Ladies and gentlemen, thank you for standing by, and welcome to the PrairieSky Royalty Ltd. First Quarter 2020 Financial Results Call. At this time, all participants are in listen only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, please press star one on your telephone. Please be advised this call is being recorded, and if you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker, Andrew Phillips. Please go ahead.
Thank you, Sydney. Good morning, and thank you for dialing into the PrairieSky Royalty Q1 2020 conference call. On the call from PSK are Cameron Proctor, COO, Pam Kazeil, CFO, and myself, Andrew Phillips. Before I begin, I would like to take a moment to address our staff, our industry, business, and community partners, as well as our investors. This has been a challenging time for industry, but more importantly, our communities and families. Our thoughts are with all of you, and I would like to personally wish all of you the best and hope you stay safe and healthy while we look towards more prosperous times ahead. At PrairieSky, we have 60 dedicated team members, all of whom have been working from home since early to mid-March. The executive team is very appreciative of all your efforts and ingenuity during our work from home protocol.
We've continued to seamlessly execute on our business plan, and it is during times like this that I'm reminded what a great culture and team we have at PrairieSky. Following our usual path, I will provide an operational update and then turn the call over to Pam to walk through the financials. First quarter royalty production totaled 22,160 BOE per day versus 22,007 BOE per day in Q1 2019. Stable production was achieved without acquiring any producing assets over the past year. Free cash flow of CAD 46.5 million was primarily allocated to the Q1 dividends of CAD 45.4 million. Another CAD 5 million was spent canceling shares, with the buyback being accelerated in mid-March following a significant decline in oil prices. PrairieSky exited the quarter with no debt.
Our strategy from the outset has been to build cash on top of the stable dividends in periods of strength for the industry and deploy that cash when opportunities to improve the business per share present themselves. In 2017, we generated over CAD 100 million on top of the CAD 175 million dividend and carried approximately CAD 100 million on our balance sheet. Quality opportunities presented themselves, and we were able to deploy this capital to acquire premier royalty assets that improved the per share value of the business. Today, the business continues to be debt free, which is an optimal capital structure in this volatile environment. On capital allocation, we have adjusted the dividend to allow the company to deploy the excess cash flow towards acquisitions and/or buybacks.
PrairieSky currently trades at just over CAD 100 per acre, has a long duration, low decline, high margin cash flow stream, and lands on the best parts of the cost curve in the basin. As a result, the hurdle rates for acquisitions are high. Fortunately, we can continue to buy more of this high-quality business through our issuer bid, while we work on opportunities that we create or which present themselves. On cash G&A, management proactively took a significant total compensation reduction in December 2019, prior to the recent oil price decline. This reduction represents over CAD 1 million annually and was shared amongst the three executives. In addition, our compensation program is heavily weighted towards share price performance, which has resulted in management realizing a fraction, approximately one-third of the target compensation as long-term incentive awards vests.
This business is managed by three senior executives, down from five, three years ago, with all of us investing the majority of our net worth in PrairieSky shares. We are shareholders first, and we continue to focus on ways to improve the per share value as well as G&A efficiencies across the organization. The compliance group was and continues to be busy and collected CAD 1.8 million over the first quarter. Shut-in volumes have been close to 10% so far but are expected to increase substantially in May, as most companies had their nominations in for April prior to the collapse in oil. We are supportive of these decisions and are working collaboratively with our industry partners, as the oil will be stored in the reservoir until better pricing can be achieved.
The challenges arising from the recent price collapse will create opportunities for PrairieSky, and we are in a strong position to execute on them. Thank you to our shareholders for their continued support, to our employees who continue to deliver results from their home office work environments. I will now turn the call to Pam to discuss financials.
Thank you, Andrew. Good morning, everyone. Before I get started, I will be including certain forward-looking information in my remarks today. I would refer all participants on this call to please reference the forward-looking information section of our MD&A at March 31st, as well as our press release issued on April 20th, 2020. During the first quarter, PrairieSky generated funds from operations of CAD 46.5 million, or CAD 0.20 per share. Cash flow was generated primarily from royalty production revenue of CAD 49.1 million on average production volumes of 22,160 Boe per day. Production volumes were consistent with Q1 2019, when production averaged 22,007 Boe per day, and Q4 2019, when production volumes averaged 22,203 Boe per day. Production was comprised of oil volumes of 8,582 barrels per day, NGL volumes of 2,945 barrels per day, and natural gas volumes of 63.8 million per day.
