TSX: PNE
WWW.PINECLIFFENERGY.COM
Long‐term Value Focus
Annual Report 2022
MESSAGE TO SHAREHOLDERS
2022
2022 was a transformative year for Pine Cliff. We set multiple PNE financial records, became debt free and initiated
dividend payments to our shareholders. Q4 2022 was our second highest quarterly adjusted funds flow1 in our history
at $40.2 million, resulting in a record annual adjusted funds flow total of $163.2 million. Our previous best annual
adjusted funds flow was $59.1 million in 2021.
Highlights from the fourth quarter and full year 2022 include:
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generated $40.2 million of adjusted funds flow ($0.11 per basic and fully diluted share) for the three months
ended December 31, 2022 and $163.2 million ($0.47 per basic and $0.45 per fully diluted share) for the year
ended December 31, 2022. This is 53% and 176% higher than the respective periods in the prior year;
generated net earnings of $24.7 million ($0.07 per basic and fully diluted share) for the three months ended
December 31, 2022 and $108.9 million ($0.31 per basic and $0.30 per fully diluted share) for the year then
ended;
production averaged 21,041 Boe/d2 and 21,015 Boe/d2 during the three months and year ended December 31,
2022, which was 10% and 14% higher than the comparable periods in 2021;
paid dividends of $10.8 million ($0.03 per share basic and fully diluted share) for the three months ended
December 31, 2022 and $23.6 million ($0.07 per basic and fully diluted share) for the year ended December
31, 2022;
repaid in full $30.0 million of term debt and $12.0 million of promissory notes to achieve debt free status by
June 20, 2022; and
had positive net cash1 of $55.9 million at December 31, 2022 compared to $49.7 million of net debt at December
31, 2021, a year over year change of $105.6 million.
Future Capital Allocations
Pine Cliff is starting 2023 with the strongest and cleanest balance sheet in our history. I am frequently asked what Pine
Cliff is going to do with its growing cash reserves. My standard response is that we will continue to make capital
allocation decisions to optimize what we feel will be best for our shareholders. This may sound simplistic, however it is
the same premise that has guided us since we started this business over 11 years ago with 100 Boe/d of production. To
provide a little more colour on this topic, here are some of our current considerations concerning capital allocation:
a) Capital Expenditures
Our 2023 capital expenditure budget of $27.9 million includes $12.8 million to drill four (2.8 net) Pekisko oil wells
in Central Alberta and three (0.3 net) Ellerslie natural gas wells, $8.6 million for facility optimization and
maintenance capital and $6.5 million for abandonments and reclamation. Despite the 37% reduction in our 2023
drilling budget compared to 2022 development expenditures, we believe this capital investment should maintain
our 2023 production between 20,0002 – 21,000 Boe/d2. Those numbers highlight Pine Cliff’s advantage of having
one of the lowest production decline rates (approximately 7%) of all oil and gas producers in Canada.
b) Asset and Corporate Acquisitions
Our team continues to conduct weekly business development meetings assessing the various assets and companies
for sale or those we think may come up for sale. The lower expected commodity prices in 2023 will result in a
reduction in our funds flow compared to 2022 but should also reduce the price expectations that vendors held in
2022. Last year was one of the only years we did not purchase any material assets since our first acquisition in
2012. Our current cash balance gives us the benefit of looking at asset packages that could help grow our base
MESSAGE TO SHAREHOLDERS
2022
without the requirement of issuing debt or additional equity. Our cash balance also extends Pine Cliff’s reach to
consider larger asset acquisitions or mergers that would not be attainable if we were carrying significant debt.
c) Dividends
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The sustainability of dividends in the oil and gas sector will come under increasing scrutiny from investors if
commodity prices show further weakness and volatility in 2023. Pine Cliff is currently committed to maintaining
our current monthly dividend and will not be reluctant to use our cash balance if necessary. Although the current
PNE dividend yield over 10% may raise eyebrows, we hope that investors will appreciate that our annual dividend
commitment is approximately $45.7 million, which is less than our growing cash balance. We have raised our
dividend twice since its inception in June 2022, and we believe that our unique business model will provide the
opportunity to raise it again in the future. Although we cannot predict the future, at today’s strip prices, our capital
and dividend program for 2023 can be fully funded from Pine Cliff’s forecasted adjusted funds flow.
The Importance of Mentorship
None of Pine Cliff’s accomplishments mentioned above would have been possible without the original founder of Pine
Cliff, Mr. George Fink. I have been fortunate to have had many mentors in my career, but George has been the one I have
leaned on the most during my time at Pine Cliff. He has been a calming influence and a relentless financial and moral
supporter of our company and our industry. Mr. Fink has advised the Board that he will not be standing for re-election
at the next Annual Meeting of shareholders. In our 11 plus years of working together at Pine Cliff, and our many years
before that as business acquaintances, George has been the consummate gentleman and a guiding light for both me and
our team, showing us how we should treat others and take pride in delivering value and results to our shareholders.
George was the one who gave me the chance to invest in myself back in January 2012, with the vision of building a low
decline natural gas focused producer. I will forever be grateful to George for that opportunity and the ongoing support
he has provided to me as a leader of an organization I am very proud of. Although George will no longer be sitting on
our Board, he remains a loyal supporter and one of Pine Cliff’s largest shareholders, so I look forward to our ongoing
interactions. On behalf of our entire team and the many Pine Cliff shareholders for whom he has helped build value, I
thank George for his time on our Board and his numerous contributions to the success of Pine Cliff.
Outlook
North America experienced one of the warmest Januarys in recorded history this year. This warm weather coincided
with the ongoing Freeport LNG export facility outage in Texas and resulted in a 41% reduction in Henry Hub natural
gas pricing in January 2023. Although AECO pricing moved lower during this time, AECO Daily 5A still averaged $3.72
per Mcf in January. The AECO Daily 5A price this morning is $3.33 Mcf and the forward AECO strip price for the
remainder of 2023 is $2.94 Mcf. At these projected prices, Pine Cliff is on track to generate the second highest annual
adjusted funds flow in our history.
We have built Pine Cliff to be a long-term sustainable business and will not allow short term pricing volatility to take
our focus off building a company that will deliver material rates of returns to our investors for many years to come. We
manage our business as the significant shareholders we are, including adding physical hedges where we feel they are
beneficial to protect us from short term volatility.
MESSAGE TO SHAREHOLDERS
2022
We continue to be optimistic about being a Western Canada natural gas producer. The Province of Alberta utilizes more
natural gas than any other Province in Canada, and that demand is growing with the final coal to gas power plant
conversions later this year. We also welcome the impact that LNG Canada and multiple other new LNG export facilities
will have on our North American market when they start up in 2025.
Thank you for your support as we look forward to an exciting 2023 and beyond.
TSX: PNE
WWW.PINECLIFFENERGY.COM
Yours truly,
Phil Hodge
President and Chief Executive Officer
March 7, 2023
1Please 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, 2022, which can be found on
www.sedar.com and is subject to the same cautionary statements as set out therein.
2 Refer to the March 7, 2023 Press Release for commodity split by product.
RESERVES INFORMATION
2022
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, 2022. 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, 2022. 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 2022 year include:
Net present value for proved plus probable (“P+P”) reserves of $411.5 million, discounted at 10%, an increase of $133.6
million, or 48%, from December 31, 2021, primarily as a result of an increase in forecast commodity prices;
Pine Cliff increased its 2022 P+P reserves by 12.5 MMBoe (20%) prior to adjusting for 2022 production, a reserve
replacement ratio of 163%, largely as a result of 10.0 MMBoe (16%) due to economic factors, 1.7 MMBoe (3%) of extensions
and an increase of 0.8 MMBoe (1%) from technical revisions;
Remaining P+P reserves of 67.6 MMBoe (86% conventional natural gas and coal bed methane) at December 31, 2022
increased by 4.8 MMBoe (8%) from 62.8 MMBoe (84% conventional natural gas and coal bed methane) at December 31,
2021, mainly as a result of economic factors; and
Approximately 77% of total reserve volumes are classified as total proved reserves and approximately 23% 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 $4.23 and
$4.40 per Mcf for AECO natural gas and US$80.33 and US$78.50 per Bbl for WTI oil in 2023 and 2024 respectively.
Summary of Remaining Working Interest Reserves, as of December 31, 2022
Reserve Category
Proved
Developed Producing
Developed Non-Producing
Undeveloped
Total Proved
Probable
Total Proved plus Probable
Oil1,2
MBbl
Natural Gas
Liquids
Conventional
Natural Gas
MBbl
MMcf
Coal Bed
Methane
MMcf
Oil
Equivalent
MBoe
2,069.2
17.5
1,012.6
3,099.3
1,783.5
4,882.9
3,408.4
10.4
244.3
3,663.1
1,171.0
4,834.2
232,665.8
2,101.1
7,813.7
242,580.6
70,623.5
313,204.2
27,934.2
-
-
27,934.2
6,449.5
34,383.6
48,911.0
378.1
2,559.2
51,848.3
15,800.0
67,648.4
1 Amounts may not add due to rounding.
2 Oil includes Light and Medium and Heavy Oil. Light and Medium oil represents 100 per cent of Total Proved and Proved plus Probable reserves.
4
PINE CLIFF ENERGY LTD.
RESERVES INFORMATION
2022
Summary of Net Present Values of Future Net Revenue, Before Income Taxes, as of December 31, 2022
($ millions)
Reserve Category1
Proved
Developed Producing
Developed Non-Producing
Undeveloped
Total Proved
Probable
Total Proved plus Probable
1 Amounts may not add due to rounding.
Discounted at (% per year)
0%
5%
10%
15%
20%
91.7
6.9
61.2
159.8
271.8
431.6
279.1
5.4
37.8
322.3
161.0
483.3
275.9
4.5
24.5
304.9
106.6
411.5
251.5
3.9
16.4
271.8
76.3
348.0
228.0
3.4
11.1
242.5
57.7
300.2
Reconciliation of Gross Reserves by Principal Product Type, as of December 31, 2022
Reserve Reconciliation Company
Gross1
Total Proved
December 31, 2021
Extension
Technical Revisions
Acquisitions
Dispositions
Economic Factors
Production
December 31, 2022
Total Proved plus Probable
December 31, 2021
Extension
Technical Revisions
Acquisitions
Dispositions
Economic Factors
Production
December 31, 2022
Natural Gas
Liquids
Natural Gas3
Oil Equivalent
MBbl
MMcf
MBoe
Oil2
MBbl
3,044.0
228.4
343.8
3.1
(191.2)
129.8
(458.5)
3,853.4
186.7
(295.9)
18.7
(3.3)
436.1
(532.6)
253,292.5
4,413.4
5,737.2
2,778.4
(1,815.3)
46,183.7
(40,075.1)
3,099.3
3,663.1
270,514.8
4,673.1
411.2
348.7
3.3
(248.8)
153.9
(458.5)
5,321.5
245.9
(725.5)
23.9
(4.4)
505.4
(532.6)
316,913.0
6,337.5
7,337.8
3,205.4
(2,400.3)
56,269.6
(40,075.1)
4,882.9
4,834.2
347,587.8
49,112.8
1,150.7
1,004.1
484.9
(497.1)
8,263.2
(7,670.3)
51,848.3
62,813.4
1,713.4
846.2
561.4
(653.3)
10,037.6
(7,670.3)
67,648.4
1 Amounts may not add due to rounding.
2 Oil includes Light and Medium and Heavy Oil. Light and Medium oil represents 100 per cent of Total Proved and Proved plus Probable reserves.
3 Natural gas includes Conventional Natural Gas and Coal Bed Methane. Conventional Natural Gas represents 90 per cent Total Proved and Proved
plus Probable reserves.
5
PINE CLIFF ENERGY LTD.
RESERVES INFORMATION
2022
Commodity Prices
The Commodity prices used in the above calculations of reserves are as follows:
Year
2023
2024
2025
2026
2027
2028
2029-2037
Thereafter
WTI Oil (US$/Bbl)1
80.33
78.50
76.95
77.61
79.16
80.74
89.27
+2.0%/yr
$C to US$ Foreign
exchange rate1
1.34
1.31
1.30
1.30
1.29
1.29
1.29
1.29
Edmonton Light Crude Oil
(Cdn$/Bbl) 1
103.76
97.74
95.27
95.58
97.07
99.01
109.12
+2.0%/yr
AECO Gas
(Cdn$/MMBtu) 1
4.23
4.40
4.21
4.27
4.34
4.43
4.89
+2.0%/yr
1 Source: Average of three consultant price forecasts, effective January 1, 2023 (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, 2022, which can be found on www.sedar.com and is subject to the same cautionary statements as set out therein.
6
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2022
This Management’s Discussion and Analysis (“MD&A”) is a review of the operations and current financial position of Pine Cliff Energy
Ltd. (“Pine Cliff” or the “Company”) for the year ended December 31, 2022. This MD&A is dated and based on information available
as at March 7, 2023 and should be read in conjunction with the audited consolidated financial statements for the year ended
December 31, 2022 and 2021 (“Financial Statements”). The Financial Statements have been prepared in accordance with
International Accounting Standards (“IFRS”) issued by the International Accounting Standards Board. Additional information
relating to the Company, including the Company’s annual information form (“AIF”), may be found on www.sedar.com and by visiting
Pine Cliff’s website at http://www.pinecliffenergy.com.
Pine Cliff is a dividend-paying company headquartered 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.
