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WWW.PINECLIFFENERGY.COM
Long-term Value Focus
Annual Report 2021
MESSAGE TO SHAREHOLDERS
2021
I hope all of Pine Cliff’s shareholders and families are well. I also hope that you are pleased with our Q4 and 2021 annual financials.
Pine Cliff’s adjusted funds flow of $26.3 million generated during the fourth quarter of 2021 was 75% higher than the previous highest
quarterly adjusted funds flow in Pine Cliff history of $15 million in Q4 2016 and the 2021 annual adjusted funds flow of $59.1 million
was 52% higher than the previous highest ever annual amount of $39 million in 2014. We thought the quarter would be good, but
these numbers exceeded our expectations. What a fantastic way to ring in our tenth anniversary!
Highlights from the fourth quarter and 2021 include:
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WWW.PINECLIFFENERGY.COM
generated $26.3 million of adjusted funds flow ($0.08 per basic and $0.07 per fully diluted share) for the three months ended
December 31, 2021, and $59.1 million ($0.18 per basic and $0.17 per fully diluted share) for the year ended December 31,
2021. This is 329% and 677% higher than the respective periods in the prior year;
generated net earnings of $80.5 million ($0.24 per basic and $0.23 per fully diluted share) for the three months ended
December 31, 2021, and $81.4 million ($0.24 per basic and $0.23 per fully diluted share) for the 2021 year;
production averaged 19,056 Boe/d and 18,445 Boe/d during the three months and year ended December 31, 2021, compared
to 19,130 Boe/d and 19,006 BOE/d for the comparable periods in 2020;
closed the acquisition of a private company on December 29, 2021 for a cash consideration of $22.2 million;
repaid in full $19.0 million of Term Debt due July 31, 2022 during the third quarter of 2021; and
net debt decreased by 21.2% or $13.4 million from $63.0 million on December 31, 2020, to $49.7 million as at December
31, 2021.
Earnings Explanation
During the fourth quarter and year ended December 31, 2021, Pine Cliff recognized a reversal of prior years’ asset impairment
provisions totaling $14.0 million, due to an increase in future commodity prices. Higher future commodity prices also led to Pine Cliff
recognizing a recovery of deferred income taxes in the amount of $50.6 million, as it is now expected that Pine Cliff will be able to
utilize these tax pools. These amounts resulted in Pine Cliff recognizing additional earnings of $64.6 million during the fourth quarter
($0.19 per basic and $0.18 per fully diluted share) and year ended December 31, 2021 ($0.19 per basic and fully diluted share). Each
of these adjustments are reflective of the increased value of Pine Cliff’s assets with the rise in commodity prices.
Drilling Update
We brought two 100% Pekisko oil wells on production in Q4 that were originally drilled in Q3 and we also drilled three more wells
(2.4 net) in Central Alberta in the fourth quarter; one of which was placed on production in Q4 with the remaining two coming on
production in February. We also were active in our Edson area, participating in three (0.6 net) non-operated wells all of which were
placed on production in Q4. We are pleased with the overall results of our 2021 drilling program and we were particularly happy with
the last two Pekisko oil wells that came on production last month. It is early days but they both appear to be producing materially
above type curve, and the timing to bring on flush oil production in this commodity environment is fortuitous.
Outlook
Pine Cliff’s portfolio of low decline natural gas assets, bolstered by the recent tuck-in acquisition of a private company with synergistic
assets in our core Ghost Pine area, positions Pine Cliff to take advantage of improved commodity prices in 2022. The Company’s
2022 capital budget of $25.5 million is expected to be fully funded from adjusted funds flow and includes approximately $18.0 million
of development drilling, $3.6 million on major maintenance and optimization capital and $3.9 million on abandonments and
reclamation (exclusive of abandonments conducted pursuant to government funded grants). We also expect to spend approximately
$6.9 million in government funded grants for site abandonment and reclamation activities in 2022. In 2021 we abandoned 335 well
bores (310 net), and in 2022 we are targeting to abandon 300 well bores while applying for 75 reclamation certificates. All of this work
is starting to show up as reduced fixed operating costs.
Annual production volumes for 2022 are expected to range between 20,000 and 21,000 BOE per day, weighted 87% to natural gas.
Commodity prices have been volatile with the Russian invasion of Ukraine, but on today’s 2022 forward strip pricing, Pine Cliff is
expected to generate more than $120 million of adjusted funds flow this year.
MESSAGE TO SHAREHOLDERS
2021
Capital Allocation and Dividends
Our team is actively considering the optimal way to return capital to shareholders. Funds flow and earnings are rising and our balance
sheet has never been stronger. In my letter to you last quarter, I mentioned that the five primary capital allocation options to a natural
gas producer such as Pine Cliff were debt repayment, drilling, asset purchases, share buybacks and dividends.
a) Debt Repayment
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Based on the forward strip commodity prices, at our projected 2022 funds flow, we could definitely be debt free in 2022 if
we choose to, even though none of our $42 million of debt is due until the end of 2024. That would be a rare position for
a public company energy producer, but it is something we are contemplating. At a minimum, our goal is to pay back the
$30 Million of AIMCo debt in 2022.
b) Drilling
Our Q4 drilling program was successful. Based on that success, we intend to spend approximately $18 Million in 2022 on
drilling four (3.4 net) Pekisko wells and participating in four (net one) gas wells in our Edson area. Our estimate is that Pine
Cliff production for 2022 will be essentially flat with our current budget.
c) Asset Purchases
Pine Cliff has now completed eleven acquisitions since we started in 2012. We continue to consider assets that would
strengthen the sustainability of our business model. We continue to proceed on the basis that any potential asset acquisition,
like the last one we did in Q4 2021, needs to increase the distributable funds flow per share and at the same time have a
liability profile that we are comfortable with in the context of the purchase price.
d) Share Buybacks
Given the high insider ownership of our stock, and the potential impact on liquidity, we do not think instituting a share
buyback plan at this time would be an optimal use of capital for Pine Cliff shareholders.
e) Dividends
The final return of capital alternative is instituting a dividend. We feel that implementing a dividend model is the best
approach for Pine Cliff to return capital to our shareholders in 2022. We will be instigating this process by delivering
commodity price sensitivity analysis at our next Board meeting in May to propose what we think will be a reasonable and
sustainable dividend strategy going forward. Pine Cliff currently has the lowest production decline rate of any public oil and
gas company in Canada and is currently generating one of the highest free cash flow yields, not just in the oil and gas
industry, but in the public markets. I know that some of you have been anxiously waiting for that first PNE dividend
payment. Our goal is that on May 4th, we will deliver on your patience.
I want to personally thank all of our shareholders for their support and willingness to invest your hard earned money in our company.
I would like to give a special thanks to our long term shareholders for their continued loyalty and confidence, staying with us from
the early days of Pine Cliff. Our Team is thrilled to be able to share our success with all of you and we are looking forward to an
exciting and pivotal 2022.
Yours truly,
Phil Hodge
President and Chief Executive Officer
March 8, 2022
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, 2021, which can be found on www.sedar.com and is subject to the same cautionary statements as set
out therein.
RESERVES INFORMATION
2021
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, 2021. 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, 2021. 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 2021 year include:
Net present value for proved plus probable (“P+P”) reserves of $277.9 million, discounted at 10%, an increase of $179.7
million, or 283% higher than December 31, 2020, primarily as a result of an increase in forecast commodity prices;
Pine Cliff replaced its 2021 production by 218% on a P+P basis, or by 14.7 MMBoe (27%) largely as a result of 7.7 MMBoe
from acquisitions (14%), 7.9 MMBoe (14%) due to economic factors, 0.5 MMBoe (1%) of extensions and a decrease of 1.4
MMBoe (2%) from negative technical revisions;
Seven gross (5.8 net) Pekisko well locations were added to Pine Cliff’s booked locations, bringing the total booked locations
in its P+P reserves to 31 gross (20.3 net) wells;
Remaining P+P reserves of 62.8 MMBoe (84% conventional natural gas and coal bed methane) at December 31, 2021
increased by 8.0 MMBoe (15%) from 54.8 MMBOE (87% conventional natural gas and coal bed methane) at December 31,
2020, mainly as a result of acquisitions and economic factors; and
Approximately 78% of total reserve volumes are classified as total proved reserves and approximately 22% are classified as
probable reserves.
Pine Cliff’s Reserves
McDaniel has used a three consultant average price (McDaniel, GLJ & Sproule) forecast, resulting in a price forecast of $3.56 and $3.21
per MMbtu for AECO natural gas and US$72.83 and US$68.78 per Bbl for WTI oil in 2022 and 2023 respectively.
3
PINE CLIFF ENERGY LTD.
Summary of Remaining Working Interest Reserves, as of December 31, 2021
RESERVES INFORMATION
2021
Summary of Net Present Values of Future Net Revenue, Before Income Taxes, as of December 31, 2021
Reconciliation of Gross Reserves by Principal Product Type, as of December 31, 2021
4
PINE CLIFF ENERGY LTD.
RESERVES INFORMATION
2021
Commodity Prices
The Commodity prices used in the above calculations of reserves are as follows:
Year
2022
2023
2024
2025
2026
2027
2028-2036
Thereafter
WTI Oil (US$/Bbl)1
72.83
68.78
66.76
68.09
69.45
70.84
78.32
+2.0%/yr
$C to US$ Foreign
exchange rate1
1.26
1.26
1.26
1.26
1.26
1.26
1.26
1.26
Edmonton Light Crude Oil
(Cdn$/Bbl) 1
86.82
80.73
78.01
79.57
81.16
82.78
91.52
+2.0%/yr
AECO Gas
(Cdn$/MMBtu) 1
3.56
3.21
3.05
3.11
3.17
3.23
3.57
+2.0%/yr
1 Source: Average of three consultant price forecasts, effective January 1, 2022 (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, 2021, 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
2021
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, 2021. This MD&A is dated and based on information available as
at March 8, 2022 and should be read in conjunction with audited consolidated financial statements for the year ended December 31,
2021 and 2020(“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 (“NGLs”) 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.
2021 AND FOURTH QUARTER 2021 HIGHLIGHTS
Highlights from 2021 and the fourth quarter of 2021 are as follows:
generated $26.3 million of adjusted funds flow ($0.08 per basic and $0.07 per fully diluted share) for the three months ended
December 31, 2021, and $59.1 million ($0.18 per basic and $0.17 per fully diluted share) for the year ended December 31,
2021, 329% and 677% higher than the respective periods in the prior year;
generated net earnings of $80.5 million ($0.24 per basic and $0.23 per fully diluted share) for the three months ended
December 31, 2021, and $81.4 million ($0.24 per basic and $0.23 per fully diluted share) for the year then ended;
production averaged 19,056 Boe/d and 18,445 Boe/d during the three months and year ended December 31, 2021, compared
to 19,130 Boe/d and 19,006 BOE/d for the comparable periods in 2020;
closed the acquisition of a private company on December 29, 2021 for cash consideration of $22.2 million;
repaid in full $19.0 million of Term Debt due July 31, 2022 during the third quarter of 2021;
net debt decreased by 21.2% or $13.4 million from $63.0 million on December 31, 2020, to $49.7 million as at December 31,
2021; and
drilled four (3.4 net ) Pekisko oil wells in the fourth quarter, two that were placed on production in Q4 and two that were
placed on production on February 16, 2022.
6
PINE CLIFF ENERGY LTD.
