Jul 21, 2020
Operator
Ladies and gentlemen, thank you for standing by, and welcome to today's conference call, PrairieSky Royalty announces their Second Quarter 2020 Financial Results. At this time, all participants are in a listen-only mode.
After the speaker presentation, there will be a question-and-answer session. [Operator Instructions].
I would now like to hand the conference to your host today, Mr. Andrew Phillips, President and Chief Executive Officer.
Please go ahead, sir.
Andrew Phillips
Thank you, and good morning and thank you for dialing into the Q2 2020 PrairieSky earnings call. On the call from PrairieSky are Pam Kazeil, CFO; Cam Proctor, COO and myself.
I will provide an operational update, then turn the call over to Pam to walk through the financials. We completed a $6 million acquisition in the Northeastern British Columbia, Montney play, where two new high rate wells in distinct zones now provide over a hundred barrels per day of net royalty oil production and gas production.
PrairieSky now has royalty interests in a hundred contiguous sections of traffic rights in this particular part of the Montney fairway and is well-positioned for the continued development of this play. During the second quarter, we evaluated numerous acquisition opportunities and submitted seven different bids on varying sizes of packages, but none were successful.
We continue to look for expansion opportunities for the business where we can achieve near and long-term accretion of free cash flow per share. These opportunities have to compete with buying PrairieSky shares for cancellation at an unlevered 7% free cash flow yield, with large contiguous tracks of undeveloped land on the best parts of the oil cost.
This is difficult to do, but we have the benefit of being able to allocate our excess cash flow on top of the dividend to the MCIB and give our owners a larger share in a wonderful business. PrairieSky entered into 19 new lease arrangements with 17 counterparties and received $0.7 million in lease issuance bonus.
The leasing was primarily for oil targets across Alberta and Saskatchewan and included some natural gas leasing. Cash during the April of $2.35 per BOE.
Royalty compliance collected $2.2 million taking the annual total to $4 million. As we have in previous downturns PrairieSky management will work hard to take advantage of this challenging environment to improve the business on a per share basis.
Given the significant amount of free cash flow that we will generate over the next 12 months in excess of the dividend payments, we are well-positioned to do this. We appreciate the support of our shareholders and our employees, who have managed the business well from a variety of work environments.
I will now pass the call to Pam to discuss the financials.
Pamela Kazeil
Thank you, Andrew. Good morning, everyone.
Before I get started, I will be including certain forward-looking information in my remarks today, as such, I would refer all participants on this call to please reference the forward-looking information section of our MD&A as of June 30, 2020 as well as our press release issued on July 20, 2020. During the second quarter, PrairieSky generated funds from operations of $21.3 million or $0.09 per share.
Royalty production revenue totaled $25.1 million on average production volumes 18,671 BOE per day. Production volumes were down from both Q1 2020 and Q2 2019, due primarily to the impact on global oil demand from COVID-19 and instability in global oil benchmark pricing.
Third-party operators reacted to market uncertainty, reducing capital budget for 2020. These changes along with spring breakout meant there was exploration and development activity across Western Canada in the quarter.
Production was comprised of oil volumes of 6,035 barrels per day, NGL volumes of 2,586 barrels per day and natural gas volumes of 60.3 million a day. Oil volumes were impacted by shut-ins across Alberta and Saskatchewan as operators reacted to the dramatic decrease in WTI benchmark pricing.
During the quarter average oil royalty volumes of approximately 2600 barrels a day were shut-in. As pricing has started to improve certain operators have started to bring production volumes back on.
At current WTI pricing differentials, we expect to see shut-in volumes on light oil continue to return over the summer. Heavier volumes including our thermal production will take longer to return.
The combined impact of shut-in volumes and lower benchmark pricing resulted in oil royalty revenues of 13.4 million a 74% decrease as compared to Q2 2019. Natural gas volumes totaled 60.3 million a day in the quarter.
