PrairieSky Royalty Ltd.

Ladies and gentlemen, thank you for standing by and welcome to the Prairie Sky Royalty announces their first quarter 2021 financial results conference call. At this time, all participants are in a listen only mode. After the speaker presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star one on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Andrew Phillips, President and CEO of Please go ahead. Thank you and good morning, and thank you for dialing into the Q1 2021 Prairie Sky Realty earnings call. On the line from Prairie Sky are Cam Proctor, COO, Pam Fussell, CFO, and myself, Andrew Phillips. Q1 of 2021 saw roughly flat production from the fourth quarter, but a 20% increase in funds from operations due to strong pricing in our unhedged royalty production. The second quarter will see the benefit of a full quarter of contribution from our recently completed deep-based and royalty acquisition. The PSK team is hard at work integrating the asset package, conducting compliance reviews, and working towards new lease narrations with producers. Given the strong economics of a variety of plates on these lands, Prairie Sky Management believes it can grow this asset in the mid-single digits over the next 10 years with no capital invested. The compliance group generated just under $1 million in revenue in the quarter, as well as generating new lease bonus as a result of their compliance initiatives. Lease insurance bonus sold $1.4 million as Prairie Sky entered into 33 new leases with 29 counterparties. Leasing in the first quarter was dominated by the Viking Formation in Alberta and Western Saskatchewan. Cost control, which has been a key focus since our IPO, continues to make progress. Q1 cash G&A of $3.27 million. per barrel is $0.20 per barrel lower than Q1 of 2020. Q1 is when management and staff received their share base compensation, which sold $700,000 for the year. Cash G&A should be well below $3 per barrel again this year. Activity levels in the base can continue to improve off the multi-decade low experienced last year. National gas prices have improved incentivizing natural gas activity and improving the economics of oil and liquid search plays as the solution gas adds more cash flow. With the backwardation of the oil curve and narrow differentials, we anticipate producers will look to drill a short cycle time quick payload oil plays. The Viking remains at the top of the pile for light oil plays, so stronger activity should resume after breakup in this play. Plague expansions and new discoveries in our south Clearwater acreage have added to our already sizable inventory of economic locations in the back half of 2021. We now have over 1 million acres of long-tenured land on this past growing clay. We also have two polymer pilot floods on our Clearwater lands, which should positively impact recovery factors and duration at no additional cost to our royalty owners. As the year progresses, we will continue to cancel shares, lease land, evaluate acquisition opportunities, and bring our leverage down to zero. In May, we will once again apply to the TSX for approval of a normal course issuer bid. We plan to renew the NCIB to repurchase up to 15.2 million shares. We look forward to our investor day and our third asset handbook release on May 18th of this year. We will highlight key plays, tabulate the value of all undeveloped locations, show investors our return on equity and how it should improve over time, as well as an expected range of outcomes for your equity investment in Prairie Sky. Employees and management continue to invest our after-tax dollars in Prairie Sky that we feel trade well below the intrinsic value of our business. I will now turn the call over to Pam to walk through the financials.

Thank you, Andrew. Good morning, everyone. During the first quarter, Prairie Sky generated funds from operations of $48.8 million, or $0.22 per share. Cash flow was generated primarily from royalty production revenue of $56.7 million, on average production volumes of 19,380 BOE per day. In late February, we closed our previously announced deep basin royalty acquisition for cash consideration of $45 million before adjustments. This acquisition consolidates into Prairie Sky 640,000 acres of royalty lands, including 170,000 acres of seed mineral titles, and adds approximately 650 BOE per day of production, which we will see the full impact of in Q2. Q1 2021 oil royalty revenue of $36.5 million increased 30% over Q4 due to strong WTI benchmark pricing. Revenue was generated on oil volumes of 7,278 barrels per day, which were flat with Q4 as new wells brought on stream and one month of production from the acquisition offset natural declines. Natural gas revenue of $12.7 million was 27% above Q4 due to strong ACO and Station 2 benchmark pricing, which more than offset the modest decline in natural gas volumes to $57.6 million a day. Natural gas volumes were negatively impacted by seasonal cold weather freeze-offs, which offset incremental production for new wells on stream and the acquisition. NGL revenue increased 34% from Q4 due to strong benchmark pricing and a 9% increase in royalty production volumes to 2,502 barrels a day. NGL volumes increased due to production from new well-worn streams and incremental volumes from the acquisition. Prairie Sky's production volumes in the quarter included 1,167 BOE per day of prior period adjustments, which were 50% liquids and included 362 BOE a day, from compliance activities and an additional 805 BOE per 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 $800,000 in the quarter. There were 100 wells spent in the quarter, of which 86 were oil. Oil activity included 46 Viking wells, 13 Clearwater wells, and 8 Cardian wells. There were also 14 natural gas wells, including nine Montney wells. Although drilling activity improved in the quarter compared to the back half of 2020, it remained significantly below levels we saw before the onset of COVID-19. Other revenue totaled $1.8 million, including $700,000 in lease rentals, $700,000 in other income, and $1.4 million in bonus considerations on entering into 33 leasing arrangements with 29 different counterparties. Cash administrative expenses total $5.7 million or $3.27 per BOE. Cash administrative expense was 19% lower than Q1 2020 and included the annual long-term incentive expense of $700,000. This is a 59% reduction compared to the incentive payments in January 2020. During Q1, Prairie Sky declared dividends of $14.5 million with the resulting payout ratio of 30%. with remaining cash flow allocated to funding the Deep Basin acquisition. At March 31st, Prairie Sky's bank debt was $61 million. Since the IPO, Prairie Sky has generated approximately $1.5 billion in funds from operations and returned $1.3 billion to shareholders through dividends and buybacks. We will now turn it over to the moderator to proceed with the Q&A.

