Mr. Andrew Phillips reports
PRAIRIESKY ANNOUNCES 2022 FIRST QUARTER RESULTS
PrairieSky Royalty Ltd. has released its first quarter results for the three-month period ended March 31, 2022.
First quarter highlights:
Royalty production averaged 23,892 barrels of oil equivalent per day, representing a 17-per-cent increase over fourth quarter 2021 and a 23-per-cent increase over first quarter 2021.
Total revenues grew to $139.9-million, a 39-per-cent increase over Q4 2021 and a 135-per-cent increase over Q1 2021, composed of royalty production revenues of $134.7-million and other revenues of $5.2-million.
- The company achieved record quarterly funds from operations of $105.0-million (44 cents per common share, basic and diluted), a 3-per-cent increase over Q4 2021 and a 115-per-cent increase over first quarter 2021 driven by a combination of royalty production growth, 2021 acquisitions and strong commodity pricing.
- The company declared a first quarter dividend of $28.7-million (12 cents per common share), representing a payout ratio of 27 per cent, with remaining cash flow allocated to $6.3-million of royalty acquisitions and the balance to retiring bank debt.
At March 31, 2022, PrairieSky's net debt totalled $568.9-million, a reduction of $66.1-million from Dec. 31, 2021, as excess funds from operations were used to reduce indebtedness incurred in connection with acquisitions completed during the second half of 2021.
- The company advanced several ESG (environmental, social and governance) and alternative energy initiatives, including completing a large-scale lithium exploration lease in Saskatchewan for $600,000 in bonus consideration with near-term drilling plans, receiving initial government approval for the Meadowbrook CCUS (carbon capture, usage and storage) project in Alberta and achieving independently measured targets, which resulted in the realization of the full positive pricing adjustment on its sustainability-linked credit facility.
"PrairieSky achieved record quarterly royalty production revenue in Q1 2022 due to a combination of strong commodity pricing and royalty production growth. The differentiation of our business model is evident in an accelerating capital environment as we lease our vast underdeveloped land base to qualified, well-capitalized industry partners. PrairieSky believes leasing is a leading indicator of future third party drilling activity on our lands and organic per-share growth in royalty production. During Q1 2022, PrairieSky generated $3.5-million in bonus consideration by entering into 52 distinct leasing arrangements with 43 different counterparties. Following a busy second half of 2021, when 359 wells were spudded on PrairieSky's royalty properties, Q1 2022 was another active quarter with 194 wells spudded, including 168 oil wells and 26 natural gas wells, almost double the 100 wells spudded in Q1 2021.
"Many of the third party wells drilled on PrairieSky lands in the second half of 2021 have now come on production, and we are seeing the impacts reflected in our growing royalty production volumes. Royalty production volumes totalled 23,892 boe per day in Q1 2022, including 2,640 boe per day of incremental royalty production volumes from the Heritage Royalty acquisition, which was effective Dec. 31, 2021. Similar to Q4 2021, we are seeing organic growth on the royalty properties with oil royalty production volumes growing by 6 per cent over Q4 2021 and 13 per cent compared to Q1 2021, excluding royalty volumes acquired in 2021.
"Our record Q1 2022 funds from operations of $105.0-million reflects the benefits of our high-margin business as PrairieSky remains insulated from direct cost inflation in the upstream sector. Our unhedged royalty production received strong netbacks, including $4.20 per [million cubic feet] for natural gas, $97.99 per barrel for crude oil and $55.66 per barrel for natural gas liquids (NGL), which drove record quarterly royalty production revenue of $134.7-million.
"PrairieSky declared dividends of $28.7-million or 12 cents per common share for shareholders of record on March 31, 2022, resulting in a payout ratio of 27 per cent. Excess funds from operations were allocated primarily to debt repayment, reducing net debt to $568.9-million as compared to $635.0-million at Dec. 31, 2021.
"Owning fee-simple mineral title offers considerable optionality for oil and gas exploration and development, as well as for energy transition opportunities. We are proud to partner with Bison Low Carbon Ventures Inc. (operator), Enerflex Ltd. and IRC Enterprises Inc. (Indian Resource Council of Canada) on the Meadowbrook CCUS hub project, which was selected by Alberta Energy as one of six successful applicants for carbon storage tenure in the industrial heartland near Edmonton, Alta. The Meadowbrook CCUS hub project is being designed to provide safe, cost-effective, permanent [carbon dioxide] sequestration, on a multiclient basis, to existing and new Alberta industries seeking to reduce their emissions through adoption of carbon capture, utilization and storage. PrairieSky expects that the project partners will enter into an evaluation permit with the government of Alberta that will allow the Meadowbrook partnership to conduct site-specific evaluation activities and commence detailed consultation in the near term to support a commercial CCUS lease application within 12 to 24 months.
"During Q1 2022, PrairieSky also completed a large-scale lithium-specific leasing arrangement in southwest Saskatchewan for approximately $600,000. The leasing arrangement covers approximately 150 gross sections of land with near-term drilling activities planned for the balance of 2022. PrairieSky has identified other potential opportunities for similar mineral specific leasing arrangements in Devonian-aged brine water across Alberta and Saskatchewan.
