Prairiesky Royalty Ltd. (OTC:PREKF) Q1 2016 Earnings Conference Call April 27, 2016 8:30 AM ET
Andrew Phillips – President and Chief Executive Officer
Pam Kazeil – Chief Financial Officer
Chad Ellison – Dundee Capital Markets
Shailender Randhawa – RBC Capital Markets
Brian Steck – Mangrove
Good morning. My name is Dan, and I will be your conference operator today. At this time, I would like to welcome everyone to the PrairieSky Royalty Limited announces their First Quarter 2016 Financial Results Conference Call. All lines have been placed on mute. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]
Thank you. Andrew Phillips, President and CEO, you may begin your conference.
Good morning and thank you for dialing into the PrairieSky Royalty Q1 earnings call. On the call from PrairieSky are Cameron Proctor, COO; Pam Kazeil, CFO, and myself, Andrew Phillips, CEO.
Before I turn the call over to Pam, I will provide a brief operational update. Q1 2016 marked the first full quarter with contribution from the CNRL royalty portfolio. Integration of the 5.5 million acres acquired is on track, and negotiators have been busy entering into leasing arrangements with quality well capitalized operators. In the January to March period, we signed leases 21 different producers, resulting in CAD1.8 million in lease issuance bonus, as well as numerous well commitments. Of particular note, the majority of the leases were short-term in nature, and likely have near-term drilling activity attached to them.
Over 100 wells were spudded or rig released in Q1, with activity focused on the Viking on both Range Royalty and CNRL, as well as Mannville and Central Alberta in the Deep Basin. Our compliance team was busy over the quarter, and collected approximately CAD1 million in revenue and returned 17,000 acres of land back to PrairieSky inventory. On the acquisition front, PrairieSky acquired 71 sections of fee and gore lands in Alberta, and 36 BOE of royalty production for approximately CAD3 million. We have CAD200 million positive working capital as of March 31st.
PrairieSky continues to focus on cost and expects further reductions over the next 18 months. Our geoscience team has generated numerous prospects on the undeveloped land, and its capital returns to the E&P space we expect to enter into leasing arrangements on these opportunities. PrairieSky generated drill ready prospects, ranging from conventional vertical oil, to unconventional Devonian horizontals.
The Board of Directors or PrairieSky has authorized a 12-month repurchase program of CAD40 million, that will buy CAD10 million of PrairieSky shares per quarter. This repurchase program will represent an important return of capital for our shareholders, and will cancel shares of a 100 year business well below the intrinsic value of the Company. This modest repurchase program will allow the Company to maintain the majority for all of its CAD200 million of positive working capital, enabling PrairieSky to make quality acquisitions, if they become available under the right terms.
PrairieSky will apply to the TSX for approval on the aforementioned program. I will now turn the call over to Pam Kazeil our CFO to walk through the financial highlights.
Thank you, Andrew. Good morning everyone. During the first quarter PrairieSky generated Funds from Operations of CAD41.4 million or CAD0.18 per share and net earnings of CAD1.7 million or CAD0.01 per share. Average daily production for the quarter was 23,081 BOE per day which would comprise of natural gas volumes at CAD70.7 million a day and liquid volumes of 11,298 barrels per day. Production was up 31% over Q4 2015 mainly as a result of full quarter production from the CNRL acquisition.
Low oil pricing impacted sliding scale volumes by approximately 100 barrels per day. Production volumes were positively impacted by prior period for all commodities, which included a positive PPA of 4.1 million a day of natural gas, a positive oil PPA of 747 barrels a day, and a positive NGL PPA of 513 barrels a day. Product revenue totaled CAD43.2 million in the quarter up 13% from Q4 2015 as additional production volumes were offset by a 27% decrease in realized natural gas pricing, and a 15% decrease in realized liquids pricing. Other revenue for the quarter was CAD5.7 million.
Other revenue included lease rental income of CAD3.2 million, and bonus consideration of CAD1.8 million. PrairieSky collected bonus consideration from 21 different payers in the period. For Q1 2016 administrative expenses totaled CAD9.2 million and CAD4.38 per BOE. Cash administrative costs were CAD7.8 million, or CAD3.71 per BOE, which included one-time severance costs of CAD1.2 million, or CAD0.57 per BOE.
PrairieSky had sufficient taxable deductions to shelter taxable resulting in no cash taxes in the period. During the quarter PrairieSky evaluated a number of opportunities, and closed asset acquisitions totaling CAD2.7 million from cash on hand. At March 31st, 2016 PrairieSky had 229 million shares outstanding. Since IPO PrairieSky has declared CAD368 million in dividends to shareholders.
We will now turn it over to the moderator to proceed with the Q&A.
[Operator Instructions] Your first question comes from the line of Chad Ellison from Dundee Capital Markets. Your line is open.
