PRESIDENT’S MESSAGE TO SHAREHOLDERS
I hope all of Pine Cliff’s shareholders and families are healthy. I also hope that you are pleased with our Q1 2021 financials as it was another good quarter for Pine Cliff. In the first quarter of 2021, we generated the highest total revenue and adjusted funds flow since the second quarter of 2017, 14 quarters ago.
Highlights from Pine Cliff’s first quarter ended March 31, 2021 include:
• generated $35.5 million from commodity sales for the three months ended March 31, 2021, 40% higher than the $25.4 million generated for the three months ended March 31, 2020;
• generated $10.0 million of adjusted funds flow ($0.03 per basic share) for the three months ended March 31, 2021, 867% higher than the $1.2 million generated for the three months ended March 31, 2020;
• net debt decreased by 16% or $9.9 million from $63.0 million on December 31, 2020, to $53.1 million as of March 31, 2021 and is Pine Cliff’s lowest net debt level since the first quarter of 2019; and
• produced an average of 18,307 Boe/d (90% natural gas) in the three months ended March 31, 2021, 4% less than the same period in 2020.
The $10.0 million of adjusted funds flow generated in the first quarter of 2021 is higher than the adjusted funds flow generated in each of Pine Cliff’s two most recently completed fiscal years. Our funds flow of $18.0 million in the past six months is more than the combined funds flow in the previous 11 quarters. These recent results reflect a fundamental shift in commodity pricing, and most importantly for Pine Cliff, natural gas pricing. On January 1, 2021, the forward AECO 5A price for calendar 2021 was $2.47 per Mcf and this morning, the forward AECO 5A price for the remainder of 2021 was $3.00 per Mcf. Every $0.10 per Mcf increase in Pine Cliff’s realized natural gas price equates to an additional $3.2 million of annual adjusted funds flow.
As I wrote last quarter, we believe a fundamental alteration in the natural gas supply and demand dynamic in North America started in 2020. We believe this shift will continue to bolster natural gas prices for the foreseeable future. The record setting February cold weather experienced in North America only accelerated and highlighted these important changes.
The natural gas market is now focused on how Canada, the United States and Europe are going to refill natural gas storage in 2021 as all three of these markets currently have storage levels below their five year average. The usual stimulus to encourage storage refill is higher natural gas prices which encourages both drilling to increase supply and switching to other energy sources such as coal to lower demand. The recent higher natural gas prices has resulted in more coal use but drilling has not recovered to historical levels in North America. This delayed drilling response is partially due to the lack of capital available to the energy sector where investors are encouraging producer discipline to live within funds flow and pay down debt. An acceleration in LNG exports from the United States has increased the tension on these supply/demand dynamics.
Pine Cliff’s operations team and field staff is performing well and we are proud of the work we are undertaking to abandon inactive wells. This activity not only lowers future environmental liabilities, but also reduces our future municipal tax and surface rental costs. Lowering costs has the same impact as rising commodity prices, in that our operating margins are increased. When both these forces are at work, we see the kind of funds flow that we have reported for the past two quarters. We are optimistic that this improved financial performance will continue for the rest of 2021. You may have noted that we reported a cash position of over $15.5 million as of March 31. Our management team is focused on the various capital allocation options to optimize that cash, which could include debt repayment, drilling or asset acquisitions.
Pine Cliff was built to thrive in a good natural gas price environment. The last three years have been difficult but we appear to be turning the corner into stronger, more sustainable natural gas prices in Canada. Thank you for your continued support as shareholders and stay safe and healthy.
President and Chief Executive Officer
May 5, 2021