Mr. Andrew Phillips reports
PRAIRIESKY ANNOUNCES 2023 SECOND QUARTER RESULTS, INCLUDING RECORD OIL ROYALTY PRODUCTION
PrairieSky Royalty Ltd. has released its second quarter (Q2 2023) results for the three-month period ended June 30, 2023.
Second quarter highlights:
Record quarterly average oil royalty production of 12,607 barrels per day, a 3-per-cent increase over Q1 2023 and Q2 2022 with total royalty production averaging 23,517 boe (barrels of oil equivalent) per day.
Revenues totalled $117.4-million, 7 per cent lower than Q1 2023 and 41 per cent below Q2 2022, comprising royalty production revenues of $108.4-million and other revenues of $9-million.
Quarterly funds from operations of $91.3-million (38 cents per common share, basic and diluted) were driven by oil royalty production growth and were 6 per cent above Q1 2023 and 43 per cent below Q2 2022.
Declared a second quarter dividend of $57.3-million (24 cents per common share), representing a payout ratio of 63 per cent, with excess cash flow allocated to $15.2-million of royalty acquisitions related primarily to exploration projects in the Mannville Stack and the balance to retiring bank debt.
Net debt totalled $275.9-million, down 39 per cent or $178-million from June 30, 2022, as excess funds from operations were used primarily to retire indebtedness.
- Maintained industry leadership AAA 2023 ESG (environmental, social, governance) risk rating.
"PrairieSky's oil royalty production volumes grew organically during the quarter reaching 12,607 barrels per day, a 3-per-cent increase over Q1 2023 and Q2 2022. Oil royalty production volume growth was focused in the Clearwater, Mannville Stack and Viking where third party operators have been actively drilling oil targets and where PrairieSky has focused its acquisition strategy over the past several years. PrairieSky's Clearwater production continued its strong growth trajectory, averaging 1,800 boe per day of royalty production in Q2 2023. Total royalty production averaged 23,517 BOE per day which was down 5 per cent from Q1 2023 and 10 per cent from Q2 2022 due primarily to the estimated 750 boe per day impact of wildfires on natural gas volumes (2.5 mmcf [million cubic feet] per day), oil volumes (135 barrels per day) and NGL [natural gas liquid] volumes (200 barrels per day) and a prior-period adjustment which impacted natural gas and NGL volumes. Our thoughts are with those communities affected by the wildfires. PrairieSky made a donation to the Red Cross to support their efforts to help impacted communities.
"There were 148 spuds on our royalty properties during the quarter as third party drilling activity moderated in line with seasonal breakup. We anticipate the pace of capital activity to increase in Q3 2023 consistent with prior years. Leasing activity remained strong during the quarter generating $5.7-million in lease bonus consideration from entering 39 leases with 37 counterparties. We also executed on $15.2-million of acquisitions focused on the emerging Mannville Stack multilateral play which is attracting significant new exploration and development capital.
"Increased oil royalty production, continued relative strength in WTI benchmark pricing, and narrow heavy and light oil differentials along with $9-million of other revenues combined to deliver quarterly funds from operations of $91.3-million or 38 cents per common share (basic and diluted). We remain insulated from direct inflationary pressures as we do not incur upstream capital costs related to exploration and development or operations which allowed us to generate an operating margin of 92 per cent, which includes our cash administrative expense. PrairieSky declared dividends of $57.3-million or 24 cents per common share for shareholders of record on June 30, 2023, resulting in a payout ratio of 63 per cent. Excess funds from operations after the dividend and royalty acquisitions were allocated to debt repayment reducing net debt to $275.9-million at June 30, 2023.
"It has been a strong first half of 2023 with organic growth in oil royalty production, leasing activity at multiyear highs, and drilling activity across a diversity of plays and targets in our expansive portfolio. We would like to thank our staff for their hard work and shareholders for their support," said Andrew Phillips, president and chief executive officer.
Q2 2023 financial highlights:
Funds from operations totalled $91.3-million or 38 cents per common share (basic and diluted). This represents a 6-per-cent increase from Q1 2023 primarily due to increased oil royalty production and lower administrative expenses. Funds from operations decreased 43 per cent from Q2 2022 due to weaker U.S. WTI and AECO benchmark pricing combined with lower natural gas and NGL royalty production, partially offset by increased oil royalty volumes.
Total royalty production volumes of 23,517 boe per day generated royalty production revenue of $108.4-million, a 7-per-cent decrease from Q1 2023 and a 43-per-cent decrease from Q2 2022. A further breakdown is as follows:
Oil royalty production volumes grew to 12,607 barrels per day, a 3-per-cent increase over Q1 2023 and Q2 2022. Third party operators continued to target a number of plays across the company's royalty land base with the largest growth in production from the Clearwater, Mannville heavy oil and Viking plays where drilling activity has been strong. Production from new wells on stream more than offset the impact to royalty oil volumes from the Alberta wildfires which are estimated to be 135 barrels per day in the quarter.
