MESSAGE TO SHAREHOLDERS
For natural gas companies such as Pine Cliff, Q2 2018 will be remembered as one of the most difficult periods in over 20 years primarily due to the average daily AECO price being at $1.18 per Mcf. Significant highlights from the second quarter and year to date were:
• produced an average of 19,557 Boe/d (94% natural gas) in the three months ended June 30, 2018, a 7% decrease compared to the same period of 2017, mainly due to shut-ins in the quarter when AECO prices fell below our internal economic threshold levels; and
• reduced bank debt by $0.5 million during the quarter and by $5.3 million during the six months ended June 30, 2018 to $12.7 million, the lowest Company bank debt level since 2014. The reduction in bank debt resulted in interest expense and bank charges, net of dividend income, of $0.41 per Boe and $0.42 per Boe for the three and six months ended June 30, 2018, compared to $0.49 per Boe and $0.50 per Boe for the comparable periods in 2017.
Impact of Our Diversification Strategy
Despite this decade’s low AECO prices this past quarter, Pine Cliff was able to realize a natural gas price of $1.55 per Mcf, an increase of $0.37 per Mcf, or 31% higher than the average daily AECO price, primarily due to our commodity price management initiatives. Our main operational focus in the first quarter of 2018 was optimizing Pine Cliff’s infrastructure to increase the flexibility to move production volumes to different delivery points. The result of that field-work is that approximately 48% of Pine Cliff’s forecasted 2018 natural gas production is currently being sold to non-AECO markets.
In this past quarter, Pine Cliff had negative adjusted funds flow of $1.0 million on production of 19,557 Boe/d. For a sense of comparison, the only other quarter in the past 25 quarters where Pine Cliff suffered negative adjusted funds flow was Q2 of 2016, when Pine Cliff had negative adjusted funds flow of $3.7 million. During that quarter, the average daily AECO price was $0.21 per Mcf higher than this past quarter at $1.39 per Mcf and Pine Cliff’s production was at 22,647 Boe/d. This comparison highlights how impactful our Q1 infrastructure and ongoing operational improvements have been in lowering our AECO adjusted funds flow breakeven point down to approximately $1.27 per Mcf.
Balance Sheet Strategy Shift
In July, Pine Cliff completed a process started in 2016 to align the balance sheet with our longer term business model. This process involved replacing the existing bank debt with a tranche of term debt due in 2022 from Alberta Investment Management Corporation (AIMCo), the same group we placed term debt with in 2016. At the same time, Pine Cliff also increased and extended our insider debt to 2020. These moves do not alter Pine Cliff’s overall net debt level, but they do move our debt away from the short term nature of bank debt, to a more flexible longer term debt. AIMCo manages $100 Billion in assets and has been a supportive partner to Pine Cliff. We look forward to continuing to work with them.
AECO gas prices have improved in Q3 from Q2, but are still not at levels we think will justify producers drilling for dry natural gas in Western Canada. We remain frustrated that the forward strip for natural gas prices are still under $2.00 per Mcf in Canada and yet North American gas storage volumes appear to be heading into the fall at 10 year lows. The 2018 storage injection season will likely end in three months and although US natural gas supply continues to come on at a record pace, it seems to be losing the storage battle to increasing domestic demand and exports of natural gas. If this trend continues, Pine Cliff is optimistic that natural gas prices will strengthen through the winter with decade low storage levels as seasonal power demand increases with colder weather.
At Pine Cliff, with the increase in oil prices, we have spent the past six months examining our own land base for liquids rich drilling prospects and have identified numerous economic drilling locations. Pine Cliff owns the mineral rights on close to two million acres and there has been extensive oil focused drilling on lands directly offsetting our acreage. We think it is prudent to continue to monitor our own funds flow closely before determining whether to proceed with drilling oil wells. As our long time shareholders know, every decision we make is with the view to increasing long term value to our shareholders and this is another time when the current environment has created opportunities that may justify spending capital in the second half of 2018. Meanwhile, we continue to review acquisition candidates that we think could strengthen our business model if we were to acquire them at the right price. We will keep you up to date on all of these initiatives as they further develop.
Thank you for your continued patience and support as shareholders and to our Pine Cliff team for their unwavering commitment.
President and Chief Executive Officer
August 8, 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.