Long-term Value Focus
Annual Report 2016
2016 was a difficult year for the oil and gas industry and definitely the most challenging year since I have been at Pine Cliff. Despite annual
AECO prices being the lowest in 18 years and our 2016 realized natural gas price only being $2.13 per Mcf, we exited the year with a record
quarter for both revenue, and more importantly, cash flow. The fourth quarter gave us insight into what our assets and team can achieve in an
improved natural gas environment. Significant highlights from the fourth quarter of 2016 were:
MESSAGE TO SHAREHOLDERS
2016
•
•
•
•
•
•
•
achieved record quarterly funds flow from operations of $15.0 million ($0.05 per basic share), 129% higher than the $6.6 million ($0.03
per basic share) in the fourth quarter of 2015;
achieved record revenue of $35.2 million, 73% higher than the $20.3 million in the fourth quarter of 2015;
achieved earnings of $3.2 million ($0.01 per basic share) compared to a loss of $3.3 million (($0.01) per basic share) in the fourth quarter
of 2015;
increased production by 43% to 21,525 Boe/d (93% natural gas) from 15,051 Boe/d (94% natural gas) in the fourth quarter of 2015 (a
12% increase on a per basic share basis);
closed the disposition of a non-core oil asset for total proceeds of $31.7 million;
continued to strengthen our balance sheet, paying down $40.9 million of bank debt, ending the year with $30.9 million in bank debt; and
reduced net debt by $46.1 million, ending the year with $64.2 million in net debt.
Our primary focus in 2016 was to strengthen our balance sheet and integrate the largest asset acquisition we had ever undertaken. We are proud
of the fact that we reduced our bank debt by $125.0 million in 2016 without issuing equity to dilute our shareholders, and at the same time, we
continued to improve margins in our business. We recognize that we cannot control the price of natural gas, weather or government policies, so
we stayed focused controlling what we can, which is reducing costs, prudently spending capital and lowering our production decline, while still
operating our assets to the same high standards that we always have. As natural gas prices recovered in the fourth quarter, we saw the benefits of
these efforts with the record funds flow we reported, even though our realized natural gas price for the quarter was only $2.95 per Mcf. Pine Cliff
achieved 2016 funds flow from operations of $19.7 million ($0.06 per basic share) with minimal production decline (net of dispositions), while
only spending $8.4 million in net capital. We consider that to be strong evidence of the sustainability of our assets and the business model we
have built.
Outlook
The 2016-2017 winter has turned out to be equally as warm in the Eastern markets as last year, which is continuing to put downward pressure on
natural gas prices, but there is reason for optimism. We continue to believe that there have been three fundamental structural changes in North
American natural gas demand that have been masked by back-to-back record warm winters. First, material shipments of LNG began leaving
North America for the first time in 2016, and current shipments are expected to be approximately 3.8 Bcf per day by the end of 2017. This LNG
export number is projected to rise to over ten Bcf per day by 2020, which would be over 14% of current U.S. natural gas production of 70 Bcf per
day. Second, Mexican pipeline imports from the U.S. are expected to exceed 4.0 Bcf per day in 2017 from less than 2.0 Bcf per day in 2014. And
finally, for the first time ever, natural gas surpassed coal in 2016 as the largest source of electricity generation in the U.S. All of these demand
variables have improved while at the same time U.S. natural gas supply in 2016 dropped for the first time in 11 years. Canadian natural gas prices
are already considerably stronger now than they were this time last year despite the warm weather. We remain confident that natural gas pricing
will continue to react positively to these fundamental changes and that natural gas storage in North America will be reduced below historical
averages if temperatures revert to more “normal” patterns.
Over the last five years, Pine Cliff has built up a portfolio of assets that we estimate can generate positive funds flow in 2017 at natural gas prices
above $1.70 per Mcf and generate positive funds flow while keeping production flat in 2017 at natural gas prices above $2.15 per Mcf. Those
numbers again speak to the sustainability of the business model we have built. If natural gas prices rise, as we expect they eventually will, we are
well positioned as every $0.10 per Mcf move in AECO prices equates to almost $4.2 million of annual funds flow, or $0.014 per outstanding basic
share.
Exiting 2016 with a strong balance sheet will allow us to withstand volatility in natural gas prices as well as provide us flexibility for possible future
acquisitions. We believe that our perseverance and discipline in building a company focused on increasing value on a per share basis will
ultimately reward all those who share our long term vision on natural gas pricing.
Finally, I would like to thank our staff for their hard work and dedication through a difficult year and would like to thank our shareholders for
your continued support.
Yours truly,
Phil Hodge
President and Chief Executive Officer
March 14, 2017
Please refer to the attached Management’s Discussion and Analysis for Reader Advisories regarding forward-looking information, non-IFRS measures and oil and gas measurements and
definitions. This President’s Message should be read in conjunction with the audited consolidated financial statements of Pine Cliff Energy Ltd. together with Management’s Discussion and
Analysis for the year ended December 31, 2016, which can be found on www.sedar.com and is subject to the same cautionary statements as set out therein.
1
PINE CLIFF ENERGY LTD.
FINANCIAL AND OPERATIONAL HIGHLIGHTS
2016
2016
Three months ended December 31
2015
Year ended December 31
2015
2016
($000s, unless otherwise indicated)
FINANCIAL1
Oil and gas sales (before royalty expense)
Cash flow from operating activities
Funds flow from operations2
Earnings (Loss)
Per share – Basic and Diluted ($/share)
Capital expenditures
Per share – Basic and Diluted ($/share)
Acquisitions, after adjustments
Proceeds on dispositions
Net Debt3
Weighted-average common shares outstanding (000s)
Basic
Diluted
OPERATIONS
Production
Natural gas (Mcf/d)
Crude oil (Bbls/d)
Natural gas liquids (Bbls/d)
Realized commodity sales prices
Total (Boe/d)
Natural gas ($/Mcf)
Crude oil ($/Bbl)
Natural gas liquids ($/Boe)
Netback ($/Boe)
Combined ($/Boe)
Oil and gas sales
Royalty income
Royalty expense
Operating costs
4
Operating netback ($/Boe)
General and administrative
Interest and bank charges and dividend income
5
Corporate netback ($/Boe)
38,316
12,632
15,026
0.05
3,210
0.01
3,356
(1,029)
(33,032)
64,224
306,977
307,095
120,540
602
833
21,525
2.95
49.12
37.08
19.35
19.35
-
(1.59)
(8.95)
8.81
(0.47)
(0.75)
7.59
1.47
1.27
21,548
973
6,550
0.03
(3,300)
(0.01)
1,875
179,540
-
141,770
240,983
240,983
85,233
264
581
15,051
2.47
44.07
21.17
15.56
15.56
0.04
(1.03)
(8.41)
6.16
(0.98)
(0.44)
4.74
118,642
22,489
19,741
0.06
(50,387)
(0.16)
9,159
(807)
(63,112)
64,224
306,329
306,329
124,906
753
924
22,495
2.13
37.41
32.53
14.41
14.41
0.13
(1.07)
(9.39)
4.08
(0.85)
(0.84)
2.39
0.68
0.40
78,593
20,768
25,818
0.11
(24,257)
(0.10)
7,259
193,065
-
141,770
240,149
240,149
72,984
160
530
12,854
2.66
48.26
25.00
16.75
16.75
0.06
(1.08)
(8.65)
7.08
(1.24)
(0.33)
5.51
4
Operating netback ($ per Mcfe)
5
Corporate netback ($ per Mcfe)
1
Includes results for acquisitions and excludes results for dispositions from the closing dates.
2
Funds flow from operations is a non-IFRS measure that represents the total of funds provided by operating activities, before adjusting for changes
in non-cash working capital, and decommissioning obligations settled.
3
Net debt is a non-IFRS measure calculated as the sum of bank debt, subordinated promissory notes at the principal amount, amounts due to
related party, and trade and other payables less trade and other receivables, cash, prepaid expenses and deposits and investments.
4
Operating netback is a non-IFRS measure calculated as the Company’s total revenue, less operating expenses, divided by the Boe production of the
Company for the period.
5
1.03
0.79
1.18
0.92
Corporate netback is a non-IFRS measure calculated as the Company’s operating netback, less general and administrative expenses, interest and
bank charges plus finance and dividend income, divided by the Boe production of the Company.
2
PINE CLIFF ENERGY LTD.
RESERVES INFORMATION
RESERVES INFORMATION
2016
McDaniel’s and Associates Limited was engaged to prepare evaluations of the Company’s reserves at December 31, 2016. The
evaluations of petroleum and natural gas reserves were conducted in accordance with National Instrument 51-101 Standards of
Disclosure for Oil and Gas Activities (“NI 51-101”) with the effective date of December 31, 2016. The gross reserves in the following
tables represent Pine Cliff’s ownership interest before royalties and before consideration of the Company’s royalty interest reserves.
Tables may not add due to rounding. As defined in NI 51-101, proved reserves are those reserves that can be estimated with a high
degree of certainty to be recoverable. It is likely that the actual remaining quantities recovered will exceed the estimated proved
reserves. Probable reserves are those additional reserves that are less certain to be recovered than proved reserves. It is equally
likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated proved plus probable
reserves. Tables may not add due to rounding.
Where amounts are expressed on a Boe basis, natural gas volumes have been converted to oil equivalence at six Mcf per one Bbl.
Where amounts are expressed in Mcfe, natural gas liquids and oil volumes are converted to one Mcfe using the same ratio. The terms
Boe and Mcfe may be misleading, particularly if used in isolation. This conversion ratio is based on an energy equivalency conversion
method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
Highlights of Pine Cliff’s reserves for the 2016 year include:
•
•
•
•
•
•
•
•
Net present value for proved plus probable reserves of $346.9 million, discounted at 10%, an increase of $6.9 million, or
2%, from December 31, 2015, despite dispositions totaling $64.0 million in 2016;
Prior to adjusting for 2016 production, total positive net changes to proved reserves were 2.6 MMBoe (4%), including 1.9
MMBoe of dispositions, from December 31, 2015, which was largely as a result of improved well performance and lower
production costs;
Remaining proved reserves of 53.8 MMBoe (94% natural gas) at December 31, 2016, decreased by 5.7 MMBoe (10%) from
59.5 MMBoe (91% natural gas) at December 31, 2015;
Prior to adjusting for 2016 production, total positive net changes to proved plus probable reserves were 0.5 MMBoe (1%),
including 2.4 MMBoe of dispositions from December 31, 2015, which was largely as a result of improved well performance
and lower production costs;
Remaining proved plus probable reserves of 70.9 MMBoe (94% natural gas) at December 31, 2016, decreased by 7.8
MMBoe from 78.7 MMBoe (91% natural gas) at December 31, 2015;
Approximately 76% of total proved plus probable reserves are classified as proved reserves and 24% are classified as
probable reserves;
Approximately 98% of proved reserves are classified as proved developed producing; and
As Pine Cliff has historically focused on acquiring new assets rather than drilling existing reserves, the McDaniel reserve
report reflects a conservative future development capital program of $57.8 million over the next five years.
Summary of Remaining Working Interest Reserves, as of December 31, 2016
Proved
Reserve Category:
Developed Producing
Developed Non-Producing
Total Proved
Undeveloped
Total Proved plus Probable
Probable
Light, Medium and
Heavy Oil
Natural Gas
(Conventional
natural gas and coal
bed methane)
Gross MBbl
Gross MMcf
509.6
0.9
536.6
26.2
770.0
233.3
297,548.4
260.5
302,540.7
4,731.8
398,635.5
96,094.8
Natural Gas
Liquids
Gross MBbl
2,539.8
13.8
2,841.0
287.4
3,726.2
885.2
Boe
Gross MBoe
52,640.8
58.1
53,801.1
1,102.2
70,935.5
17,134.3
3
PINE CLIFF ENERGY LTD.
Summary of Net Present Values of Future Net Revenue, Before Income Taxes, as of December 31, 2016 1
RESERVES INFORMATION
2016
($000,000's)
Proved
Reserve Category:
Developed Producing
Developed Non-Producing
Total Proved
Undeveloped
Total Proved plus Probable
Probable
Discounted at (% per Year)
0%
5%
10%
15%
331.7
0.5
340.9
8.7
517.8
176.9
303.2
0.5
309.3
5.6
421.2
112.0
269.5
0.5
273.6
3.6
346.9
73.4
240.0
0.4
242.8
2.4
292.5
49.7
1
Includes abandonment and reclamation costs.
Reconciliation of Gross Reserves by Principal Product Type, as of December 31, 2016
December 31, 2015
Acquisition
Disposition
Extension
Technical revisions
1
December 31, 2016
Production
Light, Medium and Heavy Oil
and Natural Gas Liquids
Natural Gas
Boe
Proved
5,576.6
(MBbl)
Proved plus
Probable
7,334.1
(MBbl)
Proved
323,254.6
(MMcf)
Proved plus
Probable
428,803.0
(MMcf)
Proved
59,452.4
(MBoe)
Proved Plus
Probable
78,701.3
(MBoe)
19.2
(1,780.1)
1.4
174.2
3,377.6
(613.7)
23.3
(2,219.3)
71.8
0.1
4,496.2
(613.7)
1,143.2
(756.7)
169.8
24,445.6
302,540.7
(45,715.8)
1,492.5
(920.0)
1,473.7
13,502.0
398,635.5
(45,715.8)
209.7
(1,906.2)
29.7
4,248.5
53,801.1
(8,233.0)
272.1
(2,372.6)
317.4
2,250.5
70,935.6
(8,233.0)
1
The production shown in the above reconciliation includes production from the acquisitions as of the closing dates.
Finding, Development and Acquisition (“FD&A”) Costs 1
Pine Cliff has been developing its asset base, primarily through acquisitions. Over the past three years, the Company has incurred the
following FD&A costs, including changes in future development capital:
$/Boe
(1)
2016
(2)
2015
(2)
(2)
2014
3 year average
Proved Reserves
$/Mcfe
Proved plus probable reserves
Proved Reserves
0.01
0.33
0.00
5.36
4.58
0.89
7.76
7.06
1.29
4.60
4.32
0.77
1
Proved plus probable reserves
0.05
2016 FD&A costs, including changes in future development capital, are calculated as the aggregate of development capital plus acquisition capital
0.76
1.18
0.72
and excluding disposition capital plus the change in future development capital dividend by the change in total reserves for the period, excluding
dispositions and production.
2
FD&A costs are calculated as the aggregate of development capital plus acquisition capital, net of dispositions, plus the change in future development
capital for the period divided by the change in total reserves for the period, excluding production.
4
PINE CLIFF ENERGY LTD.
RESERVES INFORMATION
2016
Pine Cliff has incurred the following FD&A costs, excluding changes in future development capital:
$/Boe
(3)
2016
(4)
2015
(4)
(4)
2014
3 year average
Proved Reserves
$/Mcfe
Proved plus probable reserves
1.86
2.94
5.26
4.14
9.89
7.67
5.23
4.28
0.31
Proved Reserves
Proved plus probable reserves
0.49
2016 FD&A costs, including changes in future development capital, are calculated as the aggregate of development capital plus acquisition capital
0.88
0.69
1.65
1.28
0.87
0.71
3
and excluding disposition capital dividend by the change in total reserves for the period, excluding dispositions and production.
4
FD&A costs are calculated as the aggregate of development capital plus acquisition capital, net of dispositions for the period divided by the change in
total reserves for the period, excluding production.
Commodity Prices
The Commodity prices used in the above calculations of reserves are as follows:
1
WTI Oil (US$/Bbl)
$C to US$ Foreign
1
exchange rate
Edmonton Light Crude Oil
1
AECO Gas
1
(Cdn$/Bbl)
(Cdn$/MMBtu)
Year
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
55.00
58.70
62.40
69.00
75.80
77.30
78.80
80.40
82.00
83.70
85.30
87.00
88.80
90.60
92.40
1.33
1.29
1.25
1.21
1.18
1.18
1.18
1.18
1.18
1.18
1.18
1.18
1.18
1.18
1.18
69.80
72.70
75.50
81.10
86.60
88.30
90.00
91.80
93.70
95.60
97.40
99.40
101.40
103.50
105.50
3.40
3.15
3.30
3.60
3.90
3.95
4.10
4.25
4.30
4.40
4.50
4.60
4.65
4.75
4.85
+2.0%/yr
+2.0%/yr
1.18
1
Source: McDaniel & Associates Consultants Ltd. Price forecasts, effective January 1, 2017
Thereafter
+2.0%/yr
Please refer to the attached Management’s Discussion and Analysis for Reader Advisories regarding forward-looking information, non-IFRS measures and oil and gas measurements and
definitions. This Reserves Information should be read in conjunction with the audited consolidated financial statements of Pine Cliff Energy Ltd. together with Management’s Discussion and
Analysis and Annual Information Form for the year ended December 31, 2016, which can be found on www.sedar.com and is subject to the same cautionary statements as set out therein.
5
PINE CLIFF ENERGY LTD.
INTRODUCTION
MANAGEMENT’S DISCUSSION AND ANALYSIS
2016
MD&A
”) is a review of the operations and current financial position for the
The following Management’s Discussion and Analysis (“
”) and should be read in conjunction with the
year ended December 31, 2016, for Pine Cliff Energy Ltd. (“
audited consolidated financial statements as at and for the years ended December 31, 2016 and 2015, together with the notes related
”). The Financial Statements have been prepared in accordance with International Financial
thereto (the “
Reporting Standards (“
”). Additional information relating to the Company, including the Company’s Annual Information Form,
may be found on www.sedar.com and by visiting Pine Cliff’s website at www.pinecliffenergy.com.
Financial Statements
IFRS
” or the “
Pine Cliff
Company
TSX
PNE
Pine Cliff’s head office is based in Calgary, Alberta, Canada. Common shares of the Company are listed for trading on the Toronto
READER ADVISORIES
Stock Exchange (“
”) under the symbol “
”.
NON-IFRS MEASURES
FORWARD LOOKING INFORMATION
This MD&A contains financial measures that are not defined under IFRS and forward-looking statements. Please refer to the sections
Other Measurements
titled “
” and “
”.
All amounts herein are presented in Canadian dollars unless otherwise specified. All references to C$ or $ are to Canadian dollars
and references to US$ are to United States dollars.
Bbl
Mcfe
Mcf
”) using a ratio of six (6) thousand cubic feet to one (1) Bbl. Natural gas volumes recorded in thousand cubic feet (“
”) and are converted to a thousand cubic feet equivalent
Natural gas liquids and oil volumes are recorded in barrels of oil (“
”) are
(“
converted to barrels of oil equivalent (“
”) 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 term Boe
or Mcfe may be misleading, particularly if used in isolation.
SENSITIVITIES
Boe
Pine Cliff’s results are sensitive to changes in the business environment in which it operates. The following chart shows the
Company’s sensitivity to key commodity price variables and interest rates. The sensitivity calculations are performed independently
showing the effect of the change of one variable; all other variables are held constant.
Business environment sensitivities
2
Crude oil price - Edmonton par ($/Bbl)
2
Natural gas price -AECO ($/Mcf)
1
Impact on annual funds flow from operations
Change
$000s
3
$ per share
$1.00
420
0.00
$0.10
4,180
0.01
4
Interest rate on variable rate debt
1
This analysis does not adjust for changes in working capital and uses current royalty rates.
2
Pine Cliff has prepared this analysis using its fourth quarter of 2016 production volumes annualized for twelve months.
3
Based on the fourth quarter of December 31, 2016 basic weighted average shares outstanding of 306,976,657.
4
Based on December 31, 2016 bank debt of $30.9 million, 2018 Notes, as defined herein, of $6.0 million, and 2018 Related Party Notes, as defined
herein, of $5.0 million.
