Third Quarter 2019 Highlights:
- Funds from Operations totaled $48.8 million ($0.21 per common share basic and diluted).
- Revenues totaled $58.8 million, comprised of royalty production revenues of $51.9 million and other revenues of $6.9 million for the third quarter.
- Royalty production averaged 20,512 BOE per day (50% liquids).
- Operating netback of $23.31 per BOE, down from $27.21 per BOE in Q2 2019.
- Dividends declared in the second quarter of $45.5 million ($0.1950 per share), representing a payout ratio of 93%.
- Common share repurchases of $4.2 million under the normal course issuer bid (“NCIB“).
PrairieSky’s high margin, low cost royalty structure generated $48.8 million of funds from operations during Q3 2019. Funds from operations were used to pay $45.5 million in dividends and cancel 0.2 million common shares for $4.2 million. PrairieSky continues to execute on its strategy of delivering strong, risk adjusted returns, by focusing on leasing undeveloped land, monitoring cost control in our business, maintaining our strong balance sheet and selectively growing our royalty ownership by adding petroleum and natural gas royalty assets that complement PrairieSky’s existing business and provide shareholders with medium-term to long-term value enhancement potential. During Q3 2019, PrairieSky increased its exposure to the Clearwater oil play by adding incremental gross overriding royalty acreage (“GORR lands”) for $3.9 million. We anticipate that over the next 12 months, close to 10% of drilling activity on PrairieSky lands will be focused on the Clearwater oil play that was acquired two years ago. Clearwater acreage now totals over 840,000 acres.
Headwinds in Canadian energy persist. Throughout 2019, the challenging commodity price environment, takeaway capacity constraints and government mandated curtailments on production in Alberta have resulted in continued pressure on Western Canadian drilling activity with the rig count down approximately 35% as compared to Q3 2018. Capital expenditures in 2019 are now anticipated to be under $20 billion, approximately $3.5 billion below the decade-low activity observed in 2016. This slowdown in activity across the Western Canadian Sedimentary Basin and on PrairieSky lands has resulted in lower royalty production volumes which totaled 20,512 BOE per day, down 8% from Q2 2019 royalty production volumes of 22,297 BOE per day. The third quarter has traditionally seen lower royalty production volumes as it trails the second quarter spring break-up period in Western Canada.
Revenue in Q3 2019 totaled $58.8 million, which included royalty production revenue of $51.9 million. Average oil royalty production volumes of 8,011 bbls per day were down 8% from 8,740 bbls per day in Q2 2019, generating revenue of $43.4 million (Q2 2019 – $52.1 million). Q3 2019 oil royalty production volumes were impacted by lower drilling and workover activity across Western Canada. Lower oil royalty production volumes combined with a decline in both average WTI benchmark pricing and wider differentials for heavy oil negatively impacted oil royalty production revenue in the quarter as compared to Q2 2019. Average NGL royalty production volumes of 2,334 bbls per day were down 13% from Q2 2019 NGL royalty production volumes of 2,690 bbls per day. NGL royalty production revenue totaled $4.4 million, down from Q2 2019 NGL royalty production revenue of $6.5 million, as lower average royalty production volumes combined with discounted NGL pricing resulted in lower NGL royalty revenue. Average natural gas production volumes of 61.0 MMcf per day, were down 6% from Q2 2019 natural gas royalty production volumes of 65.2 MMcf per day. Natural gas royalty production contributed $4.1 million of revenue, down from $4.5 million in Q2 2019 due to lower royalty production volumes combined with lower AECO benchmark pricing.
PrairieSky continued to see leasing interest from new and existing lessees with leasing focused on crude oil targets across Alberta and Saskatchewan. PrairieSky entered into 25 new leasing transactions with 19 different counterparties in the quarter generating $4.4 million in bonus consideration. Lease rentals and other income added $1.2 million and $1.3 million, respectively, to revenue in the quarter.
Drilling activity is down year over year across Western Canada. There were 190 wells (97% oil) spud on PrairieSky lands in Q3 2019, a 21% reduction from 242 wells (95% oil) spud in Q3 2018. There were 70 wells spud on Fee Lands (Q3 2018 – 105 wells), 87 wells spud on GORR lands (Q3 2018 – 109 wells) and 33 wells spud on unitized lands (Q3 2018 – 28 wells). The average net royalty rate of wells spud in the quarter was approximately 8.1% as compared to 9.2% in Q2 2019 and 8.0% in Q3 2018. Activity was focused on the Saskatchewan Viking light oil play where 88 wells were spud in Q3 2019. In addition, there were 38 Alberta Viking oil wells, 9 Duvernay oil wells, 8 Clearwater oil wells, 6 Cardium oil wells and 36 other heavy and light oil wells spud in Q3 2019, targeting a number of different plays including the Nisku, Mannville and Mississippian. There were 5 natural gas wells spud in Q3 2019, including 2 in the liquids rich Montney play in the Pipestone area.
