Feb 28, 2017
Executives
Andrew Phillips - President and Chief Executive Officer Pamela Kazeil - Chief Financial Officer and Vice President, Finance
Analysts
Shailender Randhawa - RBC Capital Markets
Operator
Good morning, ladies and gentlemen, and welcome to the PrairieSky Royalty announces their Fourth Quarter and Year End 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode.
Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to turn the conference over to your host Mr. Andrew Phillips, President and CEO of PrairieSky Royalty Ltd.
Andrew Phillips
Thank you, Scott and good morning, everyone, and thanks for dialing into the PrairieSky Royalty year-end 2016 earnings call. On the call from PrairieSky are Cam Proctor, COO; Pam Kazeil, CFO; and myself, Andrew Phillips, CEO.
Before I turn the call over to Pam to walk through the financials, I will provide an operational update. 2016 was a challenging year for energy, U.S.
WTI averaged $43 and AECO averaged $2.09 Mcf. Crudes spent [ph] $630 million on our lands over the year and spud over 500 wells at an average royalty rate of 10.1% versus 8.8% in 2015.
This represents a decrease of 32% from the capital spending of $923 million we saw in 2015. In spite this level of capital spending, our production from Q4 2015 to Q4 2016 grew modestly on an organic basis when taking out the acquisitions we made.
This as a result of the excellent capital efficiencies the operators drilling on our lands lower than expected declines on PrairieSky’s base production and recompletion in water flood work across Western Canada. Production per share was flat over the year at 105 barrels per million shares, but the liquids weighting improved from 41% to 46%.
Dividends declared since IPO are $520 million and buyback of totaled $32 million all had been internally generated free cash flow net of taxes and G&A. Current positive working capital is over $80 million.
We're proud of the royalty portfolio that has been assembled by the PrairieSky team over the three years since our IPO. We now find very few large royalty streams that compete with buying back PrairieSky shares at $30 per share.
PrairieSky continues to find small opportunities with strong short term, medium term, and long term accretion that can be purchased within our existing capital structure. In the fourth quarter, free cash flow was $61.8 million, $41.1 million was paid in dividends, $9.9 million was used to capital shares, and $11 million was added to balance sheet.
In the quarter, we saw per average royalty rate grow modestly from 6% to 6.2%. PrairieSky continues to focus on cost, compliance, acquisitions and organic leasing.
The leasing of our large undeveloped land base, two high quality companies is our primary focus. Cash G&A decrease to $2.22 per barrel, a record low for the company.
This was achieved adding four new talented individuals to our compliance department in 2016. Compliance recoveries for 2016 were $8.3 million.
In Q4, we added 460 barrels per day and 100,000 acres of mineral title and overriding royalties for totaled of $117 million. This included a 3.95% royalty on an early stage Saskatchewan SAGD project.
33 new lease arrangements were entered into with 29 different counterparties. The leases included lease issuance bonus of $2.4 million for the quarter.
The Board of Directors has approved a dividend increase of $0.03 per share per year to $0.75 per share or $178 million throughout the year. The buyback has been set at $44 million over the next 12 months.
The remaining free cash flow generated by PrairieSky will build on the balance sheet and can be used for quality acquisitions or buybacks in the future. With strong leasing activity in the Viking/Mannville and Duvernay oil play, PrairieSky is optimistic about the potential for organic growth and production per share over the next five to 10 years.
PrairieSky is pleased to announce to hold an Investor Day in Toronto on May, 24, 2017 to issue our asset handbook. We hope that investors and analysts will be able to attend the meeting to walk through and understand its contents.
Further details will be provided in the upcoming weeks. I will now turn over the call to Pam, our CFO to walk through the financials.
Pamela Kazeil
Thank you, Andrew. Good morning, everyone.
During the fourth quarter of 2016, PrairieSky generated funds from operations of $61.8 million or $0.27 per share. Funds from operations were up 14% over Q3 2016 due to increase production and improved AECO and WTI pricing.
For 2016, funds from operations totaled $200.2 million or $0.88 per share, up 13% from 2015 due to the addition of the CNRL land and drilling activity on our PrairieSky Royalty properties. Average daily production for the fourth quarter was 23,978 BOE per day.
Production was comprised of natural gas volumes of 78.2 million a day, oil volumes of 8,583 barrels a day and NGL volumes of 2,362 barrels per day. Production bonds were up during the quarter as a result of an active Q3 drilling program on PrairieSky lands.
