Mr. Andrew Phillips reports

PRAIRIESKY ANNOUNCES 2022 SECOND QUARTER RESULTS, RECORD OIL ROYALTY PRODUCTION AND FUNDS FROM OPERATIONS; PUBLISHES ANNUAL SUSTAINABILITY REPORT

PrairieSky Royalty Ltd. has released its second quarter results for the three-month period ended June 30, 2022.

Second quarter highlights:

• Record average royalty production of 25,992 barrels of oil equivalent per day, a 9-per-cent increase over first quarter 2022 and 32 per cent over Q2 2021 with oil royalty production reaching a record 12,220 barrels per day;
• Total revenues increased to $198.1-million, 42 per cent over Q1 2022 and 184 per cent over Q2 2021, composed of royalty production revenues of $190.2-million and other revenues of $7.9-million;
• Generated record quarterly funds from operations of $159.6-million (67 cents per common share, basic and diluted), 52 per cent above Q1 2022 and 182 per cent above Q2 2021 driven by royalty production growth and strong commodity pricing;
• Declared a second quarter dividend of $28.7-million (12 cents per common share), representing a payout ratio of 18 per cent, with excess cash flow allocated to $15.6-million of royalty acquisitions and the balance to retiring bank debt;
• Net debt totalled $453.9-million, down 20 per cent or $115.0-million from March 31, 2022, as excess funds from operations were used to retire indebtedness incurred in connection with acquisitions completed during the second half of 2021;
• PrairieSky completed $15.6-million of royalty acquisitions in the quarter, adding approximately 360 boe per day (86 per cent natural gas) of incremental gross overriding royalties in central Alberta and northeast British Columbia, as well as adding undeveloped land in the Clearwater oil play.

President's message

This is the third consecutive quarter of strong organic growth in royalty production as third party operators have been actively drilling new wells and performing workovers and recompletions across PrairieSky's extensive land base. Increased royalty production, strong commodity pricing for all products, and increased lease bonus and other revenues combined to deliver record quarterly funds from operations of $159.6-million or 67 cents per common share (basic and diluted). PrairieSky remains unhedged, realizing the full benefit of increased benchmark pricing during the quarter and generating a royalty revenue netback of $80.44 per boe. In addition, PrairieSky remains insulated from direct inflationary pressures as it does not incur upstream costs related to exploration and development capital or operations, which allowed it to generate an operating margin of 97 per cent in the quarter.

PrairieSky's royalty production volumes grew organically again in Q2 2022 to 25,992 boe per day as new wells drilled in late 2021 and Q1 2022 came on production. Oil royalty production averaged 12,220 barrels per day in the quarter, a 9-per-cent increase over Q1 2022 and a 33-per-cent increase over Q2 2021 excluding all acquisition royalty volumes. PrairieSky's Clearwater production continued on its strong growth trajectory, averaging 1,500 boe per day of royalty production in Q2 2022, a 25-per-cent increase year-to-date 2022. As the largest owner of Clearwater royalty lands with 1.3 million acres, this low-cost play is expected to provide significant royalty production growth opportunities for PrairieSky through all commodity cycles.

There were 122 spuds on the corporation's royalty properties in the quarter as third party drilling activity moderated in line with seasonal breakup, when road bans in certain areas take place. The pace of capital activity picked up late in Q2 2022, and the corporation anticipates third quarter 2022 to be very active due to the licensing activity it has seen to date and the number of new leases it entered into in the quarter, which it views as a leading indicator to forecast drilling activity. Leasing of its undeveloped land base generated $3.8-million in bonus consideration by entering into 54 distinct leasing arrangements with 45 different counterparties in Q2 2022. This includes significant new leasing for Mannville oil on its recently acquired fee mineral title acreage.

PrairieSky declared dividends of $28.7-million or 12 cents per common share for shareholders of record on June 30, 2022, resulting in a payout ratio of 18 per cent. Excess funds from operations in the quarter were allocated primarily to debt repayment, reducing net debt by $115.0-million to $453.9-million at June 30, 2022. Net debt has decreased $181.1-million since Dec. 31, 2021.

The first half of 2022 has been an exceptional start to the year with the third successive quarter of organic royalty production growth, leasing activity at multiyear highs and drilling activity in the field across the portfolio. It would like to thank its shareholders for their support, and its staff for its continued hard work.

Andrew Phillips, president and chief executive officer

Q2 2022 financial highlights:

