PrairieSky Royalty Ltd.

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

Thank you very much, Natalia, and good morning, everyone, and thank you for dialing in to the Prairie Sky Royalty year-end 2020 earnings call. On the call from PSK are Cam Proctor, COO, Pam Cazale, CFO, and myself, Andrew Phillips. I will provide an operational update and then turn the call over to Pam to walk through the financials. 2020 was an active year for the Prairie Sky team. We canceled 9.8 million shares for $91 million and actively leased undeveloped lands, including 25 new leases in Q4 with 22 distinct counterparties for just $100 million in bonus consideration. We expect leasing activity to improve in 2021 as commodity prices have normalized. The compliance team was very active and brought in $5.8 million over 2020, but more importantly, brought back quality lands into our inventory. This will add to the leasing opportunities for the company over the next five years. We have had numerous inquiries to the Duvernay shale land that are expiring in early 2022, where there have been a series of impressive discoveries. This highlights the optionality of owning sea tidal lands. Numerous polymer and water floods have been initiated across prairie site lands during 2020. This will increase the recovery factors of older oil pools on our land and decrease the base decline of our assets, enhancing the sustainability of our business. The lower base declines that we are projecting in 2021 and 2022 will mean that less capital is required to offset the declines on our land, allowing for growth in the asset over the next three to five years. The ultra-efficient clearwater drilling, which declines at a lower rate than the fracked horizontals, will also aid in our sustainability. The Viking oil play, with high net back light oil, quick individual well pales, and short cycle times will typically be one of the first places to see increased activity with higher oil pricing. Numerous water floods in this zone have extended the life of existing pools on our royalty land. Prairie Sky has over 20 years of economic development drilling inventory on display at current prices and activity levels. The Board of Directors has approved a dividend increase of 8%. This represents a cash outlay of $58 million annually, or $0.065 paid quarterly. This is $2.6 million less than it would have been last year, as we have approximately 10 million fewer shares outstanding. This continued low payout ratio will allow the company to further compound the business with buybacks and accretive acquisitions and allow us to be a leading dividend growth company over the next three, five, and ten-year period. Subsequent to year end, Prairie Sky entered into a definitive agreement to acquire 650 royalty barrels per day 640,000 net acres of royalty lands, including 170,000 acres of seed mineral title, and an extensive seismic database for cash consideration of $45 million. Management anticipates that we can grow this asset over the next 10 years through active leasing and management. This is what we do well. In addition to this, we have completed numerous smaller acquisitions, totaling in the range of $3 million in Q4 of 2020. We continue to evaluate opportunities that will enhance the per share returns of our business. Cash administration expense for 2020 was $2.49 per barrel, the lowest since inception, and 7% below 2019 levels in spite of having lower total production levels. This is a credit to our hardworking, dedicated employees who are all shareholders of the corporation. Prairie Sky entered 2020 with 45.8 million barrels of reserves. Our reserves include only drilled wells. We produced 7.2 million barrels of these royalty reserves throughout the year, did minimal acquisitions, and entered 2021 with over 48 million barrels. Industry did an excellent and efficient job of drilling and optimizing to achieve this result for us while we spent zero capital. This is a portion of our business that is often misunderstood. Over the long term, we do not have maintenance capital. Prairie Sky received top scores from several globally recognized rating agencies, including CDP and Sustainalytics, for demonstrating outstanding performance in environmental stewardship, social responsibility, and governance, and once again achieved net zero scope one and two greenhouse gas emissions. Our ESG scores are excellent, and we also have a 98% operating margin business, unreplicable perpetual fee title land, and a long-duration cash flow stream, low to no leverage, and a large basket of call options on price, new discoveries, new technologies, and enhanced recovery. 