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Good day, and thank you for standing by. Welcome to the PrairieSky Royalty Limited announcing of their Fourth Quarter 2021 Financial Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Andrew Phillips. Mr. Phillips, the floor is yours.
Thank you, Chris. Good morning, everyone, and thank you for dialing into the PrairieSky Q4 2021 Year-End Conference Call. On the call from PrairieSky are Cam Proctor, COO; Pam Kazeil, CFO; and myself, Andrew Phillips. Before we get started, there are certain forward looking statements on my notes today, so I'd ask investors to review the forward-looking statements qualified in our press release and MD&A for Q4 and the year ended December 31, 2021. Q4 saw strong organic growth in our crude oil royalty portfolio as a result of increased drilling activity across the Western Canadian Sedimentary Basin. Volumes were up 10% from Q3, reflecting the strong trailing activity number of 193 spuds from the third quarter. Q4 also had a strong activity number with 166 spuds versus 74 1 year ago. Activity was broadly spread across the basin geographically and also across operators on PrairieSky. 2021 was a successful year for PrairieSky. We have approximately $1 billion of accretive M&A transactions, adding producing and developed assets in the best parts of the cost curve, including 3 million acres of oil-prone predominantly fee title lands well assuring less than 10% of our outstanding shares. Our strong cash flow per share growth and unhedged commodity portfolio has allowed us to increase the dividend by 33% and still pay down all of the debt incurred on the Heritage fee title asset acquisition within 3 -- 2 years. The new quarterly dividend of $0.12 per quarter or $0.48 per share per year. By using the excess cash flow to reduce our debt, we'll be well positioned to execute on quality opportunities as they become available. Our technical team is busy prospecting and identifying new opportunities across the vast PrairieSky land base. Strong industry cash flows have operators looking for new opportunities to expand their asset bases. In addition, there are numerous new startup companies working in the basin. Our total proved plus probable reserves grew to 6.25 million barrels at year-end, up 37% year-over-year. This is -- this included the addition of 10.5 million barrels related to the 2021 acquisitions as well as the 9.7 million barrels related to third-party drilling and technical revisions, which more than exceeded our 2021 royalty production volumes. There was also an incremental 5 million barrels added to strong -- due to strong pricing. At year-end, the NPV of our total proved plus probable reserves discounted 10% to $1.6 billion, 88% above 2020 and this represents, of course, only the producing wells on our lands, no future wells. Our early entrants into the Clearwater play differentiates us as we have near-term development lands that we'll see our net royalty oil volumes grow to over 1,600 barrels per day by year-end 2022 on the play. Our proved plus probable reserves in the Clearwater grew to 2.6 million BOE from 435,000 last year. Excluding the 1.45 million barrels we purchased in Marten Hills, our Clearwater reserves grew over 2.7x in a single year. In addition to these already developing areas, we are the largest holder of exploration acreage in the Clearwater fairway. The active exploration across this acreage will result in sizable new developments over the next few years at no additional cost to PrairieSky owners. We are hard at work on our newly acquired fee title lands and expect to enter into numerous leases with qualified counterparties to enhance the growth profile of our oil-prone assets. We'd like to thank our shareholders, existing and new, for their support as we build the premier North American royalty business as well as the team at PrairieSky for their hard work and crisp execution during an active year for the company. I'll now turn the call over to Pam to summarize the financial highlights.
