Earnings Call: Q2 2020

Jul 21, 2020

Earnings release

Ladies and gentlemen, thank you for standing by and welcome to today's conference call. PrairieSky Royalty announces their Second Quarter twenty twenty Financial Results. At this time, all participant lines are in listen only mode. After the speakers' presentation, there will be a question and answer session. I'd now like to hand the conference over to your host today, mister Andrew Phillips, President and Chief Executive Officer. Please go ahead, sir. Thank you, and good morning, and thank you for dialing into the Q2 twenty twenty PrairieSky earnings call. On the call from PrairieSky are Pam Cazelle, CFO Cam Proctor, COO and myself. I will provide an operational update then turn the call over to Pam to walk through the financials. We completed a $6,000,000 acquisition in the Northeastern British Columbia Montney play, where two new high rate wells in distinct zones now provide over a 100 barrels per day of net royalty oil production and gas production. PrairieSky now has royalty interest in a 100 contiguous sections of Triassic rights in this particular part of the Montney Fairway and is well positioned for the continued development of this play. During the second quarter, we evaluated numerous acquisition opportunities and submitted seven different bids on varying sizes of packages, but none were successful. We continue to look for expansion opportunities for the business where we can achieve near and long term accretion on free cash flow per share. These opportunities have to compete with buying PrairieSky shares for cancellation at an unlevered 7% free cash flow yield with large contiguous tract of undeveloped land on the best parts of the oil cost curve. This is difficult to do, but we have the benefit of being able to allocate our excess cash flow on top of the dividend to the NCIB and give our owners a larger share and a wonderful business. PrairieSky entered into 19 new lease arrangements with 17 counterparties and received $700,000 in lease issuance bonus. The leasing was primarily for oil targets across Alberta and Saskatchewan and included some natural gas leasing. Cash G and A totaled $2.35 per BOE. Royalty compliance collected $2,200,000 taking the annual total to $4,000,000 As we have in previous downturns, PrairieSky management will work hard to take advantage of this challenging environment to improve the business on a per share basis. Given the significant amount of free cash flow the business will generate over the next twelve months in excess of the dividend payments, we are well positioned to do this. We appreciate the support of our shareholders and our employees who have managed the business well from a variety of work environments. I will now pass the call to Pam to discuss the financials. Thank you, Andrew. Good morning, everyone. Before I get started, I will be including certain forward looking information in my remarks today. As such, I would refer all participants on this call to please reference the forward looking information section of our MD and A as at 06/30/2020, as well as our press release issued on 07/20/2020. During the second quarter, PrairieSky generated funds from operations of $21,300,000 or $09 per share. Royalty production revenue totaled $25,100,000 on average production volumes of 18,671 BOE per day. Production volumes were down from both Q1 twenty twenty and Q2 twenty nineteen due primarily to the impacts on global oil demand from COVID-nineteen and instability in global oil benchmark pricing. Third party operators reacted to market uncertainty, reducing capital budgets for 2020. These changes, with spring breakup, meant that there was limited exploration and development activity across Western Canada in the quarter. Production was comprised of oil volumes of 6,035 barrels per day, NGL volumes of 2,586 barrels per day and natural gas volumes of 60,300,000 a day. Oil volumes were impacted by shut ins across Alberta and Saskatchewan as operators reacted to the dramatic decrease in WTI benchmark pricing. During the quarter, average oil royalty volumes of approximately 2,600 barrels a day were shut in. As pricing has started to improve, certain operators have started to bring production volumes back on. At current WTI pricing and differentials, we expect to see shut in volumes on light oil continue to return over the summer. Volumes, including our thermal production, will take longer to return. The combined impact of shut in volumes and lower benchmark pricing resulted in oil royalty revenues of $13,400,000 a 74% decrease as compared to Q2 twenty nineteen. Natural gas volumes totaled $60,300,000 a day in the quarter. Natural gas volumes were impacted by oil production shut ins, which reduced solution gas volumes as well as declines due to limited activity. Stabilized AECO pricing through Q2 versus the prior year generated $7,600,000 in revenue, a 69% increase over Q2 twenty nineteen. NGL volumes generated an additional $4,100,000 in product revenue, down 37% from Q2 twenty nineteen due to lower benchmark pricing. PrairieSky's production volumes in the quarter included twelve forty five BOE a day of prior period adjustments, which were 52% liquids and included five twenty eight BOE a day from compliance activities and an additional seven seventeen BOE a 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 $2,200,000 in the quarter. Other revenue totaled $3,100,000 including $2,200,000 in lease rentals, dollars 200,000.0 in other income and $700,000 in bonus consideration on entering into 19 leasing arrangements with 17 different counterparties. As mentioned on our Q1 twenty twenty conference call in April, given the impact of COVID-nineteen on the global economy and on the energy industry, we expect the outlook for other revenue to be in the range of $15,000,000 to $17,000,000 primarily as a result of lower anticipated leasing activity, and this includes our estimate for compliance revenues. We continue to monitor our controllable costs and cash administrative expenses totaled $4,000,000 or $2.35 per BOE in the quarter. Current tax for the quarter was $3,000,000 which reflects an improved cash flow outlook for 2020 at June 30 as compared to March 31. During Q2, PrairieSky declared dividends of $06 per share or $13,900,000 and repurchased 470,000 common shares for $4,100,000 At June 30, PrairieSky had a modest working capital deficiency of $8,700,000 and no long term debt. Since IPO, PrairieSky has generated approximately $1,300,000,000 in funds from operations and returned $1,200,000,000 to shareholders through approximately $1,100,000,000 in dividends and the repurchase of 6,200,000.0 common shares. We will now turn it over to the moderator to proceed with the Q and A. We have a question from the line of Jamie Kubik with CIBC. Your line is now open. Good morning, everybody, and thanks for taking my question here. Can you talk a little bit about counterparty risk in the current environment and how Perriska is managing that? Yes. So