SELECTED ANNUAL FINANCIAL INFORMATION
($000s, unless otherwise indicated)
FINANCIAL1
Commodity sales (before royalties)
Commodity sales (net of royalties)
Cash provided by operating activities
Adjusted funds flow2
Per share – Basic ($/share)
Per share – Diluted ($/share)
Earnings/(Loss) for the year
Per share – Basic ($/share)
Per share – Diluted ($/share)
Total assets
Total non-current financial liabilities3
Total liabilities
Capital expenditures
Acquisitions
Dispositions
Net Debt2
Weighted average common shares outstanding (000s) -
Basic
Weighted average common shares outstanding (000s) -
Diluted
OPERATIONS
Production
Natural gas (Mcf/d)
NGLs (Bbl/d)
Crude oil (Bbl/d)
Total (Boe/d)
Total (Mcfe/d)
Realized commodity sales prices
Natural gas ($/Mcf)
NGLs ($/Boe)
Crude oil ($/Bbl)
Total ($/Boe)
Netback ($/Boe)
Operating netback2
Corporate netback2
Netback ($/Mcfe)
Operating netback2
MANAGEMENT DISCUSSION AND ANALYSIS
2021
Year ended December 31,
2021
2020
2019
163,985
146,976
49,483
59,106
0.18
0.17
81,421
0.24
0.23
378,997
44,521
333,579
21,568
23,147
(320)
49,652
337,254
348,285
100,655
1,250
419
18,445
110,670
3.55
48.65
73.47
24.36
10.36
8.78
1.73
103,170
96,897
8,787
8,729
0.03
0.03
(50,107)
(0.15)
(0.15)
288,899
62,816
326,216
7,518
(6)
(829)
63,050
330,284
330,284
104,277
1,187
439
19,006
114,036
2.28
23.11
37.31
14.83
105,006
99,431
15,536
5,879
0.02
0.02
(56,430)
(0.18)
(0.18)
323,735
63,308
313,225
8,379
8,801
(1,542)
64,038
319,274
319,274
105,725
1,114
407
19,142
114,852
2.15
31.92
61.32
15.03
2.72
1.26
2.25
0.84
0.45
0.21
0.38
0.14
Corporate netback2
1.46
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
2021
Three months ended December 31,
2020
2021
Year ended December 31,
2020
2021
($000s, unless otherwise indicated)
FINANCIAL
Commodity sales (before royalty expense)
Cash provided by operating activities
Adjusted funds flow1
Per share – Basic ($/share)1
Per share – Diluted ($/share)1
Earnings/(Loss)
Per share – Basic ($/share)1
Per share – Diluted ($/share)1
Capital expenditures
Acquisitions
Dispositions
Net debt1
Weighted-average common shares outstanding (000s)
Basic
Diluted
OPERATIONS
Production
Natural gas (Mcf/d)
NGLs (Bbl/d)
Crude oil (Bbl/d)
Total (Boe/d)
Realized commodity sales prices
Natural gas ($/Mcf)
NGLs ($/Boe)
Crude oil ($/Bbl)
Combined ($/Boe)
Netback ($/Boe)
Commodity sales
Processing and gathering
Royalty expense
Transportation expenses
Operating expenses
Operating netback ($/Boe)1
General and administrative expenses
Interest and bank charges
Corporate netback ($/Boe)1
Operating netback ($ per Mcfe)1
Corporate netback ($ per Mcfe)1
54,413
20,431
26,279
0.08
0.07
80,522
0.24
0.23
10,741
23,136
(133)
49,652
31,292
2,666
7,996
0.02
0.02
(3,822)
(0.01)
(0.01)
1,307
(11)
(613)
63,050
339,213
350,806
335,284
335,284
103,320
1,258
578
19,056
104,788
1,270
395
19,130
4.56
57.42
82.75
31.04
31.04
0.49
(3.35)
(1.46)
(10.22)
16.50
(0.88)
(0.62)
15.00
2.75
2.50
2.73
28.89
43.46
17.78
17.78
0.74
(1.34)
(1.26)
(9.84)
6.08
(0.76)
(0.77)
4.55
1.01
0.76
163,985
49,483
59,106
0.18
0.17
81,421
0.24
0.23
21,568
23,147
(320)
49,652
337,254
348,285
100,655
1,250
419
18,445
3.55
48.65
73.47
24.36
24.36
0.55
(2.53)
(1.39)
(10.63)
10.36
(0.86)
(0.72)
8.78
1.73
1.46
103,170
8,787
8,729
0.03
0.03
(50,107)
(0.15)
(0.15)
7,517
(6)
(829)
63,050
330,284
330,284
104,277
1,187
439
19,006
2.28
23.11
37.31
14.83
14.83
0.60
(0.90)
(1.32)
(10.49)
2.72
(0.72)
(0.74)
1.26
0.45
0.21
1 This is a non-GAAP measure, see NON-GAAP MEASURES for additional information.
8
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2021
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.
Business environment sensitivities
Impact on annual adjusted funds flow1
Realized natural gas price2
Realized NGLs price2
Change
$0.10
$1.00
$000s
3,771
459
Realized crude oil price2
1 This analysis does not adjust for changes in working capital and uses corporate royalty rates from the year ended December 31, 2021.
2 Pine Cliff has prepared this analysis using its Q4 2021 production volumes annualized for twelve months.
3 Based on the Q4 2021 basic weighted average shares outstanding.
$1.00
211
$ per share3
0.01
0.00
0.00
BENCHMARK PRICES
Three months ended December 31,
Year ended December 31,
2021
2020
% Change
2021
2020
% 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$/C$
5.83
4.63
77.19
93.30
2.66
2.63
42.66
50.24
119
76
81
86
3.84
3.61
67.92
80.24
2.08
2.22
39.40
45.32
1.340
85
63
72
77
(7)
1.260
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 $/Mcf by multiplying by 1.05.
1.254
1.303
(3)
Quarterly Benchmark Prices
Pine Cliff’s financial results are influenced by fluctuations in commodity prices, dollar exchange rates and price differentials. The
following table shows select market benchmark average prices and foreign exchange rates in the last eight quarters to assist in
understanding the volatility in prices and foreign exchange rates that have impacted Pine Cliff’s business.
Natural gas
Q4-2021
Q3-2021
Q2-2021
Q1-2021 Q4-2020 Q3-2020
Q2-2020 Q1-2020
NYMEX (US$/Mmbtu)1
AECO Daily 5A (C$/Mcf) 2
Pine Cliff realized natural
gas price (C$/Mcf)
5.83
4.63
4.56
4.01
3.58
3.43
2.83
3.08
3.03
2.69
3.14
3.14
2.66
2.63
1.98
2.23
1.72
1.98
1.95
2.02
2.73
2.18
2.03
2.19
70.56
83.78
77.19
93.30
Crude oil
WTI (US$/Bbl)
Edmonton Light (C$/Bbl)
Pine Cliff realized NGLs
price (C$/Bbl)
Pine Cliff realized Oil
price (C$/Bbl)
Foreign exchange
US$/C$
1.332
1.260
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.
42.66
50.24
40.93
49.83
66.07
77.28
57.84
66.58
57.42
82.75
1.260
25.07
43.46
28.89
1.303
40.54
50.53
42.83
69.90
74.94
43.87
60.09
1.231
1.266
27.85
29.77
46.17
51.44
14.56
22.69
22.10
43.47
1.386
1.345
In the three months and year ended December 31, 2021, the AECO daily benchmark was 76% and 63% higher compared to the same
periods of 2020. The changes for the quarter are mainly due to supply and demand factors including North American industrial and
9
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2021
residential demand, increases in liquefied natural gas (“LNG”) exports due to increased US export capacity, natural gas exports to
Mexico, weather, economic conditions in producing and consuming regions throughout North America and political factors. The price
realized by the Company for natural gas production in Western Canada is primarily influenced by the Alberta price hub AECO, while
diversification projects to delivery points such as Dawn in Ontario and TransGas into Saskatchewan have created diversification pricing
options to complement AECO pricing.
The average benchmarks for WTI crude increased by 72% and 81%, for the three months and year ended December 31, 2021, as
compared to the same periods in 2020, primarily due to the growth in global demand as vaccines were administered in response to
the novel coronavirus (“COVID-19”). In March 2020, the World Health Organization declared COVID-19 a global pandemic, prompting
many countries around the world to close international borders and order the closure of institutions and businesses deemed non-
essential. At the same time, the Organization of Petroleum Exporting Countries (“OPEC”), and certain other countries, increased the
planned supply of crude oil in an attempt to control market share. The sudden decrease in global crude oil demand due to COVID-19
coupled with a planned increase in supply significantly reduced crude oil prices in 2020.
Agreements have been made between OPEC, Russia and other crude oil producing countries globally that have reduced global crude
oil production and brought the oversupply closer into balance with demand. While crude oil prices have recovered from the historic
lows observed earlier in 2020, support from future demand remains uncertain. Vaccination programs have begun around the world
with the pace of such vaccinations dependent upon the supply access and logistics organized by the individual countries. Local
economies and international borders are re-opening and crude oil prices are reflecting current supply and demand dynamics.
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 NGLs 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 fluctuations in NGLs price correlate significantly with
changes in the Edmonton Light oil price.
SALES VOLUMES
Total sales volumes by product
2021
2020 % Change
2021
2020 % Change
Three months ended December 31,
Year ended December 31,
Natural gas (Mcf)
NGLs (Bbl)
Crude oil (Bbl)
Total Boe
Total Mcfe
9,505,398
115,743
53,157
1,753,133
9,640,494
116,822
36,375
1,759,946
10,518,798 10,559,676
(1) 36,739,008 38,165,490
434,358
(1)
160,599
46
-
6,955,872
- 40,394,790 41,735,232
456,291
153,006
6,732,465
Natural gas weighting
90%
91%
(1)
91%
91%
(4)
5
(5)
(3)
(3)
-
Average daily sales volumes by product
2021
2020 % Change
2021
2020 % 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)
103,320
1,258
578
19,056
104,788
1,270
395
19,130
114,336
114,780
(1)
(1)
46
-
-
100,655
1,250
419
18,445
104,277
1,187
439
19,006
110,670
114,036
(4)
5
(5)
(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)
2021
10,289
7,187
1,580
19,056
2020 % Change
10,042
7,517
1,571
19,130
2
(4)
1
-
10
PINE CLIFF ENERGY LTD.
2020 % Change
2021
9,817
7,171
1,457
9,894
7,527
1,585
18,445
19,006
(1)
(5)
(8)
(3)
MANAGEMENT DISCUSSION AND ANALYSIS
2021
Pine Cliff’s sales volumes decreased nominally to 19,056 Boe/d (114,336 Mcfe/d) and by 3% to 18,445 Boe/d (114,036 Mcfe/d) for
the three months and year ended December 31, 2021, as compared to the same periods in 2020. The nominal decrease in production
is from natural production declines, offset by incremental production from facility optimization and the 2021 drilling and recompletion
programs.
Pine Cliff is projecting 2022 production volumes of 20,000 – 21,000 Boe/d (120,000 – 126,000 Mcfe/d), weighted approximately 87%
towards natural gas.
COMMODITY SALES
($000s)
Natural gas
NGLs
Crude oil
Total commodity sales
% of revenue from natural gas sales
Realized prices
$ per unit
Natural gas ($/Mcf)
NGLs ($/Bbl)
Crude oil ($/Bbl)
Total ($/Boe)
Total ($/Mcfe)
Three months ended December 31,
Year ended December 31,
2021
43,368
6,646
4,399
54,413
80%
2020
% Change
2021
2020
% Change
26,337
3,374
1,581
31,292
84%
65
97
178
74
(4)
130,546
22,198
11,241
163,985
80%
87,139
10,040
5,991
103,170
84%
50
121
88
59
(4)
Three months ended December 31,
Year ended December 31,
2021
4.56
57.42
82.75
31.04
5.17
2020 % Change
2.73
28.89
43.46
17.78
2.96
67
99
90
75
75
2021
3.55
48.65
73.47
24.36
4.06
2020
% Change
2.28
23.11
37.31
14.83
2.47
56
111
97
64
64
Commodity sales in the three months ended December 31, 2021 of $54.4 million increased 74% from $31.3 million in the
corresponding period in the prior year, primarily due to higher realized commodity prices. Commodity sales in the year ended
December 31, 2021, increased $60.8 million to $164.0 million from $103.2 million in the year ended December 31, 2020, with the
increase primary attributable to higher realized commodity prices.
Pine Cliff’s realized natural gas price was $4.56 per Mcf in the three months ended December 31, 2021, 67% higher than the $2.73 per
Mcf realized in the corresponding period of the prior year. This correlates with the AECO 5A reference price increase of 76%, between
those two periods primarily the result of robust demand across North America in the fourth quarter of 2021, increased LNG exports
due to increased US export capacity, and exports to Mexico from the United States, all resulting in the expectation of lower natural gas
storage volumes exiting the winter 21/22 season. Pine Cliff’s realized natural gas price was $3.55 per Mcf in the year ended December
31, 2021, 56% higher than the $2.28 per Mcf realized in the corresponding period of the prior year. Pine Cliff’s realized natural gas
price was 2% lower than the AECO 5A benchmarks for the three months and year ended December 31, 2021, both a result of Pine
Cliff’s marketing diversification and fixed price physical natural gas sales contracts.
