PrairieSky Royalty Ltd.

Ladies and gentlemen, thank you for standing by, and welcome to the Sperry Sky Royalty LTD announces their third quarter 2020 financial results call. At this time, our participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Andrew Phillips. Thank you. Please go ahead, sir.

Thank you and good morning, and thank you everyone for dialing in to the Prairie Sky Royalty Q3 2020 earnings call. On the call with me from Prairie Sky are Cam Proctor, COO, and Pam Cazale, CFO. I'll provide an operational update and then pass the call over to Pam to walk through the financials. During Q3, Prairie Sky entered into 15 new leasing arrangements with 15 different counterparties, resulting in lease issuance bonus of $1.8 million. This was a significant improvement from the prior quarter, as many industry participants turned their attention to future opportunities following spring break-up and easing of restrictions due to COVID-19. Among the leasing transactions for larger bonuses were for a man-billed resource play and a short-term duvernay lease. With leasing activity picking up across a number of plays and regions, we expect drilling activity to improve in 2021 provided commodity prices remain stable. On the M&A side, we bid on a number of small packages and one medium-sized opportunity at returns exceeding our cost of capital. None of the bids were accepted. We were successful, however, in acquiring and cancelling 4% of the outstanding shares of the company using excess cash flow and a modest amount of leverage that will be retired over the next three fiscal quarters. This provides us further flexibility to make acquisitions and or cancel additional shares below intrinsic value. Just over 5% of oil volumes are currently curtailed or remain shut in and will return as pricing improves and as curtailments were eased on Friday. Natural gas volumes remain stable. Recent results in the Duvernay and Clearwater plays both show lower drilling and completion costs as well as stronger tide curves. We expect our industry leading land position on both plays will provide shareholders with long term growth without capital or dilution. PSK maintained its focus on cost control through the quarter. core pillar of our strategy since inception, with cash G&A totaling $3.5 million or $2.03 per BOE. Compliance recoveries over the quarter total $1 million. Our accounting and royalty compliance groups have been extraordinarily busy over the past two fiscal quarters, focusing on collections as well as working closely with our land department, dealing with the high volume of requests for lease relaxations and production shut-ins. Throughout Q3, our team worked diligently to lift these relaxations as pricing improved, which also resulted in several new leasing arrangements in order to reactivate existing oil and natural gas wells and return undeveloped zones to our leasing inventory, particularly those prospective for natural gas and NGLs. Prairie Sky is a long duration unhedged natural gas royalty stream, which is currently benefiting from strong regional pricing environment we have seen at ACO and Station 2. As the pricing environment for natural gas has improved, many of our high gas oil ratio plays have seen enhanced economics, which we expect to translate into more robust activity levels throughout the balance of 2020 and into 2021. Prairie Sky continues to work with its industry partners to find efficiencies and highlight the world-class ESG profile of Canada's energy industry. During 2020, an important milestone was achieved. in Alberta by a private operator, which is now sequestering CO2 into a depleted oil unit in central Alberta, which includes Prairie Sky lands. Prairie Sky has a small royalty on this unit and has lands across western Canada with analogous reservoirs. In addition to permanently sequestering greenhouse gases from industrial emitters across the province, it is the equivalent of taking over 300,000 cars off the road, and the previously stranded oil reserves will be produced at some of the lowest scope 1, 2, and 3 emissions in the world. This project is a great example of Canadian ESG leadership, ingenuity, and collaboration across industries. As we look towards 2021, our organization is working hard on the third Prairie Sky Realty Playbook ahead of our Investor Day in May, as well as our fourth annual ESG report. We expect both of these documents to highlight the unique attributes of our long-duration, capital-free, high-margin business model, which was recently recognized by Sustainalytics as the number one ranked company in their oil and gas ESG rankings. I will now turn the call over to Pam to walk through the financials.

