E-mail from President to ShareholdersPresident'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 Q3 2021 financials as it was our fourth strong quarter in a row and the highest adjusted funds flow for the first nine months of the year in the history of Pine Cliff.
Highlights from Pine Cliff’s third quarter ended September 30, 2021 include:
repaid in full $19.0 million of term debt due July 31, 2022;
generated $13.3 million of adjusted funds flow ($0.04 per basic and fully diluted share) for the three months ended September 30, 2021, and $32.8 million ($0.10 per basic share and $0.09 per fully diluted share) for the nine months ended September 30, 2021;
net debt decreased by 34% or $21.6 million from $63.0 million on December 31, 2020, to $41.4 million as of September 30, 2021, which is Pine Cliff’s lowest net debt level since the third quarter of 2015; and
drilled 2 gross (2.0 net) Pekisko oil wells and 2 gross (0.4 net) Ellerslie natural gas wells that were all on production by the end of October 2021.
Balance Sheet Strength
During this quarter, Pine Cliff repaid the full $19.0 million tranche of term debt to AIMCo even though it was not due until July 31, 2022. Our remaining $42 Million of debt is not due until December 31, 2024, but we are permitted to prepay any or all of this debt at any time. We fully expect that we will exit 2021 with a debt to 12 month historical cash flow ratio of less than 1:1.
In my opinion, our balance sheet has not been this strong in over six years.
Update on Drilling Program
Two Pekisko horizontal wells were drilled in Q3, 2021 and came on production in late September. We also participated with our Edson partner in two Carrot Creek Ellerslie wells that were drilled (0.40 net to PNE) which came on production in October and one Pine Creek Notikewan well (0.2 net to PNE) which we expect to be on production by the end of the year. We are happy with all the initial results from all of these wells. We are spudding a Mannville gas well (0.9 net to PNE) this week followed up by two North Twining Unit Pekisko wells (1.4 net to PNE). We now expect our 2021 annual production volumes to average at the high end of the guidance range of 18,000 to 18,500 Boe per day.
Outlook
We have seen incredible volatility in global gas prices in 2021. Europe and Asia both had record natural gas highs in Q3 and we are currently experiencing the highest November prices for natural gas in North America than we have seen in eight years. This is due to many factors, including increased power demand throughout the world and decreased energy supply from both natural gas and alternative energy sources. The “scorecard” in the ongoing battle between natural gas supply and demand is seen in global storage levels. Unlike last year where we entered the winter withdrawal season with essentially full storage in Western Canada, the United States and Europe, storage in all three of those markets are currently below their five year averages. As we enter the winter months, there is an increased focus on how low these storage levels could become by next spring, depending on the severity of winter in the various regions. The average AECO natural gas price today was $5.30 per Mcf, the AECO strip forward price for the 2021/2022 winter season is $5.64 per Mcf and the AECO strip forward price for the 2022 calendar year is $4.31 per Mcf.
Capital Allocation
As I mentioned last quarter, Pine Cliff has now reentered the phase of capital allocation. As we indicate in our updated presentation at www.pinecliffenergy.com, if today’s commodity strip forward prices hold for 2022, and based on the assumptions we indicate on the 2022 Adjusted Funds Flow Projections slide, our adjusted funds flow number would exceed $75 Million next year. That would result in the highest annual funds flow year in Pine Cliff’s history. Actual commodity prices rarely equal forward projected prices, one way or the other, but potential prices like those have us considering what Suite 850, 1015 – 4 th Street SW, Calgary, Alberta T2R 1J4 TEL 403.269.2289 FX 587.393.1693 we would do with that cash flow if those prices do come to fruition. The five primary capital allocation options to a natural gas producer such as Pine Cliff are debt repayment, drilling, asset purchases, share buybacks and dividends.
We have dramatically lowered our debt exposure in Q3 and our net debt will continue to drop this winter. At the projected 2022 funds flow based on the forward strip commodity prices, it is possible we could be debt free in 2022 if we choose to.
Our Q4 drilling program is underway. We will evaluate the results of this program to determine the level of our 2022 CAPEX budget.
Pine Cliff was built with nine acquisitions and we have never stopped looking at additional assets that could strengthen the sustainability of our business model. We continue to look at possible asset purchases today, although our focus is narrower than when we were growing from 100 BOE Day. We are now only seeking assets that will fit, and accelerate, our intended return of capital model. We do not believe Pine Cliff needs to grow anymore to achieve a critical size to begin to return capital to shareholders. The test we have always used when looking at acquisitions is whether management personally would invest in the acquisition if it was their own money. I think this test has served us well.
Share buybacks are a popular method to return capital in free cash flow business models. Pine Cliff is a unique public company. Insiders and a small group of shareholders control or have discretion over a large proportion of our stock. Stock liquidity is an important factor considered by new and larger investors, not only for buying their initial position, but also to give them comfort that they can exit should conditions change. Share buybacks in our circumstance could decrease this perceived liquidity, and therefore we do not think instituting a share buyback would be an optimal use of capital for Pine Cliff shareholders at this time.
The final return of capital alternative is instituting a dividend. Building a dividend model is not easy to do when it is based on a volatile commodity, but we believe we have focused on the right assets to allow us to succeed. Pine Cliff currently has the lowest production decline rate of any public oil and gas company in Canada. This low decline means that we do not have to spend as much each year to replace production. The percentage of our funds flow that is “free funds flow” is one of the highest in the industry. It is anticipated that circumstances in 2022 will permit Pine Cliff to take the steps necessary to implement a sustainable dividend model. I have looked forward to writing that last sentence to you for many years.
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 who have blessed us with their loyalty and confidence to stay with us from the early days of Pine Cliff. I am thrilled to be able to share our success with all of you.
Yours truly,
Phil Hodge
President and Chief Executive Officer
November 4, 2021