Pipestone Energy : Q4 MD&A

MANAGEMENT'S DISCUSSION AND ANALYSIS

RESPONSIBLY GROWING THEEXCEPTIONAL PIPESTONE MONTNEY PLAY

FOR THE YEAR ENDED DECEMBER 31, 2021

Pipestone Energy Corp. - Financial and Operating Highlights

			Three months ended December 31,		Year ended December 31,
($ thousands, except per unit and per share amounts)
	2021		2020		2021		2020
Financial
Sales of liquids and natural gas	$		137,264	$	45,853	$	391,295	$	135,950
Cash from operating activities			71,810		10,086		157,864		41,638
Adjusted funds flow from operations (1)			58,927		11,088		166,358		40,498
Per share, basic			0.31		0.06		0.87		0.21
Per share, diluted (4)			0.21		0.04		0.59		0.15
Income (loss) and comprehensive income (loss)			51,307		(1,846)		67,920		(17,277)
Per share, basic			0.27		(0.01)		0.35		(0.09)
Per share, diluted (4)			0.18		(0.01)		0.24		(0.09)
Adjusted EBITDA (1)			63,667		15,108		183,882		56,053
Capital expenditures			39,219		43,740		186,838		104,593
Free cash flow (1)			19,777		(32,652)		(20,633)		(64,113)
Working capital deficit (end of period)							(44,515)		(48,603)
Adjusted working capital deficit (end of period) (1)							(32,552)		(37,163)
Bank debt (end of period)							171,866		133,466
Net debt (end of period) (1)							204,418		170,629
Undrawn credit facility capacity (end of period)							107,712		90,948
Available funding (end of period) (1)						$	75,160	$	53,785
Shareholders' equity (end of period)							423,639		355,058
Annualized cash return on invested capital
(CROIC) (1)			26.1%		8.1%		18.9%		7.5%
Annualized return on capital employed
(ROCE) (1)			22.8%		1.7%		14.9%		0.5%
Shares purchased under NCIB (000s)			949		-		949		-
Shares outstanding (000s) (end of period)							191,446		190,799
Weighted-average basic shares
outstanding (000s)			192,033		190,698		191,525		190,288
Weighted-average diluted shares
outstanding (000s) (4)			282,530		274,758		281,656		274,401
Operations
Production
Condensate (bbls/d)			8,481		5,493		7,561		4,626
Other Natural Gas Liquids (NGLs) (bbls/d)			3,978		2,235		3,346		2,002
Total NGLs (bbls/d)			12,459		7,728		10,907		6,628
Crude oil (bbls/d)			44		93		74		102
Natural gas (Mcf/d)			96,718		59,479		81,620		53,039
Total (boe/d) (2)			28,623		17,734		24,584		15,570
Condensate and crude oil (% of total production)			30%		31%		31%		30%
Total liquids (% of total production)			44%		44%		45%		43%
Benchmark prices
Crude oil - WTI (C$/bbl)	$		97.19	$	55.41	$	85.10	$	52.39
Condensate - Edmonton Condensate (C$/bbl)			100.17		55.86		85.88		49.82
Natural gas - AECO 5A (C$/GJ)			4.50		2.52		3.45		2.12
Average realized prices (3)
Condensate (per bbl)			95.68		50.31		81.49		44.94
Other NGLs (per bbl)			44.30		18.03		34.61		15.55
Total NGLs (per bbl)			79.27		40.97		67.11		36.06
Crude oil (per bbl)			89.13		43.54		70.45		37.46
Natural gas (per Mcf)			5.17		2.99		4.10		2.42

			Three months ended December 31,		Year ended December 31,
($ thousands, except per unit and per share amounts)
	2021		2020		2021		2020
Netbacks
Revenue (per boe)			52.12		28.10		43.61		23.86
Realized (loss) gain on commodity risk
management contracts (per boe) (5)			(8.45)		(1.34)		(6.34)		2.46
Royalties (per boe)			(2.58)		(1.25)		(1.60)		(0.73)
Operating expenses (per boe)			(13.01)		(12.22)		(11.52)		(11.18)
Transportation (per boe)			(3.02)		(3.17)		(2.77)		(3.46)
Operating netback (per boe) (1) (5)			25.06		10.12		21.38		10.95
Adjusted funds flow netback (per boe) (1)	$		22.37	$	6.80	$	18.54	$	7.11

