CALGARY, Alberta – PrairieSky Royalty Ltd. (“PrairieSky” or the “Company“) (TSX: PSK) is pleased to announce its second quarter (“Q2 2022“) results for the three-month period ended June 30, 2022.
Second Quarter Highlights:
- Record average royalty production of 25,992 BOE per day, a 9% increase over Q1 2022 and 32% over Q2 2021 with oil royalty production reaching a record 12,220 barrels per day.
- Total revenues increased to $198.1 million, 42% over Q1 2022 and 184% over Q2 2021, comprised of royalty production revenues of $190.2 million and other revenues of $7.9 million.
- Generated record quarterly funds from operations of $159.6 million ($0.67 per common share basic and diluted), 52% above Q1 2022 and 182% above Q2 2021 driven by royalty production growth and strong commodity pricing.
- Declared a second quarter dividend of $28.7 million ($0.12 per common share), representing a payout ratio of 18%, with excess cash flow allocated to $15.6 million of royalty acquisitions and the balance to retiring bank debt.
- Net debt totaled $453.9 million, down 20% or $115.0 million from March 31, 2022 as excess funds from operations were used to retire indebtedness incurred in connection with acquisitions completed during the second half of 2021.
- PrairieSky completed $15.6 million of royalty acquisitions in the quarter adding approximately 360 BOE per day (86% natural gas) of incremental gross overriding royalties in Central Alberta and Northeast British Columbia, as well as adding undeveloped land in the Clearwater oil play.
President’s Message
This is the third consecutive quarter of strong organic growth in royalty production as third-party operators have been actively drilling new wells and performing workovers and recompletions across PrairieSky’s extensive land base. Increased royalty production, strong commodity pricing for all products and increased lease bonus and other revenues combined to deliver record quarterly funds from operations of $159.6 million or $0.67 per common share (basic and diluted). PrairieSky remains unhedged, realizing the full benefit of increased benchmark pricing during the quarter and generating a royalty revenue netback of $80.44 per BOE. In addition, we remain insulated from direct inflationary pressures as we do not incur upstream costs related to exploration and development capital or operations which allowed us to generate an operating margin of 97% in the quarter.
PrairieSky’s royalty production volumes grew organically again in Q2 2022 to 25,992 BOE per day as new wells drilled in late 2021 and Q1 2022 came on production. Oil royalty production averaged 12,220 barrels per day in the quarter, a 9% increase over Q1 2022 and a 33% increase over Q2 2021 excluding all acquisition royalty volumes. PrairieSky’s Clearwater production continued on its strong growth trajectory averaging 1,500 BOE per day of royalty production in Q2 2022, a 25% increase YTD 2022. As the largest owner of Clearwater royalty lands with 1.3 million acres, this low-cost play is expected to provide significant royalty production growth opportunities for PrairieSky through all commodity cycles.
There were 122 spuds on our royalty properties in the quarter as third-party drilling activity moderated in line with seasonal breakup when road bans in certain areas take place. The pace of capital activity picked up late in Q2 2022 and we anticipate Q3 2022 to be very active due to the licensing activity we have seen to date and the number of new leases we entered into in the quarter which we view as a leading indicator to forecast drilling activity. Leasing of our undeveloped land base generated $3.8 million in bonus consideration by entering into 54 distinct leasing arrangements with 45 different counterparties in Q2 2022. This includes significant new leasing for Mannville oil on our recently acquired fee mineral title acreage.
PrairieSky declared dividends of $28.7 million or $0.12 per common share for shareholders of record on June 30, 2022, resulting in a payout ratio of 18%. Excess funds from operations in the quarter were allocated primarily to debt repayment reducing net debt by $115.0 million to $453.9 million at June 30, 2022. Net debt has decreased $181.1 million since December 31, 2021.
The first half of 2022 has been an exceptional start to the year with the third successive quarter of organic royalty production growth, leasing activity at multi-year highs and drilling activity in the field across the portfolio. We would like to thank our shareholders for their support, and our staff for their continued hard work.
