PrairieSky Royalty Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to Prairie Sky Royalty announces their first quarter 2024 financial results. At this time, all participants 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 will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Andrew Phillips, President and Chief Executive Officer. Please go ahead.

Thank you very much, Operator, and good morning, everyone. Thank you for dialing into the Prairie Sky Q1 2024 conference call. On the call from Prairie Sky are Pam Cazell, Dan Bertram, Mike Murphy, and myself, Andrew Phillips. Before we begin, there is certain forward-looking information in my commentary today, so I would ask investors to review the forward-looking statements qualifier in our press release in MDA. First quarter of 2024 saw Prairie Sky receive 13,142 barrels of royalty oil volumes, a record for the company. Natural gas and NGL volumes remained steady. 50 new leases with 42 counterparties marked another strong quarter for leasing and generated $4.2 million in bonus revenue. Two notable developments took place over the first quarter. Firstly, our largest royalty payer added two new polymer and water floods and commercialized and went to the development of a secondary recovery in its two core areas. The significance of this from a royalty owner is a potential doubling of the recoverable oil per section at no additional capital for our business. These are now in the money call options. Secondly, new discoveries in a variety of Manville heavy oil stack zones grew our inventory of royalty development wells. For context, from 1994 to 2014, approximately 1,500 cold flow heavy wells were drilled per year. This kept production steady around 350,000 barrels per day. From 2014 to today, less than 250 wells per year were drilled, and production dropped to 150,000 barrels per day. Given the stack pay, lack of bottom water, individual well economics, and total oil in place, the area should be able to grow back to its previous highs and potentially surpass them. Prairie Sky shareholders are now positioned with the largest royalty position in the region. Our 2025 Investor Day will provide a deep dive into this play and also highlight all of the active water and polymer floods across our asset base. These are important assets as they lower our base declines and enhance the durability of our asset base. I will now pass the call to Pam to walk through the financial results.

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 the three-month end of March 31, 2024. Prairie Sky delivered another record quarter of oil royalty production, which averaged 13,142 barrels per day. This represents an 8% increase in oil royalty volumes over Q1 2023 and demonstrates a strong level of activity across our land base. NGL royalty volumes averaged 2,535 barrels per day, and natural gas averaged 62.1 million a day, bringing total royalty volumes to 26,027 BOE per day, up 5% over Q1 2023. We did see lower spuds in the quarter as compared to the prior year. Based on licensing, commodity pricing, and current third-party capital budgets in the Manville and Clearwater, we anticipate drilling activity on our oil assets to remain robust in 2024. Oil royalty production volumes in Q2 will be negatively impacted by the unplanned outage at a third-party gas plant, which is impacting producers in the Nipissi area. The estimated net impact to Prairie Sky is 500 barrels per day. The current timing of a restart of the plant is unknown, and our key producer in the area is reviewing alternatives to bring production back online. Royalty production revenue totaled $113.2 million, which was 91% from liquids. Other revenue totaled $7.5 million in the quarter and included $4.2 million of bonus consideration from entering into 50 new leases with 42 different counterparties. Leasing was primarily focused in the DuVernay Light Oil and Manville Heavy Oil regions. Prairie Sky is forecasting other revenue in the range of $25 to $30 million in 2024, including lease rentals, bonus consideration, and other revenue. Cash administrative expenses. Administrative expenses in the quarter included annual employee, officer, and director payments for the year. As mentioned on our year-end call, we expect 2024 cash administrative expenses to be in the range of $35 to $40 million due to strong stock performance impacting share-based compensation. With retirements from our Board of Directors this year and last year, we anticipate certain payments under the Deferred Share Unit Plan, which are incorporated into our estimates. Directors that retired at the AGM yesterday have until December 15, 2025, to redeem their DSUs. Current income tax expense totaled $14.7 million in Q1. Entering into 2024, Prairie Sky has $1.4 billion of tax pools to offset future taxable income, deductible at 10% per year. For 2024, that means the first $140 million of pre-tax cash flow is tax-free, with incremental cash flow tax at 23.6%. During the quarter, Prairie Sky's funds from operations totaled $83 million, and we declared dividends of $59.7 million, or $0.25 per share. Prairie Sky's net debt at March 31, 2024, totaled $208.3 million, a decrease of 6% from December 31, 2023, when net debt totaled $222.1 million. We will now turn it over to the moderator to proceed with the Q&A.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from Patrick O'Rourke with ATB Capital Markets. Your line is open.

Okay, guys. Good morning. I'm just curious, in terms of the lease bonus payments that you guys are seeing here, you do provide the number that you sign on a quarterly basis and the number of offset operators. I'm wondering if you could provide maybe a little bit more color on that, in terms of that makeup. And then the second element to that would be, of course, how the actual per acre sort of valuations of those have been trending over the last couple of years.

