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Pipestone Energy Corp. Reports Record Second Quarter 2022 Results and Provides an Operations Update

·32-min read
Pipestone Energy Corp.
Pipestone Energy Corp.

Figure 1

Development Map
Development Map

CALGARY, Alberta, Aug. 10, 2022 (GLOBE NEWSWIRE) -- (PIPE – TSX) Pipestone Energy Corp. (“Pipestone” or the “Company”) is pleased to report its second quarter 2022 financial and operational results, and to provide an update on its operations.

SECOND QUARTER 2022 CORPORATE HIGHLIGHTS:

  • The Company generated record revenue of $210.4 million, which represents more than a two and a half times increase over Q2 2021 revenue of $82.3 million, and a 37% increase from Q1 2022 revenue of $153.5 million;

  • In Q2 2022, Pipestone achieved record average quarterly production totaling 30,770 boe/d (28% condensate, 41% total liquids), representing a 32% quarterly increase over Q2 2021 production of 23,336 boe/d (31% condensate, 46% total liquids), and a 12% increase over Q1 2022 production of 27,581 boe/d (29% condensate, 43% total liquids). In April 2022, the Company achieved its highest single month production rate to date averaging 35,830 boe/d. Subsequently, production volumes in the quarter were negatively impacted by planned third-party processing facility outages including a 24 day turnaround at the Veresen Midstream Hythe Plant, and an 11 day turnaround at the Keyera Wapiti Plant;

  • The Company realized a record operating netback(1) of $41.97/boe, an increase of 114% over Q2 2021 and an 11% increase over Q1 2022. Excluding the realized loss on commodity risk management contracts of $10.51/boe, the Company’s field operating netback(1) for Q2 2022 was $52.48/boe;

  • The Company also achieved record adjusted funds flow from operations(1) of $110.4 million ($0.58 per share basic and $0.39 per share fully diluted), more than tripling its adjusted funds flow from operations(1) of $35.5 million in Q2 2021, while representing a 28% or $24.1 million increase from Q1 2022 adjusted funds flow from operations(1) of $86.3 million;

  • Total capital expenditures, including capitalized G&A, were $77.8 million during the three months ended June 30, 2022. The Company continued its 2022 capital program with 10 wells drilled and 9 wells completed in the quarter;

  • In Q2 2022, the Company generated record free cash flow(1) of $32.6 million, representing 30% of its adjusted funds flow from operations(1) (as compared to the three months ended June 30, 2021 – free cash flow deficit of $12.1 million). In executing its return of capital to shareholders plan, the Company utilized $14.0 million or 43% of the free cash flow(1) to repurchase common shares during the quarter, with the remainder allocated to deleveraging its balance sheet. The Company anticipates that it will continue to produce free cash flow(1) throughout the remainder of 2022 which it will direct towards further deleveraging and share repurchases;

  • As previously announced, the Company commenced its inaugural Normal Course Issuer Bid (“NCIB”) in Q4 2021. In the quarter ended June 30, 2022, Pipestone purchased 2,826,100 common shares for cancellation at a weighted average price of $4.95 per share for a total consideration of $14.0 million including related commissions and fees. Subsequent to the quarter, and up to the date of this release, the Company has purchased an additional 1,300,000 common shares for cancellation at a weighted average price of $3.80 per share. Since the commencement of the NCIB program, the Company has purchased a total of 6,559,800 common shares at a weighted average price of $4.50 per share. Pipestone intends to continue to utilize its NCIB throughout 2022 as part of its commitment to providing shareholder returns; and

  • The Company realized robust returns on invested capital, with Q2 2022 annualized ROCE(1) and CROIC(1) of 44% and 41%, respectively, as compared to Q2 2021 annualized ROCE(1) and CROIC(1) of 14% and 19%, respectively.

(1) See “Advisory Regarding Non-GAAP Measures - Non-GAAP measures” advisory.


Pipestone Energy Corp. – Financial and Operating Highlights

 

Three months ended June 30,

Six months ended June 30,

($ thousands, except per unit and per share amounts)

2022

 

2021

 

2022

 

2021

 

Financial

 

 

 

 

 

 

 

 

 

 

 

 

Sales of liquids and natural gas

$

210,380

 

$

82,319

 

$

363,910

 

$

153,804

 

Cash from operating activities

 

129,599

 

 

33,732

 

 

193,611

 

 

51,829

 

Adjusted funds flow from operations(1)

 

110,438

 

 

35,498

 

 

196,755

 

 

63,740

 

Per share, basic

 

0.58

 

 

0.19

 

 

1.03

 

 

0.33

 

Per share, diluted(4)

 

0.39

 

 

0.13

 

 

0.69

 

 

0.23

 

Capital expenditures

 

77,790

 

 

47,553

 

 

155,749

 

 

93,842

 

Free cash flow (deficit)(1)

 

32,648

 

 

(12,055

)

 

41,006

 

 

(30,102

)

Income (loss) and comprehensive income (loss)

 

82,095

 

 

(1,190

)

 

109,147

 

 

(2,144

)

Per share, basic

 

