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Edited Transcript of PSK.TO earnings conference call or presentation 23-Apr-19 12:30pm GMT

Q1 2019 Prairiesky Royalty Ltd Earnings Call

Calgary Apr 25, 2019 (Thomson StreetEvents) -- Edited Transcript of PrairieSky Royalty Ltd earnings conference call or presentation Tuesday, April 23, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew M. Phillips

PrairieSky Royalty Ltd. - President, CEO & Non-Independent Director

* Pamela P. Kazeil

PrairieSky Royalty Ltd. - VP of Finance & CFO

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Conference Call Participants

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* Aaron Bilkoski

TD Securities Equity Research - Equity Analyst

* Dana Kingstone

* Edward Friedman

* Luke Davis

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the PrairieSky Royalty Fourth -- First Quarter 2019 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Andrew Phillips, President and Chief Executive Officer. Sir, you may begin.

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Andrew M. Phillips, PrairieSky Royalty Ltd. - President, CEO & Non-Independent Director [2]

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Thank you very much, and welcome to the PrairieSky Royalty Q1 2019 conference call.

On the call from PrairieSky are Pam Kazeil, CFO; Cam Proctor, COO; and myself, Andrew Phillips. I will provide an overview of operations for the quarter then turn the call over to Pam to walk through the financials.

Free cash flow of $57.8 million was used to pay $45.6 million of dividends, which represents a 79% payout ratio. $6.3 million was used to cancel 331,000 shares, and the remaining $5.9 million reduced our working capital deficiency by 40% to $6.2 million that was used to fund the minor land fund purchases.

Q1 oil royalty volumes of 8,904 barrels per day were impacted by production curtailments and delayed field activity throughout the fourth quarter -- throughout the fourth quarter because of straight NGLs, including condensates, were 2,586 BOE for this quarter. And natural gas royalty volumes totaled 63.1 million cubic feet a day as extreme cold weather impacted field operations as well as freezed off a number of regions. 209 wells were spud on in fee title lands in Q1 2019 with an average royalty of 5.8%. This is reflective of an active quarter of drilling in all units.

Cash G&A for the first quarter totaled $3.84 per barrel reflecting the cash settlement of LTI for all staff management. PrairieSky expects cash administration to be under $3 per barrel for the year, a record low. Compliance recoveries for the quarter totaled $1.8 million, and we continue to work hard on both lease compliance and royalty compliance. Leasing resulted in $2 million in bonus revenue as PrairieSky entered into 27 new leases with 24 new counterparties.

One interesting highlight was that leasing fee in Southwest Saskatchewan for numerous SAGD potential projects from large Canadian operators as well as small independents. Both companies have significant expertise in executing on these types of steam-assisted gravity drainage projects.

While a number of acquisition opportunities were presented and evaluated, none met our internal criteria. Modest dollars were spent through one of our land funds to capture quality land fund acreage at a reasonable price. Our continued efforts to lease land to quality counterparties is our focus and should result in oil production growth as capital flows in the Western Canadian basin return to more normalized historical levels.

Meanwhile, we will continue to pay cash dividends and capital shares below intrinsic value.

PrairieSky will host an Investor Day at 9:00 a.m. Eastern at the Fairmont Royal York hotel in Toronto on May 23. We will unveil our 2019 playbook, outline our 10-year free cash flow outlook and give more detail on plays that will be important for PrairieSky's future cash flow generation. It will also be live webcast for those who are unable to attend in person.

I will now turn the call over to Pam to walk you through the financial results.

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Pamela P. Kazeil, PrairieSky Royalty Ltd. - VP of Finance & CFO [3]

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Thank you, Andrew. Good morning, everyone.

PrairieSky generated funds from operations of $57.8 million or $0.25 per share in the quarter. Cash flow was generated primarily from royalty production revenue of $66.5 million on average production volumes of 22,007 BOE per day, which were 52% liquids.

Q1 2019 oil volumes were 8,904 barrels a day, down from Q4 2018 due primarily to the impacts of curtailments and shut ins. PrairieSky generated $46.3 million of oil royalty revenue, which was up over $18 million from Q4 2018 as lower volumes in WTI pricing were offset by narrow Canadian light and heavy oil differentials.