Natural gas volumes are impacted by oil production shut-ins which reduced solution gas volumes as well as declines due to limited activity. Stabilized ACO pricing through Q2 versus the prior year generated 7.6 million in revenue, a 69% increase over Q2 2019.
NGL volumes generated an additional 4.1 million in product revenue down 37% from Q2 2019 due to lower benchmark pricing. PrairieSky’s production volumes in the quarter included 1245 BOE a day of prior period adjustments, which were 52% liquids and included 528 BOE a day from compliance activities and an additional 717 BOE a day of other prior period adjustments related to new well count stream and better well performance.
The compliance group continues to recover missed and incorrect royalties through forensic accounting collecting 2.2 million in the quarter. Other revenues total 3.1 million including 2.2 million and lease rentals, 0.2 million in other income and 0.7 million in bonus consideration on entering into 19 leasing arrangements with 17 different counter parties.
As mentioned on our Q1 2020 conference call in April, given the impact of COVID-19 on the global economy and on the energy industry, we expect the outlook for other revenues to be in the range of $15 million to $17 million, primarily as a result of lower anticipated leasing activity. And this includes our estimate for compliance revenues.
We continue to monitor our controllable costs and cash administrative expenses totaled $4 million, or $2.35 per BOE in the quarter. Current tax for the quarter was $3 million, which reflects an improved cash flow outlook for 2020 at June 30th, as compared to March 31st.
During Q2, PrairieSky declared dividends of $0.06 per share or $13.9 million and repurchased 470,000 common shares for 4.1 million. At June 30th, PrairieSky had a modest working capital deficiency of 8.7 million and no long-term debt.
Since IPO, PrairieSky has generated approximately 1.3 billion in funds from operations and returned 1.2 billion to shareholders through approximately 1.1 billion in dividends and the repurchase of 6.2 million common shares. We will now turn it over to the moderator to proceed with the Q&A.
Operator
[Operator Instructions] We have a question from the line of Jamie Kubik with CIBC. Your line is now open.
Jamie Kubik
Good morning everybody. And thanks for taking my question here.
Can you talk a little bit about counterparty risk in the current environment and how PrairieSky is managing that?
Pamela Kazeil
Yes, so counterparty risk is something that we always are reviewing as a business. So, through the quarter, one of the things that we focused on was where counterparties wish to shut-in production.
We did compliance reviews and collected any outstanding amounts. We take production in kind, where we perceive that there may be some counterparty risk.
And, when we are entering into leasing arrangements, we are always looking at our counterparties to evaluate their balance sheets and their ability to meet their commitments. One of the things that we have tried to focus on with our counterparties is ensuring that, we r picking counterparties who are able to commit capital to develop their place.
So that has always been a priority for PrairieSky.
Andrew Phillip
Yes. And just to follow-up on that, Jamie.
PrairieSky is the owner of the resource, so if people - if a receiver stops paying or counterparties stops paying, we have the ability to remove them from our land. So that is a super secure nature of owning a piece of a land.
You actually own the resource. And of course, we see the whole spectrum because we have 325 different royalty pairs.
So, we see everything from the really financially stable companies down to the weaker ones. But again, this is a process has been ongoing for six years and Pam and her team has done a really good of ensuring we are taking production in kind for some of the stressed producers.
Jamie Kubik
Okay. Understood.
And then, maybe just another quick question here. You mentioned in your remarks, the management and PrairieSky employees are going to work hard to take advantage of this environment to improve the business.
And when we look out, obviously commodity prices are better for the second half of 2020, then what they look like they were for Q2 obviously. How should we think about, your allocations of free cash flow?
Like is a dividend increase a possibility in the next six months, given what we are seeing on pricing, or is it more likely that you repurchase stock and look to M&A?
Andrew Phillip
Yes. It is a great question.
And I think, again, we will continue to review the dividend in every February. I think, the dividend we will grow overtime with the growth and the free cash flow of the business.
But I think where we sit today, we see tremendous value in buying the stock below intrinsic value here. And, that is a primary allocation for the excess free flow on top of the dividend.