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 for the year ended December 31st, 2020, as well as our press release issued on February 8th, 2021. Prairie Sky delivered a strong fourth quarter, generating funds from operations of 41.1 million, or 18 cents per share. Funds from operations were up 8% from the third quarter, generated primarily from royalty production revenue of 43.6 million on volumes of 19,281 VOE per day, which were 50% liquids. Oil royalty volumes increased 11% from Q3 to average 7,313 barrels a day in the quarter due to new drilling on prairie sky lands and shut-in volumes being brought back on production. Oil royalty revenue totaled $28 million, up 13% from Q3, primarily due to the increase in volumes as Edmonton PAR pricing remained relatively flat. Natural gas volumes of $58.1 million a day were flat with Q3 as new wells on stream offset natural declines. Natural gas revenue of $10 million a day increased 15% from Q3 due to increased ACO and Station 2 benchmark natural gas pricing. NGL royalty production volumes totaled 2,285 barrels a day, down 8% from Q3 due to fewer compliance recoveries. NGL volumes generated $5.6 million in revenue, up 14% from Q3 due to stronger propane and WTI benchmark pricing, offsetting lower production volumes. During Q4 2020, prairie size production volumes included 938 BOE per day of prior period adjustments, which were 48% liquids and included 128 BOE a day from compliance activities, and an additional 810 BOE a day of other prior period adjustments related to new wells on stream, shut-in production coming back on, and better well performance. The compliance group continues to recover mist and incorrect royalties from forensic accounting, collecting $800,000 in the quarter and $5.8 million for the year. This brings compliance recoveries to $63 million since IPO. Annually, price against funds from operations totaled $146.8 million, or $0.64 per share, generated primarily from oil royalty revenue of $99.2 million, natural gas royalty revenue of $35.4 million, and NGL royalty revenue of $21.6 million. Annual royalty volumes totaled $19,712 daily per day. We saw increased activity in Western Canada during the quarter compared to Q3 and on Prairie Sky lands where we had 74 well spuds, 65 oil and 9 natural gas. Oil well spuds were primarily in the Viking and the Clearwater and natural gas spuds were in the Montenegro, Cardia and Spirit River. This brings total well spuds in 2020 to 288 wells as compared to 661 wells in 2019. Growth capital spending on Prairie Sky lands totaled $476 million, $27 million net. Looking forward, Prairie Sky's 2021 annual pricing sensitivities are as follows. A $5 per barrel increase or decrease in U.S. dollar WTI would result in a $12 million increase or decrease in funds from operations. This is net of cash taxes and administrative expenses. A $0.25 per MCF increase or decrease in ACO results in a $4 million increase or decrease in funds from operations, net of taxes, and GMA. And a $0.01 change in U.S.-Canadian FX rate results in a $1.5 million change in funds from operations, net of cash taxes, and admin expenses. Per-Sci generated $3.4 million in other revenue in Q4, comprised of $1.8 million in lease rentals, $700,000 in other income, and $900,000 in bonus consideration on entering into 25 leasing arrangements with 22 different counterparties. For 2020, other revenue totaled $15.2 million, made up of $5.9 million in lease rentals, $3.5 million in other revenue, and $5.8 million in bonus consideration on entering 85 leasing transactions with 51 different counterparties. Prairie Sky anticipates other revenue in the range of $15 to $20 million in 2021, including lease rentals, bonus consideration, and other revenue. Compliance recoveries will be in addition to this total. Prairie Sky is a high margin, low cost business model. Prairie Sky generated $47 million of revenue in the quarter and had total cash expenses of $5.9 million, resulting in an 87% cash operating margin in the quarter. For the full year, the cash operating margin was 86%, with annual production and mineral taxes totaling $2.5 million, or $0.35 per BOE. Annual cash administrative expenses, totaling $18 million, or $2.49 per BOE, are lowest cash per BOE since IPO. Cash administrative expense is expected to be below $3 per BOE again in 2021. Current tax expense for the quarter totaled $1 million, bringing annual cash taxes to $2.7 million for the year. At year end, Prairie Sky had approximately $1.2 billion in tax pools available to shelter future income. In 2021, these pools will provide tax shelter of approximately $120 million. During Q4, Prairie Sky declared dividends of $0.06 per share, or $13.4 million, resulting in a 33% dividend payout ratio. Access funds from operations were used to reduce the bank debt over 35% to $42.9 million at December 31st. For the full year, Prairie Sky declared dividends of $86.1 million with a resulting payout ratio of 59% and repurchased and canceled 9.8 million common shares. Since IPO, Prairie Sky has generated $1.4 billion in funds from operations, of which we've returned 96% or over $1.1 billion to shareholders in the form of dividends and $224 million of share repurchases. We will now turn it over to the moderator to proceed with the Q&A.

