Prairiesky Royalty Ltd

TSX:PSK

Earnings Call Transcript

[Operator]

Good day, and thank you for standing by. Welcome to PrairieSky Royalty announces their fourth quarter 2024 Financial Results Conference Call. [Operator Instructions]. Please be advised today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Andrew Phillips, President and CEO. Please begin.

[Andrew Phillips, executive]

Good morning, and thank you for dialing into the PrairieSky 2024 Q4 and year-end earnings call. On the call from PrairieSky are Pam Kazeil, SVP and CFO; Dan Bertram, Chief Commercial Officer; Mike Murphy, Vice President, Geosciences & 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 and 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, Mannville 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 fee 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.

[Michael Murphy, executive]

Thanks, Andrew. The fourth quarter saw a continuing trend of elevated multilateral drilling activity, with 77 well spud 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 PrairieSky 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 netback, light oil growth for PrairieSky in 2025 and beyond.

I'll now pass the call over to Pam to discuss the financials.

[Pamela Kazeil, executive]

Thank you, Mike. Good morning, everyone. PrairieSky 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 Mannville 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 the quarter and the full year.

Looking forward, PrairieSky'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. USD 1 change in the light or heavy oil differentials would increase or decrease funds from operations approximately $2.75 million. A $0.25 change per Mcf in AECO with increased or decreased 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 totaled $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. PrairieSky declared dividends of $239 million, which resulted in a payout ratio of 63%. Excess cash flow was allocated to the repayment of debt and acquisitions of $57.3 million.

At December 31, 2024, PrairieSky had net debt of $134.9 million. Subsequent to year-end, PrairieSky acquired Fee Lands, Lessor Interests and GORR Interests for $50 million. The transaction will add 350 BOE per day of production and closed on January 10. So we'll see approximately 2.5 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.

[Operator]

[Operator Instructions] Our first question comes from Jeremy McCrea with BMO Capital Markets.

[Jeremy McCrea, analyst]

I know you guys don't give guidance, but how do you see -- feel 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?

[Andrew Phillips, executive]

Yes. Thanks, Jeremy. Yes, 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 with East Shale Duvernay -- or sorry -- the West Shale Duvernay is seeing increased activity and pretty good ramp in budgets. And then, of course, all the discoveries that have been made in the Mannville 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 bring.

[Jeremy McCrea, analyst]

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 too, is there more tuck-in acquisitions like these out there than where we were probably last year. I was just wondering if there's more acquisitions to come here as well, too.

[Andrew Phillips, executive]

Yes. And I guess you just never know when these things come and when they're available. And I think what was unique at the end of the year is two of the kind of more significant ones, including the Petro-Canada mineral title as well as [ New North ], which was 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 they were -- 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 there was -- they were kind of under managed 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.

[Operator]

Our next question comes from Dustin Besaw with TD Cowen.

[Dustin Besaw, analyst]

Could 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?

[Andrew Phillips, executive]

You bet. Thanks for the question, Justin. So yes, number one, on the royalty rate, we had a lot of high royalty -- 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, you should -- 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. .

[Operator]

Our next question comes from Adam Schwartz with Black Bear Value Partners.

[Adam Schwartz, analyst]

So I had 2 unrelated questions. So the first question is capital allocation, like what the [indiscernible] are with respect to the debt paydown and whether the debt paydown 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 0 net debt position.

And then the second question really has more to do with the [indiscernible] any color on your E&P partners. And if they're commenting at all about their plans or what -- how they're planning on handling various tariff risks and what you're thinking about the capital programs for this year and next?

[Andrew Phillips, executive]

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 Petro-Can fee is a perfect example where it's only 20% leased. So again, we get a nice cash flow stream with a 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 absence any of those opportunities, we'll take that down to closer to 0, but somewhere closer to 0 or sub $100 million of debt will 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 percent growth rates and some of these high IRR 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 of what we'll see over the next year.

And then your second question was with regards to our E&P partners and what their plans are. What's interesting with the tariffs, if you think about a 10% tariff and then you see what 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. So -- but again, as of today, we'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 of weeks here.

[Adam Schwartz, analyst]

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

[Andrew Phillips, executive]

We agree. Yes, thank you.

[Operator]

Next question comes from Jamie Kubik with CIBC.

[James Kubik, analyst]

Can you talk just a bit more about the bonus issuance during the quarter what drove the large increase versus prior quarters? And could you touch on a little bit further the polymer EOR GORR that you received as well?

[Andrew Phillips, executive]

You bet. Yes. So the -- 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 Mannville deal. What was interesting on that Mannville deal, Jamie, is we had actually -- these are lands we actually leased 2 years ago, but we -- 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 Mannville zones. So that's where approximately an $8 million bonus is what we were looking for, for a 5-year lease. .

And they had this polymer -- it's a line drive polymer flood in the [indiscernible] that they plan to a little further north. And so rather than take the $8 million cash, we did a swap for a royalty on that line drive polymer 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 5-year lease.

And what's interesting about that is depending on how active they are within 5 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 base. And then we're -- again, this year, starting this year, we've, from January until today, we've signed a lease every business day. So again, we're still on that same a very active pace. .

[James Kubik, analyst]

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? .

[Andrew Phillips, executive]

You bet. Yes. 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 3 years, and that spiked up to 700 barrels. So a very significant increase, and that was just from a 5-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 2 wells that were drilled on our lands for 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. I don't know exactly where it lands. And of course, it will be -- we don't know when the wells come on. So it will be a little bit lumpy for sure. But those barrels are -- that's 40-degree API oil. So we're receiving a netback 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 free cash flow per share as well, Jamie.

[Operator]

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. .

[Andrew Phillips, executive]

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 is able to attend our Investor Day on May 14 in Calgary, where we will 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.

[Operator]

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