Jul 25, 2017
Executives
Andrew Phillips - CEO, President and Non-Independent Director Pamela Kazeil - CFO and VP of Finance
Analysts
Shailender Randhawa - RBC Capital Markets Jeremy McCrea - Raymond James Ltd.
Operator
Good morning. My name is Sarah and I will be your conference operator today.
At this time, I would like to welcome everyone to the PrairieSky Royalty Ltd announces their second quarter 2017 financial results. [Operator Instructions].
Thank you. Andrew Phillips, President and CEO of PrairieSky, you may begin your conference.
Andrew Phillips
Thank you, Sarah and good morning, everyone and thank you for dialing into the PrairieSky Royalty Q2 2017 earnings call. On the call from PrairieSky are Pam Kazeil, our CFO; Cam Proctor, our COO and myself Andrew Phillips.
The second quarter of 2017 saw 104 wells built on PSK acreage. Operationally, our future state less spring condition, numerous facility outages and typical road bands are put in place during breakup.
There are now over 200 rigs working in Western Canada which is double the rig count from 1 year ago. Royalty production for the quarter averaged 25,700 barrels of oil equivalent per day.
And was comprised of 48% crude oil and liquids. Free cash flow after-tax and G&A was $75 million for the quarter which was ahead of our internal estimates as a result of us completing the PrairieSky fee simple lands.
Of this $75 million, $44.5 million was paid in dividends, $11.6 million was used to cancel 397,000 shares and the remaining $18.9 million went into the bank. Of this $18.9 million, $9.7 million was used to make acquisitions.
This resulted in positive working capital of $108 million at the end of the second quarter. On the cost front, cash taxes totaled $4 million.
Cash G&A was $3.72 a barrel, due to the vesting of IPO grants. The company is expecting 2017 G&A to be in the low $3 range for the full year.
Our goal continues to be a sub $3 cash G&A total. Our $10 million worth of acquisitions were primarily focused on acquiring large contiguous land blocks on 2 oil resource plays for 2 separate well capitalized operators.
With $108 million in positive working capital and excess free cash flow after the dividend and buyback, PrairieSky remains well-positioned to capitalize on the opportunities in a challenging environment. Our compliance team continues to work hard and collected $1.3 million in payments and returned lands to inventory on prospective place in Alberta and Saskatchewan.
Land leasing was very active in the quarter, resulting in $14.3 million in cash bonus. This was from a variety of play types, including the Duvernay type, Mannville, viking and other oil resource plays.
Of note, we were able to immediately release a number of expiring lands, leased in 2014 further highlighting the recycling potential of our fee cut allowance. PrairieSky has internally generated an extension to a light oil play on its plans that expire in 2018, that we will work to release upon exploration.
Given PrairieSky's 345 Royalty payers and sees well data on over 500 wells manually, we get a unique view into the Canadian energy business. When you distill the business down to individual well economics you get a good gauge of industry profitability.
Today we're seeing both private and public operators hang out wells in less than 1.5 years that should remain net operating income positive for over 20 years. We're therefore encouraged the capital flows to energy will return.
We would like to thank our shareholders for their support and I will now turn it over to Pam to walk through the financials.
Pamela Kazeil
Thank you, Andrew. Good morning, everyone.
PrairieSky generated funds from operations of $75 million or $0.32 per share in the second quarter. This is up 11% from Q1 2017 funds from operations, due primarily to bonus consideration earned from leasing activities on PrairieSky's fee land base.
Average daily production for the quarter was 25,706 boe a day. Production was comprised of natural gas volumes of 80.6 million a day, oil volumes at 9,609 barrels a day and NGL volumes of 2,664 barrels a day.
Production volumes are down from Q1, 2017 due to lower compliance volume collections during the quarter as well as the impact of spring breakup. PrairieSky's production volume included 842 boe a day of compliance activity and 988 boe a day of other prior period adjustments related to new wells on stream and better well performance.
PrairieSky collected $1.3 million on compliance revenue which is included in total product revenue of $69 million for the quarter. Compliance volumes will vary quarter-to quarter and are not reported unless collection is certain.
Compliance collection, since IPO 3 years ago, totaled $33.5 million. Other revenue for the quarter was $33.2 million which included lease rental income of $3.6 million and bonus consideration of $29.5 million related to entering into 37 new leases with 34 different counterparties in the period.
Of the $29.5 million, $15.2 million was noncash and related to the amendment of the existing leasing arrangement. In leu with cash, PrairieSky received course on developed and undeveloped land as well as seismic.
Administrative cost in the quarter totaled $9.6 million or $4.10 per BOE. Cash administrative costs were $8.7 million or $3.72 per BOE which was higher than Q1, 2017 due to long term eccentric payments in the quarter, all of which related to grants made to employees and executives 3 years ago, in conjunction with the IPO.
