PrairieSky Royalty has announced its second quarter results for the three-month period ended June 30, 2022.

Second Quarter Highlights:

• Record average royalty production of 25,992 BOE per day, a 9% increase over Q1 2022 and 32% over Q2 2021 with oil royalty production reaching a record 12,220 barrels per day.
• Total revenues increased to $198.1 million, 42% over Q1 2022 and 184% over Q2 2021, comprised of royalty production revenues of $190.2 million and other revenues of $7.9 million.
• Generated record quarterly funds from operations of $159.6 million ($0.67 per common share basic and diluted), 52% above Q1 2022 and 182% above Q2 2021 driven by royalty production growth and strong commodity pricing.
• Declared a second quarter dividend of $28.7 million ($0.12 per common share), representing a payout ratio of 18%, with excess cash flow allocated to $15.6 million of royalty acquisitions and the balance to retiring bank debt.
• Net debt totaled $453.9 million, down 20% or $115.0 million from March 31, 2022 as excess funds from operations were used to retire indebtedness incurred in connection with acquisitions completed during the second half of 2021.
• PrairieSky completed $15.6 million of royalty acquisitions in the quarter adding approximately 360 BOE per day (86% natural gas) of incremental gross overriding royalties in Central Alberta and Northeast British Columbia, as well as adding undeveloped land in the Clearwater oil play.

Andrew Phillips, President & CEO, commentated:
"This is the third consecutive quarter of strong organic growth in royalty production as third-party operators have been actively drilling new wells and performing workovers and recompletions across PrairieSky's extensive land base. Increased royalty production, strong commodity pricing for all products and increased lease bonus and other revenues combined to deliver record quarterly funds from operations of $159.6 million or $0.67 per common share (basic and diluted). PrairieSky remains unhedged, realizing the full benefit of increased benchmark pricing during the quarter and generating a royalty revenue netback of $80.44 per BOE. In addition, we remain insulated from direct inflationary pressures as we do not incur upstream costs related to exploration and development capital or operations which allowed us to generate an operating margin of 97% in the quarter.

PrairieSky's royalty production volumes grew organically again in Q2 2022 to 25,992 BOE per day as new wells drilled in late 2021 and Q1 2022 came on production. Oil royalty production averaged 12,220 barrels per day in the quarter, a 9% increase over Q1 2022 and a 33% increase over Q2 2021 excluding all acquisition royalty volumes. PrairieSky's Clearwater production continued on its strong growth trajectory averaging 1,500 BOE per day of royalty production in Q2 2022, a 25% increase YTD 2022. As the largest owner of Clearwater royalty lands with 1.3 million acres, this low-cost play is expected to provide significant royalty production growth opportunities for PrairieSky through all commodity cycles.

There were 122 spuds on our royalty properties in the quarter as third-party drilling activity moderated in line with seasonal breakup when road bans in certain areas take place. The pace of capital activity picked up late in Q2 2022 and we anticipate Q3 2022 to be very active due to the licensing activity we have seen to date and the number of new leases we entered into in the quarter which we view as a leading indicator to forecast drilling activity. Leasing of our undeveloped land base generated $3.8 million in bonus consideration by entering into 54 distinct leasing arrangements with 45 different counterparties in Q2 2022. This includes significant new leasing for Mannville oil on our recently acquired fee mineral title acreage.

PrairieSky declared dividends of $28.7 million or $0.12 per common share for shareholders of record on June 30, 2022, resulting in a payout ratio of 18%. Excess funds from operations in the quarter were allocated primarily to debt repayment reducing net debt by $115.0 million to $453.9 million at June 30, 2022. Net debt has decreased $181.1 million since December 31, 2021.

The first half of 2022 has been an exceptional start to the year with the third successive quarter of organic royalty production growth, leasing activity at multi-year highs and drilling activity in the field across the portfolio. We would like to thank our shareholders for their support, and our staff for their continued hard work."