"Two thousand twenty-two has started exceptionally well for our business. We would like to thank our shareholders for their continued support and our staff for their hard work integrating the incremental approximately 3.0 million net acres of royalty properties acquired in 2021.
"Andrew Phillips, president and chief executive officer"
Q1 2022 financial highlights:
Funds from operations grew to $105.0-million driven by a combination of royalty production growth, the impact of 2021 acquisitions and strong commodity pricing.
Royalty production revenue expanded to $134.7-million, a 43-per-cent increase over Q4 2021 and a 138-per-cent increase over Q1 2021, generated from total royalty production volumes of 23,892 boe per day. A further breakdown is as follows:
Oil royalty production volumes averaged 11,188 barrels per day and included 2,358 barrels per day of incremental oil royalty production volumes associated with the Heritage Royalty acquisition, which was effective Dec. 31, 2021. Excluding all acquisitions completed in 2021, organic growth on the royalty properties totalled 6 per cent over Q4 2021 and 13 per cent over Q1 2021.
Increased oil royalty production combined with strong average WTI (West Texas Intermediate) pricing of $94.29 (U.S.) per barrel increased oil royalty revenue to $98.7-million, 61 per cent above Q4 2021 and 170 per cent above Q1 2021.
Natural gas royalty production volumes averaged 60.5 MMcf per day, in line with Q4 2021 and a 5-per-cent increase over Q1 2021. Natural gas royalty production included 1.4 MMcf per day of incremental royalty production volumes from the Heritage Royalty acquisition, as well as production from new wells on stream. Natural gas volumes were negatively impacted by approximately 1.0 MMcf per day of cold weather freeze-offs throughout January and February.
Natural gas royalty revenue increased to $22.9-million, 3 per cent above Q4 2021 and 80 per cent above Q1 2021, primarily due to strong natural gas index pricing with daily and monthly AECO (Alberta Energy Company) pricing averaging $4.67 per thousand cubic feet in the quarter.
NGL royalty production volumes averaged 2,621 barrels per day, 29 per cent above Q4 2021 and 5 per cent above Q1 2021 due to 77 barrels per day of incremental royalty production volumes from the Heritage Royalty acquisition, new wells on stream and the return of ethane volumes postcurtailments.
NGL royalty revenue increased to $13.1-million, 22 per cent over Q4 2021 and 75 per cent over Q1 2021, due to increased royalty production volumes and strong benchmark pricing.
PrairieSky generated other revenue of $5.2-million in Q1 2022 composed of $1.2-million of lease rentals, $500,000 in other income, including $200,000 of potash revenue, and $3.5-million in bonus consideration earned on entering into 52 new leasing arrangements with 43 different counterparties. Bonus consideration and leasing activity were up from $1.4-million in Q1 2021 from 33 leasing arrangements with 29 counterparties. Compliance recoveries totalled $1.5-million in Q1 2022.
Cash administrative expenses totalled $10.3-million or $4.79 per boe and included the annual cash payment of long-term incentives for staff and executives of $5.0-million (2021 annual LTI payment: $700,000 for staff and nil for executives as performance share units expired unvested due to share price performance). PrairieSky expects cash administrative expense per boe to be below $3 per boe for 2022.
PrairieSky declared a first quarter dividend of $28.7-million (12 cents per common share), which represented a 27-per-cent payout ratio, with remaining funds from operations allocated to reducing bank debt.
At March 31, 2022, PrairieSky's net debt balance totalled $568.9-million, a $66.1-million decrease from Dec. 31, 2021.
Activity on PrairieSky's royalty properties
During Q1 2022, third party operators spudded 194 wells (87 per cent oil) with 91 wells spudded on its GORR (gross overriding royalty interests) acreage, 86 wells spudded on its fee lands and 17 unit wells spudded. There were 168 oil wells spudded in Q1 2022, including 68 Viking wells, 35 Clearwater wells, 22 Mannville heavy and light oil wells, 14 Bakken light oil wells, eight Duvernay light oil wells, seven Cardium light oil wells, and 14 additional spuds in the Devonian, Mississippian, Montney and Nisku formations. There were 26 natural gas wells spudded in Q1 2022, including 14 Montney, eight Mannville and four Cardium wells. PrairieSky's average royalty rate for wells spudded in Q1 2022 was 6.1 per cent (Q1 2021: 4.4 per cent).
Financial and operational information
The attached table summarizes select operational and financial information of the company for the periods noted.
A full version of PrairieSky's management's discussion and analysis, unaudited interim condensed consolidated financial statements, and notes thereto for the fiscal period ended March 31, 2022, is available on SEDAR and PrairieSky's website.
Conference call details
A conference call to discuss the results will be held for the investment community on April 19, 2022, beginning at 6:30 a.m. MDT (8:30 a.m. EDT). To participate in the conference call, approximately 10 minutes prior to the conference call, please dial the following.
