Earnings call transcript: PrairieSky Royalty Q1 2025 beats EPS forecast

PrairieSky Royalty Ltd. (PSK), with a market capitalization of $820 million, reported its Q1 2025 earnings, surpassing analyst expectations with an earnings per share (EPS) of $0.25, compared to the forecast of $0.23. The company’s revenue reached $128.1 million, driven by strong royalty production. Following the announcement, PrairieSky’s stock closed at $22.95, marking a 1.06% increase in after-hours trading. The company currently offers an attractive 6.9% dividend yield. InvestingPro data reveals that PrairieSky has maintained dividend payments for 12 consecutive years, with increases in the last three years.

Key Takeaways

• PrairieSky exceeded EPS expectations with a reported $0.25 per share.
• Revenue reached $128.1 million, supported by increased oil production.
• Stock price rose by 1.06% in after-hours trading.
• The company declared dividends of $0.26 per share.
• PrairieSky repurchased and canceled 3.4 million shares.

Company Performance

PrairieSky Royalty demonstrated robust performance in Q1 2025, with royalty production averaging 25,339 barrels of oil equivalent (BOE) per day. This performance was bolstered by record oil volumes of 13,502 barrels per day. The company also reported a substantial increase in the average royalty rate on new wells, rising to 6.9% from 6% in the previous year. These factors contributed to a strong financial showing, despite market volatility and declining oil prices.

Financial Highlights

• Revenue: $128.1 million
• Earnings per share: $0.25, up from the forecasted $0.23
• Funds from operations: $85.8 million
• Dividends declared: $0.26 per share
• Net debt as of March 31: $258.8 million

Earnings vs. Forecast

PrairieSky’s EPS of $0.25 exceeded the forecasted $0.23, resulting in a positive surprise of approximately 8.7%. This beat reflects the company’s ability to maintain high operating margins and manage production efficiently, even in a volatile market environment.

Market Reaction

Following the earnings announcement, PrairieSky’s stock rose by 1.06% in after-hours trading, closing at $22.95. This movement aligns with the positive earnings surprise and indicates investor confidence in the company’s strategic initiatives and financial health. According to InvestingPro data, the stock is currently trading near its 52-week low of $30.85, with a 52-week high of $36.06. The platform offers 8 additional exclusive insights about PrairieSky’s valuation and momentum indicators, helping investors make more informed decisions.

Outlook & Guidance

Looking ahead, PrairieSky plans to host an Investor Day on May 14 in Calgary, where it will unveil a new royalty asset book. The company anticipates significant growth in the Williston Green Duvernay and Mannville stack production, projecting a 3-50% increase. Additionally, PrairieSky foresees continued activity in heavy oil plays, with potential for hundreds of new locations. InvestingPro analysis indicates a "Fair" overall financial health score, with strong cash flows sufficiently covering interest payments. Subscribers can access the comprehensive Pro Research Report for detailed analysis of PrairieSky’s growth prospects and financial stability.

Executive Commentary

CEO Andrew Phillips emphasized the company’s resilience, stating, "With decades of economic inventory and 98% operating margins, short term price swings both up and down have less of an effect on PrairieSky’s value." He also highlighted the strategic approach to share buybacks, describing them as acquisitions.

Risks and Challenges

• Oil price volatility remains a concern, potentially impacting future revenue.
• Natural gas volumes have declined, posing a challenge to diversify revenue streams.
• Market fluctuations could affect the valuation of new projects and acquisitions.

Q&A

During the earnings call, analysts inquired about the sustainability of dividends if oil prices fall below $50. Management reassured that the dividend is sustainable under such conditions. Questions also focused on the company’s activity in the Duvernay and plans for leveraging buybacks, with management expressing confidence in these strategic areas.

Full transcript - PrairieSky Royalty Ltd (PSK) Q1 2025:

Michelle, Conference Call Moderator: Good day, and welcome to PrairieSky Royalty Limited Announcement of First Quarter twenty twenty Cloud Financial Results. At this time, all participants are in a listen only mode. After the speakers’ presentation, there will be a question and answer session. Instructions will be given at that time. As a reminder, this call may be recorded.