Oil volumes were down from Q4 2019, primarily as a result of lower sliding scale volumes due to the decline in oil prices in March and fewer compliance volumes. Given the current oil price environment, there will be production volume shut-ins on our lands. Currently, we estimate that approximately 10% of Q1 2020 oil production will be shut in for April, growing to approximately 20% in May. The situation is continuing to evolve, and we are working with producers on our properties to make the appropriate long-term business decisions, which could result in additional shut-ins. NGL and natural gas volumes both increased from Q4 2019 as a result of the Montney wells that came on in the back half of 2019. These wells generate significant plant condensate, which boosted NGL price realizations in the quarter.
Although drilling activity on our natural gas properties has remained modest, natural gas makes up close to half of our production volumes, and we have royalty properties on plays across Western Canada, providing significant exposure to natural gas. PrairieSky's production volumes in the quarter included 1,686 BOE per day of prior period adjustments, which were 56% liquids and included 165 BOE a day from compliance activities and an additional 1,522 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 CAD 1.8 million in the quarter. There were 170 wells spudded in the quarter, primarily in January and February. There were 168 oil wells spudded, which included 86 Viking wells, 22 Mannville heavy oil wells, 16 Bakken wells, and 12 Clearwater wells.
There were also two Mannville natural gas wells spudded. Of the 22 Mannville heavy oil wells, 15 were from our two thermal oil projects at Lindbergh and Onion Lake. The average royalty rate of wells spudded in the quarter was 8.5%. Other revenue totaled CAD 3.6 million, including CAD 0.7 million in lease rentals, CAD 0.5 million in other income, and CAD 2.4 million in bonus consideration on entering into 26 leasing arrangements with 23 different counterparties. Given the impact of COVID-19 on the global economy and on the energy industry, we are reducing our outlook for other revenue from CAD 25 million in 2020 to CAD 15 million-CAD 17 million, primarily as a result of lower anticipated leasing activity. This includes our estimates for compliance revenues. Cash administrative expenses totaled CAD 7 million or CAD 3.47 per BOE and included the annual long-term incentive payment of CAD 1.7 million for all staff and executives.
As Andrew mentioned, our staff have been working remotely since March when we implemented our business continuity plan. Early on at PrairieSky, we invested in digitizing all of our records, including our land files. This investment has enhanced our ability to analyze information over the years and has enabled a smooth transition to working from home. Due to the impact of lower WTI pricing and higher light and heavy oil differentials on revenue, we've recorded a cash tax recovery in the quarter of CAD 2.5 million. During Q1, PrairieSky paid CAD 45.6 million in dividends and repurchased 500,000 common shares. PrairieSky's working capital deficiency was CAD 5.2 million at March 31st, and PrairieSky has no long-term debt. Since IPO, PrairieSky has generated approximately CAD 1.3 billion in funds from operations and returned CAD 1.2 billion to shareholders through approximately CAD 1.1 billion in dividends and the repurchase of CAD 5.7 million common shares.
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 at this time, please press the star and then the one key on your touchtone telephone. Once again, that is star 1 to ask a question. To withdraw your question, please press the pound key. Our first question comes from Aaron Bilkoski with TD Securities. Your line is now open.
Hi. Morning, guys. I was just curious how comfortable you would be using debt to make acquisitions if we enter a very target-rich environment. When I think about your use of debt, is there a maximum amount of leverage you look on the balance sheet if you were to use it?
Yeah, thanks for the question, Aaron. I think part of the reason we have the CAD 200 million bank line with the CAD 50 million accordion is to give us that flexibility, and what we're able to do today is, if we put cash in the bank on top of the dividend, we'd get a half percent interest when we can get a 6% free capital yield by buying back the stock. We can continue with the repurchasing, and if we're successful executing an acquisition, we can use leverage at that point and pay it down in a short period of time with the excess cash flow by slowing down the buyback. That kind of gives us the levers to be flexible when we see good opportunities arise that exceed our cost capital and enhance our asset base.
In terms of the total quantum of leverage, to answer the second part of your question, it really depends on the opportunity, and I hate to give you an exact number, but again, if it's something we're comfortable makes our business significantly better per share over the short, medium, and long term, we'd find ways to do it.
Thanks. If I can ask a follow-up question on the shut-ins. From a mechanical perspective, how far in advance of a shut-in are you notified that a producer intends to shut in a particular well?
It's a good question, and we actually have the ability under our contract to not allow shut-ins without force majeure. One of the things we recognize is that although we do have our 98% operating margins, it's better for the producer, and it's better for us to get more value for our crude. We've allowed 30-day shut-ins, and then at the end of the 30-day period, we can then reevaluate it. One example is there's a private producer that came to us, wanted to shut in all of their volumes for April, which we supported, but we took their production clients, so we'd already nominated it, but we found a way to actually make money with Shell by getting out of that contract. There was a way for us to actually incrementally make money and shut in the volumes and preserve the value there.
