MESSAGE TO SHAREHOLDERS
2017 was a record year for Pine Cliff in both revenue and funds flow from operations. The following are our highlights for the past quarter and the 2017 year:
• generated $3.8 million of funds flow from operations ($0.01 per basic share) for the three months ended December 31, 2017;
• generated a record annual $28.7 million ($0.09 per basic share) of funds flow from operations during the year ended December 31, 2017, compared to $19.7 million of funds flow from operations ($0.06 per basic share) during the year ended December 31, 2016, an increase of $9.0 million and 46%;
• generated a record annual total revenue of $115.1 million for the year ended December 31, 2017, an increase of 4% compared to $111.1 million during the year ended December 31, 2016;
• achieved average production of 21,489 Boe/d (95% natural gas) in the fourth quarter of 2017, slightly lower than the 21,525 Boe/d in the fourth quarter of 2016, despite incurring only $6.4 million of drilling and recompletion capital spending in 2017, representing only 22% of annual funds flow from operations, highlighting the importance of having one of the lowest decline rates in the industry;
• reduced bank debt by $12.9 million or 42% during the year ended December 31, 2017, ending the year with bank debt of $18.0 million, our lowest bank debt level at year end in four years. The decrease in bank debt resulted in interest and bank charges, net of dividend income, of $0.40 per Boe this past quarter, 53% lower than the $0.75 per Boe in the fourth quarter of 2016;
• ended 2017 with $53.7 million in net debt, our lowest net debt level at year end in four years, which is $10.5 million or 16% less than the 2016 net debt level of $64.2 million;
• reduced net-debt-to-funds flow from operations by 42% from 3.3 as at December 31, 2016 to 1.9 as at December 31, 2017; and
• entered into a long-term firm transportation agreement for approximately 11,000 Mcf per day of production to the Dawn natural gas market that commenced November 1, 2017.
Commodity Risk Management
Pine Cliff’s operations and marketing teams have spent a considerable amount of time in the past few months expanding our sales delivery points to access higher natural gas prices outside of Alberta. The Dawn market commitment was one of those initiatives. In addition, we focused attention on utilizing our own infrastructure to move more gas to Empress and into Saskatchewan to access delivery points at TransGas. We expect Q1 2018 sales volume deliveries will be approximately 56% AECO, 16% TransGas, 9% Dawn, 7% Empress, 7% Montana and 5% oil and liquids. Due to the recent completion of pipeline and compression optimization projects though, we expect sales volume deliveries will average 46% AECO, 22% TransGas, 10% Empress, 9% Dawn, 7% Montana and 6% oil and liquids from Q2 2018 through the remainder of the year.
Other than the Dawn market agreement, we are not committed to long term deliveries into these other markets and can return the production to the AECO market if prices justify it. We think this flexibility will prove valuable as different market hubs face different pricing pressures in the future. The fact that Pine Cliff owns three NEB pipelines taking gas out of Alberta has proven to be quite strategic during these volatile times.
Despite the AECO daily natural gas price averaging $0.74/Mcf in October, the lowest monthly AECO price in over 10 years, and $1.68/Mcf for the fourth quarter, AECO prices have been better than we expected for the first 10 weeks of 2018 due to colder weather across North America. The forward strip pricing for the remainder of 2018 however is still relatively weak with an average strip price of $1.41 Mcf. We continue to focus our activities on reducing costs to improve margins and getting better prices for our products. Our efforts in the past few months to mitigate exposure to AECO pricing is another example of that.
The current low forecast in gas prices in Western Canada is primarily due to an oversupply of natural gas combined with restricted pipeline access to Eastern and Southern markets. We believe that the latter issue will be resolved over the next few years as pipeline companies move ahead with various expansion plans. We also do not believe the oversupply issue is a long term concern as we are already seeing natural gas rig deployment drop in Western Canada as producers react to the lower natural gas prices. We predict that the impact of those budget decisions will start to show up later this year as natural production declines are not met with the same level of new production that we saw in 2017.
For those of you who have been shareholders with us for a while, you know we have always lived within our cash flow, rather than pursue unprofitable production growth. Due to the restrictions on capital our industry is currently facing, we are now witnessing more companies sharing the same strategy of “living within cash flow” that we have employed since 2012. I personally believe that this return to prudent behaviour will serve our industry well and will attract investors back to the energy sector as companies show better returns on capital employed.
Global natural gas demand continues to grow in almost every jurisdiction it is used, especially in developing nations where energy demand growth is the greatest. LNG export terminals continue to get built in North America, and this will continue to narrow the price differentials that currently exist between North America and the rest of the world. I remain bullish on owning shares in a natural gas company based in Western Canada like Pine Cliff and am confident we will see increasing natural gas prices in the near future.
It has been frustrating to see our share price drop along with the rest of our industry peers, but we have conviction that if we continue to run the business with a focus on positive cash generation, our efforts will eventually be acknowledged by the markets with a higher share price. The fourth quarter of 2017 was the 23rd quarter out of the last 24 quarters where we have delivered positive funds flow, and we have managed through a tremendous amount of price volatility in those six years. We will continue to focus on controlling the variables we can control and that are critical to our sustainable business model.
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
March 13, 2018
Please refer to the attached Management’s Discussion and Analysis for Reader Advisories regarding forward-looking information, non-GAAP measures and oil and gas measurements and definitions. This President’s Message should be read in conjunction with the audited consolidated financial statements of Pine Cliff Energy Ltd. together with Management’s Discussion and Analysis for the period ended December 31, 2017, which can be found on www.sedar.com and is subject to the same cautionary statements as set out therein.