Oil royalty revenue totalled $89.6-million in Q2 2023, 7 per cent higher than Q1 2023 primarily due to growth in oil royalty production volumes and a narrowed average heavy oil differential and 34 per cent below Q2 2022 due to the decrease in average WTI pricing from $108.57 (U.S.) per barrel to $73.99 (U.S.) per barrel. Oil royalty revenues were reduced in the quarter by an estimated $900,000 due to the impact of the wildfires.
- Natural gas royalty production volumes averaged 53.8 mmcf per day, 10 per cent below Q1 2023 and 18 per cent below Q2 2022. Natural gas royalty production was impacted by third party operational downtime due to wildfires in Alberta. The company estimates the impact on natural gas royalty production was 2.5 mmcf per day in the quarter. Natural gas royalty production was also negatively impacted by a prior-period overpayment of 4.5 mmcf per day.
- Natural gas royalty revenue decreased 50 per cent from Q1 2023 to $10.9-million and 70 per cent from Q2 2022 due to lower royalty production volumes and weaker AECO natural gas index pricing with daily AECO averaging $2.45 per mcf (thousand cubic feet) in the quarter, down from $3.22 per mcf in Q1 2023 and $7.24 per mcf in Q2 2022. The estimated natural gas royalty revenue impact related to the wildfires and the prior-period adjustment was $400,000 and $400,000, respectively.
NGL royalty production volumes averaged 1,943 barrels per day, 27 per cent below Q1 2023 and 30 per cent below Q2 2022 due to the impact of the Alberta wildfires which resulted in an estimated 200 barrels per day of royalty production being temporarily shut in. In addition, royalty production volumes were impacted by 370 barrels per day from a prior-period overpayment.
NGL royalty revenue totalled $7.9-million in the quarter, 29 per cent below Q1 2023 and 56 per cent below Q2 2022, due to lower NGL royalty production volumes and weaker benchmark pricing. The estimated NGL royalty revenue impact related to the wildfires and the prior-period adjustment was $500,000 and $1.6-million, respectively.
Other revenue totalled $9-million in Q2 2023 comprising $2.6-million of lease rentals and $700,000 in other income, including $600,000 of potash royalty revenue. In addition, PrairieSky earned $5.7-million in bonus consideration from 39 new leasing arrangements with 37 different counterparties.
During the quarter, cash administrative expenses totalled $7.2-million or $3.36 per boe, down 56 per cent on a per boe basis from Q1 2023 and 53 per cent above Q2 2022. Included in cash administrative expenses is the deferred share unit payment of $1.4-million to a director who was not nominated for re-election at the April, 2023, annual general meeting.
- PrairieSky declared a second quarter dividend of $57.3-million (24 cents per common share), representing a 63-per-cent payout ratio, with remaining funds from operations allocated to royalty acquisitions and reducing bank debt.
At June 30, 2023, PrairieSky's net debt balance totalled $275.9-million, a decrease of $178-million (39 per cent) from June 30, 2022.
Activity on PrairieSky's royalty properties
Annually, seasonal spring breakup results in a slowdown in third party capital activity in Western Canada as melting snow and frost cause the ground to become soft and muddy leading to ensuing road bans and limiting lease access. During Q2 2023, there were 148 wells spudded (93 per cent oil) on PrairieSky lands, including 90 wells spudded on its GORR acreage, 54 wells spudded on its fee lands and four unit wells spudded. There were 137 oil wells spudded in Q2 2023, including 43 Viking wells, 33 Clearwater wells, 32 Mannville heavy and light oil wells, eight Duvernay wells, six Mississippian wells, five Mannville heavy oil wells at Lindbergh, and 10 additional spuds in the Bakken, Belly River, Charlie Lake, Doig, Devonian, Jurassic and Nisku formations. There were 11 Montney natural gas wells spudded in Q2 2023. PrairieSky's average royalty rate for wells spudded in Q2 2023 was 5.8 per cent (Q2 2022 -- 7.2 per cent), which reflects an increase in drilling on GORR acreage including recently acquired royalties under land funds.
Environmental, social and governance update
MSCI maintains AAA ESG rating
PrairieSky maintained its AAA MSCI ESG risk rating for 2023, which is leader status, and a 10/10 ESG controversies score, denoting nil controversies. PrairieSky's MSCI AAA status highlights PrairieSky's positioning relative to industry peers on multiple key issues such as human capital development, community relations and governance.
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 equity and fixed-income ESG indexes.
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 June 30, 2023, 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, July 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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