We would be keen to do acquisitions that improve our business. We are working hard on a number of them.
But again, I think there is definitely a value gap there. So again, we will continue to capital shares down here, and look for opportunistic acquisitions.
But I think the dividend will have the opportunity to grow overtime. And I think it is a wonderful dividend paying company, in the three years prior, we paid $185 million each of those all out of free cash flow and had another $40 million left over to capital shares as well.
Those were kind of better times in terms of pricing activities. So in this environment, with quite a bit of excess free cash flow, we will utilize it to improve the business.
Jamie Kubik
Okay. And then maybe final question here for me is, if we think about Q2, you obviously had a 30% drop in oil volumes, but much less activity over the second quarter as well.
How should we think about oil volumes for Q3, Q4 here given shut-ins are likely returning as you mentioned, but activity certainly lower. So do those to offset one another or should we expect oil volumes to lift and respecting that you don't provide firm guidance, but any loose numbers that you can provide on that side would probably be helpful.
Andrew Phillip
Yes, for sure. And again, we had the 30% shut-ins.
We do anticipate, for sure the light oil, as I mentioned on the call, the light oil volumes have already come back on or in the process of coming back on. Some of the water flood pools take a little longer before they reach peak production, the 14% of our volume come from the thermal oil, those are going to take as long as December till they are back up to their full production.
And then that heavy oil. It really depends on people where they fit in the cost curve, but also, it depends on their individual hedging situations.
I know a number of our heavy oil producers crystallizer hedges, took the cash and left the volume shut-in for slightly better pricing. So again, it will take a bit of time, but I would assume oil volumes to be up from Q3 obviously with even without the even with the low activity over the back half the year, but again, it is cavies extremely anemic in the base and certainly on the wild side.
I know there is a pretty long period of time where there was zero rigs running in Saskatchewan and only two oil rigs running in Alberta. It is hard to drill a new wall when you have got oil production curtailed.
So I do think we will see an improvement in the back half of the year.
Jamie Kubik
Okay. That is it for me.
Thank you guys.
Operator
[Operator Instructions] Our next question comes from a line of Jeremy McRae with Raymond James. Your line is now open.
Jeremy McRae
Hi. Just a bit - all my follow-up question are asked Andrew.
In terms of activity. I know a lot of companies haven't said they are expanding their CapEx budgets, but just with commodity prices really starting to move up here in the last couple of weeks.
Have you heard any indications from you know the companies - in your mind that thinking about getting back to work? Maybe not.
They have announced for sure but they are asking more licensing type questions, or any kind of indication that activity is starting to come back here. And just with that is there any indications or numbers they give for how many wells were actually drilled on your lines here for Q2?
Andrew Phillip
Yes, so for sure. So, in Q2, there were zero spuds on our land and talking to a lot of the bigger producers on our lands and some of the top 10 royalty players.
There is a lot of planning for kind of a Q4 program, which kind of dovetails into their 2021 programs. So, I think, with the improvement of pricing and the narrow differentials have actually probably been the biggest and the biggest factor in people making these decisions.
We are starting to see some programs trickle into Q4, late Q3 early Q4. So, I think people are setting up their 2021.
So, we do expect greater activity than we would have two months ago had we chatted, and so again, I don't know that that will show an effect for us in the back half of this year, but it certainly will improve 2021.
Jeremy McRae
Okay. alright.
Thanks Andrew.
Andrew Phillip
Thanks Jeremy.
Operator
Our next question comes from Harshit Gupta with Accountability Research. Your line is now open.
Harshit Gupta
Hi, good morning. My questions actually have been answered.
Thank you very much.
Andrew Phillip
Thank you.
Operator
I'm showing no further questions in queue at this time. I would like to turn the call back to Mr.
Phillips for closing remarks.
Andrew Phillips
Well, thank you everyone for calling into the PrairieSky Q2 earnings call and if you have any further follow-up questions, please call Pam or myself.
Operator
Ladies and gentlemen, this concludes today’s conference call. Thank you for participating.
You may now disconnect.