TSX: PNE
WWW.PINECLIFFENERGY.COM
Long-term Value Focus
Annual Report 2023
MESSAGE TO SHAREHOLDERS
2023
I hope everyone is doing well. Pine Cliff has been busy integrating our acquisition of Certus Oil and Gas, which closed on
December 13th. We are pleased to report that the performance of these assets thus far has exceeded our expectations.
Concurrently, we are managing the challenges posed by the unusually mild winter weather and its impact on the North
American natural gas market, where prices have been halved in recent months. Key highlights from our fourth quarter and
the entirety of 2023 include:
TSX: PNE
WWW.PINECLIFFENERGY.COM
•
1
,
•
•
•
•
the highest yearly exit production rate in
exited Q4 and the 2023 year with production at ~26,000 Boe/d
12 year history;
generated $9.7 million ($0.03 per basic and fully diluted share) and $58.7 million ($0.17 per basic and $0.16 per fully
2
for the three months and year-ended December 31, 2023, compared to $40.2
diluted share) of adjusted funds flow
million ($0.11 per basic and fully diluted share) and $163.2 million ($0.47 per basic and $0.45 per fully diluted share)
for the comparable periods in 2022;
net present value for proved plus probable reserves of $476.8 million, discounted at 10%, an increase of $67 million
or 16.3%, from December 31, 2022, primarily as a result of the Certus acquisition;
paid dividends of $11.6 million ($0.03 per basic and fully diluted share) and $46.0 million ($0.13 per basic and fully
diluted share) during the three and 12 months ended December 31, 2023, compared to $10.8 million ($0.03 per basic
and diluted share) and $23.6 million ($0.07 per basic and diluted share) for the comparable periods in 2022; and
3
production averaged 21,454 Boe/d
higher and 2% lower respectively than the comparable periods in 2022.
for the three and the year ended December 31, 2023, 2%
and 20,660 Boe/d
Pine Cliff’s
3
Dividend Adjustment
Pine Cliff has been consistent with our messaging to shareholders about our dividend sustainability. We promised to defend
it strongly while emphasizing we would not use debt to maintain it, nor would we keep it at its current level if we thought that
doing so could impair the underlying value of Pine Cliff. We have worked too hard, for too many years, to weaken the Company
right before we enter an expected prosperous period for Pine Cliff and our industry. We believe this conservative fiscal
strategy will continue to be the foundation of our future success and growth, as it has been in the past.
The precipitous fall in natural gas spot prices over the past five months has dampened our 2024 cash flow projections to the
point where maintaining our dividend at its current level will result in Pine Cliff paying dividends using debt and not free cash
flow. This scenario is not sustainable. Although we are optimistic that external factors and reduced drilling activity may
support higher natural gas prices later this year, hope is not a strategy. Therefore, starting in March, we are reducing our
regular monthly to $0.005 per share or $0.06 per share on an annualized basis. We are confident that with this reduction,
combined with our physical hedge contracts in place and a limited capital expenditure budget for 2024, the dividend payout
ratio will not exceed 100% of Pine Cliff’s estimated 2024 adjusted funds flow.
We have increased our dividend twice since its inception in June 2022, however I have always considered the Pine Cliff
dividend to be a variable dividend. Of course, my preference would be that the dividend would continue to rise and never
drop, but I know that if you maintain a high payout ratio like we have done to return maximum cash to our shareholders, there
is a risk the dividend may have to be reduced in a low commodity price environment. I do believe that with low decline assets
in your portfolio, it is possible to continue to manage a dividend in an oil and gas business. It requires a strong focus on
operating costs and a team that will continue to opportunistically add production through the drill bit or through acquisitions,
as appropriate. It requires disciplined capital allocation decision makers who share the goal of making their company more
valuable in the future. Pine Cliff has these skills and capabilities, and because management are PNE shareholders, our
motivations are aligned with our other owners. We will continue to make difficult capital allocation decisions to protect the
integrity of the business and improve shareholder value.
2024 CAPEX and Production Guidance
3
on developmental capital of
Pine Cliff successfully exceeded our 2023 annual production guidance, averaging 20,660 Boe/d
3
$12.6 million. In 2024, we are anticipating spending approximately $7 million of developmental capital, and we expect that
level of spending to result in average annual production of between 24,000 and 25,000 Boe/d
, with approximately 79% of
that production being natural gas. The reason our 2024 CAPEX is 40% lower than our 2023 CAPEX, even though Pine Cliff
MESSAGE TO SHAREHOLDERS
2023
production is 30% higher this year, is that we do not believe 2024 is a time to be drilling natural gas wells. We will save our
Hedging And Market Diversification Strategy
locations for better commodity prices.
TSX: PNE
WWW.PINECLIFFENERGY.COM
In the early years of Pine Cliff, we did not use hedging in our marketing strategy. Our production was over 90% natural gas
and we were fully exposed to the volatility of the commodity. Over the past few years, we have increased our use of physical
hedges as we transitioned to a dividend paying company. We anticipate another volatile year for commodity prices in 2024,
and to reduce this risk, we proactively increased our 2024 hedge exposure from previous years to approximately 22% of our
natural gas production at an average price of $3.19 Mcf and 33% of our crude oil production at an average price of $99.48 Bbl.
We will continue to selectively utilize hedging in the coming years to support our business and our dividend.
In addition to using physical hedges, our marketing group works closely with our operations team to determine the best
strategies to utilize our three pipelines that take natural gas production out of the Province of Alberta. Their work has resulted
in realized natural gas pricing 14% higher than the AECO 5A benchmark in the 12 months ended December 31, 2023. Our
preference is to use flexible and shorter-term solutions to optimize pricing rather than entering long-term pipeline
commitments to other markets. We believe that the attractiveness of the AECO marketing hub in Alberta will rise in the coming
CFO Transition
years and we want to ensure we retain maximum flexibility to take advantage of that trend.
Pine Cliff’s Chief Financial Officer, Alan MacDonald, will be retiring from his position. I am happy to announce that Kris Zack,
who joined Pine Cliff last September as Vice-President Finance, has been appointed Pine Cliff’s Chief Financial Officer effective
May 1, 2024. Kris has over two decades of capital market and auditing experience and has been invaluable to Pine Cliff through
the Certus integration.
On a personal note, Alan has been a pleasure to work with. His calm demeanour and sage advice have helped us navigate some
choppy waters during his tenure. Pine Cliff and its shareholders are forever indebted to his significant contributions in making
Webcast
our company into what it is today. Thanks Alan.
at 10:00 AM MST (12:00 Noon EST) on March
There was a lot of information in this quarter, so we are going to give our shareholders another way to receive this information
5th
and ask management some questions. We will be conducting
Outlook
or through the links provided on the Company’s website.
. Participants can access the live webcast via this
a live webcast
Link
The short-term attention on weather and natural gas storage has overshadowed an exciting time in our industry with new oil
and gas pipelines being completed to the West Coast in Western Canada. AECO forward strip natural gas prices in Western
Canada are over $3 Mcf in 2025 and LNG exports are expected to more than double in North America in the next four years.
We believe that Pine Cliff is a unique investment option in this environment with our dividend, strong balance sheet, low
production decline rate and significant leverage to Western Canada natural gas prices. Our job at Pine Cliff is to continue to
deliver to our investors the same discipline of capital allocation and business judgment we have demonstrated over the past
12 years to increase shareholder value and build a stronger company. Thank you for your confidence in our team and for
trusting in our process.
Yours truly,
Phil Hodge
President and Chief Executive Officer
March 4, 2024
1Comprised of 123,150 Mcf/d natural gas, 2,950 Bbl/d NGLs and 2,525 Bbl/d light and medium oil.
2Please 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, 2023, which can be found on www.sedarplus.com and is subject to the same
cautionary statements as set out therein.
3Refer to the March 4, 2024 Press Release for commodity split by product.
Reserves Information
RESERVES INFORMATION
2023
McDaniel
Pine Cliff
Company
” or the “
”) was engaged to prepare evaluations of the reserves of Pine Cliff Energy
McDaniel & Associates Consultants Limited (“
”) at December 31, 2023. The evaluations of petroleum and natural gas reserves were conducted
Ltd. (“
in accordance with National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities (“
”) with the effective
date of December 31, 2023. 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.
NI 51-101
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 2023 year include:
P+P
") reserves of $476.8 million, discounted at 10%, an increase of $65.3
Net present value for proved plus probable ("
million, or 16%, from December 31, 2022, primarily as a result of the Acquisition, as defined herein, offsetting the impact
of lower natural gas benchmark pricing;
Pine Cliff increased its 2023 P+P reserves by 29.0 MMBoe prior to adjusting for 2023 production, a reserve replacement
ratio of 325% of 2024 estimated production5 as a result of the 31.5 MMBoe added from the Acquisition;
Remaining P+P reserves of 89.2 MMboe (71% conventional natural gas and coal bed methane) at December 31, 2023
increased 31% from 67.6 MMboe at December 31, 2022 largely as a result of the Acquisition; and
Approximately 70% of total reserve volumes are classified as total proved reserves, 30% 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 $2.20 and
$3.37 per MMBtu for AECO natural gas and US$73.67 and US$74.98 per Bbl for WTI oil in 2024 and 2025 respectively.
Summary of Remaining Working Interest Reserves, as of December 31, 2023
Reserve Category
Proved
Oil1,2
Natural Gas
Liquids
Conventional
Natural Gas
Coal Bed
Methane
Oil
Equivalent
MBbl
MBbl
MMcf
MMcf
MBoe
Developed Producing
Developed Non-Producing
Total Proved
Undeveloped
3,210.0
218.8
4,372.9
944.0
6,283.0
90.2
9,177.4
2,804.2
204,978.9
1,956.6
226,994.9
20,059.4
22,133.9
-
22,133.9
-
47,345.1
635.1
55,071.8
7,091.4
Total Proved plus Probable
Probable
6,773.5
2,400.6
14,629.1
5,451.7
314,294.7
87,299.8
28,802.0
6,668.1
78,585.4
23,513.6
1
Amounts may not add due to rounding.
2
Oil includes light and medium and heavy oil. Light and medium oil represents 100 per cent of total proved and P+P reserves.
3
PINE CLIFF ENERGY LTD.
Summary of Net Present Values of Future Net Revenue, Before Income Taxes, as of December 31, 2023
RESERVES INFORMATION
2023
($ millions)
Reserve Category1
Proved
Discounted at (% per year)
0%
5%
10%
15%
20%
Developed Producing
Developed Non-Producing
Total Proved
Undeveloped
51.1
21.1
214.4
142.2
199.9
12.8
300.4
87.7
213.7
8.7
279.7
57.3
198.1
6.3
243.5
39.0
178.1
4.9
210.3
27.3
Total Proved plus Probable
Probable
699.0
484.6
593.2
292.9
476.8
197.2
385.9
142.4
318.2
107.9
1
Reconciliation of Gross Reserves by Principal Product Type, as of December 31, 2023
Amounts may not add due to rounding.
Reserve Reconciliation Company Gross1
Oil2
Natural Gas Liquids
Natual Gas3
Oil Equivalent
Total Proved
December 31, 2022
Extension
Technical Revisions
Acquisitions
Economic Factors
December 31, 2023
Production
Total Proved plus Probable
December 31, 2022
Extension
Technical Revisions
Acquisitions
Economic Factors
December 31, 2023
Production
MBbl
MBbl
MMcf
MBoe
3,099.3
91.6
(23.9)
2,439.6
3.3
5,152.0
(458.0)
4,882.9
374.6
(61.9)
3,387.8
9.3
8,134.7
(458.0)
3,663.1
23.2
193.1
7,987.3
(195.6)
11,126.2
(544.8)
4,834.2
91.3
211.4
13,461.3
(251.1)
17,802.3
(544.8)
270,514.8
751.1
(5,933.4)
53,881.2
(5,680.5)
274,303.8
(39,229.4)
347,587.80
3,035.40
(8,783.80)
87,872.50
(11,164.10)
379,318.3
(39,229.40)
51,848.3
240.0
(819.8)
19,407.1
(1,139.1)
61,995.5
(7,541.0)
67,648.4
971.8
(1,314.4)
31,494.5
(2,102.5)
89,156.7
(7,541.0)
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 P+P reserves.
3
Natural gas includes conventional natural gas and coal bed methane. Conventional natural gas represents 90 per cent total proved and P+P reserves.
4
PINE CLIFF ENERGY LTD.
Commodity Prices
RESERVES INFORMATION
2023
The Commodity prices used in the above calculations of reserves are as follows:
Year
2024
2025
2026
2027
2028
2029
2030-2037
Thereafter
1
WTI Oil (US$/Bbl)
1
$C to US$ Foreign
1
exchange rate
Edmonton Light Crude Oil
1
AECO Gas
1
(Cdn$/Bbl)
(Cdn$/MMBtu)
73.67
74.98
76.14
77.66
79.22
80.80
88.42
+2.0%/yr
1.33
1.33
1.32
1.32
1.32
1.32
1.32
1.32
92.91
95.04
96.07
97.99
99.95
101.94
111.56
+2.0%/yr
2.20
3.37
4.05
4.13
4.21
4.30
4.70
+2.0%/yr
Source: Average of three consultant price forecasts, effective January 1, 2024 (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, 2023, which can be found on www.sedarplus.com and is subject to the same cautionary statements as set out therein.
