PrairieSky Frequently Asked Questions
What are Fee Lands and how did PrairieSky Royalty Ltd. (“PrairieSky”) come to own them?
Fee Lands are PrairieSky’s fee simple mineral title lands prospective for petroleum, natural gas, NGL and certain other minerals. A fee simple interest is the highest form of rights associated with land ownership, and is effectively the same as the Crown (government). Fee simple mineral title ownership is not subject to expiration, surrender or termination and is effectively perpetual. A history of how PrairieSky came to own this acreage can be found on our website at: http://prairiesky.com/History.
Does the Crown sell any mineral rights, i.e. create more fee simple acreage?
The Crown does not sell mineral rights, and there is a finite amount of fee simple acreage held by parties other than the Crown. PrairieSky is the single biggest owner of Fee Lands in Alberta and Saskatchewan with approximately 7.8 million acres with petroleum and natural gas rights.
What is a Gross Overriding Royalty (GORR)?
GORR interests are royalty interests that are granted out of and are attached to a leasehold or working interest (a lease or license issued by the Crown or the fee simple mineral title owner). A GORR interest is considered an “interest in land” and is therefore not subject to expiration, surrender or termination provided the underlying leasehold interest remains in good standing in accordance with its terms.
The term “overriding” refers to the fact that the royalty is paid by the lessee/working interest owner in addition to the royalty reserved to the lessor.
A GORR interest can be created in many different ways, including as a result of: (i) one party farming out the working interest rights to another party in exchange for retaining a GORR on production from the lands under the farmout agreement; (ii) one party providing capital to another party in exchange for a GORR; (iii) one party, as owner of certain Fee Lands that are in a checkerboard fashion, receiving a GORR on offsetting acreage, in exchange for allowing drilling by third parties of longer horizontal wells across sections that include portions of Fee Lands; (iv) where a third party has reviewed the Company’s seismic data and acquired a lease or license in respect of the Crown mineral rights underlying such data; or (v) various other contractual arrangements.
Substantially all PrairieSky’s 7.8 million acres of GORR interests are attached to Crown leases and licenses.
How does a GORR differ from Fee Lands?
The primary difference between a fee mineral title interest and a GORR is duration.
Fee Land is effectively perpetual and will never expire. The continued existence of the Fee Lands is not contingent on the actions of a third party. By contrast, a GORR is tied to the duration of the underlying lease or license, and therefore terminates upon the expiration, surrender or termination of the underlying lease. The continuation of a lease is typically dependent on the holder thereof continuing to produce hydrocarbons and maintain the lease in good standing.
How many acres of land does PrairieSky own?
PrairieSky owns 7.8 million acres of Fee Lands with petroleum and natural gas rights, 7.8 million acres of GORR Lands and 1.1 million acres of coal rights.
Does PrairieSky drill wells?
No, PrairieSky is a royalty owner and does not hold any working interest in any petroleum or natural gas wells. A working interest owner is responsible for its share of operating costs, capital costs, environmental liabilities and reclamation obligations, whereas PrairieSky bears no responsibility for these costs and associated liabilities.
Does PrairieSky own the surface rights associated with the Fee Lands?
No, PrairieSky’s only owns the mineral titles associated with sub-surface minerals, and has no legal obligations, liabilities or entitlements associated with surface ownership.
Access to surface locations for the purpose of conducting oil and gas operations is handled by the Lessee (operator), not PrairieSky, and is typically handled through negotiation with the holder of the surface rights or obtaining a right of entry order granted by the Surface Rights Board. For more information see http://surfacerights.alberta.ca/.
Would PrairieSky consider buying working interest production and/or becoming an operator?
No, PrairieSky believes there are significant advantages to being a royalty-only company. Advantages include having no capital or operating expense requirements as well as no environmental liabilities associated with operations and abandonment/reclamation obligations associated with the wells and facilities.
As a royalty-only company, we are focused on leasing lands and are not in competition with other operators.
What is the Royalty Advantage?
