Mr. Andrew Phillips reports
PRAIRIESKY ANNOUNCES FIRST QUARTER 2023 RESULTS
PrairieSky Royalty Ltd. has released its first quarter (Q1 2023) operating and financial results for the three-month period ended March 31, 2023.
First quarter highlights:
- Royalty production volumes averaged 24,809 boe (barrels of oil equivalent) per day and included 12,212 barrels per day of oil royalty production, which increased 9 per cent over Q1 2022 and held flat with Q4 2022.
- Quarterly revenues of $126.1-million comprised royalty production revenues of $116.8-million and other revenues of $9.3-million, including bonus consideration of $5.5-million.
- Quarterly funds from operations totalled $86.3-million (36 cents per share basic and diluted).
- Declared a dividend of 24 cents per share (96 cents per share annualized).
- Net debt decreased to $292.4-million at March 31, 2023, as excess funds from operations over the dividend were used primarily to reduce net debt.
"PrairieSky's positive momentum continued into the first quarter of 2023 with strong royalty production volumes of 24,809 boe per day, total revenues of $126.1-million and funds from operations of $86.3-million. Oil royalty production volumes averaged 12,212 barrels per day, 9 per cent above Q1 2022 and flat with Q4 2022 as growth from new wells on stream were partially offset by lower sliding-scale oil volumes and downtime at one of the thermal oil projects where PrairieSky owns a royalty. Royalty production revenue totalled $116.8-million driven primarily from oil royalty revenue of $83.8-million with natural gas royalty revenue contributing an additional $21.8-million and NGL royalty revenue contributing $11.2-million. It was a strong quarter for other revenue which totalled $9.3-million generated from bonus consideration, water disposal fees and record revenue from seismic data licensing to third party operators.
"Third party leasing of our royalty lands remains active and we had another strong quarter entering into 67 new leases with 57 different counterparties. This is the sixth consecutive quarter of record leasing. Third party operators spud 214 wells on our royalty properties during Q1 2023 with an average royalty rate of 8.2 per cent, an increase of 20 wells over Q1 2022 when 194 wells were spud with an average royalty rate of 6.1 per cent. Activity continues to be spread across our land base spanning from northeast British Columbia to southwest Manitoba. Drilling was most active in the Viking with 68 oil wells spud, in the Clearwater with 25 oil wells spud, and in the heavy oil region of western Saskatchewan and eastern Alberta where 30 Mannville heavy oil wells were spud. There were also 18 Montney liquids-rich natural gas wells spud in northwest Alberta and British Columbia.
"PrairieSky generated quarterly funds from operations of $86.3-million or 36 cents per share (basic and diluted). Funds from operations were below Q1 2022 and Q4 2022 primarily due to lower WTI and AECO benchmark pricing in the quarter. In addition, heavy oil differentials were significantly wider than in Q1 2022 which reduced realized pricing, the impact of which was partially offset by a weaker Canadian dollar relative to the U.S. dollar. PrairieSky declared a dividend of 24 cents per share in the quarter with a resulting payout ratio of 66 per cent. Excess funds from operations were used to reduce net debt, with $5.4-million used to acquire royalties on undeveloped land that are complementary to PrairieSky's existing asset base. Net debt decreased $22.7-million to $292.4-million at March 31, 2023, from $315.1-million at Dec. 31, 2022.
"The growing level of leasing activity across our land base and the continued expansion of drilling activity across a number of plays is encouraging. We entered 2023 optimistic that our royalty lands would continue to attract third party activity and we saw that over Q1 2023 which we expect will lead to sustainable and growing production volumes. We would like to thank our shareholders for their support, and our staff for their continued hard work," said Andrew Phillips, president and chief executive officer.
Q1 2023 financial highlights:
Funds from operations totalled $86.3-million or 36 cents per share (basic and diluted) in the quarter, below Q1 2022 and Q4 2022 due to weaker WTI and AECO benchmark pricing.
Royalty production averaged 24,809 boe per day, an increase of 4 per cent over Q1 2022 and 4 per cent below Q4 2022, which generated total royalty production revenue of $116.8-million. A breakdown is as follows:
Oil royalty production volumes averaged 12,212 barrels per day, an increase of 9 per cent over Q1 2022 and flat with Q4 2022. Organic growth in oil royalty volumes from new wells on stream more than offset the combined impact of natural declines, operational downtime in March at one of the thermal oil projects where the company owns a royalty and lower sliding-scale royalty volumes as a result of a drop in WTI benchmark pricing.
Increased oil royalty production volumes combined with average WTI benchmark pricing of $76.13 (U.S.) per barrel to generate oil royalty revenue of $83.8-million in Q1 2023. WTI benchmark pricing remained strong during the quarter but was 19 per cent below Q1 2022 when WTI benchmark pricing averaged $94.29 (U.S.) per barrel and 8 per cent below Q4 2022 when WTI benchmark pricing averaged $82.64 (U.S.) per barrel. During the quarter, oil royalty revenue was negatively impacted by wider heavy oil differentials which averaged $24.78 (U.S.) per barrel as compared with Q1 2022 when heavy oil differentials averaged $14.53 (U.S.) per barrel. This impact was partially offset by a weaker Canadian dollar relative to the U.S. dollar. Heavy oil differentials and the U.S. dollar to Canadian dollar exchange rate were relatively flat from Q4 2022 to Q1 2023.
