Oct 25, 2022
Operator
Good day and thank you for standing by. Welcome to the PrairieSky Royalty Ltd.
Third Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode.
After the speaker's presentation, there'll be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Andrew Phillips, President and Chief Executive Officer. Please go ahead sir.
Andrew Phillips
Thank you very much and good morning everyone and welcome to the PrairieSky Royalty Q3 2022 earnings call. On the call from PrairieSky are Cam Proctor, COO; Pam Kazeil, CFO; and myself Andrew Phillips.
There are certain forward-looking information in my commentary today so I would ask investors to review the forward-looking statements qualifier in our press release and MD&A. Before passing the call over to Pam to walk through the financials, I will provide an operational update.
Strong third quarter activity of 286 spuds at an average royalty of 8.9% should result in a strong finish to an already excellent year and a tailwind for 2023. Activity was spread across the basin and numerous wells were exploratory touching new concepts and play ideas.
Third quarter leasing was very strong as we entered into 58 leasing arrangements with 46 different companies resulting in lease issuance bonus of 5.9 million throughout the quarter. The compliance group also had a productive quarter and brought in 3.3 million in compliance revenue.
Given the confidence in our organic growth profile, our low payout ratio and the pace at which the debt incurred for the acquisitions in 2021 has been retired. The Board of Directors has made the decision to double the current $0.12 per quarter dividend to $0.24 or $0.96 per share per year.
This will be a factor for the Q4 2022 dividend for holders on record on December 30, 2022. Given our continued low payout ratio and our organic growth opportunities, investors can expect ratable annual dividend increases in future years.
This low payout ratio will allow us to retire the current debt and have significant liquidity available for opportunistic acquisitions or share repurchases, which ever provides the best long-term return for shareholders. The significant investment that we have made in the large heavy oil heavy oil [on PrairieSky] [ph] accumulations across the Western Canadian Sedimentary Basin at the inflection point of a new technology used to significantly increase recovery factors will provide our owners with per share reserve growth over the next 5, 10, and 15 years.
Our once every two year Investor Day is scheduled for the morning of May 17, 2023 at the Royal York Hotel in Toronto, where we look forward to publishing our asset handbook and providing shareholders with a range of outcomes over the medium and longer-term for the business. Thank you to our owners and staff for patiently allowing us to improve our business over the last five years.
I will now turn the call over to Pamela to walk through the financials.
Pamela Kazeil
Thank you, Andrew. Good morning, everyone.
As Andrew mentioned, there are certain forward-looking information in our commentary today, so I'd remind investors to review the forward-looking statements qualifier in our press release and MD&A for Q3 2022. Royalty production averaged 24,986 BOE per day in Q3, and generated another strong quarter of funds from operations, which totaled $123.5 million or $0.52 per share.
PrairieSky's oil royalty production averaged 11,376 barrels per day in Q3. Excluding all acquisitions, oil royalty volumes increased 50% over Q3 2021, due to strong third-party drilling activity across our land base.
Oil royalty revenues totaled $107.6 million in the quarter as we realized $102.80 per barrel, which is up approximately $30 per barrel over Q3 2021. As expected, oil royalty volumes were lower than Q2 2022 following seasonal breakup when third-party sales activity slowed down and fewer new wells are drilled and brought on stream.
Oil royalty revenue lagged Q2, primarily as a result of lower WTI benchmark pricing and wider light and heavy oil differentials, partially offset by a stronger U.S. dollar.
We anticipate higher oil royalty volumes into Q4 and 2023 due to the level of activity on our lands in the quarter when 268 oil wells were spud, including 107 Viking wells, 48 Clearwater wells, and 49 light and heavy mantle oil wells. Natural Gas royalty revenue totaled 24.2 million in the quarter, which was up 55% over Q3 2021 as royalty production volumes averaged 65.7 million a day and benchmark pricing improved.
Volumes increased due to acquisition volumes, as well as 5% organic growth. Natural gas royalty production volumes remained flat with Q2, but natural gas revenue declined 34% due to lower AECO and Station 2 benchmark pricing.
During the quarter, there were 18 natural gas wells spud on our royalty lands, including 5 Spirit River wells and 4 Mannville wells. NGL royalty revenue totaled 14.2 million, which was up 41% from Q3 2021, due to strong benchmark pricing and flat average NGL production volumes of 2,660 barrels per day.
NGL royalty revenue decreased 20% from Q2, primarily due to lower benchmark pricing. Prior period adjustments totaled 1,257 BOE per day in the quarter with 798 BOE per day related to new wells on stream, and 459 BOE per day related to compliance activities.
Overall PPAs were 40% liquids. The compliance group recovered missed and incorrect royalties through forensic accounting collecting $3.3 million in the quarter.
During Q3, other revenue totaled 8.7 million and included 1.6 million in lease rentals, 1.2 million of other income and 5.7 million of bonus consideration. Year to date, we have entered into 164 new leases as compared to 91 leases in the first nine months of 2021.
The new leasing is a leading indicator of field activity and we anticipate near-term drilling on many of these new leases. Cash administrative expenses totaled 4.9 million or $2.13 per BOE in the quarter.
We anticipate cash administrative expenses will be well below $3 per BOE for the full-year. Current tax expense totaled 20.4 million in Q3.
Entering the year, PrairieSky had $1.75 billion to tax tools to offset future taxable income. So in 2022, the first $175 million of cash flow is tax free, and the remainder will be tax that are statutory tax rate of approximately 23.5%.
During the quarter PrairieSky declared dividends of 28.7 million or $0.12 per share with the payout ratio of [23%] [ph]. Excess funds from operations above the dividend and our $2.5 million of acquisitions was used to repay bank debt.
Net debt at September 30 was $364.2 million. PrairieSky has reduced net debt by 43% or $270.8 million since December 31 2021.
We are pleased to announce a 100% increase in our quarterly dividend to $0.24 per share or $0.96 per share annualized effective for the December 30, 2022 record date. Since IPO, PrairieSky has generated approximately $2 billion in funds from operations and returned $1.5 billion to shareholders through dividends and buybacks.
We will now turn it over to the moderator to proceed with the Q&A.
Operator
Thank you. [Operator Instructions] Our first question comes from Patrick O'Rourke with ATB Financial.
Your line is now open.
Patrick O'Rourke
Hey guys, good morning. [Indiscernible] doubling of the dividend here.
Just curious, in terms of timing and sort of cadence in terms of review of the dividend policy going forward here. We had sort of been thinking about it as being an annual event that happened with the Q4 reporting in the February time frame.
Is this still the right way to be thinking about it? And, sort of what was the, sort of milestone or motivation or motivation for this move here?
Andrew Phillips
Yes, thanks for the question, Patrick. It will be an annual event in the future, typically in the February time frame.
We're just well ahead of our estimates when we made the acquisitions in terms of debt repayment and growth profile. So, we were comfortable rewarding shareholders just one quarter earlier.
Patrick O'Rourke
Okay, great. And then one of the key milestones I think for the business is extinguishing the debt that was taken on with the Heritage acquisition, taking this into account and current share prices, when do you forecast today that milestone happening?
Andrew Phillips
Yes, it'd be in late 2024, early 2025 depending on the pricing we achieve over that period of time, but it will be at very low levels in a pretty short period of time just given the payout ratio still remains quite low.
Patrick O'Rourke
Okay. And then final question, more on the operational front.
Obviously, leasing has been very strong, as well as spud, how much of that is, sort of being driven by that Heritage acquisition? And then wondering what you're seeing in terms of the new technology deployment, multilateral wells on that land?
Andrew Phillips
Yes. No, operationally, actually the leasing has been across the entire basin right from some original PrairieSky lands we had in southwest Manitoba all the way to the Deep Basin.
So, it's been pretty widely distributed across the Western Canadian basin. And then from an operational standpoint, we've seen numerous, kind of stacked heavy oil opportunities where you have really good grain size drilled multilaterally and some pretty significant discoveries made across some of those heritage land.
So, there's been some bright spots there and we've even seen light oil opportunity where the multilateral technology was tried in a formation where typically they fracture simulated almost every well in the pool. So, pretty interesting dispersion of this technology across the basin and we look forward to the next year, it's going to be a record number of wells.
We should have net capital spent on our lands that's greater than the last two years combined this year. So, we're seeing a lot of new wells drilled and not just development wells and exploration wells.
So, it should be a fun year to watch the technological advancements, that’s primarily the [heavy oil plant] [ph].
Patrick O'Rourke
Thank you very much.
Operator
Thank you. One moment for our next question please.
Our next question comes from Matthew Weekes with IA Capital. Your line is now open.
Matthew Weekes
Good morning. Thanks for taking my question.
I'm just interested in the opportunity on the carbon capture royalty side. I know it's something that's been discussed before.
I'm wondering if you, kind of looked internally and estimated what the opportunity could be for carbon capture royalties on your lines in terms of a tonnage amount, sort of annually over the long-term?
Andrew Phillips
Yes, it's an important part of the business that we're working towards expanding. We've been approved for another project in, kind of Southern Alberta.
I think it's a huge opportunity particularly between Edmonton and Calgary just where a lot of the [pollution corridor] [ph] is, but that's where a lot of [indiscernible] reservoirs are as well. So, I think – and there you can really quantify exactly of the volumes of CO2 that can be sequestered into those reservoirs.
So, we need a little more clarity from the governments on incentives to try and align them more with what the U.S. has, but there's definitely a huge opportunity.
We don't quantify the amount of carbon dioxide that can be sequestered, but it's a pretty significant amount across the basin obviously. And I think a lot of people pursuing it, which is great.
I think it'll be good for the Canadian energy sector to show the developments on this front, Matthew.
Matthew Weekes
Okay. Thank you.
And yes, I agree with that last point. And just a second question on the Clearwater.
It looks like, you know activity is pretty strong. I'm just wondering if you can comment on generally the trend on the Clearwater royalties and how that might be performing [versus] [ph] financial expectation?
Andrew Phillips
Yes. No, thanks for the question.
I think it's interesting because Nipissing and Martin Hills are kind of the majority of our 1,500, 1,600 barrels per day of net royalty production. There's been significant new discoveries made of size across the land base.
That's one of the benefits of having that big early land base we put together in 2016, 2017. And those discoveries are going to start to see some development this year.
So, we should see some pretty significant growth probably in the 50% range growth year-over-year over the next 12 months. And then in terms of performance expectations, two things that have positively surprised the 90 day IPs have been a positive surprise across all the [plays] [ph] and then the second surprise has been the success of some of the water and polymer opportunities across the land base.
So, I think recovery factors will probably be a little higher than we initially anticipated.
Matthew Weekes
Okay. That's great commentary.
Thank you. I'll turn it back.
Thanks.
Operator
Thank you. One moment for our next question please.
And our next question comes from Jeremy McCrea with Raymond James. Your line is now open.
Jeremy McCrea
Yes. Hi, guys.
Just a couple of questions here. In terms of you guys bumping the dividend here, is this a bit of – I'm curious what you think of the M&A market here going forward?
Just if you feel confident that you can bump dividend, but do you feel like there's enough cash if you want to make an acquisition out there? And what does M&A market look like here going forward into 2023?
Andrew Phillips
Yes. And I guess, it's – thanks for the question, Jeremy.
I think when you think about the M&A market, we did a review of all that M&A we've conducted since 2014 when we IPOed and it's all been between [indiscernible]. So, we're quite disciplined on that front, and typically try and buy at those parts of the cycle.
And one of the interesting things that we bought last year, discounting [$65] [ph] crude was something that was for sale six years prior to that. So, if you're patient and disciplined, all the best assets will end up in the hands of the low cost royalty operators.
So, we just maintain discipline on that front. The extent to which royalty opportunities are available, we have significant liquidity and still a continued low payout ratio to enable us to execute on those opportunities as they come.
I think the one comment on the Canadian energy sectors, it's [indiscernible] cash and a lot of the companies are going to debt zero in that shorter period of time. So, that's great news for us because the healthy operators to help PrairieSky and that's one of the reasons we're seeing a lot of new exploration plays developed and a lot of new leasing on new opportunities.
But I think probably there is a more it'll be a little more muted on M&A and we certainly would have trouble discounting $100 oil in an acquisition opportunity.
Jeremy McCrea
Okay. And then just lastly, of the new leases that you guys signed here, how – what breakdown would you say is because the way the crown royalty is now just quite a bit higher than where it's ever been, where guys are just saying, I'm not interested in paying 35% Crown, I'm more interested in paying 18% on PrairieSky’s [are like] [ph], how much of this new leasing activity is because of you guys have a more favorable royalty right now versus the Crown?
Andrew Phillips
Yes. And I think, I guess, to answer that one would be the majority of the really strong leasing is just from strong oil, gas, and NGL pricing across the basin.
I think it's strong, it's been in a long time all three commodities. So that would probably be the major driver.
Number two would be the [financial health] [ph], but I think for sure, there's the recognition in a lot of plays where they're getting pretty quick payout that the NPV on a PrairieSky section for an operator is actually quite a bit higher than it is on the crown right now just because the wells post [C-Star] [ph] are jumping to a higher royalty. So, that definitely is a benefit.
It's hard to know because the operators – we have 330 different operators on our lands and they don't tell us specifically why they're leasing, but I think that would be a driver in certain plays for sure, Jeremy.
Jeremy McCrea
And just with the higher royalty rate that you guys were seeing from the new wells here, is that something we can expect going forward or does that drop back down to more of a long-term normalized rate, closer to that 6%?
Andrew Phillips
Yes, it's interesting. So, our average royalty on our 42,500 [wellbore portfolio] [ph] is 6%.
We obviously saw very strong number in terms of average royalties for the wells that were spun [online] [ph] this quarter, coupled with [indiscernible] that one is the seasonal Viking activity and typically the Viking wells get drilled in Q3 and early in Q4 that they don't have to run a boiler on the single rigs. They're not competing with any well sands, core hole drilling, and in addition, when they're fracing the wells, they don't have to heat the water up as significantly from a lower ambient temperature.
So, a lot of the Viking activity happened and those are typically one mile laterals. So, those would be on 79% PrairieSky leases.
So, that kind of drives the average royalty higher. But there is one structural change that should affect that over the next 3, 5, and 10 years is the Heritage acquisition, all the heavy oil opportunities that exist on those lands from the Waseca, Sparky, GP, Rex, all the way down to the [Cummings] [ph].
Those are typically 79% leases and so the Clearwater type potential results were significantly higher royalties. So, that could help bring the average royalty up and bring the net capital up as well.
Jeremy McCrea
Okay, perfect. Thanks guys.
Operator
Thank you. One moment for our next question.
And our next question comes from Jamie Kubik with CIBC. Your line is open.
Jamie Kubik
Yes, good morning. Thanks for taking my question.
Just a quick question on capital allocation. How should we think about the NCIB for PrairieSky?
And when that could be utilized? Can you just outline a little bit capital allocation framework that you're thinking about here?
Andrew Phillips
For sure, and good morning, Jamie. I think on the NCIB, if you look historically at what we've done, we bought back [indiscernible] worth of stock.
[I think at] [ph] an average price of just over $14 per share. We've issued at an average of around [25] [ph].
So, we've done it okay in the past. We have a NCIB that's out there right now.
I think we will use it opportunistic, obviously the number one priority right now is paying the debt down to a low level, which gives you optionality on any opportunity that might come available whether it's buying back the stock or maybe there's a better per share return to be achieved with an acquisition, if natural gas prices get weak or something like that. So, we just want that optionality, which is why we're not active with it right now, but the debt repayments [are a growing] [ph] priority today.
Jamie Kubik
Got it. Okay.
And then on the new dividend rate, can you talk a bit about maybe what commodity price you think that that is defensible down to?
Andrew Phillips
Yes, it'd be defensible down to $40 oil or $50 oil and $0 gas or something like that. But again, we'll have – when you think about the businesses over the next 12 months, the debt levels are going to get very, very low on our $800 million bank line.
and so even if it got anywhere near that, it would actually provide great opportunities for our business because we'll be virtually debt free and one of the few that sustain it at a four-year old environment.
Jamie Kubik
Okay, great. And then last question from me.
A lot of activity noted in the quarter across number of different plays, but Duvernay was absent in that commentary though. Can you talk a bit about maybe the leasing opportunity that you have remaining there and any new activity that we should be looking for in the coming quarters?
Andrew Phillips
For sure, yes. I think we should see a couple – we have two of our three kind of primary operators in the Duvernay have some pads planned on PrairieSky lands and even some licensing that's already in place.
And then we are working on some significant leasing arrangements a little further west with the number of different operators. So, there's a bit of an increase in activity there in terms of the leasing opportunity.
And I do think certainly West [indiscernible] and kind of [Wilson Green] [ph] to the North Division Lake. There's a great opportunity there.
There's some pretty interesting discoveries made and a full scale development of that could be a very significant operating asset for PrairieSky could be in the range of 1,000 to 2,000 net royalty barrels per day from a very low level today, which would be 350 barrels, Pam?
Pamela Kazeil
Yes. Exactly.
Jamie Kubik
Okay. That's great.
Thank you. That's it for me.
Operator
Thank you. [Operator Instructions] Our next question comes from Mitch Cantor with Mountain Lake Investment.
Your line is open.
Mitch Cantor
Good morning, guys. I guess, Andrew, I noted in your opening comments that you talked about optimism in the trend in reserves per share on a 5, 10, and even 15 year basis.
Some of the factors contributing that you probably touched on, but I'm wondering what else you're looking at when you think about that opportunity?
Andrew Phillips
Yes. No, thanks for the question, Mitch.
And what's interesting in – and if you reference our royalty playbooks or our asset handbook that we've released in the previous three cycles, so over the last six years, typically on a lot of these heavy oil reservoirs, we have a 5% to 7% recovery factor, maybe slightly higher if there's water polymer flood opportunity on it. But what's happened with these multilateral is you're achieving far higher recovery factors and probably having a far more optimal water or polymer flood in the future.
So what it basically done is the same – this is a neat thing about technology and the great optionality that you have when you own a royalty asset basis. We've owned a lot of this stuff for almost a decade now and we've always said, okay, well, the total recovery is going to be 100,000 barrels on this section and [indiscernible] behold, you could probably get another million barrels out of it with the new technology.
So, that's kind of the major change in the multilateral technology has kind of advanced this specifically on the heavy oil reserves that the company owned. So, it just gives us confidence that that should continue to grow as more of these different zones within the [indiscernible] stack are developed with horizontal multi-laterals.
Mitch Cantor
Interesting. So, it's the existing technology just rolling out in a sense through the accounting and the portfolio?
Andrew Phillips
Precisely, yes. And having said that, there are some new discoveries as well that are completely brand new discoveries, but a lot of this heavy oil resource has been known accumulations over the last 50 years.
There just hasn't been a way to exploit it until this technology evolves in a low cost manner.
Mitch Cantor
Great. Thank you.
Andrew Phillips
Thanks for your questions.
Operator
Thank you. And I'm currently showing no further questions at this time.
I'd like to hand the conference back over to Mr. Phillips for any closing remarks.
Andrew Phillips
Thank you everyone for dialing into the PrairieSky Q3 conference call. And at any time, please call up either Pam or myself if you have any follow-up questions.
Have a good day.
Operator
This concludes today's conference call. Thank you for your participation.
You may now disconnect. Everyone have a wonderful day.