NGI -- NGL royalty volumes of 2,586 barrels a day were in line with Q4 2018 royalty volumes and generated an additional $9.1 million in revenue. Natural gas volumes were impacted by lower activity in 2018 as well as the extended cold weather in February and March. Although cold weather negatively impacted volumes, it improved AECO, generating natural gas revenue of $11.1 million in the quarter, 26% higher than Q4 2018.

PrairieSky's production volumes in the quarter included 815 BOE per day of prior period adjustments, which were 73% liquids and included 425 BOE a day from compliance activity and an additional 390 BOE a day of 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 $1.8 million in the quarter.

There were 209 wells spud in Q1, which included 194 oil wells and 15 natural gas wells. This was comparable to both Q1 2018 and Q4 2018 when 198 wells and 202 wells were -- respectively were spud. The average royalty rate of wells spud in Q1 2019 was 5.8%. Other revenue totaled $6.7 million, including $2.3 million in lease rental and $2 million in bonus consideration on entering into 27 leasing arrangements with 24 different counterparties.

PrairieSky also earned $2.4 million in other income, including $2 million related to a nonperformance payment. Production in mineral taxes totaled $1.4 million and cash administrative expenses totaled $7.6 million or $3.84 per BOE. Cash administrative expense is expected to be below $3 per BOE in 2019. Cash taxes for the quarter totaled $6 million.

During Q1, PrairieSky paid $45.6 million in dividends with a resulting payout ratio of 79% and repurchased 331,440 common shares for $6.3 million for an all-in payout ratio of 90%. During the quarter, PrairieSky reduced its working capital deficiency to $6.2 million from $10.4 million at year-end.

Since IPO, PrairieSky has generated approximately $1.1 billion in funds from operations and returned over $1 billion to shareholders through approximately $900 million in dividends and the repurchase of 4.5 million common shares.

We will now turn it over to the moderator to proceed with the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Dana Kingstone with TD Securities.

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Dana Kingstone, [2]

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I've got two questions for you this morning. The first one would be your messaging has been very consistent since the IPO regarding leverage. I'm wondering if you could share your current views on leverage with us. And then number two, do you view U.S. royalties as a potential future opportunity set for PrairieSky?

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Andrew M. Phillips, PrairieSky Royalty Ltd. - President, CEO & Non-Independent Director [3]

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Yes. Good morning, Dana, and thanks for the question. Our view on leverage is unchanged. We have not used it as a permanent part of our capital structure. We do have a $250 million bank line in case something exceptional came along, and then we could just pay it down with the free cash flow on top of the dividend by turning down the buyback. So to answer your question, our view is unchanged, and we would not use leverage as a permanent part of our capital structure.

And on the U.S. royalties, we're coming off all-time high in the United States capital spending in the major onshore basins. And in Canada, we're at about a 20-year low in CapEx. So our view is to create time to buy quality Canadian royalties. In addition, we've never seen a royalty package in the U.S. or a company with large tract of undeveloped lands, which gives you the duration of investors that share the same characteristics as the PrairieSky asset.

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Operator [4]

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(Operator Instructions) Our next question comes from Edward Friedman with McLean & Partners.

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Edward Friedman, [5]

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I have two questions. One is your gas price realizations were fairly high for the quarter, and I was wondering why is that and is it sustainable? And the second question is about activity on your lands. Due to the production curtailment, we're of the view that activity in the Canadian basin will be probably low for quite a while, meaning that services or any activity will be fairly long. I was wondering what gives you confidence or what is your view on the subject and how do you see this progressing over the next year or maybe 2.

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Pamela P. Kazeil, PrairieSky Royalty Ltd. - VP of Finance & CFO [6]

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So Edward, I'll talk about the gas price realizations. So realizations were $1.97 in the quarter. So generally, we see a blend in our realized pricing between daily and monthly AECO as well as about 10% of station 2. Realizations were higher this quarter just due to, obviously, higher daily AECO pricing. In addition, we saw some prior period adjustments, including some recoveries of introductions in the quarter, which we see it incurred in price, but not impacting volume so that helped with the price realizations as well.

