Key Highlights:
- Natural gas production of 194 mmcf/day in the quarter
- Total production of 38,404 boe/day
- Petroleum and natural gas revenue of $71.4 million, an increase of $17.1 million or 32% compared to the same quarter in 2020
- Cash flow from operations of $12.1 million
- Net Operating Income1 (“NOI”) of $14.4 million and Adjusted Funds Flow From Operations1 (“AFFO”) of $8.5 million
- Delivered our inaugural ESG report in late June 2021, anchored by our commitment of net zero emissions by 2050
- On July 26, 2021, the company announced it had initiated a formal process to identify, examine and consider a range of strategic alternatives with a view to enhancing shareholder value
Pieridae Energy Limited released its Q2 2021 financial and operating results today, highlighted by solid production in spite of the Jumping Pound Gas Complex turnaround which meant the facility was not operating and providing cash flow for five weeks, impacting 3,309 boe/day of production during the quarter. The Company was also pleased with the release of its inaugural ESG Report this quarter and continues to look at viable options for an LNG Project.
“I was pleased the Company released its first-ever ESG Report in late June, highlighted by our commitment to achieving net zero emissions, continuing to build respectful relationships with Indigenous Peoples and communities, and enhancing diversity along with progressive governance,” said Pieridae’s Chief Executive Officer Alfred Sorensen. “We have received positive feedback from other stakeholders and government on the quality of our Report and the direction we are taking to do our part in recognizing the movement toward a lower carbon world as we deliver the energy people rely on each day.
“We recently announced a step change in our approach to the Goldboro LNG Project as we analyze options that could make a reconfigured LNG initiative more compatible with the current environment. Those options might include a floating LNG Project, one with proven technology that drastically reduces GHG emissions; involves clean, electric-drive turbines and reduces capital costs substantially compared to our former project, while maintaining a projected healthy rate of return,” concluded Sorensen.
Q2 2021 Financial & Operations Highlights
Pieridae produced an average of 38,404 boe/day during the second quarter, down slightly from the previous quarter and comparative period of 2020, yet a resilient result considering Pieridae safely and successfully completed an $18.5 million, five-week scheduled turnaround at the Jumping Pound Gas Complex during the quarter, impacting 3,309 boe/day of production during that period. By the end of May, production was back on stream after the work was completed. Additionally, production was slightly impacted by other minor scheduled workover projects in the Limestone and Caroline fields.
Realized natural gas prices were consistent compared to the first quarter of 2021 and 39% higher than Q1 2020. Our realized natural gas price was $2.59/mcf in the second quarter versus the AECO benchmark of $3.11/mcf as a result of hedges in place.
The Company continues to have a robust hedging program to insulate itself from volatile commodity prices. Pieridae’s senior secured lender has temporarily amended its requirement to have 60% of production hedged on an 18-month rolling average boe basis in order to allow the Company to take advantage of strengthening crude and natural gas markets. As of June 30, 2021, 77,538 GJ/d of fixed price physical sales contracts of natural gas were in place at a weighted-average price of $2.54/GJ, and 1,500 bbl/day of 2021 condensate production was hedged at a weighted average price of $54.95/bbl, representing a hedge percentage of 49% on a modified 18-month, forward-looking basis.
In the second quarter of 2021, Pieridae generated cashflow from operating activities of $12.1 million and AFFO of $8.5 million. Higher operating costs per boe and royalties offset the comparative strength in revenues, primarily as a result of higher power prices and increased third-party processing fees, both of which are partially tied to natural gas price indexes. Additionally, net income was impacted by Pieridae’s continued investment in the Goldboro LNG Project. As noted in our news release of July 2, 2021, the Company was not able to meet all the key conditions necessary to reach FID, thus, the majority of Goldboro LNG spending has been suspended.
Petroleum and natural gas revenue in the second quarter of 2021 was $71.4 million, an increase of $17.1 million or 32% compared to the same quarter in 2020. On a year-to date basis, petroleum and natural gas revenue was $153.1 million, an increase of $34.1 million or 29% compared to the same period in 2020. The increase was primarily due to higher realized price for natural gas (27% increase), condensate (13% increase) and NGLs (combined 117% increase), offset by slightly reduced volumes as previously described.
