Hey everyone, welcome in to another Daily Editorial here on the KE Report.This is another Daily Editorial that I recorded from the floor of Joseph Schachter's Catch the Energy conference.Happened mid last month, October, in Calgary.
I had the opportunity to sit down with a handful of company executives. This conversation is with Bill Hodge, president and CEO of Pine Cliff Energy.The company is traded on the TSX under the symbol PNE and on the OTCQX under the symbol PIFYF.
This is a company with a market cap right around $350 million Canadian, slightly more natural gas focused in terms of the production profile, focused in Alberta, three different areas.
The company has industry low production decline rates, as well as high insider ownership, and also some hedges that are coming off as the company progresses into next year.
I will have Phil outline what the free cash flow is, what the company is going to be investing back into the different areas in Alberta and where growth will come from.Growth typically has come through acquisition for this company.
So a lot for Phil and I to discuss.I hope you all enjoy this interview and please send me any questions or any comments that you have for Phil so I can follow back up with him.
Alright, sitting down with Phil Hodge, President and CEO of Pine Cliff Energy.Phil, thank you very much for joining me at the conference.
No, thank you very much for inviting me.We're looking forward to it, Corey.
You and I were talking about what makes Pinecliffe unique here, and it's not that you're going out drilling wealth.The company really has grown through acquisition, and it's more of a financial engineering play, as you were explaining to me.
Please dive into the overall strategy that sets Pinecliffe apart from a lot of the other companies here.
Yeah, I think we're extremely unique.I don't think there is another story that's here at the conference that is similar to us, at least not on the natural gas weighting side. We started 13 years ago.I was employee number one.
We started with 100 barrels a day of production.And as you said, we've grown through acquisition through the last 13 years.And today we're at 23,500.So it's been an interesting 13 years.
But we are, because we started with a, we wanted to make sure we got a really low decline base.That was our, the goal was always to have a natural gas weighted dividend company.
And so we started with making sure we got assets that had the really low decline, Since then, we've added more conventional assets.The last three deals we've done since 2019 have been more oil and gas, more conventional.
And that's to give us the drilling inventory.But when you've got the lowest decline rate of any public company in Canada, it means that you don't have to be drilling if the economics don't justify it. And in 2024, they didn't justify it.
And so we had kept some money aside to do some drilling, but it never made sense.And here we are now in almost the end of October, and we still haven't drilled a well in 2024.So that makes us pretty unique, especially for a company of our size.
You'd think that everybody has to be out drilling.Well, not if you have a sub 10% decline rate.I mean, we're happy to let the production come down.We really focus on a per share value.And I know that's a common thing to say,
But if you look back at every one of our acquisitions and the way we run our CapEx program and the way we run our dividend program, you can see that we walk that walk.And that's because we're big shareholders.I've never sold a share in Pinecliffe.
I continue to buy more, bought more recently.AIMCO is our largest shareholder.AIMCO is the pension fund here in Alberta. and they are our biggest shareholder.And then we've got a couple of other individuals.
There's like four people in the top, top four shareholders own about 30% of the stock, of which I'm one of them.And so it is a unique model.You know, let's say there's some really good companies here at the conference.
So that's, but they just have very different models.I mean, one example I always used to use is Tourmaline is I think an excellent company, one of our top shining examples of oil and gas companies here in Canada.
But they, in the last three years, would have drilled over 800 wells.In the last three years, Pinecliffe, same weighting of natural gas, we would drill about 10.So it's just a very different business model.
So my own view is that who we really appeal to is a lot of the retail investors, a lot of family offices, who like the low risk because we don't have a lot of drilling risk that's attached to many of the business models that have 30, 40% decline rates.
The average natural gas company in our industry has about a 31% decline rate. And like I say, ours is single digit.So it is a unique story.
Yeah, and less capital intensive, hey?That obviously helps.Now, I see going through the notes, 79% weighted towards natural gas.You mentioned some of the recent acquisitions.Is that mixture changing a little bit more to oil?
It has changed a bit more.I mean, we used to be over 90% gas.We haven't issued, we've done three pretty significant transactions since 2019.I've issued no stock at all since 2019.
The last time we issued any stock was an acquisition we did then of some Alpha Boa assets. Since then, we did it at Apogee, and then in December of last year, we did the Certis transaction.
It was a $100 million acquisition, and we didn't issue any stock out.Those three acquisitions all would have increased our oil and liquids weighting, and I think that's been healthy.
And all, what I really focus on and what our team is how do we allocate capital to sustain the dividend and hopefully grow the dividend over time.And so that's the focus.