0.43

 

 

(0.01

)

 

0.57

 

 

(0.01

)

Per share, diluted(4)

 

0.29

 

 

(0.01

)

 

0.39

 

 

(0.01

)

Adjusted EBITDA(1)

 

115,044

 

 

39,722

 

 

206,083

 

 

72,229

 

Annualized cash return on invested capital (CROIC)(1)

 

41

%

 

19

%

 

37

%

 

17

%

Annualized return on capital employed (ROCE)(1)

 

44

%

 

14

%

 

39

%

 

12

%

Net debt (end of period)(1)

 

 

 

 

 

 

 

191,563

 

 

208,027

 

Net debt to annualized adjusted fund flow from operations for the trailing period(1)

 



0.4x

 

 



1.5x

 

 



0.5x

 

 



1.6x

 

Available funding (end of period)(1)

 

 

 

 

 

 

 

87,623

 

 

16,586

 

Amount purchased under NCIB

 

14,049

 

 

-

 

 

21,230

 

 

-

 

Common shares purchased under NCIB (000s)

 

2,826

 

 

-

 

 

4,311

 

 

-

 

Common shares outstanding (000s) (end of period)

 

 

 

 

 

 

 

188,437

 

 

191,548

 

Weighted-average basic shares outstanding (000s)

 

190,224

 

 

191,466

 

 

190,862

 

 

191,180

 

Weighted-average diluted shares

 

 

 

 

 

 

 

 

 

 

 

 

outstanding (000s)(4)

 

285,966

 

 

278,668

 

 

286,563

 

 

278,247

 

Operations

 

 

 

 

 

 

 

 

 

 

 

 

Production

 

 

 

 

 

 

 

 

 

 

 

 

Condensate (bbls/d)

 

8,428

 

 

7,345

 

 

8,197

 

 

7,175

 

Other natural gas liquids (NGLs) (bbls/d)

 

4,137

 

 

3,211

 

 

4,000

 

 

2,980

 

Total NGLs (bbls/d)

 

12,565

 

 

10,556

 

 

12,197

 

 

10,155

 

Crude oil (bbls/d)

 

79

 

 

83

 

 

56

 

 

87

 

Natural gas (Mcf/d)

 

108,754

 

 

76,180

 

 

101,590

 

 

73,369

 

Total (boe/d)(2)

 

30,770

 

 

23,336

 

 

29,185

 

 

22,470

 

Condensate and crude oil (mix of total production)

 

28

%

 

32

%

 

28

%

 

33

%

Total liquids (mix of total production)

 

41

%

 

46

%

 

42

%

 

46

%

Average realized prices(3)

 

 

 

 

 

 

 

 

 

 

 

 

Condensate (per bbl)

 

133.44

 

 

76.56

 

 

127.61

 

 

70.96

 

Other NGLs (per bbl)

 

61.18

 

 

26.32

 

 

58.44

 

 

26.54

 

Total NGLs (per bbl)

 

109.65

 

 

61.27

 

 

104.93

 

 

57.93

 

Crude oil (per bbl)

 

128.74

 

 

68.79

 

 

121.61

 

 

63.97

 

Natural gas (per Mcf)

 

8.50

 

 

3.31

 

 

7.13

 

 

3.49

 

Netbacks

 

 

 

 

 

 

 

 

 

 

 

 

Revenue (per boe)

 

75.13

 

 

38.76

 

 

68.89

 

 

37.82

 

Realized loss on commodity risk

 

 

 

 

 

 

 

 

 

 

 

 

management contracts (per boe)

 

(10.51

)

 

(5.09

)

 

(7.89

)

 

(4.72

)

Royalties (per boe)

 

(5.96

)

 

(0.24

)

 

(5.14

)

 

(0.92

)

Operating expense (per boe)

 

(12.88

)

 

(11.11

)

 

(12.01

)

 

(10.89

)

Transportation expense (per boe)

 

(3.81

)

 

(2.72

)

 

(3.89

)

 

(2.67

)

Operating netback (per boe)(1)

 

41.97

 

 

19.60

 

 

39.96

 

 

18.62

 

Adjusted funds flow netback (per boe)(1)

 

39.44

 

 

16.72

 

 

37.25

 

 

15.67

 

(1) See “Advisory Regarding Non-GAAP Measures - Non-GAAP measures advisory.
(2) For a description of the boe conversion ratio, see “Oil and Gas Measures - Basis of barrel of oil equivalent”. References to crude oil in production amounts are to the product type “tight oil” and references to natural gas in production amounts are to the product type “shale gas”. References to total liquids include oil and natural gas liquids (including condensate, butane and propane).
(3) Figures calculated before hedging.
(4) Weighted-average number of diluted shares outstanding for the purpose of calculating diluted income and comprehensive income and adjusted funds flow from operations per share in the 2022 period presented includes 92,439,513 common shares that are issuable at the discretion of convertible preferred shareholders as of June 30, 2022 for no additional proceeds to the Company (June 30, 2021 – 86,667,329 common shares issuable). The convertible preferred shares have a total convertible value of $78.6 million at June 30, 2022 (June 30, 2021 - $73.7 million) and are convertible on a conversion ratio equal to the quotient of (i) the liquidation preference of $1,000 per convertible preferred share, subject to adjustment, divided by (ii) the conversion price of $0.85 per share. The impact of other dilutive instruments is also factored into this calculation as applicable.

