Pine Cliff Energy Q1 2024 Earnings Report

Pine Cliff Energy EPS Results

• Actual EPS: -C$0.01
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Pine Cliff Energy Revenue Results

• Actual Revenue: $47.67 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Pine Cliff Energy Announcement Details

• Quarter: Q1 2024
• Date: 5/7/2024
• Time: N/A
• Conference Call Date: Wednesday, May 8, 2024
• Conference Call Time: 3:30PM ET

Pine Cliff is a natural gas and crude oil company with a long-term view of creating shareholder value.

Pine Cliff Energy Q1 2024 Earnings Call Transcript

Key Takeaways

• Due to the warm winter, North American and European storage is above average and not full, but limited capacity and higher summer demand from gas-fired power have created market tightness and contango with winter gas trading above $3/Mcf.
• Pine Cliff generated roughly CAD 10 million in Q1 funds flow even with spot gas under $2/Mcf, driven by an extensive hedge program and liquids making up just 21% of volumes yet over 50% of cash flow.
• The company has hedged about 37% of its 2024 production (last nine months) and 25% of its 2025 outlook at US $3.10/Mcf, providing substantial cash-flow protection for the next 12–18 months.
• After acquiring Certus as a CCPC, dividends were reclassified as non-eligible from May 1, 2024, to utilize its tax pools (no corporate tax in 2024, minimal in 2025), with eligible dividends resuming in H2 2025.
• Pine Cliff is exercising capital discipline by pausing new wells in Q1, holding a CAD 5–7 million drilling budget for H2 2024, aligning capex with market improvement, and continuing debt amortization.

Presentation

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

Good afternoon, everybody. This is Phil Hodge from Pine Cliff Energy. Thanks for joining us on our second webcast. Here in the boardroom with me is Terry McNeill, our Chief Operating Officer, Kris Zack, our Chief Financial Officer, and Dan Keenan, our Vice President, Exploitation. Thanks for joining us because this is a new format for us. This is our second one, webcast that we've done. The first one was around the annual meeting, and you can still find the recording of that on our website. But we thought the feedback was quite positive, and so we thought that we would continue to do these quarterly webcasts for the rest of the year, and then we'll kind of reflect again and see if it's still a good way to reach out to shareholders.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

So if you've got thoughts and feedback, we'd appreciate that. We've had quite a good feedback. Many of you that are listening would have received our quarterly email that also goes out, along with the President's letter. Got some really good feedback from that yesterday as well. I think generally, you know, this is the what we call the shoulder season, and so it's, you know, we're out of the winter, we're not yet into the summer. It is a time when it's a lot of question marks around what's gonna happen to storage levels. There was actually a really good piece I just read this morning where one analyst was calling for the storage is gonna get drawn down a lot quicker than they think it will. You know, the one thing that is...

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

Just to reflect a bit on the storage. The storage in North America and in Europe is higher than it typically is at this time of year. It's not full, and just so for those of many of you, sorry for being redundant on this point, but for those of you who aren't familiar with kind of the how this works, is that as you come out of the winter, that's when the biggest drawdown on storage occurs, and then you spend most of the summer trying to fill that storage back up to get ready for the next winter. The one thing that's changed since we've been running Pine Cliff now, which is now our thirteenth year, is that the summer uses a lot more natural gas than it ever did before.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

It used to be a very seasonal trade, so it was all about the winter. Now, that's not quite the case because, you know, in 2016, natural gas became the single biggest provider of electricity in the United States. It surpassed coal. And we're seeing that in many areas of the world, where natural gas is taking a much bigger proportionate share of the energy. You know, I touched on this in my email that went out, that the United States right now, about 42% of all the energy in the U.S. comes from natural gas. So it is not quite as seasonal as it once was, but it still is seasonal.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

What we're paying for right now with the higher storage levels is the fact that we had the warmest winter in Northern Hemisphere history, and because of that, not as much gas was used this past winter. The one comment that many of you have heard me talk about before is the fact that the storage itself has not grown anywhere by any substantial amount. In other words, in the U.S., it's about four TCF of storage. That's about the same number it was 10, 15 years ago. And yet, in the U.S., we've got production and demand going from 50 Bcf a day to over 100 Bcf a day. So the amount and how tight and how quickly storage can adjust has really increased.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