1.0%
420
0.00
Fourth quarter 2016 highlights
Significant highlights from the fourth quarter of 2016 are as follows:
•
•
•
•
•
•
•
achieved record quarterly funds flow from operations of $15.0 million ($0.05 per basic share), 129% higher than the $6.6
million ($0.03 per basic share) in the fourth quarter of 2015;
achieved record revenue of $35.2 million, 73% higher than the $20.3 million in the fourth quarter of 2015;
achieved earnings of $3.2 million ($0.01 per basic share) compared to a loss of $3.3 million (($0.01) per basic share) in the
fourth quarter of 2015;
increased production by 43% to 21,525 Boe/d (93% natural gas) from 15,051 Boe/d (94% natural gas) in the fourth
quarter of 2015 (a 12% increase on a per basic share basis);
closed the disposition of a non-core oil asset for total proceeds of $31.7 million;
continued to strengthen our balance sheet, paying down $40.9 million of bank debt, ending the year with $30.9 million in
bank debt; and
reduced net debt by $46.1 million, ending the year with $64.2 million in net debt.
6
PINE CLIFF ENERGY LTD.
PINE CLIFF’S STRATEGIC OBJECTIVES AND ACQUISITIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS
2016
WCSB
Pine Cliff is a natural gas focused, exploration and production company operating in the Western Canadian Sedimentary Basin
”). The Company’s strategy is to deliver long-term value to shareholders by building upon and developing its existing
(“
portfolio of long-life, low decline natural gas assets, while also actively seeking counter cyclical growth opportunities to acquire
natural gas assets.
The Company has been active in the acquisition and divestiture market since January 2012, with the most recent transactions
including the:
May
•
•
•
•
”);
2015 Acquisition
Acquisition of certain shallow natural gas assets in the Southern core area and Edson core area in May 2015 (the “
December 2015 Acquisition
Acquisition of certain oil and natural gas assets in the Viking and Ghost Pine areas of Central Alberta in December 2015 (the
“
Disposition of certain fee lands and royalty interests in June 2016 (the “
Disposition of non-core oil assets in December 2016 (the “
December 2016 Disposition
Royalty Disposition
”); and
”);
”).
Management believes the assets that have been assembled to date, and the cash flow from these assets, provide Pine Cliff with a
strong foundation from which to generate long-term growth in shareholder value.
PINE CLIFF’S OPERATIONS
Pine Cliff’s main core areas of production are as follows:
•
Central Area – Pine Cliff holds low decline assets in the Ghost Pine/Three Hills and Camrose/Viking areas of Central Alberta
with average mineral working interests of 76% and 79% respectively. Both areas are characterized with multiple stacked
productive horizons. Ghost Pine/Three Hills production and development opportunities are mostly from the late
Cretaceous Horse Shoe Canyon Edmonton group and the stacked Belly River sands. The majority of the Viking production
comes from the Viking shore face sands but there is potentially material upside in the Colorado Shale which is a deep water
siltstone. Pine Cliff has identified 892 gross (525 net) potential vertical drilling locations in the Ghost Pine/Three Hills
Horseshoe Canyon Coal Bed Methane fairway, 138 gross (138 net) potential horizontal gross drilling locations in the Viking
Colorado Shale and additional recompletion opportunities in this area.
Southern Area – Pine Cliff holds an approximate 85% working interest in a number of low decline, producing shallow gas
assets mainly in Southeast Alberta and Southwest Saskatchewan. The majority of the producing zones in these properties
are from the upper Cretaceous Milk River, Medicine Hat and Second White Specks sands, which together constitute a
meaningful interest for Pine Cliff in some of the largest gas fields in Western Canada. These fields are characterized by their
shallow depths, low-permeability, clay-rich sands and long production life.
Edson Area – Pine Cliff holds an average 42% working interest in a group of liquid rich natural gas assets located near the
town of Edson, Alberta. In addition to the producing assets, Pine Cliff has, in aggregate, 42 gross (11.9 net) sections of
undeveloped land with over 91 gross (33 net) potential gross drilling locations. The Edson Assets are “deep basin” assets
with multi-zone potential, many of which can be exploited using horizontal drilling technology.
•
•
•
Other Areas – Pine Cliff also has working interests in non-core and non-operated properties in the Sundance, Harmattan,
and Garrington areas of Alberta, and in the Cadillac area of Southern Saskatchewan.
GUIDANCE FOR 2017
The Pine Cliff 2017 guidance provides information as to management’s expectation for results of operations for 2017. Readers are
cautioned that the 2017 guidance may not be appropriate for other purposes. The Company’s expected results are sensitive to
fluctuations in the business environment and may vary accordingly. See “
FORWARD-LOOKING INFORMATION
”.
7
PINE CLIFF ENERGY LTD.
Production1
MANAGEMENT’S DISCUSSION AND ANALYSIS
2016
Barrels of oil equivalent per day (Boe/d)
2017 Guidance
21,250 – 21,750
127,500 – 130,500
Million of cubic feet equivalent per day (Mcfe/d)
1
Includes results for acquisitions and excludes results for dispositions from the closing dates.
Year ended
December 31, 2016
22,495
134,968
Pine Cliff is projecting 2017 production volumes of 21,250 – 21,750 Boe/d (127,500 – 130,500 Mcfe/d), weighted approximately
94% towards natural gas.
Capital Expenditures
($000s)
Total, excluding acquisitions
2017 Guidance
18,500
Year ended
December 31, 2016
9,159
Pine Cliff's board of directors has approved a capital budget of $18.5 million for 2017. Pine Cliff anticipates directing $13.5 million of
the capital budget to drilling in the Edson and Central areas of Alberta and conducting recompletions in various areas. Additionally,
Pine Cliff anticipates spending approximately $3.3 million on major maintenance capital and $1.7 million on facility and other capital.
Pine Cliff will monitor its capital spending throughout the year, and it may be modified depending on commodity prices, drilling
results and non-operated drilling activity.
Pine Cliff will continue to focus on additional opportunities to enhance shareholders’ long term value which could include additional
asset acquisitions or dispositions.
Operating and General & Administrative Expenditures
Pine Cliff anticipates operating expenses to average approximately $9.20 per Boe ($1.53 per Mcfe) in 2017, and general &
administrative expenses to average approximately $1.05 per Boe ($0.18 per Mcfe) in 2017.
QUARTERLY INFORMATION
BENCHMARKS PRICES
Pine Cliff’s financial results are significantly influenced by fluctuations in commodity prices, including price differentials. The
following table shows select market benchmark average prices and foreign exchange rates in the last eight quarters to assist in
understanding the volatility in prices and foreign exchange rates that have impacted Pine Cliff’s business.
Q4-2016
Q3-2016
Q2-2016 Q1-2016 Q4-2015
Q3-2015 Q2-2015 Q1-2015
Natural gas
NYMEX (US$/Mmbtu)
Crude oil
AECO Daily 5A (C$/Mcf)
2
1
WTI (US$/Bbl)
Foreign exchange
Edmonton light (C$/Bbl)
2.95
3.08
49.29
61.61
1.334
2.78
2.31
44.94
54.71
1.95
1.39
2.05
1.82
2.28
2.45
2.77
2.89
2.67
2.64
2.96
2.74
45.59
54.71
33.45
40.69
42.18
52.87
46.43
56.17
57.94
67.63
48.63
51.78
US$/C$
1
2
1.309
1.305
Mmbtu is the abbreviation for millions of British thermal units. One Mcf of natural gas is approximately 1.02 Mmbtu.
AECO prices are quoted in $/Gigajoule. Price has been converted from $/GJ to $/Mcf by multiplying by 1.05.
1.375
1.289
1.335
1.229
1.241
North American natural gas benchmarks continued to recover in the three months ended December 31, 2016, increasing by 6% from
the three months ended September 30, 2016, and increasing by 29% from the three months ended December 31, 2015. The increase
in prices in the second half of 2016 is a result of decreased natural gas supply and increasing natural gas demand from coal to natural
gas shifting, LNG exports leaving North America and increasing exports to Mexico from the US. The price realized by the Company
for natural gas production from Western Canada is determined primarily by the Alberta price hub AECO/NIT since all of Pine Cliff’s
natural gas production is in Alberta and Saskatchewan.
8
PINE CLIFF ENERGY LTD.
MANAGEMENT’S DISCUSSION AND ANALYSIS
2016
The average WTI benchmarks and Edmonton light crude increased by 13% and 10% in the three months ended December 31, 2016
the three months ended September 30, 2016. Oil prices continue be range bound as an oversupplied market, and increases in
production from the shale plays in the United States have countered production cuts that were announced by OPEC in late 2016.
Canadian crude prices are based upon refiner postings at Edmonton, Alberta and are linked to WTI through transportation tariffs to
common markets and the foreign exchange rate. Pine Cliff’s oil is sold at a discount to the Edmonton Light crude oil price as a result
of quality differences.
The supply and demand dynamics for certain NGL components such as ethane, propane, butane, and condensate in the recent past
has impacted the relationship between the price of NGLs and the price of oil. In the three months ended December 31, 2016, the
realized price of Pine Cliff’s NGL’s was $37.08, which was 56% of WTI.
Pine Cliff does not currently utilize a hedging strategy and thereby has not eliminated any of the upside, or potential downside, of
price fluctuations for its shareholders. The Company continues to monitor the fluctuating commodity prices closely and their impact
on our results and strategies.
QUARTERLY TRENDS AND SELECTED FINANCIAL AND OPERATIONS INFORMATION1
FINANCIAL
($000s, unless otherwise indicated)
Total revenue
Cash flow from operating activities
Cash flow from operating activities
per share – basic and diluted
($/share)
2
Funds flow from operations
Impairments
Earnings (loss)
Earnings (loss) per share – basic
and diluted ($/share)
Capital expenditures
Acquisitions, after adjustments
Capital dispositions
3
Net debt
Weighted average common shares
outstanding:
Basic
PRODUCTION VOLUMES
Diluted
Natural gas (Mcf/d)
Crude oil (Bbls/d)
Natural gas liquids (Bbls/d)
Average sales volumes (Boe/d)
PRICES AND NETBACKS
Average sales volumes (Mcfe/d)
Total oil and gas sales ($/Boe)
4
Operating netback ($/Boe)
5
Corporate netback ($/Boe)
Total oil and gas sales ($/Mcfe)
4
Operating netback ($/Mcfe)
Q4
35,189
12,632
0.05
15,026
4,648
3,210
0.01
3,356
(1,029)
(33,032)
64,224
306,977
307,095
120,540
602
833
21,525
129,150
19.35
8.81
7.59
3.23
1.47
1.27
2016
Q3
Q2
Q1
Q4
Q3
Q2
Q1
2015
30,067
4,606
19,905
(4,371)
25,891
9,622
20,258
973
19,517
6,617
16,784
4,182
17,608
8,996
0.02
6,972
-
(11,558)
(0.04)
1,437
(603)
(5,378)
110,312
(0.01)
(3,655)
-
(25,862)
(0.08)
749
240
(24,702)
122,032
0.00
1,398
-
(16,177)
(0.05)
3,617
585
-
143,587
0.03
6,550
-
(3,300)
0.03
7,507
7,586
(10,697)
(0.01)
1,875
179,540
-
141,770
(0.05)
2,051
(166)
-
35,208
0.02
5,555
-
(4,757)
( 0.02)
447
13,304
-
38,405
0.03
6,206
-
(5,503)
(0.03)
2,886
387
-
31,279
306,878
306,878
305,928
305,928
305,512
305,512
240,983
240,983
236,920
236,920
236,022
236,022
234,446
234,446
125,082
803
871
22,521
135,126
124,966
886
933
22,647
135,880
129,085
723
1,060
23,297
139,783
85,233
264
581
15,051
90,303
70,843
128
569
12,504
75,025
67,502
119
445
11,814
70,886
68,208
128
525
12,021
72,126
15.64
5.08
3.36
2.61
0.85
10.04
(0.02)
(1.76)
1.67
-
12.84
2.68
0.66
2.14
0.45
15.56
6.16
4.74
2.59
1.03
18.19
7.92
6.52
3.03
1.32
16.12
7.08
5.19
2.69
1.18
17.37
7.33
5.72
2.90
1.22
5
Corporate netback ($/Mcfe)
1
Includes results for acquisitions and excludes results for dispositions from the closing dates.
2
Funds flow from operations is a non-IFRS measure that represents the total of funds provided by operating activities, before adjusting for changes in
non-cash working capital, and decommissioning obligations settled.
(0.29)
0.11
1.09
0.56
0.79
0.95
0.87
9
PINE CLIFF ENERGY LTD.
MANAGEMENT’S DISCUSSION AND ANALYSIS
2016
3
Net debt is a non-IFRS measure calculated as the sum of bank debt, subordinated promissory notes at the principal amount, amounts due to related
party, and trade and other payables less trade and other receivables, cash, prepaid expenses and deposits and investments.
4
Operating netback is a non-IFRS measure calculated as the Company’s total revenue, less operating expenses, divided by the Boe production of the
Company for the period.
5
Corporate netback is a non-IFRS measure calculated as the Company’s operating netback, less general and administrative expenses, interest and
bank charges plus finance and dividend income, divided by the Boe production of the Company.
Over the past eight quarters, Pine Cliff’s revenues, cash and funds flow from operating activities and earnings (loss) have fluctuated
due to changes in commodity prices and sales volumes. Earnings (loss) also fluctuates with non-cash expenditures, including
depletion, depreciation and impairments. Selected highlights for the past eight quarters are presented below:
•
•
•
•
•
Average sales volumes increased from the third quarter in 2015 to the first quarter of 2016 as a result of the May 2015
Acquisition and the December 2015 Acquisition. Sales volumes decreased in the second to fourth quarters of 2016 related
to natural production declines and dispositions in the third and fourth quarters of 2016, partially offset by production
additions from modest capital spending in 2016.
Total revenue of $35.2 million in the fourth quarter of 2016 was the highest in the past eight quarters due to higher natural
gas prices and was higher than the first quarter of 2015 to the third quarter of 2015 due to higher production from the May
2015 and the December 2015 Acquisitions, partially offset by production decreases related to dispositions in the third and
fourth quarters of 2016 and lower realized crude oil and natural gas prices.
Funds flow from operating activities of $15.0 million in the fourth quarter of 2016 was the highest in the past eight quarters
as a result of higher natural gas prices.
Earnings of $3.2 million in the fourth quarter of 2016 was the highest in the past eight quarters as a result of higher natural
gas prices.
In the fourth quarter of 2016, the Company recorded an impairment to exploration and evaluation assets of $4.6 million
relating to the Southern Assets. In the third quarter of 2015, the Company recorded an impairment to property, plant and
equipment of $7.6 million relating to the Edson Assets.
SALES VOLUMES
Total sales volumes by product
2016
Three months ended December 31
2016
Year ended December 31
Natural gas (Mcf)
Crude oil (Bbls)
NGLs (Bbls)
Total Boe
Total Mcfe
Natural gas weighting
Average daily sales volumes by product
Natural gas (Mcf/d)
Crude oil (Bbls/d)
NGLs (Bbls/d)
Total (Boe/d)
Total (Mcfe/d)
11,089,678
55,418
76,611
1,980,309
11,881,852
93%
2015
% Change
7,841,432
24,259
53,419
1,384,583
8,307,500
94%
41
128
43
43
43
(1)
45,715,776
275,691
338,025
8,233,012
49,398,072
93%
2015
% Change
26,639,158
58,408
193,616
4,691,884
28,151,302
95%
72
372
75
75
75
(2)
2015
2016
Three months ended December 31
120,540
602
833
21,525
129,150
% Change
85,233
264
581
15,051
90,303
41
128
43
43
43
2016
Year ended December 31
124,906
753
924
22,495
134,968
2015
% Change
72,984
160
530
12,854
77,124
71
371
74
75
75
Average daily sales volumes by area
2016
Three months ended December 31
2016
Year ended December 31
Central Assets (Boe/d)
Southern Assets (Boe/d)
Edson (Boe/d)
Other properties (Boe/d)
Total (Boe/d)
Total (Mcfe/d)
10
PINE CLIFF ENERGY LTD.
10,099
9,264
1,932
230
21,525
129,150
2015
% Change
2,425
10,301
2,049
276
15,051
90,303
316
(10)
(6)
(17)
43
43
10,662
9,487
2,081
265
22,495
134,968
2015
% Change
611
10,125
1,902
216
12,854
77,124
1645
(6)
9
23
75
75
MANAGEMENT’S DISCUSSION AND ANALYSIS
2016
Pine Cliff’s sales volumes increased 43% to 21,525 Boe/d (129,150 Mcfe/d) and 75% to 22,495 Boe/d (134,968 Mcfe/d) in the three
months and year ended December 31, 2016, as compared to the same periods of 2015. The increases were primarily the result of the
May 2015 Acquisition and the December 2015 Acquisition along with production additions from modest 2015 and 2016 capital
programs, slightly offset by minor shut-in production and property dispositions. Base production continues to perform well in all
areas with an estimated corporate decline rate of approximately 10%.
OIL AND GAS SALES
Oil and Gas Sales
($000s)
Natural gas
Crude oil
NGL
2016
Three months ended December 31
32,753
2,722
2,841
2015
% Change
19,348
1,069
1,131
69
155
151
38,316
Total oil and gas sales
Benchmark Pricing
21,548
78
2016
Year ended December 31
97,331
10,314
10,997
118,642
2015
% Change
70,933
2,819
4,841
78,593
37
266
127
51
2016
Three months ended December 31
2016
Year ended December 31
Natural gas
NYMEX (US$/Mmbtu)
Crude oil
AECO Daily 5A (C$/Mcf)
2
1
WTI (US$/Bbl)
Foreign exchange
Edmonton light (C$/Bbl)
2.95
3.08
49.29
61.61
1.334
2015
% Change
2.28
2.45
42.18
52.87
29
26
17
17
2.43
2.15
43.32
52.93
1.326
1
US$/C$
Mmbtu is the abbreviation for millions of British thermal units. One Mcf of natural gas is approximately 1.02 Mmbtu.
AECO prices are quoted in $/Gigajoule. Price has been converted from $/GJ to $/Mcf by multiplying by of 1.05.
1.335
-
2
Realized prices
2015
% Change
2.67
2.68
48.80
57.11
1.278
(9)
(20)
(11)
(7)
4
$ per unit
Natural gas ($/Mcf)
Crude oil ($/Bbl)
NGL ($/Bbl)
Total ($/Boe)
Total ($/Mcfe)
2016
Three months ended December 31
2016
Year ended December 31
2.95
49.12
37.08
19.35
3.22
2015
% Change
2.47
44.07
21.17
15.56
2.59
19
11
75
24
24
2.13
37.41
32.53
14.41
2.40
2015
% Change
2.66
48.26
25.00
16.75
2.79
(20)
(22)
30
(14)
(14)
Oil and gas sales in the three months ended December 31, 2016 increased 78% to $38.3 million from $21.5 million in the three
months ended December 31, 2015, with $11.6 million of this increase attributable to higher production and sales volumes and $5.2
million due to higher realized prices.
For the three months ended December 31, 2016, Pine Cliff’s realized natural gas price was $2.95 per Mcf, 19% higher than in the
corresponding period of the prior year primarily as a result of an increase in the AECO price. For the three months ended December
31, 2016, Pine Cliff’s realized oil and NGL prices were $49.12 and $37.08 per Bbl, compared to $44.07 and $21.17 per Bbl in the three
months ended December 31, 2015. The increases in oil and NGL prices were a result of a corresponding increase in the Edmonton
Light oil price. Pine Cliffs realized oil and NGL prices in the three months ended December 31, 2016, were 80% and 60% of
Edmonton Light compared to 83% and 40% in the three months ended December 31, 2015.
11
PINE CLIFF ENERGY LTD.
MANAGEMENT’S DISCUSSION AND ANALYSIS
2016
Oil and gas sales in the year ended December 31, 2016 increased by 51% to $118.6 million from $78.6 million in 2015 as a result of
higher production volumes partially offset by lower realized pricing. Natural gas sales represented 82% of total oil and gas sales in
the year ended December 31, 2016, as compared to 90% in the year ended December 31, 2015. The decline is mainly attributable to
20% lower natural gas prices in the year ended December 31, 2016 compared to December 31, 2015.