Please refer to the section titled “GLOSSARY” for measurements and abbreviations that may be used in the MD&A.
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.
2022 AND FOURTH QUARTER 2022 HIGHLIGHTS
Highlights from 2022 and the fourth quarter of 2022 are as follows:
generated $40.2 million of adjusted funds flow ($0.11 per basic and fully diluted share) for the three months ended
December 31, 2022, and $163.2 million ($0.47 per basic and $0.45 per fully diluted share) for the year ended December 31,
2022, 53% and 176% higher than the respective periods in the prior year;
generated net earnings of $24.7 million ($0.07 per basic and fully diluted share) for the three months ended December 31,
2022, and $108.9 million ($0.31 per basic and $0.30 per fully diluted share) for the year then ended;
production averaged 21,041 Boe/d and 21,015 Boe/d during the three months and year ended December 31, 2022, 10%
and 14% higher than the comparable periods in 2021;
paid dividends of $10.8 million ($0.03 per share basic and fully diluted share) for the three months ended December 31,
2022 and $23.6 million ($0.07 per basic and fully diluted share) for the year ended December 31, 2022;
repaid in full $30.0 million of term debt and $12.0 million of promissory notes outstanding by the end of the second quarter
of 2022 to be debt free;
had positive net cash of $55.9 million at December 31, 2022 compared to $49.7 million of net debt at December 31, 2021, a
year over year change of $105.6 million;
drilled, four (2.8 net ) Pekisko oil wells and seven (1.4 net) Ellerslie liquids rich natural gas wells in 2022; and
2022 capital expenditures totaled $34.7 million, including development capital of $20.5 million, facilities optimization and
maintenance capital of $8.4 million and abandonment and reclamation expenditures of $5.8 million.
7
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2022
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 ($/share)
Net earnings/(loss) for the year
Per share – Basic ($/share)
Per share – Diluted ($/share)
Total assets
Total liabilities
Capital expenditures
Acquisitions
Dispositions
Dividends
Per share – Basic ($/share)
Per share – Diluted ($/share)
Positive net cash (net debt)2
Total non‐current financial liabilities3
Weighted average common shares outstanding (000s) - Basic
Weighted average common shares outstanding (000s) - Diluted
OPERATIONS
Production
Natural gas (Mcf/d)
NGLs (Bbl/d)
Crude oil (Bbl/d)
Total (Boe/d)
Total (Mcfe/d)
Realized commodity sales prices
Natural gas ($/Mcf)
NGLs ($/Boe)
Crude oil ($/Bbl)
Total ($/Boe)
Netback ($/Boe)
Operating netback2
Corporate netback2
Netback ($/Mcfe)
Operating netback2
Corporate netback2
2022
306,208
270,448
150,452
163,206
0.47
0.45
108,939
0.31
0.30
375,053
241,325
29,077
1,119
(2,649)
23,574
0.07
0.07
55,913
2,296
346,443
360,033
109,801
1,459
1,256
21,015
126,090
5.43
72.38
108.79
39.92
22.41
21.28
3.74
3.55
Year ended December 31,
2021
2020
163,985
146,976
49,483
59,106
0.18
0.17
81,421
0.24
0.23
378,997
333,579
21,568
23,147
(320)
-
-
-
(49,652)
44,521
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
1.46
103,170
96,897
8,787
8,729
0.03
0.03
(50,107)
(0.15)
(0.15)
288,899
326,216
7,518
(6)
(829)
-
-
-
(63,050)
62,816
330,284
330,284
104,277
1,187
439
19,006
114,036
2.28
23.11
37.31
14.83
2.72
1.26
0.45
0.21
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, term debt, due to related party and promissory notes.
8
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2022
Three months ended December 31,
2021
2022
Year ended December 31,
2021
2022
($000s, unless otherwise indicated)
FINANCIAL
Commodity sales (before royalty expense)
Cash provided by operating activities
Adjusted funds flow1
Per share – Basic ($/share)1
Per share – Diluted ($/share)1
Net earnings
Per share – Basic ($/share)
Per share – Diluted ($/share)
Capital expenditures
Acquisitions
Dispositions
Dividends
Per share – Basic ($/share)
Per share – Diluted ($/share)
Positive net cash (net debt)1
Weighted-average common shares outstanding (000s)
Basic
Diluted
OPERATIONS
Production
Natural gas (Mcf/d)
NGLs (Bbl/d)
Crude oil (Bbl/d)
Total (Boe/d)
Realized commodity sales prices
Natural gas ($/Mcf)
NGLs ($/Boe)
Crude oil ($/Bbl)
Combined ($/Boe)
Netback ($/Boe)
Commodity sales
Processing and gathering
Royalty expense
Transportation expenses
Operating expenses
Operating netback ($/Boe)1
General and administrative expenses
Interest and bank charges
Interest income
Corporate netback ($/Boe)1
Operating netback ($ per Mcfe)1
Corporate netback ($ per Mcfe)1
76,928
33,791
40,200
0.11
0.11
24,685
0.07
0.07
6,637
528
(137)
10,797
0.03
0.03
55,913
54,413
20,431
26,279
0.08
0.07
80,522
0.24
0.23
10,741
23,136
(133)
-
-
-
(49,652)
350,216
360,322
339,213
350,806
109,307
1,463
1,360
21,041
103,320
1,258
578
19,056
5.53
65.91
99.13
39.74
39.74
0.54
(4.42)
(1.42)
(13.38)
21.06
(0.41)
(0.06)
0.17
20.76
3.51
3.46
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
306,208
150,452
163,206
0.47
0.45
108,939
0.31
0.30
29,077
1,119
(2,649)
23,574
0.07
0.07
55,913
346,443
360,033
109,801
1,459
1,256
21,015
5.43
72.38
108.79
39.92
39.92
0.49
(4.66)
(1.41)
(11.93)
22.41
(0.89)
(0.31)
0.07
21.28
3.74
3.55
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
1 This is a non-GAAP measure, see NON-GAAP MEASURES for additional information.
9
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2022
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 flow1,2
Realized natural gas price3
Realized NGLs price3
Change
$0.10
$1.00
$000s
3,527
469
Realized crude oil price3
1 This is a non-GAAP measure, see NON-GAAP MEASURES for additional information.
2 This analysis does not adjust for changes in working capital and uses corporate royalty rates from the year ended December 31, 2022.
3 Pine Cliff has prepared this analysis using its Q4 2022 production volumes annualized for twelve months.
4 Based on the Q4 2022 basic weighted average shares outstanding.
$1.00
403
$ per share4
0.01
0.00
0.00
BENCHMARK PRICES
Three months ended December 31,
Year ended December 31,
2022
2021
% Change
2022
2021
% 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$/C$
6.26
5.09
82.64
110.13
5.83
4.63
77.19
93.30
7
10
7
18
6.64
5.29
94.23
120.10
3.84
3.61
67.92
80.24
1.254
73
47
39
50
4
1.358
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 $/Mcf by multiplying by 1.05.
1.303
1.260
8
Quarterly Benchmark Prices
Pine Cliff’s financial results are influenced by fluctuations in commodity prices, dollar exchange rates and price differentials. The
following table shows select market benchmark average prices and foreign exchange rates in the last eight quarters to assist in
understanding the volatility in prices and foreign exchange rates that have impacted Pine Cliff’s business.
Natural gas
Q4‐2022
Q3-2022
Q2-2022
Q1-2022 Q4-2021 Q3-2021
Q2-2021 Q1-2021
NYMEX (US$/Mmbtu)1
AECO Daily 5A (C$/Mcf) 2
Pine Cliff realized natural
gas price (C$/Mcf)
6.26
5.09
5.53
8.20
4.14
7.17
7.20
4.95
4.72
5.83
4.63
4.01
3.58
4.85
6.45
4.88
4.56
3.43
82.64
110.13
91.56
116.79
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
1.260
US$/C$
1 Mmbtu is the abbreviation for millions of British thermal units. One Mcf of natural gas is approximately 1.02 Mmbtu.
2 AECO prices are quoted in $/Gigajoule. Price has been converted from $/GJ to $/Mcf by multiplying by 1.05.
94.29
115.66
108.41
137.84
77.19
93.30
70.56
83.78
103.56
126.23
108.68
82.75
1.266
1.277
69.72
57.42
81.73
1.306
1.260
72.02
99.13
65.91
1.358
74.94
50.53
2.83
3.08
3.03
2.69
3.14
3.14
66.07
77.28
57.84
66.58
42.83
43.87
69.90
60.09
1.231
1.266
10
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2022
In the three months and year ended December 31, 2022, the AECO daily benchmark was 10% and 47% higher compared to the same
periods of 2022. The changes for the quarter are mainly due to supply and demand factors including North American industrial and
residential demand, increases in liquefied natural gas (“LNG”) exports, 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 7% and 39%, for the three months and year ended December 31, 2022, as
compared to the same periods in 2021, primarily due to the sanctions placed on Russian crude oil production and growth in global
demand as economies recovered from the impacts of the novel coronavirus.
Agreements made between the Organization of Petroleum Exporting Countries (“OPEC”) and other crude oil producing countries
globally have brought the supply of global oil production into approximate balance with demand. While crude oil prices are reflecting
current supply and demand dynamics, future crude oil prices remain uncertain, due to the geopolitical situation in eastern Europe,
impacts from a potential recession in areas of the world and the impact global monetary policy will have on the global economy.
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 normally correlate with
changes in the Edmonton Light oil price.
SALES VOLUMES
Total sales volumes by product
2022
2021 % Change
2022
2021 % Change
Three months ended December 31,
Year ended December 31,
Natural gas (Mcf)
NGLs (Bbl)
Crude oil (Bbl)
Total Boe
Total Mcfe
10,056,224
134,597
125,166
1,935,800
9,505,398
115,743
53,157
1,753,133
11,614,802 10,518,798
6 40,075,125 36,739,008
456,291
16
153,006
135
10
6,732,465
10 46,021,761 40,394,790
532,567
458,539
7,670,294
Natural gas weighting
87%
90%
(3)
87%
91%
9
17
200
14
14
(4)
Average daily sales volumes by product
2022
2021 % Change
2022
2021 % 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)
109,307
1,463
1,360
21,041
126,246
103,320
1,258
578
19,056
114,336
6
16
135
10
10
109,801
1,459
1,256
21,015
126,090
100,655
1,250
419
18,445
110,670
9
17
200
14
14
Average daily sales volumes by area
Central (Boe/d)
Southern (Boe/d)
Edson (Boe/d)
Total (Boe/d)
Three months ended December 31,
Year ended December 31,
2022
12,269
6,733
2,039
21,041
2021 % Change
10,289
7,187
1,580
19,056
19
(6)
29
10
2022
12,124
6,853
2,038
21,015
2021 % Change
9,817
7,171
1,457
18,445
24
(4)
40
14
Pine Cliff’s sales volumes increased by 10% to 21,041 Boe/d (126,246 Mcfe/d) and by 14% to 21,015 Boe/d (126,090 Mcfe/d) for
the three months and year ended December 31, 2022, as compared to the same periods in 2021. The increase in production is due
primarily from the private company acquisition that closed December 29, 2021, (the “December 2021 Acquisition”) and the 2022
drilling program, facility optimization and well re-activations, offset by weather related issues during the quarter and natural
production declines.
11
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2022
Pine Cliff is projecting 2023 production volumes of 20,000 – 21,000 Boe/d (120,000 – 126,000 Mcfe/d), weighted approximately
85% 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,
2022
55,650
8,871
12,407
76,928
72%
2021 % Change
2022
2021 % Change
43,368
6,646
4,399
54,413
80%
28
33
182
41
(8)
217,772
38,549
49,887
306,208
71%
130,546
22,198
11,241
163,985
80%
67
74
344
87
(9)
Three months ended December 31,
Year ended December 31,
2022
5.53
65.91
99.13
39.74
6.62
2021 % Change
4.56
57.42
82.75
31.04
5.17
21
15
20
28
28
2022
5.43
72.38
108.79
39.92
6.65
2021 % Change
3.55
48.65
73.47
24.36
4.06
53
49
48
64
64
Commodity sales in the three months ended December 31, 2022 of $76.9 million increased 41% from $54.4 million in the
corresponding period in the prior year. The quarter increase of $22.5 million consists of $16.8 million attributed to higher realized
commodity prices and $5.7 million attributed to higher production volumes. Commodity sales in the year ended December 31, 2022
increased $142.2 million to $306.2 million from $164.0 million in the year ended December 31, 2021. The year-to-date increase of
$142.2 million consists of $119.4 million attributed to higher realized commodity prices and $22.8 million attributed to higher
production volumes.
Pine Cliff’s realized natural gas price was $5.53 per Mcf in the three months ended December 31, 2022, 21% higher than the $4.56
per Mcf realized in the corresponding period of the prior year. This correlates with the AECO 5A reference price increase of 10%,
between those two periods primarily the result of demand for LNG exports from the United States, resulting in the expectation of
lower natural gas storage volumes during the winter 22/23 season. Pine Cliff’s realized natural gas price was $5.43 per Mcf during
the year ended December 31, 2022, 53% higher than the $3.55 per Mcf realized in the corresponding period of the prior year. Pine
Cliff’s realized natural gas price was 9% and 3% higher than the AECO 5A benchmarks for the three months and year ended December
31, 2022 respectively, both a result of Pine Cliff’s marketing diversification programs and fixed price physical natural gas sales
contracts.
