Copyright of the Daily Oil Bulletin 2018
PrairieSky Reports East Shale Duvernay Oil Activity On Royalty Lands
While wells spud on PrairieSky Royalty Ltd. lands continued to be focused on the Viking light oil play in western Saskatchewan and eastern Alberta, the company also saw activity on its emerging crude oil plays in the first quarter of 2018.
Three wells were spud on its East Shale Duvernay royalty lands and seven wells in the Clearwater oil play, PrairieSky said in reporting results for the quarter ended March 31, 2018.
Other active plays included the liquids-rich Montney resource play in northeast British Columbia and light oil plays such as the Cardium, Mannville and Bakken.
PrairieSky reported lower funds from operations, earnings and revenue along with lower production volumes for the 2018 first quarter compared to the comparable 2017 quarter.
The company generated funds from operations of $51.8 million (2017-$67.3 million), almost exclusively from the collection of royalty revenue on production volumes of 23,536 boe per day (47 per cent liquids), down from 26,812 boe/d (39 per cent liquids) last year.
Net earnings declined to $19.8 million from $20.8 million the previous year.
Total revenue for the quarter was $67.9 million (2017-$80.3 million) comprised of royalty production revenues of $64.1 million and other revenues of $3.8 million.
Activity in the Viking light oil play in Saskatchewan was about 25 per cent lower in the first quarter of 2018 than a year earlier although this was somewhat offset by higher activity on the Alberta side, Andrew Phillips, president and CEO, said this morning in a conference call. Activity, though, is beginning to pick up in Saskatchewan, he said.
PrairieSky completed acquisitions of royalty interests in the quarter, funded entirely from cash on hand, for aggregate consideration of $21.2 million. The first acquisition included Crown and fee title lands in the East Shale Duvernay with a two horizontal well commitment while the second acquisition for approximately $10 million was for 80 sections of land in the Deep Basin and Peace River Arch with near-term activity expected in the Montney formation, he said.
The company said it continues to evaluate royalty opportunities and will remain selective and disciplined in its evaluation of royalty acquisition opportunities.
PrairieSky entered 2018 with nine net royalty bbls/d from the Clearwater oil play and first quarter activity should result in net royalty production of 40 bbls/d after breakup, said Phillips. Based on operator plans for 2018, the company should exit the year with 150 bbls/d to 200 bbls/d of net royalty production, he said.
Numerous exploration wells in the Duvernay shale have been drilled in and around PrairieSky land which should expand its inventory of light oil horizontal wells, Phillips told analysts. Although the company has seen some recent strong results in the Ghostpine area, probably the best and consistent results continue to be with Vesta Energy Ltd. in the East Shale basin just west of Red Deer.
There also are some new exploration tests on and around PrairieSky land on the west side of the Homeglen-Rimbey reef but those are still confidential, he said. “Those could have the potential to expand our economic inventory on the Duvernay.”
Current royalty production is just under 100 bbls/d from four sections of land with netbacks of $60/bbl, double the average corporate netback of $30/bbl. It expects that to grow to 150 bbls/d to 200 bbls/d by the end of this year.
In terms of pricing, PrairieSky saw differentials of about $25/bbl on its 1,400 bbls/d of heavy oil while the light oil differential (relative to WTI) got as high as $7/bbl in the first quarter although that has since narrowed to the $4/bbl to $4.50/bbl on a spot basis, he said.
The company declared dividends in the first quarter were $44.7 million (19 cents per share).
PrairieSky entered into 28 leasing arrangements with 22 different counterparties in the first quarter across a number of new and existing plays, earning bonus consideration of $1.1 million. PrairieSky saw 198 wells spud on its lands, slightly up from the same period in 2017 and roughly flat with the fourth quarter of 2017.
PrairieSky’s total administrative costs were $2.55/boe in the quarter including cash administrative expenses of $5.15/boe as a result of annual long-term incentive settlements for all employees in the quarter, partially offset by a reduction to non-cash administrative expense. The company said it anticipates cash administrative expenses for the year will be in the low $3/boe range.
The compliance team continued to identify and collect historical royalty compliance issues, recovering $2 million in the quarter, said PrairieSky. Compliance recoveries, it said, will fluctuate quarter to quarter but the team continues to focus on collections and anticipates further collections throughout 2018.
In addition to $44.2 million in dividends paid from cash flow, an additional $15.4 million was used to purchase common shares under PrairieSky’s normal course issuer bid (NCIB). At March 31, 2018, it had positive working capital of $17.3 million, including $12.1 million of cash on hand and no debt.
The company plans to apply to the Toronto Stock Exchange to renew its NCIB for an additional one-year period. Subject to regulatory approval, the company currently intends to allocate up to $50 million over the next 12 months (approximately $4.2 million per month) to repurchase common shares.
Management said it believes a normal course issuer bid provides an opportunity to use excess cash resources to reduce PrairieSky’s share count over time, representing an investment in PrairieSky’s high quality asset base and enhancing value for remaining shareholders. Since instituting the normal course issuer bid in 2016, PrairieSky has purchased and cancelled an aggregate of 2.86 million common shares at a weighted average price per share of $29.22.
PrairieSky intends to purchase from time to time up to 1.75 million of its currently issued and outstanding common shares (representing approximately 0.7 per cent of the common shares issued and outstanding as of April 23, 2018) over a period of 12 months.
Under the NCIB, common shares may be repurchased in open market transactions on the TSX, and/or other Canadian exchanges or alternative trading systems. The price that PrairieSky will pay for common shares in open market transactions will be the market price at the time of purchase. Any common shares that are purchased under the NCIB will be cancelled upon their purchase by PrairieSky.
To date, PrairieSky has purchased and cancelled an aggregate of 1.43 million common shares at a weighted average price per share of $30.46 under a normal course issuer bid that began May 4, 2017 and which runs to May 3, 2018.
PrairieSky will be entering into an automatic purchase plan with its broker in order to facilitate purchases of its common shares. The automatic purchase plan allows for purchases by the company of its common shares at any time, including, without limitation, when it would ordinarily not be permitted to make purchases due to regulatory restriction or self-imposed blackout periods.
Purchases will be made by PrairieSky's broker based upon the parameters prescribed by the TSX and the terms of the parties' written agreement.
While PrairieSky currently intends to only use up to a maximum of $50 million to effect NCIB purchases over the next 12 months, the company's board of directors may consider, from time to time, applying to the TSX to increase the amount of NCIB purchases. Decisions regarding increases to the NCIB will be based on market conditions, share price, best use of funds from operations, and other factors including other options to expand its portfolio of royalty assets, the company said.