5
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
MD&A
2023
Pine Cliff
Company
IFRS
” or the “
”) is a review of the operations and current financial position of Pine Cliff Energy
This Management’s Discussion and Analysis (“
”) for the year ended December 31, 2023. This MD&A is dated and based on information available
Ltd. (“
Financial Statements
as at March 4, 2024 and should be read in conjunction with the audited consolidated financial statements for the year ended
December 31, 2023 and 2022 (“
”). The Financial Statements have been prepared in accordance with
”) issued by the International Accounting Standards Board. Additional information
International Accounting Standards (“
”), may be found on www.sedarplus.ca and by
relating to the Company, including the Company’s annual information form (“
visiting Pine Cliff’s website at http://www.pinecliffenergy.com.
Common
Shares
Pine Cliff is a dividend-paying company headquartered in Calgary, Alberta, Canada. Common shares of the Company (“
READER ADVISORIES
”) are listed for trading on the Toronto Stock Exchange (“
”) under the symbol “
PNE
TSX
AIF
”.
NON-GAAP MEASURES
FORWARD LOOKING INFORMATION
This MD&A contains financial measures that are not defined under IFRS and forward-looking statements. Please refer to the sections
titled “
Other Measurements
” and “
”.
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.
GLOSSARY
Please refer to the section titled “
Mcfe
NGLs
” for measurements and abbreviations that may be used in the MD&A.
Bbl
Mcf
”) and oil volumes are recorded in barrels of oil (“
”) and are converted to a thousand cubic feet
Natural gas liquids (“
”) using a ratio of one (1) Bbl to six (6) thousand cubic feet. Natural gas volumes recorded in thousand cubic feet
equivalent (“
(“
”) using the ratio of six (6) thousand cubic feet to one (1) Bbl. This conversion
ratio is based on energy equivalence primarily at the burner tip and does not represent a value equivalency at the wellhead. The
terms Boe or Mcfe may be misleading, particularly if used in isolation.
2023 AND FOURTH QUARTER 2023 RESULTS
”) are converted to barrels of oil equivalent (“
Boe
Results from 2023 are as follows:
•
•
•
•
•
•
Generated $9.7 million ($0.03 per basic and fully diluted per share) and $58.7 million ($0.17 per basic and $0.16 per fully
diluted share) of adjusted funds flow for the three months and year ended December 31, 2023, compared to $40.2 million
($0.11 per basic and fully diluted share) and $163.2 million ($0.47 per basic and $0.45 per fully diluted share) for
comparable periods in 2022;
Generated net income of $0.8 million ($0.00 per basic and fully diluted share) and $9.1 million ($0.03 per basic and fully
diluted share) for the three months and year ended December 31, 2023, compared to $24.7 million ($0.07 per basic and
fully diluted share) and $108.9 million ($0.31 per basic and $0.30 per fully diluted share) for the comparable periods in
2022;
Production averaged 21,454 Boe/d and 20,660 Boe/d during the three months and year-ended December 31, 2023,
representing a 2% increase and 2% decrease from the comparable periods in 2022;
Paid dividends of $11.6 million ($0.03 per basic and fully diluted share) and $46.0 million ($0.13 per basic and fully diluted
share) for the three months and year ended December 31, 2023, compared to $10.8 million ($0.03 per basic and fully diluted
share) and $23.6 million ($0.07 per basic and fully diluted share) in the comparable periods in 2022;
Completed the acquisition of Certus Oil & Gas (“
2023, expanding Pine Cliff’s operations in Central Alberta and providing a new core area; and
Entered into a three-year secured term debt facility in the amount of $56.3 million to fund a portion of the Acquisition.
”) for total consideration of $108.9 million on December 13,
Acquisition
6
PINE CLIFF ENERGY LTD.
SELECTED ANNUAL FINANCIAL INFORMATION
MANAGEMENT DISCUSSION AND ANALYSIS
2023
FINANCIAL1
($000s, unless otherwise indicated)
Commodity sales (before royalties)
Commodity sales (net of royalties)
Cash provided by operating activities
Adjusted funds flow2
Per share – Basic ($/share)
Net income
Per share – Diluted ($/share)
Per share – Basic ($/share)
Total assets
Per share – Diluted ($/share)
Total liabilities
Capital expenditures
Acquisitions
Dispositions
Dividends
Per share – Basic ($/share)
Positive net cash (net debt)2
Per share – Diluted ($/share)
Total non-current financial liabilities
3
Weighted average common shares outstanding (000s) - Basic
OPERATIONS
Weighted average common shares outstanding (000s) - Diluted
Production
Natural gas (Mcf/d)
NGLs (Bbl/d)
Total (Boe/d)
Crude oil (Bbl/d)
Total (Mcfe/d)
Realized commodity sales prices
Natural gas ($/Mcf)
NGLs ($/Boe)
Total ($/Boe)
Crude oil ($/Bbl)
Netback ($/Boe)
2
Operating netback
2
Netback ($/Mcfe)
Corporate netback
2023
188,852
168,889
66,627
58,687
0.17
0.16
9,121
0.03
0.03
477,072
377,144
20,966
109,326
(379)
46,015
0.13
0.13
(71,679)
48,578
354,057
359,375
107,471
1,493
1,255
20,660
123,960
2.99
53.51
92.29
25.04
8.57
7.77
1.43
1.30
Year ended December 31,
2022
2021
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
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
2
Operating netback
2
Corporate netback
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 Loan, as defined herein, Demand Loan, as defined herein, term debt, due to related party and promissory notes.
3.55
3.74
1.73
1.46
7
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2023
2023
Three months ended December 31,
2022
2023
Year ended December 31,
2022
($000s, unless otherwise indicated)
FINANCIAL
Commodity sales (before royalty expense)
Cash provided by operating activities
Adjusted funds flow1
Per share – Basic ($/share)
Net income
1
Per share – Diluted ($/share)
1
Per share – Basic ($/share)
Capital expenditures
Per share – Diluted ($/share)
Acquisitions
Dividends
Per share – Basic ($/share)
Positive net cash (net debt)1
Per share – Diluted ($/share)
Weighted-average common shares outstanding (000s)
Basic
Diluted
OPERATIONS
Production
Natural gas (Mcf/d)
NGLs (Bbl/d)
Crude oil (Bbl/d)
Realized commodity sales prices
Total (Boe/d)
Natural gas ($/Mcf)
NGLs ($/Boe)
Crude oil ($/Bbl)
Netback ($/Boe)
Combined ($/Boe)
Commodity sales
Processing and gathering
Royalty expense
Transportation expenses
Operating expenses
Operating netback ($/Boe)
General and administrative expenses
Interest and bank charges
Interest income
Corporate netback ($/Boe)
1
1
45,465
16,559
9,700
0.03
0.03
841
0.00
0.00
3,616
109,014
11,567
0.03
0.03
(71,679)
355,969
359,262
110,499
1,690
1,347
21,454
2.59
48.51
93.15
23.03
23.03
0.75
(2.63)
(1.45)
(13.66)
6.04
(1.03)
(0.26)
0.16
4.91
1.01
0.82
188,852
66,627
58,687
0.17
0.16
9,121
0.03
0.03
20,966
109,326
46,015
0.13
0.13
(71,679)
354,057
359,375
107,471
1,493
1,255
20,660
2.99
53.51
92.29
25.04
25.04
0.68
(2.65)
(1.43)
(13.07)
8.57
(0.99)
(0.10)
0.29
7.77
1.43
1.30
76,928
33,791
40,200
0.11
0.11
24,685
0.07
0.07
6,637
528
10,797
0.03
0.03
55,913
350,216
360,322
109,307
1,463
1,360
21,041
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
306,208
150,452
163,206
0.47
0.45
108,939
0.31
0.30
29,077
1,119
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
1
Operating netback ($ per Mcfe)
1
Corporate netback ($ per Mcfe)
1
This is a non-GAAP measure, see NON-GAAP MEASURES for additional information.
8
PINE CLIFF ENERGY LTD.
SENSITIVITIES
MANAGEMENT DISCUSSION AND ANALYSIS
2023
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
Realized natural gas price
3
3
Realized NGLs price
Impact on annual adjusted funds flow
4
1,2
$ per share
Change
$0.10
$000s
3,491
$1.00
485
0.01
0.00
0.00
3
Realized crude oil price
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, 2023.
3
Pine Cliff has prepared this analysis using its Q4 2023 production volumes annualized for twelve months.
4
Based on the Q4 2023 basic weighted average shares outstanding.
$1.00
408
BENCHMARK PRICES
2023
Three months ended December 31,
2023
Year ended December 31,
Natural gas
NYMEX (US$/MMBtu)
Crude oil
AECO Daily 5A (C$/Mcf)
2
1
WTI (US$/Bbl)
Foreign exchange
Edmonton Light (C$/Bbl)
2.88
2.30
78.32
99.79
1.362
2022
% Change
6.26
5.09
82.64
110.13
(54)
(55)
(5)
(9)
2.79
2.63
77.62
100.58
1.350
1
US$/C$
MMBtu is the abbreviation for millions of British thermal units. One Mcf of natural gas is approximately 1.02 MMBtu.
AECO prices are quoted in $/Gigajoule. Price has been converted from $/GJ to $/Mcf by multiplying by 1.05.
2
Quarterly Benchmark Prices
1.358
-
2022
% Change
6.64
5.29
94.23
120.10
1.303
(58)
(50)
(18)
(16)
4
Pine Cliff’s financial results are influenced by fluctuations in commodity prices, foreign exchange rates and price differentials. The
following table shows select market benchmark average prices and foreign exchange rates in the last eight quarters to assist in
understanding the volatility in prices and foreign exchange rates that have impacted Pine Cliff’s business.
Q4-2023
Natural gas
1
NYMEX (US$/MMBtu)
AECO Daily 5A (C$/Mcf)
Pine Cliff realized natural
Crude oil
2
gas price (C$/Mcf)
WTI (US$/Bbl)
Edmonton Light (C$/Bbl)
Pine Cliff realized NGLs
price (C$/Bbl)
Pine Cliff realized Oil
Foreign exchange
price (C$/Bbl)
2.88
2.30
2.59
78.32
99.79
48.51
93.15
1.362
Q3-2023
Q2-2023
Q1-2023 Q4-2022 Q3-2022
Q2-2022 Q1-2022
2.55
2.58
2.88
2.30
2.44
2.79
3.42
3.21
3.74
6.26
5.09
5.53
8.20
4.14
7.17
7.20
4.95
4.72
4.85
6.45
4.88
82.26
107.85
73.78
95.33
76.13
99.34
82.64
110.13
91.56
116.79
108.41
137.84
94.29
115.66
52.69
49.39
64.19
65.91
72.02
81.73
69.72
96.44
86.27
92.44
99.13
103.56
126.23
108.68
US$/C$
1
2
1.306
1.341
MMBtu is the abbreviation for millions of British thermal units. One Mcf of natural gas is approximately 1.02 MMBtu.
AECO prices are quoted in $/Gigajoule. Price has been converted from $/GJ to $/Mcf by multiplying by 1.05.
1.358
1.352
1.343
1.277
1.266
9
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2023
In the three months and year ended December 31, 2023, the AECO daily benchmark was 55% and 50% lower compared to the same
periods of 2022. The changes for the periods are mainly due to an increase in natural gas storage levels resulting from supply and
demand factors, including warmer than normal winters throughout North America limiting demand, all while natural gas production
in North America was increasing in anticipation of additional liquefied natural gas (“
”) export capacity from North America. 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.
LNG
The average benchmarks for WTI crude decreased by 5% and 18%, for the three months and year ended December 31, 2023, as
compared to the same periods in 2022, primarily due to supply and demand factors including global economic conditions and
geopolitical factors.
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 reflect
current supply and demand dynamics, future crude oil prices remain volatile as future crude oil prices reflect the uncertainty that
global economic conditions and geopolitical factors will have on crude oil demand.
Canadian crude prices are based upon refinery postings at Edmonton, Alberta and are linked to WTI through transportation tariffs
to common markets and the foreign exchange rate.
The supply and demand dynamics for NGLs components such as ethane, propane, butane, and condensate impact the relationship
between the price of NGLs and the price of crude oil. The fluctuations in NGLs price normally correlate with changes in the Edmonton
Light oil price due to the Company’s miscellaneous NGL components.