I would now like to turn the call over to Andrew Phillips, President and CEO. Please go ahead.

Andrew Phillips, President and CEO, PrairieSky Royalty Limited: Thank you, Michelle, and good morning, everyone, and thank you for dialing into the PrairieSky Q1 twenty twenty five call. On the call from PrairieSky are Pam Cazell, Dan Bertram, Mike Murphy and myself, Andrew Phillips. Before we begin, there are certain forward looking information and statements in our commentary today, so I’d ask listeners and investors to review the forward statements qualifier in our press release and MD and A, which can be found on our website. PrairieSky achieved record oil volumes of 13,502 barrels per day of net royalty production in the first quarter of twenty twenty five. Over 200 wells were spud in Q1, an increase of 26 wells from the same period in 2024.

The average royalty rate on these new wells was 6.9% versus 6% last year. 52 new leases with 39 counterparties were signed, generating $5,000,000 in lease issuance bonus. Notably in the quarter, we closed the Petro Canada fee title package in Southeast Saskatchewan for $50,000,000 This asset is only 20% leased, which represents an opportunity for the team to lease the asset and achieve leasing percentage similar to our corporate average. We also acquired 3,400,000.0 PrairieSky shares prior to the $0.26 dividend, giving remaining shareholders an additional 1.4% interest in the business. We view this as an acquisition of 259,000 royalty acres in the best parts of the basin.

We have also quietly added well over 100,000 acres of oil sands leases over a three year period, well below where current values sit at Crown Land Auctions. This has added years of new economic drilling inventory on a two to three times recycle ratio heavy oil asset. Subsequent to quarter end, oil prices have declined and there has been significant market volatility. Our well capitalized counterparties and strong balance sheet will allow us to be resilient and take advantage of further disconnects in value. There’s an advantage to owning hard assets with long duration profiles at all parts of the cycle.

With decades of economic inventory and 98% operating margins, short term price swings both up and down have less of an effect on PrairieSky’s value. Our Investor Day is on May 14 in Calgary at the Brookfield Building and will be available via webcast as well. We will publish our new royalty asset book, which details known asset values based on today’s discovered resource. We will also provide owners with a range of outcomes for the next ten years. Thank you to our investors for their support and our employees for their continued execution and hard work.

I’ll now turn the call over to Pam to walk through the financials.

Pam Cazell, Financial Executive, PrairieSky Royalty Limited: Thank you, Andrew. Good morning, everyone. PrairieSky’s royalty production averaged 25,339 BOE per day in the quarter. Our percentage of liquids royalty production has been steadily climbing over the last three years from 58% in Q1 twenty twenty two to sixty three percent today. It was another record quarter of oil royalty production, which averaged 13,502 barrels per day and included 177 barrels per day of production from our $50,000,000 acquisition of that closed on January 10.

As Andrew mentioned, it was an active quarter with 200 spuds on our lands at an average rate of 6.9%. Activity was focused in the Clearwater, Duvernay and Mannville heavy and light oil plays. We’ve seen a decline in natural gas volumes, which averaged 55,900,000 a day as compared to Q1 twenty twenty four. Q1 ’20 ’20 ’5 volumes included an estimate of cold weather downtime in the quarter of 1,100,000 a day. There were 14 natural gas wells spud in the quarter, primarily in the Montney, which we anticipate will come on production later in the year.

Duvernay and Viking wells will also provide incremental solution gas volumes. Royalty production revenue totaled $119,900,000 and was 93% from liquids. With narrowed heavy oil differentials, our realized price for oil increased to 87 percent of Edmonton from 84% in Q1 twenty twenty four. Other revenue totaled $8,200,000 and included $5,000,000 of bonus consideration. Leasing was primarily focused in the Duvernay light oil and Mannville heavy oil plays.