PrairieSky’s production volumes included 1,109 BOE per day from compliance activity and 943 BOE a day of other prior period adjustments related to new wells on stream and better well performance. For the full year 2016, volumes totaled 23,308 BOE per day comprised of $74.7 million a day of natural gas, 8,456 barrel barrels a day of oil and 2,403 barrels a day of liquids.
Q4 2016 product revenue totaled $52.8 million, which was 74% liquids revenue. Product revenue was positively impacted by increased production and improved commodity pricing in the quarter.
Year-to-date production revenue totaled $201.4 million, which was 78% liquids revenue. The compliance group continues to work hard identifying missed and incorrect royalties.
As a result of our efforts, we have collected $8.3 million of compliance revenue in 2016 and over $30 million since IPO. Pricing sensitivities for 2017 are as follows.
A $5 per barrel increase or decrease in U.S. dollar WTI would result in a $15 million increase or decrease in funds from operation.
This is net of cash taxes and G&A. A $0.25 per Mcf increase or decrease in AECO would result in a $5 million increase or decrease in funds from operation, net of cash taxes and G&A, and a $0.01 change in the U.S.
Canadian FX rate would result in a $3 million change of funds from operations net of cash taxes and G&A. Other revenue for the quarter was $5.1 million, which included lease rental income of $2.1 million and bonus consideration of $2.4 million related to entering into 33 new leases with 29 different counterparties in the period.
For 2016, other revenue totaled $22.8 million which included $8.5 million of lease rental, $12.4 million of bonus consideration and $1.9 million of other income. During the year, PrairieSky entered into over 110 leasing arrangements with over 70 different counterparties.
In 2017, PrairieSky expects lease transfer income to stay flat at $8.5 million and its budgeting bonus consideration of $10 million and compliance revenue of $8 million. Administrative expenses in the quarter totaled $9.3 million or $4.22 per BOE.
Cash administrative costs were $4.9 million or $2.22 per BOE, down 9% from Q3 2016 cash G&A of $2.45 per BOE. For 2016, cash G&A for BOE totaled $2.78 per BOE, down from 2015 cash G&A of $3.72 per BOE.
In 2017, we expect cash G&A to be in a low $3 per BOE range. PrairieSky pay dividends of $41.1 million or $0.18 per share in the quarter with the resulting payout ratio of 67%.
Under the normal course issuer bid, PrairieSky repurchased 327,000 common shares for $9.9 million. Since instituting the normal course issuer bid in May 2016, PrairieSky has repurchased 960,000 common shares for $26 million.
At December 31st, PrairieSky had positive working capital of $44.2 million including cash of $34 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 Shailender Randhawa with RBC Capital Markets. Your line is open.
Shailender Randhawa
Good morning. Thanks.
So just two questions from me; just first, if you could provide any color on the 2016 CapEx and well counts in terms of Fee versus GORR Lands. And then secondly, just the question for Pam, just on the Q4 net GAAP price, I thought it was a bit lower than AECO benchmark, is that just accruals or something else?
Thanks.
Pamela Kazeil
So I’ll just on the natural gas pricing, in Q4, we did see a lower gas realization than we would normally expect, we usually expect to about $0.45 of AECO. During that quarter, the impact was just the difference between MI and DI and just different producer selling that at those different rates.
But as well as you take prior period adjustments in a rising commodity price environment, you do see a lower real life natural gas price, so compliance volumes from earlier this year as well as PPAs related to Q3.
Andrew Phillips
Yes, Shailender approximately 70% of the wells that were site for on fee simple lands, 30% on GORR’s. We did see a little more GORR activities this year, because of the Viking on the Alberta side of the border.
And it will give you a little breakout of where the activities had been focused, we had about 50% of our drilling in Q4 was on the Viking. We saw a bit of resurgence on the Alberta side of the Viking, so we had 80 wells, but in Q4 in the Viking and then 14 gas wells were spud on our lands in Q4 in the Spirit River and the Montney and then 10 Mannville wells.
So that’s kind of give you a flavor for the breakdown of where they're being drilled or which players are being drilled on, but it is both 70% fee.
Shailender Randhawa
Okay. Thanks very much.
Operator
[Operator Instructions] I’m showing no further questions at this time, I would now like to turn the call back to the presenters.
Andrew Phillips
Thank you very much for dialing into the PrairieSky year-end conference call. As always feel free to call me at 587-293-4005 if you have further questions or would like more information.
Thank you.
Operator
This concludes today's conference call. You may now disconnect.