MESSAGE TO SHAREHOLDERS
I think it is safe to say that the third quarter of 2017 was the most challenging quarter in Pine Cliff’s history, from a field operations standpoint. We dealt with unprecedented volatility in AECO pricing and I would like to commend our entire operational and field staff for mitigating the impact caused by the unpredictable pricing swings with rapid adjustments to our production strategy. Despite the headwinds in the past quarter, we were still able to achieve the following highlights:
• generated $2.9 million of funds flow from operations ($0.01 per basic share) for the three months ended September 30, 2017, emphasizing the importance of maintaining one of the lowest cash flow break even gas prices in the industry at $1.71 per Mcf;
• generated $24.9 million ($0.08 per basic share) of funds flow from operations in the nine months ended September 30, 2017, compared to $4.7 million of funds flow from operations ($0.02 per basic share) in the nine months ended September 30, 2016;
• generated total revenue of $89.6 million for the nine months ended September 30, 2017, an increase of 18% compared to $75.9 million in the nine months ended September 30, 2016;
• achieved average production of 21,863 Boe/d (95% natural gas) in the third quarter, only 3% lower than the 22,521 Boe/d in the third quarter of 2016, despite selling over 600 Boe/d of production in late 2016 and experiencing short-term production curtailments of approximately 400 Boe/d in the third quarter of 2017;
• replaced our production decline during the nine months ended September 30, 2017, from a production level of 21,582 Boe/d at December 31, 2016, with drilling and recompletion capital spending of $6.0 million, representing only 24% of funds flow from operations, highlighting the importance of having one of the lowest decline rates in the industry at 10%;
• repaid $20.2 million of bank debt during the nine months ended September 30, 2017, ending the quarter with bank debt of $10.6 million, which is $60.8 million less than the third quarter of 2016 amount of $71.4 million. The decrease in bank debt resulted in lower interest and bank charges, net of dividend income, of $0.37 per Boe this past quarter, 62% lower than the $0.98 per Boe in the third quarter of 2016; and
• ended the quarter with $52.2 million in net debt, $58.1 million less than the third quarter of 2016 net debt level of $110.3 million.
Q3 AECO Volatility
AECO prices were the most frequent topic I was asked about this past quarter, not just by shareholders and employees, but by other industry participants. For those that have not followed this issue closely, the primary cause of the volatility appears to have been the inability of gas producers to access storage during pipeline maintenance due to a change in operational philosophy by the primary gathering system operator. The impact of this change, combined with a depressed summer gas market after a warm winter, resulted in the AECO daily pricing averaging $1.45 per Mcf for the quarter. I am optimistic that our industry leaders will work together to find a better solution for next summer’s pipeline maintenance, as the natural gas prices we experienced this past quarter are not good for any of the stakeholders in the system, including the producers, the storage companies and the Governments receiving royalties. I am proud of how our team worked together to navigate through a turbulent quarter, while still being able to generate $2.9 million of funds flow from operations.
In the middle of the AECO pricing chaos this past quarter, Pine Cliff recompleted 16 net wells in Central Alberta which contributed an initial 60 day producing average of 1,100 Boe/d while spending only $700,000 on the program for a capital efficiency of $636/Boe/d ($106/Mcf/d). It is important to note that 11 of these wells were previously standing wells which were successfully returned to production as part of the program. By any industry standard, those are impressive numbers.
October AECO prices still suffered from the issues discussed above, but as I write this, AECO gas prices have rebounded to the $2.70 Mcf level. The rest of fourth quarter pricing will primarily be driven by North American weather. If we see winter temperatures (especially in the Eastern US) revert to a more normalized historical pattern, this should be bullish for gas prices and our cash flow. If we see another record warm winter like we have seen the past two winters, then pricing will most likely languish as the system deals with increased natural gas production. In either event, we will continue to make the necessary decisions to maximize long term value for our shareholders.
Regardless of the short term weather, our balance sheet is strong and we continue to pay down our debt to further strengthen our business. The short-term reduction in natural gas prices has created acquisition opportunities that we continue to explore. Pine Cliff has been built on taking a counter-cyclical view of the natural gas markets and we will continue to look for accretive acquisitions that fit into our growth plan. We treat our business as a marathon, not a sprint.
We thank you for your continued patience and support as our team continues to work towards our goal of delivering long-term value to our shareholders.
President and Chief Executive Officer
November 8, 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 September 30 2017, which can be found on www.sedar.com and is subject to the same cautionary statements as set out therein.