For the year ended December 31, 2016, Pine Cliff’s realized natural gas price was $2.13 per Mcf, 20% lower than in 2015 a result of a
decrease in the AECO price. For the year ended December 31, 2016, Pine Cliff’s realized oil and NGL prices were $37.41 and $32.53
per Bbl, compared to $48.26 and $25.00 per Bbl in the three months ended December 31, 2015. The decrease in oil and NGL prices
were as a result of a corresponding decrease in the Edmonton Light prices. For the year ended, December 31, 2016, Pine Cliff’s
realized oil and NGL prices were 71% and 61% of Edmonton Light compared to 84% and 44% in the year ended December 31, 2015.
ROYALTY REVENUE
($000s)
Total royalty revenue
2016
Three months ended December 31
2016
Year ended December 31
-
2015
% Change
50
(100)
1,111
2015
% Change
260
327
Royalty revenue for the year increased as compared to the same period of 2015, primarily as a result of the royalty stream from the
fee lands acquired in the December 2015 Acquisition. On June 29, 2016, Pine Cliff sold most of its fee title lands and other minor
overriding royalty interests (the “Royalty Assets”) for cash proceeds of $24.7 million.
ROYALTY EXPENSE
($000s)
Total royalty expense
$ per Boe
$ per Mcfe
% of oil and gas sales
2016
Three months ended December 31
3,145
2015
% Change
1.59
0.26
8%
1,432
1.03
0.17
7%
120
54
53
14
2016
Year ended December 31
8,821
1.07
0.18
7%
2015
% Change
5,083
1.08
0.18
6%
74
(1)
-
17
For the three months and year ended December 31, 2016, total royalty expense increased by 120% and 74% to $3.1 million and $8.8
million from $1.4 million and $5.1 million in the three months and year ended December 31, 2015. Royalty expense as a percentage
of oil and gas sales increased to 8% and 7% in the three months and year ended December 31, 2016, compared to 7% and 6% in the
three months and year ended December 31, 2015. The increase in royalty expense is a result of higher oil and gas sales and a higher
royalty rate due to the sale of fee title lands in June 2016.
OPERATING EXPENSES
($000s)
Total operating expenses
$ per Boe
$ per Mcfe
2016
Three months ended December 31
17,716
2015
% Change
8.95
1.49
11,648
8.41
1.40
52
6
6
2016
Year ended December 31
77,318
9.39
1.57
2015
% Change
40,591
8.65
1.44
90
9
9
Operating expenses increased by 52% and 90% to $17.7 million and $77.3 million for the three months and year ended December
31, 2016, as compared to $11.6 million and $40.6 million for the three months and year ended December 31, 2015, primarily as a
result of higher sales volumes, and increased operated assets acquired in the May 2015 Acquisition and the December 2015
Acquisition. On a per Boe basis, operating costs were $8.95 and $9.39 for the three months and year ended December 31, 2016, 6%
and 9% higher than the three months and year ended December 31, 2015, primarily as a result of higher cost production from the
December 2015 Acquisition.
Pine Cliff anticipates operating expenses to average approximately $9.20 per Boe ($1.53 per Mcfe) in 2017. Pine Cliff is committed to
continuously seeking to increase efficiencies and decrease field operating expenses.
12
PINE CLIFF ENERGY LTD.
GENERAL AND ADMINISTRATIVE EXPENSES (“G&A”)
MANAGEMENT’S DISCUSSION AND ANALYSIS
2016
($000s)
Gross G&A
Add: non-recurring transaction costs
Less: overhead recoveries
Total G&A expenses
$ per Boe
$ per Mcfe
2016
Three months ended December 31
1,662
-
(726)
2015
% Change
1,253
160
(54)
33
(100)
1244
936
0.47
0.08
1,359
0.98
0.16
(31)
(52)
(50)
2016
Year ended December 31
8,465
-
(1,506)
6,959
0.85
0.14
2015
% Change
5,768
283
(212)
5,839
1.24
0.21
47
(100)
610
19
(31)
(33)
Despite production increasing by 75% in the year ended December 31, 2016, as compared to the year ended December 31, 2015,
G&A only increased 19%, reflecting cost efficiencies, economies of scale and reducing or eliminating discretionary expenses. The
19% increase in G&A relates to increased staffing requirements, expenses related to the TSX listing, and other incremental G&A costs
associated with the integration of the December 2015 Acquisition, somewhat offset by higher overhead recoveries charged to
partners associated with the December 2015 Acquisition.
G&A decreased by 31% to $0.9 million in the three months ended December 31, 2016, from $1.4 million in the three months ended
December 31, 2015, primarily as a result higher overhead recoveries charged to partners associated with the December 2015
Acquisition.
On a per Boe basis, G&A for the three months and year ended December 31, 2016, decreased by 52% and 31% to $0.47 and $0.85,
from $0.98 and $1.24 for the same periods of 2015. The decreases on a per Boe basis were primarily as a result of higher production
volumes and increases in overhead recoveries, which more than offset the increase in G&A expenses.
Pine Cliff anticipates G&A expenses to average approximately $1.05 per Boe ($0.18 per Mcfe) in 2017.
SHARE-BASED PAYMENTS
($000s)
Total share-based payments
$ per Boe
$ per Mcfe
2016
Three months ended December 31
2016
Year ended December 31
791
0.40
0.07
2015
% Change
832
0.60
0.10
(5)
(33)
(30)
3,196
0.39
0.06
2015
% Change
3,383
0.72
0.12
(6)
(46)
(50)
The Company has an equity settled stock-based compensation plan. Stock options are granted to certain officers, directors,
employees and consultants, with the number, term and vesting period of the options granted being determined at the discretion of
the Company’s board of directors to a maximum of 10% of outstanding Pine Cliff common shares (“
Common Shares
”).
During the year ended December 31, 2016, Pine Cliff granted 12,030,000 stock options to purchase Common Shares at a weighted
average exercise price of $1.12. As at December 31, 2016, the Company had 22,773,431 stock options outstanding (December 31,
2015 – 17,237,700), representing 7.4% of Common Shares outstanding. In the three months and year ended December 31, 2016,
Pine Cliff recorded share-based payments expense of $0.8 million and $3.2 million, (three months and year ended December 31,
2015 - $0.8 million and $3.4 million), related to the stock options outstanding.
13
PINE CLIFF ENERGY LTD.
DEPLETION, DEPRECIATION AND IMPAIRMENT
MANAGEMENT’S DISCUSSION AND ANALYSIS
2016
($000s)
Depletion and depreciation
$ per Boe
$ per Mcfe
Impairment of oil and gas assets
Impairment of exploration and evaluation
assets
Total depletion, depreciation and
impairment
$ per Boe
$ per Mcfe
2016
Three months ended December 31
12,877
2015
% Change
6.50
1.08
-
4,648
17,525
8.85
1.47
10,716
7.74
1.29
-
-
10,716
7.74
1.29
20
(16)
(16)
-
-
64
14
14
2016
Year ended December 31
64,387
7.82
1.30
-
4,648
69,035
8.39
1.40
2015
% Change
45,831
9.77
1.63
7,586
-
53,417
11.38
1.90
40
(20)
(20)
(100)
-
29
(26)
(26)
Total depletion and depreciation expense, excluding impairments, increased 20% and 40% for the three-months and year ended
December 31, 2016, as compared to the same periods in 2015. This increase is primarily due to higher production in the current
year periods.
On a per Boe basis, depletion and depreciation, excluding impairments, decreased 16% and 20% to $6.50 and $7.82 for the three
months and year ended December 31, 2016, as compared to $7.74 and $9.77 in the same periods of 2015, as a result of lower per unit
depletion rates for the assets acquired in the December 2015 Acquisition.
For the purposes of determining whether impairment of assets has occurred, the extent of any impairment or its reversal,
management exercises their judgment in estimating future cash flows for the recoverable amount, being the higher of fair value less
costs to sell and value in use. These key judgments include estimates about recoverable reserves, forecast benchmark commodity
prices, royalties, operating costs and discount rates.
CGUs
”) being the Southern CGU, Edson CGU, Central Gas
As at December 31, 2016 the Company has four Cash Generating Units (“
CGU, and Coal Bed Methane CGU. The Company disposed of its Central Oil CGU during the year ended December 31, 2016.
Impairment testing of all CGUs was performed as at December 31, 2016. The Company determined the fair value less costs to sell for
all four CGUs exceeds the carrying amounts as at December 31, 2016.
In the three months and year ended December 31, 2016, the Company recorded an impairment to exploration and evaluation assets
of $4.6 million relating to the Southern CGU as it was determined that the assets would not become commercially viable at existing
price forecasts and therefore the carrying amount exceeded the recoverable amount.
FINANCE EXPENSES
($000s)
Accretion on decommissioning liabilities
Accretion on subordinated promissory notes
Interest and bank charges
Total finance expenses
$ per Boe
$ per Mcfe
2016
Three months ended December 31
1,469
53
1,511
2015
% Change
701
-
701
110
100
116
3,033
1.53
0.26
1,402
1.01
0.17
116
51
53
2016
Year ended December 31
5,189
82
7,034
12,305
1.49
0.25
2015
% Change
3,532
-
1,919
5,451
1.16
0.19
47
100
267
126
28
32
In the three months and year ended December 31, 2016, Pine Cliff incurred finance expenses of $3.0 million and $12.3 million, as
compared to $1.4 million and $5.5 million in the same periods of 2015. Total finance expenses increased in the three months ended
December 31, 2016, as compared to the same periods of 2015 due to increased interest and bank charges from higher debt levels,
and one-time costs associated with the borrowing base redetermination and the subordinated promissory notes. During 2016, Pine
Cliff issued subordinated promissory notes and a related party subordinated promissory note, which decreased the Company’s bank
debt. Please refer to the “
” sections for additional information.
CAPITAL RESOURCES
LIQUIDITY
” and “
14
PINE CLIFF ENERGY LTD.
DIVIDEND INCOME
MANAGEMENT’S DISCUSSION AND ANALYSIS
2016
($000s)
Total dividend income
$ per Boe
$ per Mcfe
2016
Three months ended December 31
2016
Year ended December 31
18
0.01
-
2015
% Change
92
0.07
0.01
(80)
(86)
(100)
120
0.01
-
2015
% Change
397
0.08
0.01
(70)
(88)
(100)
During the years ended December 31, 2016 and 2015, Pine Cliff received $0.1 million and $0.4 million in dividends from its
investments in two public dividend paying companies. As at December 31, 2016, the Company had an investment in one public
company, which was received as partial consideration for properties disposed of during 2016.
Bonterra
The Company had an investment in Bonterra Energy Corp. (“
Ltd. which was sold in the second quarter of 2016 for cash proceeds of $5.4 million.
OPERATING AND CORPORATE NETBACKS
”) acquired through the acquisition of Geomark Exploration
The components of the operating and corporate netback are summarized as follows:
2016
Three months ended December 31
2016
Year ended December 31
2015
$ Change
2015
$ Change
($ per Boe)
Oil and gas sales
Royalty income
Royalty expense
Operating expenses
Operating netback
General and administrative expense
Interest and bank charges
Finance and dividend income
Corporate netback
Operating netback ($ per Mcfe)
Corporate netback ($ per Mcfe)
19.35
-
(1.59)
(8.95)
8.81
(0.47)
(0.76)
0.01
7.59
1.47
1.27
15.56
0.04
(1.03)
(8.41)
6.16
(0.98)
(0.51)
0.07
4.74
1.03
0.79
3.79
(0.04)
(0.56)
(0.54)
2.65
0.51
(0.25)
(0.06)
2.85
0.44
0.48
14.41
0.13
(1.07)
(9.39)
4.08
(0.85)
(0.85)
0.01
2.39
0.68
0.40
16.75
0.06
(1.08)
(8.65)
7.08
(1.24)
(0.41)
0.08
5.51
1.18
0.92
(2.34)
0.07
0.01
(0.74)
(3.00)
0.39
(0.44)
(0.07)
(3.12)
(0.50)
(0.52)
Pine Cliff’s corporate netback increased to $7.59 per Boe for the three months ended December 31, 2016, from $4.74 per Boe in the
three months ended December 31, 2015. This increase is primarily due to higher commodity prices and lower G&A expenses,
somewhat offset by higher royalty and operating expenses compared to the same period of 2015.
For the year ended December 31, 2016, Pine Cliff’s corporate netback decreased to $2.39 per Boe from $5.51 per Boe in the year
ended December 31, 2015. This decrease is primarily a result of lower commodity prices and higher operating costs, interest and
bank charges, partially offset by reduced G&A expenses, as compared to 2015.
INCOME TAXES
For the three months and year ended December 31, 2016, Pine Cliff deferred tax recoveries increased by 234% and 8% to $8.0
million and $11.1 million from $2.4 million and $10.3 million in the three months and year ended December 31, 2015. The 2016
recovery is primarily related to temporary differences arising from the book basis of Pine Cliff’s assets and liabilities relative to the
tax basis.
Pine Cliff has approximately $407.9 million in tax pools at December 31, 2016, (December 31, 2014 – $480.8 million) available for
future use as deductions from taxable income. The decrease in tax pools is mainly a result of the reduction to tax pools from the sale
of assets during the year ended December 31, 2016.
15
PINE CLIFF ENERGY LTD.
The Company has the following tax pools, which may be used to reduce taxable income in future years, limited to the applicable rates
of utilization:
2016
MANAGEMENT’S DISCUSSION AND ANALYSIS
2016
Category of tax pool
Undepreciated capital costs
Canadian oil and gas property expenditures
Canadian development expenditures
Canadian exploration expenditures
Eligible capital expenditures (CEC)
Share issue costs
1
Non-capital losses carried forward
2
Capital losses carried forward
Rate of Utilization (%)
20 - 100
10
30
100
7
20
100
50,982
261,452
10,537
74
113
4,968
77,703
2,027
407,856
1
Non-capital losses expire between the years 2030 and 2036.
2
The capital losses carried forward can only be claimed against taxable capital gains.
The Company does not expect to pay any cash taxes in 2017 and 2018, subject to substantial changes to projected future commodity
prices.
EARNINGS (LOSS)
Year to year end variance analysis:
Loss for the year ended December 31, 2015
($000s)
Price variance
Volume variance
Royalty expenses
Operating expenses
General and administrative
Share-based payments
Depletion and depreciation
Finance expenses
Realized loss in investments
Gain on disposition
Finance and dividend income
Deferred tax recovery (expense)
Impairment of property, plant, and equipment
Loss for the year ended December 31, 2016
Impairment of exploration and evaluation assets
(24,257)
(10,655)
51,555
(3,738)
(36,727)
(1,120)
187
(18,556)
(6,854)
(4,270)
518
(277)
869
7,586
(50,387)
(4,648)
to $50.4 million as compared to a net loss
During the year ended December 31, 2016, Pine Cliff’s net loss increased by $26.1 million
of $24.3 million during the year ended December 31, 2015. The increase in net loss is mainly a result of lower commodity prices,
higher depletion and depreciation, royalty and operating expenses, partially offset by increased sales volumes.
Other comprehensive earnings
Activity in other comprehensive earnings (“
and the realization of losses previously recorded in OCI for investments sold during 2016 of $6.3 million.
”) relates to the revaluation of investments held at December 31, 2016 of $0.3 million
OCI
16
PINE CLIFF ENERGY LTD.
FUNDS FLOW FROM OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS
2016
($000s)
Earnings (loss) for the period
Adjustments for:
Share-based payments
Accretion expense
Realized loss on sale of investments
Gain on disposition
Depletion, depreciation and
impairment
Deferred tax recovery
Funds flow from operations
Funds flow from operations ($/Boe)
Funds flow from operations ($/Mcfe)
2016
Three months ended December 31
3,210
791
1,522
-
-
17,525
(8,022)
15,026
7.59
1.27
2015
(3,300)
832
701
-
-
10,716
(2,399)
6,550
4.74
0.79
2016
Year ended December 31
(50,387)
2015
3,196
5,271
4,270
(518)
69,035
(11,126)
19,741
2.39
0.40
(24,257)
3,383
3,532
-
-
53,417
(10,257)
25,818
5.51
0.92
Funds flow from operations, which represents cash flow used in operating activities before changes in non-cash working capital and
decommissioning obligations settled, was $15.0 million in the three months ended December 31, 2016, as compared to $6.6 million
in the same period of 2015. The increase in funds flow from operations is due to higher commodity prices and higher production
volumes somewhat offset by higher operating expenses, interest and bank charges.
Funds flow from operations was $19.7 million in the year ended December 31, 2016, compared to $25.8 million in 2015. The
decrease is due primarily to lower commodity prices, higher operating expenses, and interest and bank charges, partially offset by
increased production volumes.
CAPITAL EXPENDITURES, ACQUISITIONS AND DISPOSITIONS
($000s)
Exploration and evaluation assets
Oil and gas assets
Vehicles and administrative assets
Capital expenditures
Acquisitions, after adjustments
Dispositions
Total
2016
Year ended December 31
127
8,842
190
9,159
(807)
(63,112)
(54,760)
2015
1,338
5,417
504
7,259
193,065
-
200,324
Capital additions of $9.2 million in the year ended December 31, 2016, were primarily directed towards participation in drilling five
gross (1.5 net) wells in the Edson area, reactivations of approximately 20 wells that had been shut-in in the Southern Area and
recompletions of seven wells in the Central Area.
•
During 2016 Pine Cliff disposed of the following assets for aggregate proceeds of $63.1 million:
•
•
•
June 2016 – sold substantially all of the Company’s fee title lands and other minor overriding royalty interests , which were
mostly acquired in the December 2015 Acquisition, for cash proceeds of $24.7 million.
September 2016 – sold a non-core oil asset located in Central Alberta for cash proceeds of $5.4 million. These assets were
also acquired in the December 2015 Acquisition.
December 2016 – sold a non-core oil property, located in Central Alberta, for gross proceeds of $31.6 million consisting of
$26.7 million in cash and $4.9 million common shares in a TSX listed public company. These properties were also acquired
in the December 2015 acquisition.
Other minor dispositions for cash consideration of $1.3 million.
In 2015 Pine Cliff acquired the Central Area assets for $178.1 million and additional producing assets in the Edson Area and Southern
Area for $13.4 million. During the year ended December 31, 2016 Pine Cliff completed minor acquisitions of $1.1 million and
received ($1.9 million) of adjustments relating to acquisition that were closed in previous years.
17
PINE CLIFF ENERGY LTD.
RELATED PARTY TRANSACTIONS
Management services agreement
MANAGEMENT’S DISCUSSION AND ANALYSIS
2016
Pine Cliff had a management services agreement with Bonterra, an oil and gas corporation that is publicly traded on the TSX and that
has some common directors and management to Pine Cliff, to provide executive services, technical services, accounting services, oil
and gas administration and office administration for Pine Cliff. Total fees for the year ended December 2016 and 2015 were $0.02
million and $0.06 million, plus the reimbursement of certain administrative costs. This agreement was terminated on March 31,
2016. As at December 31, 2016, Pine Cliff owed Bonterra $Nil (December 31, 2015 – $0.3 million).
Investment in Bonterra
During the second quarter of 2016 Pine Cliff sold 204,633 Bonterra common shares for proceeds of $5.4 million (as at December 31,
2015 – Pine Cliff held 204,633 shares with a fair value of approximately $3.5 million). For the year ended December 31, 2016, Pine
Cliff received dividend income of $0.1 million (year ended December 31, 2015 - $0.4 million) from its Bonterra Common shares.
Related party transactions are in the normal course of operations and from time to time Pine Cliff and Bonterra may enter into
various transactions at market value in circumstances that are considered mutually beneficial.
