PRESIDENT’S MESSAGE TO SHAREHOLDERS
I like to start my shareholder messages with a positive tone, but for natural gas producers, there was very little positive about the third quarter of 2019. AECO 5A natural gas pricing averaged $0.90 per Mcf this past quarter, the lowest quarterly average in decades. Even with Pine Cliff’s low cost structure and access to diverse natural gas markets, we were unable to avoid negative funds flow. Thankfully we believe there is optimism on the horizon, so please read on. Highlights from Pine Cliff’s third quarter were:
- realized a gas price of $1.55 per Mcf, 172% of the AECO 5A benchmark of $0.90 per Mcf;
- realized a gas price of $2.02 per Mcf for the nine months ended September 30, 2019, 133% of the AECO 5A benchmark of $1.52 per Mcf;
- exited with $3.9 million of cash in the bank; and
- subsequent to the third quarter, Pine Cliff entered into a credit agreement with AIMCo which extended the maturity dates of its $30 million in promissory notes from September 30, 2020 to December 31, 2024 and extended the term of its debt to insiders amounting to $12 million from September 30, 2020 to December 31, 2024.
In the fourth quarter of 2018, Pine Cliff drilled its first Pekisko oil well in Central Alberta. To date, this well continues to exceed expectations, averaging 280 Boe/d (56% oil and natural gas liquids) and generating $2.1 million of adjusted funds flow in the first 290 days of production. That means over 70% of the $3 million cost of this well has been recovered. Following up on that success, Pine Cliff plans to drill two Pekisko oil wells in the fourth quarter of 2019 starting in mid-November. Pine Cliff expects to have one of these wells completed and on production by the end of the year and the other well is expected to be completed and on production in the first quarter of 2020. Both well locations are on lands that were part of the strategic acquisition earlier this year. Pine Cliff currently has 30 gross (29 net) Pekisko oil locations in its inventory.
Transformation of Debt on Our Balance Sheet
I try in my shareholder letters not to use hyperbole or get too promotional. I am a Pine Cliff shareholder, so I try to think of the facts that I would like some commentary on to allow me to continue to assess my investment. That said, it is difficult for me to overstate the importance of the steps we have taken in the past few years to not only reduce our debt, but to transition all of our remaining debt from bank debt to term debt with significant shareholders of our company.
Our reported debt was at its peak level of $156 million on December 31, 2015 after our largest asset acquisition in the fall of 2015. At that time, we had a $185 million credit facility in place with a syndicate of five Canadian financial institutions. Since that time, capital has become as constrained as I have ever seen in my career while we have endured historically low natural gas prices. Despite these circumstances, I am proud to say that our management team has lowered our net debt to $63.7 million at the end of the third quarter and converted all of our bank debt to term debt. This was not an easy transformation by any means, but we viewed it as critical to ensure we have the proper balance sheet going forward to provide us with a more sustainable business model. All of our debt is now held by three of our biggest shareholders which better aligns the debt holders with the equity holders.
Nova Gas Transmission System (“NGTL”) Update
The Canadian Energy Regulator approved TC Energy’s Temporary Service Protocol (“TSP”) application in late September. The TSP was enacted with the goal of providing TC Energy more flexibility in how they deal with curtailments on the NGTL during times of maintenance. The TSP was only in effect in October of this year, but will be in place again from April to October 2020. To date, the TSP seemed to have had the desired impact of reducing volatility of AECO prices in October. From Pine Cliff’s perspective, any steps to lower the volatility in natural gas prices we have been dealing with in the past two years is welcomed and we applaud this decision and TC Energy’s and the Alberta Government’s leadership in this matter.
We are now seeing the inevitable results of lower natural gas prices. In Alberta, natural gas production and operating gas rigs both continue to decrease and Alberta gas storage is currently 20% lower than last year at this time and 25% lower than the five year average. We are entering into this winter at gas storage levels we have not seen in over 15 years, especially in Southern Alberta.
AECO natural gas price is estimated to average $2.50/Mcf for Q4, and with an AECO corporate breakeven price of approximately $1.62/Mcf, Pine Cliff would again be generating positive cash flow. Every $0.10 increase in our realized natural gas prices generates an additional $3.7 million of annual adjusted funds flow for Pine Cliff. With the remainder of the fourth quarter currently looking to average $2.50/Mcf, Pine Cliff is well positioned to provide shareholders with increased exposure to a rising natural gas pricing environment. We have continually stressed the importance of having market diversification flexibility, and with the recent increase in AECO, we are seeing firsthand the advantages of owning our own pipelines and infrastructure to enable us to generate a significant premium to AECO during periods when it is low but allow us to switch back to AECO exposure when its prices are stronger.
Once again we thank you for your patience and we will continue to work every day to strengthen our business and ultimately long term shareholder returns.
President and Chief Executive Officer
November 5, 2019
Please refer to the Management’s Discussion and Analysis for Reader Advisories regarding forward-looking information, non-GAAP measures and oil and gas measurements and definitions.