Pine Cliff Energy Ltd: President’s message to shareholders

I hope everyone is doing well. Pine Cliff has been busy integrating our acquisition of Certus Oil and Gas, which closed on December 13th. We are pleased to report that the performance of these assets thus far has exceeded our expectations. Concurrently, we are managing the challenges posed by the unusually mild winter weather and its impact on the North American natural gas market, where prices have been halved in recent months. Key highlights from our fourth quarter and the entirety of 2023 include:

exited Q4 and the 2023 year with production at ~26,000 Boe/d1 ,the highest yearly exit production rate in Pine Cliff’s 12 year history;
generated $9.7 million ($0.03 per basic and fully diluted share) and $58.7 million ($0.17 per basic and $0.16 per fully diluted share) of adjusted funds flow2 for the three months and year- ended December 31, 2023, compared to $40.2 million ($0.11 per basic and fully diluted share) and $163.2 million ($0.47 per basic and $0.45 per fully diluted share) for the comparable periods in 2022;
net present value for proved plus probable reserves of $476.8 million, discounted at 10%, an increase of $67 million or 16.3%, from December 31, 2022, primarily as a result of the Certus acquisition;
paid dividends of $11.6 million ($0.03 per basic and fully diluted share) and $46.0 million ($0.13 per basic and fully diluted share) during the three and 12 months ended December 31, 2023, compared to $10.8 million ($0.03 per basic and diluted share) and $23.6 million ($0.07 per basic and diluted share) for the comparable periods in 2022; and
production averaged 21,454 Boe/d3 and 20,660 Boe/d3 for the three and the year ended December 31, 2023, 2% higher and 2% lower respectively than the comparable periods in 2022.

Dividend Adjustment
Pine Cliff has been consistent with our messaging to shareholders about our dividend sustainability. We promised to defend it strongly while emphasizing we would not use debt to maintain it, nor would we keep it at its current level if we thought that doing so could impair the underlying value of Pine Cliff. We have worked too hard, for too many years, to weaken the Company right before we enter an expected prosperous period for Pine Cliff and our industry. We believe this conservative fiscal strategy will continue to be the foundation of our future success and growth, as it has been in the past.

The precipitous fall in natural gas spot prices over the past five months has dampened our 2024 cash flow projections to the point where maintaining our dividend at its current level will result in Pine Cliff paying dividends using debt and not free cash flow. This scenario is not sustainable. Although we are optimistic that external factors and reduced drilling activity may support higher natural gas prices later this year, hope is not a strategy. Therefore, starting in March, we are reducing our regular monthly to $0.005 per share or $0.06 per share on an annualized basis. We are confident that with this reduction, combined with our physical hedge contracts in place and a limited capital expenditure budget for 2024, the dividend payout ratio will not exceed 100% of Pine Cliff’s estimated 2024 adjusted funds flow.

We have increased our dividend twice since its inception in June 2022, however I have always considered the Pine Cliff dividend to be a variable dividend. Of course, my preference would be that the dividend would continue to rise and never drop, but I know that if you maintain a high payout ratio like we have done to return maximum cash to our shareholders, there is a risk the dividend may have to be reduced in a low commodity price environment. I do believe that with low decline assets in your portfolio, it is possible to continue to manage a dividend in an oil and gas business. It requires a strong focus on operating costs and a team that will continue to opportunistically add production through the drill bit or through acquisitions, as appropriate. It requires disciplined capital allocation decision makers who share the goal of making their company more valuable in the future. Pine Cliff has these skills and capabilities, and because management are PNE shareholders, our motivations are aligned with our other owners. We will continue to make difficult capital allocation decisions to protect the integrity of the business and improve shareholder value.

