While a Royalty Company, the Industry Is Still a Risk

PrairieSky Royalty is a pure-play oil and gas royalty company in Canada. It engages in the acquisition and management of royalty lands. It is the largest fee simple mineral title landowner in Western Canada, holding crude oil and natural gas royalty interests in the country.

PrairieSky has a prominent presence across all the four provinces. The company has 15.6 million acres of royalty properties spanning Western Canada from Northeast British Columbia to Western Manitoba. It has a large portfolio of fee simple mineral titles and oil and gas royalty interests in Canada. Saskatchewan Viking ranks amongst the key plays for many producers. The company’s land mix consists of both high risk, deep targets to low-risk shallow oil and natural gas locations. PrairieSky’s diversified assets include 38,000 producing wells and it receives payments from approximately 320 different industry payors.

It also has a license to ~13,000 km2 of 3D seismic over 3.3 million acres and ~46,000 km of 2D seismic. The company derives 77% of its product revenue from liquids volumes that accounts for 49% of the production volume. PrairieSky’s average daily royalty production volumes for Q2 2020 were 32% crude oil, 14% NGL, and 54% natural gas.

Investment Data

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Revenue Growth & Market Exposure

PrairieSky generates revenues through leasing its fee lands and its GORR interests, including royalty production revenue, bonus consideration, and lease rental income from petroleum and natural gas on its properties in Canada. Royalties are calculated on a fixed percentage. Its activities are diversified with exposure to both oil and natural gas and about 320 lessees producing from over 30 geologic horizons.

PrairieSky does not conduct operations to explore, develop, or produce petroleum or natural gas. The third parties conduct such activities to develop Royalty Properties. These parties assume all costs and liabilities related to drilling and producing the resources. PrairieSky Royalty can re-lease to third parties who plan to actively pursue future opportunities. The company focuses on the organic growth of royalty production revenue from its properties. YTD 2020, the company completed acquisitions totaling $6.7 million consisting of royalty and E&E assets.

PrairieSky derives ~61% of royalty production revenue from fee lands i.e. lands with petroleum and natural gas rights. The operators on PrairieSky Royalty fee lands include large, mid, and small-cap producers. Some of PrairieSky’s top payors include well-known names like Artis Exploration, NAL Resources, Novus Energy, Ovintiv, Vesta Energy, WhiteCap Resources, etc. Its top 25 payors represent ~71% of product revenue. The company has large land holdings located throughout the heart of the oil and gas producing basins in Alberta, British Columbia, Saskatchewan, and Manitoba. The perpetual nature of fee lands allows PrairieSky Royalty to grow its revenue base.

A drop in oil volumes and lower oil prices led to revenue declines in Q2 2020. The company’s drilling and exploration activity across Western Canada was limited during the quarter due to the impacts of decreased benchmark pricing and COVID-19 on global oil supply and demand. There was no wells spud on PrairieSky lands as well. The average royalty rate for Q2 2020 stood near 6%.

Dividends

PrairieSky currently pays a quarterly dividend of $0.06 per share. It paid a total of $13.9 million in dividends and repurchased 470,000 common shares in the second quarter. The company has returned $1.1 billion in dividends and $142 million in share buybacks to shareholders, since its IPO. It has a high dividend payout ratio but an attractive annual yield of 8.7%. It cut its dividend by 7.7% recently. The company intends to distribute the majority of its cash flow in the form of dividends and share repurchases.

PrairieSky has re-invested its cash lease bonus consideration into new emerging oil resource play opportunities to provide liquids growth in the medium to long term. Its Lindbergh and Onion Lake projects have multiple phase expansion potential. The company also has future growth opportunities in emerging Clearwater and Duvernay oil plays, stacked Montney and Spirit River liquids-rich gas plays. Central Alberta Duvernay is in the early stages of contributing to PrairieSky’s revenues. The company expects major activity to start in late Q3 or early Q4.

PrairieSky has no capital requirements to maintain the current free cash flow generation. Third-parties’ oil and gas investments result in low risk and cost for PrairieSky Royalty. It offers higher margins than conventional working business models. The company has a sound track record of revenue conversion to free cash flow for distribution through all commodity price cycles. A low-risk revenue base and no capital commitments further add to cash flow visibility. Moreover, royalties should continue to provide the free cash flow to fund acquisitions and grow its royalty portfolio.

Competition

PrairieSky competes with other oil and gas royalty companies like Freehold Royalty, and other energy companies like Enerplus Corporation, Arc Resources, WhiteCap Resources, Crescent Point Energy, Vermilion Energy, etc. The company will continue to receive revenue from oil and natural gas properties as reserves are produced over the economic life of the properties. However, its net earnings are heavily dependent on commodity prices and production volumes.

Bottom Line

PrairieSky gives its shareholders an opportunity to gain from the future royalties and cash flow through perpetual land ownership. As one of the largest royalty companies in Canada, PrairieSky stands a good chance to benefit in the current scenario with no equipment and operational risks. As a dividend-paying oil and gas royalty company, PrairieSky Royalty acquires and actively manages royalties, while providing a lower risk income vehicle for its shareholders. With pricing starting to recover and operators resuming production, the company should benefit as royalties provide top-line revenue without exposure to capital and environmental costs.

Dividend Adjusted Chart by StockRover.

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