Q2 2022 Financial Highlights

• Funds from operations increased 52% over Q1 2022 to a record $159.6 million or $0.67 per common share (basic and diluted). The increase in funds from operations was driven by organic growth in royalty production and strong commodity pricing. Funds from operations increased 182% over Q2 2021 with the addition of acquisition volumes in the second half of 2021, organic royalty production growth and improved commodity pricing.
• Other revenue totaled $7.9 million in Q2 2022 comprised of $2.9 million of lease rentals and $3.8 million in bonus consideration generated from 54 new leasing arrangements with 45 different counterparties. In addition, PrairieSky generated $1.2 million in other income which included $0.9 million of Potash royalty revenue. Compliance recoveries totaled $1.6 million in Q2 2022.
• Cash administrative expenses totaled $5.2 million or $2.20 per BOE, down 18% on a per BOE basis from Q2 2021. PrairieSky expects cash administrative expense per BOE to remain below $3.00 per BOE for 2022.
• PrairieSky declared a second quarter dividend of $28.7 million ($0.12 per common share), representing an 18% payout ratio, with remaining funds from operations primarily allocated to reducing bank debt.
• PrairieSky completed $15.6 million of royalty acquisitions in the quarter adding approximately 360 BOE per day (86% natural gas) of incremental gross overriding royalties in Central Alberta and Northeast British Columbia, as well as adding undeveloped land in the Clearwater oil play.
• At June 30, 2022, PrairieSky's net debt balance totaled $453.9 million, a $115.0 million (20%) decrease from March 31, 2022.

Royalty production revenue grew to $190.2 million, a 41% increase over Q1 2022 and a 193% increase over Q2 2021, generated from total royalty production volumes of 25,992 BOE per day. A further breakdown is as follows: 

• Oil royalty production volumes averaged 12,220 barrels per day, a 9% increase over Q1 2022 and a 74% increase over Q2 2021. Excluding all acquisition royalty volumes completed over the last 12 months, organic growth in oil royalty production totaled 8% over Q1 2022 with an incremental 130 barrels per day (1%) of royalty production from sliding scale royalties. Organic growth was 29% over Q2 2021 as third-party operators accelerated drilling activity across a variety of oil royalty plays with an incremental 285 barrels per day (4%) of royalty production from sliding scale royalties.
• Growth in oil royalty production volumes and strong average WTI pricing of US$108.57 per barrel combined to generate oil royalty revenue of $135.6 million in the quarter, a 37% increase over Q1 2022 and 216% above Q2 2021.
• Natural gas royalty production volumes increased to 66.0 MMcf per day, 9% above both Q1 2022 and Q2 2021. Natural gas royalty production included the recovery of approximately 1.0 MMcf per day of volumes related to cold weather freeze-offs in Q1 2022 and 1.9 MMcf per day from the acquisition made in the quarter. The remaining increase in natural gas royalty production volumes is attributable to new wells on stream, workovers and solution gas from oil wells offsetting natural declines.
• Natural gas royalty revenue increased to $36.8 million, a 61% increase over Q1 2022 and 169% above Q2 2021 primarily due to strong natural gas index pricing with daily AECO averaging $7.24 per Mcf in the quarter and monthly AECO pricing averaging $6.27 per Mcf in the quarter.
• NGL royalty production volumes averaged 2,772 barrels per day, 6% above both Q1 2022 and Q2 2021 due to new wells on stream and 50 barrels per day of incremental acquisition royalty volumes made in the quarter offsetting natural declines.
• NGL royalty revenue increased to $17.8 million, 36% over Q1 2022 and 114% over Q2 2021, due to increased royalty production volumes and strong benchmark pricing.

ACTIVITY ON PRAIRIESKY'S ROYALTY PROPERTIES

Annually, third-party capital activity in Western Canada slows down in the second quarter as a result of seasonal spring breakup when melting snow and frost cause the ground to become soft and muddy leading to ensuing road bans and limiting lease access. There were 122 wells spud (94% oil) on PrairieSky lands during Q2 2022 which included 62 wells spud on our Fee Lands, 44 wells spud on our GORR acreage and 16 unit wells spud. There were 115 oil wells spud in Q2 2022 including 42 Viking wells, 19 Mannville heavy and light oil wells, 14 Clearwater wells, 14 Mississippian wells, 6 Duvernay wells, 6 Mannville heavy oil wells at Lindbergh, 5 Cardium wells and 9 additional spuds in the Bakken, Belly River, Charlie Lake, Triassic and Devonian formations. There were 7 natural gas wells spud in Q2 2022, including 4 Montney, 2 Spirit River, and 1 Mannville well. PrairieSky's average royalty rate for wells spud in Q2 2022 was 7.2% (Q2 2021 - 6.3%).