Earnings Call: Q1 2021

Apr 20, 2021

Earnings release

Ladies and gentlemen, thank you for standing by, and welcome to the PrairieSky Royalty announces their First Quarter twenty twenty one Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Andrew Phillips, President and CEO. Please go ahead. Thank you, and good morning, and thank you for dialing into the Q1 twenty twenty one PrairieSky Realty Earnings Call. On the line from PrairieSky are Cam Proctor, COO Pam Crizell, CFO and myself, Andrew Phillips. 2021 saw roughly flat production from the fourth quarter, but a 20% increase in funds from operations due to strong pricing in our unhedged royalty production. The second quarter will see the benefit of a full quarter of contribution from our recently completed Deep Basin Royalty acquisition. The PSK team is hard at work integrating the asset package, conducting compliance reviews and working towards new leasing arrangements with producers. Given the strong economics of a variety of plays on these lands, PrairieSky management believes it can grow this asset in the mid single digits over the next ten years with no capital invested. The compliance group generated just under $1,000,000 in revenue in the quarter as well as generating new lease bonus as a result of their compliance initiatives. Lease issuance bonus totaled $1,400,000 as PrairieSky entered into 33 new leases with 29 counterparties. Leasing in the first quarter was dominated by the Viking formation in Alberta and Western Saskatchewan. Cost control, which has been a key focus since our IPO, continues to make progress. Q1 cash G and A of $3.27 per barrel is $0.20 per barrel lower than Q1 of twenty twenty. Q1 is when management and staff received their share based compensation, which totaled $700,000 for the year. Cash G and A should be well below $3 per barrel again this year. Activity levels in the basin continue to improve off the multi decade low experienced last year. Natural gas prices have improved, incentivizing natural gas activity and improving the economics of oil and liquid search plays as the solution gas adds more cash flow. With the backwardation in the oil curve and narrow differentials, we anticipate producers will look to drill a short cycle time quick payout oil plays. The Viking remains at the top of the pile for light oil plays, so stronger activity should resume after breakup in this play. Play expansions and new discoveries in our South Clearwater acreage have added to our already sizable inventory of economic locations in the back half of twenty twenty one. We now have over 1,000,000 acres of long tenured land on this fast growing play. We also have two polymer pilot floods on our Clearwater lands, which should positively impact recovery factors and duration at no additional cost to our royalty owners. As the year progresses, we will continue to cancel shares, lease land, evaluate acquisition opportunities and bring our leverage down to zero. In May, we will once again apply to the TSX for approval of a normal course issuer bid. We plan to renew the NCIB to repurchase up to 15,200,000.0 shares. We look forward to our Investor Day and our third asset handbook release on May 18. We will highlight key plays, tabulate the value of all undeveloped locations, show investors our return on equity and how it should improve over time as well as an expected range of outcomes for your equity investment in PrairieSky. Employees and management continue to invest our tax after tax dollars in PrairieSky that we feel trade well below the intrinsic value of our business. I will now turn the call over to Pam to walk through the financials. Thank you, Andrew. Good morning, everyone. During the first quarter, PrairieSky generated funds from operations of $48,800,000 or $0.22 per share. Cash flow was generated primarily from royalty production revenue of $56,700,000 on average production volumes of 19,380 BOE per day. In late February, we closed our previously announced Deep Basin royalty acquisition for cash consideration of $45,000,000 before adjustments. This acquisition consolidates into PrairieSky 640,000 acres of royalty lands, including 170,000 acres of fee mineral titles, and adds approximately six fifty BOE per day of production, which we will see the full impact of in Q2. Q1 twenty twenty one oil royalty revenue of $36,500,000 increased 30% over Q4 due to strong WTI benchmark pricing. Revenue was generated on oil volumes of 7,278 barrels per day, which were flat with Q4 as new wells brought onstream and one month of production from the acquisition offset natural declines. Natural gas revenue of $12,700,000 was 27% above Q4 due to strong AECO and Station two benchmark pricing, which more than offset the modest decline in natural gas volumes to $57,600,000 a day. Natural gas volumes were negatively impacted by seasonal cold weather freeze offs, which offset incremental production from new wells on stream and the acquisition. NGL revenue increased 34% from Q4 due to strong benchmark pricing and a nine percent increase in royalty production volumes to 2,502 barrels a day. NGL volumes increased due to production from new wells on stream and incremental volumes from the acquisition. PrairieSky's production volumes in the quarter included eleven sixty seven BOE per day of prior period adjustments, which were 50% liquids and included three sixty two BOE a day from compliance activities and an additional eight zero five BOE per day of other prior period adjustments related to new wells on stream and better well performance. The compliance group continues to recover missed and incorrect royalties through forensic accounting, collecting $800,000 in the quarter. There were 100 wells spent in the quarter, of which 86 were oil. Oil activity included 46 Viking wells, 13 Clearwater wells and eight Cardium wells. There were also 14 natural gas wells spud, including nine Montney Wells. Although drilling activity improved in the quarter compared to the back half of twenty twenty, it remained significantly below levels we saw before the onset of COVID-nineteen. Other revenue totaled $1,800,000 including $700,000 in lease rentals, 700,000 in other income and $1,400,000 in bonus considerations on entering into 33 leasing arrangements with 29 different counterparties. Cash administrative expenses totaled 57 sorry, totaled $5,700,000 or $3.27 per BOE. Cash administrative expense was 19% lower than Q1 twenty twenty and included the annual long term incentive expense of $700,000 This is a 59% reduction compared to the incentive payments in January 2020. During Q1, PrairieSky declared dividends of $14,500,000 with the resulting payout