Thank you, Andrew. Good morning, everyone. As Andrew mentioned, there are certain forward-looking information in my notes today, so I would remind investors to review the forward-looking statements qualified in our press release and MD&A for the Q4 and the year ended December 31, 2021. PrairieSky generated record funds from operations in Q4 of $101.8 million or $0.45 per common share. This was 54% above Q3. The increase in funds from operations was as a result of strong royalty revenue of $94.2 million, generated from average royalty production volumes of 20,340 BOE per day as well as our income tax recovery in the quarter of $12.4 million. PrairieSky's oil royalty production grew to 8,311 barrels per day, a 10% increase over Q3 2021, and included 190 barrels per day of incremental acquisition volumes and 48 barrels per day of increased light and scale pricing volumes. The quarter included only 1 day of contribution from Heritage acquisition, which was effective December 31, 2021. We will see the full impact from this acquisition in Q1 2022. A remainder of the oil royalty volume increase was due to organic growth on the Royalty Properties following an active Q3 drilling programs by third-party operators. These higher volumes and strong benchmark pricing combined to generate oil royalty revenue of $61.3 million, 22% above Q3. We are very encouraged by the growth already seen in our oil royalty volumes in Q4 and by the level of activity through the fourth quarter and into Q1. Natural gas royalty volumes averaged $60 million a day, an increase of 3% over Q3. Higher production volumes and strong echo pricing generated $22.2 million in royalty revenue, a 42% increase over Q3. Revenues from natural gas alone were more than enough to fund our Q4 dividend. NGL royalty volumes averaged 2,029 barrels per day, down from Q3, primarily as a result of ethane curtailment. Due to strong benchmark pricing for PrairieSky's NGL royalty revenue. For PrairieSky's NGLs, royalty revenue still increased 6% over Q3 to $10.7 million. There were 951 BOE per day of prior period adjustments in Q4, which were 32% liquids in the quarter. These prior period adjustments included 357 BOE a day from compliance activities and an additional 594 BOE a day of other prior period adjustments related to new wells on stream and better well performance. The compliance group recovered missed and incorrect royalties through forensic accounting, collecting $1.4 million in the quarter and bringing 2021 annual collections to $4.2 million. There were 166 wells spud in Q4, which were 95% oil. The Viking was the most active play with 60 wells and that was followed by the Clearwater with 44 spuds. Additional activity took place across the basin with wells spud in the Mannville, Mississippi and Duvernay and Cardium. In 2021, there were a total of 548 wells on PrairieSky land, 95% oil. This is up from 288 wells in 2020. PrairieSky estimates that $783 million of gross capital and $37 million of net capital was spent on our lands in 2021. We anticipate that third-party capital budgets in 2022 will be higher than 2021, and we expect to benefit from this incremental activity across the land base, including on the additional 3 million acres of Royalty Properties added to the portfolio in 2021. Looking forward, PrairieSky's 2022 annual pricing sensitivities, which were all net of G&A and taxes are as follows: a $5 change in U.S. dollar WTI would increase or decrease funds from operations approximately $19 million; the $0.25 per Mcf change in April would increase or decrease funds from operations approximately $4 million; and a $0.01 change in the U.S. to Canadian FX rate would increase or decrease funds from operations approximately $3.5 million. Other revenue, totaled $6.4 million in the quarter and included $2 million in lease rentals, $0.5 million of other income and $3.9 million of bonus considerations for entering into 48 new leases with 42 different counterparties. This brings the annual other revenues to $16.2 million. In 2021, we entered into 139 new leasing arrangements, up from 85 in 2020. New leasing has typically a precursor to increase field activity, and we anticipate near-term drilling on many of these new leases in 2022. PrairieSky's forecasting other revenue in the range of $20 million in 2022, including lease rentals, bonus consideration and other revenue. Compliance recoveries will be in an incremental to this amount. Cash administrative expenses totaled $5.4 million or $2.89 per BOE. This brings the annual cash administrative expense to $20.2 million or $2.79 per BOE. We expect cash administrative expenses to be well below $3 per BOE again in 2022. PrairieSky recorded a $12.4 million current tax recovery in Q4 through the use of the tax pool deductions from the Heritage acquisition. This brings 2021 annual current tax to $4.6 million. Entering into 2022, PrairieSky has $1.75 billion of tax pools to offset future taxable income. During the quarter, PrairieSky declared dividends of $21.5 million or $0.09 per share with a resulting payout ratio of 21%. Annually, PrairieSky generated $273.4 million in funds from operations, which were used to fund dividends of $70.5 million and repurchased shares for $22.7 million, with remaining cash flow put towards acquisitions. PrairieSky's net debt at December 31, 2021, was $635 million, which we expect to reduce in 2022 with excess funds from operations over increased annual dividend of approximately $115 million or $0.48 per share. Due to our updated Sustainalytics ESG report, which ranks us #68 in the world with a rating of negligible risk. PrairieSky will receive the full pricing reduction related to our Sustainable Credit Facility. Given current commodity prices, we expect to repay the debt used for the Heritage acquisition within 24 months. Since IPO, PrairieSky has generated approximately $1.7 billion in funds from operations and returned $1.4 billion to shareholders through dividends and buybacks. We will now turn it over to the moderator to proceed with the Q&A.
