four years, virtually all reserves were replaced organically by industry totaling over 35 million barrels while generating CAD 1.5 billion in free cash flow over the same period of time. With decades of economic inventory, our hurdle rates for any organic opportunity are high. We successfully closed on four acquisitions totaling CAD 73 million that will generate just under 20% IRRs and can show growth as we work on the assets.
Included in these packages is one of the largest collections of GRTs, as well as the Petro-Canada Fee Mineral Title in Southeast Saskatchewan. Rig count in Western Canada is 258 this morning and was 241 rigs a year ago, so we're seeing a positive start to the year in Canada. For reference, the USA rig count is down 37 at the end of January. We are also pleased to announce a 4% increase in our dividend to CAD 1.04 per common share to be paid quarterly. The first quarterly dividend of CAD 0.26 per share will be effective for the March 31st, 2025, record date. I will now turn the call over to Mike.
Thanks, Andrew. The fourth quarter saw a continuing trend of elevated multilateral drilling activity, with 77 wells spudded bringing the total number of multilateral wells drilled in 2024 to 268. Multilaterals accounted for 36% of all drilling activity in 2024, which is up from the 31% we saw in 2023. With increased productivity and recovery per well, multilaterals contributed to the strong growth in corporate oil royalty production and reserves in 2024, despite a reduction in the overall spud count year over year. Separately, our Duvernay royalty production volumes were up over 50% in 2024, driven by strong activity levels with 33 wells spudded in the year. Third-party operators have recently seen a step change improvement in initial well rates in the oil window of the West Shale Basin Duvernay, where PrairieSky has a significant fee position.
We look forward to active capital programs planned in the Pamela and Willesden Green areas this year, which is expected to drive high netback light oil growth for PrairieSky in 2025 and beyond. I'll now pass the call over to Pam to discuss the financials.
Thank you, Mike. Good morning, everyone. PrairieSky closed out 2024 with another strong quarter, with Q4 oil royalty production averaging 13,317 barrels a day, bringing annual oil royalty production to 13,125 barrels a day, a 6% increase over 2023. We continue to see strong growth in the Clearwater and Mannville Stack plays, which now represent 21% of our oil royalty production, up from 17% in 2023. We did see a decline in natural gas and NGL volumes this quarter and year over year in response to weak natural gas pricing. Oil royalties represented 87% of total royalty revenue earned in both the quarter and the full year. Looking forward, PrairieSky's 2025 annual pricing sensitivities, which are all net of G&A and taxes, are as follows: a $5 per barrel change in US dollar WTI would increase or decrease funds from operations by approximately $23.5 million.
A $1 change in the light or heavy oil differential would increase or decrease funds from operations approximately CAD 2.75 million. A CAD 0.25 change per MCF in AECO would increase or decrease funds from operations approximately CAD 4 million, and a CAD 0.01 change in the US to Canadian dollar FX rate would increase or decrease funds from operations approximately CAD 5 million. Funds from operations totaled CAD 99.41 per share in the quarter and CAD 380.5 million or CAD 1.59 per share for 2024, which was in line with the prior year. PrairieSky declared dividends of CAD 239 million, which resulted in a payout ratio of 63%. Excess cash flow was allocated to the repayment of debt and acquisitions of CAD 57.3 million. At December 31st, 2024, PrairieSky had net debt of CAD 134.9 million. Subsequent to year-end, PrairieSky acquired Seal and Lesser Slave interest and Gore interest for CAD 50 million.
The transaction will add 350 BOE per day of production and closed on January 10th, so we'll see approximately two and a half months of production in our Q1 2025 results. This is in addition to the acquisitions we closed in late December, which will add approximately 50 BOE per day of production. Coming into 2025, we have tax pools of CAD 1.3 billion to shelter future taxability at approximately 10% per year. This means in 2025, the first CAD 130 million of cash flow is tax-free, with incremental cash flow tax at 23.5%. We've prepared our 2024 U.S. tax information, and our 2024 dividends will be a 36% return of capital for U.S. investors. This information can be found on our website. We will now turn it over to the moderator to proceed with the Q&A.
Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone. If your question has been answered or you wish to move yourself from the queue, please press star 11 again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Jeremy McCrea with BMO Capital Markets. Your line is open.
Yeah, hi guys. I know you guys don't give guidance, but how do you see or feel about the outlook today versus the coming year? And how does that compare from how you felt last year? Basically, I'm just trying to understand where there may be some surprise wins for the upcoming year here.
