Release Date: July 16, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Oil royalty volumes reached a record 13,312 barrels per day, up 6% over Q2 2023.
- Year-to-date oil royalty volumes are up 7%, driven by growth in the Clearwater and Manville stack plays.
- Realized oil price increased to $91.75 per barrel, up approximately $14 from Q1 2024.
- Royalty production revenue totaled $125.5 million in Q2, with additional revenues of $10.1 million.
- Net debt decreased by 21% from year-end, totaling $174.6 million as of June 30.
Negative Points
- Well spuds were down quarter over quarter due to seasonality, with a total of 115 wells spud in Q2 2024.
- Cash administrative expenses in the quarter totaled $6.8 million, including $700,000 of deferred share unit payments.
- Current income tax expense totaled $19 million in Q2.
- Funds from operations, while up 16% from Q2 2023, still face potential volatility due to market conditions.
- Activity in the Viking play moderated in Q2, with lower spuds compared to previous quarters.
Q & A Highlights
Q: Could you comment on the short-, medium-, and long-term views of the impact of the Trans Mountain pipeline on your operators and the overall market? Also, how do you think government policies will affect the industry and your business in the next five to ten years?
A: The Trans Mountain pipeline adds 590,000 barrels of capacity to the west coast, which will compress differentials and improve economics for heavy oil producers. This structural change will likely increase activity and improve economics for us. Regarding government policies, we work with all governments, and while federal policies have been less supportive, provincial governments in Saskatchewan and Alberta have been very supportive of energy.
Q: Is the plan to continue paying down debt to zero, and would you consider keeping some debt outstanding if interest rates decline to buy back stock?
A: We aim to be debt-free by mid to late next year, which will provide flexibility. Over the next ten years, the business is expected to generate around $4.5 billion in after-tax cash flow. Buybacks will be a significant part of returns, but timing is uncertain. Building some cash is also beneficial for future downturns.
Q: Can you discuss the dynamics in the Viking play this quarter and why activity moderated?
A: Viking spuds were down in Q2 due to seasonality, but we expect increased activity in late Q3 and early Q4. The production volume was offset by efficient drilling in the Manville stack and Clearwater plays. We have over 8,000 drilling locations in the Viking, and the pace of drilling is driven by economics, which are currently favorable.
Q: Can you share details on new play concepts and leasing activities?
A: Multilateral plays are still in early stages, and we see potential in zones with similar reservoir characteristics. We've identified economic extensions in the Deep Basin and other areas. With significant seismic data, we are confident in leasing out these plays, especially given the current environment of strong cash flow and good balance sheets among producers.
Q: How do you view the federal government's understanding of the oil and gas industry's importance to the economy?
A: The federal government understands the significance of the oil and gas industry to Canada's economy, as evidenced by their support for the Trans Mountain Pipeline. While there may be public statements to appease different groups, the economic importance of the industry is recognized.
Q: What are your thoughts on the potential for programmatic buybacks?
A: We do not favor programmatic buybacks. Instead, we focus on allocating capital properly over different cycles. Buybacks will be part of our strategy, but we will time them based on market conditions and other opportunities.
Q: How do you manage capital allocation during downturns?
A: We maintain liquidity to take advantage of opportunities during downturns. In past downturns, we were able to make significant acquisitions and buy back stock. Going forward, being debt-free will provide flexibility to allocate capital effectively.
Q: What is the impact of the Trans Mountain Pipeline on heavy oil differentials?
A: The Trans Mountain Pipeline has compressed heavy oil differentials, improving economics for producers and increasing activity. This structural change benefits our business by enhancing the value of our heavy oil resources.
Q: How do you view the role of provincial governments in supporting the energy industry?
A: Provincial governments in Saskatchewan and Alberta have been very supportive of the energy industry, which contrasts with less supportive federal policies. This support is crucial for the industry's growth and stability.
Q: What are your expectations for future drilling activity in the Viking play?
A: We expect increased drilling activity in the Viking play in late Q3 and early Q4, driven by favorable economics and seasonal factors. The play remains economically attractive, and we anticipate continued development.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
