PRESIDENT’S MESSAGE TO SHAREHOLDERS
I hope all of Pine Cliff’s shareholders and families are healthy and that the worst of the COVID pandemic is finally behind us. I also hope that you are pleased with our Q2 2021 financials as it was the third strong quarter in a row for Pine Cliff. The first two quarters of 2021 represent the best two back to back adjusted funds flow quarters we have had since Q2 2017, 16 quarters ago.
Highlights from Pine Cliff’s second quarter ended June 30, 2021 include:
• generated $34.2 million from commodity sales for the three months ended June 30, 2021, 57% higher than the $21.7 million generated for the three months ended June 30, 2020;
• generated $9.5 million of adjusted funds flow ($0.03 per basic share) for the three months ended June 30, 2021 and $19.5 million ($0.06 per basic share) for the six months then ended, $10.7 million and $19.4 million higher than the amounts generated for the comparable periods in 2020; and
• net debt decreased by 28% or $17.8 million from $63.0 million on December 31, 2020, to $45.3 million as at June 30, 2021 and is Pine Cliff’s lowest net debt level since the third quarter of 2015.
Repayment of Term Debt
On July 28, 2021, Pine Cliff repaid $12.0 million of the $19.0 million tranche of Term Debt due July 31, 2022.
Update on Drilling Program
On July 22, 2021, the Company spudded the first of two gross (2.0 net) Pekisko horizontal oil wells in the Three Hills area of Central Alberta. The cost to drill, complete and equip both wells is expected to total $5.6 million and both are expected to be on production by the end of the third quarter.
We are currently experiencing the highest summer prices for natural gas in North America than we have in nine years. This is due to many factors, including increased power demand throughout North America, increased LNG and Mexico exports from the United States, and an insufficient supply response from producers to match this demand. The “scorecard” in the ongoing battle between natural gas supply and demand is seen in global storage levels. Unlike last year where we entered the fall withdrawal season with essentially full storage in Canada, the United States and Europe, storage in all three of those markets are currently below their five year averages. In the upcoming months there will be increasing focus on the storage numbers, not just where the peak numbers are in October after injection season ends, but also how low the markets believe they will be next spring after withdrawal season. As of today, we are selling our AECO gas at $3.90 per Mcf and the strip forward price for the 2021/2022 winter season is $4.29 per Mcf.
Our funds flow of $27.5 million in the past nine months is more than the total funds flow in the previous 13 quarters combined. We have now reentered the phase of capital allocation for Pine Cliff. When we started Pine Cliff in 2012, the allocation of capital was simple. We wanted to grow to a size that would allow us to run a return of capital model efficiently. We started with 100 Boe/d of production, and in the following four years grew that production base to over 20,000 Boe/d with drilling and eight acquisitions. We felt that we had reached the critical mass size that we needed to consider returning capital to shareholders but then natural gas prices started a decline that lasted until Q4 2020. During that time period, we lowered costs, replaced our bank debt with term debt, added a new 10% shareholder in AIMCo and sold some non-core assets.
Our repayment of $12.0 million of term debt last month is significant. Not only does it lower our net debt to the lowest number since 2015, but it is the first step in returning capital to our shareholders. Just like a mortgage on your house, every time we lower the debt, your shares now own a larger percentage of our entire enterprise value, which is simply the addition of our debt and our market capital (outstanding shares times stock price).
We anticipate that we will continue to lower our debt in 2021, although we are always looking for potential acquisitions that could delay this reduction. We think we have shown our discipline on acquisitions over the years and this has been rooted in the basic fundamental truth that management is aligned with our shareholders. When you have a management team that owns as much stock as we do, investors can feel comfortable that we will only do a deal that we think makes our shares more valuable after the deal than before. This same test is used on all our capital allocation decisions, including our drilling program. If we believe spending money on drilling will increase our per share value, then we proceed. If not, we don’t.
After debt repayment, acquisitions and drilling, the other possible uses of capital include share buybacks and dividends. Building a return of capital model is not easy to do based on a volatile commodity, but we believe we have focused on the right assets to allow us to succeed. All oil and gas assets have a natural decline in production, but we have one of the lowest decline rates of any oil and gas company in Canada. This low decline means that we do not have to spend as much each year as other producers to replace production. So the percentage of our funds flow that is “free funds flow” is one of the highest in the industry. We will continue to assess all of these capital allocation alternatives in the coming quarters, but be assured, that all decisions will be based on the test of what we think will deliver the highest overall rate of return to our shareholders.
Pine Cliff was built to thrive in a good natural gas price environment. We are now thriving. Thank you for your continued support as shareholders and stay safe and healthy.
President and Chief Executive Officer
August 4, 2021