Yeah, good morning. Thanks, Jeremy. Yeah, I think with the rig count up pretty significantly year over year, we're expecting kind of higher activity levels across the entire basin. I think with the East Shale Duvernay, or sorry, the West Shale Duvernay, seeing increased activity and pretty good ramp in budgets. And then, of course, all the discoveries that have been made in the Mannville Stack should be a positive year and should be better than last year from what we know today. But again, we're only through January, and we'll have to see what tariffs bring.
Okay. And then you guys did some acquisitions here. Can you give a little bit more detail on those acquisitions? And actually, I'm more curious too, is there more tuck-in acquisitions like these out there than where we were probably last year? I'm just wondering if there's more acquisitions to come here as well too?
Yeah. And I guess you just never know when these things come and when they're available. And I think what was unique at the end of the year is two of the kind of more significant ones, including the Petro-Canada Fee Mineral Title, as well as New North, which was kind of a small corporate royalty company that had a number of GRTs and Fee Mineral Title. They kind of wanted to get it done by year-end, so it was a more unique circumstance, I guess, on both of those. So I guess I don't think we'll see a lot of those this year, but if we do, that's great because if you can get kind of high teens IRRs when your corporate returns in kind of the mid-teens and you can grow that asset, I think there are things that we like to do and what we do well here.
When you think about those assets, I think they were kind of undermanaged over the last 10 years, certainly on the mineral title side, and the Petro-Canada Fee Mineral Title is just over 20% leased. So I think when our teams get their hands on it, we'll not only do a lot of compliance but also get a lot of leasing done in Southeast Saskatchewan, and there's a new upper Frobisher play that looks promising, and multilaterals can access it quite economically, so I think we'll be able to do some good things with those assets over the next couple of years, get some leasing done.
Perfect. Thanks, Andrew.
Thanks for your questions, Jeremy.
One moment for our next question. Our next question comes from Dustin Besaw with TD Cowen. Your line is open.
Morning, guys. Thanks. Could you provide some more color on why the average royalty rate for 2023 was so high and why you saw that contract to a more normalized level in 2024? I'd also be a bit interested in learning about the letter of credit you provided to a counterparty. Is this a one-off, or do you guys see more of this in the future? Thanks.
You bet. Thanks for the question, Dustin. So yeah, number one on the royalty rate, we had a lot of high net royalty wells drilled in 2023. In 2024, we saw a lot of unit wells drilled, which kind of had a lower average royalty, so it kind of skewed it a little bit lower. I think in 2025, based on what we're seeing for capital programs and where we're expecting the drilling to be, that royalty rate should be up modestly this year. So again, I don't know if we'll get back to 2023 levels, but it should be, again, higher than our corporate average royalty. And then number two on the letter of credit, I think that was a unique situation.
We effectively took a royalty that we had on Two Rivers West and spread it over the entire asset to basically have a net royalty on the entire company and provide that letter of credit again to just backstop their financial plans over the next couple of years. But again, I think it's not something that we would do all over the basin, but that was kind of a unique circumstance to enable us to get more resource and bring PV forward on that asset.
Great. Thanks a lot.
Thanks for the questions.
One moment for our next question. Our next question comes from Adam Schwartz with Black Bear Value Partners. Your line is open.
Hey, good morning, guys. Thanks for taking my questions.
Good morning, Adam.
So I had two unrelated questions. Sorry. The first question is capital allocation, what the flows are with respect to the debt pay down and whether the debt pay down is going to be continued through the end of the year and if you think the goal is to get it to basically flat zero net debt position. And then the second question really has more to do with any color on your E&P partners and if they're commenting at all about their plans or how they're planning on handling various tariff risks and what they're thinking about their capital programs for this year and next.
You bet. Okay, so on the first question on the capital allocation side, I think to the extent we can find high IRR acquisitions that have a lot of optionality, like the Petro-Canada fee is a perfect example where it's only 20% leased, so again, we get a nice cash flow stream with a high IRR, but then we actually think we can manage that, get some leasing done, and grow that, so if we can find those things, that's obviously a great way to help compound the business, but in the meantime, we'll just continue to pay down debt, and absent any of those opportunities, we'll take debt down to closer to zero, but somewhere closer to zero or sub CAD 100 million of debt, we'll likely layer in some kind of buyback along the way.