Thank you. As a reminder, if you ask a question, you'll need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Jeremy McCree with Raymond James. He may proceed with your question.

Hi, guys. I was wondering, two questions. If you could give a bit of a sneak preview of your asset playbook and some of the biggest things that we'll probably see this time around versus a couple years ago. And then just with the acquisition and the pre-boughts coming back, where current production roughly is assuming like a thousand BOE in compliance, you know, BOEs from the debate and the acquisition.

Yeah, thanks for the question, Jeremy. Investor Day will be similar to the previous two where we're going to obviously put out our new asset handbook and kind of detail the intrinsic value of the business with just what we know currently, currently economic locations and just show investors why we like to cancel shares because of where we trade relative to intrinsic value. We'll also kind of focus on returns, our return on equity, return on capital employed, which are, which parallel each other because of our low debt levels. and really highlight some new plays, new opportunities and play extensions that industry has developed over time. And I think the most powerful thing is even in this challenging two-year period, specifically last year, we've had our approved reserves stay roughly flat with no acquisitions with other people's capital. So that kind of just shows why you want to own real estate over the long term. It's all about capital available for free cash flow. And then on the current production level, obviously we don't give any guidance, and we get trailing data as well, but I will say that a lot of the big winter programs on Clearwater would have kind of partial data for the first quarter. We still have 475 barrels of shut-in or curtailed oil production, and we're working through a lot of those with producers, and I think some of it will be permanently impaired just because the cost of re-entering and re-completing or putting those wells back on production might be higher than the net present value of the remaining reserves and some of the later in life wells. But I do think some of that, at least half of that should come back on over the next two quarters. So I think, you know, and then on the gas side, you obviously had the freeze-offs. We had a very, very cold February and our shallow gas portfolio with the 20 to 30 barrels per million season freezing issues at the wellhead. So I think you'll... Should be slightly stronger production ahead, but I hate to give numbers around that Yeah, okay, thank you Thanks the question Thank you our next question comes from Aaron Wilkoski with TD Securities and we proceed with your question Thanks.

Good morning. I guess my question is around the NCIB and as we look ahead, how do you think about the NCIB? Do you see Prairie Sky using it as a tactical tool like in Q3, or do you see a return to a more regular, systematic repurchase on a quarterly basis?

Yeah, it's a good question, Aaron, and thanks for the question. I think we'll implement a regular program with the option of being tactical in the back half of the year. And I think the reason we structure it that way is we can kind of just chip away the share count see how the year progresses. Obviously, we'll have the debt repaid in a short amount of time and be down to debt zero and then have excess cash to continue to cancel shares with. But I think we just want to see how the M&A market shapes up and if there's quality assets that make sense that are accretive short, medium, and long-term, then potentially we'll have to take precedence over the MCIB. But whatever creates the most value on a per share basis to shareholders is how we'll decide that. And part of the reason we don't give any guidance or outlook on our tactical approach is because we wouldn't want people front-running the trade, I guess. So hopefully that answers your question.

Hey, Ted. If I could ask a follow-up question on the M&E front. Sure. I'm curious if you're seeing any emerging opportunities on the carbon capture and storage initiatives. And I guess, do you see Polaris Sky ultimately participating in this space?

Yeah, that's actually, you know, that's a really, you kind of gave a preview to investor day there. We've actually got a big part of the presentation to talk about carbon capture and underground storage, but as well carbon sequestration into miscible oil reservoirs where there's a lot of remaining pore space and also recover the remaining light oil reserves. Our first deal was done with Enhance. They're on one of our first pools it looks like it's starting to show first oil and it looks pretty successful and obviously taking a lot of cars off the road and there's a lot of this potential in central Alberta where we have our checkerboard acreage and if you look at that chart I always like to show which shows the duration of our asset in our presentation you can see that our production was almost triple what it is today from an oil perspective and it's all the old reefs and what's interesting is most of them still have in the range of a third of the light oil remaining. And there was just no real way with technology in the past to get those last light oil barrels out. But now with carbon dioxide floods, you could get some of these reservoirs back up to peak production. So we think it'll be a big part of our royalty production 10 years from now. And it's light oil. It's all infrastructure connected. And it'll be some of the lowest scope one, two, and three oil produced in the world. So I think It is something we're focused on at Investor Day. We're going to show 100 different reservoirs, 87, I believe, of which are going to be emittable, so just for carbon dumps, the remainder of which have some potential for enhanced oil recovery. But that will be a significant section of our asset playbook.

Interesting. Thank you very much, Rich.

Thanks for the question. Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Andrew Phillips for any further remarks. Thank you, everybody, for dialing in. Thank you very much to all our shareholders for their support and our employees for their hard work. And please call Pam or myself if you have any follow-up questions. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating.