Andrew Phillips - CEO Pam Kazeil - CFO

Jeremy McCrea - Raymond James Shailender Randhawa - RBC Capital Markets Michael Dunn - GMP FirstEnergy Edward Friedman - McLean

Good morning and thank you for dialing into the Q3 2018 Prairiesky Royalty earnings call. On the call from Prairiesky are Pam Kazeil, CFO; Cam Proctor, COO; and myself, Andrew Phillips.

Free cash flow for the third quarter was $67 million, up 7% quarter-over-quarter. With this free cash flow, we paid 45.8 million in dividends, canceled 514,000 shares for 12.5 million and used the remaining 8.7 million to partially fund 19.5 million of acquisitions.

Positive working capital was 10.6 million at quarter end. Prairiesky continues to focus on cost compliance, acquisitions and land leasing.

The first acquisition Prairiesky completed in the quarter was for $5 million and included 3.5 million of seismic data, 100 barrels a day of liquids rich gas and over 20 future Spirit River drilling locations at an 8.5% royalty. The second acquisition was 5.5 million and included 65 barrels per day of royalty heavy oil production and a potential SAGD opportunity in the upper McLaren formation in Western Saskatchewan.

And the third acquisition was 153,000 acres of undeveloped land in the Clearwater play with a multi-well commitment. Other minor land fund and futile acquisitions rounded out the total.

Compliance recovered $2.1 million, bringing year-to-date collections to 7.7 million. Cash G&A per barrel for the quarter was $2.41 and we anticipate the total to be in the low $3 per barrel range for the year.

Quarterly drilling activity was directed 95% towards oil and include 242 wells. Average net royalties on these new spuds was 8%, up from 6% in the previous quarter.

We anticipate the majority of these new wells will come on production in late Q4 and early Q1 2019. One change observed year-over-year was 20 well spud in the Cardium oil trend in West Central Alberta.

Eight distinct operators drilled the light oil targets and based on offsetting well data, the well should exhibit strong IP rates. 12 newly shaled Duvernay wells were also spud and the trend of higher IPs and lower costs looks to continue.

Bonus consideration for the quarter was $5.3 million from 28 different counterparties. The two plays that made up the majority of the quarterly bonus revenue were the Duvernay and the Cardium.

Our negotiators continue to work hard, finding qualified operators to drill on our large land base. Prairiesky generated its billionth dollar of free cash flow, after tax and G&A and has now returned over $900 million to shareholders since our May 29, 2014 IPO.

The only other companies in oil and gas in North America that have returned close to 20% of their market cap to shareholders over the same period are Schlumberger, Core Labs and ExxonMobil, but two of these companies used debt to pay their dividends during the downturn. Looking forward, the Prairiesky team is working hard on our 2019 addition of the royalty play book.

We will update our plays, type curves, pricing and provide investors with the current asset value of only the known development plays. We will have the half day Investor Day in Toronto on May 23 at the Royal Oak Hotel to walk through the contents, provide more detail on individual play advancements and answer investors’ questions.

As shareholders ourselves, we believe that the 66,000 acres per million shares owned have the potential to deliver outsized returns over the next three, five and ten year periods. I would like to thank our staff for their continued contributions and our shareholders for their continued support.

I will now turn the call over to Pam to walk through the financial results.

Thank you, Andrew. Good morning, everyone.

Prairiesky generated funds from operations of 67 million or $0.29 per share in the quarter, up 7% from Q2 2018. Cash flow was generated primarily from royalty production revenue of 71.4 million on average production volumes of 23,438 BOE per day.

Oil and NGL revenue represented 90% of total royalty revenue and approximately 49% of production volumes. WTI was up over Q2 2018, but wider, heavy and light oil differentials in the quarter resulted in lower realized oil pricing.

Natural gas revenue represented 10% of total royalty revenue due to continued low AECO pricing. Q3 2018 oil volumes were 9018 barrels a day, which was flat with the prior quarter.

The third quarter consistent with prior years has been quite active in the field with 242 wells spud comprised of 231 oil wells and 11 gas wells. Most of this production is expected to come out in the fourth quarter and early in 2019.

Natural gas volumes totaled 71.5 million a day and NGL volumes totaled 2503 barrels a day. Natural gas volumes have trended downwards from 2017 due to limited drilling and work over activity.

Prairiesky’s production volumes included 1798 BOE a day of prior period adjustments, which included 638 BOE a day from compliance activity, which were 33% liquids and an additional 1160 BOE a day of other price adjustments related to new wells on stream and better well performance. These volumes were 43% liquids.

The compliance group continues to recover missed and incorrect royalties, collecting 2.1 million in the quarter that brings year to date compliance collection to 7.7 million and collections since IPO to 48.5 million. Other revenue totaled 6.7 million, which included lease rental income of 1.2 million and bonus consideration of 5.3 million.

During the quarter, Prairiesky entered into 29 leasing arrangements with 28 different counterparties. Prairiesky has free cash costs.

Production and mineral taxes, administrative expense and income tax. In the quarter production and mineral taxes totaled 1.1 million bringing the annual rate to approximately 2% of product revenue.

Cash administrative expenses totaled 5.2 million or $2.41 per BOE. Cash G&A per BOE is expected to be in the low $3 per BOE range for the full year.

Cash taxes were 5.6 million in the quarter, bringing the effective cash tax rate to approximately 19% year-to-date. Acquisitions totaled 19.5 million in the quarter, which included additional royalty interest in both producing and non-producing properties as well as seismic.

Acquisitions added approximately 165 BOE per day of production as well as additional interest in the Clearwater oil play. At September 30, Prairiesky had a working capital of 10.6 million.

Prairiesky deployed dividends of 45.8 million or 19.5 cents per share in the quarter with the resulting payout ratio of 68%. Under the normal course issuer bid initiated on May 4, Prairiesky repurchased 514,200 common shares for 12.5 million.

Including the NCIB, Prairiesky’s payout ratio totaled 87%. From inception to September 30, 2018, Prairiesky has returned 804 million or $4.18 per share in dividends to shareholders and repurchased 3.6 million in common shares for 104 million.

Since our IPO, Prairiesky has generated 1.2 billion in total revenue, which is converted to $1 billion in free cash flow and of that 1 billion in free cash flow, 908 million has been returned to shareholders. We will now turn it over to the moderator to proceed with the Q&A.

I think probably just the elephant in the room here is just these little differentials and I just want to know how you guys are running your business any different here today here and say maybe over the next six months, are you looking ramping up, looking at different acquisitions in this low price environment, are you looking at buying back more of your shares here at these different prices, just anything that you guys are maybe doing a bit different here?

Yeah. Jeremy, I guess in terms of, we don't really change our business strategy based on short term pricing changes and obviously, we've got refinery maintenance system combined with some too much production for the pipe today, but again when there is $100 million in lost revenue data, someone will find that opportunity and close that arbitrage.

So, we’re confident that over the longer term, that'll get solved. It will certainly result in probably lower drilling activity for the coal flow heavy oil portion of our portfolio, which has seen fairly muted activity over the last three years reared anyway.

But, certainly, I think it probably created the opportunity for us to buy that $5 million heavy oil package in Western Saskatchewan that’s been producing for 25 years and in addition, we've got a SAGD project that we think might get developed in the future. So, it does create some small acquisition opportunities, but we haven't made any changes to our business strategy.

Okay. Let me just quickly -- so you talk about some small acquisitions, is there any bigger acquisitions on the horizon that you guys are potentially looking at here, like, I know you've always talked about the Exxon one before, but is there anything that's emerged here in the last six months.

There are a few packages that are out there, just for us again, it’s difficult to find thing that meet the quality and duration of our existing asset base and where we trade here today at a $5 billion valuation, interesting enough, you take our 700,000 acres of Duvernay fee lands and you think about they're all leased and some of the companies drilling on them are financed by and reversed on and the reason they're financing these businesses is because, the full cycle F&D are competitive with the Permian in these shales. So even if you use 10,000 acre Canadian, which is a quarter of what some of these US shales trade at, that $7 billion in value, just for our undeveloped land, forget about the rest of the 14.8 million acres.

So, I guess, for us, it’s pretty hard to find things that look like us where you have long duration cash flow stream, but also the future optionality that’s inherent in our portfolio. So, on the larger side, I guess to answer your question, we see a lot of manufacturer opportunities that probably just don't meet the quality of our existing asset base.

My question is on the Duvernay. I noticed that the well count in the quarter.

But just curious about the royalty rate, if there's an average royalty rate of 5%, that would probably be more weighted towards I'm guessing, how do you see that average royalty rate for the Duvernay evolving through 2019, Andrew?

Yeah. It’s a good question.

I think, we like that those royalty rates go up. So, in a lot of our agreements, we have a royalty holiday for the expiration, the first five wells in a deal and that royalty rate would be typically half of the rate that they'll go to over the long term, which is either 15% or 16%.

In addition, half of the wells is on Crown, and half of the well is Prairiesky. So that’s how you get that 5% rate.

When these wells reach a minimal amount of production or a time limit of two years, they go up to that 15% or 16%. In addition, only a certain amount of wells are at that lower royalty rate.

So, you should see that go to 7.5% over the long term, Shailender because half the wells are on Crown and half on our fee, because of these two mile long laterals. So hopefully that answers your question.

But they are on fee.

Andrew, just looking for I guess reconfirmation. I think you had said earlier this year that you were expecting oil growth in the second half of the year.

Obviously, the drilling activity was up in Q3 and you're expecting wells online in Q4, but the oil rates were roughly flat quarter-over-quarter in Q3. So should we be expecting a jump in Q4?

Yeah. Of course, I know we don't give guidance, but we did indicate that we did think you'd see some kind of single digit growth in our oil volumes and I think we still maintain that, given the drilling activity we saw in Q3 and a lot of those wells will come on in Q4.

I think it's a reasonable expectation, Mike. If you look at Q3 of last year, we’re roughly flat from Q3 of last year to Q3 of this year.

So basically the two major factors were a decline of 289 barrels from Elnora and the Southern Alberta Bakken and then we had growth in the two oil sands project and that kind of offset each other and the rest of the business kind of fit flat, so that kind of kept us at 9000 barrels a day. We do expect again 3% to 5% of oil growth in the next six months as a lot of these newer wells come on.

Now going forward, if you look out 12 to 18 months, it really depends on drilling activity in early ’19 and it remains to be seen where people’s capital budget end up. So hopefully that helps answer your question, but I do think we should see some of these new volumes come on and provide a little bit of growth for the oil part of the business.

I have three questions. One is, you did a line of credit, I’m sorry, a revolving line of credit of $200 million last quarter.

I was wondering if you can share a little bit [Technical Difficulty]. Second, not everybody is expanded equally.

So I was wondering if you can share a little bit how your [Technical Difficulty]

So the first question with regards to line of credit. Our belief is that there is opportunity to rise.

We wanted to have that in place to allow ourselves to execute on them. We don't anticipate using it.

We don't have any necessarily use of proceeds for it. We do think that if good acquisition that matter of quality and criteria came along, we could use that and then slow down the buyback until the debt was retired.

So that’s why it’s in place. So that hopefully answers your line of credit question.

Number two, all our producers are affected differently by the different. For example, some of them in Saskatchewan actually haven't seen the full brunt of the differentials and some of our larger Alberta producers have contracts with pipelines and offtake agreements that allow them to get slightly better pricing.

So they’re all affected slightly differently. Again, I think, every single one of them has a slightly different effect from these differentials, depending on not only the quality there accrued, but also their offtake agreements.

And then on the 28 different leases, the one thing that was consistent quarter-over-quarter or last year and a half was continued Duvernay leasing, the one change was we saw a lot of leasing in the Cardium light oil play, as some of the deals or leases expired. So we do expect that – future activity on that light oil play.

Thank you for calling into the Q3 Prairiesky earnings call and if you have any further question, please call Pam or myself at 587-293-4005. Thank you.