Prairiesky Royalty Ltd

TSX:PSK

Earnings Call Transcript 2018-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the PrairieSky Royalty Ltd. announces their first quarter 2018 financial results. [Operator Instructions] I would now like to turn the conference over to your host for today, Andrew Philips, President and Chief Executive Officer. You may begin.

[Andrew M. Phillips, President, CEO & Non]

Thank you, and good morning. Thank you for dialing into the PrairieSky Royalty Q1 2018 Earnings Call. On the call from PrairieSky are Pam Kazeil, CFO; Cam Proctor, COO; and myself, Andrew Philips. Before turning the call over to Pam to walk through the financials, I will provide a brief operational update.Royalty production for the quarter was 23,536 BOE per day, down from 24,406 BOE in Q4 2017. This decline was from lower activity levels, lower prior period adjustments. PrairieSky generated $51.8 million of free cash flow. $44.7 million was used to pay dividends and the balance went to the share buyback. The balance of the annual buyback was completed in Q1 and the $50 million buyback for the upcoming year will begin in May. Cash G&A per barrel was $5.15 due to annual LTI payments to management and staff. PrairieSky expect the annual number to be in the low $3 per barrel range for 2018. Our goal remains to bring this down to the mid-$2 per barrel range. 28 leasing arrangements were entered into over the quarter resulting in bonus consideration of $1.1 million. The majority of these were short-term leases for conventional crude oil. PrairieSky expects to enter into 1 to 2 larger leasing arrangements for the Duvernay shale play in the next 12 to 18 months.Acquisitions for the quarter totaled $21.2 million funded from cash on hand. The first acquisition included Crown and fee title lands in the East Shale Duvernay with 2 horizontal well commitments. The second acquisition of approximately $10 million was for 80 sections of land in the Deep Basin and Peace River Arch with near term activity expected in the Montney formation.As of March 31, PrairieSky's $17.3 million of positive working capital. The compliance team collected $2 million over the quarter and identified numerous issues that will be solved in 2018. In addition, leases were returned to the inventory and Offset Notices were sent across a number of plays. Higher-than-historical differentials for both light and heavy crude as well as the gas pricing resulted in lower cash flows from PrairieSky and other producers. Both light and heavy differentials have narrowed and pricing has improved. So activity levels post breakup should be in line with 2017 levels. We entered 2018 with 9 net royalty barrels from the Clearwater oil play, and Q1 activity should result in net royalty production of 40 barrels per day after breakup. Based upon operator plans in 2018, PrairieSky should act in the 2018 with between 150 and 200 barrels per day of net royalty oil production.Numerous exploration wells in the Duvernay shale have been drilled on and around PrairieSky land, which should defend our economic inventory of light oil horizontal wells. Current royalty production is just under 100 barrels per day from 4 sections of land with net backs of $60 per barrel versus our corporate average net back of $30 per barrel.I will now pass the call over to Pam to walk through the financials.

[Pamela P. Kazeil, VP of Finance & CFO]

Thank you, Andrew, and good morning, everyone. PrairieSky generated funds from operations of $51.8 million or $0.22 per share in first quarter. Cash flow was generated primarily from royalty production revenue of $64.1 million on average production volume of 23,536 BOE per day.Oil and NGL revenue represented 83% of total royalty revenue, which was generated from oil royalty volumes of 8,731 barrels a day and NGL royalty volumes of 2,388 barrels per day.Natural gas revenue represented 17% of royalty revenues and $74.5 million a day of royalty production volume. Although WTI was up in Q1 2018 over Q4 2017, royalty revenue was negatively impacted by wider differentials for Canadian light and heavy crude oil, which resulted in lower realized pricing. Revenue was also impacted by lower acre pricing during the quarter. Average daily production for the first quarter of 23,536 BOE per day was down 4% from Q4. As a result of fewer prior period adjustments in the quarter and declines of pace in incremental production from new drilling. PrairieSky's production volumes included 552 BOE per day from compliance activity and 890 BOE per day of other prior period adjustments related to new wells on stream and better well performance.The compliance group continues to work hard identifying missed and incorrect royalties and collected $2 million in the quarter. Other revenue totaled $3.8 million, which included lease rental of $2.6 million and bonus consideration of $1.1 million. During the quarter, PrairieSky entered into 28 leasing arrangements with 22 different counter parties. As discussed on the year-end conference call, PrairieSky expects bonus consideration of $15 million for the year and lease rental income of $9 million.Administrative expenses in the quarter totaled $5.4 million or $2.55 per BOE. Cash administrative costs were $10.9 million or $5.15 per BOE and included annual long-term incentive payment. For 2018, cash G&A per BOE is expected to be in the low $3 per BOE range.Cash taxes were $4.8 million for the quarter, which is an effective cash tax rate of 19%. PrairieSky declared dividends of $44.7 million or $0.19 per share in the quarter, with the resulting payout ratio of 86%.Under the normal issuer bid, PrairieSky repurchased 496,400 common shares for $15.4 million. From inception to March 31, 2018, PrairieSky has returned $712.5 million or $3.79 per share in dividends to shareholders and repurchased over 2.8 million common shares for $84 million. At March 31, PraireSky has positive working capital of $17.2 million, including cash of $12.1 million and no debt.We'll now turn it over to the moderator to proceed with the Q&A.

