MESSAGE TO SHAREHOLDERS
Pine Cliff continues to do everything in its control to mitigate the impact of the natural gas price volatility on our business. 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 work is that approximately 42% of the Company’s forecasted 2018 natural gas production is now anticipated to be sold to non-AECO markets. We accomplished that goal while still generating positive cash flow, the 24th of the past 25 quarters we have done that.
Significant highlights from the first quarter were:
• generated $29.7 million of oil and gas sales, 8% higher than the $27.4 million generated for the three months ended December 31, 2017;
• generated $5.1 million of adjusted funds flow ($0.02 per basic share) for the three months ended March 31, 2018, compared to $3.8 million of adjusted funds flow ($0.01 per basic share) for the three months ended December 31, 2017;
• reduced bank debt by $4.8 million or 27%, from $18.0 million to $13.2 million, during the three months ended March 31, 2018, our lowest bank debt level since 2014. The reduction in bank debt resulted in interest and bank charges, net of dividend income, of $0.42 per Boe this past quarter, 19% lower than the $0.52 per Boe in the first quarter of 2017;
• ended the quarter with $52.4 million in net debt, our lowest net debt level since 2014, which is $1.2 million lower than the fourth quarter of 2017 net debt level of $53.6 million. On a trailing 12 month basis, this resulted in our debt to cash flow ratio being 2.3 to 1;
• successfully completed a compression project on March 27, 2018, giving Pine Cliff the flexibility to deliver an additional 14 million Mcf per day of Alberta natural gas to the TransGas market in Saskatchewan, or revert production back to the AECO market in Alberta, depending on the pricing differential between the two markets. This increases Pine Cliff’s capacity to the Transgas market up to 26 million Mcf per day; and
• completed arrangements to give us the capability to physically divert up to 12 million Mcf per day of Southern Alberta gas from the AECO market to the Empress market.
Impact of Our Diversification Strategy
Despite the AECO daily natural gas price only averaging $2.07/Mcf this past quarter, Pine Cliff was able to realize $2.35/Mcf, an increase of 14%, primarily due to our commodity price management initiatives. Pine Cliff continues to focus on reducing costs and sourcing premium prices for our products to improve margins. An important component of Pine Cliff’s diversification strategy is that we utilized most of our own infrastructure in expanding the sales points. We believe this flexibility will allow us to react quickly if future market pricing dynamics change.
LNG Prospects in Canada
Other than AECO gas price forecasts and pipeline constraints, the next topic I have been asked about the most this year are Canada’s prospects to build a new major LNG export facility. We have met with several of the teams working on LNG export projects on both the West and East coasts of Canada. Over the years my level of skepticism on these projects has decreased and I would say has now reached a level of optimism, despite all of the issues we read about with regard to approving new oil infrastructure in our country. Due to the different environmental characteristics of natural gas compared to oil, the natural gas projects do not attract the same level of public resistance seen on similar liquid initiatives. It is looking increasingly likely that 2018 may see positive final investment decisions (FIDs) on perhaps several LNG export facilities in Canada. Although we would not see any of these projects operational until early in the next decade, the positive announcements alone of any of these projects moving forward would improve the sentiment around investing in Western Canada natural gas. These project approvals would also be a strong indication to the international investment community that Canada is still capable of getting much needed infrastructure projects approved and built. The impact of that message on our energy sector, one of the biggest users of capital and contributors to employment in our country, cannot be overstated.
The movement and pricing of natural gas in Canada has become increasingly complex since I joined Pine Cliff in 2012. The pipeline maintenance periods that started last summer and continue this summer has resulted in some production not being able to exit Alberta or being able to flow into storage. Compounding this issue was the significant increase in Western Canada natural gas supply in the past 12 months. Pipeline maintenance programs scheduled for May and June of this year have resulted in weak summer forecast pricing for natural gas, specifically at AECO. The positive outcome of this situation is that many industry producers have already announced reductions in their 2018 capital expenditure programs across Western Canada, natural gas rig counts have dropped and now some degree of uneconomic production is being shut-in. We believe that these producer reactions, combined with the fact that gas storage levels are below five year averages in both Canada and the US, should be positive for future natural gas pricing.
We believe these physical constraint issues will be resolved as pipeline companies move ahead with various expansion plans. Investors in both the US and Canada seem to be focusing their capital on companies that can deliver sustainable profitable production, not just growth for the sake of growth or spending beyond cash flow. This investor trend should lead to healthier capital investment decisions being made by our industry and also help to alleviate the current over supply issue. Meanwhile, demand for natural gas continues to grow both in North America and globally, as seen in the depleted Canada and US storage levels despite the supply growth. Regardless of the outcome of LNG export projects in Canada, US LNG exports are expected to increase from the current 3.5 Bcf per day to over 9 Bcf per day in the next 20 months. All of these developments should be positive for our business.
With all of the changing dynamics in our industry, Pine Cliff will continue to focus on maintaining and building a profitable, sustainable business that will generate positive cash flow for many years to come. The industry turbulence has required us to adapt and be creative, but we feel our responses to those challenges has made our business even stronger, more flexible and more resilient than ever before. As part of our response to the challenging gas price environment, we have commenced an internal review of oil and liquid drilling opportunities on our two million acres of land.
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
May 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. This President’s Message should be read in conjunction with the unaudited condensed consolidated financial statements of Pine Cliff Energy Ltd. together with Management’s Discussion and Analysis for the period ended March 31, 2018, which can be found on www.sedar.com and is subject to the same cautionary statements as set out therein.