Pipestone Energy Corp. — Interim / Quarterly Report 2021

May 12, 2021

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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HIGHLY FOCUSED ON DEVELOPING THE EXCEPTIONAL MONTNEY PLAY

FOR THE THREE MONTHS ENDED MARCH 31, 2021

Pipestone Energy Corp. Condensed Interim Consolidated Statements of Financial Position

(amounts in thousands of Canadian dollars) (unaudited)

Note Assets Current assets Accounts receivable 4(b) Prepaid expenses and deposits Total current assets Non-current assets Exploration and evaluation assets 5 Property and equipment 5 Right-of-use assets 5 Risk management contracts 4(d) Total assets Liabilities Current liabilities Accounts payable and accrued liabilities Risk management contracts 4(d) Lease liabilities 7 Total current liabilities Non-current liabilities Bank debt 6 Lease liabilities 7 Decommissioning provisions 8 Risk management contracts 4(d) Convertible preferred share obligation 9 Deferred tax liabilities Total liabilities Shareholders’ Equity Share capital 10 Warrants 10(c) Contributed surplus 10(d) Deficit Total shareholders’ equity Total liabilities and shareholders’ equity	March 31, 2021 December 31, 2020
	$ $ 32,340 17,003 6,347 5,201
	38,687 22,204 34,260 34,225 615,665 582,406 53,437 55,164 98 472
	742,147 694,471
	62,241 59,367 18,903 6,775 4,752 4,665
	85,896 70,807 166,659 133,466 52,343 53,560 9,125 9,239 1,115 1,228 69,395 68,132 2,867 2,981
	387,400 339,413
	380,708 380,367 15,307 15,307 2,915 2,613 (44,183) (43,229)
	354,747 355,058
	742,147 694,471
Commitments and contingencies (note 16) Subsequent events (note 17)

Approved by the Board of Directors.

(Signed) “GR”, Director (Signed) “BL”, Director

See accompanying notes to the financial statements.

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Pipestone Energy Corp.

Condensed Interim Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)

(amounts in thousands of Canadian dollars, except for per share amounts) (unaudited)

Note Revenue Sales of liquids and natural gas 11 Royalties Liquids and natural gas revenue Realized (loss) gain on commodity risk management contracts 4(d) Unrealized (loss) gain on commodity risk management contracts 4(d) Total revenue Expenses Operating 16 Transportation General and administrative Share-based compensation 10(d) Depletion and depreciation 5 Total expenses Operating Income Realized loss on interest rate risk management contracts 4(d) Unrealized gain (loss) on interest rate risk management contracts 4(d) Financing income Financing expense 12 Income (Loss) Before Income Taxes Deferred income tax recovery (expense) 13 Income (Loss) and Comprehensive Income (Loss) for the Period Income (Loss) per Share Basic and diluted 10(b)	Three months ended March 31, 2021 2020
	$ $ 71,485 32,017 (3,219) (1,468)
	68,266 30,549 (8,391) 6,165 (12,734) 22,379
	47,141 59,093
	20,678 14,620 5,090 4,684 1,600 1,777 574 453 14,706 12,785
	42,648 34,319
	4,493 24,774 (244) (668) 345 (734) - 173 (5,662) (3,347)
	(1,068) 20,198 114 (4,657)
	(954) 15,541
	(0.00) 0.08

See accompanying notes to the financial statements.

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Pipestone Energy Corp. Condensed Interim Consolidated Statements of Changes in Equity

(amounts in thousands of Canadian dollars) (unaudited)