Andrew Phillips, President & CEO
Q2 2022 Financial Highlights
- Funds from operations increased 52% over Q1 2022 to a record $159.6 million or $0.67 per common share (basic and diluted). The increase in funds from operations was driven by organic growth in royalty production and strong commodity pricing. Funds from operations increased 182% over Q2 2021 with the addition of acquisition volumes in the second half of 2021, organic royalty production growth and improved commodity pricing.
- Royalty production revenue grew to $190.2 million, a 41% increase over Q1 2022 and a 193% increase over Q2 2021, generated from total royalty production volumes of 25,992 BOE per day. A further breakdown is as follows:
- Oil royalty production volumes averaged 12,220 barrels per day, a 9% increase over Q1 2022 and a 74% increase over Q2 2021. Excluding all acquisition royalty volumes completed over the last 12 months, organic growth in oil royalty production totaled 8% over Q1 2022 with an incremental 130 barrels per day (1%) of royalty production from sliding scale royalties. Organic growth was 29% over Q2 2021 as third-party operators accelerated drilling activity across a variety of oil royalty plays with an incremental 285 barrels per day (4%) of royalty production from sliding scale royalties.
- Growth in oil royalty production volumes and strong average WTI pricing of US$108.57 per barrel combined to generate oil royalty revenue of $135.6 million in the quarter, a 37% increase over Q1 2022 and 216% above Q2 2021.
- Natural gas royalty production volumes increased to 66.0 MMcf per day, 9% above both Q1 2022 and Q2 2021. Natural gas royalty production included the recovery of approximately 1.0 MMcf per day of volumes related to cold weather freeze-offs in Q1 2022 and 1.9 MMcf per day from the acquisition made in the quarter. The remaining increase in natural gas royalty production volumes is attributable to new wells on stream, workovers and solution gas from oil wells offsetting natural declines.
- Natural gas royalty revenue increased to $36.8 million, a 61% increase over Q1 2022 and 169% above Q2 2021 primarily due to strong natural gas index pricing with daily AECO averaging $7.24 per Mcf in the quarter and monthly AECO pricing averaging $6.27 per Mcf in the quarter.
- NGL royalty production volumes averaged 2,772 barrels per day, 6% above both Q1 2022 and Q2 2021 due to new wells on stream and 50 barrels per day of incremental acquisition royalty volumes made in the quarter offsetting natural declines.
- NGL royalty revenue increased to $17.8 million, 36% over Q1 2022 and 114% over Q2 2021, due to increased royalty production volumes and strong benchmark pricing.
- Other revenue totaled $7.9 million in Q2 2022 comprised of $2.9 million of lease rentals and $3.8 million in bonus consideration generated from 54 new leasing arrangements with 45 different counterparties. In addition, PrairieSky generated $1.2 million in other income which included $0.9 million of Potash royalty revenue. Compliance recoveries totaled $1.6 million in Q2 2022.
- Cash administrative expenses totaled $5.2 million or $2.20 per BOE, down 18% on a per BOE basis from Q2 2021. PrairieSky expects cash administrative expense per BOE to remain below $3.00 per BOE for 2022.
- PrairieSky declared a second quarter dividend of $28.7 million ($0.12 per common share), representing an 18% payout ratio, with remaining funds from operations primarily allocated to reducing bank debt.
- PrairieSky completed $15.6 million of royalty acquisitions in the quarter adding approximately 360 BOE per day (86% natural gas) of incremental gross overriding royalties in Central Alberta and Northeast British Columbia, as well as adding undeveloped land in the Clearwater oil play.
- At June 30, 2022, PrairieSky’s net debt balance totaled $453.9 million, a $115.0 million (20%) decrease from March 31, 2022.
