Pipestone Energy : Q2 MD&A

MANAGEMENT'S DISCUSSION AND ANALYSIS

HIGHLY FOCUSED ON DEVELOPING THE EXCEPTIONAL MONTNEY PLAY

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021

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)
	2021		2020		2021		2020
Financial
Sales of liquids and natural gas	$		82,319	$	26,380	$	153,804	$	58,397
Cash from (used in) operating activities			33,732		(175)		51,829		30,892
Adjusted funds flow from operations (1)			35,498		11,231		63,740		23,051
Per share, basic			0.19		0.06		0.33		0.12
Per share, diluted (4)			0.13		0.06		0.23		0.12
Loss			(1,190)		(19,486)		(2,144)		(3,945)
Per share, basic and diluted			(0.01)		(0.10)		(0.01)		(0.02)
Capital expenditures			47,553		19,893		93,842		49,047
Property acquisitions			162		-		287		-
Adjusted working capital deficit (end of period) (1)						$	(23,912)	$	(13,435)
Bank debt (end of period)							184,115		183,248
Net debt (end of period) (1)							208,027		196,683
Undrawn credit facility capacity (end of period)							40,498		26,856
Available funding (end of period) (1)							16,586		13,421
Shareholders' equity (end of period)							354,639		367,298
Annualized cash return on invested capital
(CROIC) (1)			18.9%		8.6%		17.1%		8.9%
Annualized return on capital employed (ROCE) (1)			14.1%		(0.5%)		12.3%		0.7%
Shares outstanding (end of period)							191,548		190,295
Weighted-average basic shares outstanding			191,466		190,136		191,180		189,990
Weighted-average diluted shares outstanding (4)			278,668		190,253		278,247		190,229
Operations
Production
Condensate (bbls/d)			7,345		4,781		7,175		4,368
Other natural gas liquids (NGLs) (bbls/d)			3,211		2,306		2,980		1,786
Total NGLs (bbls/d)			10,556		7,087		10,155		6,154
Crude oil (bbls/d)			83		104		87		95
Natural gas (Mcf/d)			76,180		57,488		73,369		55,017
Total (boe/d) (2)			23,336		16,772		22,470		15,419
Condensate and crude oil (% of total production)			32%		29%		33%		29%
Total liquids (% of total production)			46%		43%		46%		41%
Benchmark prices
Crude oil - WTI (C$/bbl)	$		81.04	$	38.34	$	77.13	$	49.84
Condensate - Edmonton Condensate (C$/bbl)			79.47		31.38		77.03		45.75
Natural gas - AECO 5A (C$/GJ)			2.91		1.90		2.93		1.91
Average realized prices (3)
Condensate (per bbl)			76.56		29.21		70.96		39.92
Other NGLs (per bbl)			26.32		10.92		26.54		13.42
Total NGLs (per bbl)			61.27		23.26		57.93		32.23
Crude oil (per bbl)			68.79		19.88		63.97		29.49
Natural gas (per Mcf)			3.31		2.14		3.49		2.18
Netbacks
Revenue (per boe)			38.76		17.28		37.82		20.81
Realized (loss) gain on commodity risk
management contracts (per boe) (5)			(5.09)		6.85		(4.72)		5.92
Royalties (per boe)			(0.24)		0.28		(0.92)		(0.37)
Operating expenses (per boe)			(11.11)		(10.64)		(10.89)		(11.00)
Transportation (per boe)			(2.72)		(3.32)		(2.67)		(3.47)
Operating netback (per boe) (1) (5)			19.60		10.45		18.62		11.89
Adjusted funds flow netback (per boe) (1)	$		16.72	$	7.37	$	15.67	$	8.22

1. See "Non-GAAP measures" section of this MD&A for description.

1. For a description of the boe conversion ratio, see "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).
2. Figures calculated before hedging.
3. Weighted-averagenumber of diluted shares outstanding for the purpose of calculating diluted adjusted funds flow from operations per share in the 2021 periods presented includes 86,667,329 common shares that are issuable at the discretion of preferred shareholders as of June 30, 2021 for no additional proceeds to the Company. The preferred shares have a total convertible value of $73.7 million at June 30, 2021 and are convertible at $0.85 per common share. The impact of other dilutive instruments is also factored into this calculation.
4. Realized (loss) gain on commodity risk management contracts reclassified to be included under operating netback for 2021, prior period figures have been adjusted to conform with current presentation.