Balance at January 1, 2020 Share-based compensation Employee share purchase plan Income for the period Balance at March 31, 2020 Conversion of restricted share units Exercise of stock options Share-based compensation Employee share purchase plan Loss for the period Balance at December 31, 2020 Conversion of restricted share units Exercise of stock options Share-based compensation Employee share purchase plan Loss for the period Balance at March 31, 2021	Note	Common shares	Share capital Warrants Contributed surplus Retained earnings (deficit)
				Total
	10(d) 10(d) 10(d) 10(d) 10(d) 10(d) 10(d) 10(d) 10(d) 10(d)	(000s) 189,783 - 123 -	x $ $ $ $ 379,469 15,307 1,251 (25,952) 77 - 376 - 78 - - - - - - 15,541	$
				370,075
				453
				78
				15,541
		189,906 302 16 - 575 -	379,624 15,307 1,627 (10,411) 427 - (427) - 10 - (3) - 153 - 1,416 - 153 - - - - - - (32,818)	386,147
				-
				7
				1,569
				153
				(32,818)
		190,799 435 24 - 90 -	380,367 15,307 2,613 (43,229) 218 - (218) - 31 - (8) - 46 - 528 - 46 - - - - - - (954)	355,058
				-
				23
				574
				46
				(954)
		191,348	380,708 15,307 2,915 (44,183)	354,747

See accompanying notes to the financial statements.

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Pipestone Energy Corp. Condensed Interim Consolidated Statements of Cash Flows

(amounts in thousands of Canadian dollars) (unaudited)

Note Cash flows related to: Operating Activities Income (Loss) Add (deduct) items not involving cash: Unrealized (gain) loss on interest rate risk management contracts 4(d) Unrealized loss (gain) on commodity risk management contracts 4(d) Share-based compensation 10(d) Depletion and depreciation 5 Deferred income tax expense (recovery) 13 Non-cash financing expense 12 Decommissioning provision costs incurred 8 Change in non-cash working capital 14 Cash from operating activities Investing Activities Exploration and evaluation asset expenditures 5 Property and equipment expenditures Property and equipment acquisitions Change in non-cash working capital 14 Cash used in investing activities Financing Activities Principal portion of lease payments 7 Advances (repayments) of bank debt Issuance of common shares 10(d) Exercise of stock options 10(d) Cash used in financing activities Decrease in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end ofperiod	Three months ended March 31, 2021 2020	Three months ended March 31, 2021 2020
	$	$ 15,541 734 (22,379) 453 12,785 4,657 29 (16) 19,263
	(954)
	(345)
	12,734
	574
	14,706
	(114)
	1,641
	-
	(10,145)
	18,097	31,067
		(414) (28,740) - (29,323)
	(35)
	(46,254)
	(125)
	(3,464)
	(49,878)	(58,477)
		(841) (48) 78 -
	(1,130)
	32,842
	46
	23
	31,781	(811)
		(28,221) 28,647 426
	-
	-
	-
Supplemental cash flow information (note 14)

See accompanying notes to the financial statements.

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Pipestone Energy Corp. Notes to the Condensed Interim Consolidated Financial Statements

As at and for the three months ended March 31, 2021 and 2020 (tabular amounts in thousands of Canadian dollars unless otherwise indicated) (unaudited)

1. Reporting entity and description of the business

Pipestone Energy Corp. (“Pipestone Energy” or the “Company”) 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” and natural gas in Western Canada, with substantially all of its activities and assets focused in the Montney resource play in Alberta. The Company is incorporated under the Business Corporations Act (Alberta) and its shares are listed on the Toronto Stock Exchange (“TSX”). The address and principal place of business of the Company is Suite 3700, 888 – 3[rd] Street S.W., Calgary, Alberta, T2P 5C5.

2. Basis of preparation

a) Statement of compliance

The unaudited condensed interim consolidated financial statements were prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (IASB), including International Accounting Standard (“IAS”) 34, Interim Financial Reporting . The unaudited condensed interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements for the year ended December 31, 2020, which were prepared in accordance with IFRS. The disclosures provided herein are incremental to that in the annual consolidated financial statements. Certain information and disclosure required in the notes to the annual consolidated financial statements is condensed in these interim consolidated financial statements or disclosed only on an annual basis.