During Q1 2023, natural gas royalty production volumes averaged 59.6 mmcf (million cubic feet) per day, flat with Q1 2022 and 10 per cent below Q4 2022 as royalty volumes from new wells on stream (including solution gas from oil wells) were offset by declines and the impacts of higher-than-estimated volume freeze-offs in December, 2022, and certain production in British Columbia being temporarily shut in due to transportation constraints.
Natural gas royalty revenue totalled $21.8-million, a decrease of 5 per cent from Q1 2022, primarily due to lower natural gas daily AECO pricing which averaged $3.22 per mcf (thousand cubic feet) in the quarter, down 32 per cent from Q1 2022. Q1 2023 natural gas revenue decreased 33 per cent from Q4 2022 due to a combination of lower royalty production volumes, lower benchmark AECO pricing and temporarily shut-in production in British Columbia which was sold at stronger Sumas index pricing in Q4 2022 and January, 2023.
- NGL (natural gas liquid) royalty production volumes averaged 2,664 barrels per day in the quarter, flat with both Q1 2022 and Q4 2022 as production from new wells on stream offset natural declines.
- NGL royalty revenue totalled $11.2-million, a decrease of 15 per cent from Q1 2022 and 17 per cent from Q4 2022 due to lower benchmark pricing resulting in PrairieSky realizing NGL pricing of $46.71 per barrel in Q1 2023, down 16 per cent from $55.66 per barrel in Q1 2022 and 14 per cent from $54.56 per barrel in Q4 2022.
- Lease bonus consideration totalled $5.5-million, earned upon entering into 67 new leasing arrangements with 57 different counterparties. In addition, PrairieSky generated $1.1-million in lease rentals and $2.7-million in other income primarily related to fees for water disposal, the licensing of its seismic data and potash royalty revenue. Compliance recoveries totalled $2.6-million in Q1 2023.
PrairieSky's cash administrative expenses totalled $17.2-million or $7.70 per boe. Annual long-term incentive payments vest and are paid in the first quarter. Due to strong share price and corporate performance, PrairieSky's long-term incentive payments totalled $10.9-million in the quarter for all staff and executive, as compared with $5-million in Q1 2022.
PrairieSky declared a first quarter dividend of $57.3-million (24 cents per share), representing a 66-per-cent payout ratio with remaining funds from operations primarily used to reduce net debt. At March 31, 2023, net debt totalled $292.4-million, a decrease of 7 per cent or $22.7-million from Dec. 31, 2022, when net debt totalled $315.1-million.
Activity on PrairieSky's royalty properties
It was another busy quarter on PrairieSky's royalty properties as third party operators spudded 214 wells (87 per cent oil), including 116 wells on the company's fee lands, 85 wells on its GORR acreage and 13 unit wells. There were 186 oil wells spudded, which included 68 Viking wells, 42 Mannville light and heavy oil wells, 25 Clearwater wells, 18 Mississippian wells, 10 Bakken wells, six Duvernay wells, and 17 additional oil wells spudded in the Belly River, Cardium, Charlie Lake, Devonian, Dunvegan, Jurassic, Nisku and Triassic formations. There were 28 natural gas wells spudded in Q1 2023, including 18 Montney wells, two Spirit River wells, two shallow natural gas wells and an additional six natural gas wells in the Cardium, Mannville and Viking formations. PrairieSky's average royalty rate for wells spudded in Q1 2023 was 8.2 per cent (Q1 2022 -- 6.1 per cent).
Financial and operational information
The attached table summarizes select operational and financial information of the company for the periods noted. All dollar amounts are stated in Canadian dollars unless otherwise noted.
A full version of PrairieSky's management's discussion and analysis (MD&A) and unaudited interim condensed consolidated financial statements and notes thereto for the fiscal period ended March 31, 2023, is available on SEDAR and PrairieSky's website.
2023 investor day
PrairieSky will be hosting an investor day on May 17, 2023, in Toronto, Ont., where PrairieSky 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 on the company's website. A copy of materials will also be available on PrairieSky's website. The webcast will be archived and accessible for replay after the event.
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 request the repurchase limit be set at 10 per cent of the public float at the applicable time. 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 an 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 166,055,047 common shares as of April 17, 2023. 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 25, 2023. Common shares may be repurchased under the program over a period of up to one year. As of March 31, 2023, PrairieSky has not purchased any common shares under its current normal course issuer bid that commenced on May 26, 2022, and runs to May 25, 2023. Since instituting the normal course issuer bid in 2016 to March 31, 2023, 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 in order 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 parameters 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, 2024.
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.
Conference call details
A conference call to discuss the results will be held for the investment community on Tuesday, April 18, 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 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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