You know, we call this a tightness of the market, and we've seen examples of this, and it's quite often the marginal production or the marginal demand that can make a difference. In this last winter, we saw it happen, and that's why gas prices are at a, you know, low point. So we haven't seen this kind of lower prices in quite some time after a winter. However, the one thing that's really different this year is we're looking into a forward forecast of natural gas prices being substantially higher. That's what we refer to as contango. Right now, gas prices are around a little over $2 in the U.S. I didn't see this morning what the price was. It was about a buck fifty, I think, roughly, here at the AECO price.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

But winter prices are over CAD 3 in both countries. So it's gonna be an interesting summer to see what happens with storage. From our perspective, this was not an environment that we felt comfortable bringing on new wells into, so we've been very conservative on our drill program. You would have saw that in our quarterly results. The... It was a, okay cash flow quarter. It was, you know, surprisingly stronger... I think, you know, one comment I received from one shareholder is that they, they were a little surprised that we still generated CAD 10 million of funds flow in a quarter where gas prices were as weak as they were. The main reason for that is, Well, two reasons, I guess.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

One, we've hedged a lot more than we have in the past, and two, we have a much higher liquids proportion of our production than we have in the past. So even though oil and natural gas liquids only make up 21% of our production, they're making over 50% of our cash flow at these levels. I don't want to go through and repeat all the financial numbers. I've never been a fan of webcasts and investor conference calls that do that. I'd much rather move to questions and answers, so you know, encourage anybody listening to submit some questions. We've got a few here already. I've got the one I'll pass over to Kris.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

There was a question on, about the non-eligible dividends, that were tied to the Certus, that have resulted from the Certus deal, and how long that will be before we get back to eligible dividends. Kris, maybe I'll hand that to you.

[Kris Zack, CFO at Pine Cliff Energy]

Yeah. Thanks, Phil. So, we did in fact move our dividends to non-eligible beginning with the May first payment. This was a function of us having acquired Certus as a CCPC, a Canadian-controlled private corporation, but it did come and provide access to substantial tax pools for Pine Cliff on a consolidated basis post-acquisition.

[Kris Zack, CFO at Pine Cliff Energy]

So we will pay at the current rate of dividends. We expect that we will be able to return to eligible dividends in the second half of 2025, which means that it, the non-eligible dividends will last for about eight months of this year and probably around seven to eight months of next year, and then we'll be able to return to that status. The offset, of course, is that we have access to the tax pools from Certus, which means that we will pay no taxes in 2024. And we suspect that the tax, the tax burden on the company will be small to very minimal in 2025.

[Kris Zack, CFO at Pine Cliff Energy]

The other question that we have received was about our hedging and how much we've hedged for 2025 production, noting that our 2024 production for natural gas is hedged at around 37% of our production expectation at $2.94/MCF. So just to be clear, the 37% of production that's hedged is for the last nine months of 2024. It's on average for 2024, it's the last nine months. For 2025, we currently have about 25% of our production hedged at about $3.10. So depending on where you're at for our production forecast, that will get you in the range of where we are hedged with the protection that we've put in place for the next 12 months after 2024.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

Thanks, Kris.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

Another question that I received this morning was about just generally how we're feeling about the or how shareholders are reacting to kind of the natural gas trade, if you will. The one thing that I would, I would comment on is that we probably have more inbound calls in the last six months from generalist investors around Pine Cliff and natural gas than we've had for many years now. And I think the basic reason for that is that I think most people do see what's happening in the back half of this year. They see that not just the LNG exports, but you're seeing a lot of reports and analysts now talking about just energy use in general around the globe. You know, it's not just a North American phenomena.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

You're seeing a lot of recent discussion around data centers and around the fact of artificial intelligence and what that means for energy use. And we are also, you know, with the recent increase in Bitcoin, that increases energy use, as does electric vehicles. And so you're seeing a lot more discussion about electrification and where is that gonna come from. And I think the... when you dive into that, and when you go kind of behind the wall behind that to see where is the energy gonna come from, natural gas kind of becomes very prominent. This was, there was the recent CERAWeek, where natural gas was very highly discussed as kind of the, not just, you know.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