Because again, I think when you think about our business with kind of 6% free cash flow yield, plus or minus, and then 6-plus% growth rates and some of these high IRR acquisitions, we're kind of a mid-teens returning business. So it's hard to find asset acquisitions that measure up against what our business is doing right now. So again, that's probably more what we'll see over the next year. And then your second question was with regards to our E&P partners and what their plans are. You know what's interesting with the tariffs, if you think about a 10% tariff and then you see what's happened with the FX, the Canadian FX, you're almost neutral on cash flows. So I think plans are kind of unchanged even in the event of a tariff coming in, but that's what we know today.
Of course, things can change very quickly. Again, as of today, you've got rig count up pretty materially from last year, and last year was a great year. As of now, their plans are kind of unchanged, but we'll see what Donald brings in about a couple of weeks here.
All right. Thanks. Yeah, I would say that you've heard me harp on it before, but it's a mid-teens return on capital for an extremely what will be a low no debt, extraordinarily high margin business. So that seems unusually cheap. So that's my two cents.
Great work. Thank you.
We agree. Yeah. Thank you. Thanks for your questions.
One moment for our next question. Our next question comes from Jamie Kubik with CIBC. Your line is open.
Yeah, good morning, and thanks for taking my question. Can you talk just a bit more about the lease issuance bonus during the quarter, what drove the large increase versus prior quarters? And can you touch on a little bit further the polymer EOR GRT that you received as well? Thanks.
You bet. Yeah. So overall, we've been really active on the leasing side, leased over 100 companies over the year. And then in Q4, we had some kind of larger deals that we entered into, and one of which was the Mannville deal. What was interesting on that Mannville deal, Jamie, is we had actually these are lands we actually leased two years ago, but because we've gone to zonal leasing, that same company that did very, very well on those lands wanted to lease some of the other Mannville zones. So that's where approximately CAD 8 million bonus is what we were looking for for a five-year lease. And they had this polymer. It's a line-drive polymer flood in the Wabiskaw B that they're planning a little further north.
And so rather than take the CAD 8 million cash, we did a swap for a royalty on that line-drive polymer flood that they're planning. And so again, I think it was great for the operator because they didn't have to put up the cash. And it was great for us because we effectively get a royalty on what we believe is going to be a very good project in exchange for a five-year lease. And what's interesting about that is depending on how active they are, within five years, we're going to be releasing a lot of those lands. That's just how kind of the recycling nature of mineral title. And then the balance of the leasing was kind of across the entire basin and included a little bit of Duvernay as well on the West Shale Basin side. But it's been quite active throughout the entire basin.
Again, this year, starting this year, from January till today, we've signed a lease every business day. Again, we're still on that same very active pace.
Okay. That's great. And maybe just last question for me. You do highlight good activity in the Duvernay over the year. Can you talk a little bit more about what you're seeing on licensing activity on your lands, how you think that could translate into oil volume growth going forward, and things of that nature? Thanks.
You bet. Yeah. So on the Duvernay side, we have seen the licensing activity pick up. We think activity will be in the range of double what it was last year. We were about 400 barrels a day of net royalty production for the last three years, and that spiked up to 700 barrels. So a very significant increase. And that was just from a five well pad that was put on our lands in late last year. So again, there's really good gearing given we have mineral title there, so it's higher average royalties. And they're very high-rate wells. The last two wells that were drilled on our lands were over 1,000 barrels per day of liquids over the first 30 days. So pretty significant.
And I think what's interesting about the volume growth that we expect to see there, it should be somewhere between 50% and 100% volume growth year over year. Don't know exactly where it lands. And of course, we don't know when the wells come on, so it will be a little bit lumpy for sure. But those barrels, that's 40-degree API oils. So we're receiving a netback that's 60%-70% higher than our heavy barrels, which is where a lot of the growth in our portfolio has been. So it should help on the free cash flow per share as well, Jamie.
Okay. Great. That's all for me. Thank you.
I'm not showing any further questions at this time. I'd like to turn the call back over to Andrew for any further remarks.
Thank you very much. Thank you to our employees for another great year of execution and to our shareholders for their support. We hope everyone's able to attend our investor day on May 14th in Calgary, where we'll release our 2025 asset handbook and provide investors with a range of outcomes for the business over the next 10 years. Have a great day.
Thank you, ladies and gentlemen. This does conclude today's presentation. You may now disconnect and have a wonderful day.