OPERATIONS UPDATE:

Development Map:

Pipestone Energy Corp.
Pipestone Energy Corp.

A chart accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/06e1c83d-32f6-4e35-93f1-9bdc4781fa44

Drilling & Completions Update:

During the second quarter, Pipestone rig released six wells on the 2-32 pad, and four of a total six planned wells on the 14-19 pad. The Company plans to drill an additional 9.5 net wells during 2022.

The Company also completed its 12-36 eastern step-out well, two delineation wells southeast off the 9-14 pad, and the six wells located at its 2-32 pad. Pipestone plans to complete an additional 7.5 net wells during the remainder of 2022.

New Well Results:

During Q2 2022, Pipestone brought on stream four wells on the 2-25 padsite, which are piloting reduced inter-well spacing of 200m, as compared to the offset 15-25 pad spacing at 300m. Additionally, this pad includes the Company’s first well landed in the uppermost Montney ‘A’ zone. Over the first 30 days on production, these wells are producing at or above type curve expectations, with the wells averaging 4.5 MMcf/d raw gas + 551 bbl/d wellhead condensate (condensate gas ratio of ~123 bbl/MMcf). The Montney ‘A’ well is performing in-line with the Montney ‘B’ wells on both an absolute rate and condensate gas ratio basis.

During July 2022, production testing began on two delineation wells that were drilled southeast off the 9-14 pad, including a well landed in each of the Montney ‘B’ and Montney ‘D’ zones. The Company is encouraged by the preliminary test results. The Montney ‘B’ well has been flowing for ~8 days, at an average rate of 3.6 MMcf/d raw gas + 315 bbl/d wellhead condensate (condensate gas ratio of ~88 bbl/MMcf), with an average H2S reading of 3%. This result is in-line with our type curve expectations for this area and de-risks a significant portion of the asset that is currently unbooked. The Montney ‘D’ (Lower Montney) well flowed up casing for 24 hours, at an average rate of 4.8 MMcf/d raw gas + 708 bbl/d wellhead condensate (condensate gas ratio of ~148 bbl/MMcf) at a flowing pressure of ~10,000 kPa, with an H2S content range of 11 - 15%. Further testing and diagnostic work for the well is ongoing. Of note, Pipestone’s in-field gathering system is licensed for up to 8% H2S, as compared to a current field average H2S content of ~4.5%; the Company is currently producing wells with higher sour gas content by utilizing lower H2S Montney wells and sweet fuel gas to blend at various padsites, a strategy which will be replicated in the future on the 9-14 pad.

2022 Production Outlook:

During July 2022, which included 2 days of the planned turnaround at the Keyera Wapiti Gas Plant, corporate production averaged ~33,000 boe/d. During Q3 2022, the Company expects production to average 31,000 – 33,000 boe/d, which includes a 24-day planned turnaround at the Tidewater Gas Plant in September. The expansion of the 8-15 compressor (from 90 MMcf/d to 120 MMcf/d) is still expected to be in-service during Q4 2022, supporting forecast average fourth quarter volumes in excess of 37,000 boe/d. Pipestone is pleased to reconfirm its full year 2022 production guidance of 31,000 – 33,000 boe/d.

 

2022
Guidance

2023
Forecast

2024
Forecast

Price Forecast

US$95 WTI | $5.00 AECO | $0.80 CAD

US$90 WTI | $4.00 AECO | $0.80 CAD

Full Year Production (boe/d)

31,000 – 33,000

40,000 – 42,000

46,000 – 48,000

AT Cash Flow (C$ MM)

$380 - $420

$510

$445

Capex (C$ MM)

$225 - $235

$250

$200

Free Cash Flow (C$ MM)

$155 - $185

$260

$245

NCIB Purchases ($MM

$50 - $60

$50

$50

(Net Debt) / Net Cash ($MM)

($95) – ($75)
net debt

$125
net cash

$320
net cash

LTM Debt / Cash Flow (x)

0.2x

n.a.

n.a.

Second Quarter 2022 Financial Results Conference Call

Second quarter results are expected to be released before market open on August 10, 2022. A conference call has been scheduled for August 10, 2022 at 9:00 a.m Mountain Time (11:00 a.m Eastern Time) for interested investors, analysts, brokers, and media representatives.

Conference Call Details:

Please use the following participant registration URL to register for the Q2 2022 Financial Results Conference Call: https://register.vevent.com/register/BI24d63769265843a3b052eaaec478af62

This link will provide each registrant with a toll-free dial in number and a unique PIN to connect to the call.

Pipestone Energy Corp.

