Pipestone Energy : GMT Proxy Arguments

GMT ARGUMENTS

PIPESTONE RESPONSES

Production & Cash Flow Contribution

"I direct you to two simple measures of what Pipestone would be contributing to the new

⚫ GMT's "simple" analysis is flawed as it is based on single point estimates, and fails to take

into account the long-term value and risks of both Pipestone and Strathcona. Relative

entity. First, from a production standpoint, Pipestone would be contributing 35 MBOED of 185

valuation, which is based on long-term outlooks, not single point estimates, is the most

MBOED proforma production, which is 18.9%. The ratio may even be worse for Pipestone

appropriate measure of an exchange ratio. Analysis that is based on values assigned by

shareholders as it is based on forward-looking estimates for Strathcona versus production

independent reserves evaluators is the most appropriate way to assess exchange ratio.

levels already achieved and reported by Pipestone. Strathcona only produced 144 MBOED in

On that basis, the exchange ratio delivers fair value to Pipestone.

the second quarter of 2023 while Pipestone produced 36.8 MBOED during the same quarter

(adjusted to add back 3.7 MBOED of production lost due to Alberta wildfires during the

◼ Pipestone contributes ~8.8% based on YE 2022 2P PV 10 after tax, net of debt as of

quarter) or 20.4%."

6/30/2023 as compared to pro forma equity ownership of 8.87% and 9.05% on the

"Second, from a cash flow standpoint, a Canadian sell-side financial institution projected in a

basic and fully diluted basis, respectively, making the exchange ratio attractive to

Pipestone shareholders

report about the Strathcona acquisition published on August 1, 2023, that Pipestone would

⚫

Assessment should look at other metrics including reserve value, RLI and long-term

provide 14.2% of the combined projected cashflow ($313M of $2,210M total for 2024). These

growth potential

metrics suggest that the exchange ratio for Pipestone should be substantially higher."

"Clearly this is a very accretive transaction for Strathcona shareholders and conversely a very

◼ Pipestone RLI is 18 years compared to pro forma company of 38(1)

dilutive deal for Pipestone Shareholders."

Product Mix

"Sure, Strathcona is oilier, but much of its oil is classified as bitumen or heavy oil, which has

⚫ Pipestone is gas weighted, which has lower margins than heavy oil

lower margins than lighter oil assets."

⚫

Pipestone's unhedged operating netback for Q2 2023 averaged $19.51/boe; Strathcona's

"A significant part of both production and cash flow at Pipestone comes from condensate,

operating netback was 81% higher at $35.30/boe for the same period

⚫

Further, bitumen/heavy oil producers generally trade at higher trading multiples than gas

which is a high netback premium product in short supply for blending with heavy oil to make it

producers due to lower decline rates, multi-decade reserve life and lower maintenance

more transportable and saleable."

capital requirements

GMT ARGUMENTS

PIPESTONE RESPONSES

Organic Growth

"While the Waterous team did an excellent job assembling assets acquired at the lows of the

⚫ Organic growth does not equal growth in value. In fact, one of the reasons why the

Pipestone Board undertook a strategic review is because, despite significant organic

market and is to be commended for the equity value they have created for their shareholders,

growth, Pipestone's share price has remained relatively flat since its public debut

Strathcona has shown no organic growth thus far. For instance, since the last acquisition that

($2.40/sh close on January 5, 2019, versus $2.72/sh just prior to announcement).

Strathcona closed in the third quarter of 2022 (the acquisition of Serafina Energy Ltd.),

production has remained flat at 143-144 MBOED over the past three consecutive quarters.

⚫ GMT's proposed plan to wait some more and hope for the best has been tried and did not

Additionally, oil sand and heavy oil projects tend to be lumpier and more capital intensive than

deliver value for various reasons, including Pipestone's asset characteristics. Hope is not

Montney development. Pipestone has grown totally organically since 2019…"

a plan.

⚫ Board's 18-month extensive and thorough strategic review culminated in the Arrangement

with Strathcona, which both management and Board believe is in the best interests of

Pipestone and its shareholders

⚫ Strathcona has delivered significant organic growth throughout its history, at the same

time as growing through acquisitions; Strathcona's standalone production has recently

exceeded 155 Mboe / d, and is expected to exit 2023 at approximately 160 Mboe / d

Leverage

"Pipestone has grown totally organically since 2019 and has relatively little net debt of $172.4

⚫ Leverage for the pro forma company on a 2024 EBITDA basis (~0.9x)(1) is slightly above

peers at close, but generally in line with closing leverage for public peers that recently

million (0.5x Net Debt/TTM Adjusted EBITDA), compared to the $3.2 billion of net debt for

completed acquisitions

Strathcona (2.1x Net Debt/TTM Adjusted EBITDA)."

Share Price Performance

"The markets seem to agree as Pipestone Share prices are down 7.4% from $2.72 on July 31,

⚫ Pipestone's stock underperformed the market only in the period post announcement when

little information was known about Strathcona or the pro forma business; post publishing

2023, the day before the Strathcona-Pipestone Arrangement was publicly announced, to

the Management Information Circular on August 25, 2023, which provided additional

$2.52 as of market close on September 14, 2023. On the same timeframe, shares of Crescent

detail on Strathcona, Pipestone's stock has increased 22%, while Crescent Point, Kelt

Point Energy Corp., Kelt Exploration Ltd. and NuVista Energy Ltd., which surround Pipestone

and NuVista increased 7%, 10% and 14%, respectively

and are the most strategic potential owners of Pipestone, are up 8.0%, 16.0% and 18.5%,

respectively."

1.

Based on Pipestone management estimated year-end 2023 leverage ratio to 2024E EBITDA.