During the quarter PrairieSky’s funds from operations totaled $85,800,000 and we declared dividends of $61,200,000 or $0.26 per share, with the resulting payout ratio of 71%. We repurchased and canceled 3,400,000.0 shares in the quarter for $90,000,000 Our current NCIB expires in early June and we intend to apply to the TSX to renew it. PrairieSky’s balance sheet remains strong with net debt at March 31 of $258,800,000 We will now turn it over to the moderator to proceed with the Q and A.

Michelle, Conference Call Moderator: Thank you. And our first question comes from Patrick O’Rourke with ATB Capital Markets. Your line is open.

Patrick O’Rourke, Analyst, ATB Capital Markets: Hey guys, good morning and thanks for the rundown. Just wanted to ask maybe first off more of a broad question. But we saw a bit of a shift in free cash flow policy here with dipping into the NCIB in the quarter. And just sort of wondering how you think about where the net debt is here, sustainability, breakeven prices on the dividend and then sort of the appetite to dig into the NCIB here over the rest of the year versus a focus on paying down debt?

Andrew Phillips, President and CEO, PrairieSky Royalty Limited: Thanks for the question, Patrick, good morning. I think the NCIB, again, we view it more as an acquisition. Look at our business currently and it’s outpacing the base and in terms of growth by 200 to 300% on any given year. Again, we’re effectively buying the best assets in the basin yet on the free cash flow yield, you’re in the teens for total returns. That’s our hurdle rate.

It’s more challenging to find assets that look as good as the current PrairieSky suite of assets. I think again, no different than we were used a bit of leverage in COVID knowing we could pay it down in a short period of time. We’re willing to do that to use the NCIB and buy stock below intrinsic value when the opportunities arise.

Patrick O’Rourke, Analyst, ATB Capital Markets: And just to follow-up on that, have you guys stress tested sort of your cash flows for breakeven oil prices in this choppy environment?

Pam Cazell, Financial Executive, PrairieSky Royalty Limited: Yes, we have Patrick and the dividend is sustainable well below $50

Patrick O’Rourke, Analyst, ATB Capital Markets: Excellent. And then just second question here. You guys are typically at the cutting edge of trends that we’re seeing in the basin. We have the multilateral development both in the Clearwater, Manville, West Shale Duvernay has been successful for you. I think we’ve seen a little bit of CHOPS activity or renaissance there on some of your lands.

Can you maybe walk through what’s going on there from a technical perspective and sort of what the volume of potential locations and opportunity set is?

Andrew Phillips, President and CEO, PrairieSky Royalty Limited: Yeah, thanks for the question. It’s a great question. I think it is one of the assets that we kind of saw as a big resource of course when we acquired those heavy oil assets both from Cinnerell and then Heritage. And we have in the range of 600,000 acres in the broader area including in the Saskatchewan side. And that stuff we didn’t put any value on when we’re acquiring it because it was cold flow heavy oil production and there’s a lot of sand that comes along with it.

Operators are now running horizontal single legs and they’re running liners and they’re putting in circulation strings. They’re effectively circulating over the backside to clean out the sand consistently and they’re getting very good results. What it really does is opens up an entire new fairway of opportunities. We don’t have a number, but it’s in the hundreds, probably some days north of a thousand new locations over time on our land. It won’t be part of this current playbook because I think it’s just being refined in terms of technological advancements, but it it kinda really just steps back to the thesis.

And one of the things we’ve always tried to do at PrairieSky is when we acquire assets. We like big pay packages and lots of, large oil in place assets that we think can ultimately be exploited. Similar to what we talked about in Saskatchewan where we’ve done over seven different leases for steam assisted gravity drainage for these small modular type projects. On the Alberta side, we’ve actually identified a number of opportunities for small scale safety as well in zones like the REX and Lloydminster. So I think as technology improves, we’re believers that a lot of this large oil in place will be exploited.

Okay, thank you very much. Thanks for your question.