Toll-free in North America: 844-657-2668
Conference ID: 7958733
Virtual annual general meeting
PrairieSky's virtual annual general meeting of holders of common shares is scheduled for April 19, 2022, at 9:30 a.m. MDT. The virtual meeting will be conducted by live audio webcast. Shareholders will have an opportunity to participate at the annual general meeting on-line regardless of their geographic location. Below is some additional information on attending the virtual meeting. Further details are provided on its website.
Registered shareholders and duly appointed proxyholders will be able to listen to the virtual meeting, ask questions and vote on-line, all in real time, provided they are connected to the Internet and properly follow the instructions contained on the website. Non-registered (beneficial) shareholders who have not duly appointed themselves as proxyholders may still attend the virtual meeting as guests. Guests will be able to listen to the meeting but will not be able to vote at the meeting or ask questions. To attend the meeting:
Go to the AGM website.
- The password is prairie2022 (case-sensitive);
If you have voting rights (registered shareholders and duly appointed proxyholders), select I have a control number, and follow the instructions.
If you do not have voting rights (beneficial shareholders and guests), select I am a guest, and fill in the form.
For details, refer to the virtual meeting guide that was provided with the enclosed form of proxy or voting instruction form and is available on its website.
The company recommends that you log into the webcast at least one hour before the time of the virtual meeting.
PrairieSky encourages all shareholders to participate in the virtual annual general meeting.
Normal course issuer bid
PrairieSky will apply to extend its normal course issuer bid (NCIB) for an additional one-year period. Under the renewed NCIB and subject to prior approval of the Toronto Stock Exchange, PrairieSky intends to repurchase up to 16,965,000 common shares over a 12-month period based on the calculation of 10 per cent of the public float as of April 18, 2022. The NCIB has been approved by the company's board of directors; however, it is subject to acceptance by the TSX and, if accepted, will be made in accordance with the applicable rules and policies of the TSX and applicable securities laws. Under the NCIB, common shares may be repurchased in open market transactions on the TSX and/or other Canadian exchanges or alternative trading systems. The price that PrairieSky will pay for common shares in open market transactions will be the market price at the time of purchase. Common shares acquired under the NCIB will be cancelled.
PrairieSky will file a notice of intention to make a NCIB to purchase and cancel up to 10 per cent of the public float. The 10-per-cent limit would be set based on the issued and outstanding shares, after excluding common shares beneficially owned by directors and executive officers of PrairieSky and persons who beneficially own or exercise control or direction over more than 10 per cent of the issued and outstanding common shares of PrairieSky, which for illustrative purposes would be 169,656,768 common shares as of April 18, 2022. The actual number of common shares that may be purchased and the timing of any such purchases will be determined by PrairieSky based on its assessment of capital allocation priorities. The NCIB is expected to commence shortly after regulatory approvals are obtained and upon expiry of the current program on May 24, 2022. Common shares may be repurchased under the program over a period of up to one year. As of March 31, 2022, PrairieSky has purchased and cancelled an aggregate of 809,700 common shares at a weighted-average price per share of $13.90 under a normal course issuer bid that commenced on May 25, 2021, and runs to May 24, 2022. Since instituting the normal course issuer bid in 2016 to March 31, 2022, PrairieSky has purchased and cancelled an aggregate of 16.7 million common shares at a weighted-average price per share of $14.77.
PrairieSky will be entering into an automatic purchase plan with its broker to facilitate purchases of its common shares. The automatic purchase plan allows for purchases by the company of its common shares at any time, including, without limitation, when the company would ordinarily not be permitted to make purchases due to regulatory restriction or self-imposed blackout periods. Purchases will be made by PrairieSky's broker based upon the limits prescribed by the TSX and the terms of the parties' written agreement.
PrairieSky believes renewing the NCIB as part of its capital management strategy is in the best interests of the company and represents an attractive opportunity to use cash resources to reduce PrairieSky's share count over time and thereby enhance the value of the shares held by remaining shareholders. The board currently intends to evaluate the NCIB, and the level of purchases thereunder, on an annual basis in conjunction with PrairieSky's annual financial results. The next regularly scheduled review will be in February, 2023.
While PrairieSky currently intends to only purchase up to 16,965,000 common shares over the next 12 months based on the calculation of 10 per cent of the public float as of April 18, 2022, the company's board of directors may consider, from time to time, applying to the TSX to increase the amount of NCIB purchases. Decisions regarding increases to the NCIB will be based on market conditions, share price, best use of funds from operations and other factors, including debt repayment and options, to expand its portfolio of royalty assets.
About PrairieSky Royalty Ltd.
PrairieSky is a royalty company, generating royalty production revenues as petroleum and natural gas are produced from its properties. PrairieSky has a diverse portfolio of properties that have a long history of generating funds from operations and that represent the largest and most consolidated independently owned fee-simple mineral title position in Canada. PrairieSky's common shares trade on the Toronto Stock Exchange under the symbol PSK.
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