I think it's the one slight narrative change I've seen is that we've seen less discussion about natural gas as a transition and more discussion about natural gas being a fuel that's gonna be used for many decades to come. And the growth in LNG around the world has really highlighted that. We've got the, you know, many of you have heard us talk about this, and you'll see a graph in our slide deck on our website, is that LNG right now is about 14 Bcf a day, is what's leaving North America. So all coming out, all leaving from the Gulf of Mexico. That number is gonna more than double in the next four years coming out of North America, including the very first LNG shipments off the West Coast at Kitimat, B.C.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

So that's the first time Canada has been able to send LNG to markets other than the United States, which is pretty exciting. And just to give a context to that, that first phase of LNG Canada is about 1.9 Bcf a day. That's more than 10% of all the production that we produce in Canada. So it's a very sizable amount. And then there's other LNG projects coming behind that. So I think, you know, one initiative that I plan to be doing, taking on this year, is I plan to be talking to more U.S. shareholders.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

I think that there's been, for very good reason, there's been reasons why they have not looked to the Canadian markets as a place to invest because of, you know, perceived lack of ability to get projects done, and perceived that our, the governments maybe aren't as supportive. The one, the one point thing I'd point out is, you know, we just built two of the biggest projects in Canadian history, the TMX oil pipeline, and then the LNG pipeline for the LNG Canada site. This is now, the pipeline's 100% complete, and they're, and they're going into operation with the site this, in the next 12 months. Those, those are. That's a massive amount.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

I mean, it was a CAD 40 billion project for the LNG Canada, and a CAD 34 billion for the TMX pipeline. That's pretty significant progress. The other thing I'd point out is that the oil sands production has never been higher. The oil, conventional oil production in Canada has never been higher. Natural gas production in Canada has never been higher. We are the industry is doing everything it can to try to help supply the world's growing need for energy and commodities. And I think that's a compelling story. I think the fact that I believe that Western Canada and AECO natural gas prices are gonna be going into a very, very positive period in the next five-10 years.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

We're quite happy here at Pine Cliff, where we've positioned ourselves to take advantage of that. One of the questions was around LNG. I touched on it a little bit, but let me just give a little bit more color on that. There was a recent article that was written by Martin King from RBN Energy, and I thought it was really well done, and he focused on comparing LNG Canada to other LNG facilities that have come on in the United States. The point he was making is that you're not gonna just. The first ship that leaves, and then there'll be a fanfare about the first shipment going overseas. The reality is that a lot of natural gas will get used before then. They need to have what they call line pack.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

They need to fill up the pipeline. They need to test all the facilities, test all the storage, test the filling facilities for... So we expect that we are gonna start to see draws coming down or being used out of LNG Canada in the next few months. When that first kind of official shipment goes, it is still debatable. There was LNG Canada talks about mid-2025, so that would be kinda 12 months from now. But there's been rumblings that it possibly could be sooner than that. Some analysts are calling for sooner than that. The Petronas CEO came out and said that they thought it was gonna be sooner than that, and Petronas is one of the biggest shareholders of LNG Canada. So time will tell.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

But we are talking months, not years, and for someone who's been talking about LNG for being in the horizon for many, many years, it is quite exciting to see that it is in the months. We've got a question around the maybe the demand loan. Kris, you wanna take that one?

[Kris Zack, CFO at Pine Cliff Energy]

There's a question. I think the question that I'm seeing on the board here speaks to the payout ratio and how we see the dividend being funded through the balance of the year. At the current strip prices, we do believe that we can balance our cash flows with our current dividend. Reminding everyone on the phone that we did reduce our current dividend at the beginning of March, so we have a lower dividend payment. We've got a minimal capital spend. And so at the current strip, we still see our cash flows being fairly balanced, and part of that has to do with the fact that we are generating more cash flow from liquids pricing. So that's one advantage.

