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PrairieSky Royalty Third Quarter 2021 Results

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PrairieSky Royalty Ltd. reported its Q3 2021 results.

PrairieSky is also pleased to announce an extension and expansion of the Company’s credit facility which has been reconstituted as a sustainability-linked loan, reinforcing PrairieSky’s environmental, social and governance leadership and performance.

Highlights:

• Total revenues increased to $78.1 million, a 12% increase over Q2 2021 and 80% over Q3 2020, comprised of royalty production revenues of $76.0 million and other revenues of $2.1 million.
• Funds from Operations grew to $66.2 million ($0.30 per common share basic and diluted), a 17% increase over Q2 2021 and a 75% increase over Q3 2020.
• Royalty production averaged 19,871 BOE per day with liquids royalty production reaching 10,138 barrels per day, representing 51% of royalty production as compared to 49% in Q2 2021 and 48% in Q3 2020.
• Natural gas royalty volumes of 58.4 MMcf per day, down 3% from Q2 2021, were impacted by seasonal turnarounds and third-party downtime in the Montney and Alberta Foothills.
• Completed acquisitions totaling $190.1 million, including a previously announced $155.0 million investment in a 5.0% gross overriding royalty in the Clearwater and $34.8 million, before adjustments, in complementary Fee Lands and GORR Interests in Central Alberta.
• Declared a third quarter dividend of $20.0 million ($0.09 per common share), representing a payout ratio of 30%, with remaining cash flow allocated to acquisitions.
• Common share repurchases of $8.0 million under the normal course issuer bid (“NCIB”) at an average price per share of $13.71.

Sustainability-Linked Loan:

• Credit facility expanded to $425 million, with a permitted increase to $500 million, and extended maturity to February 28, 2025.
• Sustainability-linked pricing mechanism provides the Company the opportunity to achieve positive pricing adjustments on drawn and undrawn balances based on sustainability performance.

PrairieSky’s royalty production revenue increased to $76.0 million in Q3 2021, our second highest quarter since inception in 2014. The growth in revenue was due primarily to strong commodity prices for all products, resulting in a 17% increase in funds from operations over Q2 2021 and a 75% increase over Q3 2020. During the quarter, PrairieSky completed acquisitions totalling $190.1 million, including the previously announced 5.0% gross overriding royalty agreement in the core of the Clearwater oil play in the Marten Hills area of Alberta. On August 25, 2021, PrairieSky also completed the acquisition of 138,000 acres of Fee Land and 125,000 acres of GORR Interests in Central Alberta adding approximately 200 BOE per day of royalty production (74% liquids) for total cash consideration of $34.8 million, before adjustments. Both acquisitions were financed using PrairieSky’s credit facility which was subsequently increased to $425 million and now incorporates sustainability-linked performance criteria. Net debt at September 30, 2021 totaled $187.7 million, which assuming current strip pricing, could be repaid within a year.

During Q3 2021, third-party operators were active across Western Canada and on PrairieSky’s royalty lands with 193 wells spud (98% oil). Wells spud during the quarter included 101 wells on our GORR acreage, 71 wells on our Fee Lands and 21 unit wells. There were 190 oil wells spud in Q3 2021, including 84 Viking wells, 51 Clearwater wells, 23 Mannville heavy and light oil wells, 5 Duvernay light oil wells and additional spuds in the Bakken, Cardium, Charlie Lake and Nisku formations. There were 3 natural gas wells spud in Q3 2021, all in the Spirit River. PrairieSky’s average royalty rate for wells spud in Q3 2021 was 6.7%.

