Good day, and thank you for standing by. Welcome to the PrairieSky Royalty Ltd. third quarter 2022 financial results conference call. 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 the session, you'll need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. 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 Chief Executive Officer. Please go ahead, sir.
Thank you very much and good morning, everyone, and welcome to the PrairieSky Royalty Q3 2022 earnings call. On the call from PrairieSky are Cameron Proctor, COO, Pam Kazeil, CFO, and myself, Andrew Phillips. There's certain forward-looking information in my commentary today, so I'd ask investors to review the forward-looking statements qualifier in our press release in MD&A. Before passing the call over to Pam to walk through the financials, I will provide an operational update. Strong third quarter activity of 286 spuds and an average royalty of 8.9% should result in a strong finish to an already excellent year and a tailwind for 2023. Activity was spread across the basin and numerous wells were exploratory, testing new concepts and play ideas.
Third quarter leasing was very strong as we entered into 58 leasing arrangements with 46 different companies, resulting in lease issuance bonus of CAD 5.9 million throughout the quarter. The compliance group also had a productive quarter and brought in CAD 3.3 million in compliance revenue. Given the confidence in our organic growth profile, our low payout ratio and the pace at which the debt incurred for the acquisitions in 2021 has been retired, the Board of Directors has made the decision to double the current CAD 0.12 per quarter dividend to CAD 0.24 or CAD 0.96 per share per year. This will be effective for the Q4 2022 dividend for holders on record on December 30, 2022. Given our continued low payout ratio and organic growth opportunities, investors can expect ratable annual dividend increases in future years.
This low payout ratio will allow us to retire the current debt and have significant liquidity available for opportunistic acquisitions or share repurchases, whichever provides the best long-term return for shareholders. The significant investment that we have made in the large heavy oil in place accumulations across the Western Canada Sedimentary Basin at the inflection point of a new technology used to significantly increase recovery factors, will provide our owners with per share reserve growth over the next 5, 10 or 15 years. Our once every two-year investor day is scheduled for the morning of May 17, 2023 at the Royal York Hotel in Toronto, where we look forward to publishing our asset handbook and providing shareholders with a range of outcomes over the medium and longer term for the business.
Thank you to our owners and staff for patiently allowing us to improve our business over the last five years. I will now turn the call over to Pam to walk through the financials.
Thank you, Andrew. Good morning, everyone. As Andrew mentioned, there's certain forward-looking information in our commentary today. I'd remind investors to review the forward-looking statements qualifier in our press release in MD&A for Q3 2022. Royalty production averaged 24,986 BOE per day in Q3, and generated another strong quarter of funds from operations, which totaled CAD 123.5 million or CAD 0.52 per share. PrairieSky's oil royalty production averaged 11,376 barrels per day in Q3. Excluding all acquisitions, oil royalty volumes increased 20% over Q3 2021 due to strong third-party drilling activity across our land base.
Oil royalty revenues totaled CAD 107.6 million in the quarter as we realized CAD 102.80 per barrel, which is up approximately CAD 30 per barrel over Q3 2021. As expected, oil royalty volumes were lower than Q2 2022 following seasonal break-up when third-party field activity slows down and fewer new wells are drilled and brought on stream. Oil royalty revenue lagged Q2 primarily as a result of lower WTI benchmark pricing and wider light and heavy oil differentials, partially offset by a stronger US dollar.
We anticipate higher oil royalty volumes into Q4 in 2023 due to the level of activity on our land in the quarter when 268 oil wells were spud, including 107 Viking wells, 48 Clearwater wells, and 49 light and heavy Mannville oil wells. Natural gas royalty revenue totaled CAD 24.2 million in the quarter, which was up 55% over Q3 2021 as royalty production volumes averaged 65.7 million a day and benchmark pricing improved. Volumes increased due to acquisition volumes as well as 5% organic growth. Natural gas royalty production volumes remained flat with Q2, but natural gas revenue declined 34% due to lower AECO and Station 2 benchmark pricing. During the quarter, there were 18 natural gas wells spud on our royalty lands, including five Spirit River wells and four Mannville wells.
NGL royalty revenue totaled CAD 14.2 million, which was up 41% from Q3 2021 due to strong benchmark pricing and flat average NGL production volumes of 2,660 barrels per day. NGL royalty revenue decreased 20% from Q2, primarily due to lower benchmark pricing. Prior period adjustments totaled 1,257 BOE per day in the quarter, with 798 BOE per day related to new wells on stream and 459 BOE per day related to compliance activity. Overall, PPAs were 40% liquids.
