MESSAGE TO SHAREHOLDERS
We have had many noteworthy events in Pine Cliff’s previous five quarters. We purchased $185 million of assets in the fourth quarter of 2015, we went through a debt restructuring in the summer of 2016, we sold various non-core assets throughout 2016 and we reported record cash flow in the fourth quarter of 2016. Each time that I have written this letter to you during those periods, there have been major events that deserved attention and explanation. In the first quarter of 2017, it really was just one simple focus: operating a business that generates positive cash flow. Significant highlights from the first quarter of 2017 were that Pine Cliff:
• generated $35.1 million of sales, 29% higher than the $27.2 million generated in the first quarter of 2016;
• generated $11.2 million ($0.04 per basic share) of funds flow from operations, compared to $1.4 million ($0.00 per basic share) in the first quarter of 2016;
• achieved production of 21,214 Boe/d (95% natural gas), only 9% lower than the 23,297 Boe/d in the first quarter of 2016, despite having sold over 600 Boe/d of production in 2016, spending only $8.4 million on capital expenditures in 2016 and short-term production curtailments of approximately 250 Boe/d in the first quarter of 2017;
• reduced bank debt by $11.3 million, ending the quarter with $19.5 million in bank debt, which is $125.2 million less than the first quarter of 2016 level of $144.7 million; and
• reduced net debt by $5.3 million, ending the quarter with $58.9 million in net debt, which is 1.3 times annualized first quarter 2017 cash flow and $84.7 million less than the first quarter of 2016 level of $143.6 million.
Our team continues to strive to reduce operating costs while selectively choosing drilling and optimization well locations to maintain our production. At the same time, we continue to evaluate the many acquisition opportunities that have arisen due to the volatility of the energy markets. Most importantly to us as shareholders, we continue to generate positive cash flow. This quarter, we generated $11.2 million in funds flow from operations while only spending $3.8 million in capital, with realized natural gas prices of $2.83 per Mcf. These are the kind of results that can be achieved when you generate positive funds flow from operations at gas prices above $1.70 per Mcf.
For those of you that have been reading my letters to shareholders in our quarterly reports over the past five years, you know the various reasons we believe there are fundamental natural gas demand shifts occurring in North America that are now accelerating and should result in higher natural gas prices. If this thesis is correct, Pine Cliff will generate even more free cash flow as one of the most levered names to natural gas in the public markets. Although that upside potential is compelling, I think one of the most convincing reasons to become, or remain, a Pine Cliff shareholder is the low risk sustainable free cash business we have built.
Our focus from the inception of Pine Cliff was to seek low operating cost assets that would generate sustainable free cash flow and provide a good rate of return for our shareholders. This motivation led us to a contrarian consolidation strategy of natural gas assets that most of the companies in our industry deemed to be non-core and therefore were no longer attracting internal capital. We continue to believe that those exact kinds of assets, with the appropriate amount of attention and capital, can form the basis of a strong sustainable business that will generate cash flow for years to come, during all phases of our cyclical industry. Our business model was “stress tested” and validated in 2016 as we navigated our company through the lowest natural gas prices seen in Western Canada in 18 years, while keeping our production relatively flat and without issuing stock. Through all of that, we still brought in more cash flow than we spent on capital last year. This is the business that we think investors will continue to seek out to have in their portfolio. I know that our management team shares that view as we continue to have one of the largest insider ownership positions in our industry.
We know our business model is unique, and Pine Cliff is proud of its ability to attract value investors who historically have avoided resource stocks because many have not been guided by fundamental business principals. Growth without consideration for the economic returns of that growth is not a sustainable business model. We make our capital allocation decisions based on what our team believes will best serve us as shareholders over the long-term, and we will continue to consider market conditions when deciding where our money is best spent. Those options include paying down debt, acquisitions, organic growth, paying a dividend and share repurchases. No employee bonuses are paid based on production growth or the size of our company. Our bonus pool is entirely based on the cash flow our business generates as we think that measure has the closest alignment to the creation of long-term value for our investors, which is Pine Cliff’s guiding goal.
Even though we are now seeing the benefits of our model, we are still building this business. Of course we would prefer a higher stock price, but we know that almost all oil and gas companies have seen their share prices come under pressure in 2017, regardless of the strength of their particular business model. Eventually we think our free cash flow will gain more market recognition, but in the meantime, we expect that the current market volatility will also present additional opportunities to add to our portfolio of long life, low decline assets. We thank you for your patience and support in the path we have chosen to deliver you long-term value.
President and Chief Executive Officer
May 10, 2017
Please refer to the attached Management’s Discussion and Analysis for Reader Advisories regarding forward-looking information, non-IFRS measures and oil and gas measurements and definitions. This President’s Message should be read in conjunction with the unaudited condensed consolidated financial statements of Pine Cliff Energy Ltd. together with Management’s Discussion and Analysis for the period ended March 31, 2017, which can be found on www.sedar.com and is subject to the same cautionary statements as set out therein.