Just in case you are not on the list to receive...PRESIDENT’S MESSAGE TO SHAREHOLDERS
I hope all of Pine Cliff’s shareholders and families are well. I also hope that you are pleased with our Q4 and 2021 annual financials. Pine Cliff’s adjusted funds flow of $26.3 million generated during the fourth quarter of 2021 was 75% higher than the previous highest quarterly adjusted funds flow in Pine Cliff history of $15 million in Q4 2016 and the 2021 annual adjusted funds flow of $59.1 million was 52% higher than the previous highest ever annual amount of $39 million in 2014. We thought the quarter would be good, but these numbers exceeded our expectations. What a fantastic way to ring in our tenth anniversary!
Highlights from the fourth quarter and 2021 include:
• generated $26.3 million of adjusted funds flow ($0.08 per basic and $0.07 per fully diluted share) for the three months ended December 31, 2021, and $59.1 million ($0.18 per basic and $0.17 per fully diluted share) for the year ended December 31, 2021. This is 329% and 677% higher than the respective periods in the prior year;
• generated net earnings of $80.5 million ($0.24 per basic and $0.23 per fully diluted share) for the three months ended December 31, 2021, and $81.4 million ($0.24 per basic and $0.23 per fully diluted share) for the 2021 year;
• production averaged 19,056 Boe/d and 18,445 Boe/d during the three months and year ended December 31, 2021, compared to 19,130 Boe/d and 19,006 BOE/d for the comparable periods in 2020;
• closed the acquisition of a private company on December 29, 2021 for a cash consideration of $22.2 million;
• repaid in full $19.0 million of Term Debt due July 31, 2022 during the third quarter of 2021; and
• net debt decreased by 21.2% or $13.4 million from $63.0 million on December 31, 2020, to $49.7 million as at December 31, 2021.
Earnings Explanation During the fourth quarter and year ended December 31, 2021, Pine Cliff recognized a reversal of prior years’ asset impairment provisions totaling $14.0 million, due to an increase in future commodity prices. Higher future commodity prices also led to Pine Cliff recognizing a recovery of deferred income taxes in the amount of $50.6 million, as it is now expected that Pine Cliff will be able to utilize these tax pools. These amounts resulted in Pine Cliff recognizing additional earnings of $64.6 million during the fourth quarter ($0.19 per basic and $0.18 per fully diluted share) and year ended December 31, 2021 ($0.19 per basic and fully diluted share). Each of these adjustments are reflective of the increased value of Pine Cliff’s assets with the rise in commodity prices.
Drilling Update We brought two 100% Pekisko oil wells on production in Q4 that were originally drilled in Q3 and we also drilled three more wells (2.4 net) in Central Alberta in the fourth quarter; one of which was placed on production in Q4 with the remaining two coming on production in February. We also were active in our Edson area, participating in three (0.6 net) non-operated wells all of which were placed on production in Q4. We are pleased with the overall results of our 2021 drilling program and we were particularly happy with the last two Pekisko oil wells that came on production last month. It is early days but they both appear to be producing materially above type curve, and the timing to bring on flush oil production in this commodity environment is fortuitous.
Outlook Pine Cliff’s portfolio of low decline natural gas assets, bolstered by the recent tuck-in acquisition of a private company with synergistic assets in our core Ghost Pine area, positions Pine Cliff to take advantage of improved commodity prices in 2022. The Company’s 2022 capital budget of $25.5 million is expected to be fully funded from adjusted funds flow and includes approximately $18.0 million of development drilling, $3.6 million on major maintenance and optimization capital and $3.9 million on abandonments and reclamation (exclusive of abandonments conducted pursuant to government funded grants). We also expect to spend approximately $6.9 million in government funded grants for site abandonment and reclamation activities in 2022. In 2021 we abandoned 335 well bores (310 net), and in 2022 we are targeting to abandon 300 well bores while applying for 75 reclamation certificates. All of this work is starting to show up as reduced fixed operating costs
Annual production volumes for 2022 are expected to range between 20,000 and 21,000 BOE per day, weighted 87% to natural gas. Commodity prices have been volatile with the Russian invasion of Ukraine, but on today’s 2022 forward strip pricing, Pine Cliff is expected to generate more than $120 million of adjusted funds flow this year.
Capital Allocation and Dividends Our team is actively considering the optimal way to return capital to shareholders. Funds flow and earnings are rising and our balance sheet has never been stronger. In my letter to you last quarter, I mentioned that the five primary capital allocation options to a natural gas producer such as Pine Cliff were debt repayment, drilling, asset purchases, share buybacks and dividends.
(a) Debt Repayment Based on the forward strip commodity prices, at our projected 2022 funds flow, we could definitely be debt free in 2022 if we choose to, even though none of our $42 million of debt is due until the end of 2024. That would be a rare position for a public company energy producer, but it is something we are contemplating. At a minimum, our goal is to pay back the $30 Million of AIMCo debt in 2022.
(b) Drilling Our Q4 drilling program was successful. Based on that success, we intend to spend approximately $18 Million in 2022 on drilling four (3.4 net) Pekisko wells and participating in four (net one) gas wells in our Edson area. Our estimate is that Pine Cliff production for 2022 will be essentially flat with our current budget.
(c) Asset_Purchases Pine Cliff has now completed eleven acquisitions since we started in 2012. We continue to consider assets that would strengthen the sustainability of our business model. We continue to proceed on the basis that any potential asset acquisition, like the last one we did in Q4 2021, needs to increase the distributable funds flow per share and at the same time have a liability profile that we are comfortable with in the context of the purchase price.
(d) Share Buybacks Given the high insider ownership of our stock, and the potential impact on liquidity, we do not think instituting a share buyback plan at this time would be an optimal use of capital for Pine Cliff shareholders.
(e) Dividends The final return of capital alternative is instituting a dividend. We feel that implementing a dividend model is the best approach for Pine Cliff to return capital to our shareholders in 2022. We will be instigating this process by delivering commodity price sensitivity analysis at our next Board meeting in May to propose what we think will be a reasonable and sustainable dividend strategy going forward. Pine Cliff currently has the lowest production decline rate of any public oil and gas company in Canada and is currently generating one of the highest free cash flow yields, not just in the oil and gas industry, but in the public markets. I know that some of you have been anxiously waiting for that first PNE dividend payment. Our goal is that on May 4th, we will deliver on your patience.
I want to personally thank all of our shareholders for their support and willingness to invest your hard earned money in our company. I would like to give a special thanks to our long term shareholders for their continued loyalty and confidence, staying with us from the early days of Pine Cliff. Our Team is thrilled to be able to share our success with all of you and we are looking forward to an exciting and pivotal 2022.
Yours truly,
Phil Hodge President and Chief Executive Officer
March 8, 2022