And so having some oil and liquids in the mix at a time like in 2024, you know, we had some of the lowest gas prices we've seen in decades.
And so that if we wouldn't have had the oil and NGLs, I don't think we would have been able to keep the dividend going.So that's key to us because I think the bulk of our shareholders will be coming into our name because of the dividend.
Let's talk about that capital management.I was seeing free cash flow in 2024, about just over 21 million.I think that was right in the notes that I was seeing.Dividend yield of about six percent, debt of right around 54 million.
Talk to us about how you manage that free cash flow, returning it to shareholders, but also a debt repayment strategy.
Yeah, I think it's a good point.I mean, in 2022, we had some good gas prices and some good oil prices. In that year, we went from $50 million of debt to $50 million of cash in the bank within 12 months.
That just shows how much torque we have to the commodity price swings.We did this acquisition, so we sat on that $50 million of cash, didn't do any acquisitions in 2022 or all through 2023. The asset prices you had to pay was also higher.
That started to come down.We did our $106 million acquisition at the end of December 23.That's where the debt got put back on.And so today we're paying down the debt.We pay it down quarterly.
We've got the three-year term debt and we've got the ability to prepay it in 2025.We can start to do bigger chunks than just the $2 million a quarter.So our goal would be get to head back towards that low debt spot.
I think it's important for less so because we don't have a big CapEx program and therefore we're not worried about the debt. inhibiting that.
It's more important because for acquisitions, as you said, we're an acquisition model and so having the lower debt allows us to be able to move faster on acquisitions and we've seen that multiple times in the past where we've been able to come to the table with cash and it's not subject to financing and therefore we've been able to get assets a little cheaper than companies that have to go to the public markets and hope that the equity markets are open for them.
Let's talk about the acquisition landscape then, because the company right now focused in three different areas.
In Alberta, as you said, you've made a little bit of a transition, a bit more towards oil, averaging out the oil and natural gas production.We have heard many times that juniors are still struggling.
And look, there could be opportunities out there to do more acquisitions.What's Pinecliffe going to do then?
Yeah, I think there will be.We've done probably 16, 17 acquisitions since we started in 2012.We started with 100 barrels a day of production and we're now at 23,500 as I mentioned.I think there's going to be some more opportunities.
I think there's a variety of sources.Private equity, a lot of private equity has been invested in Western Canada. And when it comes to the end of its life, of its funds, they need to find liquidity.And so that'll be a source.
You mentioned there's a lot of smaller oil and gas companies that I think have struggled through the last few years.And therefore, they may, you know, at a point in time, they will be sellers.
And, you know, what we, even if they still believe in the commodity prices, What we offer them is taking an illiquid private asset and giving them a liquidity option.They don't have to sell the Pinecliffe stock, but it's at least an option for them.
So we haven't done one of those deals, but we're talking to several of those.I think there's going to be, and I think the one thing we've seen here is a consolidation.
I mean, most of your listeners would have seen some of the big acquisitions that have happened over the last few years, and I don't think it's going to stop.
And each time there's a major acquisition, quite often assets that previously were core to one of the companies become non-core assets, and therefore they're quite willing to dispose of them because they're focusing on their Montigny or the Clearwater or the Duvernay, whatever they're focused on.
And so I think there will be some assets that have become available that we can operate, you know, we pride ourselves that
every acquisition that we've ever done, all those acquisitions, we've lowered the operating costs from the time that from when we got it to the time that when we can handle it a year later.So we know how to run those conventional assets very well.
We run quite lean and that's just been the business model from day one and so therefore some of those assets we can be much more efficient and much more profitable with them than some of the bigger companies can be.
Okay, I get it.Forecasting acquisitions is always difficult too, right?Because who knows when the deal closes?Who knows what even comes available?One other thing that stood out to me regarding the company was hedging.
I see that you do have some hedges on this year, but coming next year, it looks like you're a lot more exposed to the natural gas price.Take us through the hedging strategy.
Yeah, it's a good point.I mean, for those of you who've known the Pinecliffe story for the last 13 years, I mean, we didn't do any hedging at all for the first probably seven, eight years of our existence.To me, there's three purposes for hedging.
One is if you have a lot of debt, then you probably want to make sure you're hedging because debt is the one thing that can kill a public oil and gas company if the commodity swings against you. The other one is CapEx programs.
If you have a very large CapEx program, you might want to be hedging because you want to make sure that you've got the, you're locking in the returns that you're hoping to get from that drilling program.And the third one would be a dividend.
So we don't have a big CapEx program.We have one of the smallest on a proportion to our ownership.