1. See "Non-GAAP measures" section of this MD&A for description.
2. 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).
3. Figures calculated before hedging.
4. Weighted-averagenumber of diluted shares outstanding for the purpose of calculating diluted per share amounts in the 2021 periods presented includes 89,506,903 common shares that are issuable at the discretion of convertible preferred shareholders as of December 31, 2021 for no additional proceeds to the Company. The convertible preferred shares have a total convertible value of $76.1 million at December 31, 2021 and are convertible at $0.85 per common share. The impact of other dilutive instruments is also factored into this calculation as applicable.
5. 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 March 9, 2022 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, 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"). 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.

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

Readers should read "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 9, 2022, a copy of which is available electronically on SEDAR at www.sedar.com.

Description of Pipestone Energy

Pipestone Energy is engaged in the responsible exploration for, and development and production of, oil and natural gas liquids (including condensate, butane and propane) herein collectively referenced as "liquids" and natural gas in Western Canada, with substantially all of its activities and assets focused in the Montney resource play in Alberta. The Company has achieved certification of all its production from its Montney asset under the Equitable Origin EO100™ Standard for Responsible Energy Development. Pipestone Energy is committed to building long-term value for its shareholders and values the partnerships that it is developing within its operating community. The Company is incorporated under the Business Corporations Act (Alberta) and its common shares are listed on the Toronto Stock Exchange ("TSX") under the ticker symbol PIPE. The address and principal place of business of the Company is Suite 3700, 888 - 3rd Street S.W., Calgary, Alberta, T2P 5C5.

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Outlook

Updated 2022 Guidance and Three-Year Development Plan (1)

Pipestone Energy has revised its 3-year business plan to modestly increase capital spend within cashflow (2) that results in additional production growth through 2024 and beyond. To facilitate this growth, the Company has secured incremental raw gas processing capacity, which it expects to be available in Q3 2023, facilitating a new production upper boundary of ~46,000 boe/d.

1. 3-yearplan as at March 2022, 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 2022 have not been finalized and are subject to a variety of factors and as a result, forecast results for 2023 and 2024 may change materially. Where a range is not provided, guidance and forecast values represent the mid-point estimate. Each US$10 per barrel change in WTI prices equates to a ~$40 million change in 2022 free cash flow (2) and each C$0.50 per GJ change in AECO natural gas price equates to a ~$20 million change in 2022 free cash flow (2).
2. See "Non-GAAP measures" section of this MD&A for description.
3. Capital expenditures are gross of capitalized G&A.

Modified 2022 Capital Program and Guidance

For 2022, largely as a result of processing capacity constraints and increased lift gas utilization, Pipestone Energy is reducing its production guidance range by 8% to 31,000 - 33,000 boe/d (from 34,000 - 36,000 boe/d). Production was disrupted for 18 full days in January and February at the Keyera Wapiti gas plant, as a result of both weather- related and mechanical issues. Opportunities to recover the calendar year production will be restricted during Q2 and Q3, as all three midstream plants Pipestone Energy is connected to are planning major plant turnarounds. Additionally, interruptible processing capacity availability is expected to be more limited during H2 2022, as other area operators grow production volumes. By Q4 2022, the Company expects to be fully utilizing its currently available processing capacity, and expects to average 37,000 boe/d over the quarter. Production is forecast to grow to 40,500 boe/d (midpoint) in 2023 as planned new processing capacity becomes available in Q3 of that year, resulting in exit volumes of ~45,000 boe/d, which based on the revised processing limitations are expected to be maintained through 2024.