The compliance group recovered missed and incorrect royalties through forensic accounting, collecting CAD 3.3 million in the quarter. During Q3, other revenue totaled CAD 8.7 million and included CAD 1.6 million in lease rentals, CAD 1.2 million of other income, and CAD 5.7 million of bonus consideration. Year to date, we have entered into 164 new leases as compared to 91 leases in the first nine months of 2021. New leasing is a leading indicator of field activity, and we anticipate near-term drilling on many of these new leases. Cash administrative expenses totaled CAD 4.9 million or CAD 2.13 per BOE in the quarter. We anticipate cash administrative expenses will be well below CAD 3 per BOE for the full year. Current tax expense totaled CAD 20.4 million in Q3.
Entering the year, 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, and the remainder will be taxed at our 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 payout ratio of 23%. Excess funds from operations above the dividend and our CAD 2.5 million of acquisitions was used to repay bank debt. Net debt at September 30 was CAD 364.2 million. PrairieSky has reduced net debt by 43% or CAD 270.8 million since December 31, 2021.
We are pleased to announce a 100% increase in our quarterly dividend to CAD 0.24 per share or CAD 0.96 per share annualized effective for the December 30, 2022 record date. Since IPO, PrairieSky has generated approximately CAD 2 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 one on your telephone. Please wait for your name to be announced. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question comes from Patrick O'Rourke with ATB Financial. Your line is now open.
Hey, guys. Good morning. Nice pleasant surprise on doubling of the dividend here. Just curious, in terms of timing and sort of cadence in terms of review of the dividend policy going forward here, we had sort of been thinking about it as being an annual event that happened with the Q4 reporting in the February timeframe. Is this still the right way to be thinking about it? Sort of what was the sort of milestone or motivation for this move here?
Yeah. Thanks for the question, Patrick. It will be an annual event in the future, typically in the February timeframe. We're just well ahead of our estimates when we made the acquisitions in terms of debt repayment and growth profile. We were comfortable rewarding shareholders just one quarter earlier.
Okay. Great. You know, one of the key milestones I think for the business is extinguishing the debt that was taken on with the Heritage acquisition. Taking this into account and current strip prices, when do you forecast today that milestone happening?
Yeah. It'd be in late 2024, early 2025, depending on the pricing we achieve over that period of time. It'll be at very low levels in a pretty short period of time, just given the payout ratio still remains quite low.
Okay. Final question, more on the operational front. Obviously, leasing has been very strong as well as SPUD. How much of that is sort of being driven by that Heritage acquisition? Wondering, you know, what you're seeing in terms of the new technology deployment, multilateral wells on that land.
Yeah, no, operationally, actually the leasing's been across the entire basin, right from some original PrairieSky lands we had in Southwest Manitoba all the way to the Deep Basin. It's been pretty widely distributed across the Western Canadian basin. From an operational standpoint, we've seen numerous kind of stacked heavy oil opportunities where you have really good grain size, drilled multilaterally and some pretty significant discoveries made across some of those Heritage lands. There's been some bright spots there. We've even seen a light oil opportunity where the multilateral technology was tried in a formation where typically they've fracture stimulated almost every well in the pool. It's pretty interesting dispersion of this technology across the basin, and we look forward to the next year. It's gonna be a record number of wells.
We should have net capital spent on our lands that's greater than the last two years combined this year. It's we're seeing a lot of new wells drilled and not just development wells and exploration wells. It should be a fun year to watch the technological advancements on this primarily the heavy oil play.
Thank you very much.
One moment for our next question, please. Our next question comes from Matthew Weekes with iA Capital. Your line is now open.
Good morning. Thanks for taking my question. I'm just interested in the opportunity on the carbon capture royalty side. I know it's something that's been discussed before. I'm wondering if you've kind of looked internally and estimated, you know, what the opportunity could be for carbon capture royalties on your lands in terms of a tonnage amount sort of annually over the long term.
It's an important part of our business that we're working towards expanding. We've been approved for another project in kind of southern Alberta. I think there's a huge opportunity, particularly between kind of Edmonton and Calgary, just where a lot of the production corridor is, but that's where a lot of our older reservoirs are as well. I think there you can really quantify exactly the volumes of CO2 that can be sequestered into those reservoirs. We need a little more clarity from the government on incentives to try and align them more with what the U.S. has. There's definitely a huge opportunity. We don't quantify the amount of CO2 that can be sequestered, but it's a pretty significant amount across the basin, obviously.
I think there's a lot of people pursuing it, which is great, and I think it'll be good for the Canadian energy sector to show the developments on this front. Matthew.