ACTIVITY ON PRAIRIESKY’S ROYALTY PROPERTIES
Annually, third-party capital activity in Western Canada slows down in the second quarter as a result of seasonal spring breakup when melting snow and frost cause the ground to become soft and muddy leading to ensuing road bans and limiting lease access. There were 122 wells spud (94% oil) on PrairieSky lands during Q2 2022 which included 62 wells spud on our Fee Lands, 44 wells spud on our GORR acreage and 16 unit wells spud. There were 115 oil wells spud in Q2 2022 including 42 Viking wells, 19 Mannville heavy and light oil wells, 14 Clearwater wells, 14 Mississippian wells, 6 Duvernay wells, 6 Mannville heavy oil wells at Lindbergh, 5 Cardium wells and 9 additional spuds in the Bakken, Belly River, Charlie Lake, Triassic and Devonian formations. There were 7 natural gas wells spud in Q2 2022, including 4 Montney, 2 Spirit River, and 1 Mannville well. PrairieSky’s average royalty rate for wells spud in Q2 2022 was 7.2% (Q2 2021 – 6.3%).
ENVIRONMENTAL, SOCIAL AND GOVERNANCE UPDATE
MSCI UPGRADE TO “AAA” ESG RATING
PrairieSky improved our year over year MSCI ESG Risk Rating, achieving a “AAA” rating and “Leader” status in 2022 and a 10/10 ESG Controversies Score, denoting nil controversies. MSCI indicated that the upgrade to AAA status highlights PrairieSky’s positioning relative to industry peers on multiple key issues such as carbon emissions, human capital development, community relations and governance, including highlighting MSCI’s assessment of PrairieSky’s “strong business ethics policies and practices relative to peers”.
MSCI is a leading provider of critical decision support tools and services for the global investment community, enabling clients to understand and analyze key drivers of risk and return and confidently build more effective portfolios. The MSCI ESG Risk Ratings cover over 8,500 companies (14,000 issuers including subsidiaries) and more than 680,000 equity and fixed income securities globally, are used by over 1,400 investors worldwide, and form the basis of MSCI’s 1,500+ equity and fixed income ESG indexes. More information is available at www.msci.com.
2021 SUSTAINABILITY REPORT PUBLISHED
During Q2 2022, PrairieSky published comprehensive ESG disclosures in its 2021 Sustainability Report which is available on our website at www.prairiesky.com/responsibility/our-approach. The report includes our Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB) and World Economic Forum (WEF) Reference Index and our progress report on principles set forth in the UN Global Compact. Additional disclosure on our website includes our Task Force on Climate-Related Financial Disclosures (TCFD) Report and independent assurance statements verifying key environmental data, such as carbon neutral scope 1 and scope 2 greenhouse gas emissions and other key performance indicators.
FINANCIAL AND OPERATIONAL INFORMATION
The following table summarizes select 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 consolidated financial statements and notes thereto for the fiscal period ended June 30, 2022 is available on SEDAR at www.sedar.com and PrairieSky’s website at www.prairiesky.com.
Three months ended |
Six months ended | |||||||||||||||
(millions, except per share or as otherwise noted) | June 30, 2022 | March 31, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |||||||||||
FINANCIAL | ||||||||||||||||
Revenues | $ | 198.1 | $ | 139.9 | $ | 69.8 | $ | 338.0 | $ | 129.3 | ||||||
