PRESIDENT’S MESSAGE TO SHAREHOLDERS
I hope all of Pine Cliff’s shareholders and families are healthy during these unprecedented times.
The second quarter of 2020 was dominated by the collapse of crude oil and liquids prices due to global over-supply combined with demand destruction from the coronavirus (“COVID-19”) pandemic. Despite 92% of our Q2 production volume being natural gas, the price collapse had a material impact on our revenue and funds flow. While the negative impact of low crude oil and liquids prices was mitigated to some degree by stable natural gas prices, it was not enough to prevent Pine Cliff from generating negative adjusted funds flow for only the 5th quarter in our past 33 quarters of operation. OPEC and non-OPEC producers reacted to the over-supply of crude oil by curtailing global production and, as we enter the second half of 2020, crude oil and liquids prices have recovered to levels that, along with strengthening natural gas prices, gives Pine Cliff optimism for the second half of the year.
Highlights from Pine Cliff’s second quarter ended June 30, 2020 include:
• realized $2.03 per Mcf natural gas price for the three months ended June 30, 2020, 3% higher than the AECO 5A benchmark of $1.98 per Mcf and 20% higher than the $1.69 per Mcf realized for the comparable quarter in 2019;
• produced an average of 18,968 Boe/d and 19,068 Boe/d in the three and six months ended June 30, 2020, a 1% decrease and 1% increase respectively compared to the same periods in 2019; and
• tied-in production from 1 gross (0.08 net) Edson oil well drilled in the first quarter of 2020.
Increase in Forward Natural Gas Prices
In Q2 2019, the AECO 5A natural gas price was $1.03 per Mcf. In Q2 2020 this number was $1.98 per Mcf. Pine Cliff has protected the downside risk to summer natural gas prices with approximately 45% of our production hedged through Q3. The strengthening of forward AECO natural gas prices has us optimistic for the back half of 2020 and into 2021, whereas of this morning, current forward prices are $2.57 per Mcf for the balance of 2020 and $2.66 per Mcf for calendar 2021.
There are various reasons for the increase in forward AECO natural gas prices, but two significant factors appear to be: (i) lower crude oil prices have resulted in a decrease in crude oil drilling and thereby reduced production of associated natural gas; and (ii) natural gas drilling has also dropped dramatically with the availability of capital being constrained. In January 2020, there was an average of 995 oil and gas drilling rigs operating in North America and for July 2020, that average had fallen to only 290. In Canada alone, oil and gas drilling rigs have fallen from an average of 204 in January 2020 to an average of 36 in July 2020.
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.
The first half of 2020 has been the most volatile and unpredictable start to a year that Pine Cliff has ever experienced, but we believe that the prospects for Canadian natural gas producers have improved significantly. AECO summer pricing is considerably stronger than last year, and that has allowed us to maintain steady production levels rather than having to curtail production for economic reasons as was necessary in 2019. Forward natural gas prices in Canada for the next twelve months are the strongest in years which raises the prospects for improved funds flow in the second half of 2020 and into 2021.
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 July, a portion of our workforce has returned to the office. We continue 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.
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 positive adjusted funds flow in a positive natural gas price environment. Pine Cliff has navigated through a difficult period over the past few years, but we feel we have emerged stronger and ready to participate in an improved natural gas environment. Thank you for your continued support as shareholders and stay safe.
President and Chief Executive Officer
August 5, 2020