SALES VOLUMES
Total sales volumes by product
2023
Three months ended December 31,
2023
Year ended December 31,
Natural gas (Mcf)
NGLs (Bbl)
Crude oil (Bbl)
Total Boe
Total Mcfe
Natural gas weighting
Average daily sales volumes by product
Natural gas (Mcf/d)
NGLs (Bbl/d)
Crude oil (Bbl/d)
Total (Boe/d)
Total (Mcfe/d)
10,166,440
155,479
123,900
1,973,786
11,842,714
86%
2022 % Change
10,056,224
134,597
125,166
1,935,800
11,614,802
87%
1
16
(1)
2
2
(1)
39,229,102
544,764
458,015
7,540,963
45,245,776
87%
2022 % Change
40,075,125
532,567
458,539
7,670,294
46,021,761
87%
(2)
2
-
(2)
(2)
-
2023
Three months ended December 31,
110,499
1,690
1,347
21,454
2022 % Change
109,307
1,463
1,360
21,041
1
16
(1)
2
128,724
126,246
2
2023
Year ended December 31,
107,471
1,493
1,255
20,660
123,960
2022 % Change
109,801
1,459
1,256
21,015
126,090
(2)
2
-
(2)
(2)
Average daily sales volumes by area
2023
Three months ended December 31,
2023
Year ended December 31,
Central (Boe/d)
Southern (Boe/d)
Edson (Boe/d)
Total (Boe/d)
13,158
6,523
1,773
21,454
2022 % Change
12,269
6,733
2,039
21,041
7
(3)
(13)
2
12,155
6,573
1,932
20,660
2022 % Change
12,124
6,853
2,038
21,015
-
(4)
(5)
(2)
Pine Cliff’s sales volumes increased by 2% to 21,454 Boe/d (128,724 Mcfe/d) for the three months ended December 31, 2023, as
compared to the same period in 2022. The increase in production is due primarily from the Acquisition, slightly offset by natural
production declines. Pine Cliff’s sales volumes decreased by 2% to 20,660 Boe/d (123,960 Mcfe/d) for the year ended December 31,
2023, as compared to the same period in 2022. The decrease in production is due primarily from natural production declines.
10
PINE CLIFF ENERGY LTD.
Pine Cliff is projecting 2024 production volumes of 24,000 – 25,000 Boe/d (144,000 – 150,000 Mcfe/d), weighted approximately
79% towards natural gas.
COMMODITY SALES
MANAGEMENT DISCUSSION AND ANALYSIS
2023
($000s)
Natural gas
NGLs
Crude oil
Total commodity sales
% of revenue from natural gas sales
Realized Prices
2023
Three months ended December 31,
2023
Year ended December 31,
26,380
7,543
11,542
45,465
58%
2022
% Change
55,650
8,871
12,407
76,928
72%
(53)
(15)
(7)
(41)
(14)
117,432
29,149
42,271
188,852
62%
2022
% Change
217,772
38,549
49,887
306,208
71%
(46)
(24)
(15)
(38)
(9)
$ per unit
Natural gas ($/Mcf)
NGLs ($/Bbl)
Crude oil ($/Bbl)
Total ($/Boe)
Total ($/Mcfe)
2023
Three months ended December 31,
2.59
48.51
93.15
23.03
3.84
2022 % Change
5.53
65.91
99.13
39.74
6.62
(53)
(26)
(6)
(42)
(42)
2023
Year ended December 31,
2.99
53.51
92.29
2022
% Change
5.43
72.38
108.79
39.92
6.65
(45)
(26)
(15)
(37)
(37)
25.04
4.17
Commodity sales in the three months ended December 31, 2023 of $45.5 million decreased 41% from $76.9 million in the
corresponding period in the prior year. The quarterly decrease of $31.5 million consists of $33.0 million attributed to lower realized
commodity prices, slightly offset by $1.5 million attributed to higher production volumes. Commodity sales in the year ended
December 31, 2023 of $188.9 million decreased 38% from $306.2 million during the year ended December 31, 2022. The year-to-
date decrease of $117.4 million consists of $112.2 million attributed to lower realized commodity prices and $5.2 million attributed
to lower production volumes.
Pine Cliff’s realized natural gas price was $2.59 per Mcf in the three months ended December 31, 2023, 53% lower than the $5.53
per Mcf realized in the corresponding period of the prior year. Pine Cliff’s realized natural gas price was $2.99 per Mcf during the
year ended December 31, 2023, 45% lower than the $5.43 per Mcf realized in the corresponding period of the prior year. Pine Cliff’s
realized natural gas price was 13% and 14% higher than the AECO 5A benchmarks for the three months and year ended December
31, 2023 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, 2023, Pine Cliff’s realized NGLs price was $48.51 per Bbl and $53.51 per Bbl,
compared to $65.91 per Bbl and $72.38 per Bbl, in the corresponding periods of the prior year. For the three months and year ended
December 31, 2023, Pine Cliff’s realized oil price was $93.15 per Bbl and $92.29 per Bbl, compared to $99.13 per Bbl and $108.79
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, 2023 were 93% and 92% of Edmonton Light compared to 90% and 91% in the corresponding periods of the prior
year. Pine Cliff’s realized NGLs prices in the three months and year ended December 31, 2023 were 49% and 53% of Edmonton Light
compared to 60% in the corresponding periods of the prior year. This decrease in crude oil and NGLs pricing in the three months
and year ended December 31, 2023, compared to the corresponding periods of 2023, is due primarily to global economic and
geopolitical factors and their impact on global oil demand.
11
PINE CLIFF ENERGY LTD.
ROYALTY EXPENSE
MANAGEMENT DISCUSSION AND ANALYSIS
2023
($000s)
Total royalty expense
$ per Boe
$ per Mcfe
Royalty expense as a % of commodity sales
2023
Three months ended December 31,
2023
Year ended December 31,
5,196
2.63
0.44
11%
2022 % Change
8,554
4.42
0.74
11%
(39)
(40)
(40)
-
19,963
2.65
0.44
11%
2022 % Change
35,760
4.66
0.78
12%
(44)
(43)
(43)
(8)
For the three months ended December 31, 2023, total royalty expense decreased by 39% to $5.2 million from $8.6 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, 2023, unchanged from the corresponding period of the prior year.
For the year ended December 31, 2023, total royalty expense decreased by 44% to $20.0 million from $35.8 million in the
corresponding period of the prior year. Royalty expense as a percentage of commodity sales decreased to 11% during the year ended
December 31, 2023, compared to 12% in the corresponding period of the prior year. The decrease in royalty expense as a percentage
of commodity sales for the year ended December 31, 2023 is mainly due to lower natural gas, crude oil and NGL commodity pricing.
Pine Cliff anticipates royalty expenses to average between 10.5% - 11.5% of commodity sales in 2024.
TRANSPORTATION COSTS
($000s)
Total transportation costs
$ per Boe
$ per Mcfe
2023
Three months ended December 31,
2023
Year ended December 31,
2,866
1.45
0.24
2022 % Change
2,743
1.42
0.24
4
2
2
10,810
1.43
0.24
2022 % Change
10,806
1.41
0.24
-
1
1
For the three months and year ended December 31, 2023, total transportation costs increased by 4% to $2.9 million from $2.7 million
and was unchanged at $10.8 million for the twelve months ended December 31, 2023. The higher transportation expenses in the
fourth quarter of 2023 compared to the corresponding period in 2022 is due to the Company diverting additional volumes to markets
with higher pricing points than AECO.
Pine Cliff anticipates transportation expenses to average between $1.40 - $1.50 per Boe ($0.23 - $0.25 per Mcfe) in 2024.
NET OPERATING EXPENSES
($000s)
Operating expenses
Less: processing and gathering income
Net operating expenses
$ per Boe
$ per Mcfe
2023
Three months ended December 31,
2023
Year ended December 31,
26,956
(1,481)
25,475
12.91
2.15
2022 % Change
25,898
(1,046)
24,852
12.84
2.14
4
42
3
1
1
98,535
(5,159)
93,376
12.39
2.07
2022 % Change
91,490
(3,780)
87,710
11.44
1.91
8
36
6
8
8
Net operating expenses increased to $25.5 million for the three months ended December 31, 2023, as compared to $24.9 million in
the corresponding period of the prior year, primarily as a result of an increase in fixed operating expenses, including municipal
property tax rates, regulatory fees and inflationary pressures. Net operating expenses increased to $93.4 million for the year ended
December 31, 2023, as compared to $87.7 million for the prior year, primarily as a result of an increase in fixed operating expenses.
On a per Boe basis, operating costs increased to $12.91 per Boe and $12.39 per Boe for the three months and year ended December
31, 2023 compared to $12.84 per Boe and $11.44 per Boe in the corresponding periods of 2022.
Pine Cliff anticipates net operating expenses to average between $12.00 - $13.00 per Boe ($2.00 - $2.17 per Mcfe) in 2024.
12
PINE CLIFF ENERGY LTD.
GENERAL AND ADMINISTRATIVE EXPENSES (“G&A”)
MANAGEMENT DISCUSSION AND ANALYSIS
2023
($000s)
Gross G&A
Less: overhead recoveries
Total G&A expenses
$ per Boe
$ per Mcfe
2023
Three months ended December 31,
2023
Year ended December 31,
2,801
(765)
2,036
1.03
0.17
2022 % Change
1,853
(1,060)
793
0.41
0.07
51
28
157
151
151
10,920
(3,425)
7,495
0.99
0.17
2022 % Change
10,183
(3,364)
6,819
0.89
0.15
7
(2)
10
11
11
G&A increased by 157% to $2.0 million in the three months ended December 31, 2023, as compared to $0.8 million in the
corresponding period of the prior year. The increase in G&A during the three months ended December 31, 2023 is primarily a result
of an increase in the provision for compensation costs pursuant to the Company’s short term incentive bonus program in the
comparable quarter in 2022. G&A increased to $7.5 million for the year ended December 31, 2023 as compared to $6.8 million in
the corresponding period of the prior year and reflects a decrease in bad debt recoveries and inflationary increases.
On a per Boe basis, G&A for the three months ended December 31, 2023, increased 151% to $1.03 per Boe from $0.41 per Boe in the
corresponding period of the prior year, primarily due to a decrease in the provision for compensation costs in the comparable
quarter. On a per Boe basis, G&A for the year ended December 31, 2023 increased 11% to $0.99 per Boe from $0.89 per Boe in the
prior year.
Pine Cliff anticipates G&A expenses to average between $1.25 - $1.35 per Boe ($0.21 - $0.23 per Mcfe) in 2024.
SHARE-BASED COMPENSATION
($000s)
Total share-based compensation
$ per Boe
$ per Mcfe
2023
Three months ended December 31,
2023
Year ended December 31,
844
0.43
0.07
2022 % Change
725
0.37
0.06
16
16
16
2,856
0.38
0.06
2022 % Change
2,456
0.32
0.05
16
19
19
Share based compensation increased by 16% for the three months and year ended December 31, compared to the corresponding
period of 2022 primarily as a result of the increase in stock options granted in 2023 compared to 2022. 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, 2023, Pine Cliff granted 11,603,180 stock options to purchase Common Shares at a weighted
average exercise price of $1.32 (December 31, 2022 – 7,161,600 at an average exercise price of $1.89). As at December 31, 2023, the
Company had 20,704,822 stock options outstanding, representing 5.8% of Common Shares outstanding (December 31, 2022 –
18,323,519 representing 5.2% of Common Shares outstanding).
DEPLETION, DEPRECIATION, AND PROPERTY, PLANT AND EQUIPMENT IMPAIRMENT
2023
Three months ended December 31,
12,820
2022 % Change
6.50
1.08
-
12,820
6.50
1.08
10,835
5.60
0.93
-
10,835
5.60
0.93
18
16
16
-
18
16
16
2023
Year ended December 31,
43,928
5.83
0.97
-
43,928
5.83
0.97
2022 % Change
44,074
5.75
0.96
(4,500)
39,574
5.16
0.86
-
1
1
(100)
11
13
13
($000s)
Total depletion and depreciation
$ per Boe
$ per Mcfe
Impairment reversal
Total depletion, depreciation, and impairment
$ per Boe
$ per Mcfe
13
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2023
Depletion and depreciation expense for the three months and year ended December 31, 2023, totaled $12.8 million and $43.9 million
compared to $10.8 million and $44.1 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, 2023, the Company had three cash generating units (“
”) 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, 2023, there were no indicators of impairment or additional impairment reversals for PP&E assets
and therefore an impairment test was not required.
Exploration and Evaluation Assets (“E&E”) Impairment Assessment
CGU’s
During the three months and year ended December 31, 2023, the Company determined that the E&E mining assets were not
commercially viable and recognized the expense in the statements of comprehensive income.
FINANCE EXPENSES
($000s)
Interest expense and bank charges
$ per Boe
$ per Mcfe
Non cash:
Accretion on decommissioning provision
Accretion on term loan
Accretion on promissory notes
Total finance expenses
$ per Boe
$ per Mcfe
2023
Three months ended December 31,
515
0.26
0.04
1,815
23
-
2,353
1.19
0.20
2022 % Change
112
0.06
0.01
1,644
-
-
1,756
0.91
0.15
360
333
333
10
100
-
34
31
31
2023
Year ended December 31,
733
2022 % Change
0.10
0.02
6,874
23
-
7,630
1.01
0.17
2,407
0.31
0.05
6,157
-
97
8,661
1.13
0.19
(70)
(68)
(68)
12
100
(100)
(12)
(11)
(11)
Finance expenses increased by 34% to $2.4 million for the three months ended December 31, 2023, as compared to $1.8 million in
the corresponding period of the prior year and decreased by 12% to $7.6 million for the year ended December 31, 2023, as compared
to $8.7 million in the corresponding period of the prior year. Please refer to the “
”
DEFERRED INCOME TAX
section for additional information.
DEBT, LIQUIDITY AND CAPITAL RESOURCES
The Company has recorded a deferred tax asset of $43.6 million (December 31, 2022 - $37.0 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, 2023:
Category of tax pool ($000s)
Undepreciated capital costs
Canadian oil and gas property expenditures
Canadian development expenditures
Canadian exploration expenditures
Share issue costs
1
Non-capital losses carried forward
Total
Capital losses carried forward
2
1
Non-capital losses expire between the years 2031 and 2040.
