PrairieSky Royalty's (PREKF) CEO Andrew Phillips on Q2 2016 Results - Earnings Call Transcript

| About: Prairiesky Royalty (PREKF)

PrairieSky Royalty Ltd. (OTC:PREKF) Q2 2016 Earnings Conference Call July 26, 2016 8:30 AM ET

Executives

Andrew Phillips - President and Chief Executive Officer

Pam Kazeil - Chief Financial Officer

Cameron Proctor - Chief Operating Officer

Analysts

Jeremy McCree - Raymond James

Shailender Randhawa - RBC Capital Markets

Brook Papau - RS Energy Group

Operator

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 Second Quarter 2016 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you.

Andrew Phillips, please go ahead.

Andrew Phillips

Good morning and thank you for dialing into the PrairieSky Royalty Q2 conference call. On the call from PrairieSky are Cameron Proctor, COO; Pam Kazeil, CFO, and myself, Andrew Phillips.

The second quarter of 2016 was busy for PrairieSky. We entered into 30 new leases with 24 to same counterparties. Our line administrators and contract analysts worked longer than normal hours ensuring the paperwork was received by industry quickly and the contracts were solid, so thank you.

Spuds in the quarter on PSK lands were 80 versus 100 in Q1 representing typical spring break-up activity levels. There 147 wild licensed in Q2 on PrairieSky lands, 47 on Gore lands and 100 on fee simple lands. This is up from 74 licenses in the first quarter.

Two other bright spots emerged in the PrairieSky Royalty portfolio in the second quarter. The first; numerous asset transactions took place in the land where we collect a royalty. Overwhelmingly the majority of the assets went from a quiet operator to a better capitalized organization with a renewed focus on property.

The second; operator small, mid-cap and large conducted numerous re-completion activities across our 36,000 wild Gore portfolio. These include commingling gas zones, coiled tubing cleans-outs, refracs and pump changes. The result of this is royalty production trending ahead of our internal estimates and budgets.

At PrairieSky, we are maintaining a cautious outlook for the balance of the year with 115 rigs workings Western Canada on Friday, down from 215 the same week a year ago.

Progress continues on the cost side of our business with cash G&A at CAD2.75 a barrel for the quarter. This is the first quarter in our history of G&A per barrel below CAD3. The combined steam was active finding CAD1 million of past royalties and 425 barrels per day of additional volumes.

PrairieSky executed an acquisition that included 300,000 acres of Royalty land, 100,000 acres of the total fee title. Production associated with the purchase is 400 barrels per day, 80% GAAP is from our legacy pool it has produced 950 Bcf of gas to date. But the upside is in the Colorado Shale that has been successfully tested by three operators.

The Royalty oil volumes come from the medium gravity crude pool that is under water flood. The decline in the acquired production is 12%. The 100,000 acres of fee are contiguous with our existing block of mineral title and PSK SI is covering one third of the acreage.

Subsequent to the quarter, PrairieSky acquired a 5% royalty on the 11 sections of undeveloped lands for CAD1 million. The operator has a strong technical team and will test the new technology to exploit the heavy oil on the lands before year-end.

Positive working capital at quarter end was CAD171 million down from CAD201 million in Q1. CAD25 million was used for our acquisition and CAD5 million for the buyback.

Dividends declared in the quarter were CAD41.2 million representing 96% of free cash flow generated in the quarter. Approximately 250,000 PrairieSky shares were purchased for cancellation by the company.

PrairieSky will continue to focus on leasing our undeveloped land inventory to qualified technical teams across the Western Canadian sedimentary basin.

I will now pass the call to Pam, to walk through the financials. And then we’ll open it up to Q&A.

Pam Kazeil

Thank you, Andrew. Good morning everyone. During the second quarter PrairieSky generated funds from operations of CAD42.8 million or CAD0.19 per share. Year-to-date funds from operations totaled CAD84.2 million or CAD0.37 per share.

Average daily production for the quarter was 23,158 BOE per day which was flat with Q1 2016 production of 22,081 BOE a day. Production was comprised of natural gas volumes of 75.3 million a day, and liquids volumes of 10,608 barrels a day. Year-to-date production, volumes averaged 23,120 BOE per day and was 47% liquids.

