Mr. Andrew Phillips reports
PRAIRIESKY ANNOUNCES FOURTH QUARTER AND RECORD YEAR-END RESULTS FOR 2022, INCLUDING RECORD ANNUAL OIL PRODUCTION VOLUMES, REVENUES, FUNDS FROM OPERATIONS AND LEASING ACTIVITY; ONGOING RECOGNITION AS A GLOBAL SUSTAINABILITY LEADER
PrairieSky Royalty Ltd. has released its fourth quarter and year-end operating and financial results for the period ended Dec. 31, 2022.
Fourth quarter highlights
- Royalty production volumes averaged 25,914 BOE (barrels of oil equivalent) per day, a 27-per-cent increase over Q4 2021 and a 4-per-cent increase over Q3 2022, which included 12,166 barrels per day of oil royalty production.
- Quarterly revenues totalled $150.6-million, comprising royalty production revenues of $144.8-million and other revenues of $5.8-million, including bonus consideration of $3-million.
- Quarterly funds from operations of $119.5-million (50 cents per share basic and diluted) were 17 per cent above Q4 2021 due to a combination of robust organic royalty production growth, acquisition royalty volumes and strong commodity pricing, and modestly behind Q3 2022 primarily as a result of a decline in WTI (West Texas Intermediate) benchmark pricing and a wider heavy oil differential.
- Declared a fourth quarter dividend of $57.3-million (24 cents per share), a 100-per-cent increase compared with Q3 2022, representing a quarterly payout ratio of 48 per cent.
Record annual funds from operations increased 86 per cent year-over-year to $507.6-million ($2.13 per share basic and $2.12 per share diluted), driven by organic growth in oil royalty volumes, acquisition royalty volumes and strong commodity pricing.
- Record annual revenues of $643.3-million increased 109 per cent over 2021, comprising:
- Royalty production revenue of $615.7-million, up 111 per cent over 2021; and
- Other revenue of $27.6-million, including $16.2-million of bonus consideration for entering into a record 228 new leasing arrangements with 119 separate counterparties which the company anticipates will result in continued strong third party drilling on these royalty lands in 2023.
Royalty production volumes totalled 25,206 BOE per day, 27-per-cent higher than 2021 average royalty production volumes and comprising 11,739 barrels per day of oil, 2,684 barrels per day of NGL (natural gas liquids and 64.7 MMcf (million cubic feet) per day of natural gas.
- Proved plus probable reserves totalled 66,719,000 BOE with a before-tax net present value, discounted at 10 per cent, of $1.94-billion, up 23 per cent from Dec. 31, 2021.
- Declared cumulative annual dividends of $143.3-million (60 cents per share) representing an annual payout ratio of 28 per cent.
- Net debt totalled $315.1-million at Dec. 31, 2022, a decrease of 50 per cent from Dec. 31, 2021, net debt of $635-million, as excess funds from operations were used primarily to retire indebtedness incurred in connection with acquisitions completed during the second half of 2021.
Ranked No. 51 of 15,061 companies (top 0.5 per cent) in Sustainalytics global universe, maintaining a "negligible risk" ESG (environmental, social and governance) risk rating.
- Awarded AAA ESG risk rating from MSCI, a measurement of resilience to long-term, industry material ESG risks.
- Received A- score on the CDP Climate Change Survey in 2022, maintaining leadership status.
It was an exceptional year for PrairieSky with increased commodity prices, leasing and drilling activity all contributing to record annual oil royalty production volumes, revenues and funds from operations. Royalty production volumes reached 25,914 BOE per day in Q4 2022, bringing average royalty production for the year to 25,206 BOE per day, representing year-over-year organic production growth of 11 per cent after excluding all acquisition royalty volumes. Oil royalty volumes averaged 12,166 barrels per day in Q4 2022, up 7 per cent from Q3 2022 due to a number of new wells coming on production following an active Q3 2022 for third party drilling and up 22 per cent over Q4 2021 removing all acquisition royalty volumes. Annually, oil royalty volumes totalled 11,739 barrels per day, a 22-per-cent increase over 2021 after removing acquisition royalty volumes.