The condensed interim consolidated financial statements were approved and authorized for issuance by Pipestone Energy’s Board of Directors on May 11, 2021.

b) Use of estimates and judgments

In March 2020, the World Health Organization declared a global pandemic following the emergence and rapid spread of a novel strain of the coronavirus (“COVID-19”). The outbreak and subsequent measures intended to limit the pandemic contributed to significant declines and volatility in financial markets. The pandemic adversely impacted global commercial activity, including significantly reducing worldwide demand for crude oil. The outbreak presents uncertainty and risk with respect to the Company, its performance, and estimates and assumptions used by management in the preparation of its financial results.

A full list of the key sources of estimation uncertainty can be found in the Company’s annual financial statements for the year ended December 31, 2020. The outbreak and current market conditions have increased the complexity of estimates and assumptions used to prepare the condensed interim consolidated financial statements, particularly related to the estimate of recoverable amounts, decommissioning costs and income taxes.

3. New accounting policies

These condensed interim consolidated financial statements follow the same accounting policies as the audited consolidated financial statements for the year ended December 31, 2020. There have been no new IFRS accounting standards adopted in 2021.

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Pipestone Energy Corp. Notes to the Condensed Interim Consolidated Financial Statements

As at and for the three months ended March 31, 2021 and 2020

(tabular amounts in thousands of Canadian dollars unless otherwise indicated) (unaudited)

4. Financial instruments and risk management

a) Risk management overview

The Company’s activities expose it to a variety of financial risks including credit risk, liquidity risk and market risk. This note presents information about changes to the Company’s exposure to each of these risks, its objectives, policies and processes for measuring and managing risk, and its management of capital during the period. Further quantitative disclosure is included throughout these financial statements. Pipestone Energy employs risk management strategies and policies to ensure its risk exposure is consistent with its business objectives and risk tolerance. While the Board of Directors has overall responsibility for Pipestone Energy’s risk management framework, Pipestone Energy’s management monitors the risks and administers the risk management measures.

b) Credit risk

Pipestone Energy is exposed to credit risk on accounts receivable and derivative assets in the event that customers, joint interest partners, or counterparties fail to discharge their contractual obligations. As at March 31, 2021, Pipestone Energy’s maximum exposure to receivable credit risk was $32.4 million (December 31, 2020 – $17.5 million) which is the value of accounts receivable and any risk management contract assets on the balance sheet. The Company considers all accounts receivable greater than 90 days to be past due. At March 31, 2021, $Nil is past due (December 31, 2020 – $Nil). The Company believes that the credit risk associated with its risk management contracts is low given that the contracts are all held with large Canadian financial institutions. The Company continues to monitor the creditworthiness of customers and joint operations to limit exposure to this risk and considers all of its current accounts receivable and risk management contract balances to be collectible.

c) Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company expects to repay its financial liabilities in the normal course of operations and to fund future operational, capital and other obligations through future operating cash flow, as well as future equity and debt financing. Refer to note 6 for further details on available amounts under existing banking arrangements.

While the Company believes it will be successful in meeting its liquidity requirements, significant uncertainty exists due to the adverse impacts that the COVID-19 pandemic has had on the state of the global economy, volatility in commodity prices; future reserve and production risks; and the ability of the Company, if required; to raise additional debt or equity financing.

The timing of undiscounted cash flows relating to the financial liabilities outstanding at March 31, 2021 is outlined below:

Accounts payable and accrued liabilities Interest rate risk management contracts Commodity risk management contracts Bank debt(1)	Within 1 year Year 2 Thereafter Total
	$ $ $ $ 62,241 - - 62,241 842 930 - 1,772 18,061 185 - 18,246 - 166,659 - 166,659

(1) Excludes future interest payable on amounts drawn on the bank debt.

The Company is also subject to lease liabilities as disclosed in note 7 and commitments as disclosed in note 16.

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Pipestone Energy Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at and for the three months ended March 31, 2021 and 2020

(tabular amounts in thousands of Canadian dollars unless otherwise indicated) (unaudited)

d) Market risk

Market risks are as follows:

Foreign currency risk

At March 31, 2021 and December 31, 2020, the Company had no forward exchange rate contracts nor any working capital denominated in foreign currencies.

