PRESIDENT’S MESSAGE TO SHAREHOLDERS
In the first quarter of 2019, Pine Cliff generated its highest adjusted funds flow and revenue since the second quarter of 2017. It feels really good to write that. Additionally, we brought our first oil well on production and subsequent to the quarter, we announced a strategic acquisition and financing that will significantly increase our growth opportunities in the Pekisko oil pool where our first well was drilled. Highlights from the first quarter of 2019 include:
• generated $32.1 million of oil and gas sales for the three months ended March 31, 2019, 8% higher than the $29.7 million generated for the three months ended March 31, 2018:
• generated $6.8 million of adjusted funds flow ($0.02 per basic share) for the three months ended March 31, 2019, 33% higher than the $5.1 million ($0.02 per basic share) generated for the three months ended March 31, 2018;
• successfully brought Pine Cliff’s first 100% operated oil drill on production in January, 2019. This well generated production of approximately 375 Boe/d (weighted approximately 60% liquids) from January 14, 2019 to March 31, 2019;
• net debt was decreased by 9% or $5.0 million from $56.8 million as at December 31, 2018 to $51.8 million as at March 31, 2019. This is Pine Cliff’s lowest net debt position since Q3-2015; and
• realized $2.84 per Mcf gas price for the three months ended March 31, 2019, 9% higher than the AECO 5A benchmark of $2.61 per Mcf.
2019 Strategic Acquisition
On April 17, 2019, Pine Cliff announced entering into an agreement to acquire oil and natural gas assets in our core Ghost Pine area of Central Alberta for net cash consideration of approximately $8.6 million. This package of assets has been on Pine Cliff’s radar for several years and although the transaction has not closed yet, we are pleased that we were able to negotiate and finance this transaction in a capital constrained environment. Our initial assessment is that this acquisition will, at current forward strip pricing, increase our economic Pekisko oil location inventory from six to 27 net locations and add approximately 1,575 Boe/d of production weighted 75% natural gas, 16% NGLs and 9% oil, essentially eliminating our annual production decline for 2019, which is less than 10%. The Twining Pekisko oil pool is estimated to be the 14th largest conventional oil pool in the Western Canadian Sedimentary Basin and has one of the lowest recovery factors (4%) to date. We intend to drill our second Pekisko oil well in the second half of 2019.
Concurrent with the acquisition, Pine Cliff announced a $4.0 million flow-through common share financing and a private placement of common shares up to $3.0 million. One of our current shareholders, the Alberta Investment Management Corporation, has indicated that it intends to increase its shareholdings in Pine Cliff by approximately 15,000,000 common shares on behalf of certain of its clients through these financings. For additional details on the acquisition and financings, please refer to the April 17, 2019 news release on our website and the Management’s discussion and analysis.
We have been asked if the drilling of our oil well or the recent acquisition changes the focus or strategy of Pine Cliff. When talking to investors over the past seven years, I have always expressed a desire to add more liquid weighted drilling inventory to Pine Cliff that we could operate and control. We feel the success of our first oil well and the announced acquisition goes a long way to achieving that aspiration. We continue to be optimistic on being a natural gas producer in Western Canada and we remain the public company with the most direct exposure to a recovery in Western Canada natural gas prices, but now we also have added more flexibility in how to deploy our cash flow. Our production remains over 90% natural gas and we do not see that changing materially any time soon.
The second and third quarters of 2019 look like they may bring similar lower natural gas prices as we experienced in 2018, however we are more prepared this year as we have protected our pricing to a greater extent. In addition to higher than anticipated cash flow, another advantage to the colder first quarter was further reductions in Western Canadian gas storage levels. Canadian natural gas storage levels at the end of March 2019 were 13% lower than the same time as 2018. This is another indicator that natural gas prices could be higher this winter than last year.
The LNG export growth in Canada and the United States has deservedly attracted most of the headlines around the natural gas space this past year, but that focus has overshadowed the fact that we are getting closer to seeing some natural gas pipeline relief in Canada. Much of the summer AECO pricing volatility in the past two years has been related to curtailments on the Nova gas system due to expansion pipeline and compressor work being conducted on the system. TCPL advises us that we should start to see some of the benefits of that work later this year as 14 projects will be completed in late 2019 allowing another 0.2 Bcf/d of gas to flow within and outside Alberta. TCPL is spending approximately $9 Billion to increase the Alberta system capability by 3.3 Bcf/d over the next four years, and that does not include the incremental natural gas demand of close to two Bcf/d from the LNG Canada project that reached a positive final investment decision late last year. We think that these developments should have a positive impact on natural gas prices as only higher gas prices will motivate producers to increase production in Western Canada by over five Bcf/d or 31% to meet this growing demand from the current production level of approximately 16 Bcf/d.
We have just completed a successful quarter at Pine Cliff. Although we are in no way declaring that we are in “clear sailing” mode, we do think that our ability to manage our balance sheet while still adding assets and drilling inventory at accretive prices has helped prove the resiliency and sustainability of our business model, our assets and our Team. We thank you for investing with us and you can be assured that we will continue to look at ways to strengthen our business to ensure long term shareholder value.
President and Chief Executive Officer
May 8, 2019
Please refer to the Management’s Discussion and Analysis for Reader Advisories regarding forward-looking information, non-GAAP measures and oil and gas measurements and definitions.