You bet. No, thanks for the question, Patrick. And yeah, leasing's been the highest in the company's history over the last two years. And it does vary from quarter to quarter and can be lumpy. Like we saw in Q4, we had a very large lease issuance bonus, and that was longer-term leases for the Duvernay shale play in the West Shale Basin. And then this quarter, we're kind of back to the more run rate or what you can expect quarter to quarter from the company. One of the interesting things, just to talk about the composition of it a little bit, is most of the leasing we've done over the last two years, operators had near-term plans for the land, so there were shorter-term leases. And in a lot of cases, a year or two goes by fairly quickly, so we've been doing a lot of re-leasing of the same lands just a couple years later. And the price on a per acre basis, to answer the second part of your question, has been trending slightly higher along with the offsetting crown lands.

Okay, thanks. And then maybe just to switch gears, and I know you guys get poked on this almost every quarter, but in terms of the return of capital policy, One thing that struck me yesterday at the AGM was that you, you know, obviously you've held the Texas Pacific Land Trust as sort of the gold standard in the energy royalty business and that a lot of their return of capital policy has been focused on the NCIB. You know, I look at it, we model it out, you're probably hitting, you know, net debt payout mid-year 2025 on our numbers and you guys can corroborate that if you will. But, you know, how are you thinking about the potential to execute on an NCIB here? Would it happen ahead of hitting that payout, or do you have to sort of fully get to zero debt before we'll see any true NCIB execution?

Yeah, and just to talk a little bit about, thanks for the question, and I think on the return of capital piece, we obviously have the dividend, which is $239 million annually. So any excess cash flow right now is just going towards paying off the debt. I think if you look at how we did it historically, we weren't seeing good M&A opportunities in 2017, 2018, 2019. For the most part, we saw better value in buying back stock, better long-term returns for shareholders and buying appraised guy share. And we're unique in that we always have that option. So we bought back about $40 million a year of stock each consecutive year. And then during COVID, when things got dislocated, we bought back $100 million in August of 2020. And right now, our cost of debt's gone up materially. We borrowed to execute on the heritage acquisition, which we closed December 2021. We borrowed $728 million. That's been repaid for the most part. As you mentioned, it'll be somewhere in the middle of next year where it's completely repaid. And so as we're moving towards that, we've got to start thinking about the excess cash. And I think there is an opportunity to even build some cash in this environment. I think you just want to have those options going forward to either make a great acquisition, which has a high return on investment capital, or conversely, buy back more shares. And I think if you look at where the business sits today for the next 10 years versus the last 10, we IPO'd with 5.2 million acres and 130 million shares. Today we have 239 million shares and we have 18.3 million acres and some of the highest quality acreage, some of the faster growing parts of the basin are You don't want to dilute that great asset base. So I think it'll definitely be a return to shareholders. We won't have a defined plan. We'll just do it. We'll do what makes the most sense when we sit as a board and discuss it. But the buybacks will start to come into play sometime in the next year or so. We'll start to think about how to implement those. So sorry, that's probably too long an answer for you, but.

I think you spoke for about as long as I framed the question for, so that was perfect. Thanks.

Thanks for the questions, Patrick.

Please stand by for our next question. Our next question comes from Jeremy McCree with BMO. Your line is open.

Hi, Andrew. I wonder if you can describe the type of wells that are coming on now, just with the amount of wells that were split this quarter versus where we were Q1 of 2023. Are the well IP rates getting higher? Are you seeing less decline with the more conventional type of wells? Are they more oilier? Just any kind of indication of how the wells this quarter are comparing to wells that we saw in Q1 of 2023.

Yeah, it's a good question. And the composition of the wells in terms of how many more conventional wells versus multi-stage crack wells is reasonably similar. I think the one difference is every year it seems there's more refinements in production techniques and drilling techniques and better fluid systems. And so we are seeing slightly better IP90s from the wells. And in addition, a lot of these wells now are getting drilled in already water flood areas. So the first year declines on those are a little more muted. So I think that's kind of benefiting the company a little bit from the total production standpoint.

Okay. And then I think just like, you know, a question we always kind of want to ask on terms of M&A, is there opportunity out there? Is it anything more interesting, less interesting? Just maybe just a quick comment on that.

Sure. Yeah. And I mean, we're, We actually had a good slide at the AGM that just showed when our – over the last – we've been public for 10 years and when we did our M&A. And on the y-axis was WTI price. And it was typically $40 to $60 crude when we executed on our acquisitions. That's usually when we went in with net cash. I think today you're in an environment where you're $110 Canadian light net. narrow heavy oil differentials. There's a lot of capital sloshing around. The businesses are typically flush with cash. So I think it's more of an environment where there's less quality opportunities that exist out there. Okay. Thanks, Andrew. Thanks for your question.

I show no further questions at this time. I would now like to hand the call back to Andrew for closing remarks.

Well, thank you very much, everyone, for dialing into the Prairie Sky Earnings call, and I hope everybody has a great Q2.

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