2
The capital losses carried forward can only be claimed against taxable capital gains.
14
PINE CLIFF ENERGY LTD.
Rate of Utilization (%)
7 - 55
10
30
100
20
100
As at December 31,
2023
38,571
188,942
41,274
167
4,747
108,626
5,624
387,951
CAPITAL EXPENDITURES, ACQUISITIONS AND DISPOSITIONS
MANAGEMENT DISCUSSION AND ANALYSIS
2023
($000s)
Exploration and evaluation
Property, plant and equipment
Capital expenditures
Acquisitions
Dispositions
Total
2023
Year ended December 31,
34
20,932
20,966
109,326
(379)
129,913
2022
63
29,014
29,077
1,119
(2,649)
27,547
Capital expenditures on PP&E totaled $21.0 million, including development capital of $11.8 million primarily to drill one gross (0.3
net) Caroline oil well, drill and tie-in three gross (2.1 net) Pekisko oil wells, drill and complete one gross (0.2 net) non-operated
conventional natural gas well in Edson, optimization and maintenance capital of $9.0 million and office capital expenditures of $0.2
million.
Acquisition
Acquisition
”) for total consideration of $108.9 million (the
On December 13, 2023, the Company acquired Certus Oil & Gas Inc. (“
“
”). This amount included $72.3 million paid to Certus shareholders, $33.0 million to repay Certus term debt and settle
�inancial derivatives, the assumption of a working capital de�iciency of $2.6 million and payment of the Company’s closing costs of
$1.0 million. As part of the acquisition the Company acquired decommissioning obligations of $26.5 million. As a result of completing
the Acquisition, Certus became a wholly owned subsidiary of Pine Cliff and was subsequently amalgamated with Pine Cliff on January
1, 2024.
Certus
The Acquisition was funded from existing cash resources and the Term Loan. The Company applied the optional concentration test
under IFRS 3, which resulted in the Acquisition being accounted for as an asset acquisition. The acquired assets are included in the
Central CGU.
DECOMMISSIONING PROVISION
The total current and long-term decommissioning provision of $271.2 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, 2023, the estimated total undiscounted and uninflated amount required to settle the decommissioning liabilities
was $327.3 million (December 31, 2022 - $277.3 million). The discounted and inflated amount required to settle the
decommissioning liabilities of $271.2 million has been calculated assuming a 2.00% inflation rate (December 31, 2022 – 2.00%) and
discounted using an average risk-free interest rate of 3.08% (December 31, 2022 – 3.33%). 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
Term Loan
On December 13, 2023, the Company entered into a three-year first lien, non-revolving term loan facility (“
Rate
amounts borrowed under the Term Loan bear interest at an annual interest rate equal to Canadian Prime Lending Rate (the “
Prime
”). The
”) plus 3.65%, where Prime Rate cannot be less than 6.95%. The Company is required to make mandatory principal quarterly
repayments equal to $2.11 million, payable on the first banking day of January, April, July and October of each calendar year,
commencing April 1, 2024. The Term Loan has a maturity date of December 13, 2026 on which date the remaining outstanding
principal balance is to be paid.
Term Loan
15
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2023
The Company shall not have the right to make an optional prepayment of the outstanding principal balance until after December 12,
2025, which shall include an amount of 1.5% of the principal amount prepaid, except for the following one-time optional
prepayments:
(i)
(ii)
(iii)
as a one-time option on December 12, 2024, make a prepayment of a portion (but not all) of the outstanding principal
amount plus an amount of 4% of the principal amount prepaid; provided that the portion of the outstanding principal
balance to be prepaid: (A) is not less than 15% and (B) not greater than 25%, in each case, of the outstanding principal
balance under the Term Loan immediately prior to such partial prepayment;
as a one-time option on March 12, 2025, make a prepayment of all or any portion of the outstanding principal balance
plus an amount of 4% of the principal amount prepaid; provided that such outstanding principal balance to be prepaid
is not less than 15% of the outstanding principal balance under the Term Loan immediately prior to such partial
prepayment; and
as a one-time option on June 12, 2025, make a prepayment of all or any portion of the outstanding principal balance
plus an amount of 3% of the principal amount prepaid; provided that such outstanding principal balance to be prepaid
is not less than 15% of the outstanding principal balance under the Term Loan immediately prior to such partial
prepayment.
The amount drawn under the Term Loan at December 31, 2023 was $56.3 million (December 31, 2022 – $nil). Based on the calculated
fair value of the Term Loan as at December 31, 2023, the effective interest rate was determined to be 12.9% using the effective
interest method. The effective interest rate was calculated by discounting future payments of interest and principal with the residual
value allocated to issue costs of $1.3 million. The value of the loan will accrete up to the principal balance at maturity. Interest accrued
at December 31, 2023 was $0.3 million (December 31, 2022 - $nil). The borrowings were used to fund the Acquisition.
Security for the Term Loan consists of floating demand debentures totaling $110.0 million (December 31, 2022 - $nil) over all of the
Company’s assets and a general security agreement with first priority ranking over all personal and real property.
•
•
The Company is subject to certain financial covenants under its Term Loan as follows:
Consolidated Debt, as defined herein, to EBITDA, as defined herein, ratio shall not exceed 1:5:1.0; and
Asset Coverage ratio, as defined herein, of not less than 1.5:1.0.
Consolidated Debt is defined as all indebtedness for borrowed money, including issued and drawn letters of credit or letters of
guarantee.
EBITDA is defined as net income for the trailing twelve-month period excluding finance costs, provision for current and deferred
income tax, depletion and depreciation, share option compensation and gain or loss on sale of assets and impairment of assets, less
cash taxes paid and decommissioning expenses incurred during the period.
Asset Coverage ratio is defined as the proved developed producing reserves of the Company (before income tax, discounted at 10%),
as evaluated by an independent third-party engineering report and evaluated on strip commodity pricing, divided by the
consolidated borrowings of the Company at December 31 of the calendar year. The ratio is calculated and revaluated for strip pricing
at June 30 period end, based on an internally prepared engineering report.
The Company was in compliance with its Term Loan covenants at December 31, 2023.
Demand Loan
Demand Loan
The Company has a demand loan (“
”) of $8.0 million with a Canadian chartered bank, of which $4.0 million was drawn
at December 31, 2023 (December 31, 2022 - $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 $6.7 million and incur an issuance fee of 2.38%. At December 31, 2023, the Company had issued $0.8 million in letters of credit
(December 31, 2022 - $1.7 million).
The Demand Loan is secured by a general security agreement over certain tangible field facilities of the Company.
The Company is subject to the following financial covenant under its Demand Loan:
Senior Debt, as defined herein, to Net EBITDA, as defined herein, ratio shall not exceed 3.0:1.0 at the end of each quarter-end.
16
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2023
Senior Debt is defined as any secured indebtedness for borrowed money. Net EBITDA shall mean net income excluding finance costs,
provision for current and deferred income tax, depletion and depreciation, share option compensation and gain or loss on sale of
assets and impairment of assets, less cash taxes and dividends paid, on a trailing twelve-month basis.
The Company was in compliance with its Demand Loan covenant at December 31, 2023.
Capital Resources
Pine Cliff’s approved capital budget for 2024 is $17.5 million, including $6.5 million in development capital, $3.5 million on facility
optimization and maintenance capital and $7.5 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.
Liquidity
As at December 31, 2023, the Company’s capital comprises shareholders’ equity, Term Loan and working capital, including Demand
Loan. 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 deficiency of $33.3 million. The working capital was negatively impacted at December
31, 2023 with the closing of Acquisition, which included a higher working capital deficiency than expected, primarily due to weaker
natural gas and crude oil prices. 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, managing dividend levels and issuing
equity when practical. On March 4, 2024, the Company reduced its regular monthly dividend to $0.005 per common share.
Forecasted commodity prices provides for supportive funds flow in 2024 and beyond to fund the Company’s capital expenditure
budget and a sustainable dividend.
The Company defines and computes its positive net cash/net debt as follows:
December 31, 2023
($000s)
Cash
Trade and other receivables
Prepaid expenses and deposits
Investments
Less:
Trade and other payables
Term loan
Demand loan
1
-
23,657
7,321
208
(43,840)
(55,023)
(4,002)
(71,679)
Positive net cash (net debt)
1
This is a non-GAAP measure, see NON-GAAP MEASURES for additional information.
Share Capital
December 31, 2022
$ Change
54,428
27,187
3,767
171
(54,428)
(3,530)
3,554
37
(29,640)
-
-
55,913
(14,200)
(55,023)
(4,002)
(127,592)
Share capital
Common Shares
Stock options
March 4, 2024
356,305,269
21,258,622
December 31, 2023
December 31, 2022
356,298,069
20,704,822
350,908,570
18,323,519
17
PINE CLIFF ENERGY LTD.
COMMITMENTS AND CONTINGENCIES
MANAGEMENT DISCUSSION AND ANALYSIS
2023
As at December 31, 2023, the Company has the following commitments and other contractual obligations:
2024
2025
2026
2027
2028
Thereafter
($000s)
1
Accounts payable and accrued liabilities
Demand loan
Term loan
Lease obligations
Transportation
1
2
43,840
4,002
14,216
1,252
73,640
10,330
-
-
13,327
1,082
22,456
8,047
-
-
44,605
819
52,348
6,924
-
-
-
229
5,464
5,235
-
-
-
7
1,261
1,254
-
-
-
-
748
748
Total commitments and contingencies
1
These amounts include the notional principal and interest payments.
2
Firm transportation agreements.
SUBSEQUENT EVENTS
Dividends
On January 31, 2024 and February 29, 2024, the Company paid a monthly dividend of $0.01083 per Common Share.
On March 4, 2024, the Company declared a monthly dividend of $0.005 per Common Share. The dividend is payable March 28, 2024,
to all shareholders of record on March 15, 2024.
18
PINE CLIFF ENERGY LTD.
QUARTERLY TRENDS AND SELECTED FINANCIAL INFORMATION
MANAGEMENT DISCUSSION AND ANALYSIS
2023
FINANCIAL
($000s, unless otherwise indicated)
Total revenue
Cash provided by operating
activities
1
Adjusted funds flow
Per share – Basic ($/share)
Per share – Diluted ($/share)
Net income (loss)
Per share – Basic ($/share)
Per share – Diluted ($/share)
Capital expenditures
Dividends
Per share – Basic ($/share)
Per share – Diluted ($/share)
Acquisitions
Positive net cash (net debt)
Weighted average common shares
outstanding (000s):
1
PRODUCTION VOLUMES
Basic
Diluted
Natural gas (Mcf/d)
NGLs (Bbl/d)
Crude oil (Bbl/d)
Average sales volumes (Boe/d)
PRICES AND NETBACKS
Average sales volumes (Mcfe/d)
1
Total commodity sales ($/Boe)
Operating netback ($/Boe)
Corporate netback ($/Boe)
Total commodity sales ($/Mcfe)
1
Operating netback ($/Mcfe)
1
Corporate netback ($/Mcfe)
1
1
Q4-2023
42,073
16,559
9,700
0.03
0.03
841
0.00
0.00
3,616
11,567
0.03
0.03
109,014
(71,679)
355,969
359,262
110,499
1,690
1,347
21,454
128,724
23.03
6.04
4.91
3.84
1.01
0.82
Q3-2023
Q2-2023
Q1-2023
Q4-2022
Q3-2022
Q2-2022
Q1-2022
45,831
39,680
48,676
69,746
62,778
82,755
59,449
15,238
17,123
0.05
0.05
4,237
0.01
0.01
4,715
11,557
0.03
0.03
-
46,502
12,504
12,040
0.03
0.03
(942)
(0.00)
(0.00)
8,193
11,478
0.03
0.03
312
49,301
22,326
19,824
0.06
0.06
4,985
0.01
0.01
4,442
11,413
0.03
0.03
-
58,139
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)
355,710
359,262
353,216
353,216
351,263
359,675
350,216
360,322
349,187
360,654
345,402
360,703
340,835
349,304
108,138
1,489
1,383
20,895
125,370
106,024
1,343
1,184
20,198
121,188
105,176
1,446
1,101
20,076
120,456
109,307
1,463
1,360
21,041
126,246
109,936
1,547
1,406
21,276
127,656
111,951
1,475
1,197
21,331
127,986
107,955
1,347
1,057
20,397
122,382
25.06
9.65
8.91
4.18
1.61
1.49
23.00
7.11
6.55
3.83
1.19
1.09
29.30
11.72
10.99
4.88
1.95
1.83
39.74
21.06
20.76
6.62
3.51
3.46
37.13
18.66
17.82
6.19
3.11
2.97
46.59
30.40
28.76
7.77
5.07
4.79
36.05
19.41
17.60
6.01
3.24
2.93
This is a non-GAAP measure, see NON-GAAP MEASURES for additional information.