Pipestone is an oil and gas exploration and production company focused on developing its large contiguous and condensate rich Montney asset base in the Pipestone area near Grande Prairie. Pipestone expects to grow its production to 32 Mboe/d (midpoint) in 2022 and to approximately 55 Mboe/d by exit 2025, while generating significant free cash flow and de-leveraging the business. Pipestone is committed to building long term value for our shareholders while maintaining the highest possible environmental and operating standards, as well as being an active and contributing member to the communities in which it operates. Pipestone has achieved certification of all its production from its Montney asset under the Equitable Origin EO100TM Standard for Responsible Energy Development. Pipestone shares trade under the symbol PIPE on the TSX. For more information, visit www.pipestonecorp.com.

Pipestone Energy Contacts:

Paul Wanklyn
President and Chief Executive Officer
(587) 392-8407
paul.wanklyn@pipestonecorp.com

Craig Nieboer
Chief Financial Officer
(587) 392-8408
craig.nieboer@pipestonecorp.com


Dan van Kessel
VP Corporate Development
(587) 392-8414
dan.vankessel@pipestonecorp.com

 

Advisory Regarding Non-GAAP Measures

Non-GAAP measures

Pursuant to section 5(4) of NI 52-112, quantitative reconciliation of the non-GAAP measures for the current and comparative period to the most directly comparable financial measure cannot be incorporated by reference because this document is an earnings news release. As such, included is a quantitative reconciliation table for cash flow, free cash flow, operating netback, adjusted funds flow netback, net debt, available funding, CROIC and ROCE below. Additionally, pursuant to section 7(2)(d) of NI 52-112, a description of any significant difference between the non-GAAP financial measure that is forward-looking and the equivalent historical non-GAAP financial measure must be included in proximity to the first instance of the non-GAAP financial measure that is forward-looking information. As such, this information should be included in respect of forecast cashflow on page 4. Additionally, for this forward-looking non-GAAP measure, the following must be included: (i) the news release discloses an equivalent historical non-GAAP financial measure; and (ii) the forecast cashflow that is forward-looking information is presented with no more prominence in the document than that of the equivalent historical non-GAAP financial measure.

This news release includes references to financial measures commonly used in the oil and natural gas industry. The terms “adjusted funds flow from operations”, “cash flow”, “free cash flow, “operating netback”, “adjusted funds flow netback”, “net debt”, “available funding”, “adjusted EBITDA”, “CROIC”, and “ROCE” are not defined under International Financial Reporting Standards (“IFRS”), which have been incorporated into Canadian GAAP, as set out in Part 1 of the Chartered Professional Accountants Canada Handbook – Accounting, are not separately defined under GAAP, and may not be comparable with similar measures presented by other companies. The reconciliations of these non-GAAP measures to the nearest GAAP measure are discussed in the Non-GAAP measures section of Pipestone’s management’s discussion and analysis (“MD&A”) for the quarter ended June 30, 2022 dated August 10, 2022, a copy of which is available electronically on Pipestone’s SEDAR profile at www.sedar.com.

Management of the Company believes the presentation of non-GAAP measures provides useful information to investors and shareholders as the measures provide increased transparency and the opportunity to better analyze and compare performance against prior periods.

Adjusted funds flow from operations

Pipestone uses “adjusted funds flow from operations” (cash from operating activities before changes in non-cash working capital, cash share-based compensation and decommissioning provision costs incurred, if applicable), a measure that is not defined under IFRS. Adjusted funds flow from operations should not be considered an alternative to, or more meaningful than, cash from operating activities, income (loss) or other measures determined in accordance with IFRS as an indicator of the Company’s performance. Management of the Company uses adjusted funds flow from operations to analyze operating performance and leverage and believes it is a useful supplemental measure as it provides an indication of the funds generated by Pipestone’s principal business activities prior to consideration of changes in working capital, cash share-based compensation and decommissioning provision costs incurred.

The following table reconciles cash from operating activities to adjusted funds flow from operations:

 

Three months ended
June 30,

 

Six months ended
June 30,

($ thousands)

2022

 

2021

 

2022

 

2021

 

$

 

$

 

$

 

$

Cash from operating activities

129,599

 

33,732

 

193,611

 

51,829

Change in non-cash working capital

(23,456

)

1,766

 

(1,151

)

11,911

Cash share-based compensation

4,295

 

-

 

4,295

 

-

Adjusted funds flow from operations

110,438

 

35,498

 

196,755

 

63,740

Operating netback and adjusted funds flow netback

Operating netback is calculated on either a total dollar or per-unit-of-production basis and is determined by deducting royalties, operating and transportation expense from liquids and natural gas sales adjusted for realized gains/losses on commodity risk management contracts.

