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Good day, ladies and gentlemen, and welcome to the PrairieSky Royalty announces their fourth quarter and year-end 2017 financial results conference call. [Operator Instructions] As a reminder, this call may be recorded.I would now like to introduce your host for today's conference, Mr. Andrew Philips. Sir, you may begin.
Thank you, Scarlet. Good morning, and thank you for calling in to the PrairieSky Royalty Q4 and Year-End 2017 Conference Call. On the call from PrairieSky are Pam Kazeil, CFO; Cam Proctor, COO; and myself, Andrew Philips. I'll provide an operational update then turn the call over to Pam to discuss the financials.Free cash flow for the quarter totaled $81.1 million. Of this total, $44.2 million was declared in dividends, $11 million used to cancel shares, and we added [$25.9 million] to the balance sheet which was put towards acquisition. Free cash flow for the year totaled $290 million, well ahead of our internal estimates, mainly due to strong lease issuance bonus. As a cautionary note, we expect lease issuance bonus in 2018 to approximate $15 million and cash taxes to increase for the upcoming year. 2017 saw 80 different operators spud wells on PrairieSky lands versus 57 in 2016. These operators also drilled a greater diversity of play types and geographic areas increasing future inventory on PrairieSky lands. Cash G&A per barrel was $3 for the year and $2.58 for the quarter. We continue to work towards the mid-$2 cash G&A per barrel number in the medium term. Our compliance team settled a number of issues over the quarter bringing in recoveries of $5.1 million and taking the annual total recovery to over $10 million. Leasing continued its strong annual trend and brought in $19 million for the quarter, taking the annual total to $67 million. The majority of this bonus was for leasing in the devonian age Duvernay Shale, which includes work commitments as well as future bonus payments.A number of new operators have entered the play and PrairieSky expects strong activity in 2018. We've begun evaluation work on the deeper Duvernay Shale packages and expect inventory to expand over the next few years in the Duvernay B and C. Acquisitions during the fourth quarter totaled $80 million, and included in Alberta-Viking royalty package that is currently producing 300 barrels per day, and [ exceed ] further while licensing.Over $40 million was spent on non-cruising lands in 2 emerging resource plays, both are liquids plays. One of these plays is the Clearwater, a multilateral resource play. A slide has been included in our presentation to give investors a feel for the scale of the play. Because of the quick [tales of these walls ] and the large original oil in place numbers, we expect this play to make up a meaningful share of our net oil royalty production over the next 3 to 5 years with no further capital required by PrairieSky.This purchase of $45 million has approximated the lease issuance bonus taken in by the company over the last 12 months. Total capital spent on PrairieSky lands in 2017 was $1.1 billion, including new oil sands, and $935 million was spent on conventional and unconventional assets, including shale.Excluding all acquisitions, this resulted in production growth of 3.5% organically versus 1.8% in 2016. 703 wells were drilled or rig released in 2017 versus 507 wells in 2016. The biggest uptick was observed in Alberta-Viking, where 113 wells were spud versus 10 in 2016. The majority of these were drilled in an old unit discovered in the 1960s. The Board of Directors has increased the dividend to $0.78 per year, and NCIB to $50 million for the year. Total dividends declared till year-end are $670 million and 2.4 million shares have been canceled under the NCIB.I would like to thank our staff for their continued hard work and our shareholders for their continued support.I will now turn the call over to Pam to discuss the financials.
Thank you, Andrew. Good morning, everyone. PrairieSky generated funds from operations of $81.1 million or $0.34 per share in the fourth quarter. Funds from operations were up 21% over Q3 2017 due to improved WTI pricing and higher bonus consideration from an active fee land leasing in the quarter. For 2017, funds from operations totaled $290.2 million or $1.23 per share. This is up 45% from 2016 due to significant leasing activity on our fee lands as well as higher production in approved commodity pricing for all products. Average daily production for the fourth quarter was 24,406 BOE per day. Production was comprised of natural gas volumes of 75.2 million a day, oil volumes of 9,419 barrels a day, and NGL volumes of 2,454 barrels a day.PrairieSky's oil production volumes were up during the quarter as a result of active Q3 drilling on PrairieSky lands, while natural gas production remained flat with Q3. PrairieSky's production volumes included 1,062 BOE a day of compliance activity volumes and 1,180 BOE per day of other prior period adjustments related to new wells on stream and better well performance.For the full year 2017, volumes totaled 25,259 BOE per day comprised of 78.1 million a day of natural gas, 9,565 barrels a day of oil and 2,677 barrels a day of liquids. Production was up 8% over the prior year due to incremental drilling on our lands and acquisition offsetting declines.Q4 2017 product revenue totaled $59.2 million, which was 84% liquids. Product revenue was positively impacted by increased crude oil production and improved WTI pricing in the quarter. In 2017, production revenue totaled $265.9 million, which was 81% liquids revenue. Production revenue was up 32% over 2016, due to increased production volumes and improved commodity prices for all products. The compliance group continues to work hard identifying missed and incorrect royalties. In 2017, we collected $10.6 million of compliance revenue, which is included with product revenue. This brings total collection since IPO to over $40 million.PrairieSky's 2018 pricing sensitivities are as follows. A $5 per barrel increase or decrease in U.S. dollar WTI results in a $15 million increase or decrease in funds from operations. This is net of cash taxes and G&A. A $0.25 per MCF increase or decrease in AECO results in a $5 million increase or decrease in funds from operations, net of cash taxes and G&A. And a $0.01 change in the U.S. CAD FX rate will result into $3 million change in funds from operations, net of cash taxes and G&A.Other revenue for the quarter was $22.3 million, which include a lease rental income of $3 million, bonus consideration of $19 million. For 2017, other revenue totaled $79.8 million, which included $10.7 million of lease rentals and $67 million of bonus consideration.During the year, PrairieSky entered into approximately 140 leasing arrangements with over 80 different counter-parties. Duvernay leasing contributed approximately $40 million of bonus consideration as well as additional lease rentals in the year. In 2018, PrairieSky expect lease rental income of $9 million, and is budgeting bonus consideration of $15 million, and compliance revenue of $8 million.Administrative expenses in the quarter totaled $6.5 million or $2.89 per BOE. Cash administrative costs were $5.8 million or $2.58 per BOE. For 2017, total G&A per BOE was $3.26 and cash G&A per BOE totaled $3, up from 2016 due to the vesting of IPO and long-term incentive grants in the second quarter. In 2018, we expect cash G&A to continue in the low $3 per BOE range. Cash taxes were $11.6 million for the year, and the effective tax rate for the year was 13%. PrairieSky declared dividends of $44.2 million or $0.1875 per share in the quarter with the resulting payout ratio of 55%. Under the normal course issuer bid, PrairieSky repurchased 336,700 common shares for $11 million. During 2017, PrairieSky declared dividends of $176.2 million and repurchased 1.4 million common shares for $42.2 million. From inception to year-end 2017, PrairieSky has returned $668 million or $3.50 per share in dividends to shareholders and repurchased 2.4 million common shares for $68.2 million. At December 31, PrairieSky's positive working capital was $45.7 million, including cash of $45.1 million, and no debt.We will now turn it over to the moderator to proceed with the Q&A.
