PrairieSky Royalty Ltd.

Good day and thank you for standing by. Welcome to Prairie Sky Royalty announces their fourth quarter 2024 financial results conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised today's conference is being recorded. I would now like to hand the comments over to your speaker today. Andrew Phillips, President and CEO, please begin.

Good morning, and thank you for dialing in to the Prairie Sky 2024 Q4 and year-end earnings call. On the call from Prairie Sky are Pam Cazale, SVP and CFO, Dan Bertram, Chief Commercial Officer, Mike Murphy, Vice President, Geosciences and Capital Markets, 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 MD&A. In 2024, Prairie Sky organically grew its oil production by 6% or 7% per debt adjusted share. This is the third consecutive year of high single-digit organic growth rates in oil per debt adjusted share. $30.8 million of lease issuance bonus was received by entering into 219 leases with over 100 counterparties. Over the last 10 years, we have positioned the company in the fastest growing oil plays in the basin. the Clearwater, Manville Stack, and the West Shale DuVernay. This will allow us to continue our material organic oil royalty growth rates into the future. After production of 9.32 million barrels of royalty production over the year, which generated $380.5 million of free cash flow, the oil reserves were more than replaced, up 3.5%, and gas was down modestly due to economic impacts of lower pricing. Over the past four years, virtually all reserves were replaced organically by industries totaling over 35 million barrels while generating $1.5 billion in free cash flow over the same period of time. With decades of economic inventory, our hurdle rates for any organic opportunity are high. We successfully closed on four acquisitions totaling $73 million that will generate just under 20% IRRs and can show growth as we work on the assets. Included in these packages is one of the largest collections of GRTs, as well as the Petro Canada feed mineral title in Southeast Saskatchewan. Rig count in Western Canada is 258 this morning and was 241 rigs a year ago, so we're seeing a positive start to the year in Canada. For reference, the USA rig count is down 37 at the end of January. We are also pleased to announce a 4% increase in our dividend to $1.04 per common share to be paid quarterly. The first quarterly dividend of $0.26 per share will be effective for the March 31, 2025 record date. I will now turn the call over to Mike.

Thanks, Andrew. The fourth quarter saw a continuing trend of elevated multilateral drilling activity, with 77 well spot bringing the total number of multilateral wells drilled in 2024 to 268. Multilaterals accounted for 36% of all drilling activity in 2024, which is up from the 31% we saw in 2023. With increased productivity and recovery per well, multilaterals contributed to the strong growth in corporate oil royalty production and reserves in 2024, despite a reduction in the overall spread count year over year. Separately, our Duvernay royalty production volumes were up over 50% in 2024, driven by strong activity levels with 33 wells spud in the year. Third-party operators have recently seen a step change improvement in initial well rates in the oil window of the West Shale Basin Duvernay, where Prairie Sky has a significant fee position. We look forward to active capital programs planned in the Pembina and Williston green areas this year, which is expected to drive high net back light oil growth for Prairie Sky in 2025 and beyond. I'll now pass the call over to Pam to discuss the financials.

Thank you, Mike. Good morning, everyone. Per Sky closed out 2024 with another strong quarter, with Q4 oil royalty production averaging 13,317 barrels a day, bringing annual oil royalty production to 13,125 barrels a day, a 6% increase over 2023. We continue to see strong growth in the Clearwater and Manville stack plays, which now represent 21% of our oil royalty production, up from 17% in 2023. We did see a decline in natural gas and NGL volumes this quarter and year over year in response to weak natural gas pricing. Oil royalties represented 87% of total royalty revenue earned in both quarter and full year. Looking forward, Prairie Sky's 2025 annual pricing sensitivities, which are all net of G&A and taxes, are as follows. A $5 per barrel change in U.S. dollar WTI would increase or decrease funds from operations by approximately $23.5 million. A U.S. $1 change in the light or heavy oil differential would increase or decrease funds from operations approximately $2.75 million. A $0.25 change per MCF in ACO would increase or decrease funds from operations approximately $4 million. And a $0.01 change in the U.S. to Canadian dollar FX rate would increase or decrease funds from operations approximately $5 million. Funds from operations total $99 million or $0.41 per share in the quarter and $380.5 million or $1.59 per share for 2024, which was in line with the prior year. Prairie Sky declared dividends of $239 million, which resulted in a payout ratio of 63%. Access cash flow was allocated to the repayment of debt and acquisitions of $57.3 million. At December 31, 2024, Prairie Sky had net debt of $134.9 million. Subsequent to year-end, Prairie Sky acquired Sea Lambs, Lesser Interest, and Gore Interest for $50 million. The transaction will add 350 BOE per day of production and closed on January 10th. So we'll see approximately two and a half months of production in our Q1 2025 results. This is in addition to the acquisitions we closed in late December, which will add approximately 50 BOE per day of production. Coming into 2025, we have tax pools of 1.3 billion to shelter future taxability at approximately 10% per year. This means in 2025, the first $130 million of cash flow is tax-free with incremental cash flow tax at 23.5%. We've prepared our 2024 U.S. tax information, and our 2024 dividends will be a 36% return of capital for U.S. investors. This information can be found on our website. We will now turn it over to the moderator to proceed with the Q&A.

Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone. If your question has been answered or you wish to move yourself from the queue, please press star 1-1 again. We'll pause for a moment while we compile our Q&A roster.

Our first question comes from Jeremy McCray with BMO Capital Markets.

Your line is open.

Hi, guys. I know you guys don't give guidance, but how do you feel about the outlook today versus the coming year? And how does that compare from how you felt last year? Basically, I'm just trying to understand where there may be some surprise wins for the upcoming year here.

Yeah, good morning. Thanks, Jeremy. Yeah, I think with the rig count up pretty significantly year over year, we're expecting kind of higher activity levels across the entire base. And I think, you know, with the East Shield Duvernay, or sorry, the West Shield Duvernay seeing increased activity and pretty good ramp in budgets. And then, of course, all the discoveries that have been made in the Manville stack. should be a positive year and should be better than last year from what we know today. But again, we're only through January and we have to see what tariffs spring.

Okay.

And then you guys did some acquisitions here. Can you give a little bit more detail on those acquisitions? And actually I'm more curious to, is there more tuck-in acquisitions like these um, out there than where we were probably last year. Just, I just wondering if there's more acquisitions to come here as well too.

Yeah. And I, I guess you just never know when these things come and when they're available. And I think, um, what was unique at the end of the year is two of the, um, kind of more significant ones, including the, uh, Petro Canada mineral title, as well as new North, which was, uh, kind of a small corporate royalty company that had a number of GRTs and fee mineral title. They kind of wanted to get it done by year end. So it was a more unique circumstance, I guess, on both of those. So I guess I don't think we'll see a lot of those this year. But if we do, that's great because if you can get kind of high teens IRRs when your corporate returns in the kind of the mid-teens and you can grow that asset, I think there are things that we like to do and what we do well here. When you think about those assets, I think they were kind of undermanaged over the last 10 years, certainly on the mineral title side. And the Petro Canada fee is just over 20% lease. So I think when our teams get their hands on it, we'll not only do a lot of compliance, but also get a lot of leasing done in Southeast. And there's a new upper Frobisher play that looks promising and multilaterals can access it quite economically. So I think we'll be able to do some good things with those assets over the next couple of years, get some leasing done.

Perfect. Thanks, Andrew.

Thanks for your questions, Jeremy.

One moment for our next question. Our next question comes from Dustin Besaw with TD Cal, and your line is open.

Morning, guys. Thanks. Can you provide some more color on why the average royalty rate for 2023 was so high and why you saw that contract to a more normalized level in 2024? I'd also be a bit interested in learning about the letter of credit you provided to a counterparty. Is this a one-off or do you guys see more of this in the future?

Thanks. You bet. Thanks for the question, Dustin. So, yeah, number one on the royalty rate, you know, we had a lot of high net royalty wells drilled in 2023. 2024, we saw a lot of unit wells drilled, which kind of had a lower average royalty, so it kind of skewed it a little bit lower. I think in 2025, based on what we're seeing for capital programs and where we're expecting the drilling to be, that royalty rate should be up modestly this year. So again, I don't know if we'll get back to 2023 levels, but it should be, again, higher than our corporate average royalty. And then number two on the letter of credit, I think that was a unique situation. We effectively took a royalty that we had on two rivers west and spread it over the entire asset to basically have a net royalty on the entire company and provide that letter of credit again to just backs up their financial plans over the next couple of years. But again, I think it's not something that we would do all over the basin, but that was kind of a unique circumstance to enable us to get more resource and bring PV forward on that asset.

Great. Thanks a lot.

Thanks for the questions.

One moment for our next question. Our next question comes from Adam Shorts with Black Bear Value Partners. Your line is open.

Hey, good morning, guys. Thanks for taking my questions.

Good morning, Adam.

So I had two unrelated questions. Sorry. So the first question is, um capital allocation like what the are with respect to uh the debt you know debt pay down and whether the whether the debt pay down uh is going to be continued through the end of the year and if you think like the goal is to get it to basically flat you know you know zero net debt position and then uh the second question really has more to do with the any color of your emp partners and if they're commenting at all about their plans or how they're planning on handling various tariff risks and what they're thinking about their capital programs for this year or next.