Third party operators spud 248 wells on the company's royalty properties in Q4 2022, bringing 2022 spuds to 850 wells (2021 -- 548 wells). This significant increase in activity was spread across the company's land base, spanning from northeast British Columbia to southwest Manitoba. Drilling activity in the quarter was focused on oil plays with 210 wells spud, including 43 Clearwater oil wells across the company's 1.3 million acres of Clearwater acreage and 46 Viking oil wells primarily on fee leases in Saskatchewan. Management expects Q4 2022 spuds to provide organic growth in royalty production volumes into 2023. During Q4 2022, PrairieSky entered into 64 distinct leasing arrangements with 53 different counterparties for bonus consideration of $3-million. The company achieved its highest level of leasing activity ever in 2022, having entered into 228 new leasing arrangements with 119 counterparties (2021: 139 new leasing arrangements with 85 counterparties), generating $16.2-million in bonus consideration. Leasing is a leading indicator of third party field activity and the company anticipates strong third party drilling on the company's royalty lands in 2023.
PrairieSky generated quarterly funds from operations of $119.5-million, or 50 cents per share (basic and diluted). With the 100-per-cent increase to the company's quarterly dividend announced in October, 2022, the dividend declared to shareholders of record on Dec. 30, 2022, totalled $57.3-million, or 24 cents per share, in the quarter, resulting in a payout ratio of 48 per cent. With record 2022 funds from operations of $507.6-million, PrairieSky's annual payout ratio was 28 per cent, with excess funds from operations generated in the year used primarily to retire debt. Net debt decreased 50 per cent to $315.1-million at Dec. 31, 2022, from $635-million at Dec. 31, 2021.
The company was very pleased with the growth in organic volumes in 2022 and the level of activity across the company's land base. The company looks forward to another busy year in 2023 and will remain focused on the company's core strategies of leasing land, managing controllable costs and conducting royalty and land compliance activities. The company would like to thank its shareholders for their support, as well as the company's staff for their continued hard work.
Andrew Phillips, president and chief executive officer
Q4 2022 financial highlights
Funds from operations totalled $119.5-million, or 50 cents per share (basic and diluted), in Q4 2022, an increase of 17 per cent over Q4 2021. The increase in funds from operations was driven by a combination of organic growth in royalty production volumes, acquisition royalty volumes and strong commodity pricing. Funds from operations decreased 3 per cent from Q3 2022 primarily as a result of a decline in WTI benchmark pricing and a wider heavy oil differential.
- PrairieSky's total royalty production volumes of 25,914 BOE per day generated royalty production revenue of $144.8-million in Q4 2022. A further breakdown is as follows:
- Oil royalty production volumes averaged 12,166 barrels per day, a 46-per-cent increase over Q4 2021. Excluding all acquisition royalty volumes, organic growth in oil royalty production totalled 22 per cent over Q4 2021, inclusive of 95 barrels per day of royalty production from sliding scale royalties. Oil royalty volumes were 7 per cent above Q3 2022 due to new wells on stream.
- Increased oil royalty production volumes combined with average WTI benchmark pricing of $82.64 (U.S.) per barrel generated oil royalty revenue of $98.9-million in the quarter, a 61-per-cent increase over Q4 2021 when WTI benchmark pricing averaged $77.19 (U.S.) per barrel and 8 per cent below Q3 2022 when WTI benchmark pricing averaged $91.68 (U.S.) per barrel. During Q4 2022, oil royalty revenue was negatively impacted by wider heavy oil differentials which averaged $25.66 (U.S.) per barrel, 75-per-cent higher than Q4 2021 and 29-per-cent higher than Q3 2022. This impact was partially offset by a stronger U.S. dollar relative to the Canadian dollar.