[Operator Instructions] Our first question comes from Jeremy McCrea with Raymond James.
I'm just wondering if you can provide some more detail on some of the land acquisitions that you made last year. So one was the Clearwater, but if you can provide any more detail on that in terms of -- is there signed commitments? And then the other property, if there has been signed commitments, if you can provide locations? Or some of the timing along that? And then, I guess, overall, is this the strategy of PrairieSky going forward, do you think where you're going to be targeting more land purchases here in the future as part of the growth strategy?
Yes. So a little more color on the Clearwater there. It's a very significant well commitment that came with the land acquisitions, and there are only a couple of wells into that. So we do have a prescribed land schedule over the next few years on that play. But just given the scale of it, a 20-well commitment would only be a few sections of land on just such a massive land base. So minor commitment in the scale of land, but it's a significant dollar commitment. And then the other plays, the Montney oil play, we can't give you any more color on that right now. There is still some minor competitive land sales upcoming. So once the operator of that play has talked a little more about it, Jeremy will give you some more color on it, but it also has some commitments as well associated with it.
Our next question comes from Shailender Randhawa with RBC Capital Markets.
Andrew, I just wanted to ask you, where do things stand in terms of Duvernay leasing? And you mentioned evaluating deeper Duvernay zones. Can you just give us some more color in terms of what you've seen to-date in terms of activity levels in the play? And then how did the deeper zones compare with that?
Yes. So in terms of Duvernay leasing, to answer your first question, it's -- we're probably about in the range of 80% leased. Now, of course, what happened is some of those leases were over 2 years ago now, some of the original leases we entered into. So those have a 5-year term. So the reality is we will be recycling some of that land as it comes back, if it is not drilled in the primary term, or we'll be re-leasing it to the same operator depending on what happens there. Activity should be up, probably about 2 times what we saw the prior year. Currently, our royalty volumes are over 100 barrels per day of net royalty light oil production on the play, that's really coming from about 3 or 4 sections of land. So it's very likely drilled right now. With some of the new agreements we've entered into, we do have some oil commitments associated with those. So we do have a little bit of visibility as to when those oils get drilled. And then on the other zones, the deeper Duvernay zone, it's kind of preliminary at this point. There are some good shale packages that should have the right thermal maturity of the rock. Everyone's focused on the Duvernay A. It's the most mapped zone, it's got the most data associated with it. But there are these horizons that are deeper. And I do think operators will go after them over time once they've got their infrastructure in place, and they've had some success in the upper sands -- upper shales, sorry. So we're doing a little bit of work ourselves just to try and understand it better. So hopefully, that answers your questions.
Our next question comes from Mike Dunn with GMP FirstEnergy.
Just wondering if you could tell us the operator or operators associated with the Alberta-Viking GORR purchases?
You bet. Yes. So there's 4 operators on the Alberta-Viking GORR purchase; 3 are private, 1 is public. So the public company is Tamarack Valley Energy. And the 3 privates are Rolling Hills Energy, Karve Exploration and Highground, which is a private equity backed back firm. So they are all well capitalized. The 3 privates have no debt, and are probably the most active in the play. And we've seen well results continue to get better, both on some of the fee lands we have in the area already, and then on these newer lands that we've recently acquired. So we're encouraged with paybacks on the play. And actually, one of the new -- latest announcements that came in was that Gibsons going to build the pipeline all the way from Hardesty into this Viking light oil area. It's a 13,000-barrel a day pipeline. So we're encouraged by that because now the operators will have lower transportation costs and will enable them to reinvest more money in the play. And will also stem the economic life of the well as once they are drilled, as there are other better economic limits. So the few positives have come on the Alberta side of the Viking play recently.
[Operator Instructions] And at this time, I'm showing no further questions. I would like to turn the call back over to Andrew for closing remarks.
Thank you, everyone, for dialing into the PrairieSky Royalty year-end conference call. And if you have any further questions, please call me at (587) 293-4005. Thank you.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.