Ladies and gentlemen, at this time, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. Again, that's star 1. To explore your question, press the pound key. We will pause for just a moment to compile the Q&A roster. Your first question is from the line of Jeremy McCree with Raymond James.

Hi, guys. Two questions. The first question is just how do you guys balance excess cash flow here over the next couple of years in terms of buying back shares, future dividend increases, or just building up cash for acquisitions? Just curious how you look at the different parameters and how you determine what gets more weighting. Just on that, and then the second question is just more on the M&A market. Are you guys seeing more deals come through? Are the cost of deals coming down? Can we expect more later this year? Thanks, guys.

Thanks for the question, Jeremy. Obviously, we'll have some excess cash flow on top of paying down the moderate amount of leverage we use and on top of the dividend as well. We'll have to really balance that over the year. I think When we're thinking about M&A versus buying back stock, we always just compare the two and what provides a better long-term IRR for shareholders. And last year, clearly, it was the buyback. And this year, we're hopeful we'll find continued opportunities. But when you think about that excess cash over the longer term, I think the dividend should have the ability to grow over the long term, Jeremy. And then I think, in addition, in this still challenging times, and there are still some good opportunities out there, we should see some creative M&A opportunities throughout the year. But again, without that, we still have the opportunity to buy back stock well below intrinsic value. And we'll highlight that at our investor day in May. And then the second question.

On the M&A market.

Yeah, and I think we're seeing some opportunities on the M&A market. We actually added some Clearwater lands that we haven't put in our presentation yet. We'll show those probably at Investor Day. So we're seeing some of that undeveloped land opportunity. We're moving on to other areas of the basin as you see with this acquisition. But again, we're always around and we always have a good balance sheet when these opportunities come available and we're ready to execute on them and ready to work hard on them. So we're hopeful that things come along. But if they don't, again, we've got that buyback in place.

Perfect. Thanks, Andrew.

Thanks, Jeremy.

Your next question is from the line of Jamie Kubik with CIBC.

Yeah, good morning, guys. In your opening remarks, Andrew, you talked about some of the upcoming duvernay expires. Just wondering if you might be able to enlighten us a little bit on the percentage of land that could come available in 2022 on that front.

Yeah, you bet, Jamie. And we have in the range of 200,000 acres expiring that there was a long-term eight-year lease on that we entered into at the IPO with the vendor of our original asset base. And it was the area that the vendor in Canada believed was the premium part of the Duvernay at the time. It's worked out to be actually an exceptional area. Technically, there's been a number of new discoveries from the north part in Pigeon Lake all the way down to Williston Green in 39.5 West 5th. So there's been some great results as WTI has gone over 50. The paybacks are actually starting to look pretty reasonable. And, again, it's 40-plus degree light oil with significant solution gas and a very thick pay package of shale. So we do think that there's opportunities to do some continued leasing on those lands and, more importantly, see some continued activity. There was two recent wells that were some of the top wells in all of Alberta a month ago. that were reported on our lands. And again, they're pretty, very good results and over a thousand barrel IPs for a mile and a half wells. So I think there's probably still some technological advancements that can take the play to advance the play further in terms of costs. But again, the cost of those wells that were drilled all the way from the south to the north came down pretty significantly. So hopefully that helps answer your question and happy to show you a map sometime.

Sure, that's good. Thanks for the call. I'll turn it back.

Again, to ask a question, please press star 1 on your telephone keypad. Again, that is star 1. And there are no further questions.

Great. Well, thanks very much for everyone who dialed in with the Q4 year-end conference call for Prairie Sky. And please call Pam or myself if you have any further questions.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.