If you did not receive... E-mail update from Phil Hodge Unfortunately, the slides and charts would not copy and paste but I think some may be available in the Corporate Presentation of March 2022... zack50
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I have been anxiously awaiting the opportunity to discuss our Q4 and 2021 annual results with all of you. It probably is not a surprise to you that Pine Cliff had record funds flow in Q4 and 2021, but the extent of the funds flow generated in Q4 was quite astonishing. Attached is my 2021 Annual Letter to Shareholders. In it I highlight that Pine Cliff generated $26.3 million of funds flow from operations in Q4, resulting in 2021 funds flow of $59.1 million. Those two numbers represent a 75% and 52% increase from the best quarter and year in Pine Cliff’s history. As excited as we were to report those numbers to you, our Team is even more eager about the prospects for 2022 and beyond. The rise in commodity prices combined with our end of year corporate acquisition and an active Q4 2021 drilling program has set Pine Cliff up with projected 2022 funds flow to be more than double our record 2021 year based on current forward strip pricing. I would direct you to Slide 2 of our presentation deck at PNE March Presentation to see our updated 2022 AECO sensitivity table.
With the invasion of Ukraine, the commodity markets have endured significant shockwaves that have driven up the prices of all oil and gas products as seen in the ARC Energy charts below.
My email updates in the last few quarters have focused on the fundamental shifts that have occurred in the North American natural gas markets that began in 2020. These trends and the “tightness” of the North American natural gas markets were amplified with the cold weather that Canada experienced in late 2021 and that both the US and Canada experienced in January/February 2022. I will briefly update you on the status of natural gas storage situation as we exit the withdrawal season in North America, with a focus on Western Canada, and then I will discuss the possible implications of the Russian invasion on longer term natural gas and LNG markets.
I think the most bullish argument for the short term sustainability of higher North American natural gas prices is the state of storage. Even with the warmest December in 127 years in the US(1), the TD charts below show that US natural gas storage is still 13% below five year average levels. As well, US “days of storage” is below their five year range and 25% below their five year average. Keep an eye on these numbers as we come out of March as they will be significant indicators. If US storage reaches the 1,250 -1300 Bcf level, there will be genuine concern about refilling storage in time for the 2022/23 winter season. This would be bullish for natural gas prices, particularly when the US will be doing everything possible to send LNG to Europe in the wake of the Russian invasion.
In Canada, the natural gas storage is even more positive for natural gas prices as it currently sits well below its five year range, 26% below this time last year and 27% below its five year average. Nova Gas system connected storage in Western Canada is now lower than at any point going back to 2010. This depleted Canadian storage situation has had the predictable response on the forward strip price of AECO, with every 2022 forward month price currently starting with a $4 handle and as of this morning, the spot AECO price was $5.22 Mcf and the forward AECO price for the remainder of 2022 was $4.63 Mcf.
The simple reason for these reductions in storage levels is that demand for natural gas is exceeding supply. Alberta exports have been at record highs this winter with the Alberta provincial demand hitting a record 8 Bcf/d in February. The Western Canada supply has risen with the increase in natural gas prices and is at the top of its five year range. The drop in storage levels indicates that demand is continuing to win this battle.
The implications of demand exceeding supply is highlighted even more in Europe. The European gas storage was already at historical low levels entering 2021-22 winter, which drove natural gas prices to record heights as seen in the Global Natural Gas chart above. It was only a warm winter that saved Europe from potentially running out of natural gas.(2) Now, though, the Russian invasion is threatening to cut the European supply of natural gas before they have had a chance to refill their storage in anticipation of the 22/23 winter. Projections of European natural gas storage this summer are at levels not seen in nine years, and this situation will get worse IF Russia stops sending them natural gas.
Europe imports approximately 85% of its natural gas supply, with approximately 65% of those imports by pipeline. Russia provided Europe with approximately 45% of those pipeline imports and also is Europe’s third largest source of LNG. If you would like more details on this topic, Oxford Energy provided the European pipeline import chart below and just published a report entitled Ukraine Invasion: What This Means for the European Gas Market.