For the three months and year ended December 31, 2022, Pine Cliff’s realized NGLs price was $65.91 per Bbl and $72.38 per Bbl,
compared to $57.42 per Bbl and $48.65 per Bbl, in the corresponding periods of the prior year. For the three months and year ended
December 31, 2022, Pine Cliff’s realized oil price was $99.13 per Bbl and $108.79 per Bbl, compared to $82.75 per Bbl and $73.47
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, 2022 were 90% and 91% of Edmonton Light compared to 89% and 92% in the corresponding period of the prior year.
Pine Cliff’s realized NGLs prices in the three months and year ended December 31, 2022 were 60% of Edmonton Light compared to
62% and 61% 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, 2022, compared to the corresponding periods of 2021, is due primarily to balanced market conditions
following the effect of sanctions on Russian oil production arising from the war in Ukraine and OPEC oil supply reductions.
12
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2022
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,
2022
8,554
4.42
0.74
11%
2021 % Change
2022
2021 % Change
5,868
3.35
0.56
11%
46
32
32
-
35,760
17,009
4.66
0.78
12%
2.53
0.42
10%
110
84
84
20
For the three months ended December 31, 2022, total royalty expense increased by 46% to $8.6 million from $5.9 million in the
corresponding period of the prior year. Royalty expense as a percentage of commodity sales were 11% in the three months ended
December 31, 2022, unchanged from the corresponding period of the prior year.
For the year ended December 31, 2022, total royalty expense increased by 110% to $35.8 million from $17.0 million in the
corresponding period of the prior year. Royalty expense as a percentage of commodity sales increased to 12% during the year ended
December 31, 2022, compared to 10% 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, 2022 is due to the increase in NGLs and crude oil as a percentage of natural gas
sales combined with an increase in commodity prices.
Pine Cliff anticipates royalty expenses to average between 9% - 11% of commodity sales in 2023.
TRANSPORTATION COSTS
($000s)
Total transportation costs
$ per Boe
$ per Mcfe
Three months ended December 31,
Year ended December 31,
2022
2,743
1.42
0.24
2021 % Change
2,564
1.46
0.24
7
(3)
(3)
2022
10,806
1.41
0.24
2021 % Change
9,328
1.39
0.23
16
1
1
For the three months and year ended December 31, 2022, total transportation costs increased by 7% and 16% to $2.7 million and
$10.8 million from $2.6 million and $9.3 million in the corresponding periods of the prior year. The higher transportation expenses
are from increased natural gas sales volumes and the Company delivering to markets with higher pricing points than AECO during
the respective periods.
Pine Cliff anticipates transportation expenses to average between $1.40 - $1.50 per Boe ($0.23 - $0.25 per Mcfe) in 2023.
NET OPERATING EXPENSES
($000s)
Operating expenses
Less: processing and gathering income
Net operating expenses
$ per Boe
$ per Mcfe
Three months ended December 31,
Year ended December 31,
2022
25,898
(1,046)
24,852
12.84
2.14
2021 % Change
2022
2021 % Change
17,923
(854)
17,069
9.73
1.62
44
22
46
32
32
91,490
(3,780)
87,710
11.44
1.91
71,590
(3,730)
67,860
10.08
1.68
28
1
29
13
13
Net operating expenses increased by 46% and 29% to $24.9 million and $87.7 million for the three months and year ended December
31, 2022, as compared to $17.1 million and $67.9 million in the corresponding periods of the prior year. The increase during the
quarter and the year ended December 31, 2022 is primarily due to the December 2021 Acquisition, inflationary pressures primarily
on power and variable field costs and incremental operating costs associated with petroleum handling and weather related issues.
On a per Boe basis, operating costs increased to $12.84 per Boe and $11.44 per Boe for the three months and year ended December
31, 2022 compared to $9.73 per Boe and $10.08 per Boe in the corresponding periods of 2021.
Pine Cliff anticipates net operating expenses to average between $11.50 - $12.00 per Boe ($1.92 - $2.00 per Mcfe) in 2023.
13
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2022
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,
2022
1,853
(1,060)
793
0.41
0.07
2021 % Change
2022
2021 % Change
3,506
(1,960)
1,546
0.88
0.15
(47)
46
(49)
(53)
(53)
10,183
(3,364)
6,819
0.89
0.15
8,847
(3,040)
5,807
0.86
0.14
15
(11)
17
3
3
G&A decreased by 49% to $0.8 million in the three months ended December 31, 2022, as compared to $1.5 million in the
corresponding period of the prior year. The decrease in G&A during the three months ended December 31, 2022 is primarily a result
of a reduction in the provision for compensation costs pursuant to the Company’s short term incentive bonus program. G&A
increased to $6.8 million for the year ended December 31, 2022 as compared to $5.8 million in the corresponding period of the prior
year and reflects an increase in annual compensation costs arising from the December 2021 Acquisition and an increase in the short-
term incentive bonus from the prior year.
On a per Boe basis, G&A for the three months ended December 31, 2022, decreased 53% to $0.41 per Boe from $0.88 per Boe in the
corresponding period of the prior year, primarily due to a reduction in the provision for compensation costs. On a per Boe basis, G&A
for the year ended December 31, 2022 increased 3% to $0.89 per Boe from $0.86 per Boe in the prior year.
Pine Cliff anticipates G&A expenses to average between $0.90 - $1.10 per Boe ($0.15 - $0.18 per Mcfe) in 2023.
SHARE‐BASED PAYMENTS
($000s)
Total share-based payments
$ per Boe
$ per Mcfe
Three months ended December 31,
Year ended December 31,
2022
725
0.37
0.06
2021 % Change
337
0.19
0.03
115
95
95
2022
2,456
0.32
0.05
2021 % Change
997
0.15
0.03
146
113
113
Share based payments increased by 115% and 146% for the three months and year ended December 31, 2022 compared to the
corresponding periods of 2021 primarily as a result of the increase in the fair value of stock options granted in 2022, as calculated
using the Black-Scholes option pricing model. The Company has an equity settled stock-based compensation plan. Stock options are
granted to certain officers, directors, and employees 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, 2022, Pine Cliff granted 7,161,600 stock options to purchase Common Shares at a weighted
average exercise price of $1.89 (December 31, 2021 – 11,386,600 at an average exercise price of $0.34). As at December 31, 2022,
the Company had 18,323,519 stock options outstanding, representing 5.2% of Common Shares outstanding (December 31, 2021 –
25,269,810 representing 7.4% of Common Shares outstanding).
DEPLETION, DEPRECIATION, AND IMPAIRMENT
($000s)
2022
2021 % Change
2022
2021 % Change
Three months ended December 31,
Year ended December 31,
Total depletion and depreciation
10,835
10,661
$ per Boe
$ per Mcfe
Impairment reversal
5.60
0.93
6.08
1.01
‐
(13,979)
Total depletion, depreciation, and impairment
10,835
(3,318)
$ per Boe
$ per Mcfe
5.60
0.93
(1.89)
(0.32)
2
(8)
(8)
(100)
(427)
(396)
(396)
44,074
40,994
5.75
0.96
6.09
1.01
8
(6)
(6)
(4,500)
(13,979)
(68)
39,574
27,015
5.16
0.86
4.01
0.67
46
29
29
14
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2022
Depletion and depreciation expense for the three months and year ended December 31, 2022, totaled $10.8 million and $44.1 million
compared to $10.7 million and $41.0 million in the corresponding periods of the prior year. The increase for the year is a result of a
higher 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, the amount and success of capital expenditures and the amount of future development costs.
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, 2022, the Company had three cash generating units (“CGU’s”) being the Southern CGU, Central CGU and Edson
CGU. In accordance with IFRS, an impairment test is performed if the Company identifies indicators of impairment at the end of a
reporting period. At December 31, 2022, there were no indicators of impairment or additional impairment reversals for PP&E assets
and therefore an impairment test was not required.
At June 30, 2022, the Company identified indicators of an impairment reversal in the Edson CGU due to increased forward commodity
prices since its previously completed impairment assessment at December 31, 2021. As a result, recovery testing was performed by
preparing estimates of future funds flows to determine the recoverable amount of the respective assets.
The Company determined that the recoverable amounts of the Company’s Edson CGU exceeded its carrying value. A total impairment
recovery of $4.5 million was recognized in the Company’s PP&E.
Impairment can be reversed for PP&E up to the lower of the recoverable amount and the original carrying value less any associated
depletion and depreciation that would have been incurred had the impairment not occurred.
The following table outlines the forecasted benchmark commodity prices and exchange rates used in the reversal of impairment
calculation of PP&E at June 30, 2022:
Year
2022
2023
2024
2025
2026
2027
2028-2036
Thereafter
WTI Oil (US$/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 July 1, 2022 (McDaniel & Associates Consultants Ltd., GLJ Petroleum
Consultants Ltd. and Sproule Associates Limited).
The recoverable amounts of each of the Company’s CGU’s at June 30, 2022 were estimated at their fair value less cost to sell (“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 reserves evaluator at June 30, 2022. 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 June 30, 2022 impairment test which considered 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 June 30, 2022. 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’s were reversed as at December 31:
CGU
Edson
CBM
Total impairment reversal
15
PINE CLIFF ENERGY LTD.
2022
(4,500)
‐
(4,500)
2021
(12,000)
(1,979)
(13,979)
MANAGEMENT DISCUSSION AND ANALYSIS
2022
Asset Exchange
On December 1, 2022, the Company closed an asset exchange agreement for non-core assets in Central Alberta, resulting in a gain of
$2.5 million.
Exploration and Evaluation Assets (“E&E”) Impairment Assessment
At December 31, 2022, the Company determined that no indicators of impairment existed for E&E assets.
FINANCE EXPENSES
($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
Three months ended December 31,
Year ended December 31,
2022
112
0.06
0.01
1,644
‐
1,756
0.91
0.15
2021 % Change
1,088
0.62
0.10
1,348
8
2,444
1.39
0.23
(90)
(90)
(90)
22
(100)
(28)
(35)
(35)
2022
2,407
0.31
0.05
6,157
97
8,661
1.13
0.19
2021 % Change
4,876
0.72
0.12
5,373
156
10,405
1.55
0.26
(51)
(57)
(57)
15
(38)
(17)
(27)
(27)
Finance expenses decreased by 28% and 17% to $1.8 million and $8.7 million for the three months and year ended December 31,
2022, as compared to $2.4 million and $10.4 million in the corresponding periods of the prior year. The outstanding Term Debt, as
defined herein, due to related party and subordinated promissory notes were all repaid in full during the six months ended June 30,
2022. Please refer to the “DEBT, LIQUIDITY AND CAPITAL RESOURCES” section for additional information.
DEFERRED INCOME TAX
The Company has recorded a deferred tax asset of $37.0 million (December 31, 2021 - $50.6 million) related to the benefit of tax
pools, as it is probable that they will be recovered.
The Company had the following tax pools, including non-capital loss carry-forwards, at December 31, 2022:
Category of tax pool ($000s)
Undepreciated capital costs
Canadian oil and gas property expenditures
Canadian development expenditures
Canadian exploration expenditures
Share issue costs
Non-capital losses carried forward1
Capital losses carried forward2
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.
Rate of Utilization (%)
7 - 55
10
30
100
20
100
2022
27,285
166,196
20,683
156
82
20,759
5,523
240,684
16
PINE CLIFF ENERGY LTD.
CAPITAL EXPENDITURES, ACQUISITIONS AND DISPOSITIONS
MANAGEMENT DISCUSSION AND ANALYSIS
2022
($000s)
Exploration and evaluation
Property, plant and equipment
Capital expenditures
Acquisitions
Dispositions
Total
Year ended December 31,
2022
63
29,014
29,077
1,119
(2,649)
27,547
2021
103
21,465
21,568
23,147
(320)
44,395
Capital expenditures on PP&E of totaled $29.1 million, including development capital of $20.5 million, facilities optimization and
maintenance capital of $8.6 million. In 2022, the Company completed and tied-in of two gross (1.4 net) Pekisko oil wells drilled
during the fourth quarter of 2021, drilled and completed four (2.8 net) Pekisko oil wells and seven (1.4 net) Ellerslie liquids rich
natural gas wells.
DECOMMISSIONING PROVISION
The total current and long-term decommissioning provision of $208.4 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, 2022, the estimated total undiscounted and uninflated amount required to settle the decommissioning liabilities
was $277.3 million (December 31, 2021 - $263.2 million). The discounted and inflated amount required to settle the
decommissioning liabilities of $208.4 million has been calculated assuming a 2.00% inflation rate (December 31, 2021 – 2.00%) and
discounted using an average risk-free interest rate of 3.33% (December 31, 2021 – 2.30%). These obligations are currently expected
to be settled based on the useful lives of the underlying assets, some of which extend beyond 50 years into the future.
DEBT, LIQUIDITY AND CAPITAL RESOURCES
Due to Related Party
Pine Cliff had a $6.0 million promissory note to the Company’s Chairman of the Board bearing interest at 6.5% per annum, payable
monthly. On June 30, 2022, Pine Cliff repaid in full the $6.0 million promissory note. Interest paid on this promissory note for the
year ended December 31, 2022 was $0.2 million (December 31, 2021 - $0.4 million).
