Pine Cliff Energy: Good News At A good Price

Pine Cliff Energy recently sold a non-core oil asset for C$31M. This asset produced 500 boe per day, which brings us to a price of C$62,000 per flowing barrel.

Not bad as Raging River Exploration recently completed a transaction in the Viking area for C$85,000 per flowing barrel. The premium is understandable as the transaction included more than 100 additional drilling locations.

This sale reduces Pine Cliff’s net debt drastically to C$75M from C$125M in August. This will strengthen the company and allow it to thrive in the uncertainty ahead.

Indeed, while natural gas futures increased in 2017, the outlook for 2018 and beyond turned bearish.

AECO Natural Gas Monthly Index December 10


The company will be able to withstand a period of lower natural gas prices with its cleaner balance sheet. Just to remind us:

The current environment of natural gas prices has created opportunities to continue to make value-adding and potentially counter-cyclical acquisitions and Pine Cliff anticipates that it will continue to be able to act quickly on acquisition opportunities identified and to fund these activities from working capital, debt or equity issues.

Pine Cliff Energy, Website, “About Us”

Pine Cliff itself was in trouble in early 2016: management wasn’t thinking about potential value-adding, couter-cyclical acquisitions in April 2016. The cleaner balance sheet will enable Pine Cliff to execute its strategy and withstand price shocks.

Disclosure: I am long PNE. Not for republication on Seeking Alpha.

Pine Cliff Energy’s Insiders To The Rescue!

We heard good and bad news today from Pine Cliff Energy. First, we know management truly have shareholders in their mind. They will lend C$11M to the company to help it ride the current bank redetermination process. Fortunately for us:

The Debentures mature on July 29, 2018, can be repaid at any time without penalty and will bear interest at 0.25% less than the monthly average effective interest rate paid to the Syndicate.

Pine Cliff Energy Press Release, August 2, 2016

Secondly, Pine Cliff sold a non-core oil asset for C$5.5M, or C$55,000 per flowing barrel. It’s close to a fire sale at first sight. However, considering the pressure the company is under to renew its credit facility and the current energy environment, it’s acceptable.

Total divestiture amounts to C$30M plus C$11M in insider debentures. Debt will amount to C$156M at the end of Q2 using a conservative -C$12M funds flow from operations.

Therefore, the current credit facility stands at C$115M when ignoring June and July funds flow from operations. Total debt stands at C$125M. This is a considerable credit squeeze considering the existing C$185M credit facility.

The bank redetermination process has been extended to August 10.

Disclosure: I am long PNE. Not for republication on Seeking Alpha.

Pine Cliff Energy Saved By Natural Gas’ Impressive Recovery

Natural gas recovered to more than $2.70 per MMBTU from the lows of early March, and it was even better in Alberta: price had a two-bagger in a matter of months. AECO spot price is currently trading at C$2.00 per MMBTU.

AECO Natural Gas Spot Price July 19


Take a look at my other quick analysis back in early April: natural gas price barely broke the C$2.50 per MMBTU mark in the winter. The picture is quite different today.

AECO Natural Gas Monthly Index July 19


This rally couldn’t happen at a better time for Pine Cliff: the company was in trouble. Indeed, the company is currently in the process of redetermining its credit facility by a syndicate of banks. Needless to say that capital was scarce. The company would have been obligated to raise capital at unfavorable terms for us current shareholders. Even though the natural gas rally is helping, Pine Cliff could still need to raise capital depending on how hungry the banks are. The redetermination process will be completed by July 30.

Now, with the collapse of AECO natural gas price behind us, I believe Pine Cliff learned a lesson. It needs to hedge at least part of its natural gas production. The banks could already be pushing for this. As we can see, AECO futures are already in backwardation: it makes sense to hedge.

The credit facility’s redetermination is certainly a big catalyst, good or bad depending on the outcome. The stock will have more upside should the credit facility remains untouched.

Disclosure: I am long PNE. Not for republication on Seeking Alpha.

Pine Cliff Energy Falls Hard: Hedging Or Not Hedging

There is almost no good news coming out of the natural gas market now. My current position in Pine Cliff Energy is hemorrhaging money and is deeply in the red.

PNE April 6


At least we saw heavy buying and clear bullish signs from a technical point of view in the last two days.

However, we could ask ourselves why is the share price tanking like that? Of course, as we know, natural gas price fell off a cliff. However, the NYMEX natural gas price is approaching $2 per MMBTU from lows of around $1.75 per MMBTU. Therefore, the price has recovered while the stock collapsed, all at the same time.

We need to look at the substantial fall of the AECO natural gas price, which is related to the Albertan natural gas market, for our answer. AECO natural gas price is testing the C$1.10 per MMBTU level again.

Daily AECO Natural Gas Price April 6


As you can see, the fall has been fast and substantial. Indeed, monthly price, which trades higher than the daily index, was trading at more than C$2 per MMBTU as recently as a month ago. Plus, futures indicate that natural gas price will continue to go lower. Expect the daily index to go even lower given the current market sentiment.

Monthly AECO Natural Gas Price April 6


The only good news is that price should recover past C$2 per MMBTU come November.

The collapse of natural gas price may be due to weak domestic demand. Natural gas exports to the US were normal, spiking in January, which is usual from what we can see from historic numbers. Natural gas imports should decrease coming in the summer, which is also normal.

All this volatility reflects the bigger risks the company is taking by not hedging part of its natural gas production. Of course, it is beneficial for shareholders if the natural gas price increases. The contrary is also true: bearish natural gas price movements will also affect Pine Cliff’s share price by taking it to extremes. All in all, you need nerves of steel when investing in Pine Cliff.

Disclosure: I am long PNE.