ratio of 30%, with remaining cash flow allocated to funding the Deep Basin acquisition. At March 31, bank debt was $61,000,000 Since IPO, PrairieSky has generated approximately $1,500,000,000 in funds from operations and returned $1,300,000,000 to shareholders through dividends and buybacks. We will now turn it over to the moderator to proceed with the Q and A. Thank you. Our first question comes from Jeremy McCree with Raymond James. You may proceed with your question. Yeah. Hi, guys. I was wondering, two questions. If you could give a bit of a sneak preview of your asset playbook and some of the biggest things that we'll probably see this time around versus a couple of years ago. And then just with the acquisition and the free loss coming back, where current production roughly assuming like 1,000 BOE in compliance, BOE is going be based on the acquisition? Yes. Thanks for the question, Jeremy. Investor Day will be similar to the previous two where we're going to obviously put out our new asset handbook and kind of detail intrinsic value of the business with just what we know currently economic locations and just show investors why we'd like to cancel shares because of where we trade relative to intrinsic value. We'll also kind of focus on returns, our return on equity, return on capital employed, which parallel each other because of our low debt level and really highlight some new plays, new opportunities in place, pensions that the industry has developed over time. And I think the most powerful thing is even in this challenging two year period, specifically last year, we've had our proved reserves stay roughly flat with no acquisitions with other people's capital. So that kind of just shows why you want to own royalties over the long term as all that capital is available for free cash flow. And then on the current production level, obviously, we don't give any guidance, and we get trailing data as well. But I will say that a lot of the big winter programs in Clearwater would have kind of partial data for the first quarter. We still have four seventy five barrels of shut in or curtailed oil production, And we're working through a lot of those with producers. And I think some of it will be permanently impaired just because the cost of reentering and recompleting and putting those wells back on production might be higher than the net present value of the remaining reserves in some of the long later in life wells. But I do think some of that at least half of that should come back on over the next two quarters. So I think and then on the gas side, you obviously had to freeze off. We had a very, very cold February. And our shallow gas portfolio with the 20 to 30 barrels per million, see some freezing issues at the wellhead. So I think you'll should see slightly stronger production ahead, but I'd hate to give numbers around that. Yes. Okay. Thanks, guys. Thanks for the question, Jeremy. Thank you. Our next question comes from Aaron Wilkoski with TD Securities. You may proceed with your question. Thanks. Good morning. I guess my question is around the NCIB. And as we look ahead, how do you think about the NCIB? Do you see PrairieSky using a tactical tool like in Q3? Or do you see a return to a more regular systematic repurchase on a quarterly basis? Yes. It's a good question, Aaron, and thanks for the question. I think we'll implement a regular program with the option of being tactical in the back half of the year. And I think the reason we structure it that way is we can kind of just chip away at the share count, see how the year progresses. Obviously, we'll have the debt repaid in a short amount of time and be down to debt zero and then have excess cash to continue to cancel shares with. But I think we would just want to see how the M and A market shapes up. And if there's quality assets that make sense that are accretive short, medium and long term, then potentially that would take precedence over the NCIB. But whatever creates the most value on a per share basis to shareholders is how we'll decide that. And part of the reason we don't give any guidance or outlook on our tactical approach is because we wouldn't want people front running their trade, I guess. Hopefully, that answers your question. Guys. If I could ask a follow-up question on the M and A front. Sure. I'm curious if you're seeing any emerging opportunities on the carbon capture and storage initiatives. And I guess, do you see PrairieSky ultimately participating in this space? Yes. That's actually that's a really you kind of gave a preview to Investor Day there. We've actually got a big part of the presentation to talk about carbon capture and underground storage, but as well carbon sequestration into, missable oil reservoirs where there's a lot of remaining pore space and also recover the remaining light oil reserves. Our first deal is done with Enhance. They're, on one of their first pools, it looks like it's starting to show first oil and it looks pretty successful and obviously taking a lot of cars off the road. And there's a lot of this potential in Central Alberta where we have our checkerboard acreage. And if you look at that chart I would like to show, which shows the duration of our asset in our presentation, you can see that our production was almost triple what it is today from an oil perspective, and it's all the old REITs. And what's interesting is most of them still have in the range of a third of the light oil remaining, and there was just no real way with technology in the past to get those last oil light oil barrels out. But now with carbon offsets, like you could get some of these reservoirs back up to peak production. So we think it will be a big part of our royalty production ten years from now. So it's and it's light oil. It's all infrastructure connected, and it will be some of the lowest Scope one, two and three oil produced in the world. So I think it is something we're focused on. At Investor Day, we're going to show 100 different reservoirs, 87, I believe, of which are going to be immiscible, so just for carbon dumps, the remainder of which have some potential for enhanced oil recovery. But that will be a significant section of our asset playbook. Interesting. Thank you very much, guys. You. And I'm not showing any further questions at this time. I would now like to turn the call back over to Andrew Phillips for any further remarks. Thank you, everybody, for dialing in. Thank you very much to all our shareholders for their support and our employees for their hard work, and please call Pam or myself if you have any follow-up questions. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.