[Operator Instructions] Our first question comes from Patrick O'Rourke of ATB Capital Markets.
Just in terms of the dividend bump here and sort of the messaging in terms of capital allocation and debt repayments. Just wondering, what was the catalyst for the dividend increase here? Obviously, activity levels were very strong in the quarter based on spuds, but commodity price is also strong. Is it one of the others? Is it some combination of both? And then as we think out into the future here and sort of the path of shareholder returns and how you're thinking about it, how you're leaning in terms of that debt repayment and further dividend increases kind of through 2022 here. I know that debt repayment has been an important part of the thesis and strategy for the company post the Heritage acquisition.
Yes, Patrick. And on the dividend, we were fortunate that since the Heritage acquisition, the excess cash return to shareholders is in line with the increased cash flow generating ability of the business. So we're still almost have the exact same debt repayment schedule. So it's just directly in line with that. And then when you look out 3, 5 and 10 years, we should have pretty strong dividend growth when you think about the business. This is a business that has paid 85% of cash flow out of the dividend in times, we can't find high-quality acquisitions to increase the per share value of our business. So the dividend growth could be pretty substantial, we'll obviously be paying down a huge amount of debt in the next 2 years at the current commodity prices, even lower commodity prices will still pay down quite quickly. So I think that will bode well for future shareholder returns in the form of the dividend. And we kind of look from a buyback perspective, we almost looked at this acquisition as prefunding the buyback rather than fully equitizing the deal, 2/3 of it was done with just over 2% leverage and now we're paying that down. So we almost did the buyback, we look at it in the 13s.
Okay. And then just on the activity levels in the quarter and looking forward here, you guys obviously have your thumb on the pulse of activity in the basin. I'm wondering, you've got the core 4 plays there. But with the run in prices here, maybe some better capital access, are you seeing a bit of an uptick in activity in terms of maybe the secondary plays in the portfolio?
For sure, we are, Patrick. I think we had 42 -- like just in the last quarter alone, we had almost $4 million in lease issuance bonus, 42 leases -- 42 different counterparties, 48 different leases. So we're leasing across the entire basin from Manitoba all the way to Northern Alberta. So it was quite a broad leasing program. And then when you look at the spuds across the basin it's been on every play, every geographic region. So it's a more balanced recovery than it was in 2017 when it was very concentrated in a few core plays. The other thing we're seeing that's kind of unique is given the recycling of a lot of the teams over the last year, there was a lot of privates that had sold and some public mergers we're seeing a lot of new teams starting up. So we're very busy here presenting to numerous teams on the acreage potential and potential leasing opportunities and our seismic data room is busy again. So it's -- we're starting to see those new start-ups enter the market as well.
And next we have Jeremy McCrea of Raymond James.
I was wondering if you could comment more on the M&A environment here today, just with commodity prices, is it as easy as to do deals now with a lot of the operators having the cash flow? Is there still as many opportunities out there and anything on those kind of lines there?
Yes. And I'd keep speculate on what the whole year looks like, Jeremy. But I think when you think about the M&A environment, some of the manufactured type royalties were a result of the very low trading multiples of some of the public producers that them still wanting to enhance the value of their business. And so I think some of that likely becomes available. But for sure, there's going to be higher expectations given this high price deck, and we typically discount that a little bit. So I think it will probably be a little thinner this year would be my guess, just given the industry cash flows and people paying down bank clients. But I guess time will tell.
Up next, we have Luke Davis of RBC.
Just wanted to clarify, did you say current exit Clearwater volumes to be at about 1,600 barrels a day this year?
That's correct. Yes. We expected -- we were in and around 1,000 BOE of net royalty oil production. It's probably a conservative number because it includes no exploration or development on some of the new discoveries that have been made across the basin -- across our Clearwater acreage. But just with kind of Nipisi and Marten Hills, which are our 2 core areas right now, we're expecting it to grow by 60% this year from 1,000 to 1,600 exit this year.