Management's Discussion and Analysis

This management's discussion and analysis (MD&A) of operating and financial results of Pipestone Energy Corp. ("Pipestone Energy" or the "Company") is dated August 11, 2021 and is based on currently available information. It should be read in conjunction with the audited financial statements and accompanying notes for the years ended December 31, 2020 and 2019 and the unaudited condensed interim consolidated financial statements and accompanying notes for the three and six months ended June 30, 2021 and 2020. Unless otherwise noted, all financial information is presented in thousands of Canadian dollars and is in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), interpretations of the International Financial Reporting Interpretations Committee (IFRIC), and with Canadian generally accepted accounting principles (GAAP) as applicable to interim financial statements, including International Accounting Standard (IAS) 34, Interim Financial Reporting. These documents, along with other statutory filings, are available on SEDAR at www.sedar.com and on the Company's website at www.pipestonecorp.com.

Refer to the end of the MD&A for commonly used abbreviations.

Readers should also refer to "Forward-Looking Statements" at the end of the MD&A, which explains the basis for and limitations of statements throughout this report that are not historical facts and may be considered "forward-looking statements" under securities regulations. Additional risks, uncertainties and other factors are discussed in Pipestone Energy's annual information form dated March 10, 2021, a copy of which is available electronically on SEDAR at www.sedar.com.

Description of Pipestone Energy

Pipestone Energy is engaged in the exploration for, and development and production of, oil and natural gas liquids (including condensate, butane and propane) herein collectively referenced as "liquids" as well as natural gas in Western Canada. The Company's head office is located in Calgary, Alberta. The Company is focused on developing its liquids-rich assets in the Pipestone area of the Alberta Montney trend. Pipestone Energy is committed to building long term value for its shareholders and values the partnerships that it is developing within its operating community. Pipestone Energy is incorporated under the Business Corporations Act (Alberta) and its shares trade on the Toronto Stock Exchange under the symbol PIPE.

Outlook

Pipestone Energy's fully funded development program positions the Company to deliver significant production and cash flow growth through 2023. The Company's development will be optimized through a continuous drilling program. The near-term focus will be on developing inventory located adjacent to existing in-field infrastructure, but will also include step out drilling in the eastern acreage. See the "Operations Update" below for more information on capital activity during the quarter.

At current commodity prices, Management believes that Pipestone Energy can deliver positive corporate returns on capital, and expects that, the Company can generate significant annual free cash flow beginning in 2022, and thereafter. With the cost reductions and well results achieved to date, the Company

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anticipates it can deliver on its development plan within its current $225.0 million borrowing capacity, while reducing leverage metrics over the next three years.

Updated Pipestone Capital Program Map

Updated 2021 Guidance and 3-Year Forecast (1)

Pipestone Energy has a robust three-year development plan that is expected to significantly grow production and generate free cash flow above maintenance capital starting in 2022, while generating positive returns on capital employed. The current outlook includes a small outspend of cash flow in 2021 resulting in net debt peaking at the end of Q3 2021 and then declining significantly, as forecast free cash flow is utilized to strengthen the balance sheet through 2022 and 2023.