• Funds from operations increased 52 per cent over Q1 2022 to a record $159.6-million or 67 cents per common share (basic and diluted). The increase in funds from operations was driven by organic growth in royalty production and strong commodity pricing. Funds from operations increased 182 per cent over Q2 2021 with the addition of acquisition volumes in the second half of 2021, organic royalty production growth and improved commodity pricing.
• Royalty production revenue grew to $190.2-million, a 41-per-cent increase over Q1 2022 and a 193-per-cent increase over Q2 2021, generated from total royalty production volumes of 25,992 boe per day. A further breakdown is as follows:
  • Oil royalty production volumes averaged 12,220 barrels per day, a 9-per-cent increase over Q1 2022 and a 74-per-cent increase over Q2 2021. Excluding all acquisition royalty volumes completed over the last 12 months, organic growth in oil royalty production totalled 8 per cent over Q1 2022 with an incremental 130 barrels per day (1 per cent) of royalty production from sliding scale royalties. Organic growth was 29 per cent over Q2 2021 as third party operators accelerated drilling activity across a variety of oil royalty plays with an incremental 285 barrels per day (4 per cent) of royalty production from sliding scale royalties.
  • Growth in oil royalty production volumes and strong average WTI (West Texas Intermediate) pricing of $108.57 (U.S.) per barrel combined to generate oil royalty revenue of $135.6-million in the quarter, a 37-per-cent increase over Q1 2022 and 216 per cent above Q2 2021.
  • Natural gas royalty production volumes increased to 66.0 million cubic feet per day, 9 per cent above both Q1 2022 and Q2 2021. Natural gas royalty production included the recovery of approximately 1.0 MMcf per day of volumes related to cold weather freeze-offs in Q1 2022 and 1.9 MMcf per day from the acquisition made in the quarter. The remaining increase in natural gas royalty production volumes is attributable to new wells on stream, workovers and solution gas from oil wells offsetting natural declines.
  • Natural gas royalty revenue increased to $36.8-million, a 61-per-cent increase over Q1 2022 and 169 per cent above Q2 2021 primarily due to strong natural gas index pricing with daily AECO (Alberta Energy Company) averaging $7.24 per thousand cubic feet in the quarter and monthly AECO pricing averaging $6.27 per Mcf in the quarter.
  • Natural gas liquids royalty production volumes averaged 2,772 barrels per day, 6 per cent above both Q1 2022 and Q2 2021 due to new wells on stream and 50 barrels per day of incremental acquisition royalty volumes made in the quarter offsetting natural declines.
  • NGL royalty revenue increased to $17.8-million, 36 per cent over Q1 2022 and 114 per cent over Q2 2021, due to increased royalty production volumes and strong benchmark pricing.
• Other revenue totalled $7.9-million in Q2 2022 composed of $2.9-million of lease rentals and $3.8-million in bonus consideration generated from 54 new leasing arrangements with 45 different counterparties. In addition, PrairieSky generated $1.2-million in other income, which included $900,000 of potash royalty revenue. Compliance recoveries totalled $1.6-million in Q2 2022.
• Cash administrative expenses totalled $5.2-million or $2.20 per boe, down 18 per cent on a per boe basis from Q2 2021. PrairieSky expects cash administrative expense per boe to remain below $3 per boe for 2022.
• PrairieSky declared a second quarter dividend of $28.7-million (12 cents per common share), representing an 18-per-cent payout ratio, with remaining funds from operations primarily allocated to reducing bank debt.
• PrairieSky completed $15.6-million of royalty acquisitions in the quarter, adding approximately 360 boe per day (86 per cent natural gas) of incremental gross overriding royalties in central Alberta and northeast British Columbia, as well as adding undeveloped land in the Clearwater oil play.
• At June 30, 2022, PrairieSky's net debt balance totalled $453.9-million, a $115.0-million (20-per-cent) decrease from March 31, 2022.

Activity on PrairieSky's royalty properties

Annually, third party capital activity in Western Canada slows down in the second quarter as a result of seasonal spring breakup, when melting snow and frost cause the ground to become soft and muddy, leading to ensuing road bans and limiting lease access. There were 122 wells spudded (94 per cent oil) on PrairieSky lands during Q2 2022, which included 62 wells spudded on its fee lands, 44 wells spudded on its GORR acreage and 16 unit wells spudded. There were 115 oil wells spudded in Q2 2022, including 42 Viking wells, 19 Mannville heavy and light oil wells, 14 Clearwater wells, 14 Mississippian wells, six Duvernay wells, six Mannville heavy oil wells at Lindbergh, five Cardium wells, and nine additional spuds in the Bakken, Belly River, Charlie Lake, Triassic and Devonian formations. There were seven natural gas wells spudded in Q2 2022, including four Montney, two Spirit River and one Mannville well. PrairieSky's average royalty rate for wells spudded in Q2 2022 was 7.2 per cent (Q2 2021: 6.3 per cent).

Environmental, social and governance update

MSCI upgrade to AAA ESG rating

PrairieSky improved its year-over-year MSCI ESG risk rating, achieving an AAA rating and leader status in 2022 and a 10 out of 10 ESG controversies score, denoting nil controversies. MSCI indicated that the upgrade to AAA status highlights PrairieSky's positioning relative to industry peers on multiple key issues such as carbon emissions, human capital development, community relations and governance, including highlighting MSCI's assessment of PrairieSky's strong business ethic policies and practices relative to peers.

MSCI is a leading provider of critical decision support tools and services for the global investment community, enabling clients to understand and analyze key drivers of risk and return and confidently build more effective portfolios. The MSCI ESG risk ratings cover over 8,500 companies (14,000 issuers, including subsidiaries) and more than 680,000 equity and fixed-income securities globally, are used by over 1,400 investors worldwide, and form the basis of MSCI's 1,500-plus equity and fixed-income ESG indexes.

2021 sustainability report published

During Q2 2022, PrairieSky published comprehensive ESG disclosures in its 2021 sustainability report, which is available on its website. The report includes its Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB) and World Economic Forum (WEF) Reference Index, and its progress report on principles set forth in the UN Global Compact. Additional disclosure on its website includes its Task Force on Climate-Related Financial Disclosures (TCFD) report and independent assurance statements verifying key environmental data, such as carbon-neutral Scope 1 and Scope 2 greenhouse gas emissions and other key performance indicators.

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 June 30, 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 July 19, 2022, beginning at 6:30 a.m. MDT (8:30 a.m. EDT). To participate in the conference call, you are asked to register. Details regarding the call will be provided to you upon registration.

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 has a long history of generating funds from operations and that represents 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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