Q2 production volumes were positively impacted by prior period adjustments for all commodities which included a positive PPA of 7.6 million a day of natural gas, a positive oil PPA of 337 barrels a day and a positive NGL PPA of 297 barrels a day.

Of the total 1,900 BOE a day of PPA, 425 BOE a day related to compliance activities in the quarter. Improved oil pricing positively impacted sliding scale volumes by approximately 240 barrels for the quarter.

Sliding scales oil volumes have increased approximately 600 barrels a day since February when WTI was below $30 per barrel.

Q2 2016 product revenue totaled CAD43.2 million in line with Q1 2016. Revenue from oil and NGL production represented 89% of total product revenue. During the quarter, the impact of improved WTI pricing on revenue were offset by significantly lower AKO pricing and a stronger Canadian Dollar.

Natural gas revenue was reduced by negative pricing PPA related to Q1 2016 as a spread in daily and monthly AKO pricing resulted in revenue over accrual. The accrual was reversed in Q2 resulting in a lower realized natural gas price.

Other revenue in the quarter was CAD4.9 million which included lease rental income of CAD1.9 million and bonus consideration of CAD2.6 million. PrairieSky collected bonus consideration from 24 different payers in the period. Year-to-date 2016 other revenue totaled CAD10.6 million.

Administrative expenses in the quarter totaled CAD6.1 million or CAD2.89 per BOE. Cash administrative costs were CAD5.8 million, or CAD2.75 per BOE. Year-to-date, cash G&A per BOE totaled CAD13.6 million or CAD3.23 per BOE. PrairieSky anticipates cash G&A to be in the low of CAD3 per BOE range in 2016.

During the quarter, PrairieSky evaluated a number of opportunities and close-in asset acquisitions for CAD25 million from cash on hand which Andrew highlighted earlier. At June 30, PrairieSky had positive working capital of CAD171.1 million including cash of CAD149.7 million.

PrairieSky declared dividends of CAD41.2 million or CAD0.18 per share in the quarter. Since IPO, PrairieSky has declared CAD409 million in dividends to shareholders.

During the quarter, PrairieSky repurchased 242,500 common shares under its normal course issuer bid for cash of CAD6 million. As a result, at June 30, 2016, PrairieSky had 228.8 million shares outstanding.

We will now turn it over to the moderator to proceed with the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Jeremy McCree from Raymond James. Please go ahead.

Jeremy McCree

Hi, Andrew, just a quick question on your PPAs and where they’re coming from. I know when you guys did the CNRL acquisition, you didn’t think there would be much PPAs, but is that where these PPAs are coming from, or is there another area?

Andrew Phillips

Thanks for the question Jeremy. The PPAs actually came from a broad swap of our acreage including range royalties, original PrairieSky as well as the CNRL lands. And one thing to highlight is the compliance group, if they don’t find these volumes within six months, they become cash compliance revenues.

If they do catch them quickly, they become a PPA. So, those PPAs were effectively from the compliance group finding volumes there weren’t being paid for the last six months. And I think because they were near date and they become production rather than cash.

Jeremy McCree

Got you. So, I know it’s hard to forecast PPAs, but is it something that we can probably expect for next quarter as well then too, just like I’m just trying to get a better sense of kind of how to model this?

Andrew Phillips

Yes. So, the PPAs, was under 500 barrels that was compliance related. The balance was again some under accruals in the previous quarters. So, we will likely continue to see PPAs as we’ve talked about there will always be PPAs both positive and negative in our business. The way we account for things now and the conservative budgeting we undertake at the company, we expect the majority of the prior period adjustments to be positive in nature. But we can’t predict how that will look in Q3. Sorry, if that doesn’t answer your question fully.

Jeremy McCree

I understand, okay. Thanks Andrew.

Andrew Phillips

Thanks for your questions.

Operator

[Operator Instructions]. Your next question comes from the line of Shailender Randhawa from RBC Capital Markets. Please go ahead.

