PRESIDENT’S MESSAGE TO SHAREHOLDERS
I hope all of Pine Cliff’s shareholders and families are healthy. I also hope that you are as pleased with our Q4 2020 financials as our team is. It was a good quarter.
Pine Cliff’s adjusted funds flow of $8.0 million generated during the fourth quarter of 2020 was the highest quarterly adjusted funds flow for the Company in 13 quarters, since the second quarter of 2017. Stable and improved natural gas prices, combined with Pine Cliff’s portfolio of low decline assets, reinforce Pine Cliff’s business model that continues to provide for adjusted funds flow growth in a rising natural gas price environment. Significant Pine Cliff highlights from the fourth quarter and 2020 include:
• generated $8.0 million of adjusted funds flow ($0.02 per basic share) for the three months ended December 31, 2020 and $8.8 million of adjusted funds flow ($0.03 per basic share) for the year ended December 31, 2020, 59% and 48% higher than the respective periods in the prior year; realized a natural gas price of $2.73 per Mcf for the fourth quarter and $2.28 per Mcf gas price for the year ended December 31, 2020, 8% and 6% higher than the respective periods in the prior year;
• spent $2.3 million on developmental drilling in 2020 and production averaged 19,130 Boe/d during the three months ended December 31, 2020, 2% higher than the 18,755 Boe/d produced during the prior quarter. Production averaged 19,006 Boe/d for the year ended December 31, 2020, 1% lower than the 19,142 Boe/d produced in 2019;
• increased its 2020 proved plus probable reserves by 4.0 million barrels of oil equivalent (“MMBoe”) prior to adjusting for 2020 production, largely as a result of 8.0 MMBoe of positive technical revisions, 1.2 MMBoe of extensions and a decrease of 5.1 MMBoe due to economic factors ; and
• received approval in 2020 for $4.0 million in government funded grants for asset site closure work, of which $0.8 million was spent during the fourth quarter of 2020 and received an additional $6 million in government funded grants in February 2021.
Accelerated Abandonment and Reclamation Work
The Alberta Site Rehabilitation Program and the Saskatchewan Accelerated Site Closure Program are programs launched by the respective provincial governments to utilize the $1.7 billion of federal funding allocated for the abandonment and reclamation of inactive oil and gas wells and facilities in Canada. Pine Cliff has historically abandoned and reclaimed more wells each year than it drills, but this closure work will be accelerated in 2021 and 2022 as we expect to spend the $10 million allocation of government grants we have received to date to accelerate the abandonment of over 300 inactive wellbores and reclamation and remediation work on over 250 well sites. To put that in perspective, we intend to eliminate over 20% of all our non-producing wells by the end of 2022, and are targeting to obtain over 200 reclamation certificates by the end of 2023. On average, each abandonment is anticipated to reduce our operating costs by approximately $1,250 per year and each full reclamation is expected to reduce our operating costs by an additional $2,500 per year.
In Q4 2020, the AECO 5A natural gas benchmark price was $2.63 per Mcf, a level not seen for a comparable fourth quarter since 2016. The continued strengthening of forward AECO natural gas prices has Pine Cliff optimistic for 2021, where this morning, spot daily AECO 5A was priced at $2.79 per Mcf and the forward AECO 5A price for the remainder of 2021 was $2.66 per Mcf. In Q1 2021, Pine Cliff has approximately 65% of its total natural gas production exposed to the AECO gas price.
We believe that there was a fundamental shift in the natural gas supply and demand dynamics in North America in 2020 that will continue to bolster natural gas prices through 2021 and beyond. The record setting cold weather experienced in February only accelerated and highlighted this shift. The focus in 2021 will be on the continued rise in domestic and global natural gas demand, the plateauing of North American natural gas supply from reduced drilling and the impact these forces will have on both Canada’s and the United States’ efforts to refill natural gas storage to appropriate levels before the 2021-22 Winter season. I will comment more on these developments when we publish our Q1 results in early May.
Pine Cliff’s increased attention on cost reductions and production optimization over the past several years of depressed natural gas prices has positioned our company to maximize free funds flow during these periods of improved pricing. This was displayed in Q4 2020 and has continued into Q1 2021. Pine Cliff has entered 2021 with a strong balance sheet and our management team is welcoming the opportunity to return our focus to Pine Cliff’s capital allocation options, which include debt repayment, drilling, asset acquisitions and ultimately, return of capital to shareholders. As always, all of these decisions will be guided by what we believe will return the highest value to our shareholders in the long term. To use a sports analogy, we are moving from defence back to offence again, and this is an exciting change of direction for Pine Cliff.
Thank you for your continued support as shareholders and stay safe and healthy.
President and Chief Executive Officer
March 9, 2021