Q3 2021 Financial Results

The substantial increase in funds from operations was driven primarily by strong oil, NGL and natural gas pricing as PrairieSky remains unhedged and benefitted from rising benchmark pricing for all products. Royalty production revenue totaled $76.0 million, a 17% increase over Q2 2021 and a 98% increase over Q3 2020. Royalty production revenue was generated from total royalty production volumes of 19,871 BOE per day which were in line with Q2 2021 and 6% higher than Q3 2020. A further breakdown of royalty revenue and production is as follows:

• Oil royalty production volumes averaged 7,535 barrels per day, an increase of 7% over Q2 2021 and 15% over Q3 2020. The increase in oil royalty production was due to the addition of production volumes from acquisitions as well as incremental production volumes from new wells on stream offsetting natural declines.
• Oil royalty revenue totaled $50.3 million, 17% above Q2 2021 and 103% above Q3 2020, due to strong West Texas Intermediate (“WTI”) pricing which averaged $70.56 per barrel partially offset by slightly wider light and heavy oil differentials.
• Natural gas royalty production volumes averaged 58.4 MMcf per day, down 3% from Q2 2021 and flat with Q3 2020. During the quarter, incremental production from new wells on stream and acquisitions offset natural declines. Production was negatively impacted by seasonal turnarounds and resultant third-party downtime which lowered volumes by 2.0 MMcf per day in the quarter.
• Natural gas royalty revenue increased to $15.6 million, 14% above Q2 2021 and 79% above Q3 2020 primarily due to the significant increase in natural gas index pricing including average AECO daily pricing of $3.60 per MMcf, a 17% increase over Q2 2021 and 59% above Q3 2020.
• Natural gas liquids (“NGL“) volumes averaged 2,603 barrels per day, flat with Q2 2021 and 5% above Q3 2020, as production from new wells on stream and incremental volumes from acquisitions offset natural declines.
• NGL royalty revenue totaled $10.1 million, an increase of 22% over Q2 2021 and 106% over Q3 2020 due to strong benchmark pricing.

Other revenue totalled $2.1 million in Q3 2021 which included $1.1 million of lease rentals, $0.3 million in other income and $0.7 million in bonus consideration. PrairieSky earned bonus consideration on entering into 24 new leases with 24 different counterparties on both oil and natural gas plays across Alberta and Saskatchewan. Compliance recoveries totaled $0.9 million as staff continued their focus on ensuring timely and accurate royalty payments.

PrairieSky’s cash operating margin, royalty production revenue less production and mineral taxes and cash administrative expenses, was 93% in the quarter. Cash administrative expenses totaled $4.3 million or $2.35 per BOE. PrairieSky expects administrative expenses to be well below $3.00 per BOE in 2021.

Sustainability-Linked Credit Facility

On September 29, 2021, PrairieSky increased and extended its unsecured revolving credit facility to $425 million with a syndicate of Canadian banks and incorporated sustainability-linked performance criteria to establish a Sustainability-Linked Credit Facility (“SLL Credit Facility”). Sustainability performance criteria will be measured by Sustainalytics, a global leader in independent environmental, social and governance (“ESG“) research, ratings and analytics.

“The increase in the SLL Credit Facility from $225 million to $425 million adds incremental liquidity for business opportunities and financial flexibility,” said Andrew Phillips, President and Chief Executive Officer. “We believe using an independent global rating agency to assess our performance demonstrates our commitment to embedding ESG principles across all aspects of our business and the standard to which we hold ourselves accountable.”

PrairieSky has linked its SLL Credit Facility to sustainability performance which will be independently measured through the Sustainalytics’ management score on an annual basis. The SLL Credit Facility includes a pricing feature whereby the Company may incur positive or negative pricing adjustments on drawn and undrawn balances based on changes to the management score. PrairieSky is currently rated as the number one oil and gas producer in the world and in the top 7.5% (1,065 out of 14,464) of global companies rated by Sustainalytics as of October 18, 2021.

In conjunction with establishing the SLL Credit Facility, PrairieSky has extended the term to a maturity date of February 28, 2025. The SLL Credit Facility provides for a permitted increase to $500 million, subject to lender consent.

TD Securities acted as Lead Arranger and Sole Bookrunner, and together with RBC Capital Markets acted as Co-Sustainability Structuring Agents for the SLL Credit Facility.