Michelle, Conference Call Moderator: Thank you. Our next question comes from Aaron Bilkoski with TD Cowen. Your line is open.

Aaron Bilkoski, Analyst, TD Cowen: Thanks. I just wanted to follow-up on Patrick’s question and get a little bit more clarity to make sure I understand what you said. Am I correct to assume that you’re saying you’re willing to take on a little bit of incremental debt to repurchase shares if they’re at the right valuation?

Andrew Phillips, President and CEO, PrairieSky Royalty Limited: That’s correct.

Aaron Bilkoski, Analyst, TD Cowen: Perfect. I have another question too. Of the net wells for all linear lands in Q1, how many or what percentage of that would be from the Williston Green window at the Duvernay and what would that have been a year ago?

Andrew Phillips, President and CEO, PrairieSky Royalty Limited: Probably the best thing to talk about is last year in the Williston Green Duvernay, the Paramount, we had seven wells total drilled on the land and this year we expect 19. They’ll come on across the entire year, so again, when their spot is not necessarily indicative of when they’ll go on production. So we did have an active program. Mike, I think was the exact number.

Mike Murphy, Executive, PrairieSky Royalty Limited: Yeah, Aaron, it’s Mike here. Yeah, I believe approximately 14 Duvernay wells were spot in the Williston Green area in Q1 and that would have been higher than last year. What’s important about these 14 that the higher royalty interest as well compared to what we would have seen previously.

Andrew Phillips, President and CEO, PrairieSky Royalty Limited: Yeah and of course, depending on the timing Aaron, these could drift all the way in Q3 just given the very large fracs and they typically do them as a big program. But but it’s very positive. I think it’s because they are such high rate wells and because we have high royalties, you’ll see some significant spikes in production throughout the year.

Aaron Bilkoski, Analyst, TD Cowen: Perfect. Thanks, guys. I appreciate that.

Andrew Phillips, President and CEO, PrairieSky Royalty Limited: Thanks for

Jamie Kubik, Analyst, CIBC: the question.

Jeremy McRae, Analyst, BMO Capital Markets: Thank you. Our

Michelle, Conference Call Moderator: next question comes from Jamie Kubik with CIBC. Your line is open.

Jamie Kubik, Analyst, CIBC: Yes, good morning. Thanks for taking my question here. Just a bit of a follow on to Aaron’s question there. You did disclose 15 wells spud in the Duvernay light oil play. Based on my count, that’s more than double what you’ve sort of ever reported.

Can you just talk about where that you expect that to trend for the rest of

Andrew Phillips, President and CEO, PrairieSky Royalty Limited: the year? Is this a bit

Jamie Kubik, Analyst, CIBC: of a one time item in terms of ramp up for the different operators in the play? Or how can you talk about, licensing activity and what you see going forward there? Thanks.

Andrew Phillips, President and CEO, PrairieSky Royalty Limited: You bet. No. Thanks for the thanks for the question. I think, you know, it’ll be very steady on the East Shale Basin, so we should see, five to seven new wells, perhaps even as high as 10 this year on the East Shale Basin side. But when you jump to the West Shale Basin where all the new leasing activity has been and where there’s been some really exceptional results, we think that could ramp again next year.

So in 2026, you could have a full doubling of that program just given the given the very economic wells and the high rate light oil wells that have been drilled in the area. One of the producers to the north signed to take the pay with a midstreamer for their liquids And and then the the in the central one, Spartan Delta, has had some excellent results and is in a very good part of the play. And then Paramount, of course, is upgrading their leaf line facility and getting their gas takeaway taken care of. So we do expect activity to continue to ramp, in the Duvernay in general. Jamie?

Jamie Kubik, Analyst, CIBC: Yeah. That’s great. And then on on the Mannville stack, you have a slide in your presentation just showing how substantial the growth has been from 2022 to 2024. But based on that chart as well, volumes have plateaued a little bit since Q2 of last year. Can you just talk a little bit about where you expect production from this play to move to in the coming years and perhaps some additional detail on things that are going on in that part of your asset base?