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Andrew M. Phillips, PrairieSky Royalty Ltd. - President, CEO & Non-Independent Director [7]

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Yes. And on the curtailment side, you're certainly not going to drill new wells when you have oil production curtails, and we definitely saw a lot of that in Q4 and into Q1, which obviously impacted the overall drilling activity. When you look at the cash flow generation of our oil producers, they're generating a huge amount of excess free cash flow right now. So it's likely that a bunch of that goes back into the fields in the back half of the year. So we're expecting second half drilling activity to pick up. And certainly with -- those, the light oil producers have started to get pretty active licensing in the short cycle time of Viking operations, so we do expect a back half bump in CapEx through late August. Hopefully that answers your question.

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Edward Friedman, [8]

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Okay. About the cash price realization, do you see this is as sustainable or -- because previously, your realization was about between 75% to 85% of AECO. Do you see this going back to the federal or -- but maybe get to [the historical] level?

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Pamela P. Kazeil, PrairieSky Royalty Ltd. - VP of Finance & CFO [9]

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Yes. When we're modeling, we would say that gas price realizations, it should be about 45% daily AECO, 45% monthly AECO and about 10% station 2. And then we would deduct $0.45 for any deductions and transportation charges. So that's a good way to model gas price realizations. Of course, with prior period adjustments and any compliance activity that we see in the quarter, that can impact pricing, but that is a good way to forecast our natural gas realizations.

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Operator [10]

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Our next question comes from Luke Davis with RBC.

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Luke Davis, RBC Capital Markets, LLC, Research Division - Analyst [11]

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I know there's an uptick in receivables this quarter, can you just try to provide a bit of detail on that? And is this something that we can expect to kind of clear out in due course? Or should we expect a higher run rate going forward?

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Pamela P. Kazeil, PrairieSky Royalty Ltd. - VP of Finance & CFO [12]

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Yes. That's a good question, Luke. So in receivables, compared to year-end, we did certainly see an uptick. Generally, we carry about 2 months of production royalty revenue in receivables. So we saw an uptick from December, that was one impact. And then the second impact is in the first quarter, we record the freehold mineral tax receivable. So freehold mineral tax is paid annually, so you'll see that our accounts payable increased as well. So we pay the entire account payable to the government, and then we collect from many of the payers. So that's why you'll see an uptick in accounts payable as well as an offsetting uptick in accounts receivable.

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Operator [13]

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(Operator Instructions) The next question comes from Aaron Bilkoski with TD Securities.

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Aaron Bilkoski, TD Securities Equity Research - Equity Analyst [14]

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Do you have an estimate of how much net oil is being shut in on your lands due to the mandated provincial curtailments? And I guess a follow-up question is what proportion of your oil drilling activities is in Saskatchewan versus Alberta?

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Pamela P. Kazeil, PrairieSky Royalty Ltd. - VP of Finance & CFO [15]

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Yes. So in terms of shut-in volumes, we saw about 100 barrels a day of volumes shut in, in the fourth quarter. We didn't see that volume come back in the first quarter. And in addition, we saw about an additional 200 barrels shut in, in Q1. Now some of that is shut-in barrels just due to pricing and some of that is directly related to the curtailments. So we would expect to see that production coming back on in the second quarter.

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Andrew M. Phillips, PrairieSky Royalty Ltd. - President, CEO & Non-Independent Director [16]

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Yes. And in terms of oil activity, 40% of our oil royalty volumes are on the Saskatchewan side. And we've seen an uptick in activity just because there are no curtailments in the Saskatchewan side. So it's -- right now, snapshot in time, about 50% of our drilling activity is on the Saskatchewan side.

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Operator [17]

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And I'm not showing any further questions at this time. I'd now like to hand the call back to Mr. Phillips for any concluding remarks.

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Andrew M. Phillips, PrairieSky Royalty Ltd. - President, CEO & Non-Independent Director [18]

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Thank you very much for dialing in to the PrairieSky Q1 earnings call. And please call Pam or myself if you have any further questions. Thank you.

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Operator [19]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.