[Kris Zack, CFO at Pine Cliff Energy]

We also are more extensively hedged through the summer months, which will also help provide some incremental cash flow support. And then the one thing I'd say is that we still have some flexibility within our capital program, whether it's to spend less or to shift capital into the back half of the year to better match the improvement in commodity prices that we're seeing at the current strip. But at the current prices, we still think that our cash flow is gonna be fairly well-balanced. And if we see a further drop in commodity prices or additional volatility, then we will revisit and continue to prudently manage our balance sheet.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

I agree, Kris. I think the thing that we're now into is that we're already into the middle of May. We're really managing for the next four or five months and making sure that we're watching every dollar that's spent. We're gonna continue to pay down debt, so that's gonna be. We're amortizing the debts, amortized over time, so we'll be making payments as we go through this summer. We've left our capital for the back half of the year, so we had about CAD 5 million-CAD 7 million of CapEx spend that would be for drilling. But we've not spent any of that money today. We're waiting to see what the back half of the year looks like.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

If it makes sense for us to do to go ahead with some drilling, then that's exactly what we'll do. If it doesn't make sense, if maybe things have-- worse, it was a more challenging summer, then we'll hold off on that. I think the one thing that shareholders have, I think, grown to expect from us is that we'll be very prudent and very disciplined with how we manage our capital allocation. We've been doing this now for quite a few years, through quite a few different cycles, and this is a-- this is another cycle which... You know, the comment I made earlier, I would repeat, is that the one difference with this particular cycle is we've never seen such a strong forward strip on natural gas, given where we are today.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

In other words, we've been through situations where gas prices have been under CAD 2 before. That's not something new to us. The difference this time is that you can see just a couple of quarters from now where gas prices are double what they are today. So it's a matter of just being disciplined, managing the summer, looking to the fall. We're already, as Kris mentioned, we're fairly well hedged for the next couple quarters. We'll continue to hedge into 2025. But it's a feeling of much more optimistic. We've got, I think, shareholders...

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

We've had more generalists, as I touched on earlier, more generalist shareholders reaching out, wanting to understand the Pine Cliff model, and I think part of that is because they also are already looking for where are they gonna get their natural gas exposure going into the winter of 2024 or 2025, when we see a lot of increased demand at that time. There was one question just, generally about regulatory and political risk. I think the comment I made earlier about just how strong the industry is doing right now with infrastructure projects and with the growth we've had in production in all our commodities, there's a lot of political discussion around our industry, but the reality is the industry is doing quite well. And I think the, you know, who knows what happens at the federal level?

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

Most of the western provinces have been very supportive. Actually, I'd say all the western provinces have been very supportive of the energy industry and the oil and gas industry, and that's where the production comes from. So we've got a very supportive government here in Alberta. Saskatchewan has been very supportive. That's where all of Pine Cliff's assets are, in Alberta and Saskatchewan. I would say the B.C. government's been very supportive in helping get the LNG built. That's a key project for our industry, along with the two pipelines, the Coastal GasLink for the gas and the TMX for the oil.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

We've got a question about tax implications for the American investors now with the dividend.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

The capital losses. It only whether it's eligible or ineligible dividends, really only impacts Canadian investors in non-registered accounts. So, you know, unfortunately for myself, on that, that's most of my shareholdings in Pine Cliff are exactly in... They're not in registered accounts, so I understand why people, you know, an extra few percent of payment to Revenue Canada is not something any of us enjoy. As Kris said, there's two big points to make on that. One is the temporary nature of it, and the second is the reason that this is being treated this way is because there's substantial tax losses that were in the entity that we purchased. It's just that it was in a CCPC, which is a Canadian-controlled private corporation.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

Because of those tax losses, though, Pine Cliff, as a corporation, is gonna be sheltered for income, or sheltered from taxes for most of 2025 and possibly some into 2026. So we've extended that shelter against our. And that will allow us to have a higher payout ratio and then hopefully be able to give that money back to shareholders. So it is, it's not something that we were, like I say, that we would have designed, but it's, it is by no means not just a negative, and it is short-term. The one question is whether or not Pine Cliff offers a DRIP. The... I've received that question a couple of times.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

For those who aren't familiar, what a DRIP is, it is a direct reinvestment plan, and what it does is that as you get dividends, you would automatically put them back into the, into the company. I don't know of many... They used to be very popular, for good reason, as for an investor, quite often it was at a discount to market, and so there was a dilution piece there. I don't know how many more DRIPs are still available in our industry. We do not have one. I know many shareholders who take their dividend and buy more Pine Cliff stocks, so they've, which is essentially a self-imposed DRIP, but obviously they have transaction costs with those, with making those purchases. But the short answer is no, we, we don't have a, a DRIP in place. Another question. Would it be...

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

Do you have another one there, Kris?