Borrowing Facility
The Company had a $4.0 million borrowing facility (the “Facility”) with the Company’s Chairman of the Board (the “Lender”),
whereby the Lender provided up to $4.0 million of borrowings at an interest rate of 6.5% per annum, payable monthly. The Facility
was cancelled effective December 1, 2022. There was no amount drawn on the Facility at any time during the year ended December
31, 2022 (December 31, 2021 - $nil). Interest paid on the Facility for the year ended December 31, 2022, was $nil (December 31,
2021 - $nil).
Promissory Notes
Pine Cliff had issued $6.0 million promissory notes to a shareholder, owning at the time, directly or by discretion, greater than 10%
of the Common Shares. Those promissory notes bore interest at 6.5% per annum, payable monthly. On June 30, 2022, Pine Cliff repaid
in full the $6.0 million promissory notes.
Term Debt
The non-revolving credit facility (“Term Debt”) with Alberta Investment Management Corporation (“AIMCO”), acting on behalf of
its clients, consisted of a first tranche with a principal amount of $30.0 million that was due to mature on December 31, 2024 (the
"2024 Tranche") and a second tranche with a principal amount of $19.0 million that was due to mature on July 31, 2022 (the "2022
Tranche"). Interest on the 2024 Tranche was payable at a rate of 10.75% per annum until September 30, 2022 and thereafter such
interest rate would increase by 1% per annum up to 12.75% and interest was payable on the 2022 Tranche at a rate of 7.05% per
17
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2022
annum. All or a portion of the principal amount outstanding was able to 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. During the first six months of 2022, the
Company repaid in full the 2024 Tranche, resulting in an interest penalty of $0.7 million. The security for the Term Debt consisting
of floating demand debentures totaling $150.0 million and a general security agreement with first ranking over all current and
acquired properties, was fully discharged.
Demand Loan Facility
The Company has a demand operating loan (the “Demand Loan”) of $8.0 million with a Canadian chartered bank, of which no amount
was drawn at December 31, 2022 (December 31, 2021 - $nil). Borrowings bear interest at the bank’s prime lending rate plus 2.0%.
Letters of credit issued under the Demand Loan are supported by a performance guarantee from Export Development Canada for an
amount up to $2.60 million and incur an issuance fee ranging from 3.12% to 3.62%. At December 31, 2022, the Company had issued
$1.68 million in letters of credit (December 31, 2021 - $2.50 million).
The Demand Loan is secured by a general security agreement over certain tangible field facilities of the Company.
Liquidity and Capital Resources
Pine Cliff’s approved capital budget for 2023 is $27.9 million, including $12.8 million in development capital, $8.6 million on facility
optimization and maintenance capital and $6.5 million on 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.
As at December 31, 2022, the Company’s capital comprises shareholders’ equity and working capital. Pine Cliff manages the capital
structure and adjusts considering economic conditions and the risks of the underlying assets. The Company currently has a working
capital surplus. 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 positive net cash/net debt as follows:
($000s)
Cash
Trade and other receivables
Prepaid expenses and deposits
Investments
Less:
Trade and other payables
Term debt1
Due to related party
Promissory notes
December 31, 2022
December 31, 2021
$ Change
54,428
27,187
3,767
171
6,874
21,613
3,446
‐
47,554
5,574
321
171
(29,640)
‐
‐
‐
(39,585)
(30,000)
(6,000)
(6,000)
9,945
30,000
6,000
6,000
Positive net cash (net debt)2
55,913
(49,652)
105,565
1 The Term Debt for positive net cash/net debt is presented at the principal amount with $30.0 million repaid in 2022.
2 This is a non-GAAP measure, see NON-GAAP MEASURES for additional information.
Share Capital
Share capital
Common Shares
Stock options
18
PINE CLIFF ENERGY LTD.
March 7, 2023
December 31, 2022
December 31, 2021
351,298,608
17,620,366
350,908,570
18,323,519
339,539,415
25,269,810
MANAGEMENT DISCUSSION AND ANALYSIS
2022
COMMITMENTS AND CONTINGENCIES
As at December 31, 2022, the Company has the following commitments and other contractual obligations:
($000s)
2023
2024
2025
2026
2027
Thereafter
Trade and other payables
Lease obligations
Transportation1
Total commitments and contingencies
1 Firm transportation agreements.
SUBSEQUENT EVENTS
Dividends
29,640
1,154
9,039
39,833
-
1,017
6,969
7,986
-
847
6,423
7,270
-
585
5,619
6,204
-
-
4,328
4,328
-
-
-
‐
On January 31, 2023 and February 28, 2023, the Company paid a monthly dividend of $0.01083 per Common Share.
On March 2, 2023, the Company declared a monthly dividend of $0.01083 per Common Share. The dividend is payable March 31,
2023, to all shareholders of record on March 15, 2023.
19
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2022
QUARTERLY TRENDS AND SELECTED FINANCIAL INFORMATION
($000s, unless otherwise indicated)
Q4‐2022
Q3-2022
Q2-2022
Q1-2022
Q4-2021
Q3-2021
Q2-2021
Q1-2021
FINANCIAL
Total revenue
Cash provided by operating
activities
Adjusted funds flow1
Per share – Basic ($/share)
Per share – Diluted ($/share)
Net earnings (loss)
Per share – Basic ($/share)
Per share – Diluted ($/share)
Capital expenditures
Dividends
Per share – Basic ($/share)
Per share – Diluted ($/share)
Acquisitions
Positive net cash (net debt)1
Weighted average common shares
outstanding (000s):
69,746
62,778
82,755
59,449
49,399
36,747
31,390
33,170
33,791
40,200
0.11
0.11
24,685
0.07
0.07
6,637
10,797
0.03
0.03
528
55,913
42,258
34,883
0.10
0.10
18,629
0.05
0.05
12,591
9,888
0.03
0.03
-
35,068
50,532
55,816
0.16
0.15
50,192
0.15
0.14
4,282
2,889
0.01
0.01
319
22,496
23,871
32,307
0.09
0.09
15,433
0.05
0.04
5,567
-
-
-
272
(24,752)
20,431
26,279
0.08
0.07
80,522
0.24
0.23
10,741
-
-
-
23,136
(49,652)
12,410
13,333
0.04
0.04
2,323
0.01
0.01
8,903
-
-
-
11
(41,413)
8,171
9,494
0.03
0.03
(744)
(0.00)
(0.00)
1,556
-
-
-
-
(45,292)
8,471
10,000
0.03
0.03
(680)
(0.00)
(0.00)
368
-
-
-
-
(53,122)
Basic
Diluted
350,216
360,322
349,187
360,654
345,402
360,703
340,835
349,304
339,213
350,806
337,921
346,732
336,802
336,802
335,556
335,556
PRODUCTION VOLUMES
Natural gas (Mcf/d)
NGLs (Bbl/d)
Crude oil (Bbl/d)
Average sales volumes (Boe/d)
109,307
1,463
1,360
21,041
109,936
1,547
1,406
21,276
111,951
1,475
1,197
21,331
107,955
1,347
1,057
20,397
103,320
1,258
578
19,056
100,462
1,178
394
18,316
99,528
1,166
341
18,095
99,267
1,400
362
18,307
Average sales volumes (Mcfe/d)
126,246
127,656
127,986
122,382
114,336
109,896
108,570
109,842
PRICES AND NETBACKS
Total commodity sales ($/Boe)
Operating netback ($/Boe)1
Corporate netback ($/Boe)1
Total commodity sales ($/Mcfe)
Operating netback ($/Mcfe)1
39.74
21.06
20.76
6.62
3.51
37.13
18.66
17.82
6.19
3.11
46.59
30.40
28.76
7.77
5.07
Corporate netback ($/Mcfe)1
1 This is a non-GAAP measure, see NON-GAAP MEASURES for additional information.
3.46
4.79
2.97
36.05
19.41
17.60
6.01
3.24
2.93
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
Over the past eight quarters, Pine Cliff’s revenues, cash flow from operating activities, adjusted funds flow, and net earnings (loss)
have fluctuated primarily due to changes in commodity prices and sales volumes. Net earnings (loss) also fluctuate with non-cash
expenditures, including depletion, depreciation and impairments. Selected highlights for the past eight quarters are consistent with
those disclosed in the Annual MD&A, except as described below.
Average sales volumes increased in the first quarter of 2022 compared to the fourth quarter of 2021 due primarily to the
additional sales volumes from the private company acquisition which closed December 29, 2021. Average sales volumes
increased in the second quarter of 2022 compared to the first quarter of 2022 due primarily to the additional sales volumes
from the completion of the 2021 capital program and weather variations. Average sales volumes decreased from the second
through to the fourth quarter of 2022 due primarily to normal production declines and shut-ins for scheduled maintenance
turnarounds, slightly offset by incremental sales volumes from the 2022 capital program.
Adjusted funds flow increased from the fourth quarter of 2021 to the first quarter of 2022 mainly as a result of increases in
commodity prices and additional sales volumes. Adjusted funds flow increased from the first quarter of 2022 to the second
20
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2022
quarter of 2022 mainly as a result of increases in commodity prices and additional sales volumes. Adjusted funds flow
decreased from the second quarter of 2022 to the third quarter of 2022 mainly as a result of decreases in commodity prices
and sales volumes. Adjusted funds flow increased from the third quarter of 2022 to the fourth quarter of 2022 mainly as a
result of increases in commodity prices, slightly offset by a decrease in sales volumes.
Net earnings increased in the first quarter of 2022 compared to the fourth quarter of 2021 as a result of an increase in
commodity sales. Net earnings increased in the second quarter of 2022 compared to the first quarter of 2022 as a result of
an increase in commodity sales and impairment reversal. Net earnings decreased in the third quarter of 2022 compared to
the second quarter of 2022 mainly as a result of a decrease in commodity sales and sales volumes. Net earnings increased
in the fourth quarter of 2022 compared to the third quarter of 2022 mainly as a result of an increase in commodity sales,
slightly offset by a decrease in sales volumes.
Total revenues increased from the fourth quarter of 2021 to the first quarter of 2022, mainly as a result of higher commodity
prices and higher sales volumes. Total revenues increased from the first quarter of 2022 to the second quarter of 2022,
mainly as a result of higher commodity prices and higher sales volumes. Total revenues decreased from the second quarter
of 2022 to the third quarter of 2022, mainly as a result of a decrease in commodity prices and sales volumes. Total revenues
increased in the fourth quarter of 2022 compared to the third quarter of 2022 mainly as a result of an increase in commodity
sales, slightly offset by a decrease in sales volumes.
OFF BALANCE SHEET TRANSACTIONS
Pine Cliff was not involved in any off-balance sheet transactions during the periods presented, nor has it entered into any such
arrangements as of the effective date of this MD&A.
FINANCIAL INSTRUMENTS
Financial instruments and fair value measurement
Financial instruments of the Company consist of cash, trade and other receivables, investments, trade and other payables, due to
related party, 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,
promissory notes and Term Debt approximate their respective fair values due to their interest rates reflecting current market
conditions. Investments are measured at fair value based on quoted market prices.
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.
RISK MANAGEMENT
The Company is exposed to both financial and non-financial risks inherent in the oil and gas business. Financial risks include:
commodity prices, interest rates, equity price, foreign exchange, credit availability and liquidity. Financial risks can be managed, at
least to a degree, through the utilization of financial instruments. Certain non-financial risks can be mitigated through the use of
insurance and/or other risk transfer mechanisms, good business practices and process controls, while others must simply be borne.
All risks can have an impact upon the financial performance of the Company.
Market Risk
Market risk is the risk that the fair value or future cash 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 natural gas, crude oil
and NGL prices may have a significant effect, positively or negatively, on the ability of the Company to meet its obligations, capital
21
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2022
spending targets and expected operational results. A material decline or extended period of low natural gas, crude oil or NGL prices
will result in a reduction of net production revenue. The economics of producing from some wells may change because of lower
prices, which will result in reduced production of natural gas, crude oil or NGL prices 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, 2022,
Pine Cliff’s average sales volumes were 87% 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, 2022, the Company had the following physical natural gas sales contracts in place:
Contractual Term
April 1, 2023 to October 31, 2023
April 1, 2023 to October 31, 2023
January 1, 2023 to March 31, 2023
January 1, 2023 to October 31, 2023
Delivery
Point
AECO
Dawn3
Suffield4
TransGas5
1 Prices reported are the weighted average prices of the periods.
2 Price has been converted from $/GJ to $/Mcf by multiplying by 1.05.
3 Dawn Hub into Dawn Township, Ontario.
4 The contract terms of the physical fixed price natural gas sales contract to Suffield#2 delivery point (Suffield, Alberta).
