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WWW.PINECLIFFENERGY.COM
Long-term Value Focus
Annual Report 2019
MESSAGE TO SHAREHOLDERS
2019
Despite all the negative news these days regarding OPEC oil supply, pipeline protests, politics and the coronavirus, I am pleased to
advise you that I am more positive on the Canadian natural gas business than I have been for some time. Notwithstanding that we
experienced one of the lowest AECO natural gas pricing environments in 20 years during the summer of 2019, Pine Cliff made
significant strides in meeting its long-term goal of enhancing shareholder value. During this past turbulent year, Pine Cliff generated
positive adjusted funds flow, added to its inventory of Pekisko oil drilling locations, extended the maturity on its debt and raised
equity to fund the development of its Pekisko oil play.
TSX: PNE
WWW.PINECLIFFENERGY.COM
Highlights from Pine Cliff’s fourth quarter and year ended 2019 were:
•
•
•
•
•
generated $5.0 million of adjusted funds flow ($0.02 per basic share) for the three months ended December 31, 2019
and $5.9 million of adjusted funds flow ($0.02 per basic share) for the year ended December 31, 2019;
realized a $2.15 per Mcf gas price for the year ended December 31, 2019, 23% higher than the AECO 5A benchmark
of $1.75 per Mcf;
closed an acquisition of oil and natural gas assets in the Ghost Pine area of Central Alberta for cash consideration of
$8.8 million (after closing adjustments) on May 31, 2019, which added over 1,600 Boe/d (79% natural gas, 12%
natural gas liquids and 9% oil) as of the closing date and increased the Company’s undeveloped Pekisko oil locations
as at December 31, 2019 by eight gross (8.0 net) booked locations;
exchanged its $49.0 million subordinated promissory notes for term debt, and extended $42.0 million of debt originally
expiring in 2020 to December 31, 2024; and
drilled and completed two 100% working interest Pekisko oil wells that came on production in December 2019 and
January 2020, respectively.
Strengthening of the Balance Sheet and Adding Oil Drilling Inventory
When I reflect on the accomplishments that our team achieved in 2019, the two that stand out the most for me were first, the
refinancing of our debt and second, completing a financing and acquisition which added significant economic oil drilling inventory.
Both of these events were achieved as a result of our unique shareholders.
It cannot be underestimated how important it was for Pine Cliff to refinance and extend its debt. I have never seen access to capital
as constrained as it is right now in our industry, and having debt mature during a low part of the commodity cycle is extremely
problematic when capital is constrained. What is quite unique about Pine Cliff is that all of our debt is held by major shareholders
(AIMCo, the Chairman of our Board and a third party shareholder who owns more than 10% of our stock), all of whom believe that
investing in a natural gas business will provide a good rate of return for years to come. The investment industry likes to use simple
ratios to rank and judge companies, but having stakeholders who are willing to extend debt during one of the lowest natural gas price
cycles we have ever experienced, does not show up in any ratio or analytic. In addition, to have those same stakeholders, in a year
like we just experienced, step up and acquire more Pine Cliff stock alongside management to complete a key strategic acquisition, is
a strong testament to the belief they have in our business model. I want to personally thank those partners on behalf of all of our
shareholders. Their conviction in our business has made us stronger during a difficult period when others in our industry have been
less fortunate.
Oil Drilling
I have been asked by shareholders whether we are changing our “story” with the oil drilling in late 2018 and in 2019. My short answer
is no. We have always run Pine Cliff as owners, and therefore we look to use any excess cash flow where we think the most value
can be created. In the early years at Pine Cliff, we felt that building our low decline natural gas production assets was the best use of
our resources, so we completed eight transactions from 2012 to 2015 to grow from 100 Boe/d to ~24,000 Boe/d. In 2016 and 2017
we encountered weak natural gas prices, so we pivoted to focus on debt reduction as we lowered our net debt position from $141.8
million at the end of 2015 to $56.8 million at the end of 2018. In late 2018, we drilled our first Pekisko oil well and based on its
success, we capitalized on an acquisition opportunity in early 2019 to add significant oil drilling inventory at an attractive price. Our
production is still 91% natural gas, and we still believe that producing natural gas will deliver significant value to our shareholders in
the coming years, but in the interim, our oil and liquids production in 2019 contributed to 21% of our revenue. By increasing our oil
and liquids production and inventory in the past two years, we have improved the sustainability of our business and added more
flexibility to where we can maximize value for future capital allocation. We have tentatively planned to drill another oil well in late
2020, but we will only do so if that is the best use of those funds at that time.
MESSAGE TO SHAREHOLDERS
2019
Outlook
There are several major items that are the basis for my cautious optimism. First, 2019 was the first time in six years that Western
Canada natural gas production declined. Second, despite a warm winter to date, Western Canada natural gas storage levels are still
hitting new five year lows, which is another positive piece of news for Western Canada natural gas producers. Thirdly, the
implementation of TC Energy’s Temporary Service Protocol (TSP) in October 2019 was invoked to reduce price volatility, and to
date, it appears to be having the desired impact as summer forward prices are currently more than 50% higher than the summer 2019
prices we experienced. And fourthly, a weakening global oil price will reduce US drilling, which in turn will reduce natural gas supply.
The single biggest source of natural gas production growth in the US last year was associated gas from oil drilling. These four events
are all important steps to bringing our supply/demand dynamic back to a level where prices should show less volatility and have the
ability to strengthen.
TSX: PNE
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2020 also brings us another year closer to the projected startup of the LNG Canada project in 2024. Although I am sure there will
be more hurdles to jump before Canada is able to join the growing number of global LNG suppliers, I am optimistic that our
Canadian natural gas will play a vital role in reducing global emissions.
2020 will not be an easy year for Pine Cliff. We continue to challenge our team to lower operating costs while at the same time
maintaining or even raising our level of safety and protection of our environment. Our goal is not just to survive through these
difficult times, but improve and come out stronger than ever. Thank you for your patience as our shareholders and we hope that it
is of some comfort to you that we are continuing to work every day to strengthen our business and ultimately improve our long term
shareholder returns.
Yours truly,
Phil Hodge
President and Chief Executive Officer
March 11, 2020
Please refer to the attached Management’s Discussion and Analysis for Reader Advisories regarding forward-looking information, non-GAAP 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 period ended December 31, 2019, which can be found on www.sedar.com and is subject to the same cautionary statements
as set out therein.
RESERVES INFORMATION
2019
Reserves Information
McDaniel & Associates Consultants Limited (“McDaniel”) was engaged to prepare evaluations of the reserves of Pine Cliff Energy Ltd.
(“Pine Cliff” or the “Company”) at December 31, 2019. 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, 2019. 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. 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 2019 year include:
•
•
•
•
despite a decrease of 8.3 MMBoe from economic factors on a proved plus probable basis (“P+P”), Pine Cliff increased its 2019
P+P reserves by 3.2 MMBoe prior to adjusting for 2019 production, largely as a result of 4.4 MMBoe of positive technical
revisions and 7.0 MMBoe from the Acquisition;
remaining P+P reserves of 57.8 MMBoe (88% natural gas) at December 31, 2019 decreased by 3.8 MMBoe (6%) from 61.6
MMBOE (92% natural gas) at December 31, 2018, mainly as a result of economic factors;
approximately 80% of total reserve volumes are classified as total proved (“1P”) reserves and approximately 20% are
classified as probable reserves; and
net present value for P+P reserves of $127.1 million, discounted at 10%, a decrease of $23.7 million, or 16%, from December
31, 2018, mainly as a result of decreases in forecast commodity prices.
New and Revised Reserves Evaluation Practices
For Pine Cliff’s 2019 year-end reserves report, Pine Cliff has included all abandonment, decommissioning and reclamation costs
(“ADR”) for inactive wells and has also included inactive well operating costs (“IWC”) in order to provide greater transparency and
accuracy of current values and future cash flows. This change was made based on new guidelines added to the Canadian Oil and Gas
Handbook (“COGEH”) in 2019, which recommends including ADR and IWC as best practices. McDaniel’s evaluation of Pine Cliff’s net
present value of future net revenue discounted at 10% before tax (“NPV10”) at December 31, 2019 for ADR related to 1P and P+P
reserves was $69.4 million and $69.5 million respectively, an increase of $12.1 million and $17.0 million compared to equivalent ADR
measures at year-end 2018.
Pine Cliff’s Reserves
McDaniel has used the average of three independent consultant average price forecasts (McDaniel, GLJ Petroleum Consultants Ltd. and
Sproule Associates Limited) effective January 1, 2020, resulting in a price forecast of $2.04 and $2.32 per Mcf for AECO natural gas and
US$61.00 and US$63.75 per Bbl for WTI oil in 2020 and 2021 respectively.
3
PINE CLIFF ENERGY LTD.
Summary of Remaining Working Interest Reserves, as of December 31, 2019
RESERVES INFORMATION
2019
Reserve Category
Proved
Developed Producing
Developed Non-Producing
Undeveloped
Total Proved
Probable
Total Proved plus Probable
Light, Medium
and Heavy Oil
Natural Gas
Liquids
Natural Gas and
Coal Bed Methane
Oil Equivalent
MBbl
MBbl
MMcf
MBoe
1,003.6
13.4
606.2
1,623.2
884.9
2,508.1
3,106.8
36.6
229.4
3,372.8
1,295.5
4,668.3
237,602.1
2,221.5
7,053.6
246,877.2
56,631.7
303,508.9
43,710.8
420.3
2,011.2
46,142.2
11,619.0
57,761.2
Summary of Net Present Values of Future Net Revenue, Before Income Taxes, as of December 31, 2019
($millions)
Reserve Category
Proved
Developed Producing
Developed Non-Producing
Undeveloped
Total Proved
Probable
Total Proved plus Probable
Discounted at (% per year)
0%
5%
10%
15%
(136.0)
3.6
31.6
(100.8)
125.8
25.0
21.0
2.9
18.4
42.3
77.3
62.0
2.3
11.0
75.3
51.9
70.9
1.9
6.5
79.3
37.1
119.6
127.1
116.4
Reconciliation of Gross Reserves by Principal Product Type, as of December 31, 2019
Light, Medium, and
Heavy Oil
Natural Gas Liquids
Natural Gas and Coal
Bed Methane
Oil Equivalent
Proved
plus
Probable
Proved
Proved
plus
Probable
Proved
Proved
plus
Probable
Proved
plus
Probable
Proved
(MBbl)
(MBbl)
(MBbl)
(MMcf)
(MMcf)
(MBoe)
(MBoe)
Proved
(MBbl)
December 31, 2018
Extension
Technical Revisions
Acquisitions
Economic Factors
Total Changes
Production
764.4
1,084.7
3,056.4
4,074.7 266,732.1 338,519.2
48,276.1
61,579.2
3.8
453.8
821.0
(13.0)
10.2
481.5
1,353.1
12.2
(44.8)
626.7
32.2
36.9
177.1
467.0
45.6
120.2
26,679.8
23,470.1
4,855.9
4,430.2
828.4
22,274.5
28,701.0
5,160.0
6,965.0
(14.6)
(129.1)
(155.3)
(30,398.8)
(49,060.9)
(5,208.6)
(8,346.7)
1,265.6
1,830.2
465.0
742.2
18,732.6
3,577.2
4,852.9
3,168.7
(406.8)
(406.8)
(148.6)
(148.6)
(38,587.5)
(38,587.5)
(6,986.7)
(6,986.7)
December 31, 2019
1,623.2
2,508.1
3,372.8
4,668.3 246,877.2 303,508.9
46,142.2
57,761.2
4
PINE CLIFF ENERGY LTD.
RESERVES INFORMATION
2019
Commodity Prices
The Commodity prices used in the above calculations of reserves are as follows:
Year
2020
2021
2022
2023
2024
2025-2034
Thereafter
WTI Oil (US$/Bbl)1
61.00
63.75
66.18
67.91
69.48
78.10
+2.0%/yr
$C to US$ Foreign
exchange rate1
1.32
1.30
1.27
1.27
1.27
1.27
1.27
Edmonton Light Crude Oil
(Cdn$/Bbl) 1
72.64
76.06
78.35
80.71
82.64
93.14
+2.0%/yr
AECO Gas
(Cdn$/MMBtu) 1
2.04
2.32
2.62
2.71
2.81
3.19
+2.0%/yr
1 Source: Average of three consultant price forecasts, effective January 1, 2020 (McDaniel, GLJ Petroleum Consultants Ltd. and Sproule Associates
Limited).
Please refer to the attached Management’s Discussion and Analysis for Reader Advisories regarding forward-looking information, non-GAAP 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, 2019, 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.
MANAGEMENT DISCUSSION AND ANALYSIS
2019
INTRODUCTION
This Management’s Discussion and Analysis (“MD&A”) is a review of the operations and financial position of Pine Cliff Energy Ltd.
(“Pine Cliff” or the “Company”) for the period ended December 31, 2019. This MD&A is dated and based on information available as
at March 11, 2020 and should be read in conjunction with audited consolidated financial statements for the year ended December 31,
2019 and 2018 (“Financial Statements”). The Financial Statements have been prepared in accordance with International Financial
Reporting Standards (“IFRS”) issued by the International Accounting Standards Board using Generally Accepted Accounting Principles
(“GAAP”). 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.
Pine Cliff’s head office is based in Calgary, Alberta, Canada. Common shares of the Company (“Common Shares”) are listed for trading
on the Toronto Stock Exchange (“TSX”) under the symbol “PNE”.
READER ADVISORIES
This MD&A contains financial measures that are not defined under IFRS and forward-looking statements. Please refer to the sections
titled “NON-GAAP MEASURES” and “FORWARD LOOKING INFORMATION”.
Other Measurements
All amounts herein are presented in Canadian dollars unless otherwise specified. All references to $CAD or $ are to Canadian dollars
and monetary references to $US are to United States dollars.
Natural gas liquids and oil volumes are recorded in barrels of oil (“Bbl”) and are converted to a thousand cubic feet equivalent (“Mcfe”)
using a ratio of one (1) Bbl to six (6) thousand cubic feet. Natural gas volumes recorded in thousand cubic feet (“Mcf”) are converted
to barrels of oil equivalent (“Boe”) using the ratio of six (6) thousand cubic feet to one (1) Bbl. This conversion ratio is based on energy
equivalence primarily at the burner tip and does not represent a value equivalency at the wellhead. The terms Boe or Mcfe may be
misleading, particularly if used in isolation.
2019 AND FOURTH QUARTER 2019 HIGHLIGHTS
Highlights from 2019 and the fourth quarter of 2019 are as follows:
•
•
•
•
•
generated $5.0 million of adjusted funds flow ($0.02 per basic share) for the three months ended December 31, 2019
and $5.9 million of adjusted funds flow ($0.02 per basic share) for the year ended December 31, 2019;
realized a $2.15 per Mcf gas price for the year ended December 31, 2019, 23% higher than the AECO 5A benchmark of
$1.75 per Mcf;
closed an acquisition of oil and natural gas assets in the Ghost Pine area of Central Alberta for cash consideration of $8.8
million (after closing adjustments) on May 31, 2019 (the “May 2019 Acquisition”), which added over 1,600 Boe/d (79%
natural gas, 12% natural gas liquids and 9% oil) as of the closing date and increased the Company’s undeveloped Pekisko
oil locations as at December 31, 2019 by eight gross (8.0 net) booked locations;
exchanged its $49.0 million subordinated promissory notes for term debt, and extended $42.0 million of debt originally
expiring in 2020 to December 31, 2024; and
drilled and completed two 100% working interest Pekisko oil wells that came on production in December 2019 and
January 2020, respectively.
6
PINE CLIFF ENERGY LTD.
SELECTED ANNUAL FINANCIAL INFORMATION
($000s, unless otherwise indicated)
FINANCIAL1
Commodity sales (before royalties)
Total revenue (net of royalties)
Cash flow from operating activities
Adjusted funds flow2
Per share – Basic and Diluted ($/share)
Loss for the year
Per share – Basic and Diluted ($/share)
Total assets
Total non-current financial liabilities3
Total liabilities
Capital expenditures
Acquisitions
Dispositions
Net Debt2
Weighted average common shares outstanding (000s) -
Basic and Diluted
OPERATIONS
Production
Natural gas (Mcf/d)
Natural gas liquids (Bbl/d)
Crude oil (Bbl/d)
Total (Boe/d)
Total (Mcfe/d)
Realized commodity sales prices
Natural gas ($/Mcf)
Natural gas liquids ($/Boe)
Crude oil ($/Bbl)
Total ($/Boe)
Netback ($/Boe)
Operating netback2
Corporate netback2
Netback ($/Mcfe)
Operating netback2
MANAGEMENT DISCUSSION AND ANALYSIS
2019
Year ended December 31,
2019
2018
2017
105,006
99,431
15,536
5,879
0.02
(56,430)
(0.18)
323,735
63,308
313,225
8,379
8,801
(1,542)
64,038
107,385
100,063
8,616
10,513
0.03
(72,719)
(0.24)
354,215
60,280
293,241
10,665
307
(285)
56,819
319,274
307,076
105,725
1,114
407
19,142
114,852
2.15
31.92
61.32
15.03
111,110
940
226
19,684
118,104
2.07
53.33
59.74
14.95
2.25
0.84
2.68
1.47
0.38
0.45
0.25
125,018
115,076
25,009
28,705
0.09
(67,864)
(0.22)
405,228
29,307
276,135
13,477
(62)
(429)
53,638
307,076
121,718
924
198
21,408
128,448
2.39
43.81
57.17
16.00
4.88
3.68
0.81
0.61
Corporate netback2
0.14
1 Includes results for acquisitions and excludes results for dispositions from the closing dates.
2 This is a non-GAAP measure, see NON-GAAP MEASURES for additional information.
3 Includes lease liabilities, due to related party, term debt and subordinated promissory notes.
7
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2019
Three months ended December 31,
2018
2019
Year ended December 31,
2018
2019
($000s, unless otherwise indicated)
FINANCIAL
Commodity sales (before royalty expense)
Cash flow from operating activities
Adjusted funds flow1
Per share – Basic and Diluted ($/share)1
Loss
Per share – Basic and Diluted ($/share)
Capital expenditures
Acquisitions
Dispositions
Net debt1
Weighted-average common shares outstanding (000s)
Basic
Diluted
OPERATIONS
Production
Natural gas (Mcf/d)
Natural gas liquids (Bbl/d)
Crude oil (Bbl/d)
Total (Boe/d)
Realized commodity sales prices
Natural gas ($/Mcf)
Natural gas liquids ($/Boe)
Crude oil ($/Bbl)
Combined ($/Boe)
Netback ($/Boe)
Commodity sales
Royalty expense
Transportation expenses
Operating expenses
Operating netback ($/Boe)1
General and administrative expenses
Interest and bank charges, net of dividend income
Corporate netback ($/Boe)1
Operating netback ($ per Mcfe)1
Corporate netback ($ per Mcfe)1
31,339
4,039
5,025
0.02
(7,987)
(0.02)
5,446
202
(1,443)
64,038
30,110
1,415
4,433
0.01
(28,520)
(0.09)
1,910
659
(16)
56,819
327,784
327,784
307,076
307,076
108,208
1,216
410
19,661
2.52
35.36
59.91
17.33
17.33
(1.56)
(1.53)
(10.08)
4.16
(0.66)
(0.71)
2.79
0.69
0.47
110,295
957
236
19,576
2.51
44.85
32.14
16.72
16.72
(0.95)
(1.80)
(10.41)
3.56
(0.42)
(0.68)
2.46
0.59
0.41
105,006
15,536
5,879
0.02
(56,430)
(0.18)
8,379
8,801
(1,542)
64,038
319,274
319,274
105,725
1,114
407
19,142
2.15
31.92
61.32
15.03
15.03
(0.80)
(1.68)
(10.30)
2.25
(0.73)
(0.68)
0.84
0.38
0.14
107,385
8,616
10,513
0.03
(72,719)
(0.24)
10,665
307
(285)
56,819
307,076
307,076
111,110
940
226
19,684
2.07
53.33
59.74
14.95
14.95
(1.02)
(1.74)
(9.51)
2.68
(0.67)
(0.54)
1.47
0.45
0.25
1 This is a non-GAAP measure, see NON-GAAP MEASURES for additional information.
SENSITIVITIES
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. The sensitivity calculations are performed independently showing the effect of the
change of one variable; all other variables are held constant.
8
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2019
Business environment sensitivities
Impact on annual adjusted funds flow1
Realized crude oil price2
Change
$1.00
$000s
564
Realized natural gas price2
1 This analysis does not adjust for changes in working capital and uses corporate royalty rates from the year ended December 31, 2019.
2 Pine Cliff has prepared this analysis using its Q4 2019 production volumes annualized for twelve months.
3 Based on the Q4 2019 basic weighted average shares outstanding.
3,752
$0.10
$ per share3
0.00
0.01
BENCHMARK PRICES
Three months ended December 31,
Year ended December 31,
2019
2018
% Change
2019
2018
% Change
Natural gas
NYMEX (US$/Mmbtu)1
AECO Daily 5A (C$/Mcf)2
Crude oil
WTI (US$/Bbl)
Edmonton Light (C$/Bbl)
Foreign exchange
US$/C$
2.50
2.46
56.96
66.57
3.73
1.74
52.41
38.94
(33)
41
9
71
2.62
1.75
57.03
68.82
3.09
1.54
63.17
68.44
1.300
(15)
14
(10)
1
2
1.320
1 Mmbtu is the abbreviation for millions of British thermal units. One Mcf of natural gas is approximately 1.02 Mmbtu.
2 AECO prices are quoted in $/Gigajoule. Price has been converted from $/GJ to $/Mcf by multiplying by 1.05.
1.327
1.331
(1)
Quarterly Benchmark Prices
Pine Cliff’s financial results are influenced by fluctuations in commodity prices, dollar exchange rates and price differentials. The
following table shows select market benchmark average prices and foreign exchange rates in the last eight quarters to assist in
understanding the volatility in prices and foreign exchange rates that have impacted Pine Cliff’s business.
Q4-2019
Q3-2019
Q2-2019
Q1-2019 Q4-2018 Q3-2018
Q2-2018 Q1-2018
Natural gas
NYMEX (US$/Mmbtu)1
AECO Daily 5A (C$/Mcf) 2
Pine Cliff realized natural
gas price (C$/Mcf)
Crude oil
WTI (US$/Bbl)
Edmonton Light (C$/Bbl)
Pine Cliff realized oil price
(C$/Bbl)
Pine Cliff realized NGL
price (C$/Bbl)
Foreign exchange
2.50
2.46
2.52
2.23
0.90
1.55
2.64
1.03
1.69
3.12
2.61
2.84
3.73
1.74
2.51
2.85
1.19
1.88
2.78
1.18
1.55
2.99
2.07
2.35
56.96
66.57
56.45
68.41
59.81
73.85
54.88
66.44
52.41
38.94
69.50
81.95
67.88
80.66
62.87
72.21
59.91
61.33
65.16
58.89
32.14
74.15
71.19
63.21
35.36
25.75
29.74
37.64
44.85
61.05
56.74
51.45
1.310
1.321
US$/C$
1 Mmbtu is the abbreviation for millions of British thermal units. One Mcf of natural gas is approximately 1.02 Mmbtu.
2 AECO prices are quoted in $/Gigajoule. Price has been converted from $/GJ to $/Mcf by multiplying by 1.05.
1.320
1.338
1.331
1.329
1.290
1.270
In the three months and year ended December 31, 2019, the AECO daily benchmark increased by 41% and 14%, compared to the same
periods of 2018. The price fluctuations for this quarter and year to date are mainly due to supply and demand factors including pipeline
curtailments and storage constraints, weather, economic conditions in producing and consuming regions throughout North America
and political factors. While the price realized by the Company for natural gas production from Western Canada is still strongly
influenced by the Alberta price hub AECO, diversification projects to delivery points such as Dawn, Empress and TransGas have
9
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2019
decreased that influence materially. See “COMMODITY SALES” section for additional information on the diversification project
premiums compared to AECO 5A.
The average benchmarks for WTI increased by 9% for the three months ended December 31, 2019 but decreased 10% for the year
ended December 31, 2019, as compared to the same periods in 2018, due to increased levels of North American oil production
combined with uncertainty around future demand. Canadian crude prices are based upon refinery postings at Edmonton, Alberta and
are linked to WTI through transportation tariffs to common markets and the foreign exchange rate.
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. The decrease in NGL prices compared to WTI in the three
months and year ended December 31, 2019 compared to the corresponding periods of the prior year is mainly due to lower propane
and butane pricing due to market conditions. The fluctuations in the NGL price correlate with changes in the WTI price.
SALES VOLUMES
Total sales volumes by product
2019
2018 % Change
2019
2018 % Change
Three months ended December 31,
Year ended December 31,
Natural gas (Mcf)
NGLs (Bbl)
Crude oil (Bbl)
Total Boe
Total Mcfe
9,955,128 10,147,122
88,039
21,757
1,800,983
10,852,584 10,805,898
111,863
37,713
1,808,764
(2) 38,587,518 40,555,104
343,162
27
82,420
73
-
7,184,766
- 41,919,948 43,108,596
406,788
148,617
6,986,658
Natural gas weighting
92%
94%
(2)
92%
94%
(5)
19
80
(3)
(3)
(2)
Average daily sales volumes by product
2019
2018 % Change
2019
2018 % Change
Three months ended December 31,
Year ended December 31,
Natural gas (Mcf/d)
NGLs (Bbl/d)
Crude oil (Bbl/d)
Total (Boe/d)
Total (Mcfe/d)
108,208
1,216
410
19,661
117,966
110,295
957
236
19,576
117,456
(2)
27
73
-
-
105,725
1,114
407
19,142
114,852
111,110
940
226
19,684
118,104
(5)
19
80
(3)
(3)
Three months ended December 31,
Year ended December 31,
Average daily sales volumes by area
Central (Boe/d)
Southern (Boe/d)
Edson (Boe/d)
Total (Boe/d)
2019
10,021
7,898
1,742
19,661
9,097
8,517
1,962
19,576
10
(7)
(11)
2019
9,513
7,857
1,772
9,231
8,462
1,991
-
19,142
19,684
2018 % Change
2018 % Change
3
(7)
(11)
(3)
Pine Cliff’s sales volumes increased slightly to 19,661 Boe/d (117,966 Mcfe/d) from 19,576 Boe/d (117,456 Mcfe/d) for the three
months ended December 31, 2019 as compared to the same period in 2018. During the quarter natural production declines were
offset by production from the May 2019 Acquisition.
Pine Cliff’s sales volumes decreased by 3% to 19,142 Boe/d (114,852 Mcfe/d) for the year ended December 31, 2019 as compared to
2018. The decrease relates to natural production declines, short-term voluntary shut-ins during the summer months, and production
downtime due to cold weather during the first quarter of 2019, somewhat offset by production from the May 2019 Acquisition.
Pine Cliff is projecting 2020 production volumes of 18,500 – 19,000 Boe/d (111,000 – 114,000 Mcfe/d), weighted approximately 92%
towards natural gas.
10
PINE CLIFF ENERGY LTD.
COMMODITY SALES
($000s)
Natural gas
NGL
Crude oil
Total commodity sales
% of revenue from natural gas sales
Realized prices
$ per unit
Natural gas ($/Mcf)
NGL ($/Bbl)
Crude oil ($/Bbl)
Total ($/Boe)
Total ($/Mcfe)
MANAGEMENT DISCUSSION AND ANALYSIS
2019
Three months ended December 31,
Year ended December 31,
2019
25,125
3,955
2,259
31,339
80%
2018
% Change
25,462
3,949
699
30,110
85%
(1)
-
223
4
(5)
2019
82,908
12,985
9,113
84,161
18,300
4,924
105,006
107,385
79%
78%
(1)
(29)
85
(2)
1
2018
% Change
Three months ended December 31,
Year ended December 31,
2019
2.52
35.36
59.91
17.33
2.89
2018 % Change
2.51
44.85
32.14
16.72
2.79
-
(21)
86
4
4
2019
2.15
31.92
61.32
15.03
2.51
2018
% Change
2.07
53.33
59.74
14.95
2.49
4
(40)
3
1
1
Commodity sales in the three months ended December 31, 2019 of $31.3 million increased by $1.2 million from $30.1 million in the
same period of 2018, with a $1.1 million increase from higher realized commodity prices and $0.1 million increase from higher sales
volumes. Commodity sales in the year ended December 31, 2019, decreased $2.4 million to $105.0 million from $107.4 million in the
same period of 2018, with $3.0 million of the decrease attributable to lower sales volumes, slightly offset by a $0.6 million increase
from higher realized commodity prices.
Pine Cliff’s realized natural gas price was $2.52 per Mcf in the three months ended December 31, 2019, effectively unchanged from the
$2.51 per Mcf in the corresponding period of the prior year. Pine Cliff’s realized natural gas price was $2.15 per Mcf during the year
ended December 31, 2019, 4% higher than the $2.07 per Mcf realized in the corresponding period of the prior year. Pine Cliff’s realized
natural gas price was 102% and 123% of the AECO 5A benchmark in the three months and year ended December 31, 2019, both a
result of Pine Cliff’s marketing diversification to non-AECO markets and fixed price physical natural gas sales contracts.
For the three months and year ended December 31, 2019, Pine Cliff’s realized NGL price was $35.36 per Bbl and $31.92 per Bbl,
compared to $44.85 per Bbl and $53.33 per Bbl in the corresponding periods of the prior year. For the three months and year ended
December 31, 2019, Pine Cliff’s realized oil price was $59.91 per Bbl and $61.32 per Bbl, compared to $32.14 per Bbl and $59.74 per
Bbl in the corresponding periods of the prior year. Pine Cliff’s realized oil prices in the three months and year ended December 31,
2019, were 90% and 89% of Edmonton Light, in-line with the 90% and 89% in the corresponding periods of the prior year. Pine Cliff’s
realized NGL prices in the three months and year ended December 31, 2019 were 47% and 42% of WTI compared to 64% and 65% in
the corresponding periods of the prior year. The decrease in NGL prices in the three months and year ended December 31, 2019
compared to the corresponding periods of the prior year is mainly due to lower butane and propane pricing as a result of market
conditions.
ROYALTY EXPENSE
($000s)
Total royalty expense
$ per Boe
$ per Mcfe
Royalty expense as a % of commodity sales
Three months ended December 31,
Year ended December 31,
2019
2,826
1.56
0.26
9%
2018 % Change
1,714
0.95
0.16
6%
65
64
64
50
2019
5,575
0.80
0.13
5%
2018 % Change
7,357
1.02
0.17
7%
(24)
(22)
(22)
(29)
For the three months ended December 31, 2019, total royalty expense increased by 65% to $2.8 million from $1.7 million in the
corresponding period of the prior year. Royalty expense as a percentage of commodity sales increased to 9% in the three months
ended December 31, 2019, compared to 6% in the corresponding periods of the prior year. The increase in royalty expense as a
percentage of commodity sales for the three months ended December 31, 2019 reflects the 41% increase in AECO Daily 5A reference
price from the same period in 2018, along with adjustments to gas cost allowance.
11
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2019
For the year ended December 31, 2019, total royalty expense decreased by 24% to $5.6 million from $7.4 million in the corresponding
period of the prior year. Royalty expense as a percentage of commodity sales decreased to 5% during the year ended December 31,
2019, compared to 7% in the corresponding period of the prior year. The decrease in royalty expenses as a percentage of commodity
sales for the year ended December 31, 2019 is mainly due to gas crown royalties being charged on a reference price that is lower than
Pine Cliff’s realized gas price and gas cost allowance adjustments.
Pine Cliff anticipates royalty expenses to average 7% of commodity sales in 2020.
TRANSPORTATION COSTS
($000s)
Total transportation costs
$ per Boe
$ per Mcfe
Three months ended December 31,
Year ended December 31,
2019
2,775
1.53
0.26
2018 % Change
(14)
3,244
1.80
0.30
(15)
(15)
2019
11,743
1.68
0.28
2018 % Change
(6)
12,525
1.74
0.29
(3)
(3)
For the three months and year ended December 31, 2019, total transportation costs decreased by 14% and 6% to $2.8 million and
$11.7 million from $3.2 million and $12.5 million in the corresponding periods of the prior year. The decrease in transportation costs
in the three months and year ended December 31, 2019 as compared to the corresponding periods of the prior year are primarily a
result of less natural gas sales volumes being diverted to non AECO markets as a result of a stronger realized AECO price.
Pine Cliff anticipates transportation expenses to average $1.45 per Boe ($0.24 per Mcfe) in 2020.
OPERATING EXPENSES
($000s)
Total operating expenses
$ per Boe
$ per Mcfe
Three months ended December 31,
Year ended December 31,
2019
18,235
10.08
1.68
2018 % Change
(3)
18,745
10.41
1.74
(3)
(3)
2019
71,973
10.30
1.72
2018 % Change
5
68,332
9.51
1.59
8
8
Operating expenses decreased by 3% to $18.2 million for the three months ended December 31, 2019, as compared to $18.7 million in
the corresponding period of the prior year, primarily a result of field optimization initiatives undertaken during the first three quarters
of the year. On a per Boe basis, operating costs decreased to $10.08 per Boe for the three months ended December 31, 2019 compared
$10.41 per Boe in the corresponding period of 2018.
Operating expenses increased by 5% to $72.0 million for the year ended December 31, 2019, as compared to $68.3 million in the
corresponding period of the prior year, primarily a result of incurring the cost of implementing field optimization initiatives and higher
operating expenses from the May 2019 Acquisition. On a per Boe basis, operating costs increased to $10.30 per Boe for the year ended
December 31, 2019 compared $9.51 per Boe in the corresponding period of 2018.
Pine Cliff anticipates operating expenses to average $10.55 per Boe ($1.76 per Mcfe) in 2020.
GENERAL AND ADMINISTRATIVE EXPENSES (“G&A”)
($000s)
Gross G&A
Add: non-recurring transaction costs
Less: overhead recoveries
Total G&A expenses
$ per Boe
$ per Mcfe
Three months ended December 31,
Year ended December 31,
2019
2,275
-
(1,076)
1,199
0.66
0.11
2018 % Change
2019
2018 % Change
1,703
-
(947)
756
0.42
0.07
34
-
14
59
57
57
7,871
15
(2,807)
5,079
0.73
0.12
7,516
-
(2,678)
4,838
0.67
0.11
5
100
5
5
9
9
For the three months and year ended December 31, 2019, G&A increased by 59% and 5% to $1.2 million and $5.1 million from $0.8
million and $4.8 million in the corresponding periods of the prior year. The increase in G&A for the three months ended and year ended
December 31, 2019 as compared to the corresponding periods of the prior year is primarily a result of recognizing higher bad debt
expense from defaulting working interest partners.
12
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2019
On a per Boe basis, G&A for the three months and year ended December 31, 2019, increased by 57% and 9% to $0.66 per Boe and
$0.73 per Boe from $0.42 per Boe and $0.67 per Boe in the corresponding periods of the prior year.
Pine Cliff anticipates G&A expenses to average $0.74 per Boe ($0.12 per Mcfe) in 2020.
SHARE-BASED PAYMENTS
($000s)
Total share-based payments
$ per Boe
$ per Mcfe
Three months ended December 31,
Year ended December 31,
2019
180
0.10
0.02
2018 % Change
505
0.28
0.05
(64)
(64)
(64)
2019
1,116
0.16
0.03
2018 % Change
2,231
0.31
0.05
(50)
(48)
(48)
Share based payments decreased by 64% and 50% for the three months and year ended December 31, 2019 compared to the
corresponding periods of 2018 primarily as a result of the decrease in the fair value of the stock options granted in 2019. 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 the outstanding Common Shares.
During the year ended December 31, 2019, Pine Cliff granted 13,137,907 stock options to purchase Common Shares at a weighted
average exercise price of $0.18 (December 31, 2018 – 7,697,800 at an average exercise price of $0.33). As at December 31, 2019, the
Company had 25,828,738 stock options outstanding, representing 7.9% of Common Shares outstanding (December 31, 2018 –
21,028,804 representing 6.8% of Common Shares outstanding).
DEPLETION, DEPRECIATION, AND IMPAIRMENT
($000s)
Total depletion and depreciation
$ per Boe
$ per Mcfe
Impairment
Total depletion, depreciation, and impairment
$ per Boe
$ per Mcfe
Three months ended December 31,
Year ended December 31,
2019
11,644
6.44
1.07
-
11,644
6.44
1.07
2018 % Change
2
11,420
6.34
1.06
-
11,420
6.34
1.06
2
2
-
2
2
2
2019
46,864
6.71
1.12
8,200
55,064
7.88
1.31
2018 % Change
7
43,760
6.09
1.02
-
43,760
6.09
1.02
10
10
100
26
29
29
Depletion and depreciation expense for the three months and year ended December 31, 2019, totaled $11.6 million and $46.9 million
compared to $11.4 million and $43.8 million in the corresponding periods of the prior year. The increase for the year is a result of a
higher depletable base. Depletion and depreciation per Boe will fluctuate from one period to the next depending on changes in reserves
and the amount and success of capital expenditures. Depletion is calculated using total proved and probable reserves and reserves
estimates are subject to revision.
Property, Plant and Equipment (“PP&E”) Impairment Assessment
As at December 31, 2019, the Company had four cash generating units (“CGUs”), being the Southern CGU, Central Gas CGU, Edson CGU,
and Coal Bed Methane CGU. The Company reviewed each CGU’s property and equipment at December 31, 2019 for indicators of
impairment and determined that an indicator related to the decrease in future commodity prices was present. The company prepared
estimates of both the value in use and fair value less cost to sell of each of the Company’s CGUs. When it is determined that any CGU
carrying value exceeds its recoverable amount, that CGU is considered impaired and an impairment expense is reported that equals
this excess.
13
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2019
The following table outlines forecast benchmark prices and exchange rates used in the Company’s impairment test as at December 31,
2019:
Year
2020
2021
2022
2023
2024
2025-2034
Thereafter
WTI Oil (US$/Bbl)1
61.00
63.75
66.18
67.91
69.48
78.10
+2.0%/yr
$C to US$ Foreign
exchange rate1
1.32
1.30
1.27
1.27
1.27
1.27
1.27
Edmonton Light Crude Oil
(Cdn$/Bbl) 1
72.64
76.06
78.35
80.71
82.64
93.14
+2.0%/yr
AECO Gas
(Cdn$/MMBtu) 1
2.04
2.32
2.62
2.71
2.81
3.19
+2.0%/yr
1 Source: Average of three independent consultant price forecasts, effective January 1, 2020 (McDaniel & Associates Consultants Ltd., GLJ Petroleum
Consultants Ltd. and Sproule Associates Limited).
The recoverable amounts of each of the Company’s CGU’s at December 31, 2019 were estimated at their fair value less cost to sell,
based on the net present value of discounted future cash flow from operating activities from oil and gas reserves as estimated by the
Company’s independent reserves evaluator at December 31, 2019. The fair value less costs to sell used to determine the recoverable
amounts are classified as Level 3 fair value measurements as certain key assumptions are not based on observable market data, but
rather, the Company’s management best estimates.
The Company used a pre-tax 15% discount rate for the December 31, 2019 impairment test which took into account risks specific to
the CGU’s and inherent in the oil and gas business. The impairment testing concluded that the fair value less costs to sell for the
Company’s CGU’s at December 31, 2019 is greater than the carrying amounts and therefore no impairment was recorded in the fourth
quarter of 2019. An impairment of $8.2 million was recorded for the period ending June 30, 2019.
The following CGU’s were impaired as at June 30, 2019:
CGUs
Southern
Total impairment
Exploration and Evaluation Assets (“E&E”) Impairment Assessment
2019
8,200
8,200
2018
-
-
In accordance with IFRS, an impairment test is performed if the Company identified an indication of impairment. An E&E asset shall
be assessed for impairment before reclassification to PP&E if the Company determines technical feasibility and commercial viability
of extraction. At December 31, 2019 and 2018, the Company determined that no indicators of impairment existed on its E&E assets
and therefore an impairment test was only performed for E&E assets transferred to PP&E.
FINANCE EXPENSES
Three months ended December 31,
Year ended December 31,
($000s)
Interest expense and bank charges
$ per Boe
$ per Mcfe
Non cash:
Accretion on decommissioning provision
Accretion on subordinated promissory notes
Total finance expenses
$ per Boe
$ per Mcfe
2019
1,279
0.71
0.12
1,560
295
3,134
1.73
0.29
2018 % Change
1,218
0.68
0.11
1,453
77
2,748
1.53
0.25
5
4
4
7
283
14
13
13
2019
4,757
0.68
0.11
6,262
534
11,553
1.65
0.28
2018 % Change
3,855
0.54
0.09
5,389
267
9,511
1.32
0.22
23
26
26
16
100
21
25
25
Finance expenses increased by 14% and 21% to $3.1 million and $11.6 million for the three months and year ended December 31,
2019, as compared to $2.7 million and $9.5 million in the corresponding periods of the prior year, primarily a result of higher interest
expense due to higher interest rates paid on the term debt compared to bank debt as well as an increase in accretion expenses related
to a higher inflation rate used to unwind the discount. Please refer to the “DEBT, LIQUIDITY AND CAPITAL RESOURCES” section for
additional information.
14
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2019
DIVIDEND INCOME
($000s)
Total dividend income
$ per Boe
Three months ended December 31,
Year ended December 31,
2019
2018 % Change
2019
2018 % Change
-
-
-
-
-
-
-
-
35
-
(100)
(100)
During the year ended December 31, 2018, Pine Cliff received $0.035 million in dividends from its investment in one dividend paying
company.
DEFERRED INCOME TAX
For the year ended December 31, 2019, deferred income tax expenses amounted to $nil from $28.9 million in the same period of 2018.
As at December 31, 2019, the Company did not record a future income tax asset (December 31, 2018 - $nil) as it is not currently
probable that Pine Cliff can utilize its tax pools against taxable profit. As at December 31, 2019, a deferred income tax asset has not
been recognized on $76.3 million (December 31, 2018 - $73.4 million) of deductible temporary differences as it is not probable that
future taxable earnings will be available against which the Company can utilize the benefits.
The Company had the following tax pools, including non-capital loss carry-forwards, at December 31, 2019:
Category of tax pool
Undepreciated capital costs
Canadian oil and gas property expenditures
Canadian development expenditures
Canadian exploration expenditures
Share issue costs
Non-capital losses carried forward 1
Capital losses carried forward2
Rate of Utilization (%)
2019
4 - 100
10
30
100
20
100
30,847
214,339
10,099
167
668
138,673
5,462
400,255
1 Non-capital losses expire between the years 2030 and 2039.
2 The capital losses carried forward can only be claimed against taxable capital gains.
As at December 31, 2019, the unused non-capital losses expire between 2030 and 2039, and the unused capital losses have no expiry
date. The deductible temporary differences do not expire under tax legislation. Pine Cliff has approximately $400.3 million in tax pools
as at December 31, 2019 (December 31, 2018 - $389.6 million), available for future use as deductions from taxable income.
CAPITAL EXPENDITURES, ACQUISITIONS AND DISPOSITIONS
($000s)
Exploration and evaluation
Property, plant and equipment
Capital expenditures
Acquisitions
Dispositions
Total
Year ended December 31,
2019
398
7,981
8,379
8,801
(1,542)
15,638
2018
239
10,426
10,665
307
(285)
10,687
Capital expenditures on PP&E of $8.0 million during the year ended December 31, 2019 were directed towards drilling two gross (2.0
net) wells in the Central area for $5.5 million, facility and maintenance capital of $2.0 million, and $0.5 million of other miscellaneous
capital additions.
15
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2019
DECOMMISSIONING PROVISION
The total current and long-term decommissioning provision of $221.4 million was estimated by management based on the Company’s
working interest and estimated costs to remediate, reclaim and abandon its wells, pipelines, and facilities and estimated timing of the
costs to be incurred in future periods.
At December 31, 2019, the estimated total undiscounted and uninflated amount required to settle the decommissioning liabilities was
$239.7 million (December 31, 2018 - $264.6 million). The discounted and inflated amount required to settle the decommissioning
liabilities of $221.4 million has been calculated assuming a 1.95% inflation rate (December 31, 2018 – 1.88%) and discounted using
an average risk-free interest rate of 2.57% (December 31, 2018 – 2.88%). These obligations are currently expected to be settled based
on the useful lives of the underlying assets, some of which extend beyond 35 years into the future.
DEBT, LIQUIDITY AND CAPITAL RESOURCES
Bank Credit Facility
On July 28, 2019, the Company’s syndicated credit facility (the “Credit Facility”) with three Canadian Financial Institutions expired
and was not renewed (December 31, 2018 - $11.0 million Credit Facility). Borrowings under the Credit Facility had interest at the
Canadian prime rate plus 1.5% to 4.0% or the bankers’ acceptance rates plus 2.5% to 5.0%, depending, in each case, on the rolling 12
month ratio of consolidated debt to EBITDA, plus applicable standby fees. EBITDA is calculated as earnings (loss) excluding
depreciation, depletion, impairment and accretion, share based payments, interest, taxes and other non-cash items. As at December
31, 2019, the Company had $nil in letters of credit issued against its Credit Facility (December 31, 2018 - $2.9 million).
Letter of Credit Facility
As at December 31, 2019, the Company had a $2.6 million letter of credit facility (“LC Facility”) with a Canadian bank which is
supported by a performance guarantee from Export Development Canada. The LC Facility is for issuing letters of credit to
counterparties and is available on a demand basis. Letters of credit issued under the LC Facility incur an issuance fee of 4% per annum.
The LC Facility does not contain any financial covenants. As at December 31, 2019, the Company had $2.6 million in letters of credit
issued against its LC Facility (December 31, 2018 - $nil).
Due to Related Party
On October 1, 2019, Pine Cliff amended and restated its $6.0 million subordinated promissory note to the Company’s Chairman of the
Board. This amended and restated promissory note matures on December 31, 2024 (“Related Party Note”), bears interest at 6.5%
per annum and is payable monthly. The Related Party Note is secured by a $6.0 million floating charge debenture over all of the
Company’s assets and is subordinated to any and all claims in favor of the holder of the Term Debt, as defined herein. Interest paid on
the Related Party Note for the year ended December 31, 2019 was $0.4 million (December 31, 2018 - $0.3 million).
Subordinated Promissory Notes
On October 1, 2019, Pine Cliff amended and restated its $6.0 million subordinated promissory notes. These amended and restated
subordinated promissory notes mature on December 31, 2024 (“$6 Million Notes”), bear interest at 6.5% per annum and are payable
monthly. The $6 Million Notes are issued to a shareholder and a relative of that shareholder, owning directly or by discretion and
control, greater than 10% of the Common Shares. The $6 Million Notes are secured by a $6.0 million floating charge debenture over
all of the Company’s assets and are subordinated to any and all claims in favor of the holder of the Term Debt.
Term Debt
On October 1, 2019, Pine Cliff entered into a credit facility with Alberta Investment Management Corporation ("AIMCo"), acting on
behalf of its clients, to repay its $30 million promissory notes maturing September 30, 2020 (“2020 Notes”) and its $19 million
promissory notes maturing July 31, 2022 (“2022 Notes”) and replace them with a non-revolving term credit facility (“Term Debt”).
The Term Debt consists of a first tranche with a principal amount of $30 million that matures on December 31, 2024 (the "2024
Tranche") and a second tranche with a principal amount of $19 million that matures on July 31, 2022 (the "2022 Tranche”),
(collectively the "Refinancing "). Interest on the 2024 Tranche is payable at a rate of 8.75% per annum until September 30, 2020 and
thereafter such interest rate will increase by 1% per annum up to 12.75% and interest is payable on the 2022 Tranche at a rate of
7.05% per annum. All or a portion of the principal amount outstanding can be repaid at any time, but without any penalty or premium
after September 30, 2022 with respect to the 2024 Tranche and, July 13, 2021 with respect to the 2022 Tranche. A total of 7.5 million
Common Share purchase warrants (the “Warrants”) were issued in connection with the Refinancing, with each Warrant entitling the
holder to purchase one Common Share of Pine Cliff for $0.20565, until September 30, 2022. The Refinancing security consists of floating
demand debentures totaling $150.0 million and a general security agreement with first ranking over all current and acquired
properties.
16
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2019
The fair value of the Refinancing was determined on drawdown to be 10.1%, using the effective interest rate method, by discounting
future payments of interest and principal with the residual value allocated to the Warrants. The value of the Term Debt accretes up to
the principal balance of each tranche at maturity.
Liquidity and Capital Resources
Pine Cliff’s approved capital budget for 2020 is $10.2 million, including $2.0 million for abandonments and reclamation and before
acquisitions and dispositions. Pine Cliff anticipates funding its capital budget from adjusted funds flow. Budgeted future capital
expenditures related to drilling are largely discretionary in nature and Pine Cliff is able to adjust the nature, amount and timing of most
planned capital expenditures to changes in the business and commodity price environment.
The Company’s capital comprises shareholders’ equity, Term Debt, subordinated promissory notes, due to related party and working
capital. Pine Cliff manages the capital structure and makes adjustments considering economic conditions and the risks of the
underlying assets. The Company carries a working capital deficiency as cash balances are used to fund ongoing operations. However
Pine Cliff has and will continue to manage its working capital needs through its physical diversification program, adjusting timing of
capital expenditures, executing asset dispositions and issuing equity when practical. The Pekisko oil development in Central Alberta
and the operating results therefrom achieved in 2019 and into 2020, are expected to have a positive impact on adjusted funds flow
and the working capital deficiency.
The Company defines and computes its net debt as follows:
($000s)
Due to related party1
Subordinated promissory notes1
Term debt2
Trade and other payables
Less:
Trade and other receivables
Cash
Prepaid expenses and deposits
Net debt3
Year ended December 31,
2019
6,000
6,000
49,000
27,514
2018
6,000
55,000
-
16,772
$ Change
-
(49,000)
49,000
10,742
(13,597)
(8,661)
(2,218)
(13,536)
(3,563)
(3,854)
(61)
(5,098)
1,636
64,038
56,819
7,219
1 The due to related party and subordinated promissory notes are due on December 31, 2024.
2 The term debt for net debt are presented at the principal amount with $19.0 million due on July 31, 2022 and $30.0 million due on December 31,
2024.
3 This is a non-GAAP measure, see NON-GAAP MEASURES for additional information.
Net debt-to-adjusted funds flow calculation:
Cash provided by operating activities
Increase (decrease) in non-cash working capital
Decommissioning obligations settled
Adjusted funds flow1
Net debt1
Net debt-to-adjusted funds flow
2019
15,536
(11,586)
1,929
5,879
64,038
11.0
As at December 31,
2018
8,616
(833)
2,730
10,513
56,819
5.4
1 This is a non-GAAP measure, see NON-GAAP MEASURES for additional information.
At December 31, 2019, the Company’s net debt to adjusted funds flow of 11.0 is higher than the Company’s historical ratio and its long-
term internal target. While this ratio is high in comparison to industry peers, approximately 95 percent of the Company’s net debt is
long-term and only 5 percent of the net debt is due with the next twelve months. The prolonged period of low commodity prices, in
particular natural gas pricing in 2018 and 2019, has reduced the Company’s adjusted funds flow and limited the availability of new
capital to repay debt or expand development activity. During this time period, the Company has limited its capital spending, raised
capital from a flow-through Common Share offering, a Common Share offering and terminated its Credit Facility in favor of Term Debt,
with the first maturity date not until July 31, 2022.
The Company remains focused on developing its Central Alberta Pekisko oil property while identifying and pursuing alternative
financing arrangements, property dispositions, corporate mergers or other recapitalization opportunities to further reduce the net
17
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2019
debt to adjusted funds flow ratio. The Company continuously monitors changes in forecasted adjusted funds flow as a result of changes
to forward commodity prices and will make adjustments to planned capital expenditures as appropriate.
Pine Cliff will continue to focus on additional opportunities to enhance shareholders’ long term value which could include additional
asset acquisitions or dispositions.
Share Capital
Share capital
Common Shares
Stock options
Warrants
March 11, 2020
December 31, 2019
December 31, 2018
327,784,193
25,631,488
10,350,000
327,784,193
25,828,738
10,350,000
307,075,787
21,028,804
2,850,000
COMMITMENTS AND CONTINGENCIES
As at December 31, 2019, the Company has the following commitments and other contractual obligations:
2020
2021
2022
2023
2024
Thereafter
($000s)
Trade and other payables
Term debt1
Due to related party
Subordinated promissory notes
Future interest
Lease obligations
Transportation2
27,514
-
-
-
4,820
1,198
8,530
-
-
-
-
5,120
1,107
6,883
-
19,000
-
-
4,861
915
6,041
-
-
-
-
4,380
739
3,168
-
30,000
6,000
6,000
4,605
96
3,168
Total commitments and contingencies
42,062
13,110
30,817
8,287
49,869
1 Principal amount.
2 Firm transportation agreements.
-
-
-
-
-
-
8,977
8,977
18
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2019
QUARTERLY TRENDS AND SELECTED FINANCIAL INFORMATION
($000s, unless otherwise indicated)
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
2019
2018
FINANCIAL
Total revenue
Cash flow from operating activities
Adjusted funds flow2
Adjusted funds flow per share –
basic and diluted ($/share)2
Loss
Loss per share – basic and diluted
($/share)
Capital expenditures
Acquisitions
Dispositions
Net debt2
Weighted average common shares
outstanding:
Basic and diluted
PRODUCTION VOLUMES
Natural gas (Mcf/d)
Natural gas liquids (Bbl/d)
Crude oil (Bbl/d)
Average sales volumes (Boe/d)
Average sales volumes (Mcfe/d)
PRICES AND NETBACKS
Total commodity sales ($/Boe)
Operating netback ($/Boe)2
Corporate netback ($/Boe)2
Total commodity sales ($/Mcfe)
Operating netback ($/Mcfe)2
28,513
4,039
5,025
19,468
(2,931)
(3,922)
21,106
6,503
(2,047)
30,344
7,925
6,823
28,396
1,415
4,433
24,148
(309)
1,920
20,419
531
(977)
27,065
6,979
5,137
0.02
(7,987)
(0.01)
(17,739)
(0.01)
(24,179)
0.02
(6,525)
0.01
(28,520)
0.01
(10,710)
0.00
(17,909)
0.02
(15,580)
(0.02)
5,446
202
(1,443)
64,038
(0.05)
1,123
(7)
(14)
63,745
(0.08)
815
8,604
(85)
58,162
(0.02)
995
2
-
51,820
(0.09)
4,302
(61)
(51)
56,819
(0.03)
1,910
659
(16)
56,325
(0.06)
1,276
(3)
(135)
54,737
(0.05)
3,177
(288)
(83)
52,414
327,784
327,784
314,130
307,076
307,076
307,076
307,076
307,076
108,208
1,216
410
19,661
117,966
104,488
1,195
423
19,033
114,198
105,965
1,063
399
19,123
114,738
104,186
981
396
18,741
112,446
110,295
957
236
19,576
117,456
111,067
861
231
19,603
117,618
110,242
967
216
19,557
117,342
112,871
977
219
20,008
120,048
17.33
4.16
2.79
2.89
0.69
11.48
(0.97)
(2.24)
1.91
(0.16)
12.35
0.18
(1.18)
2.06
0.03
19.01
5.68
4.04
3.17
0.95
0.67
16.72
3.56
2.46
2.79
0.59
0.41
14.21
2.34
1.06
2.37
0.39
0.18
12.33
0.72
(0.55)
2.06
0.12
(0.09)
16.50
4.04
2.86
2.75
0.67
0.48
Corporate netback ($/Mcfe)2
(0.20)
1 This is a non-GAAP measure, see NON-GAAP MEASURES for additional information.
(0.37)
0.47
Over the past eight quarters, Pine Cliff’s revenues, cash flow from operating activities, adjusted funds flow, and earnings (losses) have
fluctuated primarily due to changes in commodity prices and sales volumes. Earnings (losses) also fluctuate with non-cash
expenditures, including depletion, depreciation, impairments and deferred income taxes. Selected highlights for the past eight quarters
are presented below:
• Average sales volumes decreased in the first quarter of 2018 through the second quarter of 2018 related to natural
production declines and short term production outages, primarily due to voluntary shut-ins in response to low natural gas
commodity prices. Average sales volumes increased in the third quarter of 2018 compared to the second quarter of 2018,
mainly due to realizing a full quarter of production from wells drilled in the first half of 2018. Average sales volumes
decreased in the fourth quarter of 2018 through the first quarter of 2019 compared to the third quarter of 2018 due to natural
production declines and production downtime due to cold weather, partially offset by production from the current drilling
and recompletion projects. Average sales volumes increased in the second quarter of 2019 compared to the first quarter of
2019 mainly due to less downtime due to cold weather and sales volumes from the May 2019 Acquisition. Average sales
volumes decreased in the third quarter of 2019 compared to the second quarter of 2019 mainly due to shut-ins due to low
natural gas prices. Average sales volumes increased in the fourth quarter of 2019 compared to the third quarter of 2019
mainly due to no shut-ins and one gross (1.0 net) well that was drilled and placed on production during the fourth quarter of
2019.
19
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2019
•
•
•
Adjusted funds flow decreased from the first quarter of 2018 to the second quarter of 2018, mainly as a result of lower
commodity prices and sales volumes. Adjusted funds flow increased from the third quarter of 2018 to the first quarter of
2019, mainly as a result of higher commodity prices, slightly offset by decreased sales volumes. Adjusted funds flow
decreased from the first quarter of 2019 to the third quarter of 2019, mainly as a result of lower commodity prices and
changes to sales volumes. Adjusted funds flow increased from the third quarter of 2019 to the fourth quarter of 2019, mainly
as a result of higher commodity prices and increases in sales volumes.
Losses increased in the second quarter of 2018 compared to the first quarter of 2018, mainly as a result of lower oil and gas
revenues. Losses decreased from the second quarter of 2018 to the third quarter of 2018, mainly as a result of higher
commodity prices and higher sales volumes. Losses increased from the third quarter of 2018 to the fourth quarter of 2018 as
a result of a deferred income tax expense, slightly offset by higher commodity prices. Losses decreased from the fourth
quarter of 2018 to the first quarter of 2019 mainly as a result of less deferred income tax expense and higher commodity
prices, slightly offset by higher operating expenses. Losses increased from the first quarter of 2019 to the second quarter of
2019 mainly as a result of lower commodity prices and an impairment charge, slightly offset by lower royalty expenses.
Losses decreased from the second quarter of 2019 through the fourth quarter of 2019 mainly as a result of no impairment
charges in the third or fourth quarters of 2019 and fluctuations in sales volumes and commodity prices.
Total revenues have decreased from the first quarter of 2018 to the second quarter of 2018, mainly as a result of decreases
in commodity prices and sales volumes. Total revenues increased from the second quarter of 2018 to the first quarter of
2019, mainly as a result of increases in commodity prices. Total revenues decreased from the first quarter of 2019 to the
third quarter of 2019, mainly as a result of lower commodity prices and changes to sales volumes. Total revenues increased
from the third quarter of 2019 to the fourth quarter of 2019, mainly as a result of higher commodity prices and increases in
sales volumes.
OFF BALANCE SHEET TRANSACTIONS
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
Financial instruments and fair value measurement
Financial instruments of the Company consist of cash, trade and other receivables, trade and other payables, due to related party,
subordinated promissory notes and term debt. The carrying values of cash, restricted cash, trade and other receivables and trade and
other payables approximate their respective fair values due to the short time before maturing. The carrying values of due to related
party, subordinated promissory notes and term 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.
RISK MANAGEMENT
The Company is exposed to both financial and non-financial risks inherent in the oil and gas business. Financial risks include:
commodity prices, interest rates, equity price, foreign exchange, credit availability and liquidity. Financial risks can be managed, at
least to a degree, through the utilization of financial instruments. Certain non-financial risks can be mitigated through the use of
insurance and/or other risk transfer mechanisms, good business practices and process controls, while others must simply be borne.
All risks can have an impact upon the financial performance of the Company.
Market Risk
Market risk is the risk that the fair value or future cash flow from operating activities 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.
20
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2019
Commodity Price Risk
The Company is exposed to commodity price risk since its revenues are dependent on the prices of crude oil, natural gas liquids
(“NGLs”) 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 changes and geopolitical factors and instability. Changes
in oil, NGL’s 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. A material decline or extended period of low oil, NGL or natural
gas prices could result in a reduction of net production revenue. The economics of producing from some wells may change because of
lower prices, which could result in reduced production of oil, NGL’s or natural gas and a reduction in the volumes of Pine Cliff’s reserves.
Management may also elect not to produce from certain wells at lower prices.
Physical Sales Contracts
At December 31, 2019, the Company had the following physical natural gas sales contracts in place:
Contractual Term
January 1, 2020 to March 31, 2020
January 1, 2020 to October 31, 2020
April 1, 2020 to October 31, 2020
AECO
TransGas3
AECO
1 Prices reported are the weighted average prices of the periods.
2 Price has been converted from $/GJ to $/Mcf by multiplying by 1.05.
3 Subsidiary of SaskEnergy, Saskatchewan.
Delivery Point
Physical Delivery
Quantity (GJ/day)
5,000
9,000
22,500
Fixed Sale Price
($CAD/GJ)1
$2.36
$2.40
$1.54
Fixed Sale Price
($CAD/Mcf)1,2
$2.48
$2.52
$1.62
At March 11, 2020, the Company had the following additional physical natural gas sales contracts in place:
Contractual Term
April 1, 2020 to October 31, 2020
AECO
1 Prices reported are the weighted average prices of the periods.
2 Price has been converted from $/GJ to $/Mcf by multiplying by 1.05.
Delivery Point
Physical Delivery
Quantity (GJ/day)
5,000
Fixed Sale Price
($CAD/GJ)
$1.67
Fixed Sale Price
($CAD/Mcf)1, 2
$1.75
Interest Rate Risk
The Company is principally exposed to interest rate risk to the extent it draws on its variable rate debt less cash. Changes in market
interest rates could affect the cash flow from operating activities associated with variable rate debt. If interest rates applicable to Pine
Cliff’s variable rate debt less cash increased or decreased by one percent, it is estimated that Pine Cliff’s loss for the year ended
December 31, 2019, would have increased or decreased, respectively, by $nil (December 31, 2018 - $0.1 million).
Equity Price Risk
Equity price risk refers to the risk that the fair value of investments will fluctuate due to changes in equity markets for each company.
Equity price risk is also influenced from the estimated realizable value of investments that the Company holds.
Foreign Exchange Risk
The Company and its share price are exposed to risk on foreign exchange rates because the commodity prices it receives are indirectly
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 flow from operating activities. Pine Cliff has not entered into any derivative
financial instruments to manage this risk at this time.
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, which are a reflection of 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 a major Canadian chartered bank. To mitigate the
credit risk on trade and other receivables, Pine Cliff assesses the financial strength of its counterparties and endeavors to enter into
relationships with larger purchasers with established credit histories.
21
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2019
The Company’s trade and other receivables balance at December 31, 2019 of $13.6 million (December 31, 2018 – $13.5 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, 2019, there was $1.0 million
(December 31, 2018 - $1.0 million) of trade and other receivables over 90 days. Pine Cliff assesses its trade and other receivables
quarterly to determine if there has been any impairment. During the year ended December 31, 2019, the Company recorded $0.9
million (December 31, 2018 - $0.3 million) of bad debt expense against trade and other accounts receivables.
Liquidity Risk
Liquidity risk is the risk that Pine Cliff will not be able to meet its financial obligations as they become due. Pine Cliff manages its
liquidity risk through actively managing its capital, which it defines as cash, debt and equity. Capital management strategies include
continuously monitoring forecasted and actual cash flow from operating, financing and investing activities and opportunities to issue
additional equity. Pine Cliff actively monitors its credit and working capital to ensure that it has sufficient available funds to meet its
financial requirements at a reasonable cost. Management believes that funds generated from these sources currently will be adequate
to settle Pine Cliff’s financial liabilities. If required, Pine Cliff will also consider additional short-term financing or issuing equity in
order to meet its future liabilities. Any of these events could affect Pine Cliff’s ability to fund ongoing operations.
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.
Environmental
All production phases of oil, NGLs and natural gas are subject to environmental regulation pursuant to a variety of Canadian federal,
provincial and municipal laws and regulations (collectively, the “Environmental Regulations”). Environmental Regulations provide
that wells, facility sites and other properties and practices associated with our operations be constructed, operated, maintained,
abandoned, reclaimed and undertaken in accordance with the requirements set out therein. In addition, certain types of operations,
including exploration and development projects and changes to certain existing projects, may require the submission and approval of
environmental impact assessments or permit applications. Environmental Regulations impose, among other things, costs, restrictions,
liabilities and obligations in connection with the generation, handling, use, storage, transportation, treatment and disposal of
hazardous substances and waste and in connection with spills, releases and emissions of various substances in the environment. They
also impose restrictions, liabilities and obligations in connection with the management of water sources that are being used, or whose
use is contemplated, in connection with oil and gas operations. The complexities of changes in Environmental Regulations make it
difficult to predict the potential future impact to Pine Cliff.
Compliance with Environmental Regulations requires expenditures. Our future capital expenditures and operating expenses could
increase as a result of, among other things, developments in our business, operations, plans and objectives and changes to existing, or
implementation of new, Environmental Regulations. Failure to comply with Environmental Regulations may result in, among other
things, the imposition of fines, penalties, environmental protection orders, suspension of operations, and could adversely affect our
reputation. The costs of complying with Environmental Regulations may have a material adverse effect on our business, financial
condition, results of operations and cash flows from operating activities. The implementation of new Environmental Regulations or
the modification of existing Environmental Regulations affecting the oil and natural gas industry generally could reduce demand for
crude oil and natural gas as well as shift hydrocarbon demand toward relatively lower carbon sources, increase compliance costs,
lengthen project implementation times, and have an adverse effect on our business, financial condition, results of operations and cash
flows.
Fiscal Environment
Resource 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 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.
22
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2019
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.
Regulatory Risks
Regulatory risk is the risk of loss or lost opportunity resulting from the introduction of, or changes in, regulatory requirements or the
failure to secure regulatory approval for upstream or downstream development projects. The implementation of new regulations or
the modification of existing regulations could impact our existing and planned projects as well as result in increased compliance costs,
adversely impacting our financial condition, results of operations and cash flows.
The oil and gas industry in general and our operations in particular are subject to regulation and intervention under federal, provincial,
territorial, state and municipal legislation in Canada in matters such as, but not limited to: land tenure; permitting of production
projects; royalties; taxes (including income taxes); government fees; production rates; environmental protection controls; protection
of certain species or lands; provincial and federal land use designations; the reduction of greenhouse gases and other emissions; the
export of crude oil, natural gas and other products; the transportation of crude-by-rail or marine transport; the awarding or acquisition
of exploration and production, oil sands or other interests; the imposition of specific drilling obligations; control over the development,
abandonment and reclamation of fields (including restrictions on production) and/or facilities; and possibly expropriation or
cancellation of contract rights. Changes to government regulation could impact our existing and planned projects or increase capital
investment or operating expenses, adversely impacting our financial condition, results of operations and cash flows from operating
activities.
Reserves
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 Standards of Disclosure for Oil and Gas Activities 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 its 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 oil, NGL and natural gas prices.
Safety
The operation of our properties is subject to hazards of finding, recovering, transporting and processing hydrocarbons including, but
not limited to: blowouts; fires; explosions; gaseous leaks; migration of harmful substances; oil spills; corrosion; acts of vandalism; and
other accidents or hazards that may occur at or during transport to or from commercial or industrial sites. Any of these hazards can
interrupt operations, impact our reputation, cause loss of life or personal injury, result in loss of or damage to equipment, property,
information technology systems, related data and control systems, cause environmental damage that may include polluting water, land
or air, and may result in fines, civil suits, or criminal charges against Pine Cliff, any of which may have a material adverse effect on our
business, financial condition, results of operations, cash flows, and our reputation.
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
adjusted funds flow 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.
23
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2019
CRITICAL ACCOUNTING JUDGMENTS AND ESTIMATES
The timely preparation of the Financial Statements in conformity with IFRS requires Pine Cliff management to make judgments,
assumptions and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of
contingent assets and liabilities. 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 judgments or estimates.
Judgments
Cash Generating Units
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.
Estimates
Reserves
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 Standards of Disclosure for Oil and Gas Activities 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 its 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 provision
Decommissioning, abandonment and site reclamation expenditures will be incurred by the Company at the end of the operating life of
the Company’s facilities and properties. Decommissioning expenditures 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
expenditures 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.
Share-based payments
All equity-settled, share-based awards issued by the Company are recorded at fair value using the Black-Scholes option-pricing model.
In assessing the fair value of equity-based compensation, estimates have to be made regarding the expected volatility in share price,
option life, dividend yield, risk-free rate and estimated forfeitures at the initial grant date.
24
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2019
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.
ACCOUNTING POLICY AND STANDARD CHANGES
Adopted Accounting Pronouncements
As of January 1, 2019, the Company adopted the following new accounting pronouncements, in accordance with the transitional
provision of the standard. A brief description of each new accounting policy and its impact on the Company’s financial statements are
as follows:
IFRS 16 Leases (“IFRS 16”)
Effective January 1, 2019, the Company adopted IFRS 16. IFRS 16 introduces a lease accounting model for lessees that requires a right-
of-use asset and lease liability to be recognized on the balance sheet for contracts that are, or contain, a lease.
Pine Cliff adopted IFRS 16 using the modified retrospective approach, whereby the cumulative effect of initially applying the standard
was recognized as a $3.6 million increase to right-of-use assets (included in property, plant and equipment) with a corresponding
increase to lease obligations. The initial right-of-use assets recognized were measured at amounts equal to the lease obligations. The
weighted average incremental borrowing rate that will be used to determine the lease obligation at adoption is 4.7%. The right of use
assets and lease obligations are mainly from the Company’s head office lease in Calgary and vehicles for the field operations staff.
The adoption of IFRS 16 included the following elections:
•
•
•
Pine Cliff elected to not apply lease accounting to leases for which the term ends within 12 months of the date of initial
application;
Pine Cliff elected to retain the classification of previous leases under IAS 17; and
Pine Cliff elected to use hindsight in determining lease term.
As at December 31, 2018, Pine Cliff disclosed future lease obligations $4.0 million, which would have resulted in a lease obligation of
$3.6 million when discounted at the weighted average incremental borrowing rate at adoption of IFRS 16 of 4.7%.
IFRS 3 Business Combinations (“IFRS 3”)
Effective January 1, 2019, the Company early adopted IFRS 3. IFRS 3 will be applied prospectively to acquisitions and dispositions that
occur on or after January 1, 2019. The amendments introduce an optional concentration test, narrow the definitions of a business and
outputs, and clarify that an acquired set of activities and assets must include an input and a substantive process that together
significantly contribute to the ability to create outputs. These amendments do not result in changes to the Company’s accounting
policies for applying the acquisition method.
CONTROL ENVIRONMENT
Disclosure controls and procedures
Disclosure controls and procedures (“DC&P”), 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 designed
to ensure that information required to be so disclosed is accumulated and communicated to management, including the Chief Executive
Officer (“CEO”) and the Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required 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, 2019.
25
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2019
Internal control over financial reporting
Internal control over financial reporting (“ICFR”), as defined in National Instrument 52-109, includes those policies and procedures
that:
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of
assets of Pine Cliff;
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; and
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. 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-GAAP MEASURES
This MD&A uses the terms “adjusted funds flow”, “operating netbacks”, “corporate netbacks” and “net debt” which are not recognized
measures 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. These measures should not be considered as an alternative to, or more
meaningful than, IFRS measures including earnings (loss), cash flow from operating activities, or total liabilities.
Adjusted Funds Flow
The Company considers adjusted funds flow 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. Adjusted funds flow and adjusted funds flow per
Common 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 flow which is considered the most directly comparable measure under IFRS. Adjusted
funds flow is calculated as cash flow from operating activities before changes in non-cash working capital and decommissioning
obligations settled. Adjusted funds flow per Common Share is calculated using the same weighted average number of Common Shares
outstanding as in the case of the earnings per Common Share calculation for a reporting period. Adjusted funds flow per Boe or Mcfe
is calculated using the sales volumes reported for a reporting period. Pine Cliff’s method of calculating this measure may differ from
other companies, and accordingly, it may not be comparable to measures used by other companies.
Three months ended December 31,
Year ended December 31,
($000s)
Cash flow from operating activities
Adjusted by:
Change in non-cash working capital
Decommissioning obligation settled
Adjusted funds flow
Adjusted funds flow ($/Boe)
Adjusted funds flow ($/Mcfe)
Adjusted funds flow – basic and diluted
($/Common Share)
26
PINE CLIFF ENERGY LTD.
2019
4,039
127
859
5,025
2.79
0.47
2018 % Change
2019
2018 % Change
1,415
185
15,536
8,616
80
2,281
737
4,433
2.46
0.41
(94)
17
13
13
13
100
(11,586)
1,929
(833)
2,730
5,879
10,513
0.84
0.14
0.02
1.47
0.25
0.03
1,291
(29)
(44)
(43)
(43)
(33)
0.02
0.01
MANAGEMENT DISCUSSION AND ANALYSIS
2019
Operating and Corporate Netback
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 the sum of commodity sales, less royalties, transportation and
operating expenses on an absolute and a per Boe or per Mcfe basis, respectively. Company 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 results. Corporate netback on an absolute dollar and
corporate netback per Boe and per Mcfe are calculated as operating netback, less G&A and interest expense plus dividend income.
Pine Cliff uses these measures to assist in understanding the Company’s ability to generate positive cash flow from operating activities
at current commodity prices and it provides an analytical tool to benchmark changes in operational performance against prior periods.
Readers are cautioned, however, that these measures should not be construed as an alternative to other terms such as earnings (loss)
determined in accordance with IFRS as a measure of performance. Pine Cliff’s method of calculating these measures may differ from
other companies, and accordingly, it may not be comparable to measures used by other companies.
($ per Boe, unless otherwise indicated)
Commodity sales
Royalty expense
Transportation costs
Operating expenses
Operating netback
General and administrative
Interest and bank charges, net of
dividend income
Corporate netback
Operating netback ($ per Mcfe)
Corporate netback ($ per Mcfe)
Net Debt
Three months ended December 31,
Year ended December 31,
2019
2018
$ Change
2019
2018
$ Change
17.33
(1.56)
(1.53)
(10.08)
4.16
(0.66)
16.72
(0.95)
(1.80)
(10.41)
3.56
(0.42)
0.61
(0.61)
0.27
0.33
0.60
(0.24)
15.03
(0.80)
(1.68)
(10.30)
2.25
(0.73)
14.95
(1.02)
(1.74)
(9.51)
2.68
(0.67)
(0.71)
(0.68)
(0.03)
(0.68)
(0.54)
2.79
0.69
0.47
2.46
0.59
0.41
0.33
0.10
0.06
0.84
0.38
0.14
1.47
0.45
0.25
0.08
0.22
0.06
(0.79)
(0.43)
(0.06)
(0.14)
(0.63)
(0.07)
(0.11)
The Company considers net debt to be a key indicator of leverage. Net debt is calculated as the sum of due to related party,
subordinated promissory notes, term debt and trade and other payables less trade and other receivables, cash, prepaid expenses and
deposits. See “DEBT, LIQUIDITY AND CAPITAL RESOURCES” section for table.
Net debt is not a recognized measure under IFRS and Pine Cliff’s method of calculating this measure may differ from other companies,
and accordingly, it may not be comparable to measures used by other companies.
27
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2019
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 the MD&A
and Annual MD&A includes, but is not limited to: expected production levels, expected operating costs, expected transportation costs,
expected interest costs, royalty and G&A levels; future capital expenditures, including the amount and nature thereof; future drilling
opportunities and Pine Cliff’s ability to generate reserves and production from the undrilled locations; oil and natural gas prices and
demand; expansion and other development trends of the oil and natural gas industry; business strategy and guidance; expansion and
growth of our business and operations; amounts due to related party, subordinated promissory notes and due pursuant to term debt
and repayment thereof; maintenance of existing customer, supplier and partner relationships; supply channels; accounting policies;
risks; Pine Cliff’s ability to generate cash flow from operating activities and adjusted funds flow; and other such matters.
All such forward-looking information is based on certain assumptions and analyses made by us in light of our experience and
perception of historical trends, current conditions and expected future developments, as well as other factors we believe are
appropriate in the circumstances. The risks, uncertainties and assumptions are difficult to predict and may affect operations, and may
include, without limitation: foreign exchange fluctuations; equipment and labour shortages and inflationary costs; general economic
conditions; industry conditions; changes in applicable environmental, taxation and other laws and regulations as well as how such
laws and regulations are interpreted and enforced; the ability of oil and natural gas companies to raise capital; the effect of weather
conditions on operations and facilities; the existence of operating risks; volatility of oil and natural gas prices; oil and gas product
supply and demand; risks inherent in the ability to generate sufficient cash flow from operating activities 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 12, 2020
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.
Natural gas liquids and oil volumes are recorded in barrels of oil (“Bbl”) and are converted to a thousand cubic feet equivalent (“Mcfe”)
using a ratio of one (1) Bbl to six (6) thousand cubic feet. Natural gas volumes recorded in thousand cubic feet (“Mcf”) are converted
to barrels of oil equivalent (“Boe”) using the ratio of six (6) thousand cubic feet to one (1) Bbl. This conversion ratio is based on energy
equivalence primarily at the burner tip and does not represent a value equivalency at the wellhead. The terms Boe or Mcfe may be
misleading, particularly if used in isolation.
Given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy
equivalency of oil, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.
The forward-looking information contained in this MD&A is expressly qualified by this cautionary statement.
28
PINE CLIFF ENERGY LTD.
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
2019
The management of Pine Cliff Energy Inc. (the “Company”) is responsible for the financial information and operating data presented
in this financial report. The consolidated financial statements (the “Financial Statements”) have been prepared by management in
accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board and utilize
the best estimates and careful judgments of management where appropriate. Operational and other financial information contained
throughout the annual report is consistent with that provided in the Financial Statements.
Management has developed and maintains a system of internal controls designed to provide reasonable assurance that all transactions
are accurate and reliably recorded, that the Financial Statements accurately report the Company’s operating and financial results
within acceptable limits of materiality, that all other operational and financial information presented is accurate and that the
Company’s assets are properly safeguarded.
The Audit Committee, comprised of non-management directors, acts on behalf of the Board of Directors to ensure that management
fulfills its financial reporting and internal control responsibilities. The Audit Committee meets regularly with management and the
external auditors to discuss financial reporting and internal control matters and ensures each party is properly discharging its
responsibilities. The Audit Committee reviewed the Financial Statements with management and the external auditors and
recommended approval to the Board of Directors, who approved these Financial Statements.
The Financial Statements have been audited by Deloitte LLP, Chartered Professional Accountants, in accordance with generally
accepted auditing standards on behalf of the shareholders and have unlimited and unrestricted access to the Audit Committee.
“Signed Philip B. Hodge”
“Signed Alan MacDonald”
Philip B. Hodge, President and Chief Executive Officer
Alan MacDonald, Chief Financial Officer and Corporate
Secretary
29
PINE CLIFF ENERGY LTD.
INDEPENDENT AUDITOR’S REPORT
2019
INDEPENDENT AUDITOR’S REPORT
To the Shareholders of Pine Cliff Energy Ltd.
Opinion
We have audited the consolidated financial statements of Pine Cliff Energy Ltd. (the “Company”), which comprise the consolidated
statements of financial position as at December 31, 2019 and 2018, and the consolidated statements of comprehensive loss, changes
in equity and cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant
accounting policies (collectively referred to as the “Financial Statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as
at December 31, 2019 and 2018, and its financial performance and its cash flows for the years then ended in accordance with
International Financial Reporting Standards (“IFRS”).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards (“Canadian GAAS”). Our responsibilities
under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our
report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial
statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that
the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Other Information
Management is responsible for the other information. The other information comprises:
● Management’s Discussion and Analysis
●
The information, other than the financial statements and our auditor’s report thereon, in the Annual Report.
Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance
conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information
identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or
our knowledge obtained in the audit, or otherwise appears to be materially misstated.
We obtained Management’s Discussion and Analysis prior to the date of this auditor’s report. If, based on the work we have performed
on this other information, we conclude that there is a material misstatement of this other information, we are required to report that
fact in this auditor’s report. We have nothing to report in this regard.
The Annual Report is expected to be made available to us after the date of the auditor’s report. If, based on the work we will perform
on this other information, we conclude that there is a material misstatement of this other information, we are required to report that
fact to those charged with governance.
Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such
internal control as management determines is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either
intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high
level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian GAAS will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial
statements.
30
PINE CLIFF ENERGY LTD.
INDEPENDENT AUDITOR’S REPORT
2019
As part of an audit in accordance with Canadian GAAS, we exercise professional judgment and maintain professional skepticism
throughout the audit. We also:
•
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design
and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to
provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for
one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the
override of internal control.
•
•
• Obtain an understanding of internal control relevant to the audit 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 Company’s internal
control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related
disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit
evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt
on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required
to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our
auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and
whether the financial statements represent the underlying transactions and events in a manner that achieves fair
presentation.
•
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is David Langlois.
/s/ Deloitte LLP
Chartered Professional Accountants
Calgary, Alberta
March 11, 2020
31
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2019
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Canadian dollars, 000s)
ASSETS
Current assets
Cash
Trade and other receivables
Prepaid expenses and deposits
Total current assets
Exploration and evaluation
Property, plant and equipment
Total assets
LIABILITIES
Current liabilities
Trade and other payables
Lease liabilities
Decommissioning provision
Total current liabilities
Lease liabilities
Due to related party
Subordinated promissory notes
Term debt
Decommissioning provision
Total liabilities
SHAREHOLDERS' EQUITY
Share capital
Warrants
Contributed surplus
Deficit
Total shareholders' equity
Total liabilities and shareholders' equity
Commitments (Note 21)
Note
As at December 31,
2018
2019
8,661
6, 18
13,597
2,218
24,476
8,694
290,565
323,735
27,514
1,043
2,000
30,557
7
8
5
9
15
9
12
13, 14
14
2,666
6,000
6,000
48,642
15
219,360
313,225
16
273,421
460
13,631
(277,002)
10,510
323,735
3,563
13,536
3,854
20,953
22,620
310,642
354,215
16,772
-
2,466
19,238
-
6,000
54,280
-
213,723
293,241
268,743
288
12,515
(220,572)
60,974
354,215
The accompanying notes are an integral part of these consolidated financial statements.
The consolidated financial statements were approved by the Board of Directors and signed on its behalf by:
“Signed George F. Fink”
“Signed Randy M. Jarock”
George F. Fink, Chair of the Board of Directors
and Director
Randy M. Jarock, Chair of the Audit Committee
and Director
32
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2019
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Canadian dollars, 000s except per share data)
REVENUE
Commodity sales
Royalty expense
Dividend income
Total revenue
EXPENSES
Operating
Transportation
Depletion and depreciation
Impairment
Share-based payments
Finance
General and administrative
Realized loss on investments
Premium on flow-through shares
Total expenses
Loss before income taxes
Deferred income tax expense
LOSS FOR THE YEAR
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized loss on investments
Amounts reclassified from comprehensive loss
OTHER COMPREHENSIVE LOSS FOR THE YEAR, NET OF TAX
TOTAL COMPREHENSIVE LOSS FOR THE YEAR
Loss per share ($)
Basic and diluted
Note
17
8
8
16
18
19
16
10
Years ended December 31,
2019
2018
105,006
(5,575)
99,431
-
99,431
71,973
11,743
46,864
8,200
1,116
11,553
5,079
-
(667)
155,861
(56,430)
-
(56,430)
-
-
-
(56,430)
107,385
(7,357)
100,028
35
100,063
68,332
12,525
43,760
-
2,231
9,511
4,838
2,687
-
143,884
(43,821)
(28,898)
(72,719)
(2,081)
2,081
-
(72,719)
16
(0.18)
(0.24)
The accompanying notes are an integral part of these consolidated financial statements.
33
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2019
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Canadian dollars, 000s)
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Loss for the year
Items not affecting cash:
Depletion and depreciation
Impairment
Share-based payments
Finance expenses
Premium on flow-through shares
Loss on sale of investments
Deferred income tax expense
Interest and bank charges
Decommissioning obligations settled
Changes in non-cash working capital accounts
Cash provided by operating activities
INVESTING ACTIVITIES
Property, plant and equipment
Exploration and evaluation
Acquisitions
Dispositions
Sale of investments
Changes in non-cash working capital accounts
Cash used in investing activities
FINANCING ACTIVITIES
Issuance of common shares, net of share issue costs
Bank debt
Issuance of subordinated promissory notes, net of share issue costs
Repayment of subordinated promissory notes
Issuance of term debt
Issuance of related party debt
Payments on lease obligations
Cash provided by financing activities
Increase in cash
Cash - beginning of year
CASH - END OF YEAR
Note
2019
2018
Years ended December 31,
(56,430)
(72,719)
8
8
16
18
16
10
18
15
18
8
7
8
8
18
16
11
14
14
12
9
46,864
8,200
1,116
11,553
(667)
-
-
(4,757)
(1,929)
11,586
15,536
(7,981)
(398)
(8,801)
1,542
-
731
(14,907)
5,345
-
-
(49,000)
49,000
-
(876)
4,469
5,098
3,563
8,661
43,760
-
2,231
9,511
-
2,687
28,898
(3,855)
(2,730)
833
8,616
(10,426)
(239)
(307)
285
2,274
291
(8,122)
-
(18,000)
18,994
-
-
1,000
-
1,994
2,488
1,075
3,563
The accompanying notes are an integral part of these consolidated financial statements.
34
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2019
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Canadian dollars, 000s)
Note
Share
capital
Contributed
surplus1
BALANCE AT JANUARY 1, 2018
Loss for the year
Realized loss on sale of investments
Issuance of warrants
Expiry of warrants
Share-based payments
BALANCE AT DECEMBER 31, 2018
Loss for the year
Share-based payments
Issuance of warrants
Issuance of common shares, net of share
issue costs
Share issue costs, net of tax
268,743
-
-
-
-
-
268,743
-
-
-
4,768
(90)
16
14
16
16
9,326
-
-
-
958
2,231
12,515
-
1,116
-
-
-
BALANCE AT DECEMBER 31, 2019
273,421
13,631
Accumulated
other
comprehensive
gain (loss)2
(2,081)
-
2,081
-
-
-
-
-
-
-
-
-
-
Warrants
Deficit
Total
Equity
958
-
-
288
(958)
-
288
-
-
172
-
-
(147,853) 129,093
(72,719)
2,081
288
-
2,231
(72,719)
-
-
-
-
(220,572)
(56,430)
-
-
60,974
(56,430)
1,116
172
-
-
4,768
(90)
460
(277,002)
10,510
1Contributed surplus is comprised of share-based payments.
2Accumulated other comprehensive gain (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.
35
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2019
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at December 31, 2019 and 2018 and for the years then ended
(all tabular amounts in Canadian dollars 000s, unless otherwise indicated)
1. NATURE OF BUSINESS
Pine Cliff Energy Ltd. (“Pine Cliff” or the “Company”) is a public company listed on the Toronto Stock Exchange (“TSX”) 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.
Pine Cliff is engaged in the acquisition, exploration, development and production of oil and natural gas in the Western Canadian
Sedimentary Basin and conducts many of its activities jointly with others; these consolidated financial statements (the “Financial
Statements”) reflect only the Company’s proportionate interest in such activities.
2. BASIS OF PREPARATION
a) Statement of Compliance
The Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by
the International Accounting Standards Board (“IASB”).
The Financial Statements were authorized for issue by the Company’s board of directors on March 11, 2020.
b) Basis of measurement
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 the Financial Statements in conformity with IFRS requires Pine Cliff 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 – Financial instruments
Note 7 – Exploration and evaluation assets (“E&E”)
Note 8 – Property, plant and equipment (“PP&E”)
Note 15 – Decommissioning provision
Note 16 – Share capital
Cash Generating Units
Cash generating units (“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
36
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2019
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
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 Standards of Disclosure for Oil and Gas Activities 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 its 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 provision
Decommissioning, abandonment and site reclamation expenditures will be incurred by the Company at the end of the operating life of
the Company’s facilities and properties. Decommissioning expenditures 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
expenditures 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.
Share-based payments
All equity-settled, share-based awards issued by the Company are recorded at fair value using the Black-Scholes option-pricing model.
In assessing the fair value of equity-based compensation, estimates have to be made regarding the expected volatility in share price,
option life, dividend yield, risk-free rate and estimated forfeitures at the initial grant date.
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.
3. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set out below have been applied consistently to all periods presented in the Financial Statements. Certain
comparative amounts have been reclassified to conform to the current year’s presentation.
a) Basis of consolidation
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.
37
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2019
b) Revenue recognition
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; and
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 "Functional Currency"). 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
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, where 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 is comprised of cash on hand and short-term highly liquid investments that mature within three months of the date of their
purchase.
f) 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, unbooked 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.
g) Property, plant and equipment
PP&E assets include developed assets acquired, transferred-in E&E costs, development drilling, right-of-use asset and other surface
expenditures. PP&E assets are carried at cost less accumulated depletion and depreciation and impairment. The initial cost of an asset
is comprised of its purchase price, construction cost or estimated lease payments over the term of a lease, 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,
turnaround 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.
38
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2019
h) Lease obligations
Lease obligations are initially measured at the present value of the minimum lease payments that are not yet paid at the
commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s
incremental borrowing rate for that asset. Generally, the Company uses the implicit interest rate of the lease. The lease obligation is
subsequently increased by the interest cost on the lease liability and decreased by lease payments made. It is re-measured when there
is a change in future lease payments arising from a change in an index or rate or a change in estimate of the amount expected to be
payable.
All leases are accounted for by recognizing a right-of-use asset and a lease liability except for:
•
•
leases of low value assets; and
leases with a duration of 12 months or less.
IFRS 16, as defined herein, was adopted January 1, 2019 without restatement of comparative figures. The following policies apply
subsequent to the date of initial application of January 1, 2019. See note 4 for additional details.
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. Other equipment are depreciated over their
estimated useful lives on a straight line basis. Overhauls and turnarounds are depreciated over their expected life. Depletion and
depreciation is recognized in the consolidated statement of comprehensive 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 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 is recognized in the consolidated statement of loss. Impairment recognized in respect
of a CGU is 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.
Impairment recognized in prior periods are assessed at each reporting date for any indications that the impairment has decreased or
no longer exists. If the amount of the impairment decreases in a subsequent period and the decrease can be objectively related to an
event occurring after the impairment was recognized, the impairment 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 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 flow from operating activities 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
in respect of an available-for-sale financial asset is calculated by reference to its current fair value.
Impairment is recognized in the consolidated statement of comprehensive loss. Impairment is reversed if there is an indicator that
the impairment reversal can be related objectively to an event occurring after the impairment was recognized. For financial assets
measured at amortized cost, the reversal is recognized in the consolidated statement of comprehensive loss.
l) Decommissioning provision
The Company recognizes a decommissioning provision 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, Pine Cliff management reviews these estimates, and changes, if
any, are prospectively applied. The decommissioning provision 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
39
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2019
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 changes to the decommissioning provision. The decommissioning provision is
increased each reporting period with the passage of time as an accretion of decommissioning provision expense as reported in finance
expenses and changes in the estimated future cash flows are capitalized. Actual costs incurred upon settlement of the provision 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 income 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 tax is 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 tax is 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 16, options to purchase common shares of Pine Cliff (“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
three categories: amortized cost, fair value through other comprehensive income (“FVOCI”) or fair value through profit or loss
(“FVTPL”).
Cash, trade and other receivables, are classified as financial assets at amortized cost and reported at amortized cost. A provision for
impairment of trade and other receivables is established when there is evidence that the Company will not be able to collect all amounts
due according to the original terms of the receivables. Trade and other payables, due to related party, term debt and subordinated
promissory notes are classified as financial liabilities at amortized cost.
Subsequent measurement of financial instruments is based on their initial classification. FVTPL financial instruments are measured
at fair value and changes in fair value are recognized in the statement of consolidated comprehensive loss. All other financial
instruments are measured at fair value with changes in fair value recorded at FVTPL depending on their initial classification and
measurement. The remaining categories of financial instruments are recognized at amortized cost using the effective interest method.
40
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2019
p) Risk management contracts
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. 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 earnings (loss) in the period they occur. The Company has not designated any of its
risk management contracts as effective accounting hedges.
q) Earnings (loss) per share
Basic per share amounts are calculated by dividing the earnings or loss attributable to holders of Common Shares 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 and warrants 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 provision
and term debt. 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 income 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.
4. ADOPTED ACCOUNTING PRONOUNCEMENTS
As of January 1, 2019, the Company adopted the following new accounting pronouncements, in accordance with the transitional
provision of the standard. A brief description of each new accounting policy and its impact on the Company’s financial statements are
as follows:
IFRS 16 Leases (“IFRS 16”)
Effective January 1, 2019, the Company adopted IFRS 16. IFRS 16 introduces a lease accounting model for lessees that requires a right-
of-use asset and lease liability to be recognized on the balance sheet for contracts that are, or contain, a lease.
Pine Cliff adopted IFRS 16 using the modified retrospective approach, whereby the cumulative effect of initially applying the standard
was recognized as a $3.6 million increase to right-of-use assets (included in property, plant and equipment) with a corresponding
increase to lease obligations. The initial right-of-use assets recognized were measured at amounts equal to the lease obligations. The
weighted average incremental borrowing rate that will be used to determine the lease obligation at adoption is 4.7%. The right of use
assets and lease obligations are mainly from the Company’s head office lease in Calgary and vehicles for the field operations staff.
The adoption of IFRS 16 included the following elections:
•
•
•
Pine Cliff elected to not apply lease accounting to leases for which the term ends within 12 months of the date of initial
application;
Pine Cliff elected to retain the classification of previous leases under IAS 17; and
Pine Cliff elected to use hindsight in determining lease term.
As at December 31, 2018, Pine Cliff disclosed future lease obligations $4.0 million, which would have resulted in a lease obligation of
$3.6 million when discounted at the weighted average incremental borrowing rate at adoption of IFRS 16 of 4.7%.
IFRS 3 Business Combinations (“IFRS 3”)
Effective January 1, 2019, the Company early adopted IFRS 3. IFRS 3 will be applied prospectively to acquisitions and dispositions that
occur on or after January 1, 2019. The amendments introduce an optional concentration test, narrow the definitions of a business and
outputs, and clarify that an acquired set of activities and assets must include an input and a substantive process that together
41
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2019
significantly contribute to the ability to create outputs. These amendments do not result in changes to the Company’s accounting
policies for applying the acquisition method.
5. FINANCIAL INSTRUMENTS
Financial instruments and fair value measurement
Financial instruments of the Company consist of cash, trade and other receivables, trade and other payables, due to related party,
subordinated promissory notes and term debt. The carrying values of cash, trade and other receivables and trade and other payables
approximate their respective fair values due to the short time before maturing. The carrying values of due to related party,
subordinated promissory notes and term 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, 2019 and December 31, 2018:
Description
Carrying value
Fair value
Carrying value
Fair value
December 31, 2019
December 31, 2018
Cash
Trade and other receivables
Trade and other payables
Due to related party
Subordinated promissory notes
Term debt
6. RISK MANAGEMENT
8,661
13,597
(27,514)
(6,000)
(6,000)
(48,642)
8,661
13,597
(27,514)
(6,000)
(6,000)
(48,642)
3,563
13,536
(16,772)
(6,000)
(54,280)
-
3,563
13,536
(16,772)
(6,000)
(54,280)
-
The Company is exposed to both financial and non-financial risks inherent in the oil and gas business. Financial risks include:
commodity prices, interest rates, equity price, foreign exchange, credit availability and liquidity. Financial risks can be managed, at
least to a degree, through the utilization of financial instruments. Certain non-financial risks can be mitigated through the use of
insurance and/or other risk transfer mechanisms, good business practices and process controls, while others must simply be borne.
All risks can have an impact upon the financial performance of the Company.
Market Risk
Market risk is the risk that the fair value or future cash flow from operating activities 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, natural gas liquids
(“NGLs”) 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 changes and geopolitical factors and instability. Changes
in oil, NGL’s 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. A material decline or extended period of low oil, NGL or natural
gas prices could result in a reduction of net production revenue. The economics of producing from some wells may change because of
lower prices, which could result in reduced production of oil, NGL’s or natural gas and a reduction in the volumes of Pine Cliff’s reserves.
Management may also elect not to produce from certain wells at lower prices.
42
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2019
Physical Sales Contracts
At December 31, 2019, the Company had the following physical natural gas sales contracts in place:
Contractual Term
January 1, 2020 to March 31, 2020
January 1, 2020 to October 31, 2020
April 1, 2020 to October 31, 2020
AECO
TransGas3
AECO
1 Prices reported are the weighted average prices of the periods.
2 Price has been converted from $/GJ to $/Mcf by multiplying by 1.05.
3 Subsidiary of SaskEnergy, Saskatchewan.
Delivery Point
Physical Delivery
Quantity (GJ/day)
5,000
9,000
22,500
Fixed Sale Price
($CAD/GJ)1
$2.36
$2.40
$1.54
Fixed Sale Price
($CAD/Mcf)1,2
$2.48
$2.52
$1.62
At March 11, 2020, the Company had the following additional physical natural gas sales contracts in place:
Contractual Term
April 1, 2020 to October 31, 2020
AECO
1 Prices reported are the weighted average prices of the periods.
2 Price has been converted from $/GJ to $/Mcf by multiplying by 1.05.
Delivery Point
Physical Delivery
Quantity (GJ/day)
5,000
Fixed Sale Price
($CAD/GJ)
$1.67
Fixed Sale Price
($CAD/Mcf)1, 2
$1.75
Interest Rate Risk
The Company is principally exposed to interest rate risk to the extent it draws on its variable rate debt less cash. Changes in market
interest rates could affect the cash flow from operating activities associated with variable rate debt. If interest rates applicable to Pine
Cliff’s variable rate debt less cash increased or decreased by one percent, it is estimated that Pine Cliff’s loss for the year ended
December 31, 2019, would have increased or decreased, respectively, by $nil (December 31, 2018 - $0.1 million).
Equity Price Risk
Equity price risk refers to the risk that the fair value of investments will fluctuate due to changes in equity markets for each company.
Equity price risk is also influenced from the estimated realizable value of investments that the Company holds.
Foreign Exchange Risk
The Company and its share price are exposed to risk on foreign exchange rates because the commodity prices it receives are indirectly
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 flow from operating activities. Pine Cliff has not entered into any derivative
financial instruments to manage this risk at this time.
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, which are a reflection of 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 a major Canadian chartered bank. To mitigate the
credit risk on trade and other receivables, Pine Cliff assesses the financial strength of its counterparties and endeavors to enter into
relationships with larger purchasers with established credit histories.
The Company’s trade and other receivables balance at December 31, 2019 of $13.6 million (December 31, 2018 – $13.5 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, 2019, there was $1.0 million
(December 31, 2018 - $1.0 million) of trade and other receivables over 90 days. Pine Cliff assesses its trade and other receivables
quarterly to determine if there has been any impairment. During the year ended December 31, 2019, the Company recorded $0.9
million (December 31, 2018 - $0.3 million) of bad debt expense against trade and other accounts receivables.
43
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2019
Liquidity Risk
Liquidity risk is the risk that Pine Cliff will not be able to meet its financial obligations as they become due. Pine Cliff manages its
liquidity risk through actively managing its capital, which it defines as cash, debt and equity. Capital management strategies include
continuously monitoring forecasted and actual cash flow from operating, financing and investing activities and opportunities to issue
additional equity. Pine Cliff actively monitors its credit and working capital to ensure that it has sufficient available funds to meet its
financial requirements at a reasonable cost. Management believes that funds generated from these sources currently will be adequate
to settle Pine Cliff’s financial liabilities. If required, Pine Cliff will also consider additional short-term financing or issuing equity in
order to meet its future liabilities. Any of these events could affect Pine Cliff’s ability to fund ongoing operations.
7. EXPLORATION AND EVALUATION
Cost:
Balance at December 31, 2017
Additions
Transfer to PP&E
Balance at December 31, 2018
Additions
Transfer to PP&E
Balance at December 31, 2019
E&E Impairment Assessment
Oil and gas
properties
26,313
193
(7,006)
19,500
345
(14,324)
5,521
Mineral
properties
3,074
46
-
3,120
53
-
3,173
Total
29,387
239
(7,006)
22,620
398
(14,324)
8,694
In accordance with IFRS, an impairment test is performed if the Company identified an indication of impairment. An E&E asset shall
be assessed for impairment before reclassification to PP&E if the Company determines technical feasibility and commercial viability
of extraction. At December 31, 2019 and 2018, the Company determined that no indicators of impairment existed on its E&E assets
and therefore an impairment test was only performed for E&E assets transferred to PP&E.
8. PROPERTY, PLANT AND EQUIPMENT
Cost:
Balance at December 31, 2017
Additions
Transfer from E&E
Acquisitions
Dispositions
Decommissioning provision
Balance at December 31, 2018
Additions
Lease obligations
Transfer from E&E
Acquisitions
Dispositions
Decommissioning provision
Balance at December 31, 2019
Accumulated depletion and depreciation:
Balance at December 31, 2017
Depletion and depreciation
Disposition
Balance at December 31, 2018
Depletion and depreciation
Impairment
Balance at December 31, 2019
Carrying value at:
December 31, 2018
December 31, 2019
44
PINE CLIFF ENERGY LTD.
($000s)
558,482
10,426
7,006
307
(369)
12,990
588,842
7,981
4,585
14,324
8,801
(1,542)
838
623,829
($000s)
(234,524)
(43,760)
84
(278,200)
(46,864)
(8,200)
(333,264)
($000s)
310,642
290,565
CONSOLIDATED FINANCIAL STATEMENTS
2019
PP&E Impairment Assessment
As at December 31, 2019, the Company had four CGU’s being the Southern CGU, Central Gas CGU, Edson CGU, and Coal Bed Methane
CGU. The Company reviewed each CGU’s property and equipment at December 31, 2019 for indicators of impairment and determined
that an indicator related to the decrease in future commodity prices was present. The company prepared estimates of both the value
in use and fair value less cost to sell of each of the Company’s CGUs. When it is determined that any CGU carrying value exceeds its
recoverable amount, that CGU is considered impaired and an impairment expense is reported that equals this excess.
The following table outlines forecast benchmark prices and exchange rates used in the Company’s impairment test as at December 31,
2019:
Year
2020
2021
2022
2023
2024
2025-2034
Thereafter
WTI Oil (US$/Bbl)1
61.00
63.75
66.18
67.91
69.48
78.10
+2.0%/yr
$C to US$ Foreign
exchange rate1
1.32
1.30
1.27
1.27
1.27
1.27
1.27
Edmonton Light Crude Oil
(Cdn$/Bbl) 1
72.64
76.06
78.35
80.71
82.64
93.14
+2.0%/yr
AECO Gas
(Cdn$/MMBtu) 1
2.04
2.32
2.62
2.71
2.81
3.19
+2.0%/yr
1 Source: Average of three independent consultant price forecasts, effective January 1, 2020 (McDaniel & Associates Consultants Ltd., GLJ Petroleum
Consultants Ltd. and Sproule Associates Limited).
The recoverable amounts of each of the Company’s CGU’s at December 31, 2019 were estimated at their fair value less cost to sell,
based on the net present value of discounted future cash flow from operating activities from oil and gas reserves as estimated by the
Company’s independent reserves evaluator at December 31, 2019. The fair value less costs to sell used to determine the recoverable
amounts are classified as Level 3 fair value measurements as certain key assumptions are not based on observable market data, but
rather, the Company’s management best estimates.
The Company used a pre-tax 15% discount rate for the December 31, 2019 impairment test which took into account risks specific to
the CGU’s and inherent in the oil and gas business. The impairment testing concluded that the fair value less costs to sell for the
Company’s CGU’s at December 31, 2019 is greater than the carrying amounts and therefore no impairment was recorded in the fourth
quarter of 2019. An impairment of $8.2 million was recorded for the period ending June 30, 2019.
The following CGU’s were impaired as at June 30, 2019:
CGUs
Southern
Total Impairment
9. LEASE LIABILITIES
2019
8,200
8,200
Pine Cliff had the following future commitments associated with its lease liabilities:
2020
2021
2022
2023
2024
Thereafter
Total lease payments as at December 31, 2019
Amounts representing interest
Present value of lease payments
Current portion of lease obligations
Non-current portion of lease obligations
2018
-
-
($000s)
1,198
1,107
915
739
96
-
4,055
(346)
3,709
(1,043)
2,666
For the year ended December 31, 2019, interest expense of $0.2 million and a total cash outflow of $0.9 million was recognized relating
to lease obligations.
45
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2019
10. DEFERRED INCOME TAXES
At December 31, 2019, a deferred income tax asset of $nil (December 31, 2018 - $nil) has been recognized as the Company believes,
based on estimated cash flows, its realization is not probable within the allowable timeframes.
Deferred income tax assets:
Share issue costs
Decommissioning provision
Property and equipment
Lease liabilities
Capital losses carried forward
Non-capital losses carried forward
Asset before unrecognized deferred income tax
Less: unrecognized deferred income tax
Net deferred income tax asset
2019
157
52,012
(9,786)
872
464
32,571
76,290
(76,290)
-
As at December 31,
2018
454
58,362
(15,474)
-
336
29,676
73,354
(73,354)
-
As at December 31, 2019, a deferred income tax asset has not been recognized on $76.3 million (December 31, 2018 - $73.4 million)
of deductible temporary differences as it is not probable that future taxable earnings will be available against which the Company can
utilize the benefits.
Pine Cliff has approximately $400.3 million in tax pools as at December 31, 2019 (December 31, 2018 - $389.6 million), available for
future use as deductions from taxable income. Included in the Company’s tax pools are estimated non-capital loss carry-forwards of
$138.7 million (December 31, 2018 - $109.9 million) that expire between the years 2030 and 2039.
Income tax expense differs from that which would be expected from applying the effective Canadian federal and provincial tax rates
to income before income taxes as follows:
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
Premium on flow-through shares
Qualifying expenditures on flow-through shares
Return to provision true-up
Deferred income tax expense
11. BANK DEBT
2019
(56,430)
26.5%
(14,981)
-
416
11,151
2,536
-
(177)
1,062
(7)
-
Years ended December 31,
2018
(43,821)
27%
(11,832)
(9)
675
(106)
39,435
725
-
-
10
28,898
On July 28, 2019, the Company’s syndicated credit facility (the “Credit Facility”) with three Canadian Financial Institutions expired
and was not renewed (December 31, 2018 - $11.0 million Credit Facility). Borrowings under the Credit Facility had interest at the
Canadian prime rate plus 1.5% to 4.0% or the bankers’ acceptance rates plus 2.5% to 5.0%, depending, in each case, on the rolling 12
month ratio of consolidated debt to EBITDA, plus applicable standby fees. EBITDA is calculated as earnings (loss) excluding
depreciation, depletion, impairment and accretion, share based payments, interest, taxes and other non-cash items. As at December
31, 2019, the Company had $nil in letters of credit issued against its Credit Facility (December 31, 2018 - $2.9 million).
Letter of Credit Facility
As at December 31, 2019, the Company had a $2.6 million letter of credit facility (“LC Facility”) with a Canadian bank which is
supported by a performance guarantee from Export Development Canada. The LC Facility is for issuing letters of credit to
counterparties and is available on a demand basis. Letters of credit issued under the LC Facility incur an issuance fee of 4% per annum.
The LC Facility does not contain any financial covenants. As at December 31, 2019, the Company had $2.6 million in letters of credit
issued against its LC Facility (December 31, 2018 - $nil).
46
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2019
12. DUE TO RELATED PARTY
On October 1, 2019, Pine Cliff amended and restated its $6.0 million subordinated promissory note to the Company’s Chairman of the
Board. This amended and restated promissory note matures on December 31, 2024 (“Related Party Note”), bears interest at 6.5%
per annum and is payable monthly. The Related Party Note is secured by a $6.0 million floating charge debenture over all of the
Company’s assets and is subordinated to any and all claims in favor of the holder of the Term Debt, as defined herein. Interest paid on
the Related Party Note for the year ended December 31, 2019 was $0.4 million (December 31, 2018 - $0.3 million).
13. SUBORDINATED PROMISSORY NOTES
On October 1, 2019, Pine Cliff amended and restated its $6.0 million subordinated promissory notes. These amended and restated
subordinated promissory notes mature on December 31, 2024 (“$6 Million Notes”), bear interest at 6.5% per annum and are payable
monthly. The $6 Million Notes are issued to a shareholder and a relative of that shareholder, owning directly or by discretion and
control, greater than 10% of the Common Shares. The $6 Million Notes are secured by a $6.0 million floating charge debenture over
all of the Company’s assets and are subordinated to any and all claims in favor of the holder of the Term Debt.
14. SUBORDINATED PROMISSORY NOTES AND TERM DEBT
Subordinated Promissory Notes
2020 Notes - beginning of year
Accretion expense
2020 Notes repaid during the year
2020 Notes - end of year
2022 Notes - beginning of year
2022 Notes issued
Accretion expense
2022 Notes repaid during the year
2022 Notes - end of year
2019
29,544
456
(30,000)
-
2019
18,736
-
264
(19,000)
-
As at December 31,
2018
29,307
237
-
29,544
As at December 31,
2018
-
18,706
30
-
18,736
The 2022 Notes were determined to be a hybrid instrument with an embedded derivative. The fair value of the debt component of the
2022 Notes was determined on issuance to be 7.6%, 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 accretes up to the principal balance at maturity or
repayment.
Term Debt
Term debt – beginning of year
Term debt principal drawdown
Value allocated to Warrants
Accretion expense
Term Debt - end of year
2019
-
49,000
(172)
(186)
48,642
As at December 31,
2018
-
-
-
-
-
On October 1, 2019, Pine Cliff entered into a credit facility with Alberta Investment Management Corporation ("AIMCo"), acting on
behalf of its clients, to repay its $30 million promissory notes maturing September 30, 2020 (“2020 Notes”) and its $19 million
promissory notes maturing July 31, 2022 (“2022 Notes”) and replace them with a non-revolving term credit facility (“Term Debt”).
The Term Debt consists of a first tranche with a principal amount of $30 million that matures on December 31, 2024 (the "2024
Tranche") and a second tranche with a principal amount of $19 million that matures on July 31, 2022 (the "2022 Tranche”),
(collectively the "Refinancing "). Interest on the 2024 Tranche is payable at a rate of 8.75% per annum until September 30, 2020 and
thereafter such interest rate will increase by 1% per annum up to 12.75% and interest is payable on the 2022 Tranche at a rate of
7.05% per annum. All or a portion of the principal amount outstanding can be repaid at any time, but without any penalty or premium
after September 30, 2022 with respect to the 2024 Tranche and, July 13, 2021 with respect to the 2022 Tranche. A total of 7.5 million
Common Share purchase warrants (the “Warrants”) were issued in connection with the Refinancing, with each Warrant entitling the
holder to purchase one Common Share of Pine Cliff for $0.20565, until September 30, 2022. The Refinancing security consists of floating
47
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2019
demand debentures totaling $150.0 million and a general security agreement with first ranking over all current and acquired
properties.
The fair value of the Refinancing was determined on drawdown to be 10.1%, using the effective interest rate method, by discounting
future payments of interest and principal with the residual value allocated to the Warrants. The value of the Term Debt accretes up to
the principal balance of each tranche at maturity.
Non-Financial Covenants
The Term Debt contains various covenants on the part of the Company and its subsidiaries, including covenants that place limitations
on certain types of activities, including restrictions or requirements with respect to additional debt, liens, assets sales, hedging
activities, management of environmental liabilities, investments, distributions, and mergers and acquisitions. The Term Debt does not
include any financial covenants.
15. DECOMMISSIONING PROVISION
The total current and long-term decommissioning provision of $221.4 million was estimated by management based on the Company’s
working interest and estimated costs to remediate, reclaim and abandon its wells, pipelines, and facilities and estimated timing of the
costs to be incurred in future periods.
At December 31, 2019, the estimated total undiscounted and uninflated amount required to settle the decommissioning liabilities was
$239.7 million (December 31, 2018 - $264.6 million). The discounted and inflated amount required to settle the decommissioning
liabilities of $221.4 million has been calculated assuming a 1.95% inflation rate (December 31, 2018 – 1.88%) and discounted using
an average risk-free interest rate of 2.57% (December 31, 2018 – 2.88%). These obligations are currently expected to be settled based
on the useful lives of the underlying assets, some of which extend beyond 35 years into the future.
Decommissioning provision, January 1, 2018
Increase relating to development activities
Decommissioning expenditures
Revisions (changes in estimates, inflation rate, and discount rates)
Accretion
Decommissioning provision, December 31, 2018
Provisions related to acquisitions
Provisions related to dispositions
Decommissioning expenditures
Revisions (changes in estimates, inflation rate, and discount rates)
Accretion
Decommissioning provision, December 31, 2019
Less current portion of decommissioning provision
Non-current portion of decommissioning provision
16. SHARE CAPITAL
Authorized
($000s)
200,540
82
(2,730)
12,908
5,389
216,189
18,527
(43)
(1,929)
(17,646)
6,262
221,360
(2,000)
219,360
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 and outstanding
Issued and outstanding share capital continuity:
Balance, January 1, 2017
Balance, December 31, 2018
Shares issued pursuant to private and public share offerings1,2
Share issue costs, net of deferred income tax
Balance, December 31, 2019
Share capital
($000s)
268,743
268,743
4,768
(90)
273,421
1 On May 31, 2019, Pine Cliff issued by way of a non-brokered private placement, 14,492,754 flow-through Common Shares (within the meaning of
the Income Tax Act (Canada)) (the "Flow-Through Shares"), at a price of $0.276 per Flow-Through Share, resulting in gross proceeds of $4.0 million.
The net proceeds of the flow-through private placement was used to incur eligible Canadian development expenses ("CDE"). Pine Cliff incurred all
eligible CDE prior to December 31, 2019.
2 On May 31, 2019, Pine Cliff also issued by way of a non-brokered private placement (“Private Placement”), 6,215,652 Common Shares, at a price of
$0.23 per Common Share, resulting in gross proceeds of $1.4 million. Insiders, including directors and officers, subscribed for a total of 2,608,695
Common Shares of the Private Placement.
Common Shares
(000s)
307,076
307,076
20,708
-
327,784
48
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2019
Flow-through Common Shares
Canadian tax legislation permits entities meeting specified criteria to issue securities to investors whereby the deductions for tax
purposes related to eligible expenditures may be claimed by the investors rather than by the entity. The table below summarizes Flow-
Through Shares issued during the year ended December 31, 2019. As of December 31, 2019 all eligible expenditures for the Flow-
Through Shares issued in 2019 have been incurred.
As at December 31, 2019:
# of
Flow
Through
Shares
(000s)
14,493
Price ($
per Flow
Through
Shares)
0.276
Gross
Proceeds
($000s)
4,000
Deferred
Premium
(000s)
667
Eligible Expenditures1
Incurred
Closing Date
May 31, 2019
(000s) Remaining
4,000
1 Pursuant to the provisions of the Income Tax Act (Canada), the Company has incurred eligible CDE.
Type
CDE
Expenditure Period
End
- December 31, 2019
Stock Options
The Company provides an equity settled stock option plan (the “Option Plan”) for its directors, employees and consultants. Under the
Option Plan, the Company may grant stock options up to 10% of outstanding Common Shares on the grant date. The term and vesting
period of the options granted are determined at the discretion of the Company’s board of directors. The exercise price of each option
granted equals the market price of the Company’s Common Shares immediately preceding the date of grant and the option’s maximum
term is five years.
Stock options issued and outstanding:
Outstanding, January 1, 2018
Granted
Expired
Forfeited
Outstanding, December 31, 2018
Granted
Expired
Forfeited
Outstanding, December 31, 2019
Exercisable, December 31, 2019
Options
(000s)
21,316
7,698
(6,598)
(1,387)
21,029
13,138
(6,524)
(1,814)
25,829
6,965
Weighted-average
exercise price
($ per Common
Share)
1.06
0.33
1.23
0.82
0.75
0.18
1.02
0.62
0.40
0.78
Exercise price:
$0.125 - $0.47
$0.48 - $0.82
$0.83 - $1.16
Stock options
outstanding
(000s)
19,636
3,216
2,977
25,829
Weighted-average
remaining term
(years)
2.2
0.9
0.8
1.9
Stock options
exercisable
(000s)
2,280
1,708
2,977
6,965
Weighted-average
remaining term
(years)
0.4
0.4
0.8
0.6
The Company records share-based payment expense over the vesting period, based on the fair value of the options granted to
employees, directors and consultants. Typically, one third of the stock options granted vest annually on the first, second, and third
anniversaries of the grant date and expire one year after each respective vesting date. During the year ended December 31, 2019, the
Company granted 13,137,907 stock options (December 31, 2018 – 7,697,800) with a fair value of $0.07 (December 31, 2018 - $0.12)
per option using the Black-Scholes option pricing model using the following key assumptions:
Assumptions (weighted average):
Exercise price ($)
Estimated volatility of underlying Common Shares (%)
Expected life (years)
Risk-free rate (%)
Forfeiture rate (%)
49
PINE CLIFF ENERGY LTD.
Years ended December 31,
2018
2019
0.33
0.18
49.8
53.3
3.0
3.0
2.1
1.6
3.9
3.9
CONSOLIDATED FINANCIAL STATEMENTS
2019
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
Warrants outstanding:
Outstanding, January 1, 2018
Expired
Granted
Outstanding, December 31, 2018
Granted
Outstanding, December 31, 2019
Warrants
(000s)
4,500
(4,500)
2,850
2,850
7,500
10,350
Weighted-average
exercise price
($ per Common
Share)
1.38
(1.38)
0.51
0.51
0.21
0.29
During the year ended December 31, 2019, the Company granted 7,500,000 Warrants (December 31, 2018 – 2,850,000) with a fair
value of $0.03 (December 31, 2018 - $0.10) per Warrant using the Black-Scholes Warrant pricing model. A total of 2,850,000 Warrants
expire on July 31, 2021 and 7,500,000 Warrants expire on September 30, 2022.
Per Share Calculations
The average market value of the Common Shares for the purposes of calculating the dilutive effect of stock options and warrants was
based on quoted market prices for the period that the options and warrants were outstanding. In calculating the weighted average
number of diluted, Common Shares outstanding for the year ended December 31, 2019 and 2018, all stock options and warrants were
excluded as they were not dilutive.
Loss per Common Share calculation:
Numerator
Loss for the year
Denominator (000s)
Weighted-average Common Shares outstanding –
basic and diluted
Loss per Common Share – basic and diluted ($)
17. COMMODITY SALES
Years ended December 31,
2018
2019
(56,430)
(72,719)
319,274
(0.18)
307,076
(0.24)
The Company’s commodity sales revenue is determined pursuant to the terms of the marketing agreements. The revenue for natural
gas, NGL and crude oil is based on the commodity price in the month of production, adjusted for quality, location, allowable deductions,
if any, or other factors. Commodity sales revenues are based on marketed indices that are determined on a monthly or daily basis.
Years ended December 31,
2019
82,908
12,985
9,113
2018
84,161
18,300
4,924
105,006
107,385
($000s)
Natural gas
NGL
Crude oil
Total commodity sales
50
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2019
18. SUPPLEMENTAL CASH FLOW INFORMATION
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
Finance expenses:
Interest expense and bank charges
Non cash:
Accretion on decommissioning provision
Accretion on subordinated promissory notes and term debt
Total finance expenses
Years ended December 31,
2018
2019
(61)
1,636
10,742
12,317
11,586
731
12,317
1,612
28
(516)
1,124
833
291
1,124
Years ended December 31,
2018
3,855
2019
4,757
6,262
534
11,553
5,389
267
9,511
Cash interest paid in the year ended December 31, 2019, was $4.8 million (December 31, 2018 - $3.0 million). Dividends received
during the year ended December 31, 2019, were $nil (December 31, 2018 – $0.035 million).
19. GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses by nature were as follows:
General and administration expenses:
Staff expenses
Public company expenses
Professional fees
Office and other costs
Bad debt expense
Lease liabilities
Overhead recoveries
Total general and administration expenses
20. KEY MANAGEMENT RENUMERATION
Years ended December 31,
2018
4,876
299
686
1,394
261
-
(2,678)
4,838
2019
4,822
292
705
1,622
887
(442)
(2,807)
5,079
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 and directors and officers also participate in the Option Plan. Director and officer compensation was as
follows:
Key management remuneration:
Short-term benefits1
Share-based payments2
Total key management remuneration
Years ended December 31,
2018
1,498
1,157
2,655
2019
1,442
577
2,019
1 Short-term benefits includes the salary, other non-cash short-term benefits and directors fees paid to Pine Cliff’s officers and directors.
2 Share-based payments computed for officers and directors are included in Note 16 and include the fair value of awards expensed in the year.
51
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2019
21. COMMITMENTS
As at December 31, 2019, the Company has the following commitments and other contractual obligations:
2020
2021
2022
2023
2024
Thereafter
($000s)
Trade and other payables
Term debt1
Due to related party
Subordinated promissory notes
Future interest
Transportation2
27,514
-
-
-
4,820
8,530
-
-
-
-
5,120
6,883
-
19,000
-
-
4,861
6,041
-
-
-
-
4,380
3,168
-
30,000
6,000
6,000
4,605
3,168
Total commitments and contingencies
40,864
12,003
29,902
7,548
49,773
-
-
-
-
-
8,977
8,977
1 Principal amount.
2 Firm transportation agreements.
22. CAPITAL STRUCTURE
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, Common Shares or a combination thereof and make adjustments to its capital
investment programs.
The Company defines and computes its net debt as follows:
Due to related party1
Subordinated promissory notes1
Term debt2
Trade and other payables and accrued liabilities
Less:
Trade and other receivables
Cash
Prepaid expenses and deposits
Net debt
Equity
2019
6,000
6,000
49,000
27,514
(13,597)
(8,661)
(2,218)
64,038
10,733
As at December 31,
2018
6,000
55,000
-
16,772
(13,536)
(3,563)
(3,854)
56,819
60,974
1 The due to related party and promissory notes are due on December 31, 2024.
2 The term debt for net debt are presented at the principal amount with $19.0 million due on July 31, 2022 and $30.0 million due on December 31,
2024.
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-adjusted funds flow (cash flow from operating activities before changes in non-cash working capital and
decommissioning liabilities) ratio. Net debt-to-adjusted funds flow and net debt do not have a specified meaning under IFRS and may
not be comparable to measures used by other companies.
Pine Cliff’s cash flow from operating activities is expected to 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
service costs, Pine Cliff may not generate sufficient cash flow from operating activities to entirely fund its planned oil and gas capital
programs or future acquisitions. Accordingly, the Company will continually evaluate the stage of development of its proved and
producing reserves 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 risk to ensure the Company’s net debt to equity ratio is
consistent with its capital management objectives.
52
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2019
Net debt to equity is computed as follows:
Net debt to equity ratio:
Net debt
Equity
Net debt to equity
2019
64,038
10,733
6.0
As at December 31,
2018
56,819
60,974
0.9
The Company considers adjusted funds flow 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-adjusted funds flow is computed as
follows:
Net debt-to-adjusted funds flow calculation:
Cash provided by operating activities
Increase (decrease) in non-cash working capital
Decommissioning obligations settled
Adjusted funds flow
Net debt
Net debt-to-adjusted funds flow
2019
15,536
(11,586)
1,929
5,879
64,038
11.0
As at December 31,
2018
8,616
(833)
2,730
10,513
56,819
5.4
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, the long-term nature of its net debt, including its term debt, subordinated promissory notes
and due to related party 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
William S. Rice
OFFICERS
Philip B. Hodge
President and Chief Executive Officer
Terry L. McNeill
Chief Operating Officer
Alan MacDonald
Chief Financial Officer and Corporate Secretary
Heather A. Isidoro
Vice President, Business Development
Christopher S. Lee
Vice President, Geology
HEAD OFFICE
850, 1015 – 4th Street SW
Calgary, Alberta T2R 1J4
Phone: (403) 269-2289
Fax: (403) 265-7488
CORPORATE INFORMATION
2019
REGISTRAR AND TRANSFER AGENT
Odyssey Trust Company of Canada
AUDITORS
Deloitte LLP
BANK
Toronto-Dominion Bank
STOCK EXCHANGE LISTING
TSX Exchange
Trading Symbol: PNE
WEBSITE
www.pinecliffenergy.com
INVESTOR CONTACT
info@pinecliffenergy.com