The Company has refined its 2021 guidance and 2022 and 2023 forecast in the table below to reflect an improvement in expected commodity prices and acceleration of $10.0 million of completion and tie-in capital from early 2022 to Q4 2021 as a result of continued efficiencies with its drilling program:

	Updated 2021	Original 2021	2022	2023
	Guidance	Guidance	Forecast	Forecast
Price Forecast	US$65 WTI	US$55 WTI	US$65 WTI	US$65 WTI
	$3.00 AECO	$2.50 AECO	$2.50 AECO	$2.50 AECO
	$0.80 CAD	$0.785 CAD	$0.80 CAD	$0.80 CAD
Full Year Production (boe/d)	24,000 - 26,000	24,000 - 26,000	33,000 - 36,000	37,000 - 40,000
Cash Flow (C$ million) (2)	$160 - $170	$140 - $150	$280	$320
Capex (C$ million) (3)	$170 - $175	$155 - $165	$185	$130
Free Cash Flow (C$ million) (2)	($13)	($15)	$95	$190
YE Net Debt (C$ million) (2)	$183	$185	$88	+$102 net cash
LTM Debt / Cash Flow (x)	1.1x	1.2x	0.3x	0.0x

1. 3-yearplan as at August 2021, derived by utilizing, among other assumptions, historical Pipestone Energy production performance and current capital and operating cost assumptions held flat for illustration only. Budgets and forecasts beyond 2021 have not been finalized and are subject to a variety of factors, thus forecast results for 2022 and 2023 may change materially. Where a range is not provided,

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guidance and forecast values represent the mid-point estimate. 2021 production guidance incorporates currently known planned midstream outages.

1. See "Non-GAAP measures" section of this MD&A. Net debt excludes convertible preferred shares as there is no cash settled liability and includes adjusted working capital deficit.
2. Capex includes all anticipated DCE&T, infrastructure and other capital expenditures, but excludes capitalized G&A.

The Company's current in-field gathering system build out was completed in 2019 and is capable of handling approximately 40,000 boe/d of sales production, inclusive of de-bottlenecking modifications being implemented during 2021. As such, the Company anticipates the vast majority of its capital investments will be focused on drilling and completions over the next three years.

Operations Update

In the first half of April 2021 Pipestone Energy finished drilling at its 15-25 pad with the final 2 wells rig released at this site. The 6 wells located at the 15-25 pad were completed in May utilizing two frac spreads simultaneously to reduce time on site and improve capital costs. Wellsite facilities were constructed in June with the pad on production as of July. Including these 6 wells, Pipestone Energy will be bringing on production from 15 new wells in the second half of 2021.

The 6 wells at the 15-25pad-site were drilled for an average cost of $2.1 million per well with an average lateral length of 2,918 metres which equates to an average cost of $752 per lateral metre, in-line with pad average pacesetter drilling performance for the Company. The 15-25 pad also marked a milestone for Pipestone Energy with its longest lateral drilled since inception measuring 3,770 metres at a cost of $2.2 million or $617 per lateral metre. These wells were completed for an average cost of $3.2 million per well which is $0.5 million or 14% less than the Company's 2021 completion budget of $3.7 million for a 3,000 metre well. These completion cost savings were achieved despite the 15-25 wells having a higher completion intensity (2.65 tonnes per metre of proppant were placed compared to only 2.50 tonnes per metre provided for in the Company's 2021 budget).

In April 2021 the Company began the second phase of drilling operations at its existing 6-24 pad returning to a single rig execution strategy from the two rigs that were previously contracted for the 15-25 pad. A total of 6 additional wells were drilled and rig released at the 6-24 pad during the second quarter of 2021 with an average cost of $2.2 million and average lateral length of 2,914 m. This pad also generated the company's latest pacesetter drilling cost with a 3,166 m lateral drilled for $538 per lateral meter.

In May 2021 the Company also tied-in and brought 3 wells on production from the 6-13 pad, which were previously completed in the first quarter of 2021. Production results from the wells are meeting type curve expectations with average IP60 condensate and gas rates of 536 bbls/d and 2.8 MMcf/d, respectively.

In late June 2021 the Company moved its drilling rig to the existing 14-4 pad where 3 additional southeastern step-out wells, including 1 Lower Montney well, will be drilled in total. In July the Company also commenced its completion operations on the 6 additional wells drilled at the 6-24 pad. These wells are scheduled to be brought on-stream in Q3 2021.

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