CAPITAL RESOURCES
Bank Debt
Syndicate
”) with five Canadian
As at December 31, 2016, the Company had a $60.0 million syndicated credit facility (the “
Financial Institutions (the “
”) (December 31, 2015 - $185.0 million Credit Facility). The Credit Facility consists of a $50.0
million revolving syndicated credit facility and a $10.0 million revolving operating facility for a total facility of $60.0 million. Security
for the Credit Facility consists of floating demand debentures totaling $150.0 million and a general security agreement with first
ranking over all current and acquired properties. Amounts drawn under the Credit Facility at December 31, 2016, were $30.9
million (December 31, 2015 - $156.0 million). Amounts borrowed under the Credit Facility bear interest at the Canadian prime rate
plus 1.0% to 3.5% or the bankers’ acceptance rates plus 2.0% to 4.5%, depending, in each case, on the ratio of consolidated debt to
EBITDA and the Company’s borrowing base. EBITDA is calculated as earnings (loss) excluding depreciation, depletion and accretion,
share based payments, interest, taxes and other non-cash items.
Credit Facility
The Credit Facility has a 364 day revolving period maturing July 28, 2017, and if it is not renewed it will convert to a one day term
loan due on July 29, 2017. The Credit Facility is subject to semi-annual reviews on November 30
. As a result of the
dispositions and associated bank line repayments, the November 30, 2016 review was waived and the May 31, 2017 review was
rescheduled to March 31, 2017. The Credit Facility has no fixed terms of repayment.
st
and May 31
th
As at December 31, 2016, the Company had $1.7 million of letters of credit issued against its Credit Facility (December 31, 2015 -
$0.6 million). The Credit Facility does not contain any financial covenants but Pine Cliff is subject to various nonfinancial covenants
under its Credit Facility. Compliance with these covenants is monitored on a regular basis and as at December 31, 2016, Pine Cliff
was in compliance with all covenants.
Subordinated promissory notes due September 30, 2020
Units
Unit
2020 Note
On August 10, 2016, the Company issued 30,000 units (“
”) at a price of $1,000 per Unit for aggregate proceeds of
” or “
$30.0 million. Each Unit is comprised of: (i) one promissory note with a par value of $1,000 per note and bearing interest at 6.75%
per annum ("
"). The 2020
"), which is payable semi-annually; and (ii) 150 Common Share purchase warrants ("
Notes mature on September 30, 2020 and all or a portion of the principal amount outstanding can be repaid without penalty after
August 10, 2017. The 2020 Notes are secured by a $30.0 million floating charge debenture over all of the Company’s assets and is
subordinated to any and all claims in favor of the Credit Facility. A total of 4.5 million Warrants were issued, entitling the holder to
purchase one Common Share for $1.38 until August 10, 2018.
Warrants
The 2020 Notes were determined to be a hybrid instrument with an embedded derivative. The fair value of the debt component of
the 2020 Notes was determined on issuance to be 7.8%, using the effective interest rate method, by discounting future payments of
interest and principal with the residual value allocated to Warrants. The value of the debt will accrete up to the principal balance at
maturity.
18
PINE CLIFF ENERGY LTD.
Subordinated promissory notes due July 29, 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
2016
”) and bearing
On July 29, 2016, the Company issued $6.0 million in promissory notes maturing on July 29, 2018 (“
interest at 0.25% less than the monthly average effective interest rate paid on the Credit Facility, payable monthly. The 2018 Notes
were issued to a shareholder and relative of the shareholder of the Company, owning directly or by discretion and control, greater
than 10% of the Company’s outstanding Common Shares and can be repaid at any time without penalty. The 2018 Notes are secured
by $6.0 million of floating charge debentures over all of the Company’s assets and are subordinated to any and all claims in favor of
the Credit Facility and the 2020 Note holder.
Due to Related Party
2018 Notes
2018 Related Party Note
On July 29, 2016, Pine Cliff issued a $5.0 million promissory note to the Company’s Chairman of the Board maturing on July 29, 2018
(“
”) that bears interest, payable monthly, at 0.25% less than the monthly average effective interest rate
paid to the Credit Facility. The 2018 Related Party Note can be repaid at any time without penalty and is secured by a $5.0 million
floating charge debenture over all of the Company’s assets and is subordinated to any and all claims in favor of the Credit Facility,
and the 2020 Note holder, as defined herein. Interest paid on the 2018 Related Party Note during 2016 was $0.1 million (December
31, 2015 - $Nil).
Share Capital
Share capital
Common shares
Stock options
Warrants
December 31, 2016
December 31, 2015
March 14, 2017
307,075,787
22,773,431
4,500,000
305,192,287
17,237,700
-
307,075,787
21,631,431
4,500,000
During 2016, Pine Cliff issued 1,883,500 Common Shares as a result of stock option exercises for gross proceeds of $1.0 million.
As of December 31, 2016,
a total of 307,075,787 Common Shares were issued and outstanding and 22,773,431 stock options were
issued and outstanding. As at March 14, 2017, a total of 4,500,000 Warrants were issued and outstanding. As at March 14, 2017, a
total of 307,075,787 Common Shares were issued and outstanding and 21,631,431 stock options were issued and outstanding.
LIQUIDITY
Liquidity describes a company’s ability to access cash. Growth companies operating in the upstream oil and gas business, such as
Pine Cliff, require sufficient cash to fund exploration and development projects, to increase production and reserves, to acquire
strategic oil and gas assets and to repay debt.
Funds flow from operations and the unused portion of the credit facility will allow Pine Cliff to meet its short-term financial
liabilities, as well as future capital requirements, at a reasonable cost. The Company believes it has sufficient funding and access to
capital to meet its obligations as they come due and, if required, will consider selling non-core assets, additional short-term financing
or issuing equity in order to meet its future liabilities.
19
PINE CLIFF ENERGY LTD.
The following table summarizes Pine Cliff’s sources and uses of cash for the three months and years ended December 31, 2016 and
2015:
MANAGEMENT’S DISCUSSION AND ANALYSIS
2016
($000s)
Funds from operations
Bank debt proceeds (repayment)
Issuance of common shares, net of share
issue costs
Issuance of related party debt
Issuance of subordinated promissory notes
Abandonments
Dispositions
Realized loss on sale of investments
Exercise of stock options
Increase (decrease) in non-cash working
capital
Increase (decrease) in cash
Total capital expenditures
Total acquisitions
2016
Three months ended December 31
15,026
(40,524)
$ Change
2015
6,550
112,392
8,476
(152,916)
-
-
-
(104)
28,082
-
116
(231)
(38)
3,356
(1,029)
68,813
-
-
-
-
-
935
(6,875)
(400)
1,875
179,540
(68,813)
-
-
(104)
28,082
-
(819)
6,644
362
1,481
(180,569)
2016
Year ended December 31
19,741
(125,087)
-
5,000
35,963
(279)
58,162
5,573
1,033
7,561
685
9,159
(807)
2015
$ Change
25,818
108,183
(6,077)
(233,270)
68,813
-
-
-
-
-
3,530
(5,387)
(633)
7,259
193,065
(68,813)
5,000
35,963
(279)
58,162
5,573
(2,497)
12,948
1,318
1,900
(193,872)
In the year ended December 31, 2016, Pine Cliff’s uses of cash included $9.2 million of capital expenditures including acquisitions
and bank debt repayment of $125.1 million. In the year ended December 31, 2016, Pine Cliff’s sources of cash included funds flow
from operations of $19.7 million, dispositions of oil and gas assets of $58.2 million, the sale of investments of $5.6 million, exercises
of stock options of $1.0 million, issuance of subordinated promissory notes of $36.0 million, issuance of a related party debt of $5.0
million and decreases in working capital of $7.6 million.
COMMITMENTS AND CONTINGENCIES
As at December 31, 2016, the Company has the following lease commitments and other contractual obligations:
2017
2018
2019
2020
2021
Thereafter
($000s)
1
Subordinated promissory notes
Trade and other payables
Due to related party
Bank loan – principal
Future interest
Firm service commitments
Vehicle leases
Office and equipment leases
Total commitments and contingencies
-
21,319
-
30,851
3,629
4,615
506
495
61,415
6,000
-
5,000
-
2,370
2,816
451
438
17,075
-
-
-
-
2,025
1,613
344
436
4,418
30,000
-
-
-
1,519
1,326
266
464
33,575
-
-
-
-
-
867
106
464
-
-
-
-
-
688
-
922
1,437
1,610
20
PINE CLIFF ENERGY LTD.
SELECTED ANNUAL FINANCIAL INFORMATION 1
MANAGEMENT’S DISCUSSION AND ANALYSIS
2016
Year ended
December 31, 2016
Year ended
December 31, 2015
Year ended
December 31, 2014
FINANCIAL
($000s, unless otherwise indicated)
Oil and gas sales (before royalties)
Total revenue (net of royalties)
Cash flow from operating activities
Funds flow from operations2
Loss for the year
Per share – Basic and Diluted ($/share)
Total assets
Per share – Basic and Diluted ($/share)
Total non-current financial liabilities
Total liabilities
Capital expenditures
Acquisitions, after adjustments
Capital dispositions, proceeds
Net Debt3
Weighted average common shares outstanding (000s) -
OPERATIONS
Basic and Diluted
Production
Natural gas (Mcf/d)
Crude oil (Bbls/d)
Total (Boe/d)
Natural gas liquids (Bbls/d)
Total (Mcfe/d)
Realized commodity sales prices
Natural gas ($/Mcf)
Crude oil ($/Bbl)
Total ($/Boe)
Natural gas liquids ($/Boe)
Netback ($/Boe)
4
Operating netback
5
Netback ($/Mcfe)
Corporate netback
4
Operating netback
118,642
111,052
22,489
19,741
0.06
(50,387)
(0.16)
491,897
40,086
296,139
9,159
(807)
(63,112)
64,224
306,329
124,906
753
924
22,495
134,968
2.13
37.41
32.53
14.41
4.08
2.39
0.68
0.40
78,593
74,167
20,768
25,818
0.11
(24,257)
(0.10)
640,775
155,938
406,368
7,259
193,065
-
141,770
240,149
72,984
160
530
12,854
77,124
2.66
48.26
25.00
16.75
7.08
5.51
78,450
71,084
37,641
38,988
0.18
(1,942)
(0.01)
410,697
-
233,548
11,087
135,213
-
33,512
211,025
45,022
75
320
7,899
47,394
4.27
79.38
51.70
27.20
15.20
13.53
1.18
2.53
5
Corporate netback
1
Includes results for acquisitions and excludes results for dispositions from the closing dates.
2
Funds flow from operations is a non-IFRS measure that represents the total of funds provided by operating activities, before adjusting for changes in
non-cash working capital, and decommissioning obligations settled.
3
Net debt is a non-IFRS measure calculated as the sum of bank debt, subordinated promissory notes at the principal amount, amounts due to related
party, and trade and other payables less trade and other receivables, cash, prepaid expenses and deposits and investments.
4
2.26
0.92
Operating netback is a non-IFRS measure calculated as the Company’s total revenue, less operating expenses, divided by the Boe production of the
Company for the period.
5
Corporate netback is a non-IFRS measure calculated as the Company’s operating netback, less general and administrative expenses, interest and
bank charges plus finance and dividend income, divided by the Boe production of the Company.
21
PINE CLIFF ENERGY LTD.
OFF BALANCE SHEET TRANSACTIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS
2016
Pine Cliff was not involved in any off-balance sheet transactions during the periods presented, nor has it entered into any such
arrangements as of the effective date of this MD&A.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company is exposed to a number of risks associated with its financial assets and liabilities. These risks include commodity price
risk, interest rate risk, equity price risk, foreign exchange risk, credit risk and liquidity risk. The Company has several practices and
policies in place to help mitigate these risks.
Market risk
Market risk is the risk that the fair value or future cash flow of the Company’s financial instruments will fluctuate because of changes
in market prices. Components of market risk to which Pine Cliff is exposed are discussed below.
Commodity Price Risk
The Company is exposed to commodity price risk since its revenues are dependent on the prices of crude oil and natural gas.
Commodity prices have fluctuated widely during recent years due to global and regional factors including, but not limited to, supply
and demand, inventory levels, weather, economic and geopolitical factors. Changes in oil and natural gas prices may have a
significant effect, positively or negatively, on the ability of the Company to meet its obligations, capital spending targets and expected
operational results. Currently, the Company does not have any risk management contracts to sell its oil and gas commodities.
Commodities are sold at market prices at the date of sale.
Interest Rate Risk
The Company is principally exposed to interest rate risk to the extent it draws on its variable rate debt. Changes in market interest
rates could affect the cash flow associated with the credit facility. If interest rates applicable to Pine Cliff’s credit facility increased or
decreased by one percent it is estimated that Pine Cliff’s loss for the year ended December 31, 2016, would have increased or
decreased, respectively, by $0.4 million.
Equity price risk
Equity price risk refers to the risk that the fair value of the investments will fluctuate due to changes in equity markets. Equity price
risk arises from the realizable value of the investments that the Company holds which are subject to variable equity prices which on
disposition gives rise to a cash flow equity price risk. The Company will assume full risk in respect of equity price fluctuations.
Foreign Exchange Risk
The Company is exposed to foreign exchange risk because the oil and natural gas prices it receives are primarily determined in
reference to United States dollar denominated commodity prices. The Company manages this risk by monitoring the foreign
exchange rate and evaluating its effect on cash flows. Pine Cliff has not entered into any derivative financial instruments to manage
this risk.
Credit Risk
Credit risk is the risk that a third party will not complete its contractual obligations under a financial instrument and cause the
Company to incur a financial loss. Pine Cliff’s maximum exposure to credit risk is the sum of the carrying values of its trade and other
receivables and cash. The carrying values of these financial assets reflect management’s assessment of the associated maximum
exposure to such credit risk.
To mitigate the credit risk on its cash, the Company maintains its cash balances with major Canadian chartered banks. To mitigate
the credit risk on trade and other receivables, Pine Cliff assesses the financial strength of its counterparties and primarily enters into
relationships with larger purchasers with established credit histories.
The Company’s trade and other receivables balance at December 31, 2016, of $20.0 million
(December 31, 2015 – $16.5 million), is
primarily with oil and gas marketers, joint venture partners and crown royalty credits with the Province of Alberta. Amounts due
from these parties have generally been received within 30 to 60 days. When determining whether amounts that are past due are
collectible, management assesses the creditworthiness and past payment history of the counterparty, as well as the nature of the past
due amount. The Company generally considers amounts greater than 90 days to be past due. As at December 31, 2016, there was
22
PINE CLIFF ENERGY LTD.
MANAGEMENT’S DISCUSSION AND ANALYSIS
2016
$1.8 million (December 31, 2015 - $1.3 million) of trade and other receivables over 90 days. As at December 31, 2016, the Company
does not consider any trade and other receivables to be impaired.
Pine Cliff assesses its financial assets quarterly to determine if there has been any impairment. During the year ended December 31,
2016, the Company recorded $0.5 million (December 31, 2015 - $Nil) for bad debt expense against trade and other accounts
receivables.
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due or can do so only at
excessive cost. Liquidity risk includes the risk that, as a result of Pine Cliff’s operational liquidity requirements, the Company will not
have sufficient funds or ability to obtain financing to settle a transaction on the due date or continue to fund its exploration and
development projects. This could result in Pine Cliff being forced to sell assets at a value which is less than what they are worth or
the Company may be unable to settle or recover financial assets.
At December 31, 2016, the Company had a $60.0 million Credit Facility, of which $30.9 million was drawn. The unused portion of the
Credit Facility and cash provided by operating activities are expected to allow Pine Cliff to meet its financial liabilities, as well as
future capital requirements. Pine Cliff will also consider additional short-term financing or issuing equity, if required, in order to
meet its future liabilities.
RISK FACTORS
Certain activities of the Company are affected by factors that are beyond its control or influence. Additional risks and uncertainties
that management may be unaware of, or that they determine to be immaterial may also become important factors which affect the
Company. Along with the risks discussed in this MD&A, other business risks faced by the Company may be found under “Risk
Factors” in the Company’s most recent Annual Information Form which is available under the Company’s profile at www.sedar.com
or by contacting the Company.
Operational
This category encompasses a number of risks. Wells may produce at lower initial production rates than planned, or face steeper
decline rates. Operating costs can increase due to such considerations as unanticipated workovers or higher than expected costs
associated with corrosion. Pine Cliff follows prudent industry practices with respect to insurance where practicable and as guided by
external experts, but cannot fully insure against all risks. With respect to non-insurable operating risks, the Company has attempted
to design business process controls and accountability to identify problems at the earliest possible occasion and implement
solutions. However, investors must appreciate that operational risk is very much a characteristic of the business, and can never be
entirely eliminated.
Reserves
NI
The Company retains independent reserve evaluators and had 100% of the reserves reviewed. The methodologies used assess the
51-101
certainty of recovery on reserve categories under National Instrument 51-101
Standards of Disclosure for Oil and Gas Activities
(“
”). As per NI 51-101, there is a 90% probability of attaining proven reserves and a 50% probability of attaining the proven
plus probable reserves assigned. The Company plans to fund additional drilling and infrastructure expenditures from internal funds
flows from operations, as well as its credit facility, in order to achieve the reserve assignments. There remains a probability that for
technical or economic reasons, the reserves assigned may not be attained. In our case, Pine Cliff believes the risk is moderate to low
as we are operating in well-established environments. As with operational risk, however, Pine Cliff again cautions investors that
reserve risk is endemic and cannot be eliminated.
Safety, Environmental and Regulatory Risks
Safety, environmental and regulatory risks are the risks of loss or lost opportunity resulting from changes to laws governing safety,
the environment, royalties and taxation. Safety, environmental and regulatory risks Pine Cliff is exposed to include: aboriginal land
claims; uncertainties associated with regulatory approvals; uncertainty of government policy changes; the risk of carrying out
operations with minimal environmental impact; changes in or adoption of new laws and regulations or changes in how they are
interpreted or enforced; obtaining required approvals of regulatory authorities and stakeholder support for activities and growth
plans.
In November 2015, the Province of Alberta released its Climate Leadership Plan which will impact businesses that contribute to
carbon emissions in Alberta. The plan's four key areas include imposing carbon pricing that is applied across all sectors, starting at
$20 per tonne on January 1, 2017 and moving to $30 per tonne on January 1, 2018, and a 45 percent reduction in methane emissions
23
PINE CLIFF ENERGY LTD.
MANAGEMENT’S DISCUSSION AND ANALYSIS
2016
by the oil and gas sector by 2025. The Company is currently monitoring developments in this plan and will evaluate the expected
impact of the plan on its results of operations.
In October 2016, the Government of Canada announced a pan-Canadian approach to the pricing of carbon emissions. The plan
includes imposing carbon pricing beginning at a minimum of $10 per tonne in 2018 and rising by $10 per tonne each year to $50 per
tonne in 2022. Provinces and territories have a year to introduce their own carbon pricing or adopt a cap-and trade system that
meets or exceeds the federal benchmark. If provinces and territories fail to implement a price or cap-and-trade plan by 2018, the
Government of Canada has indicated that they will implement a price in that jurisdiction. The Company is currently monitoring
developments in this plan and will evaluate the expected impact of the plan on its results of operations after further clarifying
information is provided by the provincial and Federal governments.
Both the oil and gas and mining industries activities entail numerous environmental impacts which can be detrimental. Even normal
operations can generate carbon emissions. Wells can blow out, or pipelines can fail with consequent contamination of soil, air, and
water. A small number of Pine Cliff’s wells produce natural gas with a high content of hydrogen sulphide, which is poisonous and can
be fatal, thus requiring the highest standards of operational responsibility and emergency response practices and procedures.
The industries are subject to extensive environmental legislation and regulations at Federal, Provincial, and Municipal levels. Thus,
the Company is at risk not only to the cost of the incidents themselves, but to various sanctions which can be imposed by
governments or government instrumentalities. The Company expects that environmental legislation and regulations will continue
to be assessed, may become stricter over time, and that the costs of compliance may grow. The international and domestic debate
upon controls of greenhouse gas emissions will continue, with unpredictable but potentially material consequences for the oil and
gas industry and its participants like Pine Cliff.