Hi guys. Congratulations on a good quarter. There were a few, you got a few quarters now of prior period adjustments on the positive side. Can you talk about what the biggest contributors to that are, and if you think it’s something that we should be modeling to go forward?
Yes, we have had some positive prior period adjustments. We take a very conservative approach to accruing our volumes, and the production increases come from better than forecast production volumes, when we’re looking at our modeling and type curves, as well as some compliance. As part of our process, process, we’re always trying to refine that, but you should always expect that we will have prior period adjustments in the period. Those could be positive or they could be negative.
And then when you guys acquired CNRL, at the time you kind of felt that they had managed their royalty business well, with minimal opportunities for a compliance revenue. Now that you have had a few months to integrate the assets, do you still believe that to be the case, or are you starting to see some things that could bear additional fruit from what was thought at the time of the acquisition?
That’s a good question, Chad, and I think we’re thoroughly going through all of the files, and there is a huge amount of files in the office right now, that we’re going through and digitizing, and understanding the royalty contracts, and what’s being paid. It will take a little bit more time, and typically after an acquisition of this size, you won’t see any actual revenue come from the compliance side, until probably the proceeding year so 2017. We are identifying numerous spots where there have been mispayments or excessive deductions, and I do think it will be part of the 2017 revenue stream, but today we’re mainly compiling these opportunities for the future.
Your next question comes from the line of Shailender Randhawa from RBC Capital Markets. Your line is open.
Thanks. Good morning. So just a couple of questions for me. So just on Q1 activity levels, you mentioned the three areas, the Viking, Mannville, and Deep Basin. Any sense of what the split would be, in terms of those three areas, in terms of the 100 wells or so spud count? And then secondly, just in terms of the new leasing in the quarter, once again, just kind of any more commentary on which areas that was? Maybe a split between new versus existing counterparties, and what the type of commitments are? Thanks.
You bet. So both kind of on an activity and new leasing, so on your first question, Shailender, on the activity side of the 100 wells, roughly 70 were in the Viking, a handful on the Alberta side, but the majority on the Saskatchewan side, both on our Range Royalty gores, as well as the CNQ fee lands. The balance of the 30 were in either the Deep Basin or on the Mannville, and the Mannville would be those 17.5% leasor royalties we take back on those larger leasing arrangements we signed last year, so we’re starting to see the results of the new drilling for light oil in Central Alberta for those mid-Mannville channels. So that’s summarized the activity, I guess more than 50% in Saskatchewan.
In terms of the new leasing it was actually a very, very broad spectrum of leasing this quarter. One of the things that was interesting is we got, signed a number of very small leases in southeast Saskatchewan, but they’re kind of very targeted so half section, one section leases, where typically come with a well commitment, and 18% to 20% leasor royalty.
We did a number of Viking leases with both incumbents and new start-ups in the Saskatchewan fee block, and then a number of licenses on the Alberta side, or least arrangements on the Alberta side, and one in particular that was interesting is we signed another Duvernay lease, that will see a well committed on our lands by May, and has rolling options for four per year after that. So we are starting to see a little more activity on the Duvernay again. It’s starting to pick up.
Okay. Maybe just a follow-up on G&A. A little bit higher than we had expected. I know you’re working on some investments in terms of technology. Do you expect that to come down over the balance of the year, or is this sort of a new run-rate to assume?
We do expect G&A to come down through the balance of the year. We expect to be in the low CAD3 per BOE range for 2016.
Yes. 15% of that was one-time severance costs.
That resulted in CAD0.57 per BOE for the quarter.
You are correct, we are investing in technology systems to improve ours processes internally as well.
Okay. Thanks very much.
[Operator Instructions] Your next question comes from the line of Brian Steck from Mangrove. Your line is open.
Hi guys. Just a couple of quick questions. Pam, I know on the call you had given the PPA figures and the sliding scale figures. I didn’t quite get those. Would you mind repeating that?
Yes so the sliding scale impact was approximately 100 barrels a day of oil, and the prior period adjustments were a positive PPA to natural gas of 4.1 million a day of positive oil PPA of 747 barrels a day, and a positive NGL PPA of 513 barrels a day.
Great. And the other question was on the back of Shailender’s question on G&A. What kind of trajectory do you expect to have over the course of the year? Are there going to be other one-time charges that impact Q2 for example, related to the transaction? Or do you expect things to kind of drop down to a steady state for the remaining three quarters?
Relatively steady state for the remaining three quarters. We don’t anticipate the one-time charges throughout the year. We expect per BOE G&A to be in the low CAD3 range for 2016.
Okay. Thank you guys.
And at this time we have no further questions in the queue. [Operator Instructions] And we have no questions in the queue at this time. I turn the call back to Mr. Phillips.
I just want to thank everyone again for calling in to the PrairieSky Royalty Q1 conference call, and if you have any further follow-up questions, please feel free to call Pam or myself. We are usually around. Thank you.
This concludes today’s conference call you may now disconnect.
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