Over the past eight quarters, Pine Cliff’s revenues, cash provided by operating activities, adjusted funds flow, and net income (loss)
have fluctuated primarily due to changes in commodity prices and sales volumes. Net income (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 decreased in the first quarter of 2023 compared to the fourth quarter of 2022 due primarily to
natural production declines and weather-related factors. Average sales volumes increased in the second quarter of 2023
compared to the first quarter of 2023 due primarily to four gross (2.8 net) Peksiko wells coming on production prior to the
end of the quarter. Average sales volumes increased in the third quarter of 2023 compared to the second quarter of 2023
due primarily to the wells that came on production in Q2-2023 producing for the full quarter. Average sales volumes
increased in the fourth quarter of 2023 compared to the third quarter of 2023 due primarily to sales volumes added from
the Acquisition.
19
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2023
Adjusted funds flow decreased in the first quarter of 2023 compared to the fourth quarter of 2022 due primarily to the
decrease in commodity pricing and sales volumes. Adjusted funds flow decreased in the second quarter of 2023 compared
to the first quarter of 2023 due primarily to a decrease in commodity pricing. Adjusted funds flow increased in the third
quarter of 2023 compared to the second quarter of 2023 due primarily to an increase in commodity pricing. Adjusted funds
flow decreased in the fourth quarter of 2023 compared to the third quarter of 2023 due primarily to a decrease in
commodity pricing, slightly offset by higher sales volumes.
Total revenues decreased in the first quarter of 2023 compared to the fourth quarter of 2022 due primarily to the decrease
in commodity pricing. Total revenues decreased in the second quarter of 2023 compared to the first quarter of 2023 due
primarily to the decrease in commodity pricing. Total revenues increased in the third quarter of 2023 compared to the
second quarter of 2023 due primarily to the increase in commodity pricing. Total revenues decreased in the fourth quarter
of 2023 compared to the third quarter of 2023 due primarily to a decrease in commodity pricing, slightly offset by higher
sales volumes.
•
•
•
Net income decreased in the first quarter of 2023 compared to the fourth quarter of 2022 due primarily to the decrease in
total revenue. Net income(loss) decreased in the second quarter of 2023 compared to the first quarter of 2023 due primarily
to the decrease in total revenue. Net income increased in the third quarter of 2023 compared to the second quarter of 2023
due primarily to the increase in total revenue. Net income decreased in the fourth quarter of 2023 compared to the third
quarter of 2023 due primarily to the decrease in total revenue, slightly offset by deferred tax recovery.
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, accounts receivable, investments, accounts payable and accrued liabilities,
Demand Loan and Term loan. The carrying values of cash, accounts receivable, accounts payable and accrued liabilities, Demand
Loan and Term Loan approximate their respective fair values due to the short time before maturing. The carrying value of the Term
Loan approximates its fair value due to its 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. Level 2 fair value measurements are based on pricing inputs other than quoted
prices in active markets included in Level 1. Prices are either directly or indirectly observable as of the reporting date. Level 2
valuations are based on inputs, including quoted forward prices for commodities, time value and volatility factors, which can be
substantially observed or corroborated in the marketplace. Level 3 valuations are those with inputs for the asset and liability that
are not based on observable market data. 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.
The Company employs risk management strategies and policies to ensure any exposure to risk is consistent with the Company’s
business objectives and risk tolerance levels. Risk management is ultimately established by the Board of Directors and is
implemented by management. All risks can have an impact upon the financial performance of the Company.
20
PINE CLIFF ENERGY LTD.
Market Risk
MANAGEMENT DISCUSSION AND ANALYSIS
2023
Market risk is the risk that the fair value or future cash provided by operating activities of the Company’s financial instruments will
fluctuate because of changes in market prices. Components of market risk to which Pine Cliff is exposed are discussed below.
Commodity Price Risk
The Company is exposed to commodity price risk since its revenues are dependent on the prices of crude oil, NGLs and natural gas.
Commodity prices have fluctuated widely during recent years due to global and regional factors including, but not limited to, supply
and demand, inventory levels, weather, economic changes and geopolitical factors and instability. Changes in 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, 2023, the Company had the following physical natural gas sales contracts in place:
Contractual Term
April 1, 2024 to October 31, 2024
January 1, 2024 to December 31, 2024
April 1, 2024 to March 31, 2025
April 1, 2024 to October 31, 2025
January 1, 2025 to December 31, 2025
January 1, 2026 to February 28, 2026
January 1, 2024 to October 31, 2024
1
Prices reported are the weighted average prices of the periods.
2
Price has been converted from $/GJ to $/Mcf by multiplying by 1.05.
3
Subsidiary of SaskEnergy, Saskatchewan.
Delivery
Point
AECO
AECO
AECO
AECO
AECO
AECO
3
TransGas
Physical Delivery
Quantity (GJ/day)
10,500
9,626
5,000
2,500
9,037
8,311
13,000
Contract Price
1
($CAD/GJ)
$2.76
$3.49
$2.79
$2.85
$3.57
$3.58
AECO 5A + 0.46/GJ
Contract Price
1,2
($CAD/Mcf)
$2.90
$3.66
$2.93
$2.99
$3.75
$3.76
AECO 5A + 0.48/Mcf
Subsequent to December 31, 2023, the Company had the following additional physical natural gas sales contracts in place:
Delivery
Point
Contractual Term
AECO
April 1, 2024 to October 31, 2025
April 1, 2024 to December 31, 2025
AECO
1
Prices reported are the weighted average prices of the periods.
2
Price has been converted from $/GJ to $/Mcf by multiplying by 1.05.
Physical Delivery
Quantity (GJ/day)
5,000
5,000
Contract Price
1
($CAD/GJ)
$2.41
$2.85
Contract Price
1,2
($CAD/Mcf)
$2.53
$2.99
At December 31, 2023, the Company had the following physical crude oil sales contracts in place:
Contractual Term
January 1, 2024 to December 31, 2024
January 1, 2025 to December 31, 2025
January 1, 2026 to February 28, 2026
1
Crude Oil
WTI Fixed Price
WTI Fixed Price
WTI Fixed Price
Prices reported are the weighted average prices of the periods.
Contractual Term
January 1, 2024 to December 31, 2024
1
Crude Oil
WTI Fixed Price
Prices reported are the weighted average prices of the periods.
Physical Delivery Quantity
(Bbl/day)
412
472
435
Contract Price
1
($USD/Bbl)
72.87
68.91
66.60
Physical Delivery Quantity
(Bbl/day)
250
Contract Price
1
($CAD/Bbl)
$107.00
21
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2023
Contractual Term
January 1, 2024 to September 30, 2024
1
Prices reported are the weighted average prices of the periods.
Crude Oil
WTI Fixed Price
Interest Rate Risk
Physical Delivery Quantity
(Bbl/month)
5,000
Contract Price
1
($USD/Bbl)
$81.25
Interest rate risk refers to the risk that the value of a financial instrument or funds flows associated with the instrument will fluctuate
due to changes in market interest rates. Interest rate risk arises from interest bearing financial assets and liabilities that the Company
uses. The principal exposure of the Company is on its borrowings which have a variable interest rate which gives rise to a funds flow
interest rate risk.
At December 31, 2023, the Company’s debt facilities consist of a $56.3 million non-revolving first lien Term Loan and an $8.0 million
Demand Loan, secured by specific equipment assets. The borrowings under the Term Loan are at the Canadian Prime Rate plus
3.65%, (whereby Canadian Prime Rate cannot be less than 6.95%) and the Demand Loan is at the banks’ prime lending rate plus
2.0%.
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. The Company
assumes full risk in respect of equity price fluctuations.
Foreign Currency Exchange Risk
The Company is 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.
Sensitivity Analysis
Based on historic movements and volatilities in the interest rate markets and management’s current assessment of the financial
markets, the Company believes that a 1.0% variation in the Canadian prime interest rate is reasonably possible over a 12-month
period.
A 1.0% increase in the Canadian prime lending rate would decrease both annual and comprehensive income by $0.6 million,
assuming the change in interest rate is effective from the beginning of the year and the amount of the Term Loan and the Demand
Loan as at December 31, 2023.
A 1.0% decrease in the Canadian prime lending rate would increase both annual and comprehensive income by $0.2 million,
assuming the change in interest rate is effective from the beginning of the year and the amount of the Term Loan and the Demand
Loan as at December 31, 2023.
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 accounts
receivable 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 accounts receivable, Pine Cliff assesses the financial strength of its counterparties through internal evaluation and
limiting exposure to any one counterparty.
The Company’s accounts receivable balance at December 31, 2023 of $23.7 million
(December 31, 2022 – $27.2 million), is primarily
with oil and gas marketers and joint venture partners. Amounts due from these parties have generally been received within 30 to
90 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
22
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2023
than 90 days to be past due. As at December 31, 2023, there was $1.9 million (December 31, 2022 - $0.4 million) of accounts
receivable over 90 days. Pine Cliff assesses its accounts receivable quarterly to determine if there has been any impairment. During
the year ended December 31, 2023, the Company recorded a bad debt expense (recovery) of $nil (December 31, 2022 – ($0.4
million)) against accounts receivable.
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 (used in) 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. After examining the economic factors that are causing the liquidity
risk facing the Company, the judgment applied to these factors, and the various initiatives that the Company has and will undertake
to strengthen its financial position, the Company believes it will have sufficient liquidity to support its ongoing operations and meet
its financial obligations as they come due for at least the next twelve months. A significant decline in commodity prices would hamper
the Company’s ability to rectify it’s working capital deficit and potentially require the Company to seek other sources of funding. If
required, Pine Cliff will also consider reducing its dividend, 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.
The following table details the contractual maturities of Pine Cliff’s financial liabilities as at December 31, 2023:
2024
2025
2026
2027
2028
Thereafter
($000s)
Accounts payable and accrued liabilities
Demand loan
Term loan
Lease obligations
1
1
43,840
4,002
14,216
63,310
1,252
-
-
13,327
14,409
1,082
-
-
44,605
45,424
819
-
-
-
229
229
-
-
-
7
7
-
-
-
-
-
Total financial liabilities
1
These amounts include the notional principal and interest payments.
RISK FACTORS
Certain activities of the Company are affected by factors that are beyond its control or influence. Additional risks and uncertainties
that management may be unaware of, or that they determine to be immaterial, may also become important factors which affect the
Company. Along with the risks discussed in this MD&A, other business risks faced by the Company may be found under “Risk Factors”
in the Company’s most recent Annual Information Form which is available under the Company’s profile at www.sedarplus.ca or by
contacting the Company.
Environmental
Environmental Regulations
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 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
23
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2023
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
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
Standards of Disclosure for Oil and Gas Activities
Petroleum and natural gas reserves are used in the calculation of depletion, impairment and impairment reversals and are depleted
on a unit of production basis at a rate calculated by reference to proved and probable reserves determined in accordance with
National Instrument 51-101
which incorporate the estimated future cost of
developing and extracting those reserves. Reserve estimates and their resulting cash flows are based on engineering data,
probability assessments of reserve recoveries, future prices and costs, future production rates, discount rates and the timing and
extent of future capital expenditures, all of which are subject to many uncertainties and interpretation. Management expects that
over time 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.
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
24
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
2023
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
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
25
PINE CLIFF ENERGY LTD.
Standards of Disclosure for Oil and Gas Activities
MANAGEMENT DISCUSSION AND ANALYSIS
2023
National Instrument 51-101
which incorporate the estimated future cost of
developing and extracting those reserves. Reserve estimates and their resulting cash flows are based on engineering data,
probability assessments of reserve recoveries, future prices and costs, future production rates, discount rates and the timing and
extent of future capital expenditures, all of which are subject to many uncertainties and interpretation. Management expects that
over time 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 compensation
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.
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, 2023. The Company intends to
adopt this standard as it becomes 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.
26
PINE CLIFF ENERGY LTD.
CONTROL ENVIRONMENT
Disclosure controls and procedures
DC&P
MANAGEMENT DISCUSSION AND ANALYSIS
2023
Disclosure controls and procedures (“
”), as defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual
and Interim Filings, are designed to provide reasonable assurance that information required to be disclosed in the Company’s annual
filings, interim filings or other reports filed, or submitted by the Company under securities legislation is recorded, processed,
summarized and reported within the time periods specified under securities legislation and include controls and procedures
CFO
designed to ensure that information required to be so disclosed is accumulated and communicated to management, including the
Chief Executive Officer (“
”), 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, 2023.
Internal control over financial reporting
”) and the Chief Financial Officer (“
CEO
Internal control over financial reporting (“
that:
•
ICFR
”), as defined in National Instrument 52-109, includes those policies and procedures
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions
of assets of Pine Cliff;
are designed to provide reasonable assurance that transactions are recorded as necessary to permit preparation of
Financial Statements in accordance with generally accepted accounting principles and that receipts and expenditures of
Pine Cliff are being made in accordance with authorizations of management of Pine Cliff; and
are designed to provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of the Company’s assets that could have a material effect on the Financial Statements.
The CEO and CFO have designed, or caused to be designed under their supervision, ICFR as defined in National Instrument 52-109
of the Canadian Securities Administrators, in order to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of Financial Statements for external purposes in accordance with IFRS. The control framework the Company
used to design its ICFR was in accordance with the Committee of Sponsoring Organizations of the Treadway Commission “COSO
2013”.
The Company’s CEO and CFO have evaluated, or caused to be evaluated under their supervision, the effectiveness of the Company’s
internal controls over financial reporting at the financial period end of the Company and concluded that such internal controls over
financial reporting are effective. It should be noted that while Pine Cliff’s CEO and CFO believe that the Company’s internal controls
and procedures provide a reasonable level of assurance and are effective, they do not expect that these controls will prevent all errors
and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that
its objectives are met.