Again, we work collaboratively with all the producers, and we have 325 of them. We've been extremely busy in conversations with both the marketers on the one side and then those producers on the other. We definitely want to work with them and want to see them do well.
Okay. Pam mentioned that you can see shut-ins of up to 20% come May. Is that based on shut-in requests that you've seen, or is that based on just broader industry trends?
Yes. 10%'s the actual number that we've seen. 20% is what we've been told by industry. My view, and this is my view only, is that it's gonna be significantly higher than that in May. Time will tell. Again, that's what we've been given as guidance, Aaron Bilkoski, and that's kind of what we have to go off of. My view is that it should be higher than that in May.
You care to bookmark that, Ben?
I do not.
Okay.
I'd be speculating. The market's so volatile that, and it really depends on a lot of the contracts that producers have in place as well. Again, there are some, and there's obviously the issues with there's some heavy oil wells that if you shut in, the worm holes can collapse, those sorts of things. Again, you have to be cautious and do it pragmatically if you're a producer. But again, setting those aside, the economic decision would be to shut in a far higher amount than that 20%. That's just where the number comes from, that it's gonna be higher. I'd just hate to take a stab at it.
All right. I just have one more question for you , on all the time. If a producer opts to shut in a well or a field, from your past experience, how long should we expect those wells to stay shut in for? How quickly can they be returned if pricing doesn't improve?
It all depends on the type of production. A SAGD can take longer. In water floods or polymer floods, in a lot of cases, they can continue to inject the polymer water to maintain pressure, maybe even increase pressure while the balance of the field's shut in. Typically, it's very quickly. You can get wells on very quickly after, when you make that decision to put them back on production. It can be within days.
Okay. That's it for me. Thank you, guys.
Thanks, Aaron.
Thank you. Our next question comes from the line of Michael Murphy with Stifel Nicolaus. Your line is open.
Thanks. Good morning, everyone. Andrew, I'm gonna ask you to speculate on a potential board decision. I know, in the past, you've looked at your dividend sort of annually. With the prospects for, I guess, very low pricing in Q2 combined with significantly lower volumes, at least temporarily, we think. If we're coming out of this, I guess, three months later with curtailments largely behind us or an outlook to that. With weak pricing in Q2, would you speculate on whether the board would look for another temporary adjustment to the dividend, or do you think they would be comfortable with funding any shortfall via your credit lines here, at least temporarily?
We've always said we wouldn't use debt long term to pay the dividends. Mike, and thanks for the question. I guess with 90% operating margins, 50% of our production natural gas, given where the dividend sits today at CAD 0.24 a year, CAD 0.06 per quarter, it looks well-funded. I think, again, if there was a shortfall, it'd be in the order of CAD 1 million on a CAD 2 billion company, so it'd be very modest. I don't think we'd make any decisions based on two weeks of being unsustainable because all your oil gets shut in or something like that. Does that help to answer your question?
Yeah. Thanks. That's it for me.
Thanks, Mike.
Thank you. Once again, that is star then one to ask a question. That is star one. Our next question comes from Jamie Kubik with CIBC. Your line is open.
Good morning, everyone. Thanks. Quick question for you. Given the strain on operators and balance sheets in this environment, can you talk about how you're monitoring counterparty risks, and have you seen anything on that side that is concerning at this point? Any light you can shed on that would be great.
Thanks for the question, Jamie Kubik. Counterparty risk is something that we're always monitoring. We have very robust processes in place. Some of the things that we can do is, obviously, the leases are under our control, and if a producer is behind in royalty payments, we can take that lease back. That's always a very powerful message to send to someone who might be behind in royalties. We also have the ability to take our production in kind. We currently take about 10% of our production volumes that way, which eliminates that counterparty risk. We have a few letters of credit in place with certain producers. It's something that we continue to monitor very closely, trying to work with producers, as Andrew mentioned, on shut-ins. Royalties are our priority and keeping our leases in good standing.
Jamie, if I could add one thing. Again, it's a good reminder. When you own the fee simple land, you actually own the resource, so you're super secured, and you're ahead of the banks, and you always have that option of kicking people off your lands.
That's good.
If they're non-compliant, that's why we typically, if there is a bankruptcy process, which we've seen numerous bankruptcies over the last five years, the receiver pays on time monthly to ensure they secure that lease and ensure they keep their asset intact.
Okay. Thank you. That's all for me.
Thanks, Jamie.
Thank you. I'm not showing any further questions at this time. I would now like to turn the call back to your speakers.
Thank you very much again for everyone dialing into the PrairieSky Q4 conference call. As always, please call Pam or myself if you have any questions.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a great day.