Phil Hodge letter march 8 2022Capital 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