5 Subsidiary of SaskEnergy, Saskatchewan.
Contract Price
($CAD/GJ)1
$3.94
$6.27
AECO 5A + 0.98/GJ
AECO 5A + 0.56/GJ
Physical Delivery
Quantity (GJ/day)
7,500
2,500
5,000
9,500
Contract Price
($CAD/Mcf)1,2
$4.14
$6.58
AECO 5A + 1.03/Mcf
AECO 5A + 0.59/Mcf
Contractual Term
January 1, 2023 to March 31, 2023
January 1, 2023 to March 31, 2023
April 1, 2023 to October 31, 2023
Delivery
Point
AECO
AECO
AECO
1 Prices reported are the weighted average prices of the periods.
2 Price has been converted from $/GJ to $/Mcf by multiplying by 1.05.
Physical Delivery
Quantity (GJ/day)
5,000
5,000
5,000
Contract Price
($CAD/GJ)1
$4.75 - $6.00
$6.00 - $11.60
$4.00 - $5.45
Contract Price
($CAD/Mcf)1,2
$4.99 - $6.30
$6.30 - $12.18
$4.20 - $5.72
Subsequent to December 31, 2022, the Company had the following additional physical natural gas sales contracts in place:
Contractual Term
April 1, 2023 to October 31, 2023
Type of Contract
AECO3
1 One Mcf of natural gas is approximately 1.02 Mmbtu.
2 Prices reported are the weighted average prices of the periods.
3 AECO basis differential.
Physical Delivery
Quantity (Mmbtu/day) 1
5,000
Contract Price
($USD/ Mmbtu)2,3
NYMEX Henry Hub less US$1.335/Mmbtu
Contractual Term
April 1, 2023 to October 31, 2023
April 1, 2023 to June 30, 2023
Delivery
Point
AECO
AECO
1 Prices reported are the weighted average prices of the periods.
2 Price has been converted from $/GJ to $/Mcf by multiplying by 1.05.
Physical Delivery
Quantity (GJ/day)
7,500
5,000
Contract Price
($CAD/GJ)1
$2.73
$2.54
Contract Price
($CAD/Mcf)1,2
$2.87
$2.67
At December 31, 2022, the Company had the following physical crude oil sales contract in place:
Contractual Term
January 1, 2023 to March 31, 2023
Crude Oil
WTI Fixed Price
1 Prices reported are the weighted average prices of the periods.
Physical Delivery Quantity
(Bbl/day)
250
Contract Price
($CAD/Bbl)1
$117.50
22
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2022
Subsequent to December 31, 2022, the Company had the following additional physical crude oil sales contracts in place:
Contractual Term
April 1, 2023 to June 30, 2023
Crude Oil
WTI Fixed Price
1 Prices reported are the weighted average prices of the periods.
Interest Rate Risk
Physical Delivery Quantity
(Bbl/day)
250
Contract Price
($CAD/Bbl)1
$108.30
The Company is principally exposed to interest rate risk to the extent it draws on variable rate debt. The Company currently has a
Demand Loan with a Canadian chartered bank, of which no amount is drawn as at December 31, 2022. Borrowings under the Demand
Loan bears interest at the banks’ prime lending rate plus 2.5%. Pine Cliff has not entered into any derivative financial instruments to
manage this risk at this time.
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 reflect management’s assessment of the associated maximum exposure to such credit risk.
To mitigate the credit risk on its cash, the Company maintains its cash balances with a Canadian chartered bank. To mitigate the
credit risk on trade and other receivables, Pine Cliff assesses the financial strength of its counterparties through internal evaluation
and limiting exposure to any one counterparty.
The Company’s trade and other receivables balance at December 31, 2022 of $28.0 million (December 31, 2021 – $21.6 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, 2022, there
was $0.4 million (December 31, 2021 - $0.2 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, 2022, the Company
recorded a bad debt recovery of $0.4 million (December 31, 2021 - $nil) 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”
23
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2022
in the Company’s most recent Annual Information Form which is available under the Company’s profile at www.sedar.com or by
contacting the Company.
Environmental
All production phases of oil, NGLs and natural gas are subject to environmental regulation pursuant to a variety of Canadian federal,
provincial and municipal laws and regulations (collectively, the “Environmental Regulations”). Environmental Regulations provide
that wells, facility sites and other properties and practices associated with 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 several 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; current and future 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
24
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2022
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.
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 accordance 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.
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.
Impairment (impairment recovery) indicators
At each reporting date, the Company is required to assess whether there are any internal or external indicators that its petroleum
and natural gas properties and equipment within a CGU may be impaired or recovered. Pine Cliff is required to consider information
25
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2022
from both external sources (such as negative downturn in forecasted oil and gas commodity prices, significant adverse changes in
the technological, market, economic or legal environment in which the entity operates) and internal sources (such as downward
revisions in the estimate of proved and probable oil and gas reserves and the related cash flows, significant adverse effect on the
financial and operational performance of a CGU, evidence of obsolescence or physical damage to the asset). By their nature, these
assumptions are subject to management’s judgment.
Changing Regulation
Emissions, carbon and other regulations impacting climate and climate-related matters are constantly evolving. With respect to
environmental, social and governance and climate reporting, the International Sustainability Standards Board has issued an IFRS
Sustainability Disclosure Standards with the aim to develop sustainability disclosure standards that are globally consistent,
comparable, and reliable. In addition, the Canadian Securities Administrators have issued a proposed National Instrument 51-107
Disclosure of Climate-related Matters. The cost to comply with these standards, and others that may be developed or evolve over
time, has not yet been quantified and it is possible that the long-term effects of these new regulations will affect the Company’s
business, results from operations, access to capital and financial condition.
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 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.
26
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2022
Income tax
Tax regulations and legislation are subject to change and there are differing interpretations requiring management judgment.
Deferred tax assets are recognized when it is considered probable that deductible temporary differences will be recovered in future
periods. Deferred tax liabilities are recognized when it is considered probable that temporary differences will be payable to tax
authorities in future periods. Income tax filings are subject to audits and re-assessments and changes in facts, circumstances, and
interpretations of the standards may result in a material increase or decrease in the Company's provision for income taxes.
Impairment (impairment recovery)
The impairment calculation is based on significant assumptions of proved plus probable oil and natural gas reserves, production
rates, benchmark commodity prices, future costs, discount rates and other relevant assumptions. By their nature, these significant
assumptions are subject to measurement uncertainty and the impact on the financial statements of future periods could be material.
Future Accounting Pronouncements
The following are future accounting pronouncements issued and not yet effective as at December 31, 2022. The Company intends to
adopt these standards as they become effective and does not expect a significant impact.
IAS 1 –Presentation of Financial Statements
Effective January 1, 2024, amendments to the classification of liabilities as non-current include the requirement that a right to defer
settlement must have substance and exist at the end of the reporting period.
IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors
Effective January 1, 2023, amendments to IAS 8 include additional clarification on the determination of changes in accounting policies
from changes in accounting estimates. The development of accounting estimates includes selecting a measurement technique and
choosing the inputs to be used when applying the chosen measurement technique.
IAS 12 – Income Taxes
Effective January 1, 2023, amendments to IAS 12 require entities to recognize deferred tax on transactions that, on initial recognition,
give rise to equal amounts of taxable and deductible temporary differences.
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, 2022.
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.
27
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2022
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” “positive net cash” 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, 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.
($000s)
2022
2021
Change
2022
2021
Change
Three months ended December 31,
Year ended December 31,
Cash provided by operating activities
Adjusted by:
Change in non-cash working capital
Decommissioning obligations settled
Adjusted funds flow
Adjusted funds flow ($/Boe)
Adjusted funds flow ($/Mcfe)
Adjusted funds flow – basic
($/Common Share)
Adjusted funds flow – diluted
($/Common Share)
Operating and Corporate Netback
33,791
20,431
65
150,452
49,483
204
5,252
1,157
5,120
728
40,200
26,279
20.76
3.46
0.11
0.11
15.00
2.50
0.08
0.07
3
59
53
38
38
38
57
6,997
5,757
7,990
1,633
163,206
59,106
21.28
3.55
0.47
0.45
8.78
1.46
0.18
0.17
(12)
253
176
142
142
161
165
The Company considers operating netback to be a key indicator of profitability relative to current commodity prices. Operating
netback and operating netback per Boe and per Mcfe are calculated as the sum of commodity sales and processing and gathering
income, less royalties, transportation and operating expenses on an absolute and a per Boe or per Mcfe basis, respectively. Company
management uses operating netback on a per Boe basis in operational and capital allocation decisions.
The Company considers corporate netback to be a key indicator of overall results. Corporate netback on an absolute dollar and
corporate netback per Boe and per Mcfe are calculated as operating netback, plus interest income, less G&A and interest expense.
28
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2022
Pine Cliff uses these measures to assist in understanding the Company’s ability to generate cash provided by operating activities at
current commodity prices and it provides an analytical tool to benchmark changes in operational performance against prior periods.
Readers are cautioned, however, that these measures should not be construed as an alternative to other terms such as earnings (loss)
determined in accordance with IFRS as a measure of performance. Pine Cliff’s method of calculating these measures may differ from
other companies, and accordingly, it may not be comparable to measures used by other companies.
($ 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
Interest income
Corporate netback
Operating netback ($ per Mcfe)
Corporate netback ($ per Mcfe)
Positive Net Cash/Net Debt
Three months ended December 31,
Year ended December 31,
2022
2021
$ Change
2022
2021
$ Change
39.74
0.54
(4.42)
(1.42)
(13.38)
21.06
(0.41)
(0.06)
0.17
20.76
3.51
3.46
31.04
0.49
(3.35)
(1.46)
(10.22)
16.50
(0.88)
(0.62)
-
15.00
2.75
2.50
8.70
0.05
(1.07)
0.04
(3.16)
4.56
0.47
0.56
0.17
5.76
0.76
0.96
39.92
0.49
(4.66)
(1.41)
(11.93)
22.41
(0.89)
(0.31)
0.07
21.28
3.74
3.55
24.36
0.55
(2.53)
(1.39)
(10.63)
10.36
(0.86)
(0.72)
-
8.78
1.73
1.46
15.56
(0.06)
(2.13)
(0.02)
(1.30)
12.05
(0.03)
0.41
0.07
12.50
2.01
2.09
The Company considers positive net cash/net debt to be a key indicator of leverage. Positive net cash/net debt is calculated as the
sum of trade and other receivables, cash, investments and prepaid expenses and deposits, less due to related party, subordinated
promissory notes, Term Debt and trade and other payables. See “DEBT, LIQUIDITY AND CAPITAL RESOURCES” section for the
table.
Positive net cash/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.
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, 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
29
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2022
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 March 7, 2023
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.
GLOSSARY
The following is a list of abbreviations that may be used in the MD&A:
Measurement
Bbl/d1 – barrels per day
Boe/d1 – barrels of oil equivalent per day
Mcf/d1 – thousand cubic feet per day
Mcfe/d1 – thousand cubic feet equivalent per day
MMBoe – millions of barrels of oil equivalent
1Pine cliff has adopted the standard natural gas liquids (“NGLs”) and crude 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 MMBoe, 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.
Financial and Business Environment
AECO – Alberta Energy Company
CGU – Cash Generating Unit
GJ - Gigajoule
NGTL – Nova Gas Transmission Line
WTI – West Texas Intermediate
MMBtu – One million British Thermal Units
30
PINE CLIFF ENERGY LTD.
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
2022
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
31
PINE CLIFF ENERGY LTD.
INDEPENDENT AUDITOR’S REPORT
2022
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, 2022 and 2021, and the consolidated statements of comprehensive income, changes
in equity (deficit) and cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of
significant accounting policies (collectively referred to as the "financial statements").
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as
at December 31, 2022 and 2021, 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, 2022. 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.
Property, Plant and Equipment ‐ Oil and gas properties ‐ Refer to Notes 3 and 8 to the financial statements
Key Audit Matter Description
The Company’s property, plant and equipment includes oil and gas properties. Oil and gas properties are depleted using the unit-of-
production method (“depletion”) over their proved plus probable reserves. The Company engages an independent reserve evaluator
to estimate reserves using estimates, assumptions and engineering data. The Company assesses at each reporting date whether there
is an indicator of impairment or impairment reversal. If an indicator exists, the Company estimates the recoverable amount of the cash
generating unit (“CGU”), which is the higher of fair value less costs to sell or value-in-use. The determination of (1) the Company’s
proved plus probable reserves used to determine depletion and (2) the recoverable amount of a CGU requires management to make
significant estimates and assumptions related to future commodity prices, discount rates, future production rates, and future operating
and development costs. The Company identified indicators of impairment reversal related to the Edson CGU and recorded an
impairment reversal.
Given the significant judgments made by management related to future commodity prices, discount rates, future production rates, and
future operating and development costs used to determine depletion of all oil and gas properties and the recoverable amount of the
Edson CGU, 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. This resulted
in an increased extent of audit effort.
How the Key Audit Matter Was Addressed in the Audit
Our audit procedures related to future commodity prices, discount rates, future production rates, and future operating and
development costs used to determine depletion of all oil and gas properties and the recoverable amount of the Edson CGU included
the following, among others:
•
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;
32
PINE CLIFF ENERGY LTD.
INDEPENDENT AUDITOR’S REPORT
2022
•
•
•
•
Evaluated the Company’s reserve evaluators by examining reports and assessing their scope of work and findings and
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;
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.
Deferred Income Taxes — Refer to Notes 3 and 10 to the financial statements
Key Audit Matter Description
The Company recognizes deferred income taxes for the tax expected to be payable or recoverable on differences arising between the
financial statement and tax basis of assets and liabilities and is recorded at enacted or substantively enacted tax rates in effect for the
years in which the differences are expected to be realized. The Company recognized a deferred income tax asset primarily arising from
unused tax losses.
To determine whether it is probable that the deferred income tax assets will be realized, management makes assumptions related to
the forecasts of future taxable income, specifically forecasts of future commodity prices, future production rates, and future operating
and development costs. As a result of the significant measurement uncertainty, auditing the probability of the deferred income tax
assets being realized and the forecast of future taxable income required a high degree of auditor judgment, which resulted in an
increased extent of audit effort.