Funds from Operations | 159.6 | 105.0 | 56.6 | 264.6 | 105.4 | |||||||||||
Per Share – basic and diluted(1) | 0.67 | 0.44 | 0.25 | 1.11 | 0.47 | |||||||||||
Net Earnings | 110.1 | 63.9 | 27.5 | 174.0 | 45.9 | |||||||||||
Per Share – basic and diluted(1) | 0.46 | 0.27 | 0.12 | 0.73 | 0.21 | |||||||||||
Dividends declared(2) | 28.7 | 28.7 | 14.5 | 57.4 | 29.0 | |||||||||||
Per Share | 0.120 | 0.120 | 0.065 | 0.240 | 0.130 | |||||||||||
Acquisitions | 15.6 | 6.3 | 6.1 | 21.9 | 51.7 | |||||||||||
Net debt at period end(3) | 453.9 | 568.9 | 35.7 | 453.9 | 35.7 | |||||||||||
Common share repurchases | – | – | 13.2 | – | 13.2 | |||||||||||
Shares Outstanding | ||||||||||||||||
Shares outstanding at period end | 238.8 | 238.8 | 222.3 | 238.8 | 222.3 | |||||||||||
Weighted average – basic | 238.8 | 238.8 | 222.8 | 238.8 | 223.0 | |||||||||||
Weighted average – diluted | 239.1 | 239.0 | 223.2 | 239.0 | 223.4 | |||||||||||
OPERATIONAL Royalty Production Volumes |
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Crude Oil (bbls/d) | 12,220 | 11,188 | 7,028 | 11,707 | 7,152 | |||||||||||
NGL (bbls/d) | 2,772 | 2,621 | 2,612 | 2,697 | 2,557 | |||||||||||
Natural Gas (MMcf/d) | 66.0 | 60.5 | 60.5 | 63.3 | 59.1 | |||||||||||
Royalty Production (BOE/d)(4) | 25,992 | 23,892 | 19,723 | 24,954 | 19,559 | |||||||||||
Realized Pricing | ||||||||||||||||
Crude Oil ($/bbl) | 122.01 | 97.99 | 67.01 | 110.60 | 61.29 | |||||||||||
NGL ($/bbl) | 70.25 | 55.66 | 35.13 | 63.20 | 34.18 | |||||||||||
Natural Gas ($/Mcf) | 6.14 | 4.20 | 2.49 | 5.21 | 2.47 | |||||||||||
Total ($/BOE)(4) | 80.44 | 62.64 | 36.16 | 71.94 | 34.35 | |||||||||||
Operating Netback per BOE(5) | 77.69 | 56.97 | 33.43 | 67.80 | 31.07 | |||||||||||
Funds from Operations per BOE | 67.48 | 48.83 | 31.48 | 58.58 | 29.74 | |||||||||||
Oil Price Benchmarks | ||||||||||||||||
Western Texas Intermediate (WTI) (US$/bbl) | 108.57 | 94.29 | 66.07 | 101.43 | 61.95 | |||||||||||
Edmonton Light Sweet ($/bbl) | 138.18 | 115.66 | 77.24 | 126.92 | 71.91 | |||||||||||
Western Canadian Select (WCS) crude oil differential to WTI (US$/bbl) |
(12.80 | ) | (14.53 | ) | (11.49 | ) | (13.67 | ) | (11.98 | ) | ||||||
Natural Gas Price Benchmarks | ||||||||||||||||
AECO monthly index ($/Mcf) | 6.27 | 4.59 | 2.85 | 5.43 | 2.89 | |||||||||||
AECO daily index ($/Mcf) | 7.24 | 4.74 | 3.09 | 5.99 | 3.12 | |||||||||||
Foreign Exchange Rate (US$/CAD$) | 0.7820 | 0.7842 | 0.8146 | 0.7831 | 0.8022 |
(1) | Net Earnings and Funds from Operations per Share are calculated using the weighted average number of basic and diluted common shares outstanding. |
(2) | A dividend of $0.12 per common share was declared on June 7, 2022. The dividend was paid on July 15, 2022 to shareholders of record as at June 30, 2022. |
(3) | See Note 14 “Capital Management” in the interim condensed consolidated financial statements for the three and six months ended June 30, 2022 and 2021. |
(4) | See “Conversions of Natural Gas to BOE”. |
(5) | Operating Netback per BOE is defined under the Non-GAAP Measures and Ratios section of this press release. |
CONFERENCE CALL DETAILS
A conference call to discuss the results will be held for the investment community on Tuesday, July 19, 2022, beginning at 6:30 a.m. MDT (8:30 a.m. EDT). To participate in the conference call, you are asked to register at the link provided below. Details regarding the call will be provided to you upon registration.
Live call participants registration
URL: https://register.vevent.com/register/BI0ab01818277e447da41c1f36b21bb3e8