For the three months and year ended December 31, 2021, Pine Cliff’s realized NGLs price was $57.42 per Bbl and $48.65 per Bbl,
compared to $28.89 per Bbl and $23.11 per Bbl, in the corresponding periods of the prior year. For the three months and year ended
December 31, 2021, Pine Cliff’s realized oil price was $82.75 per Bbl and $73.47 per Bbl, compared to $43.46 per Bbl and $37.31 per
Bbl in the corresponding periods of the prior year. Pine Cliff’s realized crude oil prices in the three months and year ended December
31, 2021 were 89% and 92% of Edmonton Light compared to 87% and 82% in the corresponding period of the prior year. Pine Cliff’s
realized NGLs prices in the three months and year ended December 31, 2021 were 62% and 61% of Edmonton Light compared to 58%
and 51% in the corresponding periods of the prior year. This increase in crude oil and NGLs pricing in the three months and year ended
December 31, 2021, compared to the corresponding periods of 2020, is due primarily to improved market conditions arising from
recovering demand and lower supply and inventories
11
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2021
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,
2021
5,868
3.35
0.56
11%
2020 % Change
2021
2020 % Change
2,354
1.34
0.22
8%
149
150
150
38
17,009
6,273
2.53
0.42
10%
0.90
0.15
6%
171
181
181
67
For the three months ended December 31, 2021, total royalty expense increased by 149% to $5.9 million from $2.4 million in the
corresponding period of the prior year. Royalty expense as a percentage of commodity sales increased to 11% in the three months
ended December 31, 2021, compared to 8% in the corresponding period of the prior year, due to higher commodity prices.
For the year ended December 31, 2021, total royalty expense increased by 171% to $17.0 million from $6.3 million in the
corresponding period of the prior year. Royalty expense as a percentage of commodity sales increased to 10% during the year ended
December 31, 2021, compared to 6% in the corresponding period of the prior year. The increase in royalty expenses as a percentage
of commodity sales for the year ended December 31, 2021 is due to an increase in commodity prices.
Pine Cliff anticipates royalty expenses to average approximately 11% of commodity sales in 2022, due to higher commodity prices.
TRANSPORTATION COSTS
($000s)
Total transportation costs
$ per Boe
$ per Mcfe
Three months ended December 31,
Year ended December 31,
2021
2,564
1.46
0.24
2020 % Change
2,221
1.26
0.21
15
16
16
2021
9,328
1.39
0.23
2020 % Change
9,172
1.32
0.22
2
5
5
For the three months and year ended December 31, 2021, total transportation costs increased by 15% and 2% to $2.6 million and $9.3
million from $2.2 million and $9.2 million in the corresponding periods of the prior year. The higher transportation expenses in the
quarter are related to the Company delivering a higher proportion of its natural gas to markets with higher pricing points than AECO
during that period.
Pine Cliff anticipates transportation expenses to average approximately $1.50 per Boe ($0.25 per Mcfe) in 2022.
OPERATING EXPENSES
($000s)
Operating expenses
Less: Processing income
Net production expenses
$ per Boe
$ per Mcfe
Three months ended December 31,
Year ended December 31,
2021
17,923
(854)
17,069
9.73
1.70
2020 % Change
2021
2020 % Change
17,319
(1,295)
16,024
9.10
1.52
3
(34)
7
4
4
71,590
(3,730)
67,860
10.08
1.77
72,968
(4,151)
68,817
9.89
1.65
(2)
(10)
(1)
(8)
(8)
Net production expenses increased by 7% and decreased by 1% to $17.1 million and $67.9 million for the three months and year ended
December 31, 2021, as compared to $16.0 million and $68.8 million in the corresponding periods of the prior year. The increase during
the quarter is primarily due to field optimization initiatives that are expected to increase production rates in the short-term. On a per
Boe basis, operating costs increased to $9.73 per Boe and $10.08 per Boe for the three months and year ended December 31, 2021
compared to $9.10 per Boe and $9.89 per Boe in the corresponding periods of 2020.
Pine Cliff anticipates operating expenses to average approximately $10.50 per Boe ($1.75 per Mcfe) in 2022, net of processing and
gathering income.
12
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2021
GENERAL AND ADMINISTRATIVE EXPENSES (“G&A”)
($000s)
Gross G&A
Less: overhead recoveries
Total G&A expenses
$ per Boe
$ per Mcfe
Three months ended December 31,
Year ended December 31,
2021
2020 % Change
2021
2020 % Change
3,506
(1,960)
1,546
0.88
0.15
2,011
(666)
1,345
0.76
0.13
74
(194)
15
16
16
8,847
(3,040)
5,807
0.86
0.14
7,275
(2,278)
4,997
0.72
0.12
22
(33)
16
19
19
G&A increased by 15% to $1.5 million in the three months ended December 31, 2021, as compared to $1.3 million in the corresponding
period of the prior year. The increase in G&A during the three months ended December 31, 2021 is primarily a result of higher
compensation costs pursuant to the Company’s short term incentive bonus program. G&A increased to $5.8 million for the year ended
December 31, 2021 as compared to $5.0 million in the corresponding period of the prior year and reflects the increase in compensation
costs from the bonus program.
On a per Boe basis, G&A for the three months ended December 31, 2021, increased 16% to $0.88 per Boe from $0.76 per Boe in the
corresponding period of the prior year, primarily due to higher compensation costs. On a per Boe basis, G&A for the year ended
December 31, 2021 increased 19% to $0.86 per Boe from $0.72 per Boe in the prior year.
Pine Cliff anticipates G&A expenses to average $0.98 per Boe ($0.16 per Mcfe) in 2022.
SHARE-BASED PAYMENTS
($000s)
Total share-based payments
$ per Boe
$ per Mcfe
Three months ended December 31,
Year ended December 31,
2021
337
0.19
0.03
2020 % Change
101
168
0.10
0.02
90
90
2021
997
0.15
0.02
2020 % Change
35
737
0.11
0.02
36
36
Share based payments increased by 101% and 35% for the three months and year ended December 31, 2021 compared to the
corresponding periods of 2020 primarily as a result of the increase in the fair value of stock options granted in 2021. 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, 2021, Pine Cliff granted 11,386,600 stock options to purchase Common Shares at a weighted
average exercise price of $0.34 (December 31, 2020 – 8,656,850 at an average exercise price of $0.14). As at December 31, 2021, the
Company had 25,269,810 stock options outstanding, representing 7.4% of Common Shares outstanding (December 31, 2020 –
25,561,498 representing 7.6% of Common Shares outstanding).
DEPLETION, DEPRECIATION, AND IMPAIRMENT
($000s)
2021
2020 % Change
2021
2020 % Change
Three months ended December 31,
Year ended December 31,
Total depletion and depreciation
10,661
11,032
$ per Boe
$ per Mcfe
Impairment (reversal)
6.08
1.01
(13,979)
6.27
1.04
-
Total depletion, depreciation, and impairment
(3,318)
11,032
$ per Boe
$ per Mcfe
(1.89)
(0.32)
6.27
1.04
13
PINE CLIFF ENERGY LTD.
40,994
45,411
(3)
(3)
(3)
6.09
1.01
-
(13,979)
(130)
(130)
(130)
27,015
4.01
0.67
6.53
1.09
7,900
53,311
7.66
1.28
(10)
(7)
(7)
(277)
(49)
(48)
(48)
MANAGEMENT DISCUSSION AND ANALYSIS
2021
Depletion and depreciation expense for the three months and year ended December 31, 2021, totaled $10.7 million and $41.0 million
compared to $11.0 million and $45.4 million in the corresponding periods of the prior year. The decrease for the year is a result of a
lower depletable base and changes in reserves volumes. 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, 2021, the Company had four CGU’s being the Southern CGU, Central CGU, Edson CGU, and Coal Bed Methane CGU.
The Company reviewed each CGU’s PP&E at December 31, 2021 and identified indicators of an impairment reversal in the Coal Bed
Methane and Edson CGUs due to increased forward commodity prices and an increase in the Company’s market capitalization since
the impairment expense recognized as at March 31, 2020. As a result, recovery testing was performed by preparing estimates of future
cash flows to determine the recoverable amount of the respective assets.
At December 31, 2021, the Company determined that the recoverable amounts of the Company’s Edson CGU and Coal Bed Methane
CGU exceeded their carrying value. A total impairment recovery of $14.0 million was recognized in the Company’s PP&E.
Impairment can be reversed for PP&E up to the lower of the recoverable amount of the original carrying value less any associated
depletion and depreciation that would have been incurred had the impairment not occurred.
The following table outlines the forecasted benchmark commodity prices and exchange rates used in the reversal of impairment
calculation of PP&E at December 31, 2021.
Year
2022
2023
2024
2025
2026
2027
2028-2036
Thereafter
WTI Oil (US$/Bbl)1
72.83
68.78
66.76
68.09
69.45
70.84
78.32
+2.0%/yr
$C to US$ Foreign
exchange rate1
1.26
1.26
1.26
1.26
1.26
1.26
1.26
1.26
Edmonton Light Crude Oil
(Cdn$/Bbl) 1
86.82
80.73
78.01
79.57
81.16
82.78
91.52
+2.0%/yr
AECO Gas
(Cdn$/MMBtu) 1
3.56
3.21
3.05
3.11
3.17
3.23
3.57
+2.0%/yr
1 Source: Average of three independent consultant price forecasts, effective January 1, 2022 (McDaniel & Associates Consultants Ltd., GLJ Petroleum
Consultants Ltd. and Sproule Associates Limited).
The Company used a pre-tax 15% discount rate for the December 31, 2021 impairment test which took into account risks specific to
the CGU’s and inherent in the oil and gas business. Changes in the key judgements, such as a revision in reserves, changes in forecast
benchmark commodity prices, discount rates, foreign exchange rates, capital or operating costs would impact the recoverable amounts
of assets an any recoveries or impairment changes would affect net earnings. The most sensitive assumptions to the calculation are
the discount rate and the forecast benchmark commodity price estimates at December 31, 2021. The Company concluded that no
reasonable change in the key assumptions, such as a two percent change in commodity prices or a one percent change in the discount
rate, would result in a different impairment reversal being recorded.
The following CGU were impaired (reversed) as at December 31:
CGU
Edson
CBM
Total impairment (reversal)
2021
(12,000)
(1,979)
(13,979)
2020
7,900
-
7,900
During the year ended December 31, 2020, the Company had four CGU’s being the Southern CGU, Central CGU, Edson CGU, and Coal
Bed Methane CGU. The Company reviewed each CGU’s property and equipment at December 31, 2020 for indicators of impairment
and determined that an indicator related to future commodity prices was present. The company prepared estimates of both the value
in use (“VIU”) and fair value less cost to sell (“FVLCS”) of each of the Company’s CGUs. When it is determined that any CGU carrying
value exceeds it recoverable amount, that CGU is considered impaired and an impairment expense is reported that equals this excess.
14
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2021
The following table outlines forecast benchmark prices and exchange rates used in the Company’s impairment test as at December 31,
2020:
Year
2021
2022
2023
2024
2025
2026
2027-2035
Thereafter
WTI Oil (US$/Bbl)1
47.17
50.17
53.17
54.97
56.07
57.19
62.63
+2.0%/yr
$C to US$ Foreign
exchange rate1
1.30
1.31
1.31
1.31
1.31
1.31
1.31
1.31
Edmonton Light Crude Oil
(Cdn$/Bbl) 1
55.76
59.89
63.48
65.76
67.13
68.53
69.95
+2.0%/yr
AECO Gas
(Cdn$/MMBtu) 1
2.78
2.70
2.61
2.65
2.70
2.76
3.02
+2.0%/yr
1 Source: Average of three independent consultant price forecasts, effective January 1, 2021 (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, 2020 were estimated at their FVLCS, 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, 2020. The FVLCS 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’s best estimates.
The Company used a pre-tax 15% discount rate for the December 31, 2020 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 FVLCS for the Company’s CGU’s at
December 31, 2020 is greater than the carrying amounts and therefore no impairment was recorded in the fourth quarter of 2020. An
impairment of $7.9 million was recorded for the period ending March 31, 2020.
At March 31, 2020, an impairment test was conducted on Pine Cliff’s PP&E in response to the economic impact of the global COVID-19
pandemic and the global oversupply of crude oil and the impact on commodity prices. The Company prepared estimates of both the
FVLCS and VIU of each of the Company’s CGUs. When it is determined that any CGU carrying value exceeds its recoverable amount, that
CGU is considered impaired and an impairment expense is reported that equals this excess.
The following table outlines forecast benchmark prices and exchange rates used in the Company’s impairment test as at March 31,
2020:
Year
2020 (9 months)
2021
2022
2023
2024
2025
2026-2035
Thereafter
WTI Oil (US$/Bbl)1
32.50
43.35
52.02
58.37
59.53
60.72
67.13
+2.0%/yr
$C to US$ Foreign
exchange rate1
1.43
1.38
1.33
1.33
1.33
1.33
1.33
1.33
Edmonton Light Crude Oil
(Cdn$/Bbl) 1
32.14
49.45
62.69
71.02
72.44
73.89
81.69
+2.0%/yr
AECO Gas
(Cdn$/MMBtu) 1
1.85
2.30
2.44
2.49
2.54
2.59
2.87
+2.0%/yr
1 Source: Average of three independent consultant price forecasts, effective April 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 March 31, 2020 were estimated at their FVLCS, 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, adjusted for production and future pricing changes during the three months ended March
31, 2020. 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’s best estimates.