To mitigate environmental risk the Company conducts its operations to target compliance with government regulations and
guidelines. Monitoring and reporting programs for environmental health and safety performance in day-to-day operations, as well as
inspections and assessments, are designed to provide assurance that to the best of the Company’s ability, environmental and
regulatory standards are met.
Staffing
Pine Cliff functions in a very competitive environment for professional staff, and this staff is key to the Company’s ultimate success.
Recognizing this, Pine Cliff’s board of directors approved a competitive compensation program including bonuses based on the
annual performance of the Company, benefits and a stock option program to provide for long-term incentives and to retain staff.
To date, Pine Cliff has found that it has been able to attract qualified individuals to complement its existing team and to build strength
in areas where required.
Fiscal Environment
The oil and gas and minerals industries are subject to payments to various levels of government, predominantly corporate income
taxes to the federal and provincial governments and royalties to provincial governments. In recent years, while the corporate and
income tax regime has been stable, the royalty regime has not been. A series of changes have had at times both positive and negative
effects, but have certainly served to emphasize the materiality of this risk. There is potential for additional future changes to the
taxation and royalty regime in Alberta and Saskatchewan and corresponding changes in other jurisdictions where Pine Cliff may
operate has created uncertainty surrounding the ability to accurately estimate future taxation and royalties, resulting in additional
volatility and uncertainty in the oil and gas market. As a single company, we have no ability to mitigate this risk other than through
geographic diversification.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with IFRS requires management to make judgments, assumptions and
estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of
the financial statements, and revenues and expenses for the period reported. The significant accounting policies used by the
Company are disclosed in the notes to the consolidated financial statements. Management believes that the most critical accounting
policies that may have an impact on the Company’s financial results are those that specifically relate to the accounting for its oil and
gas interests, including amounts recorded for depletion and the impairment test which are both based on estimates of proved and
probable reserves, production rates, oil prices, future costs and other relevant assumptions. Actual results could differ materially
from such estimates.
24
PINE CLIFF ENERGY LTD.
Cash Generating Units
MANAGEMENT’S DISCUSSION AND ANALYSIS
2016
CGUs are defined as the lowest grouping of integrated assets that generate identifiable cash inflows that are largely independent of
the cash inflows of other assets or groups of assets. The classification of assets into CGUs requires significant judgment and
interpretations with respect to the integration between assets, the existence of active markets, external users, share infrastructures
and the way in which management monitors Pine Cliff’s operations.
Impairment indicators
Judgments are required to assess when impairment indicators exist and impairment testing is required. When assessing the
recoverability of petroleum and natural gas properties, each CGU’s carrying value is compared to its recoverable amount, defined as
the greater of its fair value less cost to sell and value in use. In determining the recoverable amount of assets, in the absence of
quoted market prices, impairment tests are based on reserve estimates, market value of undeveloped lands and other relevant
assumptions.
Reserves base
Standards of Disclosure for Oil and Gas Activities
Petroleum and natural gas reserves are used in the calculation of depletion, impairment and impairment reversals and are depleted
on a unit of production basis at a rate calculated by reference to proved and probable reserves determined in accordance with
National Instrument 51-101
which incorporate the estimated future cost of
developing and extracting those reserves. Reserve estimates and their resulting cash flows are based on engineering data,
probability assessments of reserve recoveries, future prices and costs, future production rates, discount rates and the timing and
extent of future capital expenditures, all of which are subject to many uncertainties and interpretation. Management expects that
over time Pine Cliff’s reserve estimates will be revised, either upward or downward, based on updated information such as the
results of future drilling, production costs, testing and production levels and changes to forward petroleum and natural gas prices.
Exploration and evaluation (“E&E”) assets
The application of the Company’s accounting policy for E&E expenditures requires judgment in determining whether it is likely that
future economic benefit exists when activities have not reached a stage where technical feasibility and commercial viability can be
reasonably determined. Factors such as drilling results, future capital programs, future operating expenses, as well as estimated
reserves are considered. In addition, Pine Cliff management uses judgment to determine when E&E assets are reclassified to
Property, Plant and Equipment (“
Decommissioning costs
PP&E
”).
Decommissioning costs will be incurred by the Company at the end of the operating life of the Company’s facilities and properties.
The ultimate decommissioning costs are uncertain and cost estimates can vary in response to many factors including changes to
relevant legal requirements, the emergence of new restoration techniques, experience at other production sites, and changes to the
credit-adjusted risk-free discount rate and expected inflation rate. The expected timing and amount of expenditure can also change,
for example, in response to changes in reserves or changes in laws and regulations or their interpretation. As a result, there could be
significant adjustments to the provisions established which would affect future financial results.
Income taxes
The Company recognizes the net deferred tax benefit related to deferred tax assets to the extent that it is probable that the
deductible temporary differences will reverse in the foreseeable future. Assessing the recoverability of deferred tax assets requires
the Company to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are
based on forecast cash flows from operations and the application of existing tax laws in each jurisdiction. To the extent that future
cash flows and taxable income differ significantly from estimates, the ability of the Company to realize the net deferred tax assets
recorded at the reporting date could be impacted. Additionally, future changes in tax laws in the jurisdictions in which the Company
operates could limit the ability of the Company to obtain tax deductions in future periods.
Contingencies
By their nature, contingencies will only be resolved when one or more future events occur or fail to occur. The assessment of
contingencies inherently involves the exercise of significant judgment and estimates of the outcome of future events.
25
PINE CLIFF ENERGY LTD.
ACCOUNTING POLICY AND STANDARD CHANGES
MANAGEMENT’S DISCUSSION AND ANALYSIS
2016
The accounting policies and method of computation followed in the preparation of the Financial Statements are the same as those
followed in the preparation of Pine Cliff’s 2016 Annual Financial Statements (“
”).
Annual Financial Statements
The nature and impact of each new standard or amendment is described below:
Changes in accounting policies
IFRS 11 Joint Arrangements (“IFRS 11”)
In May 2014 IFRS 11, Joint Arrangements, was clarified by adding new guidance on the accounting for the acquisition of an interest
”) decided that acquirers of such
in joint operations that constitute a business. The International Accounting Standards Board (“
interests shall apply all of the principles on business combinations accounting in IFRS 3,
and other IFRSs, that
do not conflict with the guidance in IFRS 11 and disclose the information that is required in those IFRSs in relation to business
combinations. The new IFRS 11 guidance is effective for annual periods beginning on or after January 1, 2016. Adoption of this
policy amendment did not result in an impact to the Company’s Financial Statements.
Future accounting pronouncements
Business Combinations,
IASB
IFRS 16 Leases
IFRS 16
(“
”)
In January 2016, the IASB issued IFRS 16 – Leases, which replaces IAS 17 – Leases and related interpretations. IFRS 16 eliminates
the classification of leases as finance or operating and introduces a single lessee accounting model for recognition and measurement,
which will require the recognition of assets and liabilities for most leases. IFRS 16 is effective for years beginning on or after
January
1, 2019. The Company is currently assessing the impact the adoption of this standard will have on the Financial Statements.
IFRS 15 Revenue from Contracts with Customers (“IFRS 15”)
In May 2014, the IASB published the new revenue standard, IFRS 15, which specifies how and when revenue should be recognized
and requires more informative and relevant disclosures. The standard is required to be applied on first interim periods beginning on
or after January 1, 2018, with early application permitted. The Company is currently assessing the impact the adoption of this
standard will have on the Financial Statements.
IFRS 9 Financial Instruments
IFRS 9
(“
”)
In July 2014, the IASB has amended IFRS 9 which amends its classification and measurement of financial assets and introduces a new
expected loss impairment model. This standard is effective for annual periods beginning on or after January 1, 2018, with early
adoption permitted and shall be applied retrospectively. The Company is currently assessing the impact the adoption of this
standard will have on the Financial Statements.
ADDITIONAL INFORMATION
DISCLOSURE CONTROLS AND PROCEDURES
DC&P
Disclosure controls and procedures (“
”), as defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual
and Interim Filings, are designed to provide reasonable assurance that information required to be disclosed in the Company’s annual
filings, interim filings or other reports filed, or submitted by the Company under securities legislation is recorded, processed,
summarized and reported within the time periods specified under securities legislation and include controls and procedures
CFO
designed to ensure that information required to be so disclosed is accumulated and communicated to management, including the
”), as appropriate, to allow timely decisions regarding required
Chief Executive Officer (“
disclosure. The CEO and the CFO of Pine Cliff evaluated the effectiveness of the design and operation of the Company’s DC&P. Based
on that evaluation, the CEO and CFO concluded that Pine Cliff’s DC&P were effective as at December 31, 2016.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
”) and the Chief Financial Officer (“
CEO
Internal control over financial reporting (“
that:
•
ICFR
”), as defined in National Instrument 52-109, includes those policies and procedures
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions
of assets of Pine Cliff.
26
PINE CLIFF ENERGY LTD.
•
•
MANAGEMENT’S DISCUSSION AND ANALYSIS
2016
Are designed to provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of
Pine Cliff are being made in accordance with authorizations of management of Pine Cliff.
Are designed to provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the Company’s assets that could have a material effect on the financial statements.
The CEO and CFO have designed, or caused to be designed under their supervision, ICFR as defined in National Instrument 52-109 of
the Canadian Securities Administrators, in order to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with IFRS. The control framework the Company used to
design its ICFR was in accordance with the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013).
The Company’s CEO and CFO have evaluated, or caused to be evaluated under their supervision, the effectiveness of the Company’s
internal controls over financial reporting at the financial period end of the Company and concluded that such internal controls over
financial reporting are effective.
COSO
In May 2013, the Committee of Sponsoring Organizations of the Treadway Commission (“
”) published an updated Internal
Control – Integrated Framework and related illustrative documents which supersedes the 1992 COSO Framework as of December 14,
2014. During the year, Pine Cliff has converted to the 2013 COSO framework.
It should be noted that while Pine Cliff’s CEO and CFO believe that the Company’s internal controls and procedures provide a
reasonable level of assurance and are effective, however they do not expect that these controls will prevent all errors and fraud. A
control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that its objectives
are met.
NON-IFRS MEASURES
This MD&A uses the terms “funds flow from operations”, “operating netbacks”, “corporate netbacks” and “net debt” which are not
recognized under IFRS and may not be comparable to similar measures presented by other companies. The Company uses these
measures to evaluate its performance, leverage and liquidity.
The Company considers funds flow from operations a key performance measure as it demonstrates the Company’s ability to generate
the funds necessary to repay debt and fund future growth through capital investment. Funds flow from operations and funds flow
from operations per share and per Boe or Mcfe should not be considered as an alternative to, or more meaningful than, cash flow
from operating activities presented on the statement of cash flows which is considered the most directly comparable measure under
IFRS. Funds flow from operations is calculated as cash flow from operating activities before changes in non-cash working capital and
decommissioning obligations settled. Funds flow from operations per share is calculated using the same weighted average number
of shares outstanding as in the case of the earnings per share calculation for a reporting period. Funds flow from operations per Boe
or Mcfe is calculated using the sales volumes reported for a reporting period.
Funds Flow from Operations
($000s)
Cash flow from operating activities
Adjusted by:
(Increase) decrease in non-cash working
capital
Decommissioning liabilities settled
Funds flow from operations
2016
Three months ended December 31
12,632
2015
% Change
2,290
104
15,026
973
1198
5,577
-
6,550
(59)
100
129
2016
Year ended December 31
22,489
(3,027)
279
19,741
2015
% Change
20,768
8
5,050
-
25,818
(160)
100
(24)
The Company considers operating netback to be a key indicator of profitability relative to current commodity prices. Operating
netback and operating netback per Boe and per Mcfe are calculated as oil and gas sales, less royalties and operating expenses on an
absolute and a per Boe or per Mcfe basis, respectively. Management uses operating netback on a per Boe basis in operational and
capital allocation decisions.
The Company considers corporate netback to be a key indicator of overall profitability. Corporate netback and corporate netback
per Boe and per Mcfe are calculated as operating netback, less G&A and interest expense plus finance and dividend income on an
absolute and a per Mcfe basis, respectively.
27
PINE CLIFF ENERGY LTD.
The Company considers net debt to be a key indicator of liquidity. Net debt is calculated as the sum of bank debt and trade and other
payables less trade and other receivables, cash, prepaid expenses and deposits and investments as shown in the table below:
MANAGEMENT’S DISCUSSION AND ANALYSIS
2016
Net Debt
($000s)
1
Bank debt
Due to related party
Subordinated promissory notes
Trade and other payables and accrued liabilities
Less:
Trade and other receivables
Cash
Prepaid expenses and deposits
Investments
2016
Year ended December 31
30,851
5,000
36,000
21,319
(20,012)
(148)
(3,491)
(5,295)
64,224
2015
$ Change
155,938
-
-
9,978
(16,473)
(833)
(3,250)
(3,590)
141,770
(125,087)
5,000
36,000
11,341
(3,539)
685
(241)
(1,705)
(77,546)
Net Debt
The subordinated promissory notes for net debt are presented at the principal amount.
1
FORWARD-LOOKING INFORMATION
Certain statements contained in this MD&A 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
MD&A includes, but is not limited to: expected production levels; future capital expenditures, including the amount and nature
thereof; future acquisition opportunities including Pine Cliff’s ability to execute on those opportunities; 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; amounts drawn on Pine Cliff’s credit facility and repayment thereof; maintenance of existing
customer, supplier and partner relationships; supply channels; accounting policies; risks; 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; 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.
Undrilled locations consist of drilling and recompletion locations booked in the independent reserve report dated February 13, 2017
prepared by McDaniel & Associates Consultants Limited and unbooked drilling and recompletion locations. Unbooked drilling and
recompletion locations are internal estimates based on evaluation of geologic, reserves and spacing based on industry
practice. There is no guarantee that Pine Cliff will drill these locations and there is no certainty that the drilling or completing of
these locations will result in additional reserves and production or achieve expected internal rates of return. Pine Cliff activity
depends on availability of capital, regulatory approvals, commodity prices, drilling costs and other factors.
The forward-looking information contained in this MD&A is expressly qualified by this cautionary statement.
28
PINE CLIFF ENERGY LTD.
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
2016
The information provided in this report, including the consolidated financial statements, is the responsibility of Pine Cliff’s
management. In the preparation of these consolidated financial statements, estimates are sometimes necessary to make a
determination of future values for certain assets or liabilities. Management believes such estimates have been based on careful
judgments and have been properly reflected in the accompanying consolidated financial statements.
Management maintains a system of internal controls to provide reasonable assurance that the Company’s assets are safeguarded and
to facilitate the preparation of relevant and timely information.
The audit committee has reviewed these consolidated financial statements with management and has reported to the board of
directors. The board of directors have approved the consolidated financial statements as presented in this annual report.
“Signed Philip B. Hodge”
“Signed Cheryne A. Lowe”
Philip B. Hodge, President and Chief Executive Officer
Cheryne A. Lowe, Chief Financial Officer and Corporate
Secretary
29
PINE CLIFF ENERGY LTD.
INDEPENDENT AUDITOR’S REPORT
INDEPENDENT AUDITOR’S REPORT
2016
To the Shareholders of Pine Cliff Energy Ltd.
We have audited the accompanying consolidated financial statements of Pine Cliff Energy Ltd. (the “Company”), which comprise the
consolidated statements of financial position as at December 31, 2016 and 2015, and the consolidated statements of comprehensive
loss, consolidated statements of cash flows and consolidated statements of changes in equity for the years then ended, and a
summary of significant accounting policies and other explanatory information.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the
preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits
in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements
are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material
misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order
to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and
the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Pine Cliff Energy
Ltd. as at December 31, 2016 and 2015, and its financial performance and its cash flows for the years then ended in accordance with
International Financial Reporting Standards.
“Signed Deloitte LLP”
Chartered Professional Accountants
March 14, 2017
Calgary, Canada
30
PINE CLIFF ENERGY LTD.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
CONSOLIDATED FINANCIAL STATEMENTS
2016
(Canadian dollars, 000s)
ASSETS
Current assets
Cash
Trade and other receivables
Prepaid expenses and deposits
Investments
Total current assets
Exploration and evaluation assets
Property, plant and equipment
Deferred taxes
Total assets
LIABILITIES
Current liabilities
Trade and other payables
Bank debt
Total current liabilities
Bank debt
Due to related party
Subordinated promissory notes
Decommissioning liabilities
Total liabilities
SHAREHOLDERS' EQUITY
Share capital
Warrants
Contributed surplus
Accumulated other comprehensive gain (loss)
Deficit
Total shareholders' equity
Total liabilities and shareholders' equity
As at December 31,
2016
Note
20
4,7
5,6,8
5,6,9
10
11
11
7
13
12
14
14
14
148
20,012
3,491
5,295
28,946
33,610
379,643
49,698
491,897
21,319
30,851
52,170
-
5,000
35,086
203,883
296,139
268,743
958
5,748
298
(79,989)
195,758
491,897
2015
833
16,473
3,250
3,590
24,146
45,950
532,059
38,620
640,775
9,978
-
9,978
155,938
-
-
240,452
406,368
266,809
-
3,453
(6,253)
(29,602)
234,407
640,775
The accompanying notes are an integral part of these consolidated financial statements.
The financial statements were approved by the Board of Directors and signed on its behalf by:
“Signed George F. Fink”
George F. Fink, Director
31
PINE CLIFF ENERGY LTD.
“Signed Randy M. Jarock”
Randy M. Jarock, Director
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
CONSOLIDATED FINANCIAL STATEMENTS
2016
(Canadian dollars, 000s except per share data)
Years ended December 31,
REVENUE
Oil and gas sales
Royalty income
Royalty expense
Dividend income
Total revenue
EXPENSES
Operating
General and administration
Depletion and depreciation
Share-based payments
Impairment of property, plant, and equipment
Impairment of exploration and evaluation assets
Gain on disposition
Realized loss on sale of investments
Finance expenses
Total expenses
Loss before income taxes
LOSS FOR THE YEAR
Deferred tax recovery
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) on investments
Deferred taxes on unrealized (gain) loss on investments
OTHER COMPREHENSIVE INCOME (LOSS) FOR THE YEAR, NET OF
TAX
Amounts reclassified from comprehensive loss
TOTAL COMPREHENSIVE LOSS FOR THE YEAR
Loss per share ($)
Basic and diluted
2016
118,642
1,111
(8,821)
120
111,052
77,318
6,959
64,387
3,196
-
4,648
(518)
4,270
12,305
172,565
(61,513)
(11,126)
(50,387)
345
(47)
6,253
6,551
(43,836)
(0.16)
Note
4,7
9
14
9
8
6
4
15
10
4
4,10
4
14
2015
78,593
260
(5,083)
397
74,167
40,591
5,839
45,831
3,383
7,586
-
-
-
5,451
108,681
(34,514)
(10,257)
(24,257)
(5,166)
-
-
(5,166)
(29,423)
(0.10)
The accompanying notes are an integral part of these consolidated financial statements.