Our debt is less than one and a half times debt to cash flow, and it's going to be less than one times debt to cash flow probably within six, seven months here. So the third one is the dividend.
So we have started to use the hedging more to help protect the dividend.I think the dividend is a really key part as to why you're a Pinecliffe shareholder.
I think people right now we're over 6% dividend yield and you've got the potential to get a really upswing in your capital price because natural gas I think is going to be a lot better in 2025-26.
Which is why, leads to your question, 2024 we knew was going to be a very volatile year.So we put a lot more, we've never been as hedged as ever in our history as we were in 2024.2025, 2026, I'm much more optimistic on natural gas.
Because of the LNG, because of the data centers, the energy demand, there's a lot of reasons why I think gas prices are going to be in a better spot than they were in 2024.
In which case we'll probably make sure we have a little less exposure, we'll be a little less protected and be more willing to kind of ride with the prices.
That was good timing to be hedged in 2024.Not a bad strategy when you time it like that.I guess just as we leave here, the company, what stands out here is this growth through acquisition.
So it's not capital intensive, but you are building up cash, or at least you have the ability to go out and do deals.What is your run room then?What's your target acquisition size?What are you looking for when it comes to future acquisitions?
It's a good point because a lot of people, we actually have one of the highest growth rates per share of any public company, which you wouldn't think of because we're not one of the active drillers.
Many of the companies here at the conference will put out a map and they'll say our growth or here's where we're going to spend all our money and they'll show you a bunch of sticks on a map.We can't really do that because
The acquisition, we don't control when assets are going to come up for sale.What we can do is continually be talking to people in our areas, be talking to the other companies.We are almost always in a data room.We're always looking at assets.
We're very picky, we're very selective, and I think we're very disciplined.And I think you've seen that over the last 13 years.You look at the deals that we've done. and how creative every one of those deals has been to shareholders.
And again, when you own a lot of stock in your company, it drives the right behaviors.And so we, I don't think we're done growing.I think we'll continue to look selectively.
I think we can, I mean, we, people don't recognize that the last deal we did without issuing any stock out was a 25% increase in our production.I mean, we went from 20,000 to 25,000. with that deal that we did in December.
And to do that without issuing any stock out means that on a per share basis, you're getting a very creative to your shareholders on the cash flow, on the production, on the reserves.So I think we're in a position where we can do more of those deals.
I think we're not scared to do deals, but we're very, very disciplined on them.
On the safety protection side, then you've mentioned this high insider ownership a couple of times, circling back to that dividend yield of 6%.Let's say downside protection.How stable is that dividend?
Well, we just came off two of the toughest quarters that I can recall in Q2 and Q3.We had, I think, $0.70 was the average ACO price in Q3 of this year.Our realized price was significantly higher than that because of the hedging.
But the fact that we were able to maintain the dividend through that period of time and still not be using debt.The reason we've put our dividend in place in 2022 We raised it twice and lowered it once.
And the reason we lowered it was because I've always said we do not want to sustain our dividend with debt.That's a capital allocation decision that I've made, our board's made, our management team has made.
I think that's not the case for other companies.Some companies have decided they're quite okay with that.That's fine.That's the way they're running their business.
But for us, now that we've got our payout ratio, and payout ratio is kind of all in what our costs are and all in what we're paying out, is around flat.
But we're starting to get into next year, I think our free cash flow, it will be one of the highest free cash flow yields on a per share basis. from anybody in the industry.
So that allows us to pay down more debt, and maybe it means acquisitions, maybe it means raising our dividend, but when you're not spending a lot of money on CapEx, then you've got a lot more money to make those decisions with.
And so, you know, to your point, I don't know if we're going to do a major acquisition in 2025.We'll try, but it'll have to be a creative or we won't do it.
I don't know if we're going to raise our dividend 25, but if we've got a lot of free cash flow, that's the way we've chosen to give back money to shareholders.We've looked at share buybacks in the past.I don't think that's in the short term.
I don't think that's going to be the case because if we're trading at five or six times cash flow and we can buy assets at two, three times cash flow, well then it makes sense that we buy the assets and not buy back our own shares.
So it's constantly evolving, constantly changing.We watch this very closely. My answers on how we best allocate capital for next year, for 2025, might not be the same as 2026 or 2027.We'll see what the world's got to give us.
But I think I'm quite confident that we're going to see much better gas prices in 2025 and 2026.And we were able to maintain our dividend in 2024, which was an incredibly difficult year for being a natural gas company.
All right, Phil.Perfect.Thank you very much again, Phil Hodge, President and CEO of Pinecliffe Energy.Thanks, Cory.I appreciate it.
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