The royalty advantage is a very high margin cash flow stream through all cycles, as PrairieSky has no operating costs, no Crown royalties and no finding and development costs.
PrairieSky collects royalties on all production from its Fee and GORR Lands. PrairieSky holds fee simple mineral title to over 10 million stratified, leasable, undeveloped acres which we expect will be developed in the future. Because PrairieSky owns the Fee Lands in perpetuity, we expect to receive the benefit of future technological advancements and new discoveries with no associated capital investment.
Below is a chart which shows the gross production on PrairieSky Fee Lands since production data has been collected and stored with the government. This chart demonstrates the long-term nature of the asset and the value of Fee Lands and ownership in perpetuity.
Historical Gross Production on PSK Fee Lands
Graph above from PrairieSky Corporate Presentation, data from Accumap.
How much capital does PrairieSky have to spend to maintain its production?
PrairieSky is not a working interest participant in any oil and gas projects and therefore does not invest capital in such projects. PrairieSky is exclusively a royalty collector.
Any capital investment decisions made by PrairieSky are discretionary and is limited to acquisition opportunities.
How long is a PrairieSky lease?
PrairieSky lease terms vary but in general range from a 1 to 5 year primary term and set out specific geological zones which the lessee can drill for oil and/or natural gas. A well is required to be drilled and producing in order for the lease to continue past the primary term. If there is no producing well, the lands are returned to PrairieSky which can then lease out the lands to another party. If a well is drilled and producing, the lessee will keep its lease for the producing zone past the primary term for as long as the well is producing and the lessee otherwise maintains the lease in good standing. These lands are “held by production”. All other zones, deeper or shallower, are returned to PrairieSky who can then lease these lands out to other parties. Because the mineral rights return to PrairieSky, Fee Lands are continually recycled.
The picture below demonstrates that zones where a well is producing are held by production. Other zones revert back to PrairieSky.
(1) Held by production (“HBP”)
What royalty rate does PrairieSky charge to lessees?
PrairieSky’s standard leasing rates on Fee Lands are 17.5% for oil and 15% for natural gas. PrairieSky has a number of legacy leases at both higher and lower rates.
What is PrairieSky’s average corporate royalty rate?
PrairieSky’s average corporate royalty rate is approximately 6.0% at December 31, 2018. PrairieSky’s standard leasing rates on Fee Lands are 17.5% for oil and 15% for natural gas. PrairieSky receives a 5% royalty on its shallow natural gas which makes up approximately 20% of natural gas production. PrairieSky units have royalties averaging approximately 1%. PrairieSky’s GORR royalties range from approximately 1%-6%. Although there are certain GORRs at higher rates, combining the production from over 38,000 producing wells at the above royalty rates results in the average corporate royalty rate of approximately 6.0%.
PrairieSky has certain Fee Land leases as well as GORRs at rates both higher and lower than the royalty rates listed above.
Why do operators choose to drill on PrairieSky lands versus Crown lands?
PrairieSky’s Fee Land is a geologically diverse portfolio that spans the entire stratigraphic column from surface to basement (over 10 million stratified leaseable acres). There are significant advantages to leasing PrairieSky lands.
One key advantage is reduced lead times. In order to acquire leases from the Crown, the lands must be posted at a Crown land sale. The process from posting to sale is approximately 4-4.5 months. At a Crown land sale, the highest bid wins. Even if a company posts land for a Crown land sale, the process to acquire the land is a blind competitive bid which adds significant risk to the process. When dealing with PrairieSky, we negotiate with the producer and can issue a lease in as short as a week. There is significant value in the short lead time and certainty.
A second key advantage is that PrairieSky has ~13,000 km2 of 3D seismic and ~46,000 km of 2D seismic over its lands which is available for review. In addition, PrairieSky’s geoscience and engineering team is dedicated to exploration and prospect development which are available to potential lessees (see our website for examples). Access to prospects and seismic enhances development economics and significantly reduces a lessee’s risk profile by allowing an upfront evaluation of lands which generates realistic and executable commitments and increases the likelihood of optimally placed well locations by lessees, potentially increasing production and resulting royalty revenue to the Company.