[Operator]

[Operator Instructions] Our first question comes from Jeremy McCrea of Raymond James.

[Jeremy McCrea, Energy Analyst]

I am just wondering, just given what production came in for the quarter, if you can comment more on some of the Viking activity that you've been seeing? And maybe a reason for a slow down here in Q4, and what is changing potentially for Q1, if there is any new incentives to get guys on? And then the second part of that question here is, just in terms of some of these other plays like the Clearwater and Duvernay, like how many Duvernay wells do you need to almost make up for every 10 Viking wells? Like I'm just trying to get a bit of ratios in terms of how much can Duvernay overcome some of the -- the bit of the Viking decline potentially?

[Andrew M. Phillips, President, CEO & Non]

Yes. So thanks for the question, Jeremy. In terms of the Viking activity, it was a little lower year-over-year, about 25% lower on the Saskatchewan side. It was higher on the Alberta side, which made up for some of those declines. We are starting to see licensing pick up on the Viking, on the Saskatchewan side. And in terms of how many Duvernay wells it would take to make up for the declines on the Viking portfolio, it really depends on where they're drilled, what their 30-day IPs or 90-day IPs look like and what our net royalty is. But again, I think from the level we see today just with -- we should see some growth in the back half of the year on oil and liquids portfolio. And I think probably as important is a slight -- a little bit of a slowdown on the Viking side was the conventional slowdown, and we did see about 350 barrels per day of light oil declines in our conventional portfolio in Alberta. So a lot of those we think are kind of lined out, so we should see some growth at the back end of the year, if that helps.

[Jeremy McCrea, Energy Analyst]

Okay. And just on these Duvernay wells, just given the well commitments that you have signed up so far, work that move your Duvernay, of course, and I think you said it's around 100 barrels a day right now. Just kind of what are the signed commitments for your Duvernay and where these production go by year-end do you think?

[Andrew M. Phillips, President, CEO & Non]

Yes, I think with what we know is going to happen Jeremy, we should see it grow from just under 100 barrels a day to 150 to 200 barrels per day of net royalty production. It could be a higher if some unexpected wells happen. But that's kind of what we know will occur. And then, again, the Clearwater should be between 150 and 200 barrels by year-end. So those 2 combined could make up a reasonable amount of our crude oil production by the end of the year.

[Operator]

[Operator Instructions] Our next question comes from Shailender Randhawa of RBC.

[Shailender Randhawa, Analyst]

Good morning, Andrew. A couple of questions from me. Just on the results you mentioned wider the differentials, but was there anything else unusual in terms of the accruals or accounting adjustments in terms of Q1 revenues? And then secondly, just to flip back to the Duvernay, can you provide any more color on which parts of the fairway you're seeing more activity? And just how the results compare versus your expectations as well?

[Andrew M. Phillips, President, CEO & Non]

So on your first question Shailender, on the results, we did have lower prior period adjustments quarter-over-quarter on the oil side. So it's about, Pam, I think 530 barrels per day in Q4, and that was down to just over 300 barrels per day of prior period adjustments in the first quarter. So that was about a 200-barrel effect on liquids production in Q1. But in terms of the differentials, the heavy gas were about $25 per barrel on a 1,400 barrels per day of heavy oil, and the light oil differentials actually got it's high $7 per barrel in the first quarter, which those will now come into I think spot phase in the $4 to $4.50 range. So those will improve. But in terms of any other effects on pricing, those are the only ones we can talk about. And then on the Duvernay side, we see some recent strong results in the [indiscernible] and those are -- that's public data. So you can see those, but probably the best consistent results continue to be with Vesta in the East Shale Basin kind of just West of Red Deer. There are some new exploration tests on and around our land on the West side of the home glen [indiscernible] reef, but those data points are so confidential that those will come out sometime in the next 6 months. So those could have the potential to expand our economic inventory in Duvernay.

[Operator]

[Operator Instructions] And this does conclude our Q&A session. I would now like to turn the call back over to Mr. Philips for any further remarks.

[Andrew M. Phillips, President, CEO & Non]

Thank you, again, for calling in, and please call Pam or myself if you have any further questions.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.