PrairieSky Royalty Ltd.

Welcome to Prairie Sky Rural LTD Third Quarter 2024 Financial Results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a -and-answer session. To ask a question during the session, you would 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, Michelle, and good morning, everyone. And thank you for dialing in to the Q3 2024 Prairie Sky Earnings Call. On the call from PSK are Pam Cazelle, CFO, Dan Bertram, Chief Commercial Officer, and Michael Murphy, VP Capital Markets, as well as myself. 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, MDNA. The third quarter was a very busy one for the team of Prairie Sky. Our oil volumes grew organically by 5% over Q3 2023. -to-date, 6% organic oil growth has been achieved. Strong licensing and 247 well spuds on PSK acreage are representative of the strong economics operators are seeing on our acreage in the current commodity environment. The strong spud levels this quarter should continue our momentum in oil growth over the quarter. The oil levels should also be similar to this year, absent any major changes in pricing. New leasing activity remains robust with 54 new leases signed over the quarter with 41 different counterparties. Leasing was active across most major oil plays in the quarter. The compliance department was active, bringing back land to the company and collecting $2.2 million in revenue. Water flood activity across the Clearwater has continued to show positive response, lowering our declines and ultimately increasing recovery factors in this play. Continued refinement of both drilling techniques as well as fluid systems has not only improved economics and recovery factors but also opened up potential on a number of new zones within the Manville stack that were previously uneconomic. I'll now pass the call over to Mike for further comments.

Yeah, thanks Andrew. Well spuds were up quarter over quarter coming out of spring breakup in Q2. We continue to see growth augmented by a growing proportion of higher productivity multilateral wells. In the quarter multilaterals accounted for approximately 38% of drilling activity on Prairie Skylands, which is up from 33% in the third quarter of 2023. Year to date multilaterals have accounted for 35% of total spuds, which compares to 28% over the same period last year. Clearwater activity remains strong with estimated oil production from the play greater than 2000 barrels per day in Q3-24 and year to date volumes up 19% year over year. The Manville stack in the Cold Lake region remained very active with 20 multilaterals drilled in the quarter, which is up from 12 drilled Q3-23. And finally in the Duvernay, recent oil wells brought on in the Pembina area have increased Q3-24 production to over 700 BOE per day from the Duvernay, which represents 76% growth year over year. We look forward to active upcoming capital programs in the West Shale Duvernay from our counterparties, which we expect to drive light oil growth in 2025 and beyond. With that, I'll pass the call over to Pam to discuss the financials.

Thank you, Mike. Good morning, everyone. Prairie Sky's total production volumes averaged 24,422 BOE per day in the quarter, with oil oil volume of 12,733 barrels per day, up 5% over Q3-2023 and up 6% year to date. As Mike mentioned, we continue to see growth in the Clearwater and Manville stack plays, and these two plays now represent over 20% of our oil production. We did see a decline in natural gas and NGL volumes in the quarter in response to weak natural gas pricing. We estimate approximately 2 million a day of natural gas and 80 barrels per day of NGLs have been shut in. The price that these volumes come back on is yet to be determined. This quarter, oil generated 90% of our royalty revenue due to the combination of strong volumes in price. Ruralty production revenue totalled $111.5 million in Q3, with other revenues generating an incremental $5.8 million. These bonus considerations totaled $4.1 million, bringing year to date bonus consideration to $15 million, which was our annual budget, so we're very pleased with the level of activity year to date. Funds from operations totaled $92.4 million, or $0.39 per share in the quarter, slightly below Q3-2023. Prairie Sky declared a dividend of $59.7 million, or $0.25 per share in the quarter, with the resulting payout ratio of 65%. At September 30th, Prairie Sky's net debt totalled $149.6 million, a decrease of 33% per year end. We'll 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 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. And our first question comes from Patrick O'Rourke with ATB Capital Market. Your line is open.

Yeah, good morning, guys, and thank you for taking my question. I guess just to start off with respect to the leasing activity in the quarter, can you speak to any trends or, you know, is there anything potentially you're seeing different underneath the HUD with the leasing activity this quarter?

Yeah, thanks for the first question there, Patrick. Good morning. The leasing was pretty broadly spread all the way. We actually did some leasing in Manitoba for light oil, but also Duvernay Lease in East Shale Basin, as well as a variety of Manville leases across Alberta and some in Saskatchewan. In particular, in Saskatchewan, there's some new ideas getting tested there. So, again, in the kind of heavy old Manville region. So it's pretty broadly spread to answer your question on the leasing.

Okay, thank you. And then just with respect to volumes that are under secondary recovery, water flood, etc., if you could provide a little bit of an update in the trends there.