NON-GAAP MEASURES
This MD&A uses the terms “adjusted funds flow”, “operating netbacks”, “corporate netbacks” “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 income, 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 income 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.
27
PINE CLIFF ENERGY LTD.
($000s)
Cash provided by operating activities
Adjusted by:
Change in non-cash working capital
Decommissioning obligations settled
Adjusted funds flow
Adjusted funds flow ($/Boe)
Adjusted funds flow ($/Mcfe)
Adjusted funds flow – basic
($/Common Share)
Adjusted funds flow – diluted
($/Common Share)
Operating and Corporate Netback
MANAGEMENT DISCUSSION AND ANALYSIS
2023
2023
Three months ended December 31,
2023
Year ended December 31,
16,559
(10,353)
3,494
9,700
4.91
0.82
0.03
0.03
2022
Change
33,791
(51)
5,252
1,157
40,200
20.76
3.46
0.11
0.11
(297)
202
(76)
(76)
(76)
(73)
(73)
66,627
(17,433)
9,493
58,687
7.77
1.30
0.17
0.16
2022
Change
150,452
(56)
6,997
5,757
163,206
21.28
3.55
0.47
0.45
(349)
65
(64)
(63)
(63)
(64)
(64)
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.
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 income (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.
2023
Three months ended December 31,
2023
Year ended December 31,
2022
$ Change
2022
$ Change
($ 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
23.03
0.75
(2.63)
(1.45)
(13.66)
6.04
(1.03)
(0.26)
0.16
4.91
1.01
0.82
39.74
0.54
(4.42)
(1.42)
(13.38)
21.06
(0.41)
(0.06)
0.17
20.76
3.51
3.46
(16.71)
0.21
1.79
(0.03)
(0.28)
(15.02)
(0.62)
(0.20)
(0.01)
(15.85)
(2.50)
(2.64)
25.04
0.68
(2.65)
(1.43)
(13.07)
8.57
(0.99)
(0.10)
0.29
7.77
1.43
1.30
39.92
0.49
(4.66)
(1.41)
(11.93)
22.41
(0.89)
(0.31)
0.07
21.28
3.74
3.55
(14.88)
0.19
2.01
(0.02)
(1.14)
(13.84)
(0.10)
0.21
0.22
(13.51)
(2.31)
(2.25)
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 accounts receivable, cash, investments and prepaid expenses and deposits, less Demand Loan, Term Loan and accounts
payable and accrued liabilities. See “
DEBT, LIQUIDITY AND CAPITAL RESOURCES
” section for the table.
28
PINE CLIFF ENERGY LTD.
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
MANAGEMENT DISCUSSION AND ANALYSIS
2023
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 pursuant to Term Loan, Demand Loan 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; dividends payments; and other such matters.
All such forward-looking information is based on certain assumptions and analyses made by us in light of our experience and
perception of historical trends, current conditions and expected future developments, as well as other factors we believe are
appropriate in the circumstances. The risks, uncertainties and assumptions are difficult to predict and may affect operations, and
may include, without limitation: foreign exchange fluctuations; equipment and labour shortages and inflationary costs; general
economic conditions; industry conditions; changes in applicable environmental, taxation and other laws and regulations as well as
how such laws and regulations are interpreted and enforced; the ability of oil and natural gas companies to raise capital; the effect
of weather conditions on operations and facilities; the existence of operating risks; volatility of oil and natural gas prices; oil and gas
product supply and demand; risks inherent in the ability to generate sufficient cash provided by operating activities to meet current
and other factors,
and future obligations; increased competition; stock market volatility; opportunities available to or pursued by us;
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 4, 2024
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.
Mcfe
Bbl
Mcf
”) using a
NGLs and oil volumes are recorded in barrels of oil (“
Boe
”) are converted to
ratio of one (1) Bbl to six (6) thousand cubic feet. Natural gas volumes recorded in thousand cubic feet (“
barrels of oil equivalent (“
”) using the ratio of six (6) thousand cubic feet to one (1) Bbl. This conversion ratio is based on energy
equivalence primarily at the burner tip and does not represent a value equivalency at the wellhead. The terms Boe or Mcfe may be
misleading, particularly if used in isolation.
”) and are converted to a thousand cubic feet equivalent (“
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
Measurement
The following is a list of abbreviations that may be used in the MD&A:
1
– barrels per day
Bbl/d
1
Boe/d
– barrels of oil equivalent per day
1
Mcf/d
– thousand cubic feet per day
1
Mcfe/d
– thousand cubic feet equivalent per day
MMBoe – millions of barrels of oil equivalent
29
PINE CLIFF ENERGY LTD.
MANAGEMENT DISCUSSION AND ANALYSIS
NGLs
2023
Bbl
1
Mcfe
”) and are
Pine cliff has adopted the standard natural gas liquids (“
”) using a ratio of one (1) Bbl to six (6) thousand cubic feet. Natural gas volumes
converted to a thousand cubic feet equivalent (“
recorded in thousand cubic feet (“
”) 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.
”) and crude oil volumes are recorded in barrels of oil (“
”) are converted to barrels of oil equivalent (“
Boe
Mcf
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
2023
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
2023
Independent Auditor’s Report
To the Shareholders and the Board of Directors 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, 2023 and 2022, and the consolidated statements of comprehensive income,
consolidated statements of changes in shareholders’ equity (deficit) and consolidated statements of cash flows for the years then
ended, and notes to the consolidated financial statements, including a summary of material accounting policy information (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, 2023 and 2022, 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, 2023. 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.
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, 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 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;
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;
32
PINE CLIFF ENERGY LTD.
INDEPENDENT AUDITOR’S REPORT
2023
•
•
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.
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.
33
PINE CLIFF ENERGY LTD.
INDEPENDENT AUDITOR’S REPORT
2023
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
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 4, 2024
34
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2023
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Canadian dollars, 000s)
ASSETS
Current assets
Cash
Accounts receivable
Prepaid expenses and deposits
Investments
Total current assets
Exploration and evaluation
Property, plant and equipment
Deferred income taxes
Total assets
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities
Term loan
Demand loan
Lease liabilities
Decommissioning provision
Total current liabilities
Lease liabilities
Term loan
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 19)
Subsequent events (Note 21)
Note
2023
As at December 31,
2022
5
23,657
-
54,428
27,187
7,321
3,767
208
171
31,186
85,553
7
8
10
5
11
12
9
13
9
11
13
-
2,413
402,295
250,045
43,591
37,042
477,072
375,053
43,840
8,440
4,002
1,119
29,640
-
-
1,002
7,100
6,900
64,501
37,542
1,995
2,296
46,583
-
264,065
201,487
377,144
241,325
14
278,623
277,650
18,746
16,617
(224)
(216)
(197,217)
(160,323)
99,928
133,728
477,072
375,053
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 Calvin B. Jacober”
Philip B. Hodge, President & CEO
and Director
Calvin B. Jacober, Chair of the Audit Committee
and Director
35
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2023
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Canadian dollars, 000s except per share data)
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 compensation
Finance
General and administrative
Gain on disposition
Total expenses
Income before income taxes
Deferred income taxes
NET INCOME FOR THE YEAR
OTHER COMPREHENSIVE LOSS
Unrealized gain (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 income per share ($)
Basic
Diluted
Note
15
8
7, 8
14
16
17
10
14
14
Years ended December 31,
2023
2022
188,852
(19,963)
168,889
5,159
2,212
176,260
98,535
10,810
43,928
2,447
-
2,856
7,630
7,495
-
173,701
2,559
6,562
9,121
86
(102)
8
(8)
9,113
0.03
0.03
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
The accompanying notes are an integral part of these consolidated financial statements.
36
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2023
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
(Canadian dollars, 000s)
Note
Share
capital
Contributed
surplus1
Accumulated
other
comprehensive
loss2
BALANCE AT DECEMBER 31, 2021
Net income for the year
Dividends
Share-based compensation
Other comprehensive loss, net of tax
Exercise of stock options
BALANCE AT DECEMBER 31, 2022
Net income for the year
Dividends
Share-based compensation
Other comprehensive loss, net of tax
Exercise of stock options
14
14
14
14
275,766
-
-
-
-
1,884
277,650
-
-
-
-
973
15,400
-
-
2,456
-
(1,239)
16,617
-
-
2,856
-
(727)
(60)
-
-
-
(156)
-
(216)
-
-
-
(8)
-
Total
Shareholders’
equity
45,418
108,939
(23,574)
2,456
(156)
645
133,728
9,121
(46,015)
2,856
(8)
246
Deficit
(245,688)
108,939
(23,574)
-
-
-
(160,323)
9,121
(46,015)
-
-
-
BALANCE AT DECEMBER 31, 2023
1Contributed surplus is comprised of share-based compensation.
2Accumulated other comprehensive loss is comprised of realized and unrealized losses on financial assets held at fair value through other comprehensive
loss.
(197,217)
278,623
99,928
18,746
(224)
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 income for the year
Items not affecting cash:
Depletion and depreciation
Impairment (reversal)
Site decommissioning grants
Share-based compensation
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
FINANCING ACTIVITIES
Exercise of stock options
Term loan, net of issuance costs
Demand loan
Dividends
Repayment of term debt
Repayment of related party debt
Repayment of promissory notes
Payments on lease obligations
Cash provided by (used in) financing activities
INVESTING ACTIVITIES
Property, plant and equipment
Exploration and evaluation
Property acquisitions
Proceeds from dispositions
Proceeds on sale of investments
CONSOLIDATED FINANCIAL STATEMENTS
2023
Note
Years ended December 31,
2023
2022
8
7, 8
14
16
10
16
13
16
14
11
12
14
9
8
7
8
8
9,121
108,939
43,928
2,447
-
2,856
7,630
(6,562)
-
(733)
(9,493)
17,433
66,627
246
55,000
4,002
(46,015)
-
-
-
(1,086)
12,147
44,074
(4,500)
(5,142)
2,456
8,661
13,620
(2,495)
(2,407)
(5,757)
(6,997)
150,452
645
-
-
(23,574)
(30,000)
(6,000)
(6,000)
(1,232)
(66,161)
(20,932)
(34)
(29,014)
(63)
(109,326)
(1,119)
379
315
2,649
-
Changes in non-cash working capital accounts
16
(3,604)
(9,190)
Cash used in investing activities
Increase (decrease) in cash
Cash - beginning of year
CASH - END OF YEAR
(133,202)
(36,737)
(54,428)
54,428
-
47,554
6,874
54,428
The accompanying notes are an integral part of these consolidated financial statements.
38
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at December 31, 2023 and 2022 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 crude 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, 2023, including 2022 comparative periods.
The policies applied in these consolidated financial statements are based on IFRS issued and outstanding as of March 4, 2024, 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) Functional and presentation currency
The Company’s functional and presentation currency is the Canadian dollar.
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 7 – Exploration and evaluation assets (“E&E”)
Note 8 – Property, plant and equipment (“PP&E”)
Note 13 – Decommissioning provision
Note 14 – Share capital
Cash Generating Units
Cash generating units (“CGUs”) are defined as the lowest grouping of integrated assets that generate identifiable cash inflows that are
largely independent of the cash inflows of other assets or groups of assets. The classification of assets into CGUs requires significant
judgement and interpretations with respect to the integration between assets, the existence of active markets, external users, share
infrastructures and the way in which management monitors Pine Cliff’s operations.
39
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2023
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 compensation
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.
40
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2023
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. MATERIAL 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., Pine Cliff Border
Pipelines Limited and Certus Oil & Gas Inc. All subsidiary companies are wholly owned. All intercompany balances, transactions and
income 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)
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.
d) 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.
41
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2023
e) 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.
f) 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.
g) 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.
h)
Impairment of E&E and PP&E
The carrying amounts of the Company's E&E and PP&E assets are reviewed at the end of each reporting period to determine whether
there is any indication of impairment. If such indication exists, then the assets’ carrying amounts are assessed for impairment. For the
purpose of impairment testing, assets that are not evaluated individually are grouped together into CGUs.
The recoverable amount of an asset or a CGU is the greater of its fair value less cost to sell (“FVLCS”) and value-in-use (“VIU”). An
impairment is recognized if the carrying amount of an asset or its CGU exceeds its recoverable amount. In assessing the carrying value
of its unproved properties, the Company 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.
42
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2023
i)
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 asset held at fair value through other comprehensive income (loss) 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.
j) 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.
k) Government grants
Government 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 asset.
l)
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.
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.
m) 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 and accounts receivable, are classified as financial assets at amortized cost and reported at amortized cost. A provision for
impairment of accounts receivable is established when there is evidence that the Company will not be able to collect all amounts due
43
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2023
according to the original terms of the receivables. Accounts payable and accrued liabilities, Term Loan, as defined herein, and Demand
Loan, as defined herein, 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 income. FVOCI financial instruments including investments are measured
at fair value and changes in fair value are recognized in other comprehensive income. The remaining categories of financial
instruments are recognized at amortized cost using the effective interest method.
n) 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 income (or loss) in the period they occur. The Company has not designated any of its
risk management contracts as effective accounting hedges.
o) Net income and comprehensive income per share
Basic per share amounts are calculated by dividing the income 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.
p) Finance expenses
Finance expenses are comprised of interest expenses and bank charges on borrowings and the accretion of decommissioning provision
and Term Loan. 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.