The following table details the calculation of operating netback on a total dollar basis:

 

Three months ended
June 30,

 

Six months ended
June 30,

($ thousands)

2022

 

2021

 

 

2022

 

2021

 

 

$

 

$

 

 

$

 

$

 

Sales of liquids and natural gas

210,380

 

82,319

 

 

363,910

 

153,804

 

Realized loss on commodity risk management contracts

(29,431

)

(10,807

)

 

(41,684

)

(19,198

)

Royalties

(16,698

)

(507

)

 

(27,147

)

(3,726

)

Operating expense

(36,053

)

(23,601

)

 

(63,418

)

(44,279

)

Transportation expense

(10,660

)

(5,770

)

 

(20,572

)

(10,860

)

Operating netback

117,538

 

41,634

 

 

211,089

 

75,741

 

The following table reconciles cash from operating activities to operating netback:

 

Three months ended
June 30,

 

Six months ended
June 30,

($ thousands)

2022

 

2021

 

2022

 

2021

 

$

 

$

 

$

 

$

Cash from operating activities

129,599

 

33,732

 

193,611

 

51,829

Change in non-cash working capital

(23,456

)

1,766

 

(1,151

)

11,911

G&A expense

2,494

 

1,912

 

5,006

 

3,512

Cash share-based compensation

4,295

 

-

 

4,295

 

-

Cash financing expense

4,547

 

3,960

 

9,056

 

7,981

Realized loss on interest rate risk management contracts

59

 

264

 

272

 

508

Operating netback

117,538

 

41,634

 

211,089

 

75,741

G&A expense

2,494

 

1,912

 

5,006

 

3,512

Cash financing expense

4,547

 

3,960

 

9,056

 

7,981

Realized loss on interest rate risk management contracts

59

 

264

 

272

 

508

Adjusted funds flow netback

110,438

 

35,498

 

196,755

 

63,740

Adjusted funds flow netback reflects adjusted funds flow from operations on a per-unit-of-production basis and is determined by dividing adjusted funds flow from operations by total production on a per-boe basis. Adjusted funds flow netback can also be determined by deducting G&A, transaction costs, cash financing expense, adding financing income and adjusting for realized gains/losses on interest rate risk management contracts on a per-unit-of-production basis from the operating netback.

Operating netback and adjusted funds flow netback are common metrics used in the oil and natural gas industry and are used by the Company’s management to measure operating results on a per boe basis to better analyze and compare performance against prior periods, as well as formulate comparisons against peers. These measures should not be considered an alternative to or more meaningful than cash from operating activities defined under IFRS.

Adjusted working capital and available funding

Available funding is comprised of adjusted working capital and undrawn portions of the Company’s credit facility. The available funding measure allows management and others to evaluate the Company’s short-term liquidity. Adjusted working capital is a non-GAAP measure and is comprised of current assets less current liabilities on the Company’s consolidated statement of financial position and excludes the current portion of risk management contracts and lease liabilities. Adjusted working capital should not be considered an alternative to, or more meaningful than, working capital as defined under IFRS.

Cash flow

Cash flow is a non-GAAP measure that is calculated as cash from operating activities plus changes in non-cash working capital, cash share-based compensation and decommissioning provision costs incurred, and is not defined under IFRS. Cash flow should not be considered an alternative to, or more meaningful than, cash from operating activities, income (loss) or other measures determined in accordance with IFRS as an indicator of the Company’s performance. Management of the Company uses cash flow to analyze operating performance and leverage and believes it is a useful supplemental measure as it provides an indication of the funds generated by Pipestone’s principal business activities prior to consideration of changes in working capital, cash share-based compensation and decommissioning provision costs incurred.

The following table reconciles cash from operating activities to cash flow:

 

Three months ended
June 30,

 

Six months ended
June 30,

($ thousands)

2022

 

2021

 

2022

 

2021

 

$

 

$

 

$

 

$

Cash from operating activities

129,599

 

33,732

 

193,611

 

51,829

Change in non-cash working capital

(23,456

)

1,766

 

(1,151

)

11,911

Cash share-based compensation

4,295

 

-

 

4,295

 

-

Cash flow

110,438

 

35,498

 

196,755

 

63,740

Free Cash Flow

Free cash flow should not be considered an alternative to, or more meaningful than, cash from operating activities as determined in accordance with IFRS as an indicator of financial performance. Free cash flow is presented to assist management and investors in analyzing operating performance by the business and how much cash flow is available for deleveraging and / or shareholder returns in the stated period after capital expenditures have been incurred. Free cash flow equals cash from operating activities plus the change in non-cash working capital and cash share-based compensation less capital expenditures.

The following table reconciles cash from operating activities to free cash flow:

 

Three months ended
June 30,

 

Six months ended
June 30,

($ thousands)

2022

 

2021

 

 

2022

 

2021

 

 

$

 

$

 

 

$

 

$

 

Cash from operating activities

129,599

 

33,732

 

 

193,611

 

51,829

 

Change in non-cash working capital

(23,456

)

1,766

 

 

(1,151

)

11,911

 

Cash share-based compensation

4,295

 

-

 

 

4,295

 

-

 

Capital expenditures

(77,790

)

(47,553

)

 

(155,749

)

(93,842

)

Free cash flow

32,648

 

(12,055

)

 

41,006

 

(30,102

)

Net debt

Net debt is a non-GAAP measure that equals bank debt outstanding and adjusted working capital. The Company does not consider its convertible preferred share obligation to be part of net debt as this represents a non-cash obligation that will ultimately be settled by conversion into common shares and reclassified from a liability to share capital on the Company’s statement of financial position. Net debt is considered to be a useful measure in assisting management and investors to evaluate Pipestone’s financial strength.