Yeah, I think over 25% of our clear water oil is under secondary recovery. It's probably actually a higher number than that now, but we just we get a trailing update from the operator there. I think an increasing number of those barrels will be under water or polymer flood by the end of next year. And I think just the great results we've seen on the nine different patterns that they've tested and piloted, they've shown great results. And so I think we'll continue to see that play expand on the water flood side. I think it's a really important piece for us, just given the amount of production it represents in our corporate volumes and the low declines associated with it. So that's a big positive for us. And I think over the during our investor day in May, we're going to do a big rollout of our water and polymer floods and why they're important for the business. Okay, thank you very much. Thanks for your question.

And the next question comes from Adam Schwartz with Black Bear Value Partners. Your line is open.

Thank you. Good morning. Thanks for taking my question.

Good morning.

I had a couple, so I'll try and keep them somewhat brief. So I was wondering if you can comment on medium to long term, so more than a few years from now, what your expectations are for natural gas volumes and pricing as the US LNG and Canadian takeaway improves and how much you incorporate that into your projected cash flows and also how you think about looking out a few years, three, five plus years away. What contribution when you think about like your cash flows, how much could be coming potentially from natural gas versus where it is today?

Yeah, no, thanks for that question, Adam. And I know, you know, natural gas represented only 2% of our volumes here this quarter, but we have a massive natural gas resource base. We've actually expanded it in the Montney. We have a very, very significant natural gas resource base in the Duvernay as well in the West Shale. And again, a lot of conventional natural gas assets across Western Canada, TCS of it. So, you know, we don't know exactly when pricing will improve, but in terms of the trajectory of the volumes, what we saw in 2022 when we had a good price signal, we saw pretty good supply response. We had 5% year over year growth in our natural gas volumes. I think, you know, in a more normalized price environment, we could get kind of low to mid single digit growth in our natural gas volumes. But again, that would require us to know exactly what pricing is going to be. But in this environment, obviously, you're going to see some shut ins, which we have, as well as less active natural gas drilling. Right now, one third of our natural gas volumes are actually associated gas. So, they're more driven by the economics of the oil. And so that part, that one third of our asset base likely grows over the next year, just because it's mostly driven by the oil economics. So, hopefully, that helps answer your question. Again, it's the nice thing about having key mineral title is it lasts forever. You own it. And so, again, whenever that pricing occurs, we'll capture the value of that. And it will be someday a significant part of our cash flows.

And do you think that, like, is there a house of you? I know predictions, I'm not asking for prediction more sort of your kind of overall inkling as to, you know, do you think that Canadian natural gas will eventually converge with US and then kind of overall, do you think North American natural gas will converge with the rest of the world just as the takeaway capacity getting kind of off-continent improves? Like, how do you think about that with your existing assets? And then do you incorporate any of those house of yous when you're looking at potential acquisitions?

Yeah, and I think it's a good question. And of course, I don't have the perfect answer to it. But I do think over time, when you see these differentials and pricing, people take advantage of it. And that's one of the reasons why LNG is being built out in Canada. You have petrochemical plants being built out. We're now exporting a lot of propane. And again, I think over time, people will find ways to take advantage of these low prices in both North America and Canada at the end of the pipe. So I do think those will converge over longer periods of time. Don't know the exact timing of it. And the fortunate thing with owning a long duration asset is you don't have to be right on timing. You just have to own it. So we do continue to actually add resource on the natural gas side when we can buy good optionality that has long duration. And we'll continue to do that over time. And we will capture that value when things improve. But don't know the exact time.

Yeah, no, I mean, I appreciate the answer. So it's fair to say when someone's asking about the company to say a lot of natural gas is incorporated right now or in the cash flows, but you have a kind of infinite expiration call option on improved economics. Precisely,

precisely. Yeah, it's call options that don't expire. And we do love our natural gas resource base. And the Canadian operators have become extremely efficient at exploiting the resource. We are excited when we start to see pricing improve that we can see some growth in our opportunities. And I think one of the things I've said, if gas was equivalent to oil over the last 10 years, we would be a 70% natural gas company. We'd have the same oil volumes, but we'd be 70% natural gas. So just to give an idea of the actual resource we own, again, that would require better pricing. But we'll see in time when that happens.

Okay, thank you.

Thanks for your questions.

And our next question comes from Aaron Bilkowski with TV Cohen. Your line is open.

Thanks. Good morning. So I'm curious about your DuBernay position. I was hoping you'd be able to talk a little bit about what we might expect over the next one to five years in terms of cadence of wells being drilled. Are there any capital commitments on the lands or drilling commitments on the lands? What should we be expecting for either IP rates or IP 365 rates? What percentage of that is going to be oil? Can you talk a little bit more about the play and your expectations from it?