Okay. Thank you. Yeah, I agree with that last point. Just a second question on the Clearwater. It looks like, you know, activity is pretty strong. I'm just wondering if you can comment on, you know, generally the trend on the Clearwater royalties and you know how that might be performing versus initial expectations.
Yeah. No, thanks for the question. I think it's interesting 'cause Nipisi and Martin Hills are kind of the majority of our 1,500-1,600 barrels per day of net royalty production. There's been significant new discoveries made of size across the land base. That's one of the benefits of having that big early land base we put together in 2016, 2017. Those discoveries are gonna start to see some development this year. We should see some pretty significant growth probably in the 50% range, growth year-over-year over the next 12 months. In terms of performance expectations, two things that have positively surprised. The 90-day IPs have been a positive surprise across all the plays.
The second surprise has been the success of some of the water and polymer opportunities across the land base. I think the recovery factors will probably be a little higher than we initially anticipated.
Okay. That's great commentary. Thank you. I'll turn it back to the operator.
Thank you.
Thank you.
One moment for our next question, please. Your next question comes from Jeremy McCrea with Raymond James. Your line is now open.
Yeah. Hi, guys. Just a couple questions here. In terms of you guys bumping the dividend here, is this a bit of... I'm curious what you think of the M&A market here going forward, just, you know, do you feel confident that you can bump the dividend, but do you feel like there's enough cash if you want to make an acquisition out there? You know, what does the M&A market look like here going forward into 2023?
Yeah. Thanks for the question, Jeremy. I think when you think about the M&A market, we did a review of all the M&A we've conducted since 2014 when we IPO-ed, and it's all been between $40-$60 oil. We're quite disciplined on that front and typically try and buy at those parts of the cycle. One of the interesting things that we bought last year, discounting $65 crude, was something that was for sale 6 years prior to that. If you're patient and disciplined, all the best assets will end up in the hands of a low cost royalty operator. We just maintain discipline on that front.
The extent to which royalty opportunity is available, we have significant liquidity and still a continued low payout ratio to enable us to execute on those opportunities as they come. I think the one comment on the Canadian energy sector is it's flush with cash, and a lot of the companies are going to debt zero in a shorter period of time. That's great news for us 'cause the healthy operators are helping PrairieSky, and that's one of the reasons we're seeing a lot of new exploration plays developed and a lot of new leasing on new opportunities. I think probably it'll be a little more muted on M&A, and we certainly would have trouble discounting $100 oil in an acquisition opportunity.
Okay. Just lastly, of the new leases that you guys signed here, what breakdown would you say is because of the way the Crown royalty is now just quite a bit higher than where it's ever been, where guys are just saying, "I'm not interested in paying 35% Crown. I'm more interested in paying 18% on PrairieSky." I'm like, how much of this new leasing activity is because you guys have a more favorable royalty right now versus the Crown?
Yeah. I think I'll give two answers to that. One would be the majority of the really strong leasing is just from strong oil, gas, and NGL pricing across the basin. I think it's been the strongest in a long time, all three commodities. That would probably be the major driver. Number two would be the financial health. I think for sure there's a recognition in a lot of plays where they're getting pretty quick payout that the NPV on a PrairieSky section for an operator is actually quite a bit higher than it is on the Crown right now, just because the wells post lease start are jumping to a higher royalty. That definitely is a benefit.
It's hard to know because the operators, you know, we have 330 different operators on our lands, and they don't tell us specifically why they're leasing, but I think that would be a driver in certain plays for sure, Jeremy.
Just with the higher royalty rate that you guys were seeing from the new wells here, is that something we could expect going forward, or does that drop back down to more of a long-term normalized rate closer to that 6%?
Yeah. It's interesting. Our average royalty on our 42,500 wellbore portfolio is 6%. We obviously saw a very strong number in terms of average royalties for the wells that were brought online this quarter. A couple of them drive that. One is the seasonal Viking activity, and typically, the Viking wells get drilled in Q3 and early in Q4, that they don't have to run a boiler on the single rigs. They're not competing with any well stands, core hole drilling. In addition, when they're fracking the wells, they don't have to heat the water up as significantly from a lower ambient temperature. A lot of the Viking activity happened, and those are typically 1-mile laterals, so those would be on 17.5% rate at least.
That kind of drives the average royalty higher. There is one structural change that should affect that over the next 3 to 10 years is the Heritage acquisition, all the heavy oil opportunities that exist on those lands from the Waseca Sparky, GP Stacks, all the way down to the Cummings. Those are typically 17.5% leases, and they're Clearwater-type potential results for significantly higher royalties. That could help bring the average royalty up, and bring the net capital up as well.