How the Key Audit Matter Was Addressed in the Audit
Our audit procedures related to the assessing the probability of the deferred income tax assets being realized and management’s
forecasts of future taxable income included the following, among others:
•
•
•
Evaluated management’s ability to accurately forecast future taxable income by comparing actual results to
management’s historical forecasts;
Evaluated forecasts of future taxable income, specifically forecasts of future commodity prices, future production rates,
and future operating and development costs by performing the audit procedures described above in the Property, Plant
and Equipment – Oil and gas properties Key Audit Matter;
Evaluating whether management’s estimates of future taxable income are consistent with the requirements of IAS 12 -
Income Taxes relating to the probability of forecasted taxable income and the length of the forecasted period.
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 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.
33
PINE CLIFF ENERGY LTD.
INDEPENDENT AUDITOR’S REPORT
2022
We obtained Management’s Discussion and Analysis and the Annual Report 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.
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 from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the
override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal
control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related
disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit
evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt
on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required
to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our
auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and
whether the financial statements represent the underlying transactions and events in a manner that achieves fair
presentation.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
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
34
PINE CLIFF ENERGY LTD.
INDEPENDENT AUDITOR’S REPORT
2022
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 7, 2023
35
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2022
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Canadian dollars, 000s)
ASSETS
Current assets
Cash
Trade and other receivables
Prepaid expenses and deposits
Investments
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
Term debt
Due to related party
Promissory notes
Decommissioning provision
Total liabilities
SHAREHOLDERS' EQUITY
Share capital
Contributed surplus
Accumulated other comprehensive loss
Deficit
Total shareholders' equity
Total liabilities and shareholders' equity
Commitments (Note 21)
Subsequent events (Note 23)
2022
As at December 31,
2021
Note
5
8
9
11
5
11
15
10
14
12
13
15
54,428
27,187
3,767
7
171
85,553
2,413
250,045
37,042
6,874
21,613
3,446
-
31,933
2,350
294,073
50,641
375,053
378,997
29,640
1,002
6,900
37,542
2,296
‐
‐
‐
201,487
39,585
1,050
3,900
44,535
2,618
29,903
6,000
6,000
244,523
241,325
333,579
16
277,650
16,617
(216)
(160,323)
133,728
375,053
275,766
15,400
(60)
(245,688)
45,418
378,997
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 Philip B Hodge”
“Signed Jacqueline R. Ricci”
Philip B. Hodge, President & CEO
and Director
Jacqueline R. Ricci, Chair of the Audit Committee
and Director
36
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2022
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Canadian dollars, 000s except per share data)
Years ended December 31,
Note
2022
2021
REVENUE
Commodity sales
Royalty expense
Commodity sales, net of royalties
Processing and gathering
Interest income
Total revenue
EXPENSES
Operating
Transportation
Depletion and depreciation
Impairment reversal
Site decommissioning grants
Share-based payments
Finance
General and administrative
Gain on disposition
Total expenses
Earnings before income taxes
Deferred income taxes
NET EARNINGS FOR THE YEAR
OTHER COMPREHENSIVE LOSS
Unrealized loss on investments
Realized loss on investments
Deferred income tax on unrealized loss on investments
OTHER COMPREHENSIVE LOSS, NET OF TAX
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Net earnings per share ($)
Basic
Diluted
17
306,208
(35,760)
270,448
3,780
500
274,728
91,490
10,806
44,074
(4,500)
(5,142)
2,456
8,661
6,819
(2,495)
152,169
122,559
(13,620)
108,939
(177)
‐
21
(156)
108,783
0.31
0.30
9
9
15
16
18
19
8,9
11
16
16
163,985
(17,009)
146,976
3,730
-
150,706
71,590
9,328
40,994
(13,979)
(5,047)
997
10,405
5,807
(169)
119,926
30,780
50,641
81,421
-
(60)
-
(60)
81,361
0.24
0.23
The accompanying notes are an integral part of these consolidated financial statements.
37
PINE CLIFF ENERGY LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Canadian dollars, 000s)
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings for the year
Items not affecting cash:
Depletion and depreciation
Impairment reversal
Site decommissioning grants
Share-based payments
Finance expenses
Deferred income taxes
Gain on disposition
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
Repayment of term debt
Repayment of related party debt
Repayment of promissory notes
Dividends
Payments on lease obligations
Cash used in financing activities
Increase (decrease) in cash
Cash - beginning of year
CASH ‐ END OF YEAR
CONSOLIDATED FINANCIAL STATEMENTS
2022
Note
2022
2021
Years ended December 31,
108,939
81,421
9
9
15
16
18
11
8,9
18
15
18
9
8
9
8,9
7
18
16
14
12
13
16
10
44,074
(4,500)
(5,142)
2,456
8,661
13,620
(2,495)
(2,407)
(5,757)
(6,997)
150,452
(29,014)
(63)
(1,119)
2,649
‐
(9,190)
(36,737)
645
(30,000)
(6,000)
(6,000)
(23,574)
(1,232)
(66,161)
47,554
6,874
54,428
40,994
(13,979)
(5,047)
997
10,405
(50,641)
(169)
(4,875)
(1,633)
(7,990)
49,483
(21,465)
(103)
(23,147)
320
340
13,283
(30,772)
377
(19,000)
-
-
-
(1,092)
(19,715)
(1,004)
7,878
6,874
The accompanying notes are an integral part of these consolidated financial statements.
38
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2022
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
(Canadian dollars, 000s)
Note
Share
capital
Contributed
surplus1
Warrants
Accumulated
other
comprehensive
loss2
BALANCE AT DECEMBER 31, 2020
Net earnings for the year
Share-based payments
Other comprehensive loss, net of tax
Exercise of stock options
Expiry of warrants
BALANCE AT DECEMBER 31, 2021
Net earnings for the year
Dividends
Share-based payments
Other comprehensive loss, net of tax
Exercise of stock options
16
16
16
274,964
-
-
-
802
-
275,766
-
-
-
-
1,884
14,540
-
997
-
(425)
288
15,400
-
-
2,456
-
(1,239)
288
-
-
-
-
(288)
‐
-
-
-
-
-
‐
-
-
(60)
-
-
(60)
-
-
-
(156)
-
Total
Shareholders’
equity (deficit)
(37,317)
81,421
997
(60)
377
-
45,418
108,939
(23,574)
2,456
(156)
645
Deficit
(327,109)
81,421
-
-
-
-
(245,688)
108,939
(23,574)
-
-
-
BALANCE AT DECEMBER 31, 2022
1Contributed surplus is comprised of share-based payments.
2Accumulated other comprehensive loss is comprised of realized and unrealized losses on financial assets held at fair value through other
comprehensive loss.
(160,323)
277,650
16,617
(216)
‐
133,728
The accompanying notes are an integral part of these consolidated financial statements.
39
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2022
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at December 31, 2022 and 2021 and for the years then ended
(all tabular amounts in Canadian dollars 000s, unless otherwise indicated)
1. NATURE OF BUSINESS
Pine Cliff Energy Ltd. (“Pine Cliff” or the “Company”) is a public company listed on the Toronto Stock Exchange (“TSX”) and
incorporated under the Business Corporations Act (Alberta). The address of the Company’s registered office is Suite 850, 1015 - 4th
Street SW, Calgary, Alberta, T2R 1J4.
Pine Cliff is engaged in the acquisition, exploration, development and production of 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
These consolidated financial statements have been prepared under International Financial Reporting Standards (“IFRS”), as issued by
the International Accounting Standards Board as at and for the year ended December 31, 2022, including 2021 comparative periods.
The policies applied in these consolidated financial statements are based on IFRS issued and outstanding as of March 7, 2023, the date
the Board of Directors approved the statements.
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. The methods used to measure fair values are discussed in Note 5.
c) 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. Foreign exchange gains and losses are recorded as income or expense in the period in
which they occur.
d) Use of judgements and estimates
The timely preparation of the Financial Statements in accordance 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 statements 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 5 – Financial instruments
Note 8 – Exploration and evaluation assets (“E&E”)
Note 9 – Property, plant and equipment (“PP&E”)
Note 15 – Decommissioning provision
Note 16 – Share capital
Cash Generating Units
Cash generating units (“CGUs”) are defined as the lowest grouping of integrated assets that generate identifiable cash inflows that are
largely independent of the cash inflows of other assets or groups of assets. The classification of assets into CGUs requires significant
40
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2022
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.
Impairment (impairment recovery) indicators
At each reporting date, the Company is required to assess whether there are any internal or external indicators that its petroleum and
natural gas properties and equipment within a CGU may be impaired or recovered. Pine Cliff is required to consider information from
both external sources (such as negative downturn in forecasted oil and gas commodity prices, significant adverse changes in the
technological, market, economic or legal environment in which the entity operates) and internal sources (such as downward revisions
in the estimate of proved and probable oil and gas reserves and the related cash flows, significant adverse effect on the financial and
operational performance of a CGU, evidence of obsolescence or physical damage to the asset). By their nature, these assumptions are
subject to management’s judgment.
Changing Regulation
Emissions, carbon and other regulations impacting climate and climate-related matters are constantly evolving. With respect to
environmental, social and governance and climate reporting, the International Sustainability Standards Board has issued an IFRS
Sustainability Disclosure Standards with the aim to develop sustainability disclosure standards that are globally consistent,
comparable, and reliable. In addition, the Canadian Securities Administrators have issued a proposed National Instrument 51-107
Disclosure of Climate-related Matters. The cost to comply with these standards, and others that may be developed or evolve over time,
has not yet been quantified and it is possible that the long-term effects of these new regulations will affect the Company’s business,
results from operations, access to capital and financial condition.
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 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.
41
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2022
Income tax
Tax regulations and legislation are subject to change and there are differing interpretations requiring management judgment. Deferred
tax assets are recognized when it is considered probable that deductible temporary differences will be recovered in future periods.
Deferred tax liabilities are recognized when it is considered probable that temporary differences will be payable to tax authorities in
future periods. Income tax filings are subject to audits and re-assessments and changes in facts, circumstances, and interpretations of
the standards may result in a material increase or decrease in the Company's provision for income taxes.
Impairment (impairment recovery)
The impairment calculation is based on significant assumptions of proved plus probable oil and natural gas reserves, production rates,
benchmark commodity prices, future costs, discount rates and other relevant assumptions. By their nature, these significant
assumptions are subject to measurement uncertainty and the impact on the financial statements of future periods could be material.
3. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set out below have been applied consistently to all periods presented in the Financial Statements.
a) Basis of consolidation
The Financial Statements include the accounts of Pine Cliff and its subsidiary companies, Geomark Exploration Ltd. and Pine Cliff
Border Pipelines Limited. All subsidiary companies are wholly owned. All intercompany balances, transactions and earnings or losses
are eliminated upon consolidation.
b) Revenue recognition
Revenue associated with the sale of natural gas, crude oil 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, crude oil and NGLs coincides with legal 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.
Revenue from interest on cash on hand is recognized when earned.
c) Foreign currency transactions
Items included in the Financial Statements of each consolidated entity are measured using the currency of the primary economic
environment in which the entity operates (the "Functional Currency"). Foreign currency transactions are translated into the
Functional Currency using the exchange rates prevailing at the dates of the transaction. Foreign exchange gains and losses resulting
from the settlement of such transactions and from the translation of monetary assets and liabilities not denominated in the Functional
Currency of an entity are recognized in the statements of comprehensive income.
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.
42
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2022
f) Exploration and evaluation assets
E&E costs are initially capitalized with the intent to establish commercially viable reserves.
E&E includes undeveloped land license acquisitions, unbooked locations in acquisitions, exploration drilling and testing and directly
attributable general and administrative costs. Expenditures incurred prior to obtaining the legal right to explore are expensed as
incurred. E&E assets continue to be capitalized as long as sufficient progress is being made to assess the reserves and economic
viability of the well and/or related project. Once technical feasibility and commercial viability has been established, E&E assets are
transferred to PP&E. E&E assets are assessed for impairment either annually, upon transfer to PP&E or where indicators arise to
ensure they are not carried above their recoverable amounts.
g) Property, plant and equipment
PP&E include developed assets acquired, transferred-in E&E costs, development drilling, right-of-use assets 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, plant turnaround
costs, or major 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.
Subsequent costs incurred to the determination of technical feasibility and commercial viability are recognized as PP&E when they
increase the future economic benefits in the specific asset to which they relate. Such capitalized developed and producing petroleum
and natural gas interests generally represent costs incurred in developed proved and/or probable reserves and bringing in or
enhancing production from such reserves. The cost of day-to-day servicing petroleum and natural gas properties and equipment is
expensed as incurred.
Gains and losses on disposal of PP&E are determined as the difference between proceeds from disposal and the carrying amount of the
asset sold and are recognized as a gain or loss on disposal in the statements of comprehensive income.
h) Lease obligations
Lease obligations are initially measured at the present value of the lease payments 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. Plant turnarounds and major overhauls are
depreciated over their expected life. Other equipment is depreciated over estimated useful lives on a straight-line basis. Depletion and
depreciation is recognized in the consolidated statements of comprehensive income.
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.
43
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2022
The recoverable amount of an asset or a CGU is the greater of its fair value less cost to sell (“FVLCS”) and value-in-use. 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 considers 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 statements of comprehensive income. Impairment
recognized in respect of a CGU is allocated first to reduce the carrying amount of any goodwill allocated to the CGU.