You bet. Okay, so on the first question on the capital allocation side, I think to the extent we can find high IRR acquisitions that have a lot of optionality, like the PetroCamp fee is a perfect example where it's only 20% leased. So, again, we get a nice cash flow stream with high IRR, but then we actually think we can manage that, get some leasing done and grow that. So if we can find those things, that's obviously a great way to help compound the business. But in the meantime, we'll just continue to pay down debt. And absent any of those opportunities, we'll take debt down to closer to zero, but somewhere closer to zero or sub $100 million of debt. we'll likely layer in some kind of buyback along the way. Because again, I think when you think about our business with kind of 6% free cash flow yield, plus or minus, and then 6% plus growth rates, and some of these higher acquisitions, we're kind of a mid-teens returning business. So it's hard to find asset acquisitions that measure up against what our business is doing right now. So again, that's probably... more what we'll see over the next year. And then your second question was with regards to our EMP partners and what their plans are. You know, what's interesting with the tariffs, if you think about a 10% tariff and then you see what's happened with the FX, the Canadian FX, you're almost neutral on cash flows. So I think plans are kind of unchanged even in the event of a tariff coming in. But that's what we know today. And of course, things can change very quickly. But again, as of today, you've got rig count up pretty materially from last year, and last year was a great year. So as of now, their plans are kind of unchanged, but we'll see what Donald brings in about a couple weeks here.

Thanks. Yeah, I would say that, you know, you've heard me harp on it before, but it's a mid-teens, you know, turn on capital for an extremely... what will be a low, no debt, high, you know, extraordinarily high margin business. So that seems unusually cheap. So that's my two cents. Great work. Thank you.

We agree. Yeah. Thank you. Thanks for your question. One moment for our next question. Our next question comes from Jamie Kubik with CIBC. Your line is open.

Yeah, good morning, and thanks for taking my question. Can you talk just a bit more about the bonus issuance during the quarter? What drove the large increase versus prior quarters? And can you touch on a little bit further the polymer EOR gore that you received as well?

Thanks. You bet. Yeah, so overall, we've been really active on the leasing side, leased over 100 companies over the year. And then in Q4, we had some kind of larger deals that we entered into. and one of which was the Manville deal. What was interesting on that Manville deal, Jamie, is we had actually, these are lands we actually leased two years ago, but because we've gone to zonal leasing, that same company that did very, very well on those lands wanted to lease some of the other Manville zones. So that's where approximately an $8 million bonus is what we were looking for for a five-year lease. And they had this polymer, it's a line drive polymer flood in the Wabiscot B that they're planning. a little further north. And so rather than take the $8 million cash, we did a swap for a royalty on that line drive Palmer flood that they're planning. And so again, I think it was great for the operator because they didn't have to put up the cash. And it was great for us because we effectively get a royalty on what we believe is going to be a very good project in exchange for a five-year lease. And what's interesting about that is, you know, depending on how active they are, within five years, we're going to be releasing a lot of those lands. That's just how kind of the recycling nature of mineral title. And then the balance of the leasing was kind of across the entire basin and included a little bit of DuVernay as well on the West Shale side. But it's been quite active throughout the entire basin. And we're, again, this year, starting this year, from January till today, we've signed a lease every business day. So again, we're still on that same very active pace.

Okay, that's great. And maybe just last question for me. You do highlight good activity in the DuVernay over the year. Can you talk a little bit more about what you're seeing on licensing activity on your lands, how you think that could translate into oil volume growth going forward and things of that nature?

Thanks. You bet. Yeah, so on the DuVernay side, We have seen the licensing activity pick up. We think activity will be in the range of double what it was last year. We were about 400 barrels a day of net royalty production for the last three years, and that spiked up to 700 barrels, so a very significant increase, and that was just from a five-well pad that was put on our lands in late last year. So, again, there's really good gearing given we have mineral title there, so it's higher average royalties, and they're very high-rate wells, The last two wells that were drilled on our lands were over 1,000 barrels per day of liquids over the first 30 days. So pretty significant. And I think what's interesting about the volume growth that we expect to see there, it should be somewhere between 50% and 100% volume growth year over year. Don't know exactly where it lands. And of course, we don't know when the wells come on. So it will be a little bit lumpy for sure. But those barrels, that's 40-degree API oil. So we're receiving a net pack that's 60 to 70% higher than our heavy barrels, which is where a lot of the growth in our portfolio has been. So should help on the pre-cash flow for sure as well, Jamie. Okay, great.

That's all for me. Thank you. And I'm not showing any further questions at this time. I'd like to turn the call back over to Andrew for any further remarks.

Well, thank you very much, and thank you to our employees for another great year of execution and to our shareholders for their support. We hope everyone's able to attend our Investor Day on May 14th in Calgary, where we'll release our 2025 Asset Handbook and provide investors with a range of outcomes for the business over the next 10 years. Have a great day.

Thank you, ladies and gentlemen. This does conclude today's presentation. You may now disconnect and have a wonderful day.