Cash administrative expenses totaled $4.7 million or $2.49 per BOE in the quarter, in line with Q2 2019 cash administrative expenses of $4.9 million or $2.41 per BOE. PrairieSky anticipates cash administrative expenses for the year will be below $3.00 per BOE. PrairieSky’s staff continued their focus on ensuring timely and accurate royalty payments, collecting compliance recoveries totaling $1.8 million in the quarter bringing year to date compliance recoveries to $5.6 million.
I would like to thank our shareholders for their continued support and our dedicated staff for their efforts. Please contact Pam Kazeil, our Chief Financial Officer, at 587-293-4089 or myself at 587-293-4005 with any questions.
Andrew Phillips, President & CEO
FINANCIAL AND OPERATIONAL INFORMATION
The following table summarizes selected operational and financial information of the Company for the periods noted. All dollar amounts are stated in Canadian dollars unless otherwise noted.
A full version of PrairieSky’s Management’s Discussion and Analysis (“MD&A“) and unaudited interim condensed financial statements and notes thereto for the fiscal period ended September 30, 2019 is available on SEDAR at www.sedar.com and PrairieSky’s website at www.prairiesky.com.
|Three months ended
|Nine months ended
|(millions, except per share or as otherwise noted)||2019||2018||2019||2018|
|Funds from Operations||48.8||67.0||164.6||181.2|
|Per Share – basic(1)(2)||0.21||0.29||0.70||0.77|
|Per Share – diluted(1)(2)||0.21||0.28||0.70||0.77|
|Net Earnings and Comprehensive Income||16.7||28.5||87.1||73.4|
|Per Share – basic and diluted(2)||0.07||0.12||0.37||0.31|
|Working Capital (Deficiency) at period end||(7.4||)||10.6||(7.4||)||10.6|
|Shares outstanding at period end||233.3||234.7||233.3||234.7|
|Weighted average – basic||233.4||235.0||233.7||235.4|
|Weighted average – diluted||233.8||235.3||234.1||235.7|
Royalty Production Volumes
|Crude Oil (bbls/d)||8,011||9,018||8,548||8,950|
|Natural Gas (MMcf/d)||61.0||71.5||63.1||71.8|
|Crude Oil ($/bbl)||$||59.04||$||66.68||$||60.79||$||64.12|
|Natural Gas ($/Mcf)||0.72||1.15||1.14||1.19|
|Operating Netback per BOE(1)||$||23.31||$||30.47||$||26.73||$||29.23|
|Funds from Operations per BOE||$||25.86||$||31.07||$||27.91||$||28.48|
|Natural Gas Price Benchmarks|
|AECO monthly index ($/Mcf)||$||1.05||$||1.35||$||1.39||$||1.41|
|AECO daily index ($/Mcf)||$||0.89||$||1.19||$||1.52||$||1.48|
|Foreign Exchange Rate (US$/CAD$)||0.7564||0.7683||0.7525||0.7768|
|Oil Price Benchmarks|
|Western Texas Intermediate (WTI) (US$/bbl)||$||56.50||$||68.81||$||57.07||$||66.29|
|Edmonton Light Sweet ($/bbl)||$||68.48||$||77.15||$||69.62||$||75.57|
|Western Canadian Select (WCS) crude oil
differential to WTI (US$/bbl)
|(1) A non-GAAP measure which is defined under the Non-GAAP Measures section in the MD&A.|
|(2) Net Earnings and Comprehensive Income and Funds from Operations per Common Share are calculated using the weighted average number of common shares outstanding.|
|(3) A dividend of $0.065 per common share was declared on September 10, 2019. The dividend was paid on October 15, 2019 to shareholders of record as at September 30, 2019.|
|(4) See “Conversions of Natural Gas to BOE”.|
CONFERENCE CALL DETAILS
A conference call to discuss the results will be held for the investment community on Tuesday, October 29, 2019 beginning at 6:30 a.m. MDT (8:30 a.m. EDT). To participate in the conference call, approximately 10 minutes prior to the conference call, please dial:
|(844) 657-2668 (toll free in North America)|
|(612) 979-9882 (International)|