counterparty risk is something that we always are reviewing as a business. So through the quarter, one of the things that we focused on was where counterparties wish to shut in production. We did compliance reviews and collected any outstanding amounts. We take production in kind where we perceive that there may be some counterparty risk. And when we're entering into leasing arrangements, we're always looking at our counterparties to evaluate their balance sheets and their ability to meet their commitments. One of the things that we've tried to focus on with our counterparties is ensuring that we're picking counterparties who are able to commit capital to develop their plays. So that's always been a priority for PrairieSky. Yes. And just to follow-up on that, Jamie. PrairieSky is the owner of the resource. So if people if a receiver stops paying or a counterparty stops paying, we have the ability to remove them from our land. So that's a super secured nature of owning a few simple lands. You actually own the resource. And course, we see the whole spectrum because we have three twenty five different royalty pairs. So we see everything from the really financially stable companies down to the weaker ones. But again, we've this is a process that's been ongoing for six years. And Pam's done a really good Pam and her team have done a really good job of ensuring we're taking production in kind for some of the stress producers. Okay. Understood. And then maybe just another quick question here. You mentioned in your remarks, the management and the FirstNet employee is going to work hard to take advantage of this environment to improve the business. And when we look out, obviously, commodity prices are better for the 2020 than what they look like they were for Q2, obviously. How should we think about your allocations of free cash flow? Like is a dividend increase a possibility in the next six months given what we're seeing on pricing? Or is it more likely that you repurchase stock and look to M and A? Yes. It's a great question. And I think, again, we'll continue to review the dividend in every February. I think the dividend, we will grow over time with the growth in the free cash flow of the business. But I think where we sit today, we see tremendous value in buying the stock below intrinsic value here. And that's a primary allocation for the excess free cash flow on top of the dividend. We'd be keen to do acquisitions that improve our business. We're working hard on a number of them. But again, I think there's definitely a value gap there. So again, we'll continue to cancel shares down here and look for opportunistic acquisitions. But I think the dividend will have the opportunity to grow over time. And I think it's a wonderful dividend paying company. The three years prior, paid $185,000,000 each of those years, all the free cash flow and had another $40,000,000 left over to cancel shares with. Those are kind of better times in terms of pricing and activity. In this environment, with quite a bit of excess free cash flow, we'll utilize it to improve the business. Okay. And then maybe final question here from me is if we think about Q2, you obviously had a 30% drop in oil volumes, but much less activity over the second quarter as well. How should we think about oil volumes for Q3, Q4 here given shut ins are likely returning, as you mentioned, but activity is certainly lower. So do those two offset one another? Or should we expect oil volumes to lift? And respecting that you don't provide firm guidance, but any loose numbers that you can provide on that side would probably be helpful. Yes, for sure. And again, we had the 30% shut ins. We do anticipate, for sure, the light oil, as Pam mentioned on the call, the light oil volumes have already come back on or in the process of coming back on. Some of the waterflood pools take a little longer before they reach peak production. The 14% of our volumes come from the thermal oil. Those are going to take as long as December until they're back up to their full, full production. And then the heavy oil, it really depends on people where they sit on the cost curve, but also it depends on, their their individual, hedging situations. I know a number of our heavy oil producers crystallized their hedges, took the cash and left the volume shut in for slightly better pricing. So again, it'll it'll take a bit of time, but I would assume oil volumes to be up from Q3, obviously, with even without the even with the low activity over the back half of the year. But, again, it's activity is extremely anemic in the base and certainly on the oil side. I know there is a pretty long period of time where there was zero rigs running in Saskatchewan and only two oil rigs running in Alberta. It's hard to drill a new oil when you've got oil production curtailed. So I do think, we will see an improvement, in the back half of the year. Okay. That's it for me. Thank you, guys. Our next question comes from the line of Jeremy McRae with Raymond James. Your line is now open. Hi, guys. Just a bit on my follow-up question there or Andrew. In terms of activity, I know a lot of companies haven't said they are expanding their CapEx budgets. But just with commodity prices really starting to move up here in the last couple weeks, has have you heard any indications from any of the companies that are on your line that they're thinking about getting back to work? Maybe not, they've announced official, but they're asking more licensing type questions, or any kind of indication that activity is starting to come back here. And just on with that, is there any indications or numbers that you give for how many wells are actually drilled on your lands here for for q two? Yeah. So, for sure. So in q two, there were zero spuds, on our land. And talking to a lot of the bigger producers on our lands and some of the top 10 royalty players, there's a lot of planning for kind of a q four program, which kinda dovetails into their, 2021 program. So I think, with the improvement of pricing and, the narrow differentials have actually probably been the biggest factor in people making these decisions. We're starting to see some programs trickle into Q4, late Q3, early Q4. So I think people are setting up their 2021. So we do expect, greater activity than we would have two months ago had we chatted. And and so, again, I I don't know that that'll show an effect, for us in the back half of this year, but it certainly will improve 2021. Okay. Alright. Thanks, Andrew. Thanks, Jeremy. Our next question comes from Harshita Gupta with Accountability Research. Your line is now open. Hi. Good morning. My questions actually have been answered. Thank you very much. Thank you. I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Phillips for closing remarks. Well, thank thank you, everyone, for calling into the PrairieSky Q2 earnings call. And if you have any further follow-up questions, please call Pam or myself. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.