Mike Murphy, Executive, PrairieSky Royalty Limited: Yeah, Jamie, it’s Mike here. Yeah, we see the Mandel stack is having potential to have volumes approaching out of the clear water. So in that chart that you saw, it did look like production is plateauing a bit. We still expect pretty strong growth in 2025. It’s not going to be the 70% we saw last year, but somewhere between 3050% would be reasonable.

We only saw probably seven or eight Mannville stacked spuds in Q1, but we expect a pretty active program for the rest of the year, similar to last year or stronger.

Jamie Kubik, Analyst, CIBC: That’s all for me.

Andrew Phillips, President and CEO, PrairieSky Royalty Limited: Just one other comment on that. At our Investor Day on May 14, we’re going to have three CEOs present. Fotis from Spartan Delta, Ian Curry from Spur, and then also Tom Bischke from KelTex Trilogy. And it’ll be a great opportunity to really get some color on the Mandelstack and just the amount and quantum of, drilling locations that they’ve uncovered just in their general area. And then, of course, CNRL has a massive amount of drilling inventory on PrairieSky, SeaMinerals, Tidal, and Gore.

So it’s, it’ll be a good opportunity to kinda hear it from the producer that’s grown the fastest in the region. So that’s less than one month away. So hopefully, we can you you can ask the same question to someone who’s actually spending the capital.

Jamie Kubik, Analyst, CIBC: Okay. Great. Thanks for the additional color. I’ll hand it back.

Michelle, Conference Call Moderator: Thank you. Our next question comes from Jeremy McRae with BMO Capital Markets. Your line is open.

Jeremy McRae, Analyst, BMO Capital Markets: Hey, Just with the decline in oil prices here recently, have you seen any indications that you’re seeing a bit of a slowdown? Like, I know most of your lands are in pretty economic plays. And so there’s a bit of a debate saying, you know, how much of a slowdown do we potentially see? And I’m just have any operators expressed that? And then kind of part two of that is with the rebound in natural gas prices, are you seeing any more operators express interest in developing more of the gas assets that you have here, specifically maybe in the Montney?

Andrew Phillips, President and CEO, PrairieSky Royalty Limited: Yes, so just to touch on the second question on the gas side, we have a significant Montney development both Pacific Cambium but also Selicanth has some wells coming on, so we do have some significant Montney volumes coming on and those are drilled in advance of this gas price run up, that’ll be positive for them assuming that hangs in there at the AECO basis level. And then on the oil side, I think it’s probably too early for operators to have made any shifts. We haven’t been told of any shifts. I think some of our privates will drill right through this just given their net cash positions and very economic wells. But certainly, would expect to see some activity fall off somewhere throughout the year with the big drawdown in WTI prices, but we haven’t heard of anything yet.

I think what makes it a little easier for operators is we’re heading into spring breakup right now as we speak. So there’s gonna be the the natural every year slowdown in as rigs drop because of road bans. And that’ll give people a chance to regroup and really understand what they wanna do for the rest of the year. But interestingly enough, a lot of our producers are in exceptional shape going into this one. It was a different story going into COVID when they had, stretched balance sheets in some cases going into it.

So we’ll see how the rest of the year kind of unfolds, but we haven’t heard of anything, any major changes yet.

Jeremy McRae, Analyst, BMO Capital Markets: Okay. Perfect. Thanks, Andrew.

Andrew Phillips, President and CEO, PrairieSky Royalty Limited: Thanks for the question, Jeremy.

Michelle, Conference Call Moderator: Thank you. I’m showing no further questions at this time. I’d like to turn the call back over to Andrew Phillips for any closing remarks.

Andrew Phillips, President and CEO, PrairieSky Royalty Limited: Thank you all very much for dialing into the early morning conference call. Hope everyone has a great day and hope to see a number of you at our Investor Day.

Michelle, Conference Call Moderator: Thank you for your participation. This does conclude the program. You may now disconnect. Good day.

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