4. FUTURE ACCOUNTING PRONOUNCEMENTS
The following are future accounting pronouncements issued and not yet effective as at December 31, 2023. The Company intends to
adopt this standard as it becomes 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.
5. FINANCIAL INSTRUMENTS
Financial instruments and fair value measurement
Financial instruments of the Company consist of cash, accounts receivable, investments, accounts payable and accrued liabilities,
Demand Loan and Term loan. The carrying values of cash, accounts receivable, accounts payable and accrued liabilities, Demand Loan
and Term Loan approximate their respective fair values due to the short time before maturing. The carrying value of the Term Loan
approximates its fair value due to its 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. Level 2 fair value measurements are based on pricing inputs other than quoted prices in
active markets included in Level 1. Prices are either directly or indirectly observable as of the reporting date. Level 2 valuations are
based on inputs, including quoted forward prices for commodities, time value and volatility factors, which can be substantially
44
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2023
observed or corroborated in the marketplace. Level 3 valuations are those with inputs for the asset and liability that are not based on
observable market data. 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, 2023 and December 31, 2022:
($000s)
Description
December 31, 2023
December 31, 2022
Carrying value
Fair value
Carrying value
Fair value
Cash
Accounts receivable
Investments
Accounts payable and accrued liabilities
Demand loan
Term loan
-
23,657
208
(43,840)
(4,002)
(55,023)
-
23,657
208
(43,840)
(4,002)
(55,023)
54,428
27,187
171
(29,640)
-
-
54,428
27,187
171
(29,640)
-
-
6. 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.
The Company employs risk management strategies and policies to ensure any exposure to risk is consistent with the Company’s
business objectives and risk tolerance levels. Risk management is ultimately established by the Board of Directors and is implemented
by management. 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 and natural gas.
Commodity prices have fluctuated widely during recent years due to global and regional factors including, but not limited to, supply
and demand, inventory levels, weather, economic changes and geopolitical factors and instability. Changes in 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.
45
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2023
At December 31, 2023, the Company had the following physical natural gas sales contracts in place:
Contractual Term
April 1, 2024 to October 31, 2024
January 1, 2024 to December 31, 2024
April 1, 2024 to March 31, 2025
April 1, 2024 to October 31, 2025
January 1, 2025 to December 31, 2025
January 1, 2026 to February 28, 2026
January 1, 2024 to October 31, 2024
Delivery
Point
AECO
AECO
AECO
AECO
AECO
AECO
TransGas3
1 Prices reported are the weighted average prices of the periods.
2 Price has been converted from $/GJ to $/Mcf by multiplying by 1.05.
3 Subsidiary of SaskEnergy, Saskatchewan.
Physical Delivery
Quantity (GJ/day)
10,500
9,626
5,000
2,500
9,037
8,311
13,000
Contract Price
($CAD/GJ)1
$2.76
$3.49
$2.79
$2.85
$3.57
$3.58
AECO 5A + 0.46/GJ
Contract Price
($CAD/Mcf)1,2
$2.90
$3.66
$2.93
$2.99
$3.75
$3.76
AECO 5A + 0.48/Mcf
Subsequent to December 31, 2023, the Company had the following additional physical natural gas sales contracts in place:
Contractual Term
April 1, 2024 to October 31, 2025
April 1, 2024 to December 31, 2025
Delivery
Point
AECO
AECO
1 Prices reported are the weighted average prices of the periods.
2 Price has been converted from $/GJ to $/Mcf by multiplying by 1.05.
Physical Delivery
Quantity (GJ/day)
5,000
5,000
Contract Price
($CAD/GJ)1
$2.41
$2.85
Contract Price
($CAD/Mcf)1,2
$2.53
$2.99
At December 31, 2023, the Company had the following physical crude oil sales contracts in place:
Contractual Term
January 1, 2024 to December 31, 2024
January 1, 2025 to December 31, 2025
January 1, 2026 to February 28, 2026
Crude Oil
WTI Fixed Price
WTI Fixed Price
WTI Fixed Price
1 Prices reported are the weighted average prices of the periods.
Contractual Term
January 1, 2024 to December 31, 2024
Crude Oil
WTI Fixed Price
1 Prices reported are the weighted average prices of the periods.
Contractual Term
January 1, 2024 to September 30, 2024
Crude Oil
WTI Fixed Price
1 Prices reported are the weighted average prices of the periods.
Interest Rate Risk
Physical Delivery Quantity
(Bbl/day)
412
472
435
Contract Price
($USD/Bbl)1
72.87
68.91
66.60
Physical Delivery Quantity
(Bbl/day)
250
Contract Price
($CAD/Bbl)1
$107.00
Physical Delivery Quantity
(Bbl/month)
5,000
Contract Price
($USD/Bbl)1
$81.25
Interest rate risk refers to the risk that the value of a financial instrument or funds flows associated with the instrument will fluctuate
due to changes in market interest rates. Interest rate risk arises from interest bearing financial assets and liabilities that the Company
uses. The principal exposure of the Company is on its borrowings which have a variable interest rate which gives rise to a funds flow
interest rate risk.
At December 31, 2023, the Company’s debt facilities consist of a $56.3 million non-revolving first lien term loan (the “Term Loan”)
and an $8.0 million demand operating loan (the “Demand Loan”), secured by specific equipment assets. The borrowings under the
Term Loan are at the Canadian Prime Rate plus 3.65%, (whereby Canadian Prime Rate cannot be less than 6.95%) and the Demand
Loan is at the banks’ prime lending rate plus 2.0%.
Pine Cliff has not entered into any derivative financial instruments to manage this risk at this time.
46
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2023
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. The Company assumes
full risk in respect of equity price fluctuations.
Foreign Currency Exchange Risk
The Company is 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.
Sensitivity Analysis
Based on historic movements and volatilities in the interest rate markets and management’s current assessment of the financial
markets, the Company believes that a 1.0% variation in the Canadian prime interest rate is reasonably possible over a 12-month period.
A 1.0% increase in the Canadian prime lending rate would decrease both annual and comprehensive income by $0.6 million, assuming
the change in interest rate is effective from the beginning of the year and the amount of the Term Loan and the Demand Loan as at
December 31, 2023.
A 1.0% decrease in the Canadian prime lending rate would increase both annual and comprehensive income by $0.2 million, assuming
the change in interest rate is effective from the beginning of the year and the amount of the Term Loan and the Demand Loan as at
December 31, 2023.
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 accounts
receivable 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 accounts receivable, Pine Cliff assesses the financial strength of its counterparties through internal evaluation and limiting
exposure to any one counterparty.
The Company’s accounts receivable balance at December 31, 2023 of $23.7 million (December 31, 2022 – $27.2 million), is primarily
with oil and gas marketers and joint venture partners. Amounts due from these parties have generally been received within 30 to 90
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, 2023, there was $1.9 million (December 31, 2022 - $0.4 million) of accounts receivable
over 90 days. Pine Cliff assesses its accounts receivable quarterly to determine if there has been any impairment. During the year
ended December 31, 2023, the Company recorded a bad debt expense (recovery) of $nil (December 31, 2022 – ($0.4 million)) against
accounts receivable.
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 (used in) 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. After examining the economic factors that are causing the liquidity
risk facing the Company, the judgment applied to these factors, and the various initiatives that the Company has and will undertake to
strengthen its financial position, the Company believes it will have sufficient liquidity to support its ongoing operations and meet its
financial obligations as they come due for at least the next twelve months. A significant decline in commodity prices would hamper the
Company’s ability to rectify it’s working capital deficit and potentially require the Company to seek other sources of funding. If
required, Pine Cliff will also consider reducing its dividend, 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.
47
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2023
The following table details the contractual maturities of Pine Cliff’s financial liabilities as at December 31, 2023:
2024
2025
2026
2027
2028
Thereafter
($000s)
Accounts payable and accrued liabilities
Demand loan
Term loan1
Lease obligations1
43,840
4,002
14,216
1,252
-
-
13,327
1,082
Total financial liabilities
1 These amounts include the notional principal and interest payments.
63,310
14,409
7. EXPLORATION AND EVALUATION
Cost:
Balance at December 31, 2021
Additions
Balance at December 31, 2022
Additions
Impairment
Balance at December 31, 2023
E&E Impairment Assessment
-
-
44,605
819
45,424
-
-
-
229
229
-
-
-
7
7
-
-
-
-
-
($000s)
2,350
63
2,413
34
(2,447)
-
During the year ended December 31, 2023, the Company determined that the E&E mining assets were not commercially viable and
recognized an impairment for the outstanding balance in the statements of comprehensive income.
8. PROPERTY, PLANT AND EQUIPMENT
Cost:
Balance at December 31, 2021
Additions
Right-of-use assets
Acquisitions
Dispositions
Decommissioning provision
Balance at December 31, 2022
Additions
Right-of-use assets
Acquisitions
Dispositions
Decommissioning provision
Balance at December 31, 2023
Accumulated depletion and depreciation:
Balance at December 31, 2021
Depletion and depreciation
Impairment reversal
Dispositions
Balance at December 31, 2022
Depletion and depreciation
Dispositions
Balance at December 31, 2023
Carrying value at:
December 31, 2022
December 31, 2023
48
PINE CLIFF ENERGY LTD.
($000s)
707,663
29,014
500
1,119
(7,046)
(35,295)
695,955
20,932
966
136,914
(2,455)
37,809
890,121
($000s)
(413,590)
(44,074)
4,500
7,254
(445,910)
(43,928)
2,012
(487,826)
($000s)
250,045
402,295
CONSOLIDATED FINANCIAL STATEMENTS
2023
PP&E Impairment Assessment
As at December 31, 2023, 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, 2023, there were no indicators of impairment or additional impairment reversals for PP&E assets
and therefore an impairment test was not required.
Acquisition
On December 13, 2023, the Company acquired Certus Oil & Gas Inc. (“Certus”) for total consideration of $108.9 million (the
“Acquisition”). This amount included $72.3 million paid to Certus shareholders, $33.0 million to repay Certus term debt and settle
(cid:976)inancial derivatives, the assumption of a working capital de(cid:976)iciency of $2.6 million and payment of the Company’s closing costs of $1.0
million. As part of the acquisition the Company acquired decommissioning obligations of $26.5 million. As a result of completing the
Acquisition, Certus became a wholly owned subsidiary of Pine Cliff and was subsequently amalgamated with Pine Cliff on January 1,
2024.
The Acquisition was funded from existing cash resources and the Term Loan. The Company applied the optional concentration test
under IFRS 3, which resulted in the Acquisition being accounted for as an asset acquisition. The acquired assets are included in the
Central CGU.
9. LEASE LIABILITIES
Pine Cliff had the following future commitments associated with its lease liabilities:
($000s)
2023
2024
2025
2026
2027
2028
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
2023
-
1,252
1,082
819
229
7
3,389
(275)
3,114
(1,119)
1,995
As at December 31,
2022
1,154
1,017
847
585
-
-
3,603
(305)
3,298
(1,002)
2,296
For the year ended December 31, 2023, interest expense of $0.2 million (December 31, 2022 - $0.2 million) and a total cash outflow of
$1.1 million (December 31, 2022 - $1.2 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
$8.2 million and $5.4 million in depreciation on the right-of-use-assets are included in PP&E. Refer to Note 8.
10. DEFERRED INCOME TAXES
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:
Income before income taxes
Corporate income tax rate
Computed income tax expense
Non-deductible compensation expense
Changes in the unrecognized deferred tax assets
Return to provision true-up
Deferred income taxes
2023
2,559
23.5%
601
677
(7,139)
(701)
(6,562)
Years ended December 31,
2022
122,559
23.5%
28,807
600
(15,955)
168
13,620
The Company has recorded a deferred tax asset of $43.6 million (December 31, 2022 - $37.0 million) related to the benefit of tax pools,
as it is probable that they will be recovered.
49
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2023
Deferred income tax assets
Share issue costs
Other
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
2023
1,116
265
63,716
(31,009)
732
661
25,352
60,833
(17,242)
43,591
As at December 31,
2022
19
21
48,963
(8,254)
775
475
4,741
46,740
(9,698)
37,042
Pine Cliff has approximately $388.0 million in tax pools as at December 31, 2023 (December 31, 2022 - $240.7 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
$108.6 million (December 31, 2022 - $20.8 million) that expire between the years 2031 and 2040.
The Company had the following tax pools, including non-capital loss carry-forwards, at December 31, 2023:
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
Total
1 Non-capital losses expire between the years 2031 and 2040.
2 The capital losses carried forward can only be claimed against taxable capital gains.
11. TERM LOAN
Rate of Utilization (%)
7 - 55
10
30
100
20
100
As at December 31,
2023
38,571
188,942
41,274
167
4,747
108,626
5,624
387,951
On December 13, 2023, the Company entered into a three-year first lien, non-revolving term loan facility. The amounts borrowed under
the Term Loan bear interest at an annual interest rate equal to Canadian Prime Lending Rate (the “Prime Rate”) plus 3.65%, where
Prime Rate cannot be less than 6.95%. The Company is required to make mandatory principal quarterly repayments equal to $2.11
million, payable on the first banking day of January, April, July and October of each calendar year, commencing April 1, 2024. The Term
Loan has a maturity date of December 13, 2026 on which date the remaining outstanding principal balance is to be paid.