[Kris Zack, CFO at Pine Cliff Energy]

There's some questions here on our realized gas and NGL prices. The average realized gas price in the first quarter for Pine Cliff was CAD 2.56. And so we still managed to realize a reasonable price, despite the fact that natural gas prices were under significant pressure through the first quarter. NGL pricing post the close of the Certus acquisition, it is also lower as a percentage of our oil price from what you may have seen prior to the acquisition. And that part of that has to do with the production mix that we brought over as part of the acquisition.

[Kris Zack, CFO at Pine Cliff Energy]

So some of the NGLs that came over with the Certus volumes were of a lower quality nature into the ethane, the propane. So the price realizations did come down on a combined basis, but are still higher than what we would have what you would expect if it was just natural gas.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

One of the things that we're very conscious of, anybody who's followed Pine Cliff over the years knows, that our Pine Cliff realized prices on gas have always been, and I hate to, you know, say that it will predict and guarantee that it'll continue to be, but they've always been at a premium to AECO pricing. And we do that, some of it's hedging, but a big key part of that is the fact that we own three nationally regulated pipelines, one that goes into the United States and two that go into Saskatchewan. Maybe, Terry, you can comment a little bit on what we're doing right now with our gas production on those pipelines.

[Terry McNeill, COO at Pine Cliff Energy]

Sure. Thanks, Phil. So with the gas that we've got going to the U.S. right now, that's probably our most valuable marginal molecule. We generally get AECO price +CAD 0.05 on that, and we don't pay a receipt toll onto NGTL. So from a pricing perspective, there's probably about a CAD 0.15-CAD 0.20 premium that we get on that particular molecule by using our TC-regulated pipeline. The Alberta to the Saskatchewan pipelines, we've got two of them, and that's a little bit different on the long-term hedges that we have in place on that production. We typically would realize anywhere from a CAD 0.15-CAD 0.20 boost on AECO prices based on where we're at today. Historically, that's been as much as CAD 1, depending on what's going on in the AECO market.

[Terry McNeill, COO at Pine Cliff Energy]

But right now, it's sort of in that CAD 0.15-CAD 0.20 range. And, you know, we do try to maximize as much gas that we can ship through those, CER-regulated, federally regulated pipelines, just to maximize the value that we can get in the premium to AECO. So, you know, it's good flexibility that we have, and we operate those, and we can turn them around with hours of notice. So, very, very good, flexible pieces of pipe that we can. Gives us a great deal of flexibility in our operation.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

Thanks, Terry. One question was just on the increase in G&A in Q1. That was something that we're very sensitive to and something that we discussed at the board yesterday. A big part of that was the fact that you know, there is a carryover of some software from the Certus acquisition. We definitely had some people from transition that were involved in helping move the Certus assets and the Certus the accounting systems and the land systems over to Pine Cliff. Some of those people that were involved in the transition are no longer with us. They were hired just for the transitional period. We've got the office lease, for instance, it expires in August on the Certus assets.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

So there we expect to see some of those G&A costs come down throughout the rest of 2024. But so it was a little bit higher in Q1 than we would've than I think we'll see going forward. Another question was just around on the covenants and with our banking debt. This is something that we watch obviously very closely, and we've you know quite comfortable at the current strip prices that we will be well within under the covenants both with our long-term debt provider and also with our credit facility debt provider. So that's something that the entire team keeps an eye on.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

But at this point, we are definitely under all of the covenants, and there isn't very many to keep an eye on. The one that's kind of the debt to EBITDA, and like I said, at these times, we're under those covenants. Is there any other questions? Looks like we've... I think that we got average realized price in Q1.

[Kris Zack, CFO at Pine Cliff Energy]

Yep, we touched on that.

[Phil Hodge, President, CEO, and Director at Pine Cliff Energy]

Yep. I think we've covered all the questions. Again, I don't want to keep everybody just for the sake of keeping you here. So if there are no further questions, obviously, everybody knows how to reach us. There's by email, by phone. We're happy to have these conversations with you individually, if you'd prefer. But I think we still will continue each quarter having these webcasts, because we've had pretty good feedback on this form of communication. So without anything further for questions, I will say goodbye, and thank you very much for your time today. Appreciate it.

Participants

Executives

• Kris Zack, CFO
• Phil Hodge, President, CEO, and Director
• Terry McNeill, COO