In 2017, PrairieSky expects cash G&A to be in the low $3 of boe range. PrairieSky declared dividends of $44.5 million in the quarter which result in payout ratio of 59%.
Under the normal course issuer bid, PrairieSky repurchased 397,200 common shares for $11.6 million. Since instituting the normal course issuer bid in May, 2016, PrairieSky has repurchased approximately 1.7 million common shares for approximately $48 million.
At June 30, 2017 PrairieSky had positive working capital of $108 million, including cash of $96.9 million and no debt. We will now turn it over to the moderator to proceed with the Q&A.
Operator
[Operator Instructions]. Your first question comes from the line of Jeremy McCrea from Raymond James.
Jeremy McCrea
Just on your new leasing arrangements, I'm wondering if you guys can give some indication of where those leasing agreements are being focused and has that changed over the last year? So I'm just trying to get a better sense if those leasings arrangements are more so just Viking or do they encompass a lot more other newer plays as well here too?
Andrew Phillips
No problem, Jeremy. Yes and I'm happy to talk a little bit more about that.
I know we're -- lease issuance bonus was far exceeded our internal estimates. About $5 million of that was kind of the plain vanilla leasing we've been doing over the last 2 years which included Viking, Mannville and one other new type oil resource play that a company has got an idea on.
So that represented about $5 million of the bonus. $9 million of the bonus was on the Duvernay, the east shale, Duvernay.
So those were across the variety, you know again, the east shale Duvernay is quite large and we have the checkerboard pattern within the bulk of the play. So that was two -- primarily 2 different well capitalized operators on that play.
And we're encouraged by both the quality operators and the quality of the technical work that was done in advance of leasing the lands from us. So I guess the additional $9 million was from the Duvernay.
Jeremy McCrea
And then just relate to the new lease arrangements that, I think was 37 or so that was mentioned, Is that very specific as well too or is that spread across the portfolio as well?
Andrew Phillips
Yes, that's actually -- you bring up a good point, that sounds like a lot of leasing arrangements and this one of the things in our business that's pretty common in the quarter. We have 23,000 individual sections and a lot of those individual mile-by-mile sections are stratified.
So every single quarter we have leases expiring or new small leases entered into with different producers. Just because of the extensive nest of the land-based, it's very, very common to do 30 or so leases and you can't really predict which ones those are going to be and those are on a wide variety of plays, from conventional plays to extensions to waterfloods.
And the other parts that we're starting to see is we did a lot of leasing when oil was $104 a barrel in 2014 and now a lot of those leases that we entered into were 3-year leases, they're now expiring, but the company is typically wanting to keep them for another 3 years if they haven't drilled them. So we're re-leasing some of those lands as well.
Operator
Your next question comes from the line of Shailender Randhawa from RBC Capital Markets.
Shailender Randhawa
Two questions for me today, Andrew. So 1, just on the new leasing front, can you give us a sense of the associated drilling commitments around those?
And then just what are you seeing in terms of lease terms as well, in terms of a 10-year and Royalty rate, just given the commodity price environment? And then secondly, a question for Pam.
Do the Q2 acquisitions, do some of those get allocated to the CEE pools?
Andrew Phillips
So on the new leasing arrangements, we don't talk about the associated drilling commitments. And all the arrangements are structured little bit differently.
We talk about the royalties are typically 16%. In certain cases, we offer some front-end incentives for the first few wells built in the play, to allow some exploration to be done.
And then in terms of tenure, they're typically 3 years with an extension to take it to the same level as the Crown, then at the end of the 3-year period there's another bonus that gets paid if a minimum drilling commitment has been made. So there are some commitments in there, but we don't talk about specifics, just for the confidentiality of the operators.
But typically, you can think of them as 3 to 5 year leases, depending on the amount of drilling that gets done. And I guess the final comments on the leasing is, we're encouraged by the operators that are leasing on the Duvernay.
It will require a fair amount of capital to drill this acreage and with the 890 sections, we're trying to get some of the better lands that we deem technically prospective leased while people are interested in testing the play.
Shailender Randhawa
Just a follow-up, just in terms of the percentage lease on the Duvernay, I think it was around 1/3 at the Investor Day, is that about right?
Andrew Phillips
Yes. That would be about right and one of those leases was entered into at the time of the Investor Day, so it's not a lot higher.
And actually, interestingly enough, in our prospective fairway that we had knocked out one of the new leases we just entered into with an operator was not in our fairway. They had a different view on the oil window.
So again, that's where their more maturities were best. So those would not have been in our 890 section inventory.
Pamela Kazeil
On the tax pool, $4.9 million was added to CEE.
Operator
There are no further questions at this time. Mr.
Phillips, I will turn the call back over to you.
Andrew Phillips
Again, I just like to thank everyone for calling in and as always, if you have additional questions, please feel free to call Pam or myself at 587-293-4005. Thank you.
Operator
This concludes today's conference call. you may now disconnect.