Thank you, Andrew. Good morning, everyone. Before I get started, I will be including certain forward-looking information in my remarks today. As such, I would refer all participants on this call to please reference the forward-looking information section of our MD&A as at September 30, 2020, as well as the press release issued on October 26, 2020. Funds from operations totaled $37.9 million, or 16 cents per share in the quarter, generated primarily from royalty production revenue of $38.4 million on production volumes of 18,745 BOE per day. Overall production volumes were up modestly from Q2 2020 as increases in oil production volumes were offset by decreases in natural gas and NGLs. We saw increased activity in Western Canada during the quarter as compared to Q2 and on Prairie Sky lands where we had 44 wells spud. These wells were primarily oil wells in the Viking and the Clearwater. Oil royalty production volumes totaled 6,572 barrels per day, a 9% increase from Q2 2020 as third-party operators started to bring on previously shut-in production throughout the quarter. Natural gas volumes totaled $58.2 million a day in the quarter and were down due to declines and reduced solution gas volumes from shut-in oil production. Natural gas royalty revenue totaled $8.7 million, up 14% from Q2 due to strong ACO pricing. NGL volumes generated an additional $4.9 million in product revenue, up 20% from Q2 due to improved benchmark pricing. During Q3, Prairie Skies production volumes included 780 BOE a day of prior period adjustments, which were 27% liquids, and included 371 BOE a day from compliance activities and an additional 409 BOE a day of other prior period adjustments related to new wells on stream and better well performance. The compliance group continues to recover missed and incorrect royalties through forensic accounting, collecting $1 million in the quarter. Prairie Sky generated $5.1 million in other revenue comprised of $1.2 million in lease rentals, $2.1 million in other income, and $1.8 million in bonus consideration on entering into 15 leasing arrangements with 15 different counterparties. Prairie Sky is a high-margin, low-cost business model. Total cash expenses during the quarter were $5.6 million on $43.5 million of revenue, resulting in an 87% cash operating margin. Cash expenses included income taxes of $1.1 million and cash administrative expenses of $3.5 million or $2.03 per BOE. Looking forward, we expect cash administrative expense per BOE to be well below $3 for 2020. During Q3 2020, Prairie Sky declared dividends of $0.06 per share or $13.4 million, resulting in a 35% payout ratio. Under the NCIB, we repurchased and canceled 8.9 million common shares for $81.8 million in the quarter. At September 30th, Prairie Sky had a working capital deficit of $66.2 million, including bank debt of $67 million, which we expect to repay in less than nine months. Since IPO, Prairie Sky has generated $1.4 billion in funds from operations, of which we have returned 96% or over $1.3 billion to shareholders in the form of dividends and share repurchases. This equates to returning over 65% of our current market capitalization to shareholders in just over six years. We will now turn it over to the moderator to proceed with the Q&A.

And thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Once again, that is star 1 if you would like to ask a question. one moment for questions. And again, ladies and gentlemen, if you'd like to ask a question, that is star one. And our first question comes from Mike Dunn from Stiefel. Your line is now open.

Oh, thank you. Good morning, everyone. I just, um, wondered, uh, I know, uh, obviously, um, you folks don't give guidance historically, um, Q3 is a busy, uh, drilling, drilling period on, on your lands, particularly in the Viking. And you see a bump in volumes in Q4, um, but with all the puts and takes of, I guess, curtailments and, uh, uh, voluntary or otherwise. And, um, Just wondering if you can talk to what you think Q4 might be shaping up for you guys on the oil side or total BOEs, maybe just in general terms relative to Q3.

Sure, Mike. Thank you for the question. No, we don't give guidance, of course, but just directionally, we do obviously still have some curtailed and shut-in oil volumes, which had been coming back at the back half of Q3. So those would represent a full quarter in Q4, as well as some of the ones that come back on. As well, obviously not a very active Viking quarter like we typically have in Q3, but there was some activity that will translate into some volumes trickling into Q4. I guess probably the most impactful one would be the most efficient play on our lands, which was we had two rigs running. through the back half of q3 on the clear water play and it's our most capital efficient like per dollar spend it's the most capital efficient play we have in the in the business and it also has the lowest base decline so speaking of q4 again we do expect some some growth on the oil volume side and then the the gas should remain fairly stable but we don't again give exact numbers on that and then into 2021 we do have some more active drilling programs that are starting to be shown to us from industry. So I think we should see an improvement in 2021 in terms of activity. And of course, the last piece I'll talk about is obviously our business is based on two things and the sustainability of that is the declines and then the capital spent. So just one comment on the declines. Our declines have gone down from on the oil side in the high 20s to the low 20s or in the range of 20% and gases in the mid to low teens. So because our lower base declines as a company, we have less capital required to keep those production volumes flat. And then the last piece to that is the people who are drilling right now are the most typically drilling their best prospects and the most capital efficient producers with the best opportunity set. So the capital we are seeing spent is very efficient. So it should require less capital to maintain production or potentially grow production in the future. So hopefully that answers your question.

Thanks, Andrew. Yeah, that helps. That's all for me.

Thank you. And again, ladies and gentlemen, that's star one if you'd like to ask a question. Our next question comes from Mark McLennan from Alberta Energy. Your line is now open.

Hi there. If you could provide any color around the use of the bank debt to fund the NCIB, is that something you can see yourself doing more in the future, or is this more of just taking advantage of one-time dislocations?

Yeah, that's a good question, Mark. And I think, you know, the NCIP has also always been kind of a pillar of our return strategy to shareholders. And we're an interesting business because we generate a lot of cash and we don't spend any. So in order to return shareholders, we have three ways. One is through acquisitions. Number two is through, obviously, dividends in which we paid in the range of $1.2 billion in dividends. And the third is through buybacks. And just given where our shares trade, which we think is way below the intrinsic value of the business. It's a great way, we think, to enhance the compounding potential of this business. We're currently an 8% free cash flow yield. And we think we have a terminal growth rate somewhere in the range of 3% to 5% over the long term. So we just think it's a great way to take advantage, obviously, of the dislocation in price versus intrinsic value. But also, over the long term, it is a way to return capital to shareholders. It's not just something we do for a short period of time. It's been something we've been doing for years.

I agree. Thanks so much.

Have a good day. Thank you. And I'm showing no further questions. I would now like to turn the call back over to Andrew Phillips for further remarks.

Thank you, everyone, for taking the time to dial into our call, and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.