- Natural gas royalty production volumes averaged 66.4 MMcf per day in Q4 2022, 11 per cent above Q4 2021. The increase in natural gas royalty production volumes is attributable to organic growth from new wells on stream (including solution gas from oil wells), acquisition royalty volumes, and compliance recoveries more than offsetting natural declines. Natural gas royalty production volumes were up slightly from Q3 2022 as incremental royalty production volumes from new wells on stream offset natural declines and estimates of the impact of cold weather freeze offs in December, 2022.
- Natural gas royalty revenue totalled $32.4-million, a 46-per-cent increase over Q4 2021 due to higher natural gas royalty production volumes combined with stronger natural gas index pricing with daily AECO pricing averaging $5.11 per Mcf (thousand cubic feet) in the quarter and monthly AECO pricing averaging $5.58 per Mcf in the quarter. Q4 2022 natural gas revenue increased 34 per cent over Q3 2022 due to stronger natural gas pricing as Q3 2022 daily AECO index pricing was negatively impacted by pipeline maintenance restricting volumes out of Western Canada.
- NGL royalty production volumes averaged 2,681 barrels per day, 32 per cent above Q4 2021 due to new wells on stream and incremental acquisition royalty volumes offsetting natural declines. In addition, during Q4 2021, NGL royalty production volumes were negatively impacted by ethane volume curtailments which were not repeated in Q4 2022. NGL royalty production volumes were flat with Q3 2022 as new wells on stream offset natural declines.
- NGL royalty revenue totalled $13.5-million, an increase of 26 per cent over Q4 2021 due to increased royalty production volumes and stronger benchmark pricing. NGL royalty revenue decreased 5 per cent from Q3 2022 due to lower benchmark pricing.
Other revenue totalled $5.8-million in Q4 2022, which included $3-million in bonus consideration earned on entering into a quarterly record 64 new leasing arrangements with 53 different counterparties. In addition, PrairieSky generated $2.1-million in lease rentals and $700,000 in other income. Compliance recoveries totalled $2.1-million in Q4 2022.
- PrairieSky's cash administrative expenses totalled $5.1-million, or $2.14 per BOE, down 26 per cent on a per BOE basis from Q4 2021.
- PrairieSky declared a fourth quarter dividend of $57.3-million (24 cents per share), representing a 48 per cent payout ratio. Remaining funds from operations were primarily allocated to reducing bank debt.
Annual financial highlights
PrairieSky generated record funds from operations of $507.6-million ($2.13 per share basic and $2.12 per common diluted) 86 per cent above 2021, driven by strong benchmark commodity pricing, organic growth in royalty production and acquisition royalty volumes.
- Royalty production volumes averaged 25,206 BOE per day, a year-over-year increase of 27 per cent (11 per cent removing all royalty acquisition volumes). Oil royalty volumes averaged 11,739 barrels per day, 56-per-cent higher than Q4 2021 (22 per cent removing all royalty acquisition volumes).
- Total revenues increased to a record $643.3-million, including $615.7-million of royalty production revenue and $27.6-million of other revenue. Other revenue included $16.2-million of bonus consideration earned on entering into an annual record 228 new leasing arrangements with 119 counterparties, up significantly from 139 new leases with 85 new counterparties in 2021.
- Compliance recoveries totalled $8.5-million for the year, a 102-per-cent increase over 2021.
- Cash administrative expenses totalled $25.5-million, or $2.77 per BOE, in line with 2021 cash administrative expense per BOE of $2.79.
- PrairieSky declared cumulative annual dividends of $143.3-million, or 60 cents per share, with a resulting annual payout ratio of 28 per cent.
- At Dec. 31, 2022, PrairieSky's net debt totalled $315.1-million, a decrease of $319.9-million or 50 per cent from Dec. 31, 2021, net debt of $635-million.