Interest rate risk

Interest rate risk is the risk that future cash flows will fluctuate because of changes in market interest rates. The Company is exposed to interest rate fluctuations on its bank debt which bears variable rates of interest. The Company has a floatingto-fixed interest rate swap in place with one of its lenders.

A reconciliation of changes of fair value in Pipestone Energy’s interest rate risk management contract and its carrying value is as follows:

Fair value of contracts, beginning of period Change in the fair value of contracts in the period Fair value of contracts realized in the period Fair value of contracts, end of period Current liability Long-term liability	March 31, 2021 December 31, 2020
	$ $ (2,117) (1,439) 101 (2,039) 244 1,361
	(1,772) (2,117)
	(842) (889) (930) (1,228)

At March 31, 2021, a 1 percent fluctuation in interest rates would impact the fair value of the interest rate risk management contract as well as profit or loss for the three months ended March 31, 2021, through unrealized gains or losses, by $1.3 million (three months ended March 31, 2020 – $1.9 million).

Commodity price risk

The following table summarizes the carrying value of Pipestone Energy’s outstanding commodity risk management contract assets (liabilities) by product type:

ontract assets (liabilities) by product type:
Crude oil Natural gas Condensate Net commodity risk management contract liability	March 31, 2021 December 31, 2020
	$ $ (16,179) (6,040) (1,754) 712 (215) (86)
	(18,148) (5,414)

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Pipestone Energy Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at and for the three months ended March 31, 2021 and 2020

(tabular amounts in thousands of Canadian dollars unless otherwise indicated) (unaudited)

The Company has offset the following commodity risk management contracts where it has a legal right to settle on a net basis with its counterparties:

Long-term asset Current liability Long-term liability Net position	March 31, 2021 December 31, 2020
	$ $ $ $ $ $ Asset Liability Net Asset Liability Net 98 - 98 774 (302) 472 439 (18,500) (18,061) 1,269 (7,155) (5,886) 145 (330) (185) - - -
	682 (18,830) (18,148) 2,043 (7,457) (5,414)

At March 31, 2021, Pipestone Energy had the following commodity risk management contracts in place:

	**C$ WTI swaps **	**C$ WTI swaps **	**EdCon basis swaps **	**EdCon basis swaps **	**AECO 5A swaps **	**AECO 5A swaps **
Term	**bbls/d **	C$/bbl	**bbls/d **	US$/bbl	**GJ/d **	C$/GJ
Apr. – Jun. ‘21 4,000 57.51 3,000 0.45 42,870 2.34 Jul. – Sept. ‘21 4,000 58.05 - - 45,375 2.35 Oct. – Dec. ‘21 4,000 58.05 - - 41,210 2.32 Jan. – Dec. ‘22 62 74.50 - - 12,530 2.27

(1) Weighted-average volumes and prices are presented.

(2) EdCon refers to Edmonton Condensate.

Reconciliation of changes of fair value in Pipestone Energy’s risk management contracts:

Fair value of contracts, beginning of period Change in the fair value of contracts in the period Fair value of contracts realized in the period Fair value of contracts, end of period	March 31, 2021 December 31, 2020
	$ $ (5,414) (891) (21,125) 9,507 8,391 (14,030)
	(18,148) (5,414)

Commodity price sensitivities – risk management positions

The following summarizes the sensitivity of the fair value of Pipestone Energy’s risk management contracts to fluctuations in commodity prices, with all other variables held constant. Management believes the price fluctuations identified below are a reasonable measure of volatility. Fluctuating commodity prices could have resulted in unrealized gains or losses on the Company’s risk management contracts at March 31, 2021, affecting profit or loss for the three months ended as follows:

