President's Message to Shareholders

Certus Acquisition

At Pine Cliff, we have always prided ourselves on our discipline when it comes to acquisitions. We believe that our patience and perseverance has been an integral part of our success in securing accretive deals that have delivered value for our shareholders and grown our production base from 100 Boe/d in 2012 to over 20,000 Boe/d today. On October 31st, we announced that we had entered into a definitive agreement to offer to acquire the shares of Certus Oil & Gas, a privately held oil and natural gas producer, for a cash purchase price of $100 million. This ties the second largest acquisition in our history; however, I would argue that it is one of the most strategic fits of all our acquisitions.  We will fund the deal with a combination of cash available at closing and a new three-year term debt facility with the flexibility for accelerated repayment.  The Certus assets fit geographically with our existing footprint, extending our core operations to the Caroline area of west Central Alberta. This acquisition will add approximately 5,300 boe/d using the September production numbers and therefore take our pro-forma production over25,000 Boe/d. We expect that the deal will close before the end of the year.

The Certus acquisition checks several boxes for Pine Cliff. First, it is accretive on a per share basis for our shareholders as we do not need to issue equity to fund the deal. This accretion is material on every measurable metric we use to evaluate assets, including funds flow¹, free funds flow¹, reserves and production.

Second, the production we are expecting to add will improve the commodity diversification in our portfolio by increasing our liquids exposure. Certus production in September was roughly split evenly between natural gas and liquids, which will take our overall liquids production weight to just over 20% on a pro forma basis.  We believe that the increased liquids exposure will enhance the sustainability of our dividend by reducing the price of natural gas that is needed at current prices to cover our dividend and capital spending requirements. At the same time, our production is still materially weighted to natural gas, which means we will continue to have significant leverage to higher natural gas prices.  While we are bullish on the outlook for natural gas going into the second half of the decade, volatility is inevitable, and we believe this additional support for our dividend and optionality for capital allocation will make our company stronger.

Last, we have been clear in our strategy of seeking acquisitions that would add to our drilling inventory. Our preliminary assessment is that within the Certus assets are 31 gross (15.4 net) deep basin liquids rich natural gas and oil development locations that will compete for capital in our annual spending program for the next several years.  We were able to buy these assets at a discount to the $112.5 million estimated proved developed producing value and received the additional proved undeveloped and probable reserves and drilling locations on the properties without having to pay extra for them.  We feel strongly that the Certus acquisition is indeed a very good fit for Pine Cliff and its shareholders.

Our Pine Cliff team has worked hard to build a strong balance sheet and we always believed that the cash position we built up through 2022 would position us well to capitalize on acquisition opportunities.  I love the baseball analogy that Warren Buffet uses that: "The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot, and if people are yelling, 'Swing, you bum!' ignore them." Our team has looked at a lot of pitches in the past two years. Our patience was rewarded as our team uniformly agreed that these Certus assets were the “pitch we wanted to swing at”.  This transaction reinforces what we can accomplish if we remain disciplined. While the integration of the new asset base into our business will be our primary focus over the coming months, we are still excited about the prospect of other M&A opportunities for us to consider in 2024, and we will continue to watch the pitches closely.

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Dividend Sustainability

We remain firmly committed to our dividend payment. As of November 14, we have happily paid ~ $62 million in dividends to our shareholders since the inception of the dividend in Q2 2022. The predominant filter we apply to all possible acquisitions is that it must strengthen the sustainability of our dividend. In other words, we were only willing to trade our valuable cash position for assets that would increase our confidence to maintain our dividend in 2024 and beyond. We believe the Certus acquisition met this high threshold. Even though this acquisition will increase our production by over 25%, we anticipate that our corporate production decline rate will still e one of the lowest of all public companies in Canada under 10%.  We have not finalized our 2024 drilling budget for Pine Cliff, but on current forward strip prices, we anticipate that our funds flow payout ratio will be materially reduced in 2024 with this acquisition.  

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Marketing and Diversification Strategy

Throughout 2023, we continue to benefit from the hard work of our marketing team. Their work has resulted in realized natural gas pricing 12% and 14% higher than the AECO 5A benchmark in the three and nine months ended September 30, 2023. These results are due to the physical sale contracts we put in place, as well as the internal market diversification options we have with owning three pipelines that exit the Province of Alberta. We will continue to opportunistically hedge our commodity exposure in 2024 to help reduce risk.

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Drilling Program Updates

Our third quarter drilling activity was limited to participating in one Ellerslie natural gas well (0.15 net) in our Edson area that came onstream at the end of October 2023.  Most of our Q3 spending was focused on maintenance preparing for the winter.  Meanwhile, the three Pekisko oil wells (2.1net) drilled during the first half of 2023 continue to produce in line with expectations.  We are maintaining our 2023 annual production guidance to average more than 20,000 boe/d.

We will set our CAPEX program for 2024 in Q1. You can be assured that the Certus acquisition will not alter our measured approach to capital spending. We strongly believe that one of the key factors to maintaining our sustainable dividend in a volatile commodity business is carefully protecting our low decline rate.

Outlook

It is an exciting time in our industry with new Canadian pipelines being completed to the West Coast in Western Canada and LNG exports expected to more than double in North America in the coming years.  We believe that Pine Cliff is a unique investment option in this environment with our strong balance sheet, sustainable dividend, low decline rate and significant leverage to natural gas prices.  Every single day, the world needs more energy, and it has become apparent to more market observers that oil and natural gas demand is going to continue to rise for many years to come. Our job at Pine Cliff is to continue to deliver to our investors the same discipline of capital allocation we have demonstrated over the past 12 years to build more shareholder value. I believe our team is up to meeting this challenge and we are excited to continue to deliver.

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Yours truly,

Phil Hodge,

President and Chief Executive Officer

November 14, 2023

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¹Disclosure Note: Please refer to Pine Cliff’s Website for Reader Advisories regarding forward looking information, non-GAAP measures, oil and gas measurements, definitions as this email is subject to the same cautionary statements as set out therein.

²Refer to the November 14, 2023 Press Release for commodity split by product.