Impairment recognized in prior periods are assessed at each reporting date for any indications that the impairment has decreased or
no longer exists. If the amount of the impairment decreases in a subsequent period and the decrease can be objectively related to an
event occurring after the impairment was recognized, the impairment is reversed only to the extent that the asset’s carrying amount
does not exceed the carrying amount that would have been determined, net of depletion and depreciation, if no impairment had been
recognized.
k)
Impairment of financial assets
Impairment of financial assets is determined by measuring the assets’ expected credit loss (“ECL”). The ECL pertaining to accounts
receivable is assessed at initial recognition and this provision is re-assessed at each reporting date. 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. Financial assets are tested for impairment on an individual basis. An impairment in respect of a
financial assets held at fair value through other comprehensive loss financial asset is calculated by reference to its current fair value.
Impairment is recognized in the consolidated statements of comprehensive income. 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 statements 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 is 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
statements of comprehensive income.
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 statements of comprehensive 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 decommissioning obligation.
n)
Income taxes
Income tax comprises current and deferred taxes. Income tax is recognized in the statements of comprehensive income except to the
extent that it relates to items recognized in other comprehensive loss or directly in equity, in which the related income tax expense or
recovery is also recognized directly into other comprehensive loss or elsewhere in shareholders’ equity.
Current tax expense is the expected cash tax payable on the taxable income for the year, using tax rates enacted, or substantively
enacted, at the end of the reporting period, and any adjustment to tax payable in respect of previous years.
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.
44
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2022
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 16, options to purchase common shares of Pine Cliff (“Common Shares”)
are granted to directors, officers and employees. 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 statements of
comprehensive income. Upon exercise of share purchase options, the proceeds received net of any transaction costs and the fair value
of the exercised share purchase options are credited to share capital.
The Company estimates future forfeitures for stock options and expenses stock options based on the Company’s estimate of stock
options expected to reach vesting. Any difference between the number of stock options expected to vest and the number of stock
options which actually vest is accounted for as a change in estimate when those stock options become vested or are forfeited before
vesting.
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 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 net earnings. FVOCI financial instruments including investments are measured
at fair value and changes in fair value are recognized in other comprehensive income/loss. 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 per share
Basic per share amounts are calculated by dividing the earnings 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 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 statements 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.
45
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2022
4. FUTURE ACCOUNTING PRONOUNCEMENTS
The following are future accounting pronouncements issued and not yet effective as at December 31, 2022. The Company intends to
adopt these standards as they become effective and does not expect a significant impact.
IAS 1 –Presentation of Financial Statements
Effective January 1, 2024, amendments to the classification of liabilities as non-current include the requirement that a right to defer
settlement must have substance and exist at the end of the reporting period.
IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors
Effective January 1, 2023, amendments to IAS 8 include additional clarification on the determination of changes in accounting policies
from changes in accounting estimates. The development of accounting estimates includes selecting a measurement technique and
choosing the inputs to be used when applying the chosen measurement technique.
IAS 12 – Income Taxes
Effective January 1, 2023, amendments to IAS 12 require entities to recognize deferred tax on transactions that, on initial recognition,
give rise to equal amounts of taxable and deductible temporary differences.
5. FINANCIAL INSTRUMENTS
Financial instruments and fair value measurement
Financial instruments of the Company consist of cash, trade and other receivables, investments, trade and other payables, due to
related party, 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, promissory
notes and term debt approximate their respective fair values due to their interest rates reflecting current market conditions.
Investments are measured at fair value based on quoted market prices.
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, 2022 and December 31, 2021:
($000s)
Description
Cash
Trade and other receivables
Investments
Trade and other payables
Due to related party
Promissory notes
Term debt
6. RISK MANAGEMENT
December 31, 2022
December 31, 2021
Carrying value
Fair value
Carrying value
Fair value
54,428
27,187
171
(29,640)
‐
‐
‐
54,428
27,187
171
(29,640)
‐
‐
‐
6,874
21,613
-
(39,585)
(6,000)
(6,000)
(29,903)
6,874
21,613
-
(39,585)
(6,000)
(6,000)
(29,903)
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.
46
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2022
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 natural gas, crude oil
and NGL 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 natural gas, crude oil or NGL prices
will result in a reduction of net production revenue. The economics of producing from some wells may change because of lower prices,
which will result in reduced production of natural gas, crude oil or NGL prices 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.
At December 31, 2022, the Company had the following physical natural gas sales contracts in place:
Contractual Term
April 1, 2023 to October 31, 2023
April 1, 2023 to October 31, 2023
January 1, 2023 to March 31, 2023
January 1, 2023 to October 31, 2023
Delivery
Point
AECO
Dawn3
Suffield4
TransGas5
1 Prices reported are the weighted average prices of the periods.
2 Price has been converted from $/GJ to $/Mcf by multiplying by 1.05.
3 Dawn Hub into Dawn Township, Ontario.
4 The contract terms of the physical fixed price natural gas sales contract to Suffield#2 delivery point (Suffield, Alberta).
5 Subsidiary of SaskEnergy, Saskatchewan.
Contract Price
($CAD/GJ)1
$3.94
$6.27
AECO 5A + 0.98/GJ
AECO 5A + 0.56/GJ
Physical Delivery
Quantity (GJ/day)
7,500
2,500
5,000
9,500
Contract Price
($CAD/Mcf)1,2
$4.14
$6.58
AECO 5A + 1.03/Mcf
AECO 5A + 0.59/Mcf
Contractual Term
January 1, 2023 to March 31, 2023
January 1, 2023 to March 31, 2023
April 1, 2023 to October 31, 2023
Delivery
Point
AECO
AECO
AECO
1 Prices reported are the weighted average prices of the periods.
2 Price has been converted from $/GJ to $/Mcf by multiplying by 1.05.
Physical Delivery
Quantity (GJ/day)
5,000
5,000
5,000
Contract Price
($CAD/GJ)1
$4.75 - $6.00
$6.00 - $11.60
$4.00 - $5.45
Contract Price
($CAD/Mcf)1,2
$4.99 - $6.30
$6.30 - $12.18
$4.20 - $5.72
Subsequent to December 31, 2022, the Company had the following additional physical natural gas sales contracts in place:
Contractual Term
April 1, 2023 to October 31, 2023
Type of Contract
AECO3
1 One Mcf of natural gas is approximately 1.02 Mmbtu.
2 Prices reported are the weighted average prices of the periods.
3 AECO basis differential.
Physical Delivery
Quantity (Mmbtu/day) 1
5,000
Contract Price
($USD/ Mmbtu)2,3
NYMEX Henry Hub less US$1.335/Mmbtu
Contractual Term
April 1, 2023 to October 31, 2023
April 1, 2023 to June 30, 2023
Delivery
Point
AECO
AECO
1 Prices reported are the weighted average prices of the periods.
2 Price has been converted from $/GJ to $/Mcf by multiplying by 1.05.
Physical Delivery
Quantity (GJ/day)
7,500
5,000
Contract Price
($CAD/GJ)1
$2.73
$2.54
Contract Price
($CAD/Mcf)1,2
$2.87
$2.67
47
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2022
At December 31, 2022, the Company had the following physical crude oil sales contract in place:
Contractual Term
January 1, 2023 to March 31, 2023
Crude Oil
WTI Fixed Price
1 Prices reported are the weighted average prices of the periods.
Physical Delivery Quantity
(Bbl/day)
250
Contract Price
($CAD/Bbl)1
$117.50
Subsequent to December 31, 2022, the Company had the following additional physical crude oil sales contracts in place:
Contractual Term
April 1, 2023 to June 30, 2023
Crude Oil
WTI Fixed Price
1 Prices reported are the weighted average prices of the periods.
Interest Rate Risk
Physical Delivery Quantity
(Bbl/day)
250
Contract Price
($CAD/Bbl)1
$108.30
The Company is principally exposed to interest rate risk to the extent it draws on variable rate debt. The Company currently has a
Demand Loan, as defined herein, with a Canadian chartered bank, of which no amount is drawn as at December 31, 2022. Borrowings
under the Demand Loan bears interest at the banks’ prime lending rate plus 2.5%. Pine Cliff has not entered into any derivative financial
instruments to manage this risk at this time.
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 reflect management’s assessment of the associated maximum exposure to such credit risk.
To mitigate the credit risk on its cash, the Company maintains its cash balances with a Canadian chartered bank. To mitigate the credit
risk on trade and other receivables, Pine Cliff assesses the financial strength of its counterparties through internal evaluation and
limiting exposure to any one counterparty.
The Company’s trade and other receivables balance at December 31, 2022 of $27.2 million (December 31, 2021 – $21.6 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, 2022, there was $0.4 million
(December 31, 2021 - $0.2 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, 2022, the Company recorded a bad
debt recovery of $0.4 million (December 31, 2021 - $nil) 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.
48
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2022
7. INVESTMENTS
At December 31, 2022, the Company had an investment in a public company of $0.2 million, which was received as partial consideration
of $0.3 million (see Note 8).
8. EXPLORATION AND EVALUATION
Cost:
Balance at December 31, 2020
Additions
Transfer to property, plant and equipment
Dispositions
Balance at December 31, 2021
Additions
Balance at December 31, 2022
Oil and gas
properties
5,507
51
(5,558)
-
-
-
-
Mineral
properties
3,224
52
-
(926)
2,350
63
2,413
Total
8,731
103
(5,558)
(926)
2,350
63
2,413
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. Once 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 two years.
The first payment of $0.40 million was received on February 17, 2021 (340,000 common shares of Nighthawk) and all these shares
were subsequently sold in 2021. The second payment of $0.35 million was received on February 17, 2022 (475,996 common shares
of Nighthawk). Nighthawk will not earn an interest in the property until all amounts have been paid. The present value of the remaining
payment has been recorded as a receivable from Nighthawk and payment of $0.35 million was received on February 17, 2023 (865,693
common shares of Nighthawk).
E&E Impairment Assessment
At December 31, 2022, the Company determined that no indicators of impairment existed for E&E assets.
9. PROPERTY, PLANT AND EQUIPMENT
Cost:
Balance at December 31, 2020
Additions
Right-of-use assets
Transfer from exploration and evaluation
Acquisitions
Dispositions
Decommissioning provision
Balance at December 31, 2021
Additions
Right-of-use assets
Acquisitions
Dispositions
Decommissioning provision
Balance at December 31, 2022
Accumulated depletion and depreciation:
Balance at December 31, 2020
Depletion and depreciation
Impairment reversal
Balance at December 31, 2021
Depletion and depreciation
Impairment reversal
Dispositions
Balance at December 31, 2022
Carrying value at:
December 31, 2021
December 31, 2022
49
PINE CLIFF ENERGY LTD.
($000s)
641,518
21,465
1,568
5,558
23,147
(320)
14,727
707,663
29,014
500
1,119
(7,046)
(35,295)
695,955
($000s)
(386,575)
(40,994)
13,979
(413,590)
(44,074)
4,500
7,254
(445,910)
($000s)
294,073
250,045
CONSOLIDATED FINANCIAL STATEMENTS
2022
PP&E Impairment Assessment
As at December 31, 2022, the Company had three cash generating units (“CGU’s”) being the Southern CGU, Central CGU and Edson
CGU. In accordance with IFRS, an impairment test is performed if the Company identifies indicators of impairment at the end of a
reporting period. At December 31, 2022, there were no indicators of impairment or additional impairment reversals for PP&E assets
and therefore an impairment test was not required.
At June 30, 2022, the Company identified indicators of an impairment reversal in the Edson CGU due to increased forward commodity
prices since the latest impairment reversal recognized at December 31, 2021. As a result, recovery testing was performed by preparing
estimates of future funds flows to determine the recoverable amount of the respective assets.
The Company determined that the recoverable amounts of the Company’s Edson CGU exceeded its carrying value. A total impairment
recovery of $4.5 million was recognized in the Company’s PP&E.
Impairment can be reversed for PP&E up to the lower of the recoverable amount and the original carrying value less any associated
depletion and depreciation that would have been incurred had the impairment not occurred.
The following table outlines the forecasted benchmark commodity prices and exchange rates used in the reversal of impairment
calculation of PP&E at June 30, 2022:
Year
2022
2023
2024
2025
2026
2027
2028-2036
Thereafter
WTI Oil (US$/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 July 1, 2022 (McDaniel & Associates Consultants Ltd., GLJ Petroleum
Consultants Ltd. and Sproule Associates Limited).
The recoverable amounts of each of the Company’s CGU’s at June 30, 2022 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 reserves
evaluator at June 30, 2022. 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 June 30, 2022 impairment test which considered 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 June 30, 2022. 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’s were reversed as at December 31:
CGU
Edson
CBM
Total impairment reversal
Asset Exchange
2022
(4,500)
‐
(4,500)
2021
(12,000)
(1,979)
(13,979)
On December 1, 2022, the Company closed an asset exchange agreement for non-core assets in Central Alberta, resulting in a gain of
$2.5 million.
50
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2022
10. LEASE LIABILITIES
Pine Cliff had the following future commitments associated with its lease liabilities:
($000s)
2023
2024
2025
2026
2027
Thereafter
Total lease payments as at December 31
Amounts representing interest
Present value of lease payments
Current portion of lease obligations
Non‐current portion of lease obligations
2022
1,154
1,017
847
585
‐
‐
3,603
(305)
3,298
(1,002)
2,296
As at December 31,
2021
1,050
1,027
856
703
473
-
4,109
(441)
3,668
(1,050)
2,618
For the year ended December 31, 2022, interest expense of $0.2 million (December 31, 2021 - $0.2 million) and a total cash outflow of
$1.2 million (December 31, 2021 - $1.1 million) was recognized relating to lease obligations.