Pipestone Energy is also increasing its 2022 capital guidance range to $210 - $220 million (up from $180 - $200 million). This revised capital program is funded well within cashflow (2) and will further delineate Pipestone Energy's asset while accelerating Pipestone Energy's growth into 2023. The expanded capital program will include: a) Increased infrastructure expenditures, including a pipeline to the 6-33step-out pad; b) Increased drilling and completion activity in H2 2022; and c) Completion and long-term test of the drilled, but uncompleted Montney delineation well at 12-36 during Q2 2022. Including the additional capital, Pipestone Energy still forecasts to generate $130 - $140 million of free cash flow (2) in 2022 (from $140 - $160 million previously). The revised ending net debt (2) balance is $65 - $75 million for 2022 (from $30 million previously).

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Long-Term Development Trajectory

The previously released year-end 2021 McDaniel 2P reserve report includes 149 undeveloped locations, which supports growth to ~45,000 boe/d and that could be held flat until 2032. Pipestone Energy has internally identified an additional 180 Tier 1 (Tier 1 = <12-month payout at US$80 WTI I $3.50 AECO) net unbooked locations on its Central and Eastern acreage blocks, that would support further growth to a risked plateau of ~55,000 boe/d by exit 2025, with an additional plateau period of >10 years. To achieve this production level, Pipestone Energy will have to continue to contract incremental processing capacity. The Company estimates there to be ~250 MMcf/d of currently available or planned sour gas processing expansions in the Pipestone area that could be in-service by 2025.

Operations Update

In early November 2021, Pipestone Energy completed the construction and commissioning of the previously announced Veresen Midstream-owned and Pipestone Energy-operated 12" gathering pipeline and 6-30 battery. This infrastructure ties Pipestone Energy's production into the Veresen Midstream Hythe gas plant.

In late October 2021, the Company brought on production from its 3 southeastern step-out wells off the existing 14- 4 pad. In November 2021, the 3 additional wells located at the 6-13 pad were also tied-in and brought on-stream to support available production.

Pipestone Energy achieved its lowest all-in drilling, completion, equip and tie-in ("DCE&T") costs to date on the 3 additional wells, as part of the second phase of operations, at the 6-13 pad. The average DCE&T cost per well was $4.9 million, comprised of: $1.7 million on drilling, $2.8 million on completions and $0.4 million on equip and tie-in. These wells were drilled with a lateral length of 2,417 metres and were completed with proppant intensity of 2.5 tonnes per metre. The Company's DCE&T budget per well for 2021 was $6.4 million which included an average lateral length of 3,000 metres and 2.5 tonnes per metre of proppant. These results continue to demonstrate the Company's enhancement of value through strong capital execution in the field.

The Company continued drilling at the 2-31 pad where 5 wells were drilled and rig-released during the fourth quarter of 2021 for a total of 6 wells at this location. The Company contracted a second rig to concurrently drill and rig- release 3 wells from the 6-30 pad, as part of the second phase of operations at this location, during the quarter. This rig was racked prior to year-end. In late December 2021 the Company relocated the drilling rig from its 2-31 pad to the 2-25 pad where it spudded the first of four wells planned at this site. Drilling operations are currently concluding at this location.

As drilling at the 2-31 pad was ahead of schedule, the Company was able to rig in two frac spreads at the end of December 2021 ahead of original schedule. The completions on the 6 wells at the 2-31 pad were finished in early January 2022. Subsequently, the Company released one spread and moved the other to the 6-30 pad where it completed the 3 additional wells previously drilled.

Fourth Quarter 2021 Corporate Highlights

• In Q4 2021 Pipestone Energy achieved record average quarterly production totaling 28,623 boe/d (30% condensate, 44% total liquids), which was a 16% quarterly increase over Q3 2021 production of 24,704 boe/d and a 61% increase over Q4 2020 production of 17,734 boe/d. The Company met its previously announced average corporate production target for November and December 2021 of 30,000 boe/d with actual production averaging 30,809 boe/d;
• As a result of its continued production growth combined with improving commodity prices during the quarter, the Company generated record revenue of $137.3 million, nearly tripling revenue from Q4 2020 of $45.9 million and increasing revenue from Q3 2021 of $100.2 million by 37% or $37.1 million;

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