PRESIDENT’S MESSAGE TO SHAREHOLDERS
I hope all of Pine Cliff’s shareholders and families are healthy during these unprecedented times.
The third quarter of 2020 saw the steady recovery of crude oil prices along with stable natural gas prices, resulting in Pine Cliff generating positive adjusted funds flow of $809,000. Highlights from Pine Cliff’s third quarter ended September 30, 2020 include:
• realized $2.18 per Mcf natural gas price for the three months ended September 30, 2020, 41% higher than the $1.55 per Mcf realized for the comparable quarter in 2019;
• produced an average of 18,755 Boe/d and 18,963 Boe/d in the three and nine months ended September 30, 2020, a 1% decrease and unchanged respectively compared to the same periods in 2019;
• brought on production at the end of the quarter from one gross (0.08 net) Edson liquids rich natural gas well drilled during the quarter; and
• issued 7,500,000 common shares at a price of $0.20565 per share on the exercise of share purchase warrants by Alberta Investment Management Corporation.
Rise of Forward Natural Gas Prices
In Q3 2019, the AECO 5A natural gas benchmark price was $0.90 per Mcf. In Q3 2020, this benchmark price was $2.23 per Mcf, a level not seen for a comparable third quarter since 2016. The continued strengthening of forward AECO natural gas prices has Pine Cliff optimistic for the fourth quarter of 2020 and calendar 2021, where this morning, spot daily AECO 5A was priced at $3.15 Mcf and the forward AECO 5A price for calendar 2021 was $3.05 per Mcf.
There are various reasons for the increase in forward AECO natural gas prices, but four significant factors appear to be: (i) lower crude oil prices have resulted in a significant contraction in capital spending by crude oil producers and thereby reduced production of associated natural gas; (ii) natural gas drilling has dropped dramatically with the availability of capital being highly constrained as a result of lenders and investors reducing their exposure to the energy sector; (iii) the recovery of liquefied natural gas exports from the United States from their mid-year lows; and (iv) winter is coming and there is apprehension about how low natural gas storage levels could be in the spring of 2021. These are all legitimate concerns and variables that Pine Cliff will continue to monitor closely.
During the second quarter Pine Cliff received two payments from the Federal Government’s Canada Emergency Wage Subsidy Program (“CEWS”) totaling $561,000, which provided Pine Cliff with a subsidy of 75% of employee's wages (up to a maximum of $847 per employee per week) for a period of eight weeks. Pine Cliff has also been working with service providers to participate in both the Alberta Site Rehabilitation Program and the Saskatchewan Accelerated Site Closure Program. At this time, any awards Pine Cliff receives through these programs would be 100% federal government funded.
Operating within the confines of a global pandemic has brought challenges to all businesses, but relatively speaking, the natural gas sector has not been impacted as much as most other industries. The reduction in oil demand combined with oil oversupply has resulted in a reduced global oil price and North American rig counts remaining at historical lows. Pine Cliff’s production is 92% natural gas and over 75% of our production is currently priced off AECO, making Pine Cliff one of the most levered public companies to increases in AECO pricing. With a production decline rate of approximately 8%, Pine Cliff needs to spend a relatively minimal amount of its adjusted funds flow to support, maintain or grow its production levels. This means that the ratio of Pine Cliff’s adjusted funds flow to free funds flow is one of the highest in the Canadian oil and gas industry.
Pine Cliff continues to be disciplined and focused on its strategy, including prioritizing the health and safety of its employees. Pine Cliff successfully transitioned its office staff to work remotely in March and as restrictions eased through the summer, Pine Cliff’s entire workforce had returned to the office by mid-September. Pine Cliff continues to monitor the situation related to COVID-19 and will follow the advice of public health officials in supporting our employees, their families and our business partners.
Since 2019, Pine Cliff has been focused on cash management and strengthening our balance sheet. We have navigated through the worst Canadian natural gas prices in 20 years and emerged with no bank debt and all of our term debt being held by our three largest shareholders, the majority of which is not due until more than four years from now. Insider stock ownership has continued to grow in Pine Cliff during this time period. The strength of the stakeholders we are aligned with has been a differentiating factor for us in the past, and it will continue to distinguish us in the future. Pine Cliff has been built with the goal of creating a sustainable company that can leverage the low production decline and low operating costs of its assets to generate strong funds flow in a positive natural gas price environment. We feel that Pine Cliff is entering 2021 in a solid position and is poised to participate in an improved natural gas environment. Thank you for your continued support as shareholders and stay safe.
President and Chief Executive Officer
November 3, 2020