Adjusted EBITDA, CROIC and ROCE

Adjusted EBITDA is calculated as profit or loss before interest, income taxes, depletion and depreciation, adjusted for other non-cash and extraordinary items including unrealized gains and losses on risk management contracts, realized losses on interest rate risk management contracts, share-based compensation and E&E expense. Adjusted EBITDA is considered a useful measure by management of the Company to understand and compare the profitability of Pipestone to other companies excluding the effects of capital structure, taxation and depreciation. Adjusted EBITDA is not defined under IFRS and therefore may not be comparable with the calculation of similar measures by other entities and should not be considered an alternative to, or more meaningful than, income (loss) and comprehensive income (loss). Adjusted EBITDA is also used to calculate CROIC. Adjusted EBIT is calculated as adjusted EBITDA less depletion and depreciation. Adjusted EBIT is used to calculate ROCE.

The following table reconciles income (loss) and comprehensive income (loss) to adjusted EBITDA:

 

Three months ended
June 30,

 

 

Six months ended
June 30,

 

($ thousands)

2022

 

2021

 

 

2022

 

2021

 

 

$

 

$

 

 

$

 

$

 

Income (loss) and comprehensive income (loss)

82,095

 

(1,190

)

 

109,147

 

(2,144

)

Deferred income tax expense

25,085

 

841

 

 

32,663

 

727

 

Financing expense

6,150

 

5,609

 

 

12,240

 

11,271

 

Unrealized gain on interest rate risk management contracts

(591

)

(419

)

 

(1,477

)

(764

)

Realized loss on interest rate risk management contracts

59

 

264

 

 

272

 

508

 

D&D expense

19,807

 

15,899

 

 

37,750

 

30,605

 

E&E expense

829

 

414

 

 

829

 

414

 

Share-based compensation

4,641

 

1,011

 

 

6,077

 

1,585

 

Unrealized (gain) loss on commodity risk management contracts

(23,031

)

17,293

 

 

8,582

 

30,027

 

Adjusted EBITDA

115,044

 

39,722

 

 

206,083

 

72,229

 

CROIC is determined by dividing adjusted EBITDA by the gross carrying value of the Company’s oil and gas assets at a point in time. For the purposes of the CROIC calculation, the net carrying value of the Company’s exploration and evaluation assets, property and equipment and ROU assets, is taken from the Company’s consolidated statement of financial position, and excludes accumulated depletion and depreciation as disclosed in the financial statement notes to determine the gross carrying value.

ROCE is determined by dividing adjusted EBIT by the carrying value of the Company’s net assets. For the purposes for the ROCE calculation, net assets are defined as total assets on the Company’s consolidated statement of financial position less current liabilities at a point in time.

CROIC and ROCE allow management and others to evaluate the Company’s capital spending efficiency and ability to generate profitable returns by measuring profit or loss relative to the capital employed in the business.

The Company has calculated its CROIC and ROCE using annualized results for the three and six months ended June 30, 2022 and balances as at June 30, 2022 and 2021 as follows:

 

Three months ended
June 30,

 

Six months ended
June 30,

($ thousands)

2022

2021

 

2022

2021

 

$

$

 

$

$

Adjusted EBITDA

115,044

39,722

 

206,083

72,229

 

 

 

 

 

 

Annualized Adjusted EBITDA(1)

460,176

158,888

 

412,166

144,458

(1) Annualized factor 4x for the three months ended June 30, 2022 and 2021. Annualized factor 2x for the six months ended June 30, 2022 and 2021.

 

 

As at June 30,

 

($ thousands)

 

2022

 

2021

 

 

 

$

 

$

 

Exploration and evaluation (E&E) assets – gross carrying value

 

29,033

 

33,868

 

Property and equipment (P&E) – net carrying value

 

843,000

 

654,436

 

P&E – accumulated D&D

 

155,687

 

91,282

 

E&E assets and P&E – gross carrying value

 

1,027,720

 

779,586

 

ROU assets – net carrying value

 

77,850

 

51,759

 

ROU assets – accumulated depreciation

 

19,809

 

11,055

 

E&E, P&E and ROU assets – gross carrying value

 

1,125,379

 

842,400

 

 

 

 

 

Annualized CROIC (three months ended June 30)

 

41

%

19

%

Annualized CROIC (six months ended June 30)

 

37

%

17

%


 

Three months ended
June 30,

 

 

Six months ended
June 30,

 

($ thousands)

2022

 

2021

 

 

2022

 

2021

 

 

$

 

$

 

 

$

 

$

 

Adjusted EBITDA

115,044

 

39,722

 

 

206,083

 

72,229

 

D&D expense

(19,807

)

(15,899

)

 

(37,750

)

(30,605

)

Adjusted EBIT

95,237

 

23,823

 

 

168,333

 

41,624

 

 

 

 

 

 

 

Annualized Adjusted EBIT(1)

380,948

 

95,292

 

 

336,666

 

83,248

 

(1) Annualized factor 4x for the three months ended June 30, 2022 and 2021. Annualized factor 2x for the six months ended June 30, 2022 and 2021.