How does PrairieSky lease lands to operators?
PrairieSky is a pro-active leaser of land. There is a significant advantage to being a royalty-only company. PrairieSky provides access to its seismic data room and our website provides information for producers on certain plays and available rights on our land. Because PrairieSky does not compete for drilling opportunities, companies can bring plays to PrairieSky to discuss leasing terms without concern that PrairieSky might drill the opportunity. In addition, PrairieSky works up plays internally and provides these ideas to oil and gas producers (see our website). This can significantly decrease lead times for companies. PrairieSky landmen actively reach out to producers with opportunities.
Is PrairieSky focused on one or two plays? What is the homogeneity of the geology on PrairieSky lands?
The geological cross section of PrairieSky lands looks similar to that of the Crown given our diverse asset base from northeast British Columbia to Manitoba.
Why doesn’t PrairieSky provide guidance?
PrairieSky does not provide guidance as it does not control the timing of operations in the field, drilling, maintenance, downtime, etc.
PrairieSky collects Lease Issuance Bonus and Lease Rentals. What are these other types of revenues?
Lease rental revenue is analogous to apartment rent. It is an amount owing over the term of the lease based on a per hectare amount.
Lease Issuance Bonus is an upfront payment made to acquire a lease. It is similar to the upfront payment that is paid to acquire a lease from the Crown. The bonus amount will vary by lease based on activity in the area, term of the lease and any upfront capital commitments made by the lessee.
What is compliance revenue?
PrairieSky has a number of staff dedicated to Lease and Royalty compliance. These staff review PrairieSky lands and contracts to ensure operators are operating in compliance with their lease terms and paying their royalties accurately and in a timely fashion. Amounts collected through compliance are recognized in product revenue in the period they are certain to be received and included as a PPA (see below).
PrairieSky speaks of PPAs. What is a PPA?
A PPA is a prior period adjustment. Because PrairieSky does not operate its wells, it receives production data approximately 2 months after production. As a result, there are adjustments, both positive and negative to volumes as actuals are trued up to estimates. In addition, PrairieSky’s compliance group is collecting compliance volumes and revenue which relate to prior periods. As a result, these volumes are also reported as PPAs. PrairieSky reports compliance revenue in the period when collection is certain to be received.
How much debt does PrairieSky have?
PrairieSky has cash on its balance sheet and does not have any debt. PrairieSky does not intend to use debt as part of its capital structure. Over the long-term, PrairieSky expects to provide better risk adjusted returns to shareholders with this conservative capital structure.
How many staff does PrairieSky have?
PrairieSky has approximately 66 full time employees. All of PrairieSky’s staff are in our Calgary head office. We have no field staff as we have no field operations.
Does PrairieSky pay a dividend?
PrairieSky pays a monthly dividend that is set on an annual basis in February. PrairieSky’s current monthly dividend is $0.065 per share, or $0.78 per common share on an annualized basis.
For further information regarding PrairieSky, please see our website as well as our profile on www.sedar.com.
This document may include certain statements regarding PrairieSky's future plans and operations and forward-looking statements that we believe allow readers to better understand our business and prospects. The use of any of the words "expect", "anticipate", "continue", "estimate", "objective", "ongoing", "may", "will", "project", "should", "believe", "plans", "intends", "strategy" and similar expressions are intended to identify forward-looking information or statements.
By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond our control. These risks are described in detail in PrairieSky's MD&A, and the Annual Information Form for the period ended December 31, 2018 under the headings "Risk Management" and "Risk Factors", respectively, each of which is available at www.sedar.com. The forward-looking information and statements contained in this document are expressly qualified by the cautionary statement contained in the documents mentioned above.
- Investor Day 2019
- Royalty Playbook
- Financial Reports
- Corporate Presentation
- Shareholder Meeting and Proxy Materials
- Incentive Compensation Plans
- News Releases & Notices
- Dividend Information
- PrairieSky Royalty Tax Information
- Information for CNRL Shareholders
- PrairieSky Frequently Asked Questions