Commodity	Sensitivity range	Increase	Decrease
		$	$
Crude oil	± Cdn$1 per bbl – WTI NYMEX	(976)	976
Natural gas	± Cdn$0.10 per GJ – AECO 5A	(1,180)	1,180
Condensate	± Cdn$1 per bbl – Edmonton Condensate	(177)	177

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Pipestone Energy Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at and for the three months ended March 31, 2021 and 2020

(tabular amounts in thousands of Canadian dollars unless otherwise indicated) (unaudited)

e) Capital management

The Company considers its capital structure to include shareholders’ equity, convertible preferred share obligations, bank debt and adjusted working capital. The balance of each of these items is as follows:

Adjusted working capital deficit(1) Bank debt Net debt Convertible preferred share obligation Shareholders’ equity Total capitalization	March 31, 2021 December 31, 2020
	$ $ 23,554 37,163 166,659 133,466
	190,213 170,629 69,395 68,132 354,747 355,058
	614,355 593,819

(1) Adjusted working capital deficit is calculated as accounts payable and accrued liabilities, less accounts receivable and prepaid expenses and deposits.

There were no changes to the Company’s approach to capital management during the three months ended March 31, 2021.

5. Exploration and evaluation (“E&E”), property and equipment (“P&E”) and right-of-use (“ROU”) assets

Cost Balance, January 1, 2020 Additions(1) Transfers Decommissioning provisions (note 8) Expiries Balance, December 31, 2020 Additions(1) Property acquisition Decommissioning provisions (note 8) Balance, March 31, 2021 Accumulated depletion and depreciation Balance, January 1, 2020 Depletion and depreciation Balance, December 31, 2020 Depletion and depreciation Balance, March 31, 2021 Carrying amount Balance, December 31, 2020 Balance, March 31, 2021	E&E assets	Liquids and natural gas interests Corporate	Total P&E assets	ROU assets
	$ 38,881 605 (4,847) - (414)	$ $ 534,514 741 103,876 112 4,847 - 2,442 - - -	$	$ 54,756 8,014 - - -
			535,255
			103,988
			4,847
			2,442
			-
	34,225 35 - -	645,679 853 46,227 27 125 - (141) -	646,532	62,770 - - -
			46,254
			125
			(141)
	34,260	691,890 880	692,770	62,770
	- -	16,961 95 46,986 84		1,531 6,075
			17,056
			47,070
	- -	63,947 179 12,958 21	64,126	7,606 1,727
			12,979
	-	76,905 200	77,105	9,333
	34,225 34,260	581,732 674 614,985 680		55,164 53,437
			582,406
			615,665

(1) Pipestone Energy capitalized direct general and administrative expenses of $0.8 million during the three months ended March 31, 2021 (year ended December 31, 2020 - $2.6 million).

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Pipestone Energy Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at and for the three months ended March 31, 2021 and 2020

(tabular amounts in thousands of Canadian dollars unless otherwise indicated) (unaudited)

Pipestone Energy has a single CGU.

At March 31, 2021, the Company did not identify any indicators of impairment.

The majority of the Company’s ROU assets at March 31, 2021 relate to a compressor lease. In 2019 a midstream partner funded the construction of a compressor station for use by Pipestone Energy. In exchange the Company entered into a long-term fixed fee commitment with this third-party for the right to operate and use the asset, which became available for use in late 2019. During the fourth quarter of 2020, an additional compressor was added by the third-party to increase the capacity of the compressor station. The infrastructure remains under the third-party’s ownership.

6. Bank debt

a) Reserve-based loan

Balance, beginning of period Increase (decrease) in borrowing Debt issuance costs, cash Amortization of debt issuance costs Balance, end of period Current portion Long-term portion	March 31, 2021 December 31, 2020
	$ $ 133,466 163,048 32,842 (28,996) - (1,271) 351 685
	166,659 133,466
	- - 166,659 133,466

On July 20, 2020, Pipestone Energy reconfirmed and executed an amendment to its $225.0 million reserve-based loan (the “RBL”) comprised of a $125.0 million senior facility (the “Senior Facility”), a $70.0 million additional facility (the “Additional Facility”) and a $30.0 million operating facility (the “Operating Line”). As part of the amendment to the RBL, the Company’s banking syndicate did not undertake a fall 2020 borrowing base review, and the next redetermination was scheduled for May 2021. In addition, previously imposed capital spending restrictions from the June 2020 redetermination were removed, and the Company agreed to implement a hedging program with respect to expected condensate volumes through calendar 2021. See note 17 for an update on the RBL redetermination that occurred subsequent to quarter end.