Okay, perfect. Thanks, Andrew Phillips.
Thank you.
Thank you.
One moment. One moment for our next question. Our next question comes from Jamie Kubik with CIBC. Your line is open.
Yeah, good morning. Thanks for taking my question. Just a quick question on capital allocation. How should we think about the NCIB for PrairieSky and when that could be utilized? Can you just outline a little bit capital allocation framework that you're thinking about here?
For sure. Good morning, Jamie. I think, on the NCIB, you know, if you look historically at what we've done, we've bought back a quarter billion dollars with the stock. I think an average price of just over CAD 14 per share. We've issued at an average of around CAD 25. We've done it okay in the past. We have a NCIB that's out there right now. I think we will use it opportunistically. Obviously, the number one priority right now is paying the debt down to a low level, which gives you optionality on any opportunity that might come available, whether it's buying back the stock or maybe there's a better per share return to be achieved with an acquisition if natural gas prices get weak or something like that.
We just want that optionality, which is why we're not active with it right now. The debt repayment is the number one priority today.
Got it. Okay. Then on the new dividend rate, can you talk a bit about maybe what commodity price you think that is defensible down to?
Yeah, I think defensible down to $40 oil or $50 oil and $0 gas or something like that. Again, we'll have, you know, when you think about the business over the next 12 months, the debt levels are gonna get very, very low on our $800 million bank line. So even if it got anywhere near that, it would actually provide great opportunities for our business because we'll be virtually debt-free and one of the few that can sustain it at a $40 oil environment.
Okay, great. Last question from me. A lot of activity noted in the quarter across a number of different plays. The Duvernay was absent in that commentary, though. Can you talk a bit about maybe the leasing opportunity that you have remaining there and any, you know, new activity that we should be looking for in the coming quarters?
For sure. Yeah, I think, you know, we should see a couple. We have two of our three kind of primary operators in the Duvernay have some pads planned on PrairieSky land and even some licensing that's already in place. We are working on some significant leasing arrangements a little further west with a number of different operators. There's a bit of an increase in activity there in terms of the leasing opportunity. I do think, certainly west of Homeglen, Rimbey Reef and kind of Willesden Green to the north of Pigeon Lake, there's a great opportunity there. There's been some pretty interesting discoveries made, and a full-scale development of that could be a very significant operating asset for PrairieSky.
Could be in the range of 1,000-2,000 net royalty barrels per day from a very low level today, which would be 350 barrels now.
Okay, that's great. Thank you. That's it for me.
Thank you. As a reminder to ask a question, that's star one one. One moment for our next question. Our next question comes from Mitch Cantor with Mountain Lake Investment. Your line is open.
Good morning, guys. I guess, Andrew, I noted in your opening comments that you talked about optimism in the trend in reserves per share on a 5, 10, and even 15-year basis. Some of the factors contributing that you probably touched on, but I'm wondering what else you're looking at when you think about that opportunity.
Yeah, no, thanks for the question, Mitch. What's interesting is if you reference our royalty playbooks or our asset handbook that we've released in the previous three cycles, so over the last six years, typically on a lot of these heavy oil reservoirs, we have a 5%-7% recovery factor, maybe slightly higher if there's a waterflood, polymer flood opportunity on it. But what's happened with these multilaterals is you're achieving far higher recovery factors and probably having a far more optimal waterflood or polymer flood in the future. What it basically does is the same.
This is the neat thing about technology and the great optionality that you have when you own a royalty asset base, is we've owned a lot of this stuff for almost a decade now, and we've always said, okay, well, the total recovery is gonna be 100,000 barrels on this section, and lo and behold, you could probably get another 1 million barrels out of it with the new technology. That's kind of the major change in the multilateral technology has kind of advanced this, specifically on the heavy oil reserves that the company owns. It just gives us confidence that that should continue to grow as more of these different zones within the Mannville Stack are developed with horizontal multilaterals.
Interesting. It's the existing technology just rolling out in a sense through the accounting in the portfolio?
Precisely, yeah. Having said that, there are some new discoveries as well that are completely brand new discoveries. A lot of this heavy oil resource has been known accumulations over the last 50 years. There just hasn't been a way to exploit it until this technology evolved in a low-cost manner.
Great. Thank you.
Thank you.
Thanks for your question.
I'm currently showing no further questions at this time. I'd like to hand the conference back over to Mr. Phillips for any closing remarks.
Thank you everyone for dialing into the PrairieSky Q3 conference call. At any time, please call either Pam or myself if you have any follow-up questions. Have a good day.
This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.