 

 

As at June 30,

($ thousands)

 

2022

 

2021

 

 

 

$

 

$

 

Total assets

 

1,014,395

 

777,549

 

Total current liabilities

 

(152,336

)

(101,206

)

Net Assets

 

862,059

 

676,343

 

 

 

 

 

Annualized ROCE (three months ended June 30)

 

44

%

14

%

Annualized ROCE (six months ended June 30)

 

39

%

12

%

Advisory Regarding Forward-Looking Statements

In the interest of providing shareholders of Pipestone and potential investors information regarding Pipestone, this news release contains certain information and statements (“forward-looking statements”) that constitute forward-looking information within the meaning of applicable Canadian securities laws. Forward-looking statements relate to future results or events, are based upon internal plans, intentions, expectations and beliefs, and are subject to risks and uncertainties that may cause actual results or events to differ materially from those indicated or suggested therein. All statements other than statements of current or historical fact constitute forward-looking statements. Forward-looking statements are typically, but not always, identified by words such as “anticipate”, “estimate”, “expect”, “intend”, “forecast”, “continue”, “propose”, “may”, “will”, “should”, “believe”, “plan”, “target”, “objective”, “project”, “potential” and similar or other expressions indicating or suggesting future results or events.

Forward-looking statements are not promises of future outcomes. There is no assurance that the results or events indicated or suggested by the forward-looking statements, or the plans, intentions, expectations or beliefs contained therein or upon which they are based, are correct or will in fact occur or be realized (or if they do, what benefits Pipestone may derive therefrom).

In particular, but without limiting the foregoing, this news release contains forward-looking statements pertaining to: Pipestone’s capital investment program, including drilling and other development plans for the remainder of 2022 and beyond, the Company’s intention to continue frac operations through the remainder of the year, as well as growth of production, cash flow and free cash flow; Pipestone’s intention to continue to purchase common shares under the NCIB throughout the remainder of 2022 and beyond and the Company’s commitment to providing shareholder returns; expectations regarding the Company’s 2022 business plan and its ability to deleverage; expected timing to reduce net debt; the Company’s intention to deploy capital expenditures on drilling, completion and pad-site equipping and tie-in activity; forecasted average production volumes for Q3 and Q4 2022; expectations regarding 2022 annual production volumes and beyond; the Company’s expectations and timing for recovering take-or-pay fees incurred over the remainder of 2022; Pipestone’s intention to continue its licenses with 2022 expiry dates; 2023 and 2024 forecasts for each of production, cash flow, capital expenditures/development plans, free cash flow, net debt/net cash and cash flow; the Company’s expectations with respect to capital management and liquidity; continued testing and diagnostic work for the Montney 'D' (Lower Montney) well; the timing of the 8-15 compressor expansion; the timing and duration of the 24-day planned turnaround at the Tidewater Gas Plant; and the Company’s long-term strategy.

With respect to the forward-looking statements contained in this news release, Pipestone has assessed material factors and made assumptions regarding, among other things: future commodity prices and currency exchange rates, including consistency of future oil, NGLs and natural gas prices with current commodity price forecasts; the economic impacts of the COVID-19 pandemic; Pipestone’s continued ability to obtain qualified staff and equipment in a timely and cost-efficient manner; the predictability of future results based on past and current experience; the predictability and consistency of the legislative and regulatory regime governing royalties, taxes, environmental matters and oil and gas operations, both provincially and federally; Pipestone’s ability to successfully market its production of oil, NGLs and natural gas; the timing and success of drilling and completion activities (and the extent to which the results thereof meet expectations); Pipestone’s future production levels and amount of future capital investment, and their consistency with Pipestone’s current development plans and budget; future capital expenditure requirements and the sufficiency thereof to achieve Pipestone’s objectives; the successful application of drilling and completion technology and processes; the applicability of new technologies for recovery and production of Pipestone’s reserves and other resources, and their ability to improve capital and operational efficiencies in the future; the recoverability of Pipestone 's reserves and other resources; Pipestone’s ability to economically produce oil and gas from its properties and the timing and cost to do so; the performance of both new and existing wells; future cash flows from production; future sources of funding for Pipestone’s capital program, and its ability to obtain external financing when required and on acceptable terms; future debt levels; geological and engineering estimates in respect of Pipestone’s reserves and other resources; the accuracy of geological and geophysical data and the interpretation thereof; the geography of the areas in which Pipestone conducts exploration and development activities; the timely receipt of required regulatory approvals; the access, economic, regulatory and physical limitations to which Pipestone may be subject from time to time; and the impact of industry competition.