The Company used a pre-tax 15% discount rate for the March 31, 2020 impairment test which took into account risks specific to the
CGU’s and inherent in the oil and gas business.
The following CGU was impaired as at March 31, 2020:
CGUs
Edson
Total Impairment
15
PINE CLIFF ENERGY LTD.
2020
7,900
7,900
MANAGEMENT DISCUSSION AND ANALYSIS
2021
Exploration and Evaluation Assets (“E&E”) Impairment Assessment
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, 2021 and 2020, the Company determined that no indicators of impairment existed 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
2021
1,088
0.62
0.10
1,348
8
2,444
1.39
0.23
2020 % Change
1,352
0.77
0.13
1,363
27
2,742
1.56
0.26
(20)
(19)
(19)
(1)
(70)
(11)
(11)
(11)
2021
4,876
0.72
0.12
5,373
156
5,182
0.74
0.12
5,455
105
10,405
10,742
1.55
0.26
1.54
0.26
(6)
(3)
(3)
(2)
49
(3)
1
1
2020 % Change
Finance expenses decreased by 11% and 3% to $2.4 million and $10.4 million for the three months and year ended December 31, 2021,
as compared to $2.7 million and $10.7 million in the corresponding periods of the prior year, primarily a result of a decrease in interest
expenses related to the Term Debt. Please refer to the “DEBT, LIQUIDITY AND CAPITAL RESOURCES” section for additional
information.
DEFERRED INCOME TAX
For the three months and year ended December 31, 2021, Pine Cliff recorded a deferred tax recovery of $50.6 million (December 31,
2020 - $nil). The 2021 recovery reflects the temporary timing differences arising from the book basis of Pine Cliff’s assets and liabilities
relative to the tax basis.
The Company had the following tax pools, including non-capital loss carry-forwards, at December 31, 2021:
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 (%)
7 - 100
10
30
100
20
100
2021
28,399
185,365
14,756
167
46
136,433
5,583
370,750
1 Non-capital losses expire between the years 2035 and 2040.
2 The capital losses carried forward can only be claimed against taxable capital gains.
As at December 31, 2021, the unused non-capital losses expire between 2035 and 2040, and the unused capital losses have no expiry
date. The deductible temporary differences do not expire under tax legislation. Pine Cliff has approximately $370.8 million in tax pools
as at December 31, 2021 (December 31, 2020 - $398.2 million), available for future use as deductions from taxable income.
16
PINE CLIFF ENERGY LTD.
CAPITAL EXPENDITURES, ACQUISITIONS AND DISPOSITIONS
MANAGEMENT DISCUSSION AND ANALYSIS
2021
($000s)
Exploration and evaluation
Property, plant and equipment
Capital expenditures
Acquisitions
Dispositions
Total
Year ended December 31,
2021
103
21,465
22,479
23,147
(320)
44,395
2020
37
7,480
7,517
(6)
(829)
6,682
Capital expenditures on PP&E of $21.5 million was spent during the year ended December 31, 2021. $14.5 million was directed
towards the drilling of four gross (3.4 net) Pekisko oil wells, one gross (0.9 net) Basal Quartz natural gas well, two gross (0.4 net)
Ellerslie natural gas wells and one (0.2 net) Notikewin natural gas well, $6.1 million on facility maintenance and optimization capital,
$0.5 million on capitalized lease rentals and $0.4 million on seismic.
DECOMMISSIONING PROVISION
The total current and long-term decommissioning provision of $248.4 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, 2021, the estimated total undiscounted and uninflated amount required to settle the decommissioning liabilities was
$263.2 million (December 31, 2020 - $247.5 million). The discounted and inflated amount required to settle the decommissioning
liabilities of $248.4 million has been calculated assuming a 2.00% inflation rate (December 31, 2020 – 2.00%) and discounted using
an average risk-free interest rate of 2.30% (December 31, 2020 – 2.30%). 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
Due to Related Party
Pine Cliff has a $6.0 million subordinated promissory note to the Company’s Chairman of the Board. This promissory note matures on
December 31, 2024, bears interest at 6.5% per annum and is payable monthly. This promissory 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 this promissory note for the year ended December 31, 2021 was $0.4 million (December 31,
2021 - $0.4 million).
The Company has a $4.0 million borrowing facility (the “Facility”) with the Company’s Chairman of the Board (the “Lender”), whereby
the Lender provides up to $4.0 million of borrowings at an interest rate of 6.5% per annum, payable monthly. The term (the “Term”)
of the Facility expires on the later of: (i) December 31, 2024; or (ii) the date of full repayment of any outstanding borrowings. Amounts
can be drawn, repaid and redrawn by the Company at any time during the Term and borrowings under the Facility are payable on
demand to the Lender on 60 days written notice. The Facility can be cancelled at any time by the Lender on 60 days written notice,
while the Term may also be extended by mutual consent of the Company and the Lender. There was no amount drawn on the Facility
as at or during the year ended December 31, 2021. Interest paid on the Facility for the year ended December 31, 2021 was Nil
(December 21, 2020 - $0.007 million).
Subordinated Promissory Notes
Pine Cliff has issued $6.0 million subordinated promissory notes to a shareholder and a relative of that shareholder, owning directly
or by discretion and control, greater than 10% of the Common Shares. These subordinated promissory notes mature on December 31,
2024, bear interest at 6.5% per annum and are payable monthly. These subordinated promissory 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.
17
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2021
Term Debt
The non-revolving credit facility (“Term Debt”) with Alberta Investment Management Corporation (“AIMCO”), acting on behalf of its
clients, consists of a first tranche with a principal amount of $30.0 million that matures on December 31, 2024 (the "2024 Tranche")
and a second tranche with a principal amount of $19.0 million that would have matured on July 31, 2022 (the "2022 Tranche").
Interest on the 2024 Tranche was payable at a rate of 9.75% per annum until September 30, 2021 and thereafter such interest rate
increased by 1% per annum up to 12.75% and interest was 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. The security for the Term Debt consists of floating
demand debentures totaling $150.0 million and a general security agreement with first ranking over all current and acquired
properties. During the year ended December 31, 2021, the Company repaid in full the 2022 Tranche.
Demand Loan Facility
The Company currently has a demand operating loan of $5.0 million with a Canadian chartered bank, of which no amount had been
drawn as at December 31, 2021. Borrowings bear interest at the banks’ prime lending rate plus 2.5%. The demand operating loan is
secured by a general security agreement over certain tangible field facilities of the Company.
Letter of Credit Facility
As at December 31, 2021, 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 (December 31, 2020 – $2.6 million). 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 4.5% per annum. The LC Facility does not contain any financial covenants. As at December 31, 2021, the Company had
$2.5 million in letters of credit issued against its LC Facility (December 31, 2020 - $2.5 million).
Liquidity and Capital Resources
Pine Cliff’s approved capital budget for 2022 is $25.5 million, including $18.0 million in development capital, $3.6 million on
maintenance and optimization capital and $3.9 million for abandonments and reclamation. This capital budget does not include
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 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,
2021
6,000
6,000
30,000
39,585
(21,613)
(6,874)
(3,446)
49,652
2020
6,000
6,000
49,000
27,275
(14,863)
(7,878)
(2,484)
63,050
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 repaid in 2021 and $30.0 million due on December 31, 2024.
3 This is a non-GAAP measure, see NON-GAAP MEASURES for additional information.
18
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2021
Net debt-to-adjusted funds flow calculation:
Cash provided by operating activities
Changes in non-cash working capital
Decommissioning obligations settled
Adjusted funds flow1
Net debt1
Net debt-to-adjusted funds flow
Year ended December 31,
2020
8,787
(1,561)
1,503
8,729
63,050
7.2
2021
49,483
7,990
1,633
59,106
49,652
0.8
1 This is a non-GAAP measure, see NON-GAAP MEASURES for additional information.
At December 31, 2021, approximately 85 percent of the Company’s net debt is long-term with 15 percent of the net debt due within
the next twelve months.
The Company remains focused on developing its natural gas and oil properties while further reducing the net 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.
Share Capital
Share capital
Common Shares
Stock options
Warrants
March 8, 2022
December 31, 2021
December 31, 2020
341,008,441
23,538,970
-
339,539,415
25,269,810
-
335,284,193
25,561,498
2,850,000
COMMITMENTS AND CONTINGENCIES
As at December 31, 2021, the Company has the following commitments and other contractual obligations:
2022
2023
2024
2025
2026
Thereafter
($000s)
Trade and other payables
Term Debt1
Due to related party
Subordinated promissory notes
Future interest
Lease obligations
Transportation2
39,586
-
-
-
4,080
1,050
8,027
-
-
-
-
4,380
1,027
5,229
-
30,000
6,000
6,000
4,680
856
4,589
-
-
-
-
-
703
4,232
-
-
-
-
-
473
3,879
Total commitments and contingencies
52,743
10,636
52,125
4,935
4,352
1 Principal amount.
2 Firm transportation agreements.
-
-
-
-
-
-
2,991
2,991
19
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2021
QUARTERLY TRENDS AND SELECTED FINANCIAL INFORMATION
($000s, unless otherwise indicated)
Q4-2021
Q3-2021
Q2-2021
Q1-2021 Q4-2020
Q3-2020
Q2-2020
Q1-2020
FINANCIAL
Total revenue
Cash provided by operating
activities
Adjusted funds flow1
Adjusted funds flow per share –
basic ($/share) 1
Adjusted funds flow per share –
diluted ($/share) 1
Earnings/(Loss)
Earnings/(Loss) per share –
basic ($/share)
Earnings/(Loss) per share –
diluted ($/share)
Capital expenditures
Acquisitions
Dispositions
Net debt1
Weighted average common shares
outstanding:
Basic
Diluted
PRODUCTION VOLUMES
Natural gas (Mcf/d)
Natural gas liquids (Bbl/d)
Crude oil (Bbl/d)
Average sales volumes (Boe/d)
49,399
20,431
36,747
12,411
31,390
8,171
33,170
8,471
30,233
2,665
24,701
3,945
21,463
539
24,651
1,637
26,279
0.08
13,333
0.04
9,494
0.03
10,000
0.03
7,996
0.02
809
0.00
(1,229)
(0.00)
1,153
0.00
0.07
0.04
0.03
0.03
0.02
0.00
(0.00)
0.00
80,522
0.24
2,323
0.01
(744)
(0.00)
(680)
(0.00)
(3,822)
(0.01)
(12,110)
(0.04)
(14,164)
(0.04)
(20,011)
(0.06)
0.23
0.01
(0.00)
(0.00)
(0.01)
(0.04)
(0.04)
(0.06)
10,741
23,136
(133)
49,652
8,903
11
(10)
41,413
1,556
-
(152)
45,292
368
-
(25)
53,122
1,307
(11)
(613)
63,050
2,213
10
(181)
69,312
2,175
(75)
(30)
69,273
1,822
70
(5)
65,532
339,213
350,806
337,921
346,732
336,802
336,802
335,556
335,284
335,556 335,284
330,230
330,230
327,784
327,784
327,784
327,784
103,320
1,258
578
19,056
100,462
1,178
394
18,316
99,528
1,166
341
18,095
99,267
1,400
362
18,307
104,788
1,270
395
19,130
103,304
1,171
367
18,755
104,611
1,075
458
18,968
104,412
1,231
536
19,169
Average sales volumes (Mcfe/d)
114,336
109,896
108,570
109,842
114,780
112,530
113,808
115,014
PRICES AND NETBACKS
Total commodity sales ($/Boe)
Operating netback ($/Boe)1
Corporate netback ($/Boe)1
Total commodity sales ($/Mcfe)
Operating netback ($/Mcfe)1
Corporate netback ($/Mcfe)1
1 This is a non-GAAP measure, see NON-GAAP MEASURES for additional information.
31.04
16.50
15.00
5.17
2.75
2.50
23.67
9.22
7.92
3.95
1.54
1.32
20.75
7.50
5.77
3.46
1.25
0.96
21.56
7.88
6.05
3.59
1.31
1.01
17.78
6.08
4.55
2.96
1.01
0.76
14.34
1.90
0.47
2.39
0.32
0.08
12.57
0.59
(0.71)
2.10
0.10
(0.12)
14.58
2.25
0.65
2.43
0.38
0.11
Over the past eight quarters, Pine Cliff’s revenues, cash flow provided by 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 in the first quarter of 2020 were lower than the fourth quarter in 2019 due to natural production
decline and downtime due to inclement weather conditions. Sales volumes in the second quarter of 2020 were higher than
the preceding quarter due primarily to better weather conditions offset by natural production declines. The third quarter
sales volumes were lower than the second quarter of 2020 primarily due to natural production declines. The fourth quarter
2020 sales volumes were higher than the third quarter of 2020 primarily due seven gross (7.0 net) natural gas well
recompletions conducted and placed on production during the fourth quarter. Average sales volumes in the first quarter of
2021 were lower than the fourth quarter in 2020 due to natural production decline and downtime due to inclement weather
conditions. Sales volumes in the second quarter of 2021 were lower than the preceding quarter due primarily to natural
production declines. The third quarter sales volumes were higher than the second quarter of 2021 primarily due to field
production optimization initiatives offset by natural production declines. The fourth quarter 2021 sales volumes were higher
20
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2021
than the third quarter of 2021 primarily due to two gross (2.0 net) oil wells and two gross (0.4 net) natural gas wells that
were drilled during the third quarter and placed on production during the fourth quarter.