Got you. That's helpful. And I know your biggest royalty oil that would be spur, but can you provide some commentary on other producers that are operating in that play that you have exposure to?
Yes, you bet. I think there have been a couple of other discoveries made in the South Clearwater, just West of Peavine as well and then a little bit of work in some other exploration areas that we can't comment on just because it's been conducted by privates. And -- but it is -- the play has expanded, and I think the South Clearwater is probably the one that's seeing the most development right now. And now Rolling Hills has made some pretty good discoveries and some compartmentalized pools that we think will be really conducive to polymer floods. And so there's -- that's expanded pretty dramatically as well. But I think in the 2 core areas, what you're seeing is just type critical cog substantially on each new wells, the EURs are 35% higher than they were the year before. So that's where we got the big uptick in reserves on just the proven.
And next, we have Aaron Bilkoski of TD Securities.
I've had a couple of questions just following up on some of Pam's comments. In terms of lease expiries, is there anything significant that's up for renewal this year that you guys think could be meaningful, especially now that we're sitting at, I guess, $90 WTI?
Yes. That's a -- it's a good question. I think we did see a nice uptick in lease issuance bonus in Q4, almost $4 million. We did -- we do have a large expiry West the Homeland Reveres in the Duvernay Shale. We've already kind of -- we're working with a couple of counterparties on some smaller leasing arrangements there, but there is a large piece of land available there, and there's been some pretty significant results. And of course, the play is -- this play is very sensitive just given the very high initial rates and then the higher declines because it's a multi-stage, multi-frac well. It's very sensitive to the first year oil price and gas price and of course both of those are very strong right now. So we do expect some leasing opportunities there with industries. So I'd just hate to speculate as to when those happen. But in the next 12 months, we do expect some leasing there. And then I think one of the things we saw in 2020, our compliance team is really active and really busy making sure that we got back all the rights we could in the downturn. And as a result of that, we got back over 4,000 leases in 2020. And now industry is looking to release a lot of those smaller pieces of acreage across the basin to reactivate wells, to reactivate a waterflood, et cetera. So we're expecting that to be busy as well on the conventional side, Aaron.
Perfect. That's really helpful. If I could ask another question. I know it's early days on the recently acquired assets, but I'd be curious if you have any initial comments on the potential magnitude of compliance revenue from those properties.
That's on the compliance, that is one that takes quite a bit of time. Sometimes the contract could be 100 pages, and you got to go through every little detail of it to understand it. We did a lot of work prior to the acquisition. We worked on it, obviously, for almost 6 months last year. So we did identify a number of opportunities. But these are these situations where you've got to make sure you're a long way advanced. So you know exactly what the opportunity is there, so we think it is significance. I don't think you'll see a significant bump in compliance revenue from that specific asset in 2022, but I do think long numbers come out of their past.
And if I can ask one more question. This is sort of a follow-up to, I guess, Patrick's first question. When I look at the royalty space, most of your peers have a targeted dividend payout range at the E&P level producers are starting to, I guess, increasingly outline targets that return a portion of free cash flow back to shareholders. Do you foresee PrairieSky becoming more formulaic in the strategy around shareholder returns?
Yes. It's a good question. I don't think we will, Aaron, I think one of the reasons we like to be flexible is because we like to do what's best for the business and what's best per share for shareholders. And I think when you get too formulaic, you get boxed in. And even when it is a variable dividend, you end up -- it's basically a dividend that you've committed to the formulaic approach doesn't allow you to change your strategy slightly when the opportunity presents itself. And I think last year, it was very unique. We had a very low payout ratio. We did $1 billion in M&A and diluted shareholders by less than 10%. So it really allowed us to grow the business in compound the business over time. And then in 2017, '18 and '19, we paid -- we had around an 80% payout ratio, paid $185 million in annual dividends and just because we couldn't find the right opportunities and did very little M&A in those years. And when you get back to that, that's the opportunity at the time. So I don't see us getting more formulaic. I don't see special dividends being reflected in multiples, and we're just -- we'll do what's best for the business on that front.
