President's message to shareholders...I hope all of Pine Cliff’s supporters are enjoying their summer. I sure am. Pine Cliff is pleased to report a third consecutive quarter with its highest quarterly adjusted funds flow in its history at $55.8 million in Q2 2022. This surpassed our previous quarterly adjusted funds flow record set last quarter by 73%. Q2 2022 adjusted funds flow is only 6% less than our entire adjusted funds flow in 2021, which was Pine Cliff’s best full year. After the first six months of 2022, we have already exceeded 2021’s annual funds flow record by $29.0 million or 49%. It has been a great start to 2022. We hope that this success validates and rewards the patience of our shareholders who have continued to believe in our business model.
Highlights from the six-months ended June 30, 2022 include:
* generated $55.8 million ($0.16 per basic and $0.15 per fully diluted share) and $88.1 million ($0.26 per basic and $0.25 per fully diluted share) of adjusted funds flow for the three and six months ended June 30, 2022, compared to $9.5 million ($0.03 per basic and fully diluted share) and $19.5 million ($0.06 per basic and fully diluted share) for comparable periods in 2021, increases of 587% and 452%, respectively.
* generated net earnings of $50.2 million ($0.15 per basic and $0.14 per fully diluted share) and $65.6 million ($0.19 per basic and $0.18 per fully diluted share) for the three and six months ended June 30, 2022, compared to a net loss of $0.7 million ($0.00 per basic and fully diluted share) and a net loss of $1.4 million ($0.00 per basic and fully diluted share) for comparable periods in 2021.
* change in positive net cash (net debt) position of $72.1 million from December 31, 2021 to June 30, 2022.
* production averaged 21,331 Boe/d and 20,866 Boe/d for the three and six months ended June 30, 2022, 18% and 15% higher respectively than comparable periods in 2021.
* repaid all debt during the six months ended June 30, 2022, including $30.0 million of term debt, $6.0 million of related party debt and $6.0 million of promissory notes.
* paid the Company’s first monthly dividend on June 30, 2022 of $0.0083 per common share.
Positive Net Cash Position
Pine Cliff’s primary focus in the first half of 2022 was to pay down debt. This initiative resulted in Pine Cliff reducing its net debt position from $49.7 million as of December 31, 2021 to a positive net cash position of $22.5 million as at June 30, 2022, a decrease of $72.1 million. The largest contribution to this decrease was paying down all $30.0 million of the remaining AIMCo debt and $12.0 million in promissory notes. The removal of all debt removes interest charges from our overhead, strengthens our balance sheet for possible acquisitions, and allows Pine Cliff to move its focus to alternative ways to return capital to our shareholders.
Increase in Dividend
Our team was excited to announce that Pine Cliff’s Board of Directors approved a 20% increase in our monthly dividend to $0.01 per common share (effective annual rate of $0.12 per common share). The increased dividend payment will be payable August 31, 2022 to shareholders of record on August 15, 2022. With current forward strip prices and our production profile, we are proud that Pine Cliff was able to increase its dividend only two months after initiating our dividend program. This increased dividend equates to a 6.6% annual yield at today’s closing price of $1.83, one of the higher dividend yields available in the Canadian public markets.
Future Capital Allocations
The Pine Cliff management and Board continue to discuss the optimal strategies for returning capital to our shareholders, and although our thinking is always evolving, here are some of our current considerations:
a) Capital Expenditures Our 2022 capital program of $29.5 million consists of the drilling of four gross (2.8 net) Pekisko wells, six gross (1.15 net) Edson gas wells, recompletions, optimizations, maintenance capital and abandonment projects. Our 2022 drilling program is intended to maintain our production level with the possibility of some moderate growth. I am appreciative of our operations and field staff who, working together, have not only achieved this goal but their efforts have exceeded our production expectations. Pine Cliff has never focused on material organic growth. We pride ourselves in our ability to continually maintain and improve production from our existing wells or wells we acquire, while at the same time strategically drilling new wells to replace production each year. Pine Cliff has one of the lowest production declines of any public energy producer in Canada, and that affords us the ability to spend minimum amounts on our CAPEX program compared to other producers of similar production size. This philosophy has never changed since we formed Pine Cliff and it is unlikely to change soon. In this time of inflation and supply chain stress, we are particularly grateful for the production growth path we have chosen.
b) Asset Purchases Asset purchases have been the prime contributor to the growth of our business. With 11 acquisitions since 2012, we have grown from 100 Boe/d to over 21,000 Boe/d today. We think we have shown discipline and patience in our past acquisitions as several of them took multiple years to finally arrive at a price that we felt was optimal for our shareholders. This is where we believe having employees who own Pine Cliff stock brings the most value. We look at all deals as if it was our “own” money that we are spending, because as Pine Cliff shareholders, it is. We will remain active in the acquisition and disposition markets as that enables us to better understand where market pricing on assets we own or covet are being priced. We also continue to manage our cash and credit resources in contemplation of potential transactions that we may see on the horizon.
c) Dividend Structure We continually seek feedback and consult with our fellow shareholders and market participants about the pros and cons of various dividend structures. Our starting point has been to set a base dividend that we believe is sustainable in the context of current and forecasted commodity prices. We believe we can continue to raise this base level as we did this quarter but recognize that oil and gas pricing volatility will continue to play a prominent role in our decision process. Our goal with all our capital return decisions is to try and deliver the highest level of return to our longterm shareholders. With this in mind, we closely watch the market reactions to other energy producers who have implemented variable dividend structures or paid special dividends. I will continue to report to you on our thinking on this topic and I welcome your input.
d) Share Buybacks While Pine Cliff has a high level of insider ownership, we have seen an increase in the average volume and value traded in our “public float” of stock since the initial dividend announcement in May 2022. This increase in share volume and value has helped alleviate some of our liquidity concerns. We continue to consider the merits of applying for an issuer bid program.
Outlook
As the world wrestles with the issues of the Russian invasion, record setting summer heat, decarbonization efforts and lack of sufficient supply response from oil and gas producers, global commodity prices continue to be extremely volatile. Natural gas storage remains below five years average levels in Canada and the United States and European natural gas storage is desperately trying to fill before this winter in anticipation of more possible Russian pipeline curtailments. LNG exports out of the United States are expected to return to record heights this winter after dealing with a summer fire that removed 15% of exports from the US. Although the resumption of those LNG exports will assist Europe in its plight, it will also put additional upward pressure on North American gas prices as we enter the winter with less domestic supply available for use.
Most Canadians appear to be in favour of helping our European friends with their energy crisis, however the reality is we will not be able to assist until we have material LNG export ability from Canada. LNG Canada continues to move forward with their project and is advising that it expects it will be able to begin exports by mid-decade. Canada, and our natural gas, are now frequent topics of conversation of Governments around the world as they have become acutely aware of the importance of energy security and the critical role natural gas will play in their efforts to reduce carbon emissions in combatting climate change.
On today’s 2022 forward strip pricing, Pine Cliff can expect to generate more than $185 million of adjusted funds flow in 2022. It is safe to say that it is a good time to be a natural gas producer in Western Canada. Thank you to everyone for your continued support and we look forward to working at increasing shareholder value in the second half of 2022 and beyond.
Yours truly,
Phil Hodge
President and Chief Executive Officer
August 3, 2022