Shailender Randhawa

Thanks. And good morning, so, just two questions from me. Firstly on the acquisitions, if you could give us some color, Andrew, on the upside that you do see in the Colorado shales, maybe just in terms of a resource sizing, and what the resource may look like?

And then secondly, you talked a bit about the sliding scales, the impact year-to-date, how should we think about the impact from here over the balance of the year, just based on current crude prices, and maybe just a rough sensitivity if you could, please?

Andrew Phillips

You bet. So, I’ll, for the second part of your question Shailender, I’ll pass it over to Pam on the impact of the sliding scales going forward. On the acquisition front, there are two upsides that we saw on the fee simple lands that we acquired in the Viking Kinsella region, one is the Colorado Shale you highlighted, and a couple of operators, one private and one large senior U.S. independent drilled these horizontals in this Colorado Shale.

And the wells are about CAD600,000 a well and come on in the range of 800 Mcf a day. So, when you look at dry Montney [ph] that’s actually fairly competitive with that resource. So we think over time it will get developed.

The other nice thing there is all the bones are laid for the infrastructure over the area because of the deeper Viking Kinsella gas unit has produced 950 Bcf. So, it wouldn’t be a very low-cost resource to develop.

The other thing is it’s about 96% methane, so very little processing cost. All you need is a dehydration facility and compressor station and you could effectively put it through your furnace, so very low processing cost could be in the range of CAD0.25 Mcf. So, we do believe over time it will get developed. Obviously it’s not happening today.

And then the other potential there is, we acquired the Randall [ph] rights as well and we believe there is, numerous heavy-oil pools and that will be found over time on those lands. And we do have some 3D Seismic to delineate some of it.

And then, I’ll pass over to Pam to talk about the impact of the sliding scales going forward.

Pam Kazeil

Yes. So, good morning Shailender. So, on the sliding scale volumes, we did see a recovery of about 600 barrels a day from the time that we were just under CAD30 WTI to the end of June. So, depending on what the pricing is in any given month that will determine how it impacts the quarter.

Basically what you see between CAD30 WTI and CAD70 WTI is, for every move about CAD10 you should see approximately 300 barrels a day come back on oil. So, I mentioned earlier that between the CAD30 and CAD50 we thought 600 barrels come back. So that’s even a good way to model it.

Shailender Randhawa

Great. Okay. Thanks very much.

Andrew Phillips

Thanks for your questions.

Operator

[Operator Instructions]. Your next question comes from the line of Brook Papau with RS Energy Group. Please go ahead.

Brook Papau

Hi, guys thanks for taking my question. Can you run through the math one more time on the AKO realizations and the CAD0.67 there?

Pam Kazeil

Yes. So, in Q1, so we accrued two months of every quarter for production and revenue. So in February and March of Q1, we saw a very large spread between daily and monthly AKO. And in performing our accruals, we considered that more gas sales would be at monthly AKO.

And then when we realized our revenue in the second quarter and reversed our accruals, we saw that more natural gas had actually been sold at daily. That resulted in an over accrual of just over CAD1 million or CAD1.5 million. And that was reversed in Q2 and resulted in the large spread in the natural gas price in the quarter.

Brook Papau

Sorry. I guess going forward, is that something like, can we, is that something that you guys have changed going forward that you’ll be using the daily AKO price or still with monthly?

Pam Kazeil

Yes. So, we’ve reviewed our process and we don’t expect to see that repeated.

Brook Papau

Okay.

Andrew Phillips

Yes, and so, when you review Q2, we had a 96% payout ratio with AKO weak as it was below all our, 89% of our revenue came from liquids. So Q3 and Q4 should be positively impacted by the better pricing for AKO gas.

Brook Papau

Great. Thank you.

Andrew Phillips

Thanks.

Operator

And we have no further questions in the queue at this time. I turn the call back to the presenters.

Andrew Phillips

Thank you for dialing in the PrairieSky Q2 conference call. Feel free to call Pam or myself anytime to discuss the quarter or any other matter. Thank you.

Operator

This concludes today’s conference call. You may now disconnect.

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