[Operator Instructions] Our next question comes from Amar Sheth of Bellwood Partners.
I was wondering if you could comment more on the Heritage acquisition. I saw just from the purchase agreement, a couple of assets were held back. And just more about the -- what's the long-term kind of potential of why you guys really thought it was an attractive acquisition?
You bet. It's a good question. I think it's one of those -- it's the premier fee title asset in the oil portion of the Western Canada Sedimentary Basin. So it's a very oily asset. There's been a major step change in technology with multilateral drilling and better drilling fluids that have really unlocked the potential of it. It's at 2,700 barrels per day of net royalty production without assuming anything we think it's on a modest growth profile, we think with a strong leasing program over the next 10 years, we can grow it in the higher single digits. So we think it's a great growth asset with no future capital. And it's only 20% lease. So we just believe it's under managed from the standpoint that we can get a lot more of those lands leased. So what's great about it at this very strong cash flow profile. It's over a 10% free cash yield on the purchase price we paid, but 80% of the lands are currently not generating revenue. So that's the potential for shareholders. And that's the difference between this and a lot of other royalty asset acquisitions is not only do you get this really strong cash flow stream at a very reasonable discount rate, but then you also get in 2030, you've got the growth potential on those undeveloped lands. So that was the rationale behind it. It's something we've coveted for a long time. We bid on it jointly with Franco Nevada on this asset in 2015, and they were the successful acquirer. So we've kind of won until and ever since something we can add very scalable -- scalably. We add 0 staff in order to manage another 1.9 million acres. So we're well equipped on it.
It's extremely, extremely helpful. And I guess my other question is on some of the presentations, you guys present extraordinarily helpful slide about production over time on per share lands. And obviously, with this recent downturn has been declined, I'm just wondering in terms of what your guys view on, is there an inflection happening currently of that changing?
Yes. We have seen an inflection in activity in the basin. We kind of start to see it in the middle part of last year, where we saw some growth across a lot of the basin. I think our view is that there's enough activity right now in the basin to grow production on our lands, which is great so we have seen inflection on the conventional activity. The other thing that's differentiated us a little bit is we've invested all our acquisitions in the lowest cost parts of the -- lowest cost parts of the cost curve on the oil cost curve. So we've -- which allows us to outperform the basin. Assets like the Clearwater, again have the lowest full-cycle F&D in the basin. On the light oil side, is the Viking. And we're the largest royalty owner on both of those. So that allows us to outpace the basin as well. So we should see a stronger inflection of PrairieSky's acreage.
We have Matthew Weekes of iA Capital Markets.
I just think I wanted to clarify something you said earlier. You said exiting 2021, your net production on Clearwater acreage was about 1,000 BOE a day. Is that correct?
Correct. Yes. That's correct, Matthew.
And this is expected to grow to about 1,600 net by the end of 2022?
That's correct. Yes. So the Clearwater alone should grow to 1,600. And of course, it's a reasonably conservative estimate because we're kind of just including the core areas of Nipisi and Marten Hills, but of course, we have a huge acreage position outside of that as well. That totals only 100,000 acres of our over 1 million acres on the play. So there is potential upon seeing further developments for upside there, but I think that's a reasonable estimate.
Got it. On -- if you have an estimate on how many rigs in the industry were operating on PrairieSky lands in the quarter and compared to what you're seeing now?
Yes. We don't actually -- we don't put that out and part of the reason is it can sometimes be misleading because, of course, sometimes you can have a rig or 2 operating in a unit where you have a 0.2% interest, and sometimes you have 4 rigs running in an area where you have 17.5% royalties. So it's -- we don't put out that specific number, but because of our broad swap acreage from Manitoba all the way BC, we get a pretty significant share of that rig count. And today, 225 rigs running versus 180 the same day last year. So obviously, there's an uptick. So it looks like capital spend will be higher in the basin this year, and we'll get our share of that as a PrairieSky acreage owner.
I'm seeing no further participants in the queue. I will return the conference back to the speakers.
Well, thank you everyone for dialing into the PrairieSky Q4 2021 Conference Call and please feel free to call Pam or myself if you have any further questions. Have a good day.
This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.