I Will Be Patient Before Doubling Down On Natural Gas

As we know, natural gas is trading at multi-year lows. All producers are under financial stress and their share price has reacted accordingly. Daily AECO natural gas prices are dangerously close to the C$1.10 per Mcf level. Yes you read that right: this is $0.84 per Mcf using Friday’s exchange rate. Natural gas price have been collapsing since the start of the year.

As you probably could imagine, my position in Pine Cliff Energy is deeply in the red. I am not planning to sell, instead, I plan to double down on natural gas in the short to medium-term. Natural gas is still a good long-term investment.

To profit from the rise of natural gas, let’s build a position in another natural gas producer. Only two companies survived the initial TSX screening: Advantage Oil & Gas and Painted Pony Petroleum. The details of the screening will not be posted here as a similar screening has been detailed less than a month ago.

Of course, let’s concentrate our position in only one: either Advantage or Painted Pony. Therefore, the question is: which one is the best of the two?

First, let’s take a look at the operating costs of the two producers against the other preferred low-cost producers.

Advantage O&G, Painted Pony Petroleum, Peyto Exploration, Pine Cliff Energy & Tourmaline Oil - Cost Profiles (C$/Mcf)

Operating costs0.351.050.411.401.03
Operating break-even0.451.090.541.571.15
G&A costs0.110.550.080.160.11
Corporate break-even0.771.740.781.821.36

Source: Financial Reports

First, as you know, Advantage has one the best cost profiles of the industry. Second, we can see that Painted Pony’s cost profile is competitive and compares favorably to the cost profiles of Tourmaline and Pine Cliff if we exclude Painted Pony’s G&A costs.

Painted Pony’s G&A costs are very high compared to its peers: this tells us that the company already has the people to manage its ambitious growth plan. Indeed, Painted Pony’s G&A costs will be cut in half in 2016 and will decrease further in the following years by taking into account Painted Pony’s ambitious growth in the medium-term. The company plans to triple its production in the next two years.

Let’s take a look a the reserves of both Advantage and Painted Pony.

Advantage Oil & Gas & Painted Pony - Net Reserves & PV10

1P natural gas, net (Bcf)1,1401,610
2P natural gas, net (Bcf)1,7143,543
PV10, after-tax, 1P (C$M)1,071953
PV10, after-tax, 2P (C$M)1,6812,047

Source: Annual Reports

As you can see, while Advantage’s 1P reserves are lower, they are more valuable. The contrary is true for Advantage’s 2P reserves. However, let’s not forget that Painted Pony’s 2P reserves are twice as big. Also, comparing a company to its 2P reserves is of course riskier. Therefore I don’t see any company taking the upper hand just based on the NPV of their reserves.

It is interesting to see that Advantage was trading on Friday at a market cap of C$1,246M, which is higher than the NPV of its 1P reserves. Painted Pony was trading on Friday at a market cap of C$398M on the TSX.

As you can see, the picture is not clear only by looking at the cost profiles and the reserves of both Advantage and Painted Pony. We will need to dig deeper to find the best pick between the two. The result will be presented in a following post. Let’s look at the valuation of each companies and compare them to their cash flow from operations and their expected earnings in 2016 and 2017.

Disclosure: I am long PNE.

Pine Cliff Energy: Q4 2015 Earnings Highlights And Cost Profile

Pine Cliff Energy reported its Q4 2015 results last week. As you know, it was a pretty good year for the company.

  • The acquisition of natural gas assets in central Alberta has been completed. This essentially doubles production.
  • The corporate break-even will get even lower. The new corporate break-even of the company is now below C$2 per Mcf. This gives the company some breathing room given the current environment. Indeed, AECO natural gas price fell to as low as C$1.12 per Mcf in early-March.

Let’s focus next on the cost profile of the company and of its low cost peers. We will also be able to verify the corporate break-even of the company: will it be under C$2 per Mcf this year?

Advantage O&G, Peyto Exploration, Pine Cliff Energy & Tourmaline Oil - Cost Profiles (C$/Mcf)

Operating costs0.350.411.401.03
Operating break-even0.450.541.571.15
G&A costs0.
Corporate break-even0.770.781.821.36

Source: Annual Reports, Cadotte Capital Partners

As you can see, the corporate break-even is already under C$2 per Mcf. Mission accomplished! Investors should also expect lower operating costs this year according to the management. Of course this will also help to lower the corporate break-even.

Back to the table above. Clearly both Advantage and Peyto are in another league when it comes to operating costs. Note that Tourmaline includes revenue from the processing of natural gas for third-parties in their operating costs: their true costs are higher.

Interests paid per Mcf are higher for Advantage and Peyto: these two producers are more leveraged than the others. Obviously this is acceptable considering that their operating costs are very low.

While some peers have an even better cost profile than Pine Cliff, it’s still a low cost natural gas producer.

Let’s quickly move to the debt load of the company, which skyrocketed this year. The good news is that interests paid per Mcf are still below those of its competitors.

As we saw this year, Pine Cliff is issuing shares to partially fund its acquisitions. Dilution is nonexistent if we look at production per share and reserves per share. Therefore, we shouldn’t be concerned about shareholder dilution for now. Take a look at this figure taken from the March 2016 presentation.

PNE Shareholder Dilution March 22

Source: Pine Cliff Energy March 2016 Corporate Presentation

Finally, let’s recap the guidance provided by the company.

  • Production in 2016 will stabilize to over 22,500 boe/d, even with limited capital expenditures of only C$10M.
  • All excess cash flow from operations will be used to pay debt.

Of course, the company will still be looking for quality natural gas assets at fire sale price, and there should be plenty given the current environment in natural gas. Business as usual.

Disclosure: I am long PNE.