The first and second quarters of 2020 had lower adjusted funds flow than the fourth quarter of 2019 primarily due to lower
commodity prices and changes to sales volumes. The third quarter of 2020 had increased adjusted funds flow compared to
the previous quarter in 2020 due to better commodity pricing. The fourth quarter of 2020 had higher adjusted funds flow
than the third quarter of 2020 due to a combination of higher realized commodity pricing and increased production volumes.
The first and second quarters of 2021 had higher adjusted funds flow than the fourth quarter of 2020 primarily due to higher
commodity prices, despite lower sales volumes. The third quarter of 2021 had increased adjusted funds flow compared to
the previous quarter in 2021 due to higher commodity pricing. The fourth quarter of 2021 had higher adjusted funds flow
than the third quarter of 2021 due to a combination of higher realized commodity pricing and increased sales volumes.
Losses in the first quarter of 2020 were higher than the fourth quarter of 2019 due to in impairment charge. Losses in the
second and third quarters of 2020 were lower than the first quarter due to no impairment charges, but still impacted by
fluctuating price and volumes. Losses in the fourth quarter of 2020 were lower than the third quarter of 2020 due to
increased production and higher commodity prices. Losses in the first quarter of 2021 were lower than the fourth quarter of
2020 due to higher commodity prices. Losses in the second quarter of 2021 were slightly higher than the first quarter due
to lower sales volumes. Earnings in the third quarter of 2021 were due to an increase in sales volumes and higher commodity
prices. Earnings in the fourth quarter of 2021 were higher than the third quarter of 2021 due to an increase in sales volumes
and higher commodity prices, the impairment reversal and the recovery of deferred incomes taxes.
Total revenues from the first quarter of 2020 decreased relative to the fourth quarter of 2019, due to lower realized
commodity pricing and lower average production. Total revenues decreased from the first quarter of 2020 to the second
quarter of 2020 primarily due to lower realized commodity prices and production decline. Total revenues increased from
the second quarter of 2020 to the third quarter due to better realized commodity prices. Total revenues for the fourth quarter
of 2020 were higher than third quarter of 2020 due to a combination of increased production and higher realized commodity
prices. Total revenues from the first quarter of 2021 increased relative to the fourth quarter of 2020, due to higher realized
commodity pricing. Total revenues decreased from the first quarter of 2021 to the second quarter of 2021 primarily due to
natural production decline. Total revenues increased from the second quarter of 2021 to the third quarter due to higher
realized commodity prices. Total revenues for the fourth quarter of 2021 were higher than the third quarter of 2021 due to
a combination of increased sales volumes and higher realized commodity prices.
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.
21
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2021
Market Risk
Market risk is the risk that the fair value or future cash provided by 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, 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, NGLs 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, NGLs 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, NGLs 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. During the year ended December 31, 2021, Pine Cliff’s average sales volumes
were 91% natural gas.
Physical Sales Contracts
Pine Cliff enters into physical delivery sales contracts to manage commodity price risk. These contracts are considered normal
executory sales contracts and are not recorded at fair value in the financial statements.
At December 31, 2021, the Company had the following physical natural gas sales contracts in place:
Contractual Term
January 1, 2022 to March 31, 2022
April 1, 2022 to October 31, 2022
January 1, 2022 to October 31, 2022
January 1, 2022 to October 31, 2022
January 1, 2022 to October 31, 2022
Delivery Point
AECO
AECO
TransGas3
TransGas3,4
TransGas3,5
Physical Delivery
Quantity (GJ/day)
7,500
12,500
4,000
5,500
5,500
Fixed Sale Price
($CAD/GJ)1
$4.16
$3.28
$4.62
Fixed Sale Price
($CAD/Mcf)1,2
$4.37
$3.45
$4.85
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.
4 The contract terms of the physical fixed price natural gas sales contract to TransGas delivery point are AECO 5A plus $0.22/GJ.
5 The contract terms of the physical fixed price natural gas sales contract to Suffield#2 delivery point (Suffield, Alberta) are AECO 5A plus $0.58/GJ.
At March 8, 2022, the Company had the following additional physical natural gas sales contracts in place:
Contractual Term
April 1, 2022 to October 31, 2022
April 1, 2022 to October 31, 2022
April 1, 2022 to October 31, 2022
Delivery Point
AECO
Dawn3
AECO
Physical Delivery
Quantity (GJ/day)
10,000
5,000
2,600
Fixed Sale Price
($CAD/GJ)
$3.65
$4.63
$4.36
Fixed Sale Price
($CAD/Mcf)1, 2
$3.83
$4.86
$4.58
1 Prices reported are the weighted average prices of the periods.
2 Price has been converted from $/GJ to $/Mcf by multiplying by 1.05.
3 Dawn Hub into Dawn Township, Ontario.
At March 8, 2022, the Company had the following additional physical crude oil sales contracts in place:
Contractual Term
April 1, 2022 to June 30, 2022
July 1, 2022 to September 30, 2022
Crude Oil
WTI Fixed Price
WTI Fixed Price
1 Prices reported are the weighted average prices of the periods.
Physical Delivery
Quantity
(Bbl/day)
250
250
Fixed Sale Price
($CAD/Bbl)1
$117.45
$110.75
22
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2021
Interest Rate Risk
The Company is principally exposed to interest rate risk to the extent it draws on variable rate debt. The Company currently has a
demand operating loan (the “Demand Loan Facility”) with a Canadian chartered bank, of which no amount had been drawn as at
December 31, 2021. Borrowings under the Demand Loan Facility bears interest at the banks’ prime lending rate plus 2.5%.
All of the Company’s outstanding debt is with due to related party, subordinated promissory notes and Term Debt. They are all fixed
rate debt and are not exposed to interest rate risk.
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 provided by 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, 2021 of $21.6 million (December 31, 2020 – $14.9 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, 2021, there was $0.2 million
(December 31, 2020 - $1.1 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, 2021, the Company recorded $nil
(December 31, 2020 - $0.5 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 provided by 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.
23
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2021
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 the company’s 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. Pine Cliff’s future capital expenditures and operating expenses
could increase as a result of, among other things, developments in the Company’s 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 the Company’s reputation. The costs of complying with Environmental Regulations may have a material adverse effect
on Pine Cliff’s 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 Pine Cliff’s 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, Pine Cliff has no ability to mitigate this risk other than through geographic diversification.
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 the Company’s existing and planned projects as well as result in increased
compliance costs, adversely impacting Pine Cliff’s financial condition, results of operations and cash flows.
The oil and gas industry in general and the Company’s 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 the Company’s existing and planned
projects or increase capital investment or operating expenses, adversely impacting Pine Cliff’s financial condition, results of operations
and cash flows from operating activities.
24
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2021
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, NGLs and natural gas prices.
Safety
The operation of Pine Cliff’s 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 the Company’s 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 Pine Cliff’s business, financial condition, results of operations, cash flows, and 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.
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.
Novel Coronavirus COVID-19
In March 2020, the World Health Organization declared COVID-19 a global pandemic, prompting many countries around the world to
close international borders and order the closure of institutions and businesses deemed non-essential. At the same time, OPEC and
certain other countries, increased the planned supply of crude oil in an attempt to control market share. The sudden decrease in global
crude oil demand due to COVID-19 coupled with a planned increase in supply significantly reduced crude oil prices.
In addition to the impact on commodity prices and commodity sales, the effects of COVID-19 have created uncertainties in the crude
oil and natural gas industry, including increased counterparty risk and decreased valuation of long-lived crude oil and natural gas
assets. At December 31, 2021, Pine Cliff has incorporated the uncertainties from COVID-19 in its estimates and judgements in
preparation of these financial statements.
Judgements
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 judgement 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.
25
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2021
Impairment indicators
Judgements 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 FVLCS and VIU. 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 judgement 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 judgement 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, but are not limited to, 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 judgement and estimates of the outcome of future events.
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, 2021.
26
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2021
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, 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 provided by 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 provided by
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 provided by 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,
2021
20,431
5,120
728
26,279
15.00
2.50
0.08
2020
2,666
4,570
760
7,996
4.55
0.76
0.02
Change
17,765
550
(32)
18,283
10.45
1.74
0.06
2021
49,483
7,990
1,633
59,106
8.78
1.46
0.18
2020
Change
8,787
40,696
(1,561)
1,503
8,729
1.26
0.21
0.03
9,551
130
50,377
7.52
1.25
0.15
0.08
0.02
0.06
0.17
0.03
0.14
($000s)
Cash provided by operating activities
Adjusted by:
Change in non-cash working capital
Decommissioning obligations settled
Adjusted funds flow
Adjusted funds flow ($/Boe)
Adjusted funds flow ($/Mcfe)
Adjusted funds flow – basic
($/Common Share)
Adjusted funds flow – diluted
($/Common Share)
27
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2021
Operating and Corporate Netback
The Company considers operating netback to be a key indicator of profitability relative to current commodity prices. Operating
netback and operating netback per Boe and per Mcfe are calculated as the sum of commodity sales and processing and gathering
income, less royalties, transportation and operating expenses on an absolute and a per Boe or per Mcfe basis, respectively. Company
management uses operating netback on a per Boe basis in operational and capital allocation decisions.
The Company considers corporate netback to be a key indicator of overall results. Corporate netback on an absolute dollar and
corporate netback per Boe and per Mcfe are calculated as operating netback, less G&A and interest expense.
Pine Cliff uses these measures to assist in understanding the Company’s ability to generate positive cash provided by operating
activities at current commodity prices and it provides an analytical tool to benchmark changes in operational performance against
prior periods.
Readers are cautioned, however, that these measures should not be construed as an alternative to other terms such as earnings (loss)
determined in accordance with IFRS as a measure of performance. Pine Cliff’s method of calculating these measures may differ from
other companies, and accordingly, it may not be comparable to measures used by other companies.
($ per Boe, unless otherwise indicated)
Commodity sales
Processing and Gathering
Royalty expense
Transportation costs
Operating expenses
Operating netback
General and administrative
Interest and bank charges
Corporate netback
Operating netback ($ per Mcfe)
Corporate netback ($ per Mcfe)
Net Debt
Three months ended December 31,
Year ended December 31,
2021
2020
$ Change
2021
2020
$ Change
31.04
0.49
(3.35)
(1.46)
(10.22)
16.50
(0.88)
(0.62)
15.00
2.75
2.50
17.78
0.74
(1.34)
(1.26)
(9.84)
6.08
(0.76)
(0.77)
4.55
1.01
0.76
13.26
(0.25)
(2.01)
(0.20)
(0.38)
10.42
(0.12)
0.15
10.45
1.74
1.74
24.36
0.55
(2.53)
(1.39)
(10.63)
10.36
(0.86)
(0.72)
8.78
1.73
1.46
14.83
0.60
(0.90)
(1.32)
(10.49)
2.72
(0.72)
(0.74)
1.26
0.45
0.21
9.53
(0.05)
(1.63)
(0.07)
(0.14)
7.64
(0.14)
0.02
7.52
1.28
1.25
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 and 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.
28
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2021
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 processing and gathering income, expected
operating costs, expected transportation costs, expected interest costs, royalty and G&A levels; expected current and deferred income
taxes, 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 provided by 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 provided by 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 8, 2022
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.
NGLs 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.
29
PINE CLIFF ENERGY LTD.
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
2021
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 judgements 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
30
PINE CLIFF ENERGY LTD.
INDEPENDENT AUDITOR’S REPORT
2021
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, 2021 and 2020, and the consolidated statements of comprehensive income or
(loss), cash flows and changes in equity or (deficit) 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, 2021 and 2020, 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.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated
financial statements for the year ended December 31, 2021. These matters were addressed in the context of our audit of the
consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these
matters.