Yeah, you bet. Thanks for the question, Aaron. It's interesting. We actually expect some pretty meaningful growth over the next one to five years. I think for a 10-year period, the DuBernay should be somewhere between 4,000 and 6,000 net royalty barrels from 700 today. So it should be one of our largest individual producing areas. One of the important things about that play is 40-degree API crude. So it really helps to double the netback of a heavy barrel. So it'll be very important for the netbacks for the company. It also comes with a lot of associated gas. So we'll receive the NGL portion of that as well. Again, the IP 365, time will tell because we have a huge land position, over 800,000 acres, including the East Shale. And it's spread over a large geographic area. What we're seeing today is the more recent IP 90s are in the kind of ,500-plus barrel a day range. And it really depends where they're drilled. The further west they are, obviously, they get gassier. And you get up to a couple million a day of natural gas and 5, 600 barrels a day of oil. As you move east into the more volatile oil window, you start to see closer to 800 to 1,000 barrels a day and less than a million a day of gas. So it depends exactly where they're drilled. But in the fullness of time, I think, just given the ability to get the gas out, there's good egress opportunities with the Big Kira Rimby plant sitting right in the middle there. We do expect pretty good growth there, certainly with the better well results we're seeing. And again, I think, as Mike pointed out in the call earlier, we saw 70% growth this year from one single well pad. So it just shows the gearing you have to these high-rate wells with the higher royalties.

Thanks. And maybe you touched on it or you didn't, but are there capital commitments with your counterparties on this land or no?

No. The way we structured it is we've layered the bonuses in over an eight-year period. And in order to continue the lands, minimum amount of capital has to be spent. So in effect, they're not forced to spend the capital, but to the extent that they want to retain the land, they have to spend a minimum amount in the different agreements we have throughout the play. So again, the one nice thing about Mineral Title is you do have an expiry on it. So in order to maintain that asset, you do have to have some sort of continuous drilling. And I think what we saw is our very first lease was within Kana. And it seemed like a long time, but as it got closer to the end, we ended up getting all those lands back. And then we get a whole bunch of new lease issuance bonus, and we can choose more qualified operators to execute on the play. So they are, in effect, capital commitments. And if they're not executed on, we get those lands back. And that's one of the reasons why in other plays, we've gone to shorter-term leasing, just because there's a lot of demand for oil leasing right now. So if you have a year or two to get your well drilled, we're able to take those lines back in a reasonable amount of time.

That's perfect. Thank you very much,

Andrew. Thanks for your questions.

And the next question comes from Jeremy McCree with BMO. Your line is now open.

Hey, Andrew. Just a quick question. When you look at your go-forwards here for the next few years, what would be the top one, two, three growth areas? You talk about the Duvernay growing quite rapidly. What would be the next ones here? And then is there any surprise, new well results on your land that you're seeing saying, you know, this could actually be pretty big as well too, but it's not on the radar quite yet, but it could be quite meaningful here in a couple of years?

Yeah. So the top three growth areas, for sure, on the liquid side, the Duvernay is one we touched on already on this call. What's unique about that is coming from a very small, low level of production. It was about 400 barrels a day. A few quarters ago, it's now 700, but it does have the potential to be in the thousands in the next three, five, ten year period. The Clearwater is just around 2000 net relative barrels, and that's on a trajectory down to $50 oil to still grow to well over 3000 barrels a day and then be stabilized there. And then the Manville stack, obviously, I think that's an area of the basin that once produced 350,000 barrels, it's down to 150. We think it has the easy ability to get back there, and we're the largest landowner on that place. So that's one that'll be in the multi-thousand barrels a day of net relative production. A couple areas where we've seen some neat well results are kind of southern Alberta, people taking kind of more modern style fracks to the tighter Manville sands like the Basel Quartz and seeing some really good results. We've had some pretty good well results also in the Montney that we've seen that could expand that for us. And I think the longer dated one is we've done a ton of leasing to Sonovus and its predecessor, Husky, and some other operators that are smaller for small scale SAGD in Saskatchewan. So again, if one or two of those projects are built over time, we think that could provide some more long duration oil growth for the company. So when you kind of walk through all the different areas that are growing and then still we're busy every single day, almost every day we're entering into a new lease, it's really hard to find things that we can buy that make our business better that grow at that rate. So again, most other peers in our world have to buy assets at all parts of the cycle to maintain their growth. We can just lease the land. But those are the top three, the Duvernay, the Clearwater, and the Manville for sure that are kind of more near term and we're seeing them real time. Thanks, Andrew. Thanks for the question, Jeremy.

I am showing no further questions at this time. I would like to hand the call back over to Andrew for closing remarks.

Well, thank you everyone for joining our call today. If you have any further questions, please feel free to reach out to any of us during the day. Thank

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