32
PINE CLIFF ENERGY LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED FINANCIAL STATEMENTS
2016
(Canadian dollars, 000s)
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Loss for the year
Items not affecting cash:
Share-based payments
Depletion and depreciation
Finance expenses
Deferred tax recovery
Gain on disposition
Impairment of property, plant, and equipment
Impairment of exploration and evaluation assets
Loss on sale of investments
Changes in non-cash working capital accounts
Interest and bank charges paid
Decommissioning obligation settled
Cash provided by (used in) operating activities
INVESTING ACTIVITIES
Expenditures on property, plant and equipment
Expenditures on exploration and evaluation assets
Acquisitions, net of working capital acquired
Proceeds on dispositions
Proceeds on sale of investments
Changes in non-cash working capital accounts
Cash provided by (used in) investing activities
FINANCING ACTIVITIES
Issuance of common shares, net of share issue costs
Issuance of related party debt
Issuance of units, net of issue costs
Exercise of stock options
Bank debt
Changes in non-cash working capital accounts
Cash provided by (used in) financing activities
Increase (decrease) in cash
CASH - END OF YEAR
Cash - beginning of year
Years ended December 31,
2016
Note
2015
14
9
15
10
6
9
8
4
19
15,19
13
9
8
5
6,8
7
19
7
12
14
11
20
(50,387)
3,196
64,387
12,305
(11,126)
(518)
-
4,648
4,270
3,027
(7,034)
(279)
22,489
(9,032)
(127)
807
58,162
5,573
4,304
59,687
-
5,000
35,963
1,033
(125,087)
230
(82,861)
(685)
833
148
(24,257)
3,383
45,831
5,451
(10,257)
-
7,586
-
-
(5,050)
(1,919)
-
20,768
(5,921)
(1,338)
(193,065)
-
-
(107)
(200,431)
68,813
-
-
3,530
108,183
(230)
180,296
633
200
833
The accompanying notes are an integral part of these consolidated financial statements.
33
PINE CLIFF ENERGY LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
CONSOLIDATED FINANCIAL STATEMENTS
2016
(Canadian dollars, 000s)
BALANCE AT JANUARY 1, 2015
Note
Share
capital
191,319
Contributed
1
surplus
2,262
Accumulated
other
comprehensive
2
Warrants
income (loss)
-
(1,087)
Deficit
(5,345)
Total
Equity
187,149
Issuance of shares
Share issue costs, net of tax
Loss for the year
Other comprehensive loss for the year
Share-based payments
BALANCE AT DECEMBER 31, 2015
Exercise of stock options
14
14
14
14
71,999
(2,231)
-
-
-
266,809
5,722
-
-
-
-
3,383
3,453
(2,192)
Issuance of warrants
Unit issue costs, net of tax
Loss for the year
Transfer of realized loss on sale of
investments
Unrealized gain on investments
Deferred taxes on unrealized gain on
investments
Share-based payments
BALANCE AT DECEMBER 31, 2016
Exercise of options
12,14
4
4
4
14
14
-
-
-
-
-
-
-
-
-
-
-
-
268,743
1,934
-
3,196
5,748
(901)
-
-
-
(5,166)
-
(6,253)
-
-
-
-
6,253
345
(47)
-
298
-
-
-
-
-
-
-
-
-
-
(24,257)
-
-
(29,602)
-
995
(37)
-
-
-
-
-
(50,387)
-
-
71,999
(2,231)
(24,257)
(5,166)
3,383
234,407
3,530
995
(37)
(50,387)
6,253
345
-
-
958
-
-
-
(79,989)
-
(47)
3,196
195,758
1,033
1
2
Contributed surplus is comprised of share-based payments.
Accumulated other comprehensive income (loss) is comprised of unrealized gains and losses on available-for-sale investments.
The accompanying notes are an integral part of these consolidated financial statements.
34
PINE CLIFF ENERGY LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
2016
As at December 31, 2016 and 2015 and for the years then ended
(all tabular amounts in Canadian dollars 000s, unless otherwise indicated)
1. NATURE OF BUSINESS
Pine Cliff
Company
TSX
Pine Cliff Energy Ltd. (“
”) and
incorporated under the Business Corporations Act (Alberta). The address of the Company’s registered office is Suite 850, 1015 4th
Street SW, Calgary, Alberta, T2R 1J4.
”) is a public company listed on the Toronto Stock Exchange (“
” or the “
Financial
Pine Cliff is engaged in the acquisition, exploration, development and production of oil and natural gas in the Western Canadian
Statements
Sedimentary Basin and conducts many of its activities jointly with others; these consolidated financial statements (the “
2. BASIS OF PREPARATION
”) reflect only the Company’s proportionate interest in such activities.
a)
Statement of compliance
The Financial Statements have been prepared in accordance with International Financial Reporting Standards (“
”).
The Financial Statements were authorized for issue by the Company’s board of directors on March 14, 2017.
b) Basis of measurement
IFRS
The Financial Statements have been prepared on a historical cost basis, except for certain financial instruments and share-based
payment transactions which are measured at fair value.
c) Use of judgments and estimates
The timely preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and
assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, revenue and expenses as
well as the disclosure of contingent assets and liabilities as at the date of the statement of financial position. Actual results could
differ materially from estimated amounts and affect the results reported in the Financial Statements. Estimates and underlying
assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimates
are revised and in any future years affected.
Information about significant areas of estimation uncertainty in applying accounting principles that have the most significant effect
on the amounts recognized in the Financial Statements are included in the notes.
Judgments
In the process of applying Pine Cliff’s accounting policies, judgments, apart from those involving estimates, have been made, of which
the following may have the most significant effect on the amounts recognized in the Financial Statements:
Note 5 – Acquisitions
Note 6 – Dispositions
Note 8 – Exploration and evaluation assets (“
Note 9 – Property, plant and equipment (“
Note 13 – Decommission liabilities
Note 14 – Share capital
Note 18 – Financial instruments
Cash Generating Units
E&E
PP&E
”)
”)
CGUs
Cash Generating Units (“
”) are defined as the lowest grouping of integrated assets that generate identifiable cash inflows that
are largely independent of the cash inflows of other assets or groups of assets. The classification of assets into CGUs requires
significant judgment and interpretations with respect to the integration between assets, the existence of active markets, external
users, share infrastructures and the way in which management monitors Pine Cliff’s operations.
35
PINE CLIFF ENERGY LTD.
Impairment indicators
CONSOLIDATED FINANCIAL STATEMENTS
2016
Judgments are required to assess when impairment indicators exist and impairment testing is required. When assessing the
recoverability of petroleum and natural gas properties, each CGU’s carrying value is compared to its recoverable amount, defined as
the greater of its fair value less cost to sell and value in use. In determining the recoverable amount of assets, in the absence of
quoted market prices, impairment tests are based on reserve estimates, market value of undeveloped lands and other relevant
assumptions.
Estimates
Reserves base
Standards of Disclosure for Oil and Gas Activities
Petroleum and natural gas reserves are used in the calculation of depletion, impairment and impairment reversals and are depleted
on a unit of production basis at a rate calculated by reference to proved and probable reserves determined in accordance with
National Instrument 51-101
which incorporate the estimated future cost of
developing and extracting those reserves. Reserve estimates and their resulting cash flows are based on engineering data,
probability assessments of reserve recoveries, future prices and costs, future production rates, discount rates and the timing and
extent of future capital expenditures, all of which are subject to many uncertainties and interpretation. Management expects that
over time Pine Cliff’s reserve estimates will be revised, either upward or downward, based on updated information such as the
results of future drilling, production costs, testing and production levels and changes to forward petroleum and natural gas prices.
Exploration and evaluation assets
The application of the Company’s accounting policy for E&E expenditures requires judgment in determining whether it is likely that
future economic benefit exists when activities have not reached a stage where technical feasibility and commercial viability can be
reasonably determined. Factors such as drilling results, future capital programs, future operating expenses, as well as estimated
reserves are considered. In addition, management uses judgment to determine when E&E assets are reclassified to PP&E.
Decommissioning costs
Decommissioning costs will be incurred by the Company at the end of the operating life of the Company’s facilities and properties.
The ultimate decommissioning costs are uncertain and cost estimates can vary in response to many factors including changes to
relevant legal requirements, the emergence of new restoration techniques, experience at other production sites, and changes to the
credit-adjusted risk-free discount rate and expected inflation rate. The expected timing and amount of expenditure can also change,
for example, in response to changes in reserves or changes in laws and regulations or their interpretation. As a result, there could be
significant adjustments to the provisions established which would affect future financial results.
Income taxes
The Company recognizes the net deferred tax benefit related to deferred tax assets to the extent that it is probable that the
deductible temporary differences will reverse in the foreseeable future. Assessing the recoverability of deferred tax assets requires
the Company to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are
based on forecast cash flows from operations and the application of existing tax laws in each jurisdiction. To the extent that future
cash flows and taxable income differ significantly from estimates, the ability of the Company to realize the net deferred tax assets
recorded at the reporting date could be impacted. Additionally, future changes in tax laws in the jurisdictions in which the Company
operates could limit the ability of the Company to obtain tax deductions in future periods.
Contingencies
By their nature, contingencies will only be resolved when one or more future events occur or fail to occur. The assessment of
contingencies inherently involves the exercise of significant judgment and estimates of the outcome of future events.
d) Presentation currency
The Company’s functional and presentation currency is the Canadian dollar. Monetary assets and liabilities are translated into
Canadian dollars at the rates prevailing on the reporting date. Non-monetary assets and liabilities are translated into Canadian
dollars at the rates prevailing on the transaction dates. Exchange gains and losses are recorded as income or expense in the period in
which they occur.
36
PINE CLIFF ENERGY LTD.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of consolidation
CONSOLIDATED FINANCIAL STATEMENTS
2016
The Financial Statements include the accounts of Pine Cliff and its subsidiary companies, Geomark Exploration Ltd. (“
”),
Geomark Minerals USA Inc., WMC International Limited and Pine Cliff Border Pipelines Limited. All subsidiary companies are wholly
owned. All intercompany balances, transactions and earnings or losses are eliminated upon consolidation.
b) Revenue recognition
Geomark
Revenues from the sale of petroleum and natural gas are recorded when the significant risks and rewards of ownership have been
transferred to the customer. Revenue is measured at the fair value of the consideration received or receivable. Petroleum and
natural gas revenues are recognized when all of the following conditions have been satisfied:
•
•
•
•
Pine Cliff has transferred the significant risks and rewards of ownership of the production to the buyer which usually
occurs at the time petroleum or natural gas passes through a terminal point.
The amount of revenue can be measured reliably.
It is probable that the economic benefits associated with the transaction will flow to the Company.
The costs incurred or to be incurred in respect of the transaction can be reliably measured.
Dividend income is recorded when earned.
c) Foreign currency transactions
Items included in the financial statements of each consolidated entity are measured using the currency of the primary economic
environment in which the entity operates (the "
"). Foreign currency transactions are translated into the
Functional Currency using the exchange rates prevailing at the dates of the transaction. Foreign exchange gains and losses resulting
from the settlement of such transactions and from the translation of monetary assets and liabilities not denominated in the
Functional Currency of an entity are recognized in the consolidated statement of comprehensive loss.
d) Joint arrangements
Functional Currency
Pine Cliff conducts significant portions of its oil and gas operations through jointly controlled operations and the financial statements
reflect only the Company’s proportionate interest in such activities. Contractual arrangements for the Company’s jointly controlled
operations, whereby it does not have a 100% working interest, govern that the partners have rights to the assets and obligations for
the liability. It is possible that at some future date allocation adjustments to revenues and expenditures could result from revised
billings, audit or litigation with these other participants. Pine Cliff does not have any joint arrangements that are individually
material to the Company or that are structured through joint venture arrangements.
e) Cash
Cash includes short-term, highly liquid investments that mature within three months of the date of their purchase.
f) Investments
Investments consist of equity securities classified on initial recognition as available-for-sale and are carried at fair value. Fair value is
determined by multiplying the period end trading price of the investments by the number of equity securities held as at period end.
Unrealized holding gains and losses are recognized in other comprehensive income or loss. Net gains and losses arising on disposal
are recognized in net earnings.
g) Exploration and evaluation assets
E&E costs are initially capitalized with the intent to establish commercially viable reserves.
E&E includes undeveloped land license acquisitions, un-booked locations in acquisitions, exploration drilling and testing and directly
attributable general and administrative costs. Expenditures incurred prior to obtaining the legal right to explore are expensed as
incurred. E&E assets continue to be capitalized as long as sufficient progress is being made to assess the reserves and economic
viability of the well and/or related project. Once technical feasibility and commercial viability has been established, E&E assets are
transferred to PP&E. E&E assets are assessed for impairment either annually, upon transfer to PP&E or where indicators arise to
ensure they are not carried above their recoverable amounts.
37
PINE CLIFF ENERGY LTD.
h) Property, plant and equipment
CONSOLIDATED FINANCIAL STATEMENTS
2016
PP&E assets include developed assets acquired, transferred-in E&E costs, development drilling and other surface expenditures.
PP&E assets are carried at cost less accumulated depletion and depreciation and impairment losses. The initial cost of an asset is
comprised of its purchase price or construction cost, including expenditures such as drilling costs, the present value of the initial and
changes in the estimate of any decommissioning obligation associated with the asset, expenses on qualifying assets and costs that are
directly attributable to bringing the asset to the location and condition necessary to operate as intended by management and which
result in an identifiable future benefit. Improvements that increase capacity or extend the useful lives of the assets are capitalized.
Expenditures on major maintenance of producing assets include the cost of replacement assets or parts of assets, inspection costs or
overhaul costs. Where an asset, or part of an asset that was separately depreciated, is replaced and it is probable that there are
future economic benefits associated with the item, the expenditure is capitalized and the carrying amount of the replaced item is
derecognized. Inspection costs associated with major maintenance programs and necessary for continued operation of the asset are
capitalized and amortized over the period to the next inspection. All other maintenance costs are expensed as incurred.
i) Depletion and depreciation
When commercial production has commenced in an area, PP&E assets, including estimated future development costs, are depleted
using the unit-of-production method over their proved plus probable reserve life. Furniture, fixtures and other equipment are
depreciated over their estimated useful lives on a straight line basis. Overhauls and turnarounds are depreciated over their expected
life on unit of production. Depletion and depreciation is recognized in the consolidated statement of loss.
Depletion and depreciation methods, useful lives and residual values are reviewed annually, with any amendments considered to be
changes in estimates and accounted for prospectively.
j) Impairment of E&E and PP&E
The carrying amounts of the Company's E&E and PP&E assets are reviewed at the end of each reporting period to determine whether
there is any indication of impairment. If such indication exists, then the assets’ carrying amounts are assessed for impairment. For
the purpose of impairment testing, assets that are not evaluated individually are grouped together into CGUs.
The recoverable amount of an asset or a CGU is the greater of its value-in-use and its fair value. An impairment loss is recognized if
the carrying amount of an asset or its CGU exceeds its recoverable amount. In assessing the carrying value of its unproved
properties, the Company takes into account future plans for those properties, the remaining terms of the leases and other factors that
may be indicators of potential impairment. Impairment losses are recognized in the consolidated statement of loss. Impairment
losses recognized in respect of a CGU are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then
to reduce the carrying amount of the other assets of the CGU on a pro-rata basis.
For assets excluding goodwill, impairment losses recognized in prior periods are assessed at each reporting date for any indications
that the loss has decreased or no longer exists. If the amount of the impairment loss decreases in a subsequent period and the
decrease can be objectively related to an event occurring after the impairment was recognized, the impairment loss is reversed only
to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of
depletion and depreciation, if no impairment loss had been recognized.
k) Impairment of financial assets
A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the
estimated future cash flows of that asset. Significant financial assets are tested for impairment on an individual basis. The remaining
financial assets are assessed collectively in groups that share similar credit risk characteristics. An impairment loss in respect of an
available-for-sale financial asset is calculated by reference to its current fair value.
All impairment losses are recognized in the consolidated statement of comprehensive loss. An impairment loss is reversed if there is
an indicator that the impairment reversal can be related objectively to an event occurring after the impairment loss was recognized.
Any subsequent recovery of an impairment loss in respect of an investment in an equity instrument classified as available-for-sale is
reversed through other comprehensive loss instead of the statement of loss. For financial assets measured at amortized cost, the
reversal is recognized in the consolidated statement of comprehensive loss.
38
PINE CLIFF ENERGY LTD.
l) Decommissioning liabilities
CONSOLIDATED FINANCIAL STATEMENTS
2016
The Company recognizes a decommissioning obligation in the period in which it has a present legal or constructive liability and a
reasonable estimate of the amount can be made. On a periodic basis, management reviews these estimates, and changes, if any, are
prospectively applied. The decommissioning obligation is recorded as a liability, with a corresponding increase to the carrying
amount of the related asset. The capitalized amount is depleted on a unit-of-production basis over the life of the associated proved
plus probable reserves. Periodic revisions to the liability specific discount rates, estimated timing of cash flows and/or to the
original estimated undiscounted costs can also result in change to the decommissioning obligation. The decommissioning obligation
is increased each reporting period with the passage of time as reported in accretion expense and changes in the estimated future
cash flows are capitalized. Actual costs incurred upon settlement of the obligations are recorded against the provision to the extent
of the liability recorded and the remaining balance of the actual costs is recorded in the consolidated statement of comprehensive
loss.
m) Income taxes
Income tax is recognized in profit or loss, except to the extent that it relates to items recognized in other comprehensive loss or
directly in equity.
Current tax is the expected tax on taxable income less adjustments to prior periods using tax rates enacted, or substantively enacted
as at the reporting date in jurisdictions where the Company operates.
Deferred income taxes are recognized based on temporary differences arising between the tax value of assets and liabilities and their
carrying amounts in the Financial Statements. Deferred tax liabilities are not recognized if they arise from the initial recognition of
goodwill and are not accounted for if they arise from the initial recognition of an asset or liability in a transaction other than a
business combination that at the time of the transaction affects neither accounting nor taxable income. Deferred income taxes are
calculated on the basis of the tax laws enacted or substantively enacted as at the reporting date and apply to when the related
deferred income tax asset is realized or the deferred income tax liability is settled. Current and deferred income tax assets and
liabilities are offset when there is a legally enforceable right to settle on a net basis and when such assets and liabilities relate to
income taxes imposed by the same taxation authority.
A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences to the extent that it is
probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each
reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
n) Share-based payments
Under the Company’s stock option plan described in note 14, options to purchase common shares are granted to directors, officers,
employees, and consultants. The fair value of common share purchase options is calculated at the date of grant using the Black-
Scholes option pricing model and that value is recorded as compensation expense over the vesting period of the option with an
offsetting credit to contributed surplus. At the end of each reporting period, the Company assesses for subsequent periods its
estimates of the number of awards that are expected to vest and recognizes the impact of the revisions in the consolidated statement
of comprehensive loss. Upon exercise of share purchase options, the proceeds received net of any transaction costs and the fair value
of the exercised share purchase options are credited to share capital.
The Company estimates future forfeitures for stock options and expenses stock options based on the Company’s estimate of stock
options expected to reach vesting. Any difference between the number of stock options expected to vest and the number of stock
options which actually vest is accounted for as a change in estimate when those stock options become vested or are forfeited before
vesting.
o) Financial instruments
Financial instruments are measured at fair value on initial recognition of the instrument and are classified into one of the following
five categories: fair-value through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale financial
assets and financial liabilities at amortized cost.
Cash is classified as fair-value through profit or loss. Trade and other receivables and loan receivables are classified as loans and
receivables which are measured at amortized cost. Investments are classified as available-for-sale which are measured at fair value.
Trade and other payables, due to related party, subordinated promissory notes and bank debt are classified as financial liabilities at
amortized cost.
39
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2016
Subsequent measurement of financial instruments is based on their initial classification. Fair-value through profit or loss financial
instruments are measured at fair value and changes in fair value are recognized in the statement of consolidated comprehensive loss.
Available-for-sale financial instruments are measured at fair value with changes in fair value recorded in other comprehensive
income until the instrument is derecognized or impaired at which time the cumulative loss that had been recognized in other
comprehensive income (loss) (“
”) is reclassified to earnings or loss. The remaining categories of financial instruments are
recognized at amortized cost using the effective interest method.
p) Risk management contracts
OCI
The Company is exposed to market risks resulting from fluctuations in commodity prices, foreign currency exchange rates and
interest rates in the normal course of its business. The Company may use a variety of instruments to manage these exposures. For
transactions where hedge accounting is not applied, the Company accounts for such instruments using the fair value method by
initially recording an asset or liability, and recognizing changes in the fair value of the instruments in earnings as unrealized gains or
losses on risk management contracts. Fair values of financial instruments are based on third party quotes or valuations provided by
independent third parties. Any realized gains or losses on risk management contracts are recognized in net earnings in the period
they occur.
q) Earnings (loss) per share
Basic per share amounts are calculated by dividing the earnings or loss attributable to common shareholders of the Company by the
weighted average number of common shares outstanding during the reporting period.