2024 CAPEX and Production Guidance
Pine Cliff successfully exceeded our 2023 annual production guidance, averaging 20,660 Boe/d3 on developmental capital of $12.6 million. In 2024, we are anticipating spending approximately $7 million of developmental capital, and we expect that level of spending to result in average annual production of between 24,000 and 25,000 Boe/d3, with approximately 79% of that production being natural gas. The reason our 2024 CAPEX is 40% lower than our 2023 CAPEX, even though Pine Cliff production is 30% higher this year, is that we do not believe 2024 is a time to be drilling natural gas wells. We will save our locations for better commodity prices.

Hedging And Market Diversification Strategy

In the early years of Pine Cliff, we did not use hedging in our marketing strategy. Our production was over 90% natural gas and we were fully exposed to the volatility of the commodity. Over the past few years, we have increased our use of physical hedges as we transitioned to a dividend paying company. We anticipate another volatile year for commodity prices in 2024, and to reduce this risk, we proactively increased our 2024 hedge exposure from previous years to approximately 22% of our natural gas production at an average price of $3.19 Mcf and 33% of our crude oil production at an average price of $99.48 Bbl. We will continue to selectively utilize hedging in the coming years to support our business and our dividend.

In addition to using physical hedges, our marketing group works closely with our operations team to determine the best strategies to utilize our three pipelines that take natural gas production out of the Province of Alberta. Their work has resulted in realized natural gas pricing 14% higher than the AECO 5A benchmark in the 12 months ended December 31, 2023. Our preference is to use flexible and shorter-term solutions to optimize pricing rather than entering long-term pipeline commitments to other markets. We believe that the attractiveness of the AECO marketing hub in Alberta will rise in the coming years and we want to ensure we retain maximum flexibility to take advantage of that trend.

CFO Transition

Pine Cliff’s Chief Financial Officer, Alan MacDonald, will be retiring from his position. I am happy to announce that Kris Zack, who joined Pine Cliff last September as Vice-President Finance, has been appointed Pine Cliff’s Chief Financial Officer effective May 1, 2024. Kris has over two decades of capital market and auditing experience and has been invaluable to Pine Cliff through the Certus integration. On a personal note, Alan has been a pleasure to work with. His calm demeanour and sage advice have helped us navigate some choppy waters during his tenure. Pine Cliff and its shareholders are forever indebted to his significant contributions in making our company into what it is today. Thanks Alan.

Webcast
There was a lot of information in this quarter, so we are going to give our shareholders another way to receive this information and ask management some questions. We will be conducting a live webcast at 10:00 AM MST (12:00 Noon EST) on March 5th. Participants can access the live webcast via this Link or through the links provided on the Company’s website. Outlook The short-term attention on weather and natural gas storage has overshadowed an exciting time in our industry with new oil and gas pipelines being completed to the West Coast in Western Canada. AECO forward strip natural gas prices in Western Canada are over $3 Mcf in 2025 and LNG exports are expected to more than double in North America in the next four years. We believe that Pine Cliff is a unique investment option in this environment with our dividend, strong balance sheet, low production decline rate and significant leverage to Western Canada natural gas prices. Our job at Pine Cliff is to continue to deliver to our investors the same discipline of capital allocation and business judgment we have demonstrated over the past 12 years to increase shareholder value and build a stronger company. Thank you for your confidence in our team and for trusting in our process.

Outlook
The short-term attention on weather and natural gas storage has overshadowed an exciting time in our industry with new oil and gas pipelines being completed to the West Coast in Western Canada. AECO forward strip natural gas prices in Western Canada are over $3 Mcf in 2025 and LNG exports are expected to more than double in North America in the next four years. We believe that Pine Cliff is a unique investment option in this environment with our dividend, strong balance sheet, low production decline rate and significant leverage to Western Canada natural gas prices. Our job at Pine Cliff is to continue to deliver to our investors the same discipline of capital allocation and business judgment we have demonstrated over the past 12 years to increase shareholder value and build a stronger company. Thank you for your confidence in our team and for trusting in our process.

Yours truly,

Phil Hodge
President and Chief Executive Officer
March 4, 2024