At March 31, 2021, the Company had $125.0 million drawn against the Senior Facility (December 31, 2020 - $125.0 million), $13.0 million drawn against the Additional Facility (December 31, 2020 – $Nil) and $28.9 million drawn on the Operating Line (December 31, 2020 - $9.1 million), for an aggregate draw on the RBL of $166.9 million (December 31, 2020 - $134.1 million). At March 31, 2021, the Company had no letters of credit issued against its Operating Line (December 31, 2020 – no letters of credit issued on Operating Line).

As at March 31, RBL – portion drawn Unamortized debt issuance costs Balance, end of period	2021
	$ 166,894 (235)
	166,659

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Pipestone Energy Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at and for the three months ended March 31, 2021 and 2020

(tabular amounts in thousands of Canadian dollars unless otherwise indicated) (unaudited)

The borrowing base on the facility was scheduled to be redetermined in May 2021, subject to further amendments, and is based on the lenders' assessment of the Company’s reserves and future commodity prices. If not extended by any or all lenders, the commitments of such non-extending lenders under the RBL will cease to revolve, and all outstanding advances thereunder owing to such non-extending lenders will become repayable in one year from the term date and the margins owing on such outstanding advances will increase by 0.50 percent. In the event the borrowing base is reduced below amounts outstanding, any excess will become due and payable 60 days subsequently. Borrowing base redetermination will also be required if the Company’s Liability Management Rating or equivalent measurement falls below 2.00 in any material jurisdiction where Pipestone Energy operates.

Advances under the RBL are available by way of Canadian prime rate, and U.S. base rate loans with interest rates ranging between 2.00 percent and 6.00 percent, on the Senior Facility and Operating Line, and 4.00 percent and 8.00 percent, on the Additional Facility, over the bank's prime lending rate, as well as bankers' acceptances, which are subject to stamping fees and margins ranging from 3.00 percent to 7.00 percent, on the Senior Facility and Operating Line, and 5.00 percent to 9.00 percent, on the Additional Facility. The applicable interest rate varies, depending upon the Company’s senior debt to Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) ratio calculated at the Company’s previous quarter end.

As at March 31, 2021, Pipestone Energy’s applicable pricing included a 3.25 percent to 5.25 percent per annum margin on prime loans, a 4.25 percent to 6.25 percent per annum stamping fee and margin on bankers' acceptances along with a 0.45 percent per annum standby fee on the portion of the RBL that is not drawn. Borrowing margins and fees are reviewed annually as part of the bank syndicate's annual renewal. For the three months ended March 31, 2021 borrowing costs averaged 5.4 percent (three months ended March 31, 2020 – 4.2 percent).

b) Letter of credit facility

Pipestone Energy has a $15.0 million unsecured letter of credit facility (the “EDC Letter of Credit Facility”) under Export Development Canada’s performance security guarantee program. At March 31, 2021, the Company has $15.0 million of letters of credit issued and outstanding against the EDC Letter of Credit Facility (December 31, 2020 - $14.3 million). Letters of credit issued under the EDC Letter of Credit Facility do not impact Pipestone Energy’s borrowing capacity under the RBL, and as such provides the Company with additional liquidity. See note 17 for an update to the EDC Letter of Credit Facility capacity that closed subsequent to quarter end.

7. Lease liabilities

Balance, beginning of period Additions Interest expense (note 12) Lease payments Balance, end of period Current portion Long-term portion	March 31, 2021 December 31, 2020
	$ $ 58,225 53,917 