Impairment of Property, Plant and Equipment — Refer to Note 8 to the financial statements
Key Audit Matter Description
The Company’s property, plant and equipment includes developed assets acquired, transferred-in E&E costs, development drilling,
right-of-use asset and other surface expenditures (“oil and gas properties”). These properties are depleted on a unit of production basis
(“depletion”) and are evaluated for impairment through determination of each CGU’s recoverable amount by using the higher of value-
in-use and fair value less costs to sell. The Company engages an independent reserve evaluator to estimate reserves using estimates,
assumptions and engineering data. The development of the Company’s reserves and the related future net cash flows used to evaluate
the depletion and impairment or impairment reversal requires management to make significant estimates and assumptions related to
commodity prices and costs, future production rates, discount rates and future capital expenditures.
Given the significant judgments made by management related to future commodity prices, discount rates, future production rates,
future operating costs, and future development costs used to measure oil and gas properties, these estimates and assumptions are
subject to a high degree of estimation uncertainty. Auditing these estimates and assumptions required auditor judgment in applying
audit procedures and in evaluating the results of those procedures, which resulted in an increased extent of audit effort including the
involvement of fair value specialists.
How the Key Audit Matter Was Addressed in the Audit
Our audit procedures related to future commodity prices, discount rates, future production rates, future operating costs, and future
development costs used to measure oil and gas properties included the following, among others:
With the assistance of fair value specialists,
o Evaluated future commodity prices by independently developing a reasonable range of forecasts based on reputable
third-party forecasts and market data and comparing those to the future commodity prices selected by
management.
o Evaluated the reasonableness of the discount rates by developing a range of independent estimates and comparing
those to the discount rates selected by management.
Assessed future production rates by evaluating the Company’s independent external reserve evaluator by:
o Examining reports and assessing their scope of work and findings;
31
PINE CLIFF ENERGY LTD.
INDEPENDENT AUDITOR’S REPORT
2021
o Assessing the competence, capability and objectivity by evaluating their relevant professional qualifications and
experience.
Evaluated the reasonableness of future production rates by testing the source financial information underlying the rates and
comparing the future production volumes to historical production volumes.
Evaluated the reasonableness of future operating and development costs by testing the source financial information
underlying the estimate, comparing future costs to historical results, and evaluating whether they are consistent with
evidence obtained in other areas of the audit.
Performed a retrospective review to evaluate management’s ability to accurately forecast and to assess for indications of
estimation bias over time.
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.
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
32
PINE CLIFF ENERGY LTD.
INDEPENDENT AUDITOR’S REPORT
2021
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.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within
the Company to express an opinion on the financial statements. We are responsible for the direction, supervision and
performance of the group audit. We remain solely responsible for our audit opinion.
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.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in
the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these
matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare
circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so
would reasonably be expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this independent auditor’s report is Christopher Gill.
/s/ Deloitte LLP
Chartered Professional Accountants
Calgary, Alberta
March 8, 2022
33
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2021
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
Deferred income taxes
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 (DEFICIT)
Share capital
Warrants
Contributed surplus
Accumulated other comprehensive loss
Deficit
Total shareholders' equity (deficit)
Total liabilities and shareholders' equity
Commitments (Note 20)
Note
As at December 31,
2020
2021
4, 17
21,613
14,863
6,874
7,878
7
8
10
4, 17
9
14
9
11
12, 13
13
14
15
15
6
3,446
2,484
31,933
25,225
2,350
8,731
294,073
254,943
50,641
-
378,997
288,899
39,585
27,275
1,050
1,120
3,900
1,500
44,535
29,895
2,618
2,069
6,000
6,000
29,903
6,000
6,000
48,747
244,523
233,505
333,579
326,216
275,766
-
15,400
(60)
(245,688)
274,964
288
14,540
-
(327,109)
45,418
(37,317)
378,997
288,899
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 Jacqueline R. Ricci”
George F. Fink, Chair of the Board of Directors Jacqueline R. Ricci, Chair of the Audit Committee
and Director
and Director
34
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2021
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME OR (LOSS)
(Canadian dollars, 000s except per share data)
REVENUE
Commodity sales
Royalty expense
Commodity sales, net of royalties
Processing and gathering
Total revenue
EXPENSES
Operating
Transportation
Depletion and depreciation
Impairment (reversal)
Site decommissioning grants
Gain on disposition
Share-based payments
Finance
General and administrative
Total expenses
Earnings/(loss) before income taxes
Deferred income tax recovery
EARNINGS /(LOSS) FOR THE YEAR
OTHER COMPREHENSIVE LOSS
Realized loss on investments
TOTAL COMPREHENSIVE INCOME/(LOSS) FOR THE YEAR
Earnings/(Loss) per share ($)
Basic
Diluted
Note
16
8
8
14
7
15
17
18
10
6
15
15
Years ended December 31,
2021
2020
163,985
(17,009)
146,976
3,730
150,706
71,590
9,328
40,994
(13,979)
(5,047)
(169)
997
10,405
5,807
119,926
30,780
50,641
81,421
(60)
81,361
0.24
0.23
103,170
(6,273)
96,897
4,151
101,048
72,968
9,172
45,411
7,900
(772)
-
737
10,742
4,997
151,155
(50,107)
-
(50,107)
-
(50,107)
(0.15)
(0.15)
The accompanying notes are an integral part of these consolidated financial statements.
35
PINE CLIFF ENERGY LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Canadian dollars, 000s)
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Earnings/(Loss) for the year
Items not affecting cash:
Depletion and depreciation
Impairment (reversal)
Gain on disposition
Deferred income tax recovery
Site decommissioning grants
Share-based payments
Finance expenses
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
Proceeds on sale of investments
Changes in non-cash working capital accounts
Cash used in investing activities
FINANCING ACTIVITIES
Exercise of stock options
Issuance of common shares, net of share issue costs
Repayment of Term Debt
Payments on lease obligations
Cash provided by (used in) financing activities
Decrease in cash
Cash - beginning of year
CASH - END OF YEAR
CONSOLIDATED FINANCIAL STATEMENTS
2021
Note
2021
2020
Years ended December 31,
8
8
7
10
14
15
17
17
14
17
8
7
8
8
6
17
15
15
13
9
81,421
(50,107)
40,994
(13,979)
(169)
(50,641)
(5,047)
997
10,405
(4,875)
(1,633)
(7,990)
49,483
(21,465)
(103)
(23,147)
320
340
45,411
7,900
-
-
(772)
737
10,742
(5,182)
(1,503)
1,561
8,787
(7,481)
(37)
6
829
-
13,283
(3,332)
(30,772)
(10,015)
377
-
(19,000)
(1,092)
(19,715)
(1,004)
7,878
6,874
-
1,543
-
(1,098)
445
(783)
8,661
7,878
The accompanying notes are an integral part of these consolidated financial statements.
36
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2021
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY OR (DEFICIT)
(Canadian dollars, 000s)
Note
Share
capital
Contributed
surplus1
Warrants
Accumulated
other
comprehensive
loss2
BALANCE AT DECEMBER 31, 2019
Loss for the year
Exercise of warrants
Issuance of common shares, on
exercise of warrants
Share-based payments
BALANCE AT DECEMBER 31, 2020
Earnings for the year
Share-based payments
Realized loss on investments
Exercise of stock options
Expiry of warrants
15
15
15
273,421
-
-
1,543
-
274,964
-
-
-
802
-
13,631
-
172
-
737
14,540
-
997
-
(425)
288
460
-
(172)
-
-
288
-
-
-
-
(288)
-
-
-
-
-
-
-
-
(60)
-
-
Deficit
(277,002)
(50,107)
-
-
-
(327,109)
81,421
-
-
-
-
BALANCE AT DECEMBER 31, 2021
1Contributed surplus is comprised of share-based payments.
2Accumulated other comprehensive loss is comprised of realized losses on available-for-sale investments.
275,766
15,400
-
(60)
(245,688)
Total
Shareholders’
equity (deficit)
10,510
(50,107)
-
1,543
737
(37,317)
81,421
997
(60)
377
-
45,418
The accompanying notes are an integral part of these consolidated financial statements.
37
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2021
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at December 31, 2021 and 2020 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 natural gas and oil 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 8, 2022.
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 judgements and estimates
The timely preparation of the Financial Statements in conformity with IFRS requires Pine Cliff management to make judgements,
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.
Judgements
In the process of applying Pine Cliff’s accounting policies, judgements, 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 4 – Financial instruments
Note 7 – Exploration and evaluation assets (“E&E”)
Note 8 – Property, plant and equipment (“PP&E”)
Note 14 – Decommissioning provision
Note 15 – 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
judgement 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.
38
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2021
Impairment indicators
Judgements 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 (“FVLCS”) and value in use (“VIU”). 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 judgement 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 judgement 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 judgement 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.
39
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2021
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, Pine Cliff Border Pipelines Limited and Apogee Petroleum Inc. All subsidiary companies are
wholly owned. All intercompany balances, transactions and earnings or losses are eliminated upon consolidation.
b) Revenue recognition
Revenue associated with the sale of natural gas and natural gas liquids (“NGLs”) is measured based on the consideration specified in
contracts with customers. Revenue from contracts with customers is recognized when Pine Cliff satisfies a performance obligation by
transferring a promised good or service to a customer. A good or service is transferred when the customer obtains control of that good
or service. The transfer of control of natural gas, NGLs and crude oil usually coincides with title passing to the customer and the
customer taking physical possession.
The collection of revenue associated with the sale of natural gas, NGLs and crude oil occurs on or about the 25th of the month following
production.
Revenues from fees charged to third parties for product processing and gathering services provided at facilities are recorded as these
services are provided.
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 income or (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.
40
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2021
g) Property, plant and equipment
PP&E assets include developed assets acquired, transferred-in E&E costs, development drilling, right-of-use assets (“ROU”) 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.
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.
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 income or (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 FVLCS and VIU. 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.
41
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2021
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 provided by 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 income or (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 income or 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
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 income or (loss).
m) Site decommissioning grants
Site decommissioning grants are recognized when there is reasonable assurance that Pine Cliff will comply with the conditions
attached to them and the grants will be received. If a grant is received before it is certain whether compliance with all conditions will
be achieved, the grant is recognized as a deferred liability until such conditions are fulfilled. When the conditions of a grant relate to
income or expense, it is recognized in the statement of income. When the conditions of a grant relate to an underlying asset, it is
recognized as a reduction to the carrying amount of the related asset.
n)
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.
o) Share-based payments
Under the Company’s stock option plan described in note 15, 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 income or (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.
42
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2021
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.
p) 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.
q) 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 (or loss) in the period they occur. The Company has not designated any of
its risk management contracts as effective accounting hedges.
r) 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.
s) 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.
43
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2021
4. 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 judgement 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, 2021 and December 31, 2020:
Description
Carrying value
Fair value
Carrying value
Fair value
December 31, 2021
December 31, 2020
Cash
Trade and other receivables
Trade and other payables
Due to related party
Subordinated promissory notes
Term Debt
5. RISK MANAGEMENT
6,874
21,613
(39,585)
(6,000)
(6,000)
(29,903)
6,874
21,613
(39,585)
(6,000)
(6,000)
(29,903)
7,878
14,863
(27,275)
(6,000)
(6,000)
(48,747)
7,878
14,863
(27,275)
(6,000)
(6,000)
(48,747)
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 provided by 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, NGLs, 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, NGLs 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, NGLs 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, NGLs 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
Pine Cliff enters into physical delivery sales contracts to manage commodity price risk. These contracts are considered normal
executory sales contracts and are not recorded at fair value in the financial statements.
44
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2021
At December 31, 2021, the Company had the following physical natural gas sales contracts in place:
Contractual Term
January 1, 2022 to March 31, 2022
April 1, 2022 to October 31, 2022
January 1, 2022 to October 31, 2022
January 1, 2022 to October 31, 2022
January 1, 2022 to October 31, 2022
Delivery Point
AECO
AECO
TransGas3
TransGas3,4
TransGas3,5
Physical Delivery
Quantity (GJ/day)
7,500
12,500
4,000
5,500
5,500
Fixed Sale Price
($CAD/GJ)1
$4.16
$3.28
$4.62
Fixed Sale Price
($CAD/Mcf)1,2
$4.37
$3.45
$4.85
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.
4 The contract terms of the physical fixed price natural gas sales contract to TransGas delivery point are AECO 5A plus $0.22/GJ.