Activity on PrairieSky's royalty properties
It was another active quarter for third party operators across PrairieSky's royalty properties. There were 248 wells spud (85 per cent oil) in the quarter, which included 111 wells spud on the company's GORR acreage, 107 wells spud on the company's Fee Lands and 30 unit wells spud. There were 210 oil wells spud which included 48 Mannville heavy and light oil wells, including two wells on the Onion Lake thermal oil project, 46 Viking wells, 43 Clearwater wells, 29 Mississippian wells, 13 Cardium wells, 11 Bakken wells and 20 additional oil wells spud in the Belly River, Charlie Lake, Doig, Duvernay, Jurassic, Nisku and Triassic formations. There were 38 natural gas wells spud in Q4 2022, including 20 shallow natural gas wells, seven Montney wells, four Spirit River wells, four Mannville wells, two Mississippian wells and one Belly River well. PrairieSky's average royalty rate for wells spud in Q4 2022 was 6.4 per cent (Q4 2021 -- 5.7 per cent). A strong Q4 brings 2022 total spuds to 850 wells on PrairieSky's royalty properties, an increase of 55 per cent over 2021 spuds of 548 wells. The average royalty rate for wells spud in 2022 was 7.3 per cent (2021 -- 5.8 per cent).
Strong commodity pricing drove increased capital spending by third party operators across the Western Canadian sedimentary basin and on PrairieSky's expansive royalty land base. Capital spending targeted oil plays, including those where PrairieSky has made strategic investments, with the most active plays being the Clearwater oil play, Viking light oil and the Mannville heavy oil plays in Western Saskatchewan. PrairieSky estimates that $1.5-billion (net capital -- $84-million) in third party capital was spent in 2022 drilling and completing wells on PrairieSky royalty properties, up from $783-million (net capital -- $37-million) in 2021, representing a 127-per-cent increase in net capital spent on PrairieSky's land base year-over-year.
Two thousand twenty-two reserves information
PrairieSky's proved plus probable reserves totalled 66,719 MBOE at Dec. 31, 2022 (Dec. 31, 2021 -- 66,250 MBOE), and include only developed assets (developed producing and developed non-producing properties) and do not include any future development capital on undeveloped lands. Proved plus probable reserves remained relatively flat year-over-year with a 4-per-cent increase in total proved reserves due to third party drilling and improved recovery (6,841 MBOE), technical additions (2,082 MBOE) and economic factors (1,116 MBOE). At Dec. 31, 2022, the before-tax net present value of total proved plus probable reserves, discounted at 10 per cent, increased 23 per cent to $1.94-billion (2021 -- $1.58-billion).
PrairieSky's year-end 2022 reserves were evaluated by independent reserves evaluators GLJ Ltd. The evaluation of PrairieSky's royalty properties was done in accordance with the definitions, standards and procedures contained in the Canadian Oil and Gas Evaluation Handbook and National Instrument 51-101 -- Standards of Disclosure for Oil and Gas Activities. PrairieSky's reserves information is included in the Company's Annual Information Form which is available on SEDAR and PrairieSky's website.
Global sustainability rankings
Once again, PrairieSky has received industry leading scores from several globally recognized environmental, social and governance rating agencies for 2022. These results demonstrate the company's carbon-neutral status and continuing commitment to environmental stewardship, social responsibility and strong corporate governance practices; they are set forth in the associated table.
Two thousand twenty-three investor day
PrairieSky will be hosting an investor day on May 17, 2023, in Toronto, Ont., where members of PrairieSky's management and technical team will present details on the company's crude oil and natural gas plays. The investor day will be a live webcast starting at 9 a.m. EDT. Interested parties may participate in the webcast which will be available through PrairieSky's investor centre. A copy of materials will also be available on PrairieSky's website. The webcast will be archived and accessible for replay after the event.
Financial and operational information
The associated 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 (MD&A) and audited annual consolidated financial statements and notes thereto for the fiscal period ended Dec. 31, 2022, are 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 Tuesday, Feb. 7, 2023, 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 have a long history of generating funds from operations and which 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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