Second Quarter 2020 Highlights
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 Pine Cliff's Q2 production volume being natural gas, the price collapse had a material impact on its 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.
Highlights from Pine Cliff's second quarter ended June 30, 2020 include:
Insider Loan Facility
Without access to a bank credit facility, the crude oil price volatility resulting from COVID-19 put a strain on the Company's cash balance and working capital. To alleviate this short-term pressure on liquidity, Pine Cliff has entered into a Loan Facility (the "Facility") with an insider of the Company (the "Lender") whereby the Lender will provide up to $4.0 million of borrowings at an interest rate of 6.5% per annum. The term (the "Term") of the Facility will expire on the later of: (i) March 31, 2021; or (ii) the date of full repayment of any outstanding borrowings. Amounts can be drawn, repaid and redrawn by the Company at any time during the Term and borrowings under the Facility are payable on demand to the Lender on 60 days written notice. The Facility can be cancelled at any time by the Lender on 60 days written notice, while the Term may also be extended by mutual consent of the Company and the Lender.
While the first half of 2020 has been the most volatile and unpredictable start to a year that Pine Cliff has ever experienced, the prospects for Canadian natural gas producers are improving. With forward natural gas prices in Canada for the next twelve months being the strongest in years, this raises the prospects for improved funds flow in the second half of 2020 and into 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.
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.
Financial and Operating Results1
1 Includes results for acquisitions and excludes results for disposition from the closing date.
2 This is a non-GAAP measure, see "NON-GAAP Measures" for additional information.
For further information, please contact:
Philip B. Hodge - President and CEO
Alan MacDonald -CFO and Corporate Secretary
Telephone: (403) 269-2289
Fax: (403) 265-7488
Certain statements contained in this news release include statements which contain words such as "anticipate", "could", "should", "expect", "seek", "may", "intend", "likely", "will", "believe" and similar expressions, statements relating to matters that are not historical facts, and such statements of our beliefs, intentions and expectations about developments, results and events which will or may occur in the future, constitute "forward-looking information" within the meaning of applicable Canadian securities legislation and are based on certain assumptions and analysis made by us derived from our experience and perceptions. Forward-looking information in this news release includes, but is not limited to: future capital expenditures, including the amount and nature thereof; future drilling opportunities and Pine Cliff's ability to generate reserves and production from the undrilled locations; oil and natural gas prices and demand; expansion and other development trends of the oil and natural gas industry; business strategy and guidance; expansion and growth of our business and operations; maintenance of existing customer, supplier and partner relationships; supply channels; accounting policies; risks; Pine Cliff's ability to generate funds flow; and other such matters.
All such forward-looking information is based on certain assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances. The risks, uncertainties and assumptions are difficult to predict and may affect operations, and may include, without limitation: foreign exchange fluctuations; equipment and labour shortages and inflationary costs; general economic conditions; industry conditions; changes in applicable environmental, taxation and other laws and regulations as well as how such laws and regulations are interpreted and enforced; the ability of oil and natural gas companies to raise capital; the effect of weather conditions on operations and facilities; the existence of operating risks; volatility of oil and natural gas prices; oil and gas product supply and demand; the effects of COVID-19 on global crude oil demand and pricing; risks inherent in the ability to generate sufficient cash flow from operations to meet current and future obligations; increased competition; stock market volatility; opportunities available to or pursued by us; and other factors, many of which are beyond our control. The foregoing factors are not exhaustive.
Actual results, performance or achievements could differ materially from those expressed in, or implied by, this forward-looking information and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking information will transpire or occur, or if any of them do, what benefits will be derived there from. Except as required by law, Pine Cliff disclaims any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise.
Natural gas liquids and oil volumes are recorded in barrels of oil ("Bbl") and are converted to a thousand cubic feet equivalent ("Mcfe") using a ratio of one (1) Bbl to six (6) thousand cubic feet. Natural gas volumes recorded in thousand cubic feet ("Mcf") are converted to barrels of oil equivalent ("Boe") using the ratio of six (6) thousand cubic feet to one (1) Bbl. This conversion ratio is based on energy equivalence primarily at the burner tip and does not represent a value equivalency at the wellhead. The terms Boe or Mcfe may be misleading, particularly if used in isolation.
Given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of oil, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.
The forward-looking information contained in this news release is expressly qualified by this cautionary statement.
This press release uses the terms "adjusted funds flow", "operating netbacks", "corporate netbacks" and "net debt" which are not recognized under International Financial Reporting Standards ("IFRS") and may not be comparable to similar measures presented by other companies. These measures should not be considered as an alternative to, or more meaningful than, IFRS measures including net income (loss), cash provided by operating activities, or total liabilities. The Company uses these measures to evaluate its performance, leverage and liquidity. Adjusted funds flow is a non-Generally Accepted Accounting Principles ("non-GAAP") measure that represents the total of funds provided by operating activities, before adjusting for changes in non-cash working capital, and decommissioning obligations settled. Net debt is a non-GAAP measure calculated as the sum of term debt, subordinated promissory notes at the principal amount, amounts due to related party and trade and other payables less trade and other receivables, cash and prepaid expenses and deposits. Operating netback is a non-GAAP measure calculated as the Company's total revenue, less net operating expenses, divided by the Boe production of the Company. Corporate netback is a non-GAAP measure calculated as the Company's operating netback, less general and administrative expenses and interest expense and bank charges, divided by the Boe production of the Company. Please refer to the Annual Report for additional details regarding non-GAAP measures and their calculation.
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