Diluted per share amounts are calculated similar to basic per share amounts except that the weighted average common shares
outstanding are increased to include additional common shares from the assumed exercise of dilutive share options. The number of
additional outstanding common shares is calculated by assuming that the outstanding in-the-money share options were exercised
and that the proceeds from such exercises were used to acquire common shares at the average market price during the reporting
period.
r) Finance expenses
Finance expenses are comprised of interest expenses and bank charges on borrowings and the accretion of decommissioning
liabilities and subordinated promissory notes. Interest expenses and bank charges are considered operating expenses on the
statement of cash flows. Borrowing costs incurred for the construction of qualifying assets are capitalized during the period of time
that is required to complete and prepare the assets for their intended use or sale. Qualifying assets are those assets that necessarily
take a substantial period of time to get ready for their intended use. All other borrowing costs are recognized in earnings or loss.
The capitalization rate used to determine the amount of borrowing costs to be capitalized is the weighted average interest rate
applicable to the Company’s outstanding borrowings during the period.
ACCOUNTING POLICY AND STANDARD CHANGES
The nature and impact of each new standard or amendment is described below:
Changes in accounting policies
IFRS 11 Joint Arrangements (“IFRS 11”)
In May 2014, IFRS 11 Joint Arrangements, was clarified by adding new guidance on the accounting for the acquisition of an interest
”) decided that acquirers of such
in joint operations that constitute a business. The International Accounting Standards Board (“
interests shall apply all of the principles on business combinations accounting in IFRS 3,
and other IFRSs, that
do not conflict with the guidance in IFRS 11 and disclose the information that is required in those IFRSs in relation to business
combinations. The new IFRS 11 guidance is effective for annual periods beginning on or after January 1, 2016. Adoption of this
policy amendment did not result in an impact to the Company’s Financial Statements.
Future accounting pronouncements
Business Combinations,
IASB
IFRS 16 Leases
IFRS 16
(“
”)
In January 2016, the IASB issued IFRS 16 – Leases, which replaces IAS 17 – Leases and related interpretations. IFRS 16 eliminates
the classification of leases as finance or operating and introduces a single lessee accounting model for recognition and measurement,
which will require the recognition of assets and liabilities for most leases. IFRS 16 is effective for years beginning on or after
January
1, 2019. The Company is currently assessing the impact the adoption of this standard will have on the Financial Statements.
40
PINE CLIFF ENERGY LTD.
IFRS 15 Revenue from Contracts with Customers (“IFRS 15”)
CONSOLIDATED FINANCIAL STATEMENTS
2016
In May 2014, the IASB published the new revenue standard, IFRS 15, which specifies how and when revenue should be recognized
and requires more informative and relevant disclosures. The standard is required to be applied on first interim periods beginning on
or after January 1, 2018, with early application permitted. The Company is currently assessing the impact the adoption of this
standard will have on the Financial Statements.
IFRS 9 Financial Instruments
IFRS 9
(“
”)
In July 2014, the IASB has amended IFRS 9 which amends its classification and measurement of financial assets and introduces a new
expected loss impairment model. This standard is effective for annual periods beginning on or after January 1, 2018, with early
adoption permitted and shall be applied retrospectively. The Company is currently assessing the impact the adoption of this
standard will have on the Financial Statements.
4. INVESTMENTS
As at December 31, 2015, the Company had investments in three public companies, including Bonterra Energy Corp. (“
”) a
related party (see Note 7). All of the investments owned at December 31, 2015 were sold during the year ended December 31, 2016,
for proceeds of $5.6 million and a realized loss on investments of $4.3 million.
As at December 31, 2016, the Company had an investment in one public dividend paying company of $5.3 million, which was
received as partial consideration of $5.0 million (see Note 6), and an increase in fair value of $0.3 million recorded to OCI.
Other comprehensive earnings
Bonterra
Activity in OCI relates to the revaluation of investments held at December 31, 2016 of $0.3 million and the realization of losses
previously recorded in OCI for investments sold during 2016 of $6.3 million.
5. ACQUISITIONS
Acquisitions during the year ended December 31, 2016
Pine Cliff completed minor property acquisitions during the year for cash consideration of $1.1 million ($1.5 million of PP&E, net of
$0.4 million of decommissioning costs), not including prior year acquisition adjustments.
Acquisitions during the year ended December 31, 2015
Acquisition of new core area in December 2015
On December 11, 2015, Pine Cliff completed the acquisition of certain oil and natural gas assets in the Ghost Pine and Viking areas in
the Province of Alberta (the “
”) for cash consideration of $185.0 million, prior to any adjustments.
December 2015 Acquisition
Net assets acquired:
Property and equipment
Exploration and evaluation assets
Decommissioning liabilities
Consideration paid:
Cash
161,073
35,177
(18,083)
178,167
178,167
Transaction costs related to the December 2015 acquisition of $0.2 million were expensed in the year ended December 31, 2015 and
are included in general and administrative expenses in the consolidated statement of loss and are part of operating cash flows in the
consolidated statement of cash flows.
Acquisition of core area assets in May 2015
On May 29, 2015, Pine Cliff completed the acquisition of certain oil and natural gas assets in the Edson area and in the Southern
Assets area in the Province of Alberta (the “
”) for cash consideration of $14.1 million, prior to any
adjustments.
May 2015 Acquisition
41
PINE CLIFF ENERGY LTD.
The May 2015 Acquisition has been accounted for using the acquisition method and the purchase price was allocated to the assets
acquired and the liabilities assumed as follows:
CONSOLIDATED FINANCIAL STATEMENTS
2016
Net assets acquired:
Property and equipment
Exploration and evaluation assets
Decommissioning liabilities
Consideration paid:
Cash
14,604
684
(1,888)
13,400
13,400
Transaction costs related to the May 2015 acquisition of $0.1 million were expensed in the year ended December 31, 2015 and are
included in general and administrative expenses in the consolidated statement of loss and are part of operating cash flows in the
consolidated statement of cash flows.
6. DISPOSITIONS
Disposition of non-core oil assets in December 2016
On December 7, 2016 the Company disposed of certain non-core oil assets located in Central Alberta. The net assets sold and the
sales proceeds received consisted of:
Net assets disposed:
Property and equipment
Exploration and evaluation assets
Decommissioning liabilities
Consideration received:
Cash
Common shares in TSX listed acquirer
Disposition of non-core oil assets in September 2016
35,696
5,618
(9,642)
31,672
26,722
4,950
31,672
On September 12, 2016 the Company disposed of certain non-core oil assets located in Central Alberta. The net assets sold and the
sales proceeds received consisted of:
Net assets disposed:
Property and equipment
Exploration and evaluation assets
Decommissioning liabilities
Consideration received:
Cash
Disposition of royalty assets in June 2016
5,149
980
(751)
5,378
5,378
Royalty
Assets
On June 29, 2016, Pine Cliff completed the disposition of fee title land and other minor overriding royalty interests (the “
”). The Royalty Assets included 99,930 net fee title acres that were acquired in December 2015.
Net assets disposed:
Property and equipment
Gain on disposition
Consideration received:
Cash
42
PINE CLIFF ENERGY LTD.
24,184
518
24,702
24,702
Minor property dispositions
CONSOLIDATED FINANCIAL STATEMENTS
2016
Pine Cliff completed minor property dispositions during the year ended December 31, 2016 for cash consideration of $1.3 million
allocated to property, plant and equipment.
7. TRANSACTIONS WITH RELATED PARTIES
Management services agreement
Pine Cliff had a management services agreement with Bonterra, an oil and gas corporation that is publicly traded on the TSX and that
has some common directors and management to Pine Cliff, to provide executive services, technical services, accounting services, oil
and gas administration and office administration for Pine Cliff. Total fees for the year ended December 2016 and 2015 were $0.02
million and $0.06 million, plus the reimbursement of certain administrative costs. This agreement was terminated on March 31,
2016. As at December 31, 2016, Pine Cliff owed Bonterra $Nil (December 31, 2015 – $0.3 million).
Investment in Bonterra
During the second quarter of 2016 Pine Cliff sold 204,633 Bonterra common shares for proceeds of $5.4 million (as at December 31,
2015 – Pine Cliff held 204,633 shares with a fair value of approximately $3.5 million). See investment Note 4. For the year ended
December 31, 2016, Pine Cliff received dividend income of $0.1 million (year ended December 31, 2015 - $0.4 million) from its
Bonterra Common shares.
Related party transactions are in the normal course of operations and from time to time Pine Cliff and Bonterra may enter into
various transactions at market value in circumstances that are considered mutually beneficial.
Due to Related Party
2018 Related Party Note
On July 29, 2016, Pine Cliff issued a $5.0 million promissory note to the Company’s Chairman of the Board maturing on July 29, 2018
(“
”) that bears interest, payable monthly, at 0.25% less than the monthly average effective interest rate
paid to the Credit Facility. The 2018 Related Party Note can be repaid at any time without penalty and is secured by a $5.0 million
floating charge debenture over all of the Company’s assets and is subordinated to any and all claims in favor of the Credit Facility,
and the 2020 Note holder, as defined herein, in Note 11 and 12. Interest paid on the 2018 Related Party Note during 2016 was $0.1
million for the year ended December 31, 2016 (December 31, 2015 - $Nil).
8. EXPLORATION AND EVALUATION ASSETS
The following table reconciles Pine Cliff’s exploration and evaluation assets:
Exploration and evaluation assets:
Balance at December 31, 2014
Additions
Transfer to property, plant, and equipment
Acquisitions
Balance at December 31, 2015
Additions
Transfer to property, plant, and equipment
Impairment
Balance at December 31, 2016
Dispositions
Oil and gas
properties
7,097
1,301
(1,301)
35,861
42,958
88
(1,176)
(4,648)
30,579
(6,643)
Mineral
properties
2,029
963
-
2,992
39
-
-
3,031
-
Total
9,126
2,264
(1,301)
35,861
45,950
127
(1,176)
(4,648)
33,610
(6,643)
In 2016, $4.6 million of E&E costs relating to undeveloped land in Pine Cliff’s Southern CGU were deemed not to be commercially
viable and recorded as impairment of exploration and evaluation assets.
43
PINE CLIFF ENERGY LTD.
9. PROPERTY, PLANT AND EQUIPMENT
CONSOLIDATED FINANCIAL STATEMENTS
2016
The following table reconciles Pine Cliff’s PP&E assets:
Cost:
Balance at December 31, 2014
Additions
Transfer from exploration and evaluation
Acquisitions
Decommissioning liabilities
Balance at December 31, 2015
Additions
Transfer from exploration and evaluation
Acquisitions
Dispositions
Balance at December 31, 2016
Decommissioning liabilities
Accumulated depletion and depreciation:
Balance at December 31, 2014
Depletion and depreciation
Impairment
Balance at December 31, 2015
Depletion and depreciation
Balance at December 31, 2016
Dispositions
Carrying value at:
December 31, 2016
December 31, 2015
Impairment Assessment
Oil and gas
properties
401,651
5,417
1,301
177,258
52,373
638,000
8,842
1,176
(807)
(59,952)
545,780
(41,479)
Oil and gas
properties
(53,510)
(45,486)
(7,586)
(106,582)
(63,944)
(166,525)
4,001
Oil and gas
properties
379,255
531,418
Administrative
assets
810
504
-
-
-
1,314
190
-
-
-
1,504
-
Administrative
assets
(328)
(345)
-
(673)
(443)
(1,116)
-
Administrative
assets
388
641
Total
402,461
5,921
1,301
177,258
52,373
639,314
9,032
1,176
(807)
(59,952)
547,284
(41,479)
Total
(53,838)
(45,831)
(7,586)
(107,255)
(64,387)
(167,641)
4,001
Total
379,643
532,059
Property, plant and equipment includes oil and natural gas development and production assets that are grouped into CGUs for the
purpose of assessing impairment. An impairment test is performed whenever events and circumstances arising during the
development and production phase indicate that the carrying value of a CGU may exceed its recoverable amount. On a CGU basis,
each carrying amount is compared against its expected recoverable amount, defined as the greater of fair value less costs to sell or its
value in use. Fair value less costs to sell is determined as the amount that would be obtained for the sale of a CGU in an arm’s length
transaction between knowledgeable and willing parties. Fair value less costs to sell a CGU can also be determined by using
assumptions that an independent market participant may take into account. This evaluation could use discounted future net cash
flows of proved and probable reserves using forecast prices and costs including the development of prospective lands. Management
determines value in use for each CGU by estimating the present value of future net cash flows from continued production through
exploitation of its proved and probable reserves. Management applies a present value to these cash flows using a discount rate range
depending on the category of reserves being discounted. When it is determined that any CGU’s carrying value exceeds its
recoverable amount, that CGU is considered impaired and an impairment expense is reported that equals this excess.
For the purposes of determining whether impairment of assets has occurred, the extent of any impairment or its reversal,
management exercises their judgment in estimating future cash flows for the recoverable amount, being the higher of fair value less
costs to sell and value in use. These key judgments include estimates about recoverable reserves, forecast benchmark commodity
prices, royalties, operating costs and discount rates.
As at December 31, 2016 the Company has four CGUs being the Southern CGU, Edson CGU, Central Gas CGU, and Coal Bed Methane
CGU. The Company disposed of its Central Oil CGU during the year ended December 31, 2016. Impairment testing of all CGUs was
performed as at December 31, 2016. The Company determined the fair value less costs to sell for all four CGUs exceeds the carrying
amounts as at December 31, 2016.
44
PINE CLIFF ENERGY LTD.
The following table outlines forecast benchmark prices and exchange rates used in the Company’s impairment test as at December
31, 2016.
CONSOLIDATED FINANCIAL STATEMENTS
2016
$C to US$ Foreign
1
exchange rate
1
WTI Oil (US$/Bbl)
Year
1.33
2017
1.29
2018
1.25
2019
1.21
2020
1.18
2021
1.18
2022-2030
1.18
Thereafter
1
Source: McDaniel & Associates Consultants Ltd. price forecasts, effective January 1, 2017.
10. DEFERRED TAXES
55.00
58.70
62.40
69.00
75.80
84.63
+2.0%/yr
Edmonton Light Crude Oil
1
AECO Gas
1
(Cdn$/Bbl)
(Cdn$/MMBtu)
69.80
72.70
72.50
81.10
86.60
96.66
+2.0%/yr
3.40
3.15
3.30
3.60
3.90
4.44
+2.0%/yr
The Company has recorded a deferred tax asset related to the benefit of tax pools, as it is probable that they will be recovered.
Loss before income taxes
Corporate income tax rate
Computed income tax recovery
Non-taxable dividends
Non-deductible compensation expense
Changes in tax rate
Changes in the unrecorded benefit of tax pools
Realized loss on sale of investments
Other
Deferred income tax recovery
2016
Year ended December 31
(61,513)
2015
27%
(34,514)
(16,609)
26%
(28)
(8,974)
863
(103)
-
880
3,418
(2,330)
1,955
392
(725)
-
(11,126)
(122)
(10,257)
Deferred income tax recovery varies from the amount that would be computed by applying federal and provincial income tax rates as
follows:
Deferred income tax assets (liabilities):
Share issue costs
Investment
Decommissioning liabilities
Property and equipment
Capital losses carried forward
Non-capital losses carried forward
Asset before unrecognized deferred tax
Less: unrecognized deferred tax
Net deferred income tax asset
2016
1,341
(47)
55,981
(24,710)
155
20,980
53,700
(4,002)
49,698
Year ended December 31
2015
1,813
496
64,913
(41,192)
128
13,499
39,657
(1,037)
38,620
Pine Cliff has approximately $407.9 million in tax pools at December 31, 2016 (December 31, 2015 - $480.8 million) available for
future use as deductions from taxable income. Included in these pools are estimated non-capital loss carry forwards of $77.7 million
(December 31, 2015 - $50.0 million) that expire between the years 2030 and 2036.
45
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2016
The Company has the following tax pools, which may be used to reduce taxable income in future years, limited to the applicable rates
of utilization:
2016
50,982
261,452
10,537
74
113
4,968
77,703
2,027
407,856
Undepreciated capital costs
Canadian oil and gas property expenditures
Canadian development expenditures
Canadian exploration expenditures
Eligible capital expenditures (CEC)
Share issue costs
Non-capital losses carried forward
1
Capital losses carried forward
Rate of Utilization (%)
20 - 100
10
30
100
7
20
100
1
The capital losses carried forward can only be claimed against taxable capital gains.
11. BANK DEBT
Syndicate
”) with five Canadian
As at December 31, 2016, the Company had a $60.0 million syndicated credit facility (the “
Financial Institutions (the “
”) (December 31, 2015 - $185.0 million Credit Facility). The Credit Facility consists of a $50.0
million revolving syndicated credit facility and a $10.0 million revolving operating facility for a total facility of $60.0 million. Security
for the Credit Facility consists of floating demand debentures totaling $150.0 million and a general security agreement with first
ranking over all current and acquired properties. Amounts drawn under the Credit Facility at December 31, 2016, were $30.9
million (December 31, 2015 - $156.0 million). Amounts borrowed under the Credit Facility bear interest at the Canadian prime rate
plus 1.0% to 3.5% or the bankers’ acceptance rates plus 2.0% to 4.5%, depending, in each case, on the ratio of consolidated debt to
EBITDA and the Company’s borrowing base. EBITDA is calculated as earnings (loss) excluding depreciation, depletion and accretion,
share based payments, interest, taxes and other non-cash items.
Credit Facility
The Credit Facility has a 364 day revolving period maturing July 28, 2017, and if it is not renewed it will convert to a one day term
loan due on July 29, 2017. The Credit Facility is subject to semi-annual reviews on November 30
. As a result of the
dispositions and associated bank line repayments, the November 30, 2016 review was waived and the May 31, 2017 review was
rescheduled to March 31, 2017. The Credit Facility has no fixed terms of repayment.
st
and May 31
th
As at December 31, 2016, the Company had $1.7 million of letters of credit issued against its Credit Facility (December 31, 2015 -
$0.6 million). The Credit Facility does not contain any financial covenants but Pine Cliff is subject to various nonfinancial covenants
under its Credit Facility. Compliance with these covenants is monitored on a regular basis and as at December 31, 2016, Pine Cliff
was in compliance with all covenants.
12. SUBORDINATED PROMISSORY NOTES
Subordinated promissory notes due September 30, 2020:
Issued – August 10, 2016
Accretion expense
Subordinated promissory notes due September 30, 2020 as at December 31, 2016
Subordinated promissory notes due July 29, 2018:
Issued – July 29, 2016
Subordinated promissory notes due July 29, 2018 as at December 31, 2016
Total subordinated promissory notes, as at December 31, 2016
Subordinated promissory notes due September 30, 2020
Units
Unit
29,004
82
29,086
6,000
6,000
35,086
2020 Note
On August 10, 2016, the Company issued 30,000 units (“
”) at a price of $1,000 per Unit for aggregate proceeds of
” or “
$30.0 million. Each Unit is comprised of: (i) one promissory note with a par value of $1,000 per note and bearing interest at 6.75%
per annum ("
"). The 2020
"), which is payable semi-annually; and (ii) 150 Common Share purchase warrants ("
Notes mature on September 30, 2020 and all or a portion of the principal amount outstanding can be repaid without penalty after
August 10, 2017. The 2020 Notes are secured by a $30.0 million floating charge debenture over all of the Company’s assets and is
subordinated to any and all claims in favor of the Credit Facility. A total of 4.5 million Warrants were issued, entitling the holder to
purchase one Common Share for $1.38 until August 10, 2018.
