PrairieSky Royalty Ltd.

Good day and thank you for standing by. Welcome to today's conference call. Prairie Sky Royalty announces their second quarter 2022 financial results. At this time, all participants are in 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Andrew Phillips, President and CEO. Please go ahead.

Good morning, everyone, and thank you for dialing into the Prairie Sky Royalty Q2 2022 earnings call. On the call from Prairie Sky are Cam Proctor, COO, Pam Cazale, CFO, and myself, Andrew Phillips. There are certain forward-looking information in my notes today, so I would ask investors to review the forward-looking statements qualifier in our press release and MD&A. Before turning the call over to Pam to walk through the financials, I will provide an operational update. Prairie Sky achieved its third consecutive quarter of strong organic production growth, realizing the benefits of an 18.5 million acre royalty footprint across the Western Canadian sedimentary basin. Investments in low F&D cost oil royalties and mineral tidal lands are the primary contributors to the strong volume growth. Clearwater volumes reach a record 1,500 BOE per day of total royalty production and will continue to grow for the remainder of the year and in future periods. Viking oil volumes also grew approximately 10% over the quarter. We expect to have over 300 Viking wells drilled on our acreage this year. Prairie Sky has over 10,000 Viking development wells that can be drilled over the next few decades on its fee title and royalty land base. On Monday, there were 206 rigs operating in the basin compared to 150 rigs in the previous year on the same day. As a reminder, Prairie Sky also saw volume growth in 2021 in a lower activity environment. Our natural gas volumes increased as new liquids or chihuahuas came on production, and solution gas associated with oil drilling contributed to growth. Natural gas revenue alone now covers the entire dividend. Activity was noted across the entire Western Canadian sedimentary basin, which has not been observed since 2014. Leasing activity remained strong, with 54 leasing arrangements entered into with over 45 different companies. This resulted in $3.8 million of bonus considerations. Year-to-date, we have entered into 106 leasing arrangements versus 67 in the first half of 2021. The advancements in multilateral drilling techniques and better drilling fluid systems has structurally changed the value of Prairie Sky's heavy oil royalty portfolio. Prairie Sky acquired the largest heavy oil fee title royalty portfolio in Canada through the acquisitions of Canadian Natural Resources royalties in 2015 and through the heritage acquisition which closed in december 2021 thick heavy oil reservoirs with low recovery factors can be exploited using these drilling techniques pioneered in the clear water and will result in decades of new drilling activity for heavy oil on prairie sky lands at no additional cost to our shareholders our unique fee title royalty model allows prairie sky to capitalize on cyclicality and counter cyclicality in the lower cycles we can use our strong balance sheet to execute on organic opportunities and in the high commodity environments, we can lease our large undeveloped land base to qualified industry participants. The Prairie Sky Realty Model provides high margins, inflation protection, and strong growth rates, which will lead to strong dividend growth in the coming years. From an ESG perspective, we have now published our most recent sustainability report, which can be found on our website. Since publishing the report, we have received an updated MSCI ESG ranking and achieved the highest possible rating of AAA. I will now turn the call over to Pam to walk through the financials.

Thank you, Andrew. Good morning, everyone. As Andrew mentioned, there is certain forward-looking information in the notes today, so I would remind investors to review the forward-looking statements qualifier in our press release in MD&A for Q2 2022. This was Prairie Sky's third quarter, consecutive quarter, of organic royalty production growth and a record quarter for oil production. Production growth and strong commodity pricing for oils Oil, NGLs, and natural gas combined to generate record quarterly funds from operations of $159.6 million, or $0.67 per share, more than double Q2 of last year and 52% above Q1 2022. Royalty production totaled 25,992 BOE per day, which was 58% liquid, and generated $190.2 million in royalty production revenue, the highest quarter in our history. Prairie Sky's oil royalty production grew to 12,220 barrels per day in Q2, which was up over 1,000 barrels per day compared to Q1, and over 5,192 barrels per day over Q2 2021. Backing out all acquisitions, Prairie Sky's oil royalty production grew organically 9% over the first quarter and 33% over Q2 2021. Prairie Sky anticipated the increase in royalty production given our active leasing program and the number of spuds across our acreage in late 2021 and first half of 2022. Oil royalty revenues grew to $135.6 million in the quarter. Natural gas royalty volumes averaged $66 million a day, up 9% over both Q1 2022 and Q2 2021. Volumes included $1.9 million a day from the acquisition closed in the quarter, well as the return of one million a day of volumes that were shut in due to cold weather in q1 with remaining incremental volumes from new wells on stream and workovers and re-completions with strong equal pricing natural gas royalty revenue totaled 36.8 million dollars ngl royalty volumes averaged 2 772 barrels per day which was up six percent over both q1 2022 and q2 2021 and included 50 barrels a day of incremental production from the acquisition closed in the quarter, and incremental volumes from new, liquids-rich natural gas wells that came on production. NGL royalty revenue totaled $17.8 million in Q2, driven by strong benchmark pricing. There were 1,670 BOE per day of prior credit adjustments in the quarter related to new wells on stream as a result of a very active first quarter of drilling, with an additional 232 BOE per day related to compliance activity Overall, PPAs were 60% liquids. The compliance group recovered missed and incorrect royalties through forensic accounting, collecting $1.6 million in the quarter. Compliance revenue since IPO now totals over $70 million. There were 122 wells spud in Q2, which were 94% oil. The Viking was the most active play with 42 wells spud, followed by the Manville with 19 heavy and light oil wells and the Clearwater with 14 wells. Additional oil focused activity took place across the portfolio, including wells spud in the Cardium, Duvernay, Mississippian, and six wells at Lindbergh. There were also seven natural gas wells spud, including wells in the Montanese, Spirit River, and Manville. Although activity in the corridor was moderated by seasonal breakup, the number of wells drilled was up 37% from 89 wells spud in Q2 2021. Other revenue included $7.9 million and included $2.9 million in lease rentals, $1.2 million of other income, including $900,000 of potash revenue, and $3.8 million of bonus consideration for entering into 54 new leases with 45 different counterparties. New leasing is a leading indicator of field activity, and we anticipate near-term drilling on many of these new leases. Given the level of leasing activity, we now expect other revenues in the range of $25 to $30 million in 2022. This is up from our original estimate of $20 million. Compliance recoveries will be incremental to this amount. Cash administrative expenses total $5.2 million, or $2.20 per BOE, in Q2. We anticipate cash administrative expense to be well below $3 per BOE for the full year. At June 30, 2022, Prairie Sky's total outstanding dilutives were 0.6%. Prairie Sky recorded a current tax expense of $27 million in Q2 due to our record royalty production revenue. Entering the year, Prairie Sky had $1.75 billion of tax pools to offset future taxable income. So in 2022, the first $170 million of cash flow is tax-free, with the remainder taxed at our statutory tax rate of approximately 23.5%. During the quarter, Prairie Sky declared dividends of $28.7 million, or 12 cents per share, with the resulting payout ratio of 18%. Excess funds from operations above the dividend and our $15.6 million of acquisitions was used to repay bank debt. Net debt at June 30th was $453.9 million. Prairie Sky has reduced net debt by 29% or $181.1 million in the first six months of 2022. Since IPO, Prairie Sky has generated $1.9 billion in funds from operations and returned $1.5 billion to shareholders through dividends and buybacks. We will now turn it over to the moderator to proceed with the Q&A.