The right-of-use assets and lease obligation relates to the Company's vehicle and head office lease in Calgary. A right-of-use asset of
$7.2 million and $4.0 million in depreciation on the right-of-use-assets are included in PP&E. Refer to Note 9.
11. DEFERRED INCOME TAXES
The Company has recorded a deferred tax asset of $37.0 million (December 31, 2021 - $50.6 million) related to the benefit of tax pools,
as it is probable that they will be recovered.
Deferred income tax assets:
Share issue costs
Investment
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
2022
19
21
48,963
(8,254)
775
475
4,741
46,740
(9,698)
37,042
As at December 31,
2021
11
-
58,371
(15,384)
862
475
31,959
76,294
(25,653)
50,641
Pine Cliff has approximately $240.7 million in tax pools as at December 31, 2022 (December 31, 2021 - $370.8 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
$20.8 million (December 31, 2021 - $136.4 million) that expire between the years 2035 and 2040.
Category of tax pool ($000s)
Undepreciated capital costs
Canadian oil and gas property expenditures
Canadian development expenditures
Canadian exploration expenditures
Share issue costs
Non-capital losses carried forward1
Capital losses carried forward2
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.
Rate of Utilization (%)
7 - 55
10
30
100
20
100
2022
27,285
166,196
20,683
156
82
20,759
5,523
240,684
51
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2022
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 before income taxes
Corporate income tax rate
Computed income tax expense
Non-deductible compensation expense
Changes in the unrecorded benefit of tax pools
Return to provision true-up
Deferred income tax expense (recovery)
12. DUE TO RELATED PARTY
2022
122,559
23.5%
28,807
600
(15,955)
168
13,620
Years ended December 31,
2021
30,780
23.5%
7,235
271
(61,365)
3,218
(50,641)
Pine Cliff had a $6.0 million promissory note to the Company’s Chairman of the Board bearing interest at 6.5% per annum, payable
monthly. On June 30, 2022, Pine Cliff repaid in full the $6.0 million promissory note. Interest paid on this promissory note for the year
ended December 31, 2022 was $0.2 million (December 31, 2021 - $0.4 million).
Borrowing Facility
The Company had a $4.0 million borrowing facility (the “Facility”) with the Company’s Chairman of the Board (the “Lender”), whereby
the Lender provided up to $4.0 million of borrowings at an interest rate of 6.5% per annum, payable monthly. The Facility was cancelled
effective December 1, 2022. There was no amount drawn on the Facility at any time during the year ended December 31, 2022
(December 31, 2021 - $nil). Interest paid on the Facility for the year ended December 31, 2022, was $nil (December 31, 2021 - $nil).
13. PROMISSORY NOTES
Pine Cliff had issued $6.0 million promissory notes to a shareholder, owning at the time, directly or by discretion, greater than 10% of
the Common Shares. Those promissory notes bore interest at 6.5% per annum, payable monthly. On June 30, 2022, Pine Cliff repaid in
full the $6.0 million promissory notes.
14. TERM DEBT
Term debt – beginning of year
Repayment on term debt
Accretion expense
Term debt - end of year
2022
29,903
(30,000)
97
‐
As at December 31,
2021
48,747
(19,000)
156
29,903
The non-revolving credit facility (“Term Debt”) with Alberta Investment Management Corporation (“AIMCO”), acting on behalf of its
clients, consisted of a first tranche with a principal amount of $30.0 million that was due to mature on December 31, 2024 (the "2024
Tranche") and a second tranche with a principal amount of $19.0 million that was due to mature on July 31, 2022 (the "2022
Tranche"). Interest on the 2024 Tranche was payable at a rate of 10.75% per annum until September 30, 2022 and thereafter such
interest rate would 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 was able to 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 remaining 2022 Tranche. During the first six months of
2022, the Company repaid in full the 2024 Tranche, resulting in an interest penalty of $0.7 million. The security for the Term Debt
consisting of floating demand debentures totaling $150.0 million and a general security agreement with first ranking over all current
and acquired properties, was fully discharged.
Demand Loan Facility
The Company has a demand operating loan (the “Demand Loan”) of $8.0 million with a Canadian chartered bank, of which no amount
was drawn at December 31, 2022 (December 31, 2021 - $nil). Borrowings bear interest at the bank’s prime lending rate plus 2.0%.
Letters of credit issued under the Demand Loan are supported by a performance guarantee from Export Development Canada for an
amount up to $2.60 million and incur an issuance fee ranging from 3.12% to 3.62%. At December 31, 2022, the Company had issued
$1.68 million in letters of credit (December 31, 2021 - $2.50 million).
The Demand Loan is secured by a general security agreement over certain tangible field facilities of the Company.
52
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2022
15. DECOMMISSIONING PROVISION
The total current and long-term decommissioning provision of $208.4 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, 2022, the estimated total undiscounted and uninflated amount required to settle the decommissioning liabilities was
$277.3 million (December 31, 2021 - $263.2 million). The discounted and inflated amount required to settle the decommissioning
liabilities of $208.4 million has been calculated assuming a 2.00% inflation rate (December 31, 2021 – 2.00%) and discounted using
an average risk-free interest rate of 3.33% (December 31, 2021 – 2.30%). These obligations are currently expected to be settled based
on the useful lives of the underlying assets, some of which extend beyond 50 years into the future.
Decommissioning provision, January 1, 2021
Increase in liabilities relating to development activities
Provisions related to acquisitions
Site decommissioning grants
Decommissioning expenditures
Revisions (changes in estimates and discount rates)
Accretion
Decommissioning provision, December 31, 2021
Increase in liabilities relating to development activities
Provisions related to acquisitions
Provisions related to dispositions
Site decommissioning grants
Decommissioning expenditures
Revisions (changes in estimates and discount rates)
Accretion
Decommissioning provision, December 31, 2022
Less current portion of decommissioning provision
Non‐current portion of decommissioning provision
16. SHARE CAPITAL
Authorized
($000s)
235,005
322
25,728
(5,047)
(1,633)
(11,325)
5,373
248,423
113
2,835
(7,965)
(5,142)
(5,757)
(30,278)
6,158
208,387
(6,900)
201,487
The Company is authorized to issue an unlimited number of Common Shares without nominal or par value. Common Shares carry one
vote per share and the right to any dividends declared. 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, 2021
Exercise of stock options
Balance, December 31, 2021
Exercise of stock options
Balance, December 31, 2022
Stock Options
Common Shares
(000s)
335,284
4,255
339,539
11,370
350,909
Share capital
($000s)
274,964
802
275,766
1,884
277,650
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.
53
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2022
Stock options issued and outstanding:
Outstanding, January 1, 2021
Granted
Exercised
Expired
Forfeited
Outstanding, December 31, 2021
Granted
Exercised
Expired
Forfeited
Outstanding, December 31, 2022
Exercisable, December 31, 2022
Options
(000s)
25,562
11,387
(6,457)
(3,143)
(2,079)
25,270
7,162
(12,896)
(291)
(921)
18,324
2,145
Exercise price:
$0.10 - $0.15
$0.16 - $0.33
$0.34 - $0.99
$1.00 - $1.92
Stock options
outstanding
(000s)
3,568
7,752
195
6,809
18,324
Weighted-average
remaining term
(years)
1.2
1.7
1.8
2.4
1.9
Stock options
exercisable
(000s)
1,254
826
65
-
2,145
Weighted-average
exercise price
($ per Common
Share)
0.22
0.34
0.19
0.50
0.22
0.25
1.89
0.23
0.52
0.81
0.87
0.22
Weighted-average
remaining term
(years)
0.7
0.4
0.8
-
0.6
The Company records share-based payment expense over the vesting period, based on the fair value of the options granted to
employees, directors and consultants. Typically, one third of the stock options granted vest annually on the first, second, and third
anniversaries of the grant date and expire one year after each respective vesting date. During the year ended December 31, 2022, the
Company granted 7,161,600 stock options (December 31, 2021 – 11,386,600) with a fair value of $0.73 (December 31, 2021 - $0.16)
per option using the Black-Scholes option pricing model using the following key assumptions:
Assumptions (weighted average):
Exercise price ($)
Estimated volatility of underlying Common Shares (%)
Expected life (years)
Risk-free rate (%)
Forfeiture rate (%)
Expected dividend yield (%)
Years ended December 31,
2021
2022
0.34
1.89
78.4
73.2
3.0
3.0
0.5
2.7
3.9
7.7
-
5.1
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.
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 were outstanding.
Net earnings per share calculation ($000s):
Numerator
Net earnings for the year
Denominator (000s)
Weighted-average Common Shares outstanding –
basic
Dilutive effect of options outstanding
Weighted-average Common Shares outstanding –
diluted
Net earnings per Common Share – basic ($)
Net earnings per Common Share – diluted ($)
54
PINE CLIFF ENERGY LTD.
Years ended December 31,
2021
2022
108,939
81,421
346,443
13,590
360,033
0.31
0.30
337,254
11,031
348,285
0.24
0.23
CONSOLIDATED FINANCIAL STATEMENTS
2022
Dividends declared and paid for the year ended December 31, 2022 were $23.6 million (December 31, 2021 - $nil) or $0.07 per
Common Share ($nil per Common Share for the year ended December 31, 2021).
17. COMMODITY SALES
The Company’s commodity sales revenue is determined pursuant to the terms of the marketing agreements. The revenue for natural
gas, crude oil and NGLs 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
18. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in non-cash working capital:
Trade and other receivables1
Prepaid expenses and deposits
Trade and other payables and accrued liabilities
Change related to:
Operating activities
Investing activities
1 Changes in non-cash working capital excludes the receivable amount referred to in note 8.
Finance expenses:
Interest expense and bank charges
Non cash:
Accretion on decommissioning provision
Accretion on promissory notes and term debt
Total finance expenses
Years ended December 31,
2022
217,772
38,549
49,887
306,208
2021
130,546
22,198
11,241
163,985
Years ended December 31,
2021
2022
(5,574)
(321)
(9,945)
(15,840)
(6,997)
(9,190)
(16,187)
(6,055)
(962)
12,310
5,293
(7,990)
13,283
5,293
Years ended December 31,
2021
4,876
2022
2,407
6,157
97
8,661
5,373
105
10,405
Cash interest paid in the year ended December 31, 2022, was $3.6 million (December 31, 2021 - $5.1 million).
19. 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
Years ended December 31,
2021
6,433
2,414
(3,040)
5,807
2022
7,424
2,759
(3,364)
6,819
55
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2022
20. KEY MANAGEMENT RENUMERATION
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 short-term cash
benefits and its 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,
2021
1,939
895
2,834
2022
2,587
1,007
3,594
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 16 and include the fair value of awards expensed in the year.
21. COMMITMENTS
As at December 31, 2022, the Company has the following commitments and other contractual obligations:
($000s)
Trade and other payables
Lease obligations1
Transportation2
Total commitments and contingencies
1 See Note 10.
2 Firm transportation agreements.
22. CAPITAL STRUCTURE
2023
2024
2025
2026
2027
Thereafter
29,640
1,154
9,039
39,833
-
1,017
6,969
7,986
-
847
6,423
7,270
-
585
5,619
6,204
-
-
4,328
4,328
-
-
-
‐
The Company’s objectives when managing capital, which the Company defines to include shareholders’ equity and positive net
cash/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 positive net cash/net debt as follows:
($000s)
Cash
Trade and other receivables
Prepaid expenses and deposits
Investments
Less:
Trade and other payables
Term debt1
Due to related party
Promissory notes
Positive net cash (net debt)
Equity
December 31, 2022
December 31, 2021
54,428
27,187
3,767
171
(29,640)
‐
‐
‐
55,913
133,728
6,874
21,613
3,446
-
(39,585)
(30,000)
(6,000)
(6,000)
(49,652)
45,418
1 The term debt for positive net cash/net debt is presented at the principal amount with $30.0 million repaid in 2022.
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
56
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2022
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 positive net cash (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 fund future growth through capital investment, to pay dividends and where necessary repay debt. Positive net cash
(net debt)-to-adjusted funds flow is computed as follows:
Positive net cash (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
Positive net cash (net debt)
2022
150,452
6,997
5,757
163,206
55,913
As at December 31,
2021
49,483
7,990
1,633
59,106
(49,652)
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.
23. SUBSEQUENT EVENTS
Dividends
On January 31, 2023 and February 28, 2023, the Company paid a monthly dividend of $0.01083 per Common Share.
On March 2, 2023, the Company declared a monthly dividend of $0.01083 per Common Share. The dividend is payable March 31, 2023,
to all shareholders of record on March 15, 2023.
57
PINE CLIFF ENERGY LTD.
CORPORATE INFORMATION
2022
REGISTRAR AND TRANSFER AGENT
Odyssey Trust Company of Canada
AUDITORS
Deloitte LLP
STOCK EXCHANGE LISTING
TSX Exchange
Trading Symbol: PNE
WEBSITE
www.pinecliffenergy.com
INVESTOR CONTACT
info@pinecliffenergy.com
BOARD OF DIRECTORS
George F. Fink - Chairman
Philip B. Hodge
Robert B. Fryk
Calvin B. Jacober
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
HEAD OFFICE
850, 1015 – 4th Street SW
Calgary, Alberta T2R 1J4
Phone: (403) 269-2289
Fax: (403) 265-7488
58
PINE CLIFF ENERGY LTD.