The Company shall not have the right to make an optional prepayment of the outstanding principal balance until after December 12,
2025, which shall include an amount of 1.5% of the principal amount prepaid, except for the following one-time optional prepayments:
(i)
(ii)
(iii)
as a one-time option on December 12, 2024, make a prepayment of a portion (but not all) of the outstanding principal
amount plus an amount of 4% of the principal amount prepaid; provided that the portion of the outstanding principal
balance to be prepaid: (A) is not less than 15% and (B) not greater than 25%, in each case, of the outstanding principal
balance under the Term Loan immediately prior to such partial prepayment;
as a one-time option on March 12, 2025, make a prepayment of all or any portion of the outstanding principal balance
plus an amount of 4% of the principal amount prepaid; provided that such outstanding principal balance to be prepaid
is not less than 15% of the outstanding principal balance under the Term Loan immediately prior to such partial
prepayment; and
as a one-time option on June 12, 2025, make a prepayment of all or any portion of the outstanding principal balance plus
an amount of 3% of the principal amount prepaid; provided that such outstanding principal balance to be prepaid is not
less than 15% of the outstanding principal balance under the Term Loan immediately prior to such partial prepayment.
The amount drawn under the Term Loan at December 31, 2023 was $56.3 million (December 31, 2022 – $nil). Based on the calculated
fair value of the Term Loan as at December 31, 2023, the effective interest rate was determined to be 12.9% using the effective interest
method. The effective interest rate was calculated by discounting future payments of interest and principal with the residual value
allocated to issue costs of $1.3 million. The value of the loan will accrete up to the principal balance at maturity. Interest accrued at
December 31, 2023 was $0.3 million (December 31, 2022 - $nil). The borrowings were used to fund the Acquisition.
50
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2023
Security for the Term Loan consists of floating demand debentures totaling $110.0 million (December 31, 2022 - $nil) over all of the
Company’s assets and a general security agreement with first priority ranking over all personal and real property.
The Company is subject to certain financial covenants under its Term Loan as follows:
Consolidated Debt, as defined herein, to EBITDA, as defined herein, ratio shall not exceed 1:5:1.0; and
Asset Coverage ratio, as defined herein, of not less than 1.5:1.0.
Consolidated Debt is defined as all indebtedness for borrowed money, including issued and drawn letters of credit or letters of
guarantee.
EBITDA is defined as net income for the trailing twelve-month period excluding finance costs, provision for current and deferred
income tax, depletion and depreciation, share option compensation and gain or loss on sale of assets and impairment of assets, less
cash taxes paid and decommissioning expenses incurred during the period.
Asset Coverage ratio is defined as the proved developed producing reserves of the Company (before income tax, discounted at 10%),
as evaluated by an independent third-party engineering report and evaluated on strip commodity pricing, divided by the consolidated
borrowings of the Company at December 31 of the calendar year. The ratio is calculated and revaluated for strip pricing at June 30
period end, based on an internally prepared engineering report.
The Company was in compliance with its Term Loan covenants at December 31, 2023.
12. DEMAND LOAN
The Company has a Demand Loan of $8.0 million with a Canadian chartered bank, of which $4.0 million was drawn at December 31,
2023 (December 31, 2022 - $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 $6.7 million and
incur an issuance fee of 2.38%. At December 31, 2023, the Company had issued $0.8 million in letters of credit (December 31, 2022 -
$1.7 million).
The Demand Loan is secured by a general security agreement over certain tangible field facilities of the Company.
The Company is subject to the following financial covenant under its Demand Loan:
Senior Debt, as defined herein, to Net EBITDA, as defined herein, ratio shall not exceed 3.0:1.0 at the end of each quarter-end.
Senior Debt is defined as any secured indebtedness for borrowed money. Net EBITDA shall mean net income excluding finance costs,
provision for current and deferred income tax, depletion and depreciation, share option compensation and gain or loss on sale of assets
and impairment of assets, less cash taxes and dividends paid, on a trailing twelve-month basis.
The Company was in compliance with its Demand Loan covenant at December 31, 2023.
13. DECOMMISSIONING PROVISION
The total current and long-term decommissioning provision of $271.2 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, 2023, the estimated total undiscounted and uninflated amount required to settle the decommissioning liabilities was
$327.3 million (December 31, 2022 - $277.3 million). The discounted and inflated amount required to settle the decommissioning
liabilities of $271.2 million has been calculated assuming a 2.00% inflation rate (December 31, 2022 – 2.00%) and discounted using
an average risk-free interest rate of 3.08% (December 31, 2022 – 3.33%). 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.
51
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2023
Decommissioning provision, January 1, 2022
Increase in liabilities relating to development activities
Provisions related to acquisitions
Provisions related to dispositions
Site decommissioning grants
Decommissioning expenditures
Changes in estimates
Accretion
Decommissioning provision, December 31, 2022
Increase in liabilities relating to development activities
Provisions related to acquisitions
Decommissioning expenditures
Changes in estimates and discount rates
Accretion
Decommissioning provision, December 31, 2023
Less current portion of decommissioning provision
Non-current portion of decommissioning provision
14. SHARE CAPITAL
Authorized
($000s)
248,423
113
2,835
(7,965)
(5,142)
(5,757)
(30,278)
6,158
208,387
136
27,588
(9,493)
37,673
6,874
271,165
(7,100)
264,065
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, 2022
Exercise of stock options
Balance, December 31, 2022
Exercise of stock options
Balance, December 31, 2023
Stock Options
Common Shares
(000s)
339,539
11,370
350,909
5,389
356,298
Share capital
($000s)
275,766
1,884
277,650
973
278,623
The Company provides an equity settled stock option plan (the “Option Plan”) for its directors, employees and consultants. Under the
Option Plan, the Company may grant stock options up to 10% of outstanding Common Shares on the grant date. The term and vesting
period of the options granted are determined at the discretion of the Company’s board of directors. The exercise price of each option
granted equals the market price of the Common Shares immediately preceding the date of grant and the option’s maximum term is five
years.
Stock options issued and outstanding:
Outstanding, January 1, 2022
Granted
Exercised
Expired
Forfeited
Outstanding, December 31, 2022
Granted
Exercised
Expired
Forfeited
Outstanding, December 31, 2023
Exercisable, December 31, 2023
52
PINE CLIFF ENERGY LTD.
Options
(000s)
25,270
7,162
(12,896)
(291)
(921)
18,324
11,603
(6,291)
(596)
(2,335)
20,705
2,970
Weighted-average
exercise price
($ per Common
Share)
0.25
1.89
0.23
0.52
0.81
0.87
1.32
0.24
1.03
1.13
1.28
1.29
CONSOLIDATED FINANCIAL STATEMENTS
2023
Exercise price:
$0.145 - $0.20
$0.21 - $0.33
$0.34 - $1.30
$1.31 - $1.60
$1.61 - $1.92
Stock options
outstanding
(000s)
277
3,619
9,152
2,324
5,333
20,705
Weighted-average
remaining term
(years)
0.4
1.2
2.4
2.5
1.4
1.9
Stock options
exercisable
(000s)
277
818
4
109
1,762
2,970
Weighted-average
remaining term
(years)
0.4
0.4
1.3
0.3
0.4
0.4
The Company records share-based compensation 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, 2023, the
Company granted 11,603,180 stock options (December 31, 2022 – 7,161,600) with a fair value of $0.34 (December 31, 2022 - $0.73)
per option using the Black-Scholes option pricing model using the following key assumptions:
Assumptions (weighted average):
Exercise price ($)
Estimated volatility of underlying Common Shares (%)
Expected life (years)
Risk-free rate (%)
Forfeiture rate (%)
Expected dividend yield (%)
Years ended December 31,
2022
2023
1.89
1.32
73.2
61.5
3.0
3.0
2.7
3.8
7.7
7.5
5.1
9.8
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 income per share calculation ($000s):
Numerator
Net income for the year
Denominator (000s)
Weighted-average Common Shares outstanding –
basic
Dilutive effect of options outstanding
Weighted-average Common Shares outstanding –
diluted
Net income per Common Share – basic ($)
Net income per Common Share – diluted ($)
Years ended December 31,
2022
2023
9,121
108,939
354,057
5,318
359,375
0.03
0.03
346,443
13,590
360,033
0.31
0.30
Dividends declared and paid for the year ended December 31, 2023 were $46.0 million (December 31, 2022 - $23.6 million) or $0.13
per Common Share ($0.07 per Common Share for the year ended December 31, 2022).
15. 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.
53
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2023
($000s)
Natural gas
NGLs
Crude oil
Total commodity sales
16. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in non-cash working capital:
Accounts receivable
Prepaid expenses and deposits
Accounts payable and accrued liabilities
Change related to:
Operating activities
Investing activities
Finance expenses:
Interest expense and bank charges
Non cash:
Accretion on decommissioning provision
Accretion on promissory notes and term loan/term debt
Total finance expenses
Years ended December 31,
2023
117,432
29,149
42,271
188,852
2022
217,772
38,549
49,887
306,208
Years ended December 31,
2022
2023
3,530
(3,554)
14,200
14,176
17,780
(3,604)
14,176
(5,574)
(321)
(9,945)
(15,840)
(6,997)
(9,190)
(16,187)
Years ended December 31,
2022
2,407
2023
733
6,874
23
7,630
6,157
97
8,661
Cash interest paid in the year ended December 31, 2023, was $0.2 million (December 31, 2022 - $3.6 million).
17. 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
18. KEY MANAGEMENT RENUMERATION
Years ended December 31,
2022
7,424
2,759
(3,364)
6,819
2023
7,312
3,607
(3,424)
7,495
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 compensation2
Total key management remuneration
Years ended December 31,
2022
2,587
1,007
3,594
2023
2,053
1,265
3,318
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 compensation computed for officers and directors are included in note 14 and include the fair value of awards expensed in the year.
54
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2023
19. COMMITMENTS
As at December 31, 2023, the Company has the following commitments and other contractual obligations:
2024
2025
2026
2027
2028
Thereafter
($000s)
Accounts payable and accrued liabilities
Demand loan
Term loan1
Lease obligations1
Transportation2
43,840
4,002
14,216
1,252
10,330
-
-
13,327
1,082
8,047
-
-
44,605
819
6,924
Total commitments and contingencies
1 These amounts include the notional principal and interest payments.
2 Firm transportation agreements.
73,640
22,456
52,348
20. CAPITAL STRUCTURE
-
-
-
229
5,235
5,464
-
-
-
7
1,254
1,261
-
-
-
-
748
748
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 (used in) 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 and dividend programs.
The Company defines and computes its positive net cash/net debt as follows:
($000s)
Cash
Accounts receivable
Prepaid expenses and deposits
Investments
Less:
Accounts payable and accrued liabilities
Term loan
Demand loan
Positive net cash (net debt)
Equity
December 31, 2023
December 31, 2022
-
23,657
7,321
208
54,428
27,187
3,767
171
(43,840)
(55,023)
(4,002)
(71,679)
99,928
(29,640)
-
-
55,913
133,728
The Company’s cash provided by (used in) operating activities is expected to provide the necessary capital for oil and gas exploration
and development activities. However, due to the potential impact of adverse changes in commodity prices, production rates, capital
efficiencies and service costs, the Company may not generate sufficient cash provided by operating activities to entirely fund its
planned oil and gas capital programs or future acquisitions. Accordingly, the Company will continually evaluate the stage of
development of its proved and producing reserves and the expected return on investment of acquisitions and consider issuing equity
and/or debt or amend its dividend 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:
55
PINE CLIFF ENERGY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
2023
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)
Net debt-to-adjusted funds flow
2023
66,627
(17,433)
9,493
58,687
(71,679)
1.2
As at December 31,
2022
150,452
6,997
5,757
163,206
55,913
-
The Company’s financial objectives and strategy as described above have remained substantially unchanged over the reporting
periods. These objectives and strategy are reviewed on an annual basis. The Company believes its ratios are within reasonable limits,
in light of the relative size of the Company, the long-term nature of its net debt, including its Term Loan and its capital management
objectives.
21. SUBSEQUENT EVENTS
Dividends
On January 31, 2024 and February 29, 2024, the Company paid a monthly dividend of $0.01083 per Common Share.
On March 4, 2024, the Company declared a monthly dividend of $0.005 per Common Share. The dividend is payable March 28, 2024,
to all shareholders of record on March 15, 2024.
56
PINE CLIFF ENERGY LTD.
CORPORATE INFORMATION
2023
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
William S. Rice - Chairman
Hilary A. Foulkes
Robert B. Fryk
Philip B. Hodge
Calvin B. Jacober
Jacqueline R. Ricci
OFFICERS
Philip B. Hodge
President and Chief Executive Officer
Terry L. McNeill
Chief Operating Officer
Alan MacDonald
Chief Financial Officer and Corporate Secretary
Kristopher B. Zack
Vice President Finance
HEAD OFFICE
850, 1015 – 4th Street SW
Calgary, Alberta T2R 1J4
Phone: (403) 269-2289
Fax: (403) 265-7488
57
PINE CLIFF ENERGY LTD.