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A pair of derricks in Western Canada.Todd Korol/The Globe and Mail

PrairieSky Royalty Ltd.'s returns are getting squeezed, as the energy companies that lease its vast Western Canadian acreage cut spending on drilling and fewer step up to secure new acreage, its chief executive said.

PrairieSky now leases to 285 companies, and capital spending on the leased lands must hit $400-million a year for PrairieSky's overall production to remain flat. The drillers spent more than that on the acreage controlled by the company, which was spun off by Encana Corp. in two separate share issues last year valued at a total of $4.3-billion.

"As companies slow down on our acreage, we'll see a commensurate drop in our activity," Andrew Phillips, PrairieSky's chief executive, said in an interview at FirstEnergy Capital Corp.'s energy conference in New York.

He would not predict the potential outlay in 2015, but said activity has slowed markedly. Because PrairieSky's lands extend from southeastern Saskatchewan to northeastern British Columbia, drilling trends mirror those in the broader industry. "If drilling drops 35 per cent year over year, we'll get 35 per cent less drilling," Mr. Phillips said.

The company doesn't drill its own wells on the acreage, but collects royalties on output from 24,700 wells, most them old-style vertical ones. Without new drilling, overall production falls an average of 20 per cent a year. Output averaged 17,280 barrels of oil equivalent a day in the fourth quarter.

Cushioning the potential impact of a slowdown, many of the land deals PrairieSky signed last year included well commitments, so a third of the activity will be from capital that is rock-solid, Mr. Phillips said.

New leasing activity has also slowed with the downturn in oil and gas prices.

"What we're seeing today is that there's interest in the lands, but it's not to the same degree. We have a data room where we make all our seismic [data] available to industry, and [in the past], that was booked five days a week, 12 hours a day," Mr. Phillips said. "Now it's about half that. So there's lower anticipated leasing in the lands over the next year."

Late last year, the company acquired Range Royalty, another fee collector, to bolster its land spread. The all-stock structure of the deal has actually been beneficial, as cash flow per share has increased, he said.

Cenovus Energy Inc. and Canadian Natural Resources Ltd. are both looking to cash out of their own royalty acreage, either through a sale or public offering, when the market is favourable. Mr. Phillips declined to say whether PrairieSky had been in talks with them. He said size alone would be no reason to do a deal.

"We don't necessarily want to get bigger. We just want to get better. If it makes sense per share, then we'll look at them but if it doesn't make sense per share then we're very happy with the size that we're at," he said.