Warrants
46
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2016
The 2020 Notes were determined to be a hybrid instrument with an embedded derivative. The fair value of the debt component of
the 2020 Notes was determined on issuance to be 7.8%, using the effective interest rate method, by discounting future payments of
interest and principal with the residual value allocated to Warrants. The value of the debt will accrete up to the principal balance at
maturity.
Subordinated promissory notes due July 29, 2018
On July 29, 2016, the Company issued $6.0 million in promissory notes maturing on July 29, 2018 (“
”) and bearing
interest at 0.25% less than the monthly average effective interest rate paid on the Credit Facility, payable monthly. The 2018 Notes
were issued to a shareholder and a relative of that shareholder of the Company, owning directly or by discretion and control, greater
than 10% of the Company’s outstanding Common Shares and can be repaid at any time without penalty. The 2018 Notes are secured
by $6.0 million of floating charge debentures over all of the Company’s assets and are subordinated to any and all claims in favor of
the Credit Facility and the 2020 Note holder.
13. DECOMMISSIONING LIABILITIES
2018 Notes
The total future decommissioning provision was estimated by management based on the Company’s working interest in its wells and
facilities, estimated costs to remediate, reclaim and abandon the wells and facilities and estimated timing of the costs to be incurred
in future periods.
At December 31, 2016, the estimated total undiscounted and uninflated amount required to settle the decommissioning liabilities
was $240.2 million (December 31, 2015 - $315.4 million). The provision has been calculated assuming a 1.76% inflation rate
(December 31, 2015 – 1.72%). These obligations are currently expected to be settled based on the useful lives of the underlying
assets which extend beyond 40 years into the future. This amount has been discounted using an average risk-free interest rate of
2.39% (December 31, 2015 – 2.61%).
Changes to decommissioning liabilities were as follows:
Decommissioning provision, January 1, 2016
Provisions related to dispositions
Provisions related to acquisitions
Increase in liabilities relating to development activities
Decommissioning expenditures
Revisions (change in estimate and discount rates)
Accretion expense during period
Decommissioning provision, December 31, 2016
14. SHARE CAPITAL
Authorized
2016
240,452
(10,393)
505
301
(279)
(31,892)
5,189
203,883
As at December 31,
2015
164,513
-
20,034
44
-
52,329
3,532
240,452
The Company is authorized to issue an unlimited number of common shares without nominal or par value. The Company is also
authorized to issue, in one or more series, an unlimited number of Class B Preferred Shares without nominal or par value.
Issued
Issued and outstanding share capital continuity (000s):
Balance at January 1, 2015
Shares issued pursuant to public share offerings
Exercise of options
Share issue costs, net of tax
Balance at December 31, 2015
Share issue costs, net of tax
Exercise of options
Balance at December 31, 2016
47
PINE CLIFF ENERGY LTD.
Common Shares
233,879
66,666
4,647
-
305,192
-
307,076
1,884
Share capital
191,319
71,999
5,722
(2,231)
266,809
-
268,743
1,934
Per share calculations
CONSOLIDATED FINANCIAL STATEMENTS
2016
The average market value of the Company’s shares for the purposes of calculating the dilutive effect of share options was based on
quoted market prices for the period that the options were outstanding. In calculating the weighted average number of diluted shares
outstanding for the years ended December 31, 2016 and 2015, all stock options were excluded as they were anti-dilutive.
Numerator
Earnings per share calculation:
Loss for the year
Denominator (000s)
Weighted-average common shares outstanding – basic and diluted
Loss per share – basic and diluted ($)
Stock options
2016
Year ended December 31
2015
(50,387)
306,329
(0.16)
(24,257)
240,149
(0.10)
The Company provides an equity settled stock option plan (the “Option Plan”) for its directors, employees and consultants. Under
the Option Plan, the Company may grant stock options up to 10% of outstanding common shares on the grant date. The term and
vesting period of the options granted are determined at the discretion of the board of directors. The exercise price of each option
granted equals the market price of the Company’s stock immediately preceding the date of grant and the option’s maximum term is
five years.
The following table summarizes changes in the number of stock options outstanding:
Stock options issued and outstanding:
Outstanding, December 31, 2014
Granted
Exercised
Expired
Forfeited
Outstanding, December 31, 2015
Granted
Exercised
Expired
Forfeited
Outstanding, December 31, 2016
Options
(000s)
15,695
6,878
(4,647)
(350)
(338)
17,238
12,030
(1,884)
(3,471)
(1,140)
22,773
Weighted-average
exercise price
($ per share)
1.15
1.11
0.76
1.55
1.29
1.23
1.12
0.55
1.43
1.22
1.20
The following table summarizes information about stock options outstanding at December 31, 2016:
Exercise price:
$0.73 - $1.15
$1.16 - $1.58
$1.59 - $1.97
Stock options
outstanding
(000s)
8,432
11,327
3,014
22,773
Weighted-average
remaining term
(years)
1.8
2.8
0.8
2.2
Stock options
exercisable
(000s)
2,821
350
1,463
4,634
Weighted-average
remaining term
(years)
0.7
0.6
0.3
0.6
The Company records share-based payment expense over the vesting period, which ranges between one to three years, based on the
fair value of the options granted to employees, directors and consultants. In the year ended December 31, 2016, the Company
granted 12,030,000 stock options (2015 – 6,877,900) with a fair value of $0.39 (2015 - $0.46) per option using the Black-Scholes
option pricing model using the following key assumptions:
48
PINE CLIFF ENERGY LTD.
Assumptions (weighted average):
Exercise price ($)
Estimated volatility of underlying common shares (%)
Expected life (years)
Risk-free rate (%)
Forfeiture rate (%)
Expected dividend yield (%)
CONSOLIDATED FINANCIAL STATEMENTS
2016
2106
1.12
52.1
3.0
0.8
3.9
0.0
Year ended December 31,
2015
1.11
63
2.9
0.7
3.9
0.0
Estimated volatility is measured as the standard deviation of expected share price returns based on statistical analysis of historical
daily share prices for a representative period.
Warrants
The Warrants were issued as part of the Unit financing completed on August 10, 2016 (see note 12). Each Warrant entitles the
holder to purchase one common share of the Company for $1.38 until August 10, 2018.
The following table summarizes changes in the number of Warrants outstanding:
Issued with 2020 Note
Unit issue costs
Balance, December 31, 2016
15. FINANCE EXPENSES
Number of Warrants (000s)
4,500
-
4,500
Amount of Warrants ($000s)
995
(37)
958
Finance expenses are comprised of:
Finance expenses:
Interest expense and bank charges
Accretion on decommissioning liabilities
Accretion on subordinated promissory notes
Total finance expenses
16. GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses by nature were as follows:
General and administration expenses:
Staff expenses
Consultants
Public company expenses
Professional fees
Intercompany administration
Business development
Foreign exchange
Office and other costs
Bad debt expense
Transaction fees (non-recurring)
Overhead recoveries
Total general and administration expenses
49
PINE CLIFF ENERGY LTD.
2016
Year ended December 31
7,034
2015
5,189
1,919
82
3,532
12,305
-
5,451
2016
Year ended December 31
3,946
2015
1,246
3,452
265
779
970
78
20
485
39
60
-
32
1,521
(145)
458
1,027
-
-
(1,506)
283
6,959
(212)
5,839
17. KEY MANAGEMENT REMUNERATION
CONSOLIDATED FINANCIAL STATEMENTS
2016
Key management personnel are those persons, including all directors and officers, having authority and responsibility for planning,
directing and controlling the activities of the Company. In addition to their salaries, the Company also provides non-cash benefits to
its directors and officers. Directors and officers also participate in the Option Plan. Director and officer compensation was as
follows:
2016
Year ended December 31
1,182
2015
Key management remuneration:
1,768
1
1,483
Short-term benefits
2,950
2
1,952
Share-based payments
Total key management remuneration
3,435
1
Short-term benefits includes the salary and other non-cash short-term benefits of Pine Cliff’s President and Chief Executive Officer, Chief Financial
Officer (10.5 months), Vice President Finance (1.5 months), Chief Operations Officer, Vice President of Business Development (previously Manager of
Business Development), Senior Geologist, and former Chief Financial Officer (1.5 months), as well as director fees paid through Pine Cliff.
2
Share-based payments computed for officers and the board of directors are included in Note 14 includes the fair value of awards expensed in the
year.
18. FINANCIAL INSTRUMENTS
Financial instruments and fair value measurement
Financial instruments of the Company consist of cash, trade and other receivables, investments, trade and other payables, due to
related party, subordinated promissory notes, and bank debt. The carrying values of cash, trade and other receivables, and trade and
other payables approximate their respective fair values due to their short-term to maturity. The carrying values due to related party,
subordinated promissory notes, and bank debt approximate their respective fair values due to their interest rates reflecting current
market conditions.
Assets and liabilities that are measured at fair value are classified into levels, reflecting the method used to make the measurements.
Level 1 fair value measurements are based on quoted prices that are available in active markets for identical assets or liabilities as of
the reporting date. Active markets are those in which transactions occur in sufficient frequency and volume to provide pricing
information on an ongoing basis. Pine Cliff has no level 2 or level 3 financial instruments. Assessment of the significance of a
particular input to the fair value measurement requires judgment and may affect the placement within the fair value hierarchy level.
The following table sets out the Company’s classification, carrying value and fair value of financial assets and liabilities as at
December 31, 2016 and December 31, 2015:
December 31, 2016
Description
Cash
Trade and other receivables
Investments
Trade and other payables
Due to related party
Subordinated promissory notes
Bank Debt
Level
1
1
Carrying value
148
20,012
5,295
(21,319)
(5,000)
(35,086)
(30,851)
Fair value
148
20,012
5,295
(21,319)
(5,000)
(35,086)
(30,851)
December 31, 2015
Carrying value
833
16,473
3,590
(9,978)
-
-
(155,938)
Fair value
833
16,473
3,590
(9,978)
-
-
(155,938)
50
PINE CLIFF ENERGY LTD.
19. SUPPLEMENTAL CASH FLOW INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS
2016
Changes in non-cash working capital:
Trade and other receivables
Prepaid expenses and deposits
Trade and other payables and accrued liabilities
Change related to:
Operating activities
Investing activities
Financing activities
2016
Year ended December 31
2015
(3,539)
(241)
11,341
7,561
3,027
4,304
230
7,561
(2,817)
(1,260)
(1,310)
(5,387)
(5,050)
(107)
(230)
(5,387)
Cash interest paid in the year ended December 31, 2016 was $7.0 million (December 31, 2015 – $1.9 million). Dividends received
during the year ended December 31, 2016 were $0.1 million (December 31, 2015 – $0.4 million).
20. RISK MANAGEMENT
The Company is exposed to a number of risks associated with its financial assets and liabilities. These risks include commodity price
risk, interest rate risk, equity price risk, foreign exchange risk, credit risk and liquidity risk. The Company has several practices and
policies in place to help mitigate these risks.
Market risk
Market risk is the risk that the fair value or future cash flow of the Company’s financial instruments will fluctuate because of changes
in market prices. Components of market risk to which Pine Cliff is exposed are discussed below.
Commodity Price Risk
The Company is exposed to commodity price risk since its revenues are dependent on the prices of crude oil and natural gas.
Commodity prices have fluctuated widely during recent years due to global and regional factors including, but not limited to, supply
and demand, inventory levels, weather, economic and geopolitical factors. Changes in oil and natural gas prices may have a
significant effect, positively or negatively, on the ability of the Company to meet its obligations, capital spending targets and expected
operational results. Currently, the Company does not have any risk management contracts to sell its oil and gas commodities.
Commodities are sold at market prices at the date of sale.
Interest Rate Risk
The Company is principally exposed to interest rate risk to the extent it draws on its variable rate debt. Changes in market interest
rates could affect the cash flow associated with the credit facility. If interest rates applicable to Pine Cliff’s credit facility increased or
decreased by one percent it is estimated that Pine Cliff’s loss for the year ended December 31, 2016 would have increased or
decreased, respectively, by $0.4 million (December 31, 2015 - $0.6 million).
Equity price risk
Equity price risk refers to the risk that the fair value of the investments will fluctuate due to changes in equity markets. Equity price
risk arises from the realizable value of the investments that the Company holds which are subject to variable equity prices which on
disposition gives rise to a cash flow equity price risk. The Company will assume full risk in respect of equity price fluctuations.
Foreign Exchange Risk
The Company is exposed to foreign exchange risk because the oil and natural gas prices it receives are primarily determined in
reference to United Stated dollar denominated commodity prices. The Company manages this risk by monitoring the foreign
exchange rate and evaluating its effect on cash flows. Pine Cliff has not entered into any derivative financial instruments to manage
this risk.
51
PINE CLIFF ENERGY LTD.
Credit Risk
CONSOLIDATED FINANCIAL STATEMENTS
2016
Credit risk is the risk that a third party will not complete its contractual obligations under a financial instrument and cause the
Company to incur a financial loss. Pine Cliff’s maximum exposure to credit risk is the sum of the carrying values of its trade and other
receivables and cash. The carrying values of these financial assets reflect management’s assessment of the associated maximum
exposure to such credit risk.
To mitigate the credit risk on its cash, the Company maintains its cash balances with major Canadian chartered banks. To mitigate
the credit risk on trade and other receivables, Pine Cliff assesses the financial strength of its counterparties and enters into
relationships with larger purchasers with established credit histories.
The Company’s trade and other receivables balance at December 31, 2016 of $20.0 million
(December 31, 2015 – $16.5 million), is
primarily with oil and gas marketers, joint venture partners and crown royalty credits with the Province of Alberta. Amounts due
from these parties have generally been received within 30 to 60 days. When determining whether amounts that are past due are
collectible, management assesses the creditworthiness and past payment history of the counterparty, as well as the nature of the past
due amount. There are no material financial assets that Pine Cliff considers past due. The Company generally considers amounts
greater than 90 days to be past due. As at December 31, 2016, there was $1.8 million (December 31, 2015 - $1.3 million) of trade and
other receivables over 90 days. As at December 31, 2016 the Company does not consider any trade and other receivables to be
impaired.
Pine Cliff assesses its financial assets quarterly to determine if there has been any impairment. During the year ended December 31,
2016, the Company recorded $0.5 million (December 31, 2015 - $Nil) bad debt expense against trade and other accounts receivables.
Liquidity Risk
Liquidity risk includes the risk that, as a result of Pine Cliff’s operational liquidity requirements, the Company will not have sufficient
funds or ability to obtain financing to settle a transaction on the due date or continue to fund its exploration and development
projects. This could result in Pine Cliff being forced to sell assets at a value which is less than what they are worth or the Company
may be unable to settle or recover financial assets.
At December 31, 2016 the Company had a $60.0 million Credit Facility, of which $30.9 million was drawn. The unused portion of the
Credit Facility and cash provided by operating activities are expected to allow Pine Cliff to meet its financial liabilities, as well as
future capital requirements. Pine Cliff will also consider additional short-term financing or issuing equity in order to meet its future
liabilities, if required.
21. COMMITMENTS
As at December 31, 2016, the Company has the following lease commitments and other contractual obligations:
2017
2018
2020
2019
2021
Thereafter
($000s)
1
Subordinated promissory notes
Trade and other payables
Due to related party
Bank loan – principal
Future interest
Firm service commitments
Vehicle leases
Office and equipment leases
Total commitments and contingencies
The subordinated promissory notes for commitments are presented at the principal amount.
6,000
-
5,000
-
2,370
2,816
451
438
17,075
-
21,319
-
30,851
3,629
4,615
506
495
61,415
1
22. CAPITAL STRUCTURE
-
-
-
-
2,025
1,613
344
436
4,418
30,000
-
-
-
1,519
1,326
266
464
33,575
-
-
-
-
-
867
106
464
1,437
-
-
-
-
-
688
-
922
1,610
The Company’s objectives when managing capital, which the Company defines to include shareholders’ equity and net debt, is to
ensure that it has the financial capacity, liquidity and flexibility to fund its capital program and acquisitions. As it is not unusual for
capital expenditures and acquisitions to exceed cash flow from operating activities in a given period, the Company is required to
maintain financial flexibility and liquidity to maintain an optimal capital structure to reduce the cost of capital. In order to maintain
or adjust the capital structure, the Company may issue debt, new shares or a combination thereof and make adjustments to its capital
investment programs.
52
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2016
The Company defines and computes its net debt as follows:
Bank debt
Due to related party
1
Subordinated promissory notes
Trade and other payables and accrued liabilities
Less:
Trade and other receivables
Cash
Prepaid expenses and deposits
Investments
Net debt
Equity
The subordinated promissory notes for net debt are presented at the principal amount.
1
December 31, 2016
30,851
5,000
36,000
21,319
(20,012)
(148)
(3,491)
(5,295)
64,224
195,758
December 31, 2015
155,938
-
-
9,978
(16,473)
(833)
(3,250)
(3,590)
141,770
234,407
The Company monitors the leverage in its capital structure and the strength of its balance sheet by reviewing its net debt to equity
ratio and its debt-to- funds flow from operations (cash flow from operating activities before changes in non-cash working capital)
ratio. Debt-to-funds flow from operations and net debt do not have a specified meaning under IFRS and may not be comparable to
measures used by other companies.
As Pine Cliff’s oil and gas production increases, cash provided by operating activities is expected to increasingly provide the
necessary capital for oil and gas exploration and development activities. However, due to the potential impact of adverse changes in
commodity prices, production rates, capital efficiencies and material and service costs, Pine Cliff may not generate sufficient cash
from operating activities to entirely fund its planned oil and gas capital programs, minerals exploration programs or future
acquisitions. Accordingly, the Company will continually evaluate the stage of development of its proved and producing reserves, the
results of the minerals exploration program and the expected return on investment of acquisitions and consider issuing equity
and/or debt to provide additional financing to maintain appropriate net debt and equity levels. The Company sets the amounts of
capital in proportion to risk and manages to ensure the Company’s net debt to equity ratio is less than one. Net debt to equity is
computed as follows:
The Company considers funds flow from operations to be a key performance measure as it demonstrates the Company’s ability to
generate funds necessary to repay debt and to fund future growth through capital investment. Net debt-to-funds flow from
operations is computed as follows:
Net debt to equity ratio:
Net debt
Equity
Net debt to equity
Net debt-to-funds flow from operations calculation:
Cash provided by operating activities
Increase (decrease) in non-cash working capital
Abandonments
Funds flow from operations
Net debt
Net debt-to-funds flow from operations
December 31, 2016
64,224
195,758
0.33
December 31, 2016
22,489
(3,027)
279
19,741
64,224
3.3
December 31, 2015
141,770
234,407
0.60
December 31, 2015
20,768
5,050
-
25,818
141,770
5.5
The Company’s financial objectives and strategy as described above have remained substantially unchanged over the reporting
periods. These objectives and strategy are reviewed on an annual basis. The Company believes its ratios are within reasonable
limits, in light of the relative size of the Company and its capital management objectives.
53
PINE CLIFF ENERGY LTD.
BOARD OF DIRECTORS
Gary J. Drummond
George F. Fink - Chairman
Philip B. Hodge
Randy M. Jarock
Carl R. Jonsson
William S. Rice
OFFICERS
Philip B. Hodge
President and Chief Executive Officer
Cheryne A. Lowe
Chief Financial Officer and Corporate Secretary
Terry L. McNeill
Chief Operating Officer
Heather A. Isidoro
Vice President, Business Development
HEAD OFFICE
th
Street SW
850, 1015 – 4
Calgary, Alberta T2R 1J4
Phone: (403) 269-2289
Fax: (403) 265-7488
CORPORATE INFORMATION
REGISTRAR AND TRANSFER AGENT
2016
Computershare Trust Company of Canada
AUDITORS
Deloitte LLP
BANKERS
Toronto-Dominion Bank
Alberta Treasury Branches
National Bank of Canada
Canadian Western Bank
Business Development Bank of Canada
STOCK EXCHANGE LISTING
TSX Exchange
Trading Symbol: PNE
WEBSITE
www.pinecliffenergy.com
INVESTOR CONTACT
info@pinecliffenergy.com