Third party processing revenue comes from fees charged to third parties for processing their production and sulphur volumes through Pieridae’s three sour gas processing facilities. This income adds significantly to the economic benefits realized from these facilities by offsetting highly fixed operating costs. Third party processing income in the second quarter of 2021 was $3.8 million, a decrease of $3.1 million or 45% compared to the same quarter in 2020. The decreases are due to lower throughput volumes from third parties as a result of shut-ins of certain third-party owned production assets during the year, the Jumping Pound turnaround which restricted third-party throughput capacity for 38 days during the quarter, as well as Pieridae’s fall 2020 acquisition of working interest ownership in Waterton which lowered third party processing revenue while increasing Pieridae’s own production volumes.
Quarterly Highlights
COVID-19 Update
Pieridae remains committed to the health and safety of its employees as they continue to do a remarkable job operating our assets safely and reliably.
As of July 2, with the Alberta Government lifting all restrictions, the majority of Pieridae employees working from home returned to work.
The company supports health officials in urging all those who are able to get vaccinated. We still encourage our employees to maintain physical distancing along with regular hand washing and sanitizing to ensure we keep our workplaces safe.
As a result of the ongoing vigilance by our employees, Pieridae has not suffered any significant loss of productivity related to the pandemic.
Q2 2021 Developments
Peters & Co. Strategic Review
On July 26, 2021, the company announced it had initiated a formal process to identify, examine and consider a range of strategic alternatives with a view to enhancing shareholder value. Such strategic alternatives may include, but are not limited to, a corporate sale, merger, a sale of a material portion of Pieridae’s assets or other transactions.
Pieridae’s Board of Directors authorized the creation of a special committee, chaired by Board member Andrew Judson, that will review and evaluate potential strategic alternatives and transactions.
Peters & Co. Limited has been engaged as financial advisor to advise the special committee on this comprehensive review and analysis of strategic alternatives. McCarthy Tétrault LLP will also provide advice to the committee.
Pieridae has not set a definitive schedule to complete its identification, examination and consideration of strategic alternatives. It is the Company’s current intention not to disclose developments with respect to the process unless and until its Board of Directors has approved a specific transaction or otherwise determines that disclosure is necessary or appropriate. We caution that there are no assurances or guarantees that the process will result in a transaction or, if a transaction is undertaken, the terms or timing of such a transaction.
Shareholders and the Company have invested heavily in the Goldboro LNG Project for a number of years and Pieridae has acquired and consolidated a large base of Foothills upstream assets, so it is prudent for the company to look for ways to ensure an appropriate return is found for the investments made to date.
Chief Financial Officer Changes
On July 26, 2021, the Company was pleased to announce that the Board of Directors had approved the appointment of Adam Gray as Interim Chief Financial Officer. Mr. Gray has been with Pieridae since January 2020, acting as Vice-President and Controller. He brings nearly 15 years of experience to the role, including five years with PwC, then eight managing accounting, commercial finance and operational readiness for the multi-billion-dollar North West Redwater Partnership, and providing financial modelling and analysis to the Government of Alberta’s Department of Energy. Mr. Gray holds a Bachelor of Commerce degree (BCom) from the University of Calgary, a Graduate Diploma in Leadership from Royal Roads University and is a Chartered Professional Accountant (CPA).
On July 5, 2021, we announced the resignation of Pieridae’s former CFO Rob Dargewitcz. Mr. Dargewitcz’s departure was not related to any issues or disagreements regarding Pieridae’s financial disclosures or accounting policies and practices. We thank Mr. Dargewitcz for his service.
Goldboro LNG
On July 2, 2021, the Company announced it was not able to meet all the key conditions necessary to make an FID for the Goldboro LNG Project.
Following consultation with the Board, Pieridae decided to move Goldboro LNG in a new direction. It became apparent that cost pressures and time constraints due to COVID-19 made building the current version of the LNG Project impractical.
We are now assessing options and analyzing strategic alternatives that could make an LNG Project more compatible with the current environment. In addition, the Company continues its work to further optimize the operation and development of our extensive Foothills resources and midstream assets, including our carbon capture and sequestration and blue power development.