This situation has caused European nations to reconsider their net zero and energy transition policies(3)(4) with Germany regulating natural gas storage to secure supplies(5) and accelerating plans for two LNG import terminals.(6) The European Commission has publically declared that it wants to include natural gas in its plans for building a climate-friendly future.(7) The renewed focus on securing natural gas from reliable sources has raised considerable pressure on the United States(8) and Canada(9)(10) to accelerate their various plans for LNG export. Unfortunately, the US is already exporting as much LNG as it can (13 Bcf per day) and LNG import and export terminals take years to build. Due to this, I anticipate that there will be an increase in new North American LNG export projects getting approved in 2022.
Hopefully this crisis will help decision makers move forward with solutions that can be of assistance in similar situations in the future.(11) At one point in the early 2010s, more than a dozen LNG export projects were on the drawing board in Canada with a combined liquefaction capacity of 25.2 Bcf/d, which is 50% higher than all of Canada’s current natural gas production. Only the Shell-led LNG Canada project received the necessary final investment decision and is now expected to be operational in three years.(12) It has become clear that the world could use alternative sources of natural gas. Shell’s LNG outlook is quite telling.(13) One year ago Shell forecasted a global LNG shortage to begin in 2030. In their updated forecast below, they are now predicting that shortage to start in 2025, even with LNG Canada production expected to commence that year. This bodes well for Canadian natural gas producers like Pine Cliff and for Shell with the likelihood of an announcement of an expansion of that project.(14)
A recent article from renowned energy author Peter Tertzakian(15) focused on what he called the four dimensions of energy: cheap, clean, safe and secure. The article points out that for the past ten years the Western world had enjoyed three of these four and we were working on the clean dimension. With the Russian invasion of Ukraine, the importance of security of supply has now been highlighted. In addition, without the security dimension, energy then becomes more expensive. Natural gas has already proven to be a safe, clean and critical energy source. It is the only hydrocarbon energy source that is still growing in global demand and many countries have been vocal that it is a key piece to their plans to achieve net zero emissions.(16)
All of the above makes me very optimistic to be a Pine Cliff shareholder. Our natural gas production is playing a role in providing safe, clean and reliable energy for most of your homes and businesses. Further, the day that Canadian natural gas can help improve the lives of people around the world is now on the horizon. In the meantime, we will continue to work hard to make PNE a strong investment in your portfolio. Our plan to start returning capital to our shareholders in 2022 should help solidify that effort.
I hope you found some of this information useful. As always, please do not hesitate to share any pieces of information you may come across regarding natural gas supply and demand, and of course, feel free to call me directly if you would like to discuss Pine Cliff or the natural gas markets. I hope to see or talk to you again soon.
Regards,
Phil
Footnotes:
(1) Yale Climate - Warmest US December in History
(2) Reuters: Warm Northern Hemisphere Winter Averts Energy Crisis - For Now
(3) Reuters: Germany's Energy About-face on Nuclear and LNG
(4) Energy Flux News: Germany's Seismic Energy Policy U-turn
(5) Reuters: Germany Must Regulate Gas Storage
(6) S&P Global: Germany to Push Ahead With Two LNG Terminals
(7) ABC News: EU Wants to Allow Natural Gas Investment
(8) Bloomberg: Threat to Europe Gas Supply Bolsters Push on New US LNG Plants
(9) Financial Post: Ukraine Crisis Puts Canada East Coast LNG Back on the Map
(10) Financial Post Opinion: Lack of LNG Ports is Costing Canada
(11) Financial Post- Eric Nuttall: What Canadian Policymakers Can Learn From Europe's Energy Woes
(12) LNG Canada Website
(13) Shell LNG Outlook 2022 Report
(14) S&P Global: Shell Calls for More LNG Supply Side Investment on Looming Demand Gap
(15) Financial Post - Peter Tertzakian: The Dream of Cheap Clean Safe and Secure Energy is Being Put on Hold
(16) Reuters: EU Propose Green Investment Label on Natural Gas and Nuclear Sources