MESSAGE TO SHAREHOLDERS
Our second quarter was quite similar to the previous quarter with our team maintaining a consistent focus on operations and generating positive cash flow. This past quarter did, however, have a few headwinds, with pipeline curtailments impacting Western Canada natural gas storage levels and consequently AECO pricing and with wet weather disrupting some of our scheduled swabbing. Despite these obstacles, our revenue was the second best in Pine Cliff’s history and Pine Cliff generated $10.8 million in funds flow from operations. Significant highlights from the second quarter and first half of 2017 were that Pine Cliff:
• generated $35.4 million of total revenue, 71% higher than the $20.7 million of total revenue generated in the second quarter of 2016;
• for the six months ended June 30, 2017, total revenue increased by 47% to $70.5 million compared to $47.9 million in the six months ended June 30, 2016;
• generated $10.8 million ($0.04 per basic share) of funds flow from operations, compared to $3.7 million of funds flow used in operations ($0.01 per basic share) in the second quarter of 2016;
• generated $22.1 million ($0.07 per basic share) of funds flow from operations in the six months ended June 30, 2017, compared to $2.3 million of funds flow used in operations ($0.01 per basic share) in the six months ended June 30, 2016;
• achieved production of 21,077 Boe/d (94% natural gas), only 7% lower than the 22,647 Boe/d in the second quarter of 2016, despite having sold over 600 Boe/d of production late in 2016, which impacted 2017 production volumes, and short-term production curtailments of approximately 400 Boe/d in the second quarter of 2017;
• reduced bank debt by $8.8 million, ending the quarter with $10.7 million in bank debt, which is $110.4 million less than the second quarter of 2016 amount of $121.1 million. The reduction in bank debt resulted in reduced interest and bank expenses to $0.52 per Boe in the second quarter of 2017, 42% lower than the $0.89 per Boe in the second quarter of 2016; and
• reduced net debt by $7.6 million, ending the quarter with $51.4 million in net debt, which is 1.2 times annualized second quarter 2017 cash flow and $70.7 million less than the second quarter of 2016 net debt level of $122.0 million.
For the 21st of the past 22 quarters, we again generated positive cash flow, with $10.8 million of funds flow from operations while only spending $3.3 million in capital expenditures. We continued to selectively choose drilling and optimization well locations in the second quarter as we felt that the level of gas prices did not justify more aggressive use of our free cash flow on capital expenditures.
Entering into the third quarter of each year is usually an interesting time for natural gas weighted companies like Pine Cliff and 2017 is no exception. The days are now getting shorter and the North American natural gas market is much “tighter” than last year which means there is less gas in storage than the previous summer at this time. Our long range view of natural gas continues to be bolstered by the increasing LNG export facilities being built in the United States and the fact that U.S. dry natural gas production has declined for 15 consecutive months compared with previous year periods, but the short term natural gas prices will still largely be impacted by weather.
I often get asked what size I think Pine Cliff will eventually get to and I get the sense that my response rarely satisfies the questioner. We have never had a target size for our company, although we are cognizant that as we grow more institutional investors may be able to invest in our company. We have always analyzed every opportunity independently and having now looked at over 400 potential transactions in the past five and a half years, our team is quite adept at valuing the key components of a deal or assets. Despite the fact that we have one of the industry’s fastest growth rates with a 66% production per share compounded annual growth rate since 2013, we can never predict when or how big our next transaction may be. That said, 2017 is a buyer’s market like we have not seen before. Oil and gas equity prices have been reduced throughout the industry and access to capital is as restricted as I have ever seen it since we started Pine Cliff in 2012. Despite this backdrop, quality assets are still being made available for sale. We will continue to seek creative ways to add assets to our model that fit our goal of building an asset base that will deliver long term cash flow to our shareholders, all while minimizing dilutive impact to current shareholders. If we can’t achieve these goals, then we will move on to the next opportunity.
On the point of value to shareholders, I can assure you that your management team is actively considering the best uses of the free cash flow our assets are generating. The 2016 focus of reducing bank debt has now been replaced with a discussion of the merits of organic growth, acquisitions, implementing a dividend or buying back our own shares. This is a nice problem to have, and frankly, not one that is shared by many in our industry in this low commodity price environment. What should give you some comfort is that we will be making these capital decisions with the sole goal of optimizing value for our shareholders. That is the advantage of having management that are significant shareholders.
We thank you for your patience and support in the path we have chosen to deliver you long-term value.
President and Chief Executive Officer
August 9, 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 June 30, 2017, which can be found on www.sedar.com and is subject to the same cautionary statements as set out therein.