The LNG Project’s fundamentals remain strong: robust LNG demand from Europe and high global LNG prices, Indigenous participation, a net-zero emissions pathway forward, and support from jurisdictions across Canada. This speaks to our ongoing efforts to find a partner to take advantage of these opportunities.
Pieridae continues looking for innovative ways of supplying the world with the clean natural gas it requires as a reliable bridge fuel and providing the energy to fuel people’s lives while supporting the environment and the transition to a lower-carbon economy.
Alberta Energy Regulator (“AER”) Licence Transfer
The Alberta Energy Regulator sent Pieridae and Shell a letter on May 14, 2021, informing us that they have decided to hold a hearing with respect to the re-application to transfer Shell’s Foothills assets licences to Pieridae.
On July 9, 2021, Shell sent a letter to the AER asking for a pause in the process due to Pieridae announcing it was moving the Goldboro LNG Project in a new direction.
With this development, Shell felt it prudent to consider how this fundamental change would impact the current licence transfer application, thus the pause.
On July 20, 2021, the AER granted this request and notified both parties that the public hearing process is adjourned until September 30, 2021.
Pieridae continues to own the Foothills assets and has responsibility for their continued safe operation. Shell remains the licensee of record.
Inaugural Environmental, Social & Governance (“ESG”) Report Released
We were pleased to release Pieridae Energy’s inaugural ESG Report on June 22, 2021. The report is the continuation of our sustainability journey to demonstrate the Company’s commitment to achieving an authentic ESG outcome through caring deeply about what we stand for and by responding to our stakeholders’ needs and concerns.
The Report’s release was the culmination of more than 14 months of effort to develop an ESG framework and strategy before producing and finalizing the document.
We have defined the top material ESG risks and opportunities to be prioritized over the coming months and have made a number of commitments the Company will focus on delivering such as net zero emissions by 2050; Indigenous Peoples reconciliation; constructive community and stakeholder engagement; a focus on health, safety and the environment; and building a diverse culture and workplace.
Caroline Carbon Capture Power Complex Announced
On May 27, 2021, we were pleased to let stakeholders know about the creation of the Caroline Carbon Capture Power Complex. This large-scale carbon capture and sequestration and blue power production complex will be located at Pieridae’s very own Caroline Gas Complex in Alberta.
The Complex will capture and store underground up to three million tonnes of CO2 annually from the gas processing facility, power production and third parties. Sequestering three million tonnes of CO2 per year would be the equivalent of taking more than 650,000 cars off the road each year or eliminating 4.4 billion kilowatt-hours of coal-fired power annually.
This ‘made in Canada’ solution positions Pieridae to play a key role in helping to lower overall Canadian greenhouse gas emissions. We know the world is looking for ways to transition to a lower-carbon intensity economy. By capturing and storing carbon on such a large scale, we move further down the strategic path of ensuring Pieridae is net carbon negative.
Phase One of the Complex will sequester one million tonnes of CO2 and produce enough blue power to power approximately 112,000 households each year.
2021 Guidance
The Company’s guidance has been adjusted, with production forecast to be 40,000-42,500 boe/day for the remainder of 2021, compared to previous guidance of 40,000-45,000 boe/day. We are guiding to a lower NOI in the range of $85-$100 million, down from the previous forecast of $100-$130 million. As well, adjusted operating expenses per boe are expected to increase from $9.50-$10.50 to $12.50-$13.00 primarily reflecting the increase in power prices and processing fees expected for the remainder of the year. A previously stated development budget of $15-$20 million for the Goldboro LNG Project is no longer being considered. The bulk of the Company’s $35-$45 million upstream capital budget will continue to be invested to ensure the safe-reliable operation of our assets, including a fall turnaround at our Caroline Gas Complex.
Board Member Resigns
Yesterday morning, Mark Horrox tendered his resignation from Pieridae’s Board of Directors, effective immediately.
“We have had a number of discussions with Mark recently and jointly decided that with the strategic review of the Company underway and Mark being a Principal with our main, senior secured lender Third Eye Capital, it was best for him to resign his position with Pieridae’s Board to avoid any potential conflicts of interest,” said Pieridae CEO Alfred Sorensen.