5 The contract terms of the physical fixed price natural gas sales contract to Suffield#2 delivery point (Suffield, Alberta) are AECO 5A plus $0.58/GJ.
Subsequent to December 31, 2021, the Company had the following additional physical natural gas sales contracts in place:
Contractual Term
April 1, 2022 to October 31, 2022
April 1, 2022 to October 31, 2022
April 1, 2022 to October 31, 2022
Delivery Point
AECO
Dawn3
AECO
Physical Delivery
Quantity (GJ/day)
10,000
5,000
2,600
Fixed Sale Price
($CAD/GJ)
$3.65
$4.63
$4.36
Fixed Sale Price
($CAD/Mcf)1, 2
$3.83
$4.86
$4.58
1 Prices reported are the weighted average prices of the periods.
2 Price has been converted from $/GJ to $/Mcf by multiplying by 1.05.
3 Dawn Hub into Dawn Township, Ontario.
Subsequent to December 31, 2021, the Company had the following additional physical crude oil sales contracts in place:
Contractual Term
April 1, 2022 to June 30, 2022
July 1, 2022 to September 30, 2022
Crude Oil
WTI Fixed Price
WTI Fixed Price
1 Prices reported are the weighted average prices of the periods.
Interest Rate Risk
Physical Delivery
Quantity
(Bbl/day)
250
250
Fixed Sale Price
($CAD/Bbl)1
$117.45
$110.75
The Company is principally exposed to interest rate risk to the extent it draws on variable rate debt. The Company currently has a
demand operating loan (the “Demand Loan Facility”) with a Canadian chartered bank, of which no amount had been drawn as at
December 31, 2021. Borrowings under the Demand Loan Facility bears interest at the banks’ prime lending rate plus 2.5%.
All of the Company’s outstanding debt is with due to related party, subordinated promissory notes and Term Debt. They are all fixed
rate debt and are not exposed to interest rate risk.
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 provided by operating activities. Pine Cliff has not entered into any derivative
financial instruments to manage this risk at this time.
Novel Coronavirus COVID-19 (“COVID-19”)
In March 2020, the World Health Organization declared COVID-19 a global pandemic, prompting many countries around the world to
close international borders and order the closure of institutions and businesses deemed non-essential. At the same time, the
Organization of Petroleum Exporting Countries (“OPEC”), and certain other countries, increased the planned supply of crude oil in an
attempt to control market share. The sudden decrease in global crude oil demand due to COVID-19 coupled with a planned increase in
supply significantly reduced crude oil prices in 2020.
45
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2021
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, 2021 of $21.6 million (December 31, 2020 – $14.9 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, 2021, there was $0.2 million
(December 31, 2020 - $1.1 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, 2021, the Company recorded a credit
of $nil (December 31, 2020 - $0.5 million) in 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 provided by 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.
6. INVESTMENTS
Pine Cliff sold its investment in a public company for $0.3 million, which was received as partial consideration of $0.4 million (see Note
7). The realized loss on sale was recognized in Other Comprehensive Income (Loss).
7. EXPLORATION AND EVALUATION
Cost:
Balance at December 31, 2019
Additions
Balance at December 31, 2020
Additions
Transfer to property, plant and equipment
Dispositions
Balance at December 31, 2021
Oil and gas
properties
5,521
(14)
5,507
51
(5,558)
-
-
Mineral
properties
3,173
51
3,224
52
-
(926)
2,350
Total
8,694
37
8,731
103
(5,558)
(926)
2,350
On February 17, 2021, Pine Cliff entered into an option agreement with Nighthawk Gold Corp. (“Nighthawk”) for the disposition of its
Kim Cass gold property located in the Northwest Territories. If the full option is exercised, Pine Cliff will receive a 2.5% net smelter
royalty (of which 100% can be repurchased by Nighthawk for $2.5 million) and $1.1 million, with payments payable over the next two
years. The first payment of $0.4 million was received on February 17, 2021 (340,000 common shares of Nighthawk). Nighthawk will
not earn an interest in the property until all amounts have been paid. The present value of future payments has been recorded as a
receivable from Nighthawk. Pine Cliff has recognized a gain of $0.2 million on the disposition of these assets.
E&E Impairment Assessment
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, 2021 and 2020, the Company determined that no indicators of impairment existed for E&E assets
transferred to PP&E.
46
PINE CLIFF ENERGY LTD.
8. PROPERTY, PLANT AND EQUIPMENT
Cost:
Balance at December 31, 2019
Additions
Lease obligations
Acquisitions
Dispositions
Decommissioning provision
Balance at December 31, 2020
Additions
Lease obligations
Transfer from exploration and evaluation
Acquisitions
Dispositions
Decommissioning provision
Balance at December 31, 2021
Accumulated depletion and depreciation:
Balance at December 31, 2019
Depletion and depreciation
Impairment
Balance at December 31, 2020
Depletion and depreciation
Impairment reversal
Balance at December 31, 2021
Carrying value at:
December 31, 2020
December 31, 2021
PP&E Impairment Assessment
CONSOLIDATED FINANCIAL STATEMENTS
2021
($000s)
623,829
7,481
576
(6)
(829)
10,467
641,518
21,465
1,568
5,558
23,147
(320)
14,727
707,663
($000s)
(333,264)
(45,411)
(7,900)
(386,575)
(40,994)
13,979
(413,590)
($000s)
254,943
294,073
As at December 31, 2021, the Company had four CGU’s being the Southern CGU, Central CGU, Edson CGU, and Coal Bed Methane CGU.
The Company reviewed each CGU’s PP&E at December 31, 2021 and identified indicators of an impairment reversal in the Coal Bed
Methane and Edson CGUs due to increased forward commodity prices and an increase in the Company’s market capitalization since
the impairment expense recognized as at March 31, 2020. As a result, recovery testing was performed by preparing estimates of future
cash flows to determine the recoverable amount of the respective assets.
At December 31, 2021, the Company determined that the recoverable amounts of the Company’s Edson CGU and Coal Bed Methane
CGU exceeded their carrying value. A total impairment recovery of $14.0 million was recognized in the Company’s PP&E.
Impairment can be reversed for PP&E up to the lower of the recoverable amount of the original carrying value less any associated
depletion and depreciation that would have been incurred had the impairment not occurred.
The following table outlines the forecasted benchmark commodity prices and exchange rates used in the reversal of impairment
calculation of PP&E at December 31, 2021.
Year
2022
2023
2024
2025
2026
2027
2028-2036
Thereafter
WTI Oil (US$/Bbl)1
72.83
68.78
66.76
68.09
69.45
70.84
78.32
+2.0%/yr
$C to US$ Foreign
exchange rate1
1.26
1.26
1.26
1.26
1.26
1.26
1.26
1.26
Edmonton Light Crude Oil
(Cdn$/Bbl) 1
86.82
80.73
78.01
79.57
81.16
82.78
91.52
+2.0%/yr
AECO Gas
(Cdn$/MMBtu) 1
3.56
3.21
3.05
3.11
3.17
3.23
3.57
+2.0%/yr
1 Source: Average of three independent consultant price forecasts, effective January 1, 2022 (McDaniel & Associates Consultants Ltd., GLJ Petroleum
Consultants Ltd. and Sproule Associates Limited).
47
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2021
The Company used a pre-tax 15% discount rate for the December 31, 2021 impairment test which took into account risks specific to
the CGU’s and inherent in the oil and gas business. Changes in the key judgements, such as a revision in reserves, changes in forecast
benchmark commodity prices, discount rates, foreign exchange rates, capital or operating costs would impact the recoverable amounts
of assets an any recoveries or impairment changes would affect net earnings. The most sensitive assumptions to the calculation are
the discount rate and the forecast benchmark commodity price estimates at December 31, 2021. The Company concluded that no
reasonable change in the key assumptions, such as a two percent change in commodity prices or a one percent change in the discount
rate, would result in a different impairment reversal being recorded.
The following CGU were impaired (reversed) as at December 31:
CGU
Edson
CBM
Total Impairment (reversal)
2021
(12,000)
(1,979)
(13,979)
2020
7,900
-
7,900
During the year ended December 31, 2020, an impairment test was conducted following decreases in the outlook for future commodity
prices since Pine Cliff’s previous impairment test at December 31, 2019. The Company reviewed each CGU’s property and equipment
at December 31, 2020 for indicators of impairment and determined that an indicator related to future commodity prices was present.
The company prepared estimates of both the VIU and FVLCS 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,
2020:
Year
2021
2022
2023
2024
2025
2026
2027-2035
Thereafter
WTI Oil (US$/Bbl)1
47.17
50.17
53.17
54.97
56.07
57.19
62.63
+2.0%/yr
$C to US$ Foreign
exchange rate1
1.30
1.31
1.31
1.31
1.31
1.31
1.31
1.31
Edmonton Light Crude Oil
(Cdn$/Bbl) 1
55.76
59.89
63.48
65.76
67.13
68.53
69.95
+2.0%/yr
AECO Gas
(Cdn$/MMBtu) 1
2.78
2.70
2.61
2.65
2.70
2.76
3.02
+2.0%/yr
1 Source: Average of three independent consultant price forecasts, effective January 1, 2021 (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, 2020 were estimated at their FVLCS, 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, 2020. The FVLCS 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’s best estimates.
The Company used a pre-tax 15% discount rate for the December 31, 2020 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 FVLCS for the Company’s CGU’s at
December 31, 2020 is greater than the carrying amounts and therefore no impairment was recorded in the fourth quarter of 2020. An
impairment of $7.9 million was recorded for the period ending March 31, 2020.
At March 31, 2020, an impairment test was conducted on Pine Cliff’s PP&E in response to the economic impact of the global COVID-19
pandemic and the global oversupply of crude oil and the impact on commodity prices. The Company prepared estimates of both the
FVLCS and VIU of each of the Company’s CGUs. When it is determined that any CGU carrying value exceeds its recoverable amount, that
CGU is considered impaired and an impairment expense is reported that equals this excess.
48
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2021
The following table outlines forecast benchmark prices and exchange rates used in the Company’s impairment test as at March 31,
2020:
Year
2020 (9 months)
2021
2022
2023
2024
2025
2026-2035
Thereafter
WTI Oil (US$/Bbl)1
32.50
43.35
52.02
58.37
59.53
60.72
67.13
+2.0%/yr
$C to US$ Foreign
exchange rate1
1.43
1.38
1.33
1.33
1.33
1.33
1.33
1.33
Edmonton Light Crude Oil
(Cdn$/Bbl) 1
32.14
49.45
62.69
71.02
72.44
73.89
81.69
+2.0%/yr
AECO Gas
(Cdn$/MMBtu) 1
1.85
2.30
2.44
2.49
2.54
2.59
2.87
+2.0%/yr
1 Source: Average of three independent consultant price forecasts, effective April 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 March 31, 2020 were estimated at their FVLCS, 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, adjusted for production and future pricing changes during the three months ended March
31, 2020. 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’s best estimates
The Company used a pre-tax 15% discount rate for the March 31, 2020 impairment test which took into account risks specific to the
CGU’s and inherent in the oil and gas business.
The following CGU was impaired as at March 31, 2020:
CGUs
Edson
Total Impairment
Acquisitions
2020
7,900
7,900
On December 29, 2021, the Company acquired a private oil and gas company for total cash consideration of $22.2 million. The assets
are located adjacent to Pine Cliff’s Ghost Pine area within the Central CGU. The acquired assets complement Pine Cliff’s existing Ghost
Pine operations and was funded from existing cash resources. The Company applied the optional concentration test under IFRS 3
Business Combinations which resulted in the acquisition being accounted for as an asset acquisition.
9. LEASE LIABILITIES
Pine Cliff had the following future commitments associated with its lease liabilities:
($000s)
2022
2023
2024
2025
2026
Thereafter
Total lease payments as at December 31, 2021
Amounts representing interest
Present value of lease payments
Current portion of lease obligations
Non-current portion of lease obligations
As at December
31,
2020
1,237
1,046
870
226
56
-
3,435
(246)
3,189
(1,120)
2,069
2021
1,050
1,027
856
703
473
-
4,109
(441)
3,668
(1,050)
2,618
For the year ended December 31, 2021, interest expense of $0.4 million (December 31, 2020 - $0.2 million) and a total cash outflow of
$1.5 million (December 31, 2020 - $1.1 million) was recognized relating to lease obligations.
The ROU and lease obligation relates to the Company's vehicle/head office leases in Calgary. An ROU of $3.8 million is included in
PP&E. Refer to Note 8.
49
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2021
10. DEFERRED INCOME TAXES
The Company has recorded a deferred tax asset of $50.6 million (December 31, 2020 - $nil) related to the benefit of tax pools, as it is
probable that they will be recovered.