The forward-looking statements contained herein reflect management of the Company's current views, but the assessments and assumptions upon which they are based may prove to be incorrect. Although Pipestone believes that its underlying assessments and assumptions are reasonable based on currently available information, undue reliance should not be placed on forward-looking statements, which are inherently uncertain, depend upon the accuracy of such assessments and assumptions, and are subject to known and unknown risks, uncertainties and other factors, both general and specific, many of which are beyond Pipestone’s control, that may cause actual results or events to differ materially from those indicated or suggested in the forward-looking statements. Such risks and uncertainties include, but are not limited to, volatility in market prices and demand for oil, NGLs and natural gas and hedging activities related thereto; the ability to successfully manage the Company's operations; general economic, business and industry conditions; variance of Pipestone’s actual capital costs, operating costs and economic returns from those anticipated; the ability to find, develop or acquire additional reserves and the availability of the capital or financing necessary to do so on satisfactory terms; the availability of sufficient natural gas processing capacity; and risks related to the exploration, development and production of oil and natural gas reserves. Additional risks, uncertainties and other factors are discussed in the MD&A dated August 10, 2022 and in Pipestone’s annual information form dated March 9, 2022, copies of which are available electronically on Pipestone’s SEDAR profile at www.sedar.com.

Certain information in this news release is a “financial outlook” within the meaning of applicable Canadian securities laws. The purpose of the financial outlook is to provide readers with disclosure of the Company’s reasonable expectations of anticipated results. The financial outlook is provided as of the date of this news release. Certain assumptions made underlying the financial outlook are disclosed herein under “Operations Outlook – 2022 Production Outlook”. Readers are cautioned that the financial outlook may not be appropriate for other purposes.

The forward-looking statements contained in this news release are made as of the date hereof and Pipestone assumes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable securities laws. All forward-looking statements herein are expressly qualified by this advisory.

Oil and Gas Measures

Basis of barrel of oil equivalent

Petroleum and natural gas reserves and production volumes are stated as a “barrel of oil equivalent” (boe), derived by converting natural gas to oil equivalency in the ratio of 6,000 cubic feet of gas to one barrel of oil. Readers are cautioned that boe figures may be misleading, particularly if used in isolation. A boe conversion ratio of 6,000 cubic feet of gas to one barrel of oil is based on energy equivalency, which is primarily applicable at the burner tip, and does not represent a value equivalency at the wellhead.

Initial Production Rates and Short-Term Test Rates

This news release may disclose test rates of production for certain wells over short periods of time (i.e. IP30, IP60, IP90, etc.), which are preliminary and not determinative of the rates at which those or any other wells will commence production and thereafter decline. Short-term test rates are not necessarily indicative of long-term well or reservoir performance or of ultimate recovery. Although such rates are useful in confirming the presence of hydrocarbons, they are preliminary in nature, are subject to a high degree of predictive uncertainty as a result of limited data availability and may not be representative of stabilized on-stream production rates.

Production over a longer period will also experience natural decline rates, which can be high in the Montney play and may not be consistent over the longer term with the decline experienced over an initial production period. Initial production or test rates may also include recovered “load” fluids used in well completion stimulation operations. Actual results will differ from those realized during an initial production period or short-term test period, and the difference may be material.

Production

References to natural gas and condensate production in this news release refer to the shale gas and natural gas liquids (which includes condensate), respectively, product types as defined in National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities. References to liquids include tight oil and NGLs (including condensate, butane and propane).

Abbreviations

The following summarizes the abbreviations used in this document:

Crude Oil, Condensate and other Natural Gas Liquids and Natural Gas

bbl

barrel

Mcf

thousand cubic feet

bbls/d

barrels per day

MMcf

million cubic feet

boe

barrel of oil equivalent

Mcf/d

thousand cubic feet per day

boe/d

barrel of oil equivalent per day

GJ

Gigajoule; 1 Mcf of natural gas is about 1.05 GJ

Mboe/d

thousand barrels of oil equivalent per day

MMcf/d

million cubic feet per day

NGL

natural gas liquids, consisting of ethane (C2), propane (C3) and butane (C4)

 

 

condensate

Pentanes plus (C5+) separated at the field level and C5+ separated from the NGL mix at the facility level

 

 


Other Abbreviations

 

 

adjusted working capital

working capital (current assets less current liabilities), excluding financial derivative instruments and lease liabilities

AECO

the AECO Hub, a natural gas storage facility located in Suffield and Countess, Alberta, part of the NOVA Pipeline System

C$

Canadian dollars

COVID-19

Novel Coronavirus and its variants

CROIC

cash return on invested capital

D&D

depletion and depreciation

E&E

exploration and evaluation

EBIT

earnings before interest and taxes

EBITDA

earnings before interest, taxes, depreciation and amortization

G&A

general and administrative

GAAP

generally accepted accounting principles

H2S

hydrogen sulfide

IFRS

International Financial Reporting Standards

Keyera

Keyera Corp. and its affiliates

kPa

kilopascal

NCIB

normal course issuer bid

Q1

first quarter ended March 31st

Q2

second quarter ended June 30th

Q3

third quarter ended September 30th

Q4

fourth quarter ended December 31st

ROCE

return on capital employed

ROU

right-of-use

sour gas

natural gas containing H₂S in quantities greater than 100 ppm

TSX

Toronto Stock Exchange

US$

United States dollars

WTI

West Texas Intermediate