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
2021
11
58,371
(15,384)
862
475
31,959
76,294
(25,653)
50,641
As at December 31,
2020
14
55,218
(6,180)
750
464
37,150
87,416
(87,416)
-
Pine Cliff has approximately $370.8 million in tax pools as at December 31, 2021 (December 31, 2020 - $398.2 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
$136.4 million (December 31, 2020 - $158.2 million) that expire between the years 2035 and 2040.
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 (%)
7 - 100
10
30
100
20
100
2021
28,399
185,365
14,756
167
47
136,433
5,583
370,750
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:
Earnings /(loss) before income taxes
Corporate income tax rate
Computed income tax expense (recovery)
Non-deductible compensation expense
Changes in the unrecorded benefit of tax pools
Gain on sale
Return to provision true-up
Deferred income tax recovery
11. DUE TO RELATED PARTY
2021
30,780
23.5%
7,235
271
(61,365)
(40)
3,258
(50,641)
Years ended December 31,
2020
(50,107)
25.2%
(12,623)
212
11,507
-
904
-
Pine Cliff has a $6.0 million subordinated promissory note to the Company’s Chairman of the Board. This promissory note matures on
December 31, 2024, bears interest at 6.5% per annum and is payable monthly. This promissory 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 this promissory note for the year ended December 31, 2021 was $0.4 million (December 31,
2021 - $0.4 million).
50
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2021
The Company has a $4.0 million borrowing facility (the “Facility”) with the Company’s Chairman of the Board (the “Lender”), whereby
the Lender provides up to $4.0 million of borrowings at an interest rate of 6.5% per annum, payable monthly. The term (the “Term”)
of the Facility expires on the later of: (i) December 31, 2024; or (ii) the date of full repayment of any outstanding borrowings. Amounts
can be drawn, repaid and redrawn by the Company at any time during the Term and borrowings under the Facility are payable on
demand to the Lender on 60 days written notice. The Facility can be cancelled at any time by the Lender on 60 days written notice,
while the Term may also be extended by mutual consent of the Company and the Lender. There was no amount drawn on the Facility
as at or during the year ended December 31, 2021. Interest paid on the Facility for the year ended December 31, 2021 was Nil
(December 21, 2020 - $0.007 million).
12. SUBORDINATED PROMISSORY NOTES
Pine Cliff has issued $6.0 million subordinated promissory notes to a shareholder and a relative of that shareholder, owning directly
or by discretion and control, greater than 10% of the Common Shares. These subordinated promissory notes mature on December 31,
2024, bear interest at 6.5% per annum and are payable monthly. These subordinated promissory 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.
13. TERM DEBT
Term Debt – beginning of year
Repayment on Term Debt
Accretion expense
Term Debt - end of year
2021
48,747
(19,000)
156
29,903
As at December 31,
2020
48,642
105
48,747
The non-revolving credit facility (“Term Debt”) with Alberta Investment Management Corporation (“AIMCO”), acting on behalf of its
clients, consists of a first tranche with a principal amount of $30.0 million that matures on December 31, 2024 (the "2024 Tranche")
and a second tranche with a principal amount of $19.0 million that was to mature on July 31, 2022 (the "2022 Tranche"). Interest on
the 2024 Tranche is payable at a rate of 10.75% per annum until September 30, 2022 and thereafter such interest rate will increase
by 1% per annum up to 12.75% and interest was 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. During the year ended December 31, 2021, the Company
repaid in full the 2022 Tranche. The security for the Term Debt consists of floating demand debentures totaling $150.0 million and a
general security agreement with first ranking over all current and acquired properties.
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.
Demand Loan Facility
The Company currently has a demand operating loan of $5.0 million with a Canadian chartered bank, of which no amount had been
drawn as at December 31, 2021. Borrowings bear interest at the banks’ prime lending rate plus 2.5%. The demand operating loan is
secured by a general security agreement over certain tangible field facilities of the Company.
Letter of Credit Facility
As at December 31, 2020, 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 (December 31, 2020 - $2.6 million). 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 4.5% per annum. The LC Facility does not contain any financial covenants. As at December 31, 2021, the Company had
$2.5 million in letters of credit issued against its LC Facility (December 31, 2020 - $2.5 million).
51
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2021
14. DECOMMISSIONING PROVISION
The total current and long-term decommissioning provision of $248.4 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, 2021, the estimated total undiscounted and uninflated amount required to settle the decommissioning liabilities was
$263.2 million (December 31, 2020 - $247.5 million). The discounted and inflated amount required to settle the decommissioning
liabilities of $248.4 million has been calculated assuming a 2.00% inflation rate (December 31, 2020 – 2.00%) and discounted using
an average risk-free interest rate of 2.30% (December 31, 2020 – 2.30%). 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, 2020
Increase in liabilities relating to development activities
Provisions related to acquisitions
Provisions related to dispositions
Site decommissioning grants
Decommissioning expenditures
Revisions (changes in estimates, inflation rate, and discount rates)
Accretion
Decommissioning provision, December 31, 2020
Increase in liabilities relating to development activities
Provisions related to acquisitions
Provisions related to dispositions
Site decommissioning grants
Decommissioning expenditures
Revisions (changes in estimates, inflation rate, and discount rates)
Accretion
Decommissioning provision, December 31, 2021
Less current portion of decommissioning provision
Non-current portion of decommissioning provision
15. SHARE CAPITAL
Authorized
($000s)
221,360
125
875
(493)
(772)
(1,503)
9,958
5,455
235,005
322
25,728
-
(5,047)
(1,633)
(11,325)
5,373
248,423
(3,900)
244,523
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, 2020
Shares issued pursuant to exercise of warrants
Balance, December 31, 2020
Exercise of stock options
Balance, December 31, 2021
Common Shares
(000s)
327,784
7,500
335,284
4,255
339,539
Share capital
($000s)
273,421
1,543
274,964
802
275,766
52
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2021
Stock Options
The Company provides an equity settled stock option plan (the “Option Plan”) for its directors, employees and consultants. Under the
Option Plan, the Company may grant stock options up to 10% of outstanding Common Shares on the grant date. The term and vesting
period of the options granted are determined at the discretion of the Company’s board of directors. The exercise price of each option
granted equals the market price of the Common Shares immediately preceding the date of grant and the option’s maximum term is five
years.
Stock options issued and outstanding:
Outstanding, January 1, 2020
Granted
Expired
Forfeited
Outstanding, December 31, 2020
Granted
Exercised
Expired
Forfeited
Outstanding, December 31, 2021
Exercisable, December 31, 2021
Options
(000s)
25,829
8,657
(6,782)
(2,142)
25,562
11,387
(6,457)
(3,143)
(2,079)
25,270
5,406
Weighted-average
exercise price
($ per Common
Share)
0.40
0.14
0.78
0.35
0.22
0.34
0.19
0.50
0.22
0.25
0.21
Exercise price:
$0.10-$0.15
$0.16-$0.21
$0.22-$0.33
$0.34-$0.82
Stock options
outstanding
(000s)
9,210
3,279
12,586
195
25,270
Weighted-average
remaining term
(years)
1.5
1.0
2.2
2.8
1.8
Stock options
exercisable
(000s)
2,628
1,357
1,421
-
5,406
Weighted-average
remaining term
(years)
0.6
0.4
0.4
-
0.5
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, 2021, the
Company granted 11,386,600 stock options (December 31, 2020 – 8,656,850) with a fair value of $0.16 (December 31, 2020 - $0.07)
per option using the Black-Scholes option pricing model using the following key assumptions:
Assumptions (weighted average):
Exercise price ($)
Estimated volatility of underlying Common Shares (%)
Expected life (years)
Risk-free rate (%)
Forfeiture rate (%)
Years ended December 31,
2020
2021
0.14
0.34
69.6
78.4
3.0
3.0
0.3
0.5
3.9
3.9
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, 2020
Exercised
Outstanding, December 31, 2020
Expired
Outstanding, December 31, 2021
53
PINE CLIFF ENERGY LTD.
Warrants
(000s)
10,350
(7,500)
2,850
(2,850)
Nil
Weighted-average
exercise price
($ per Common
Share)
0.29
0.21
0.51
0.51
Nil
CONSOLIDATED FINANCIAL STATEMENTS
2021
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, 2020, all stock options and warrants were excluded
as they were not dilutive.
Earnings/(Loss) per Common Share calculation:
Numerator
Earnings/(Loss) for the year
Denominator (000s)
Weighted-average Common Shares outstanding –
basic
Effect of options outstanding
Weighted-average Common Shares outstanding –
diluted
Earnings/(Loss) per Common Share – basic ($)
Earnings/(Loss) per Common Share – diluted ($)
16. COMMODITY SALES
Years ended December 31,
2020
2021
81,421
(50,107)
337,254
11,031
348,285
0.24
0.23
330,284
-
330,284
(0.15)
(0.15)
The Company’s commodity sales revenue is determined pursuant to the terms of the marketing agreements. The revenue for natural
gas, NGLs 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.
($000s)
Natural gas
NGLs
Crude oil
Total commodity sales
17. 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
Changes in non-cash working capital excludes the receivable amount referred to in Note 7.
Finance expenses:
Interest expense and bank charges
Non cash:
Accretion on decommissioning provision
Accretion on subordinated promissory notes and Term Debt
Total finance expenses
54
PINE CLIFF ENERGY LTD.
Years ended December 31,
2021
130,546
22,198
11,241
163,985
2020
87,139
10,040
5,991
103,170
Years ended December 31,
2020
2021
(6,055)
(962)
12,310
5,293
(1,266)
(266)
(239)
(1,771)
(7,990)
13,283
5,293
1,561
(3,332)
(1,771)
Years ended December 31,
2020
5,182
2021
4,876
5,373
156
10,405
5,455
105
10,742
CONSOLIDATED FINANCIAL STATEMENTS
2021
Cash interest paid in the year ended December 31, 2021, was $5.1 million (December 31, 2020 - $4.1 million).
18. GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses by nature were as follows:
General and administration expenses:
Salary and benefits
Administrative and other costs
Overhead recoveries
Total general and administrative expenses
19. KEY MANAGEMENT RENUMERATION
Years ended December 31,
2020
4,651
2,624
(2,278)
4,997
2021
6,433
2,414
(3,040)
5,807
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,
2020
1,432
349
1,781
2021
1,939
895
2,834
1 Short-term benefits includes the salary, other non-cash short-term benefits and directors fees paid to the Company’s officers and directors.
2 Share-based payments computed for officers and directors are included in Note 15 and include the fair value of awards expensed in the year.
20. COMMITMENTS
As at December 31, 2021, the Company has the following commitments and other contractual obligations:
2022
2023
2024
2025
2026
Thereafter
($000s)
Trade and other payables
Term Debt1
Due to related party
Subordinated promissory notes
Future interest
Lease obligations2
Transportation3
39,586
-
-
-
4,080
1,050
8,027
-
-
-
-
4,380
1,027
5,229
-
30,000
6,000
6,000
4,680
856
4,589
-
-
-
-
-
703
4,232
-
-
-
-
-
473
3,879
Total commitments and contingencies
52,743
10,636
52,125
4,935
4,352
1 Principal amount.
2See Note 9
3 Firm transportation agreements.
-
-
-
-
-
-
2,991
2,991
55
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2021
21. 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 provided by 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 (deficit)
2021
6,000
6,000
30,000
39,585
(21,613)
(6,874)
(3,446)
49,652
45,418
As at December 31,
2020
6,000
6,000
49,000
27,275
(14,863)
(7,878)
(2,484)
63,050
(37,317)
1 The due to related party and promissory notes are due on December 31, 2024.
2 The Term Debt for net debt is presented at the principal amount with $19.0 million repaid in 2021 and $30.0 million due on December 31, 2024.
The Company’s cash provided by 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, the Company may not generate sufficient cash provided by 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 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
Changes in non-cash working capital
Decommissioning obligations settled in cash
Adjusted funds flow
Net debt
Net debt-to-adjusted funds flow
2021
49,483
7,990
1,633
59,106
49,652
0.8
As at December 31,
2020
8,787
(1,561)
1,503
8,729
63,050
7.2
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.
56
PINE CLIFF ENERGY LTD.
BOARD OF DIRECTORS
George F. Fink - Chairman
Philip B. Hodge
Robert B. Fryk
Jacqueline R. Ricci
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
Christopher S. Lee
Vice President, Exploration
HEAD OFFICE
850, 1015 – 4th Street SW
Calgary, Alberta T2R 1J4
Phone: (403) 269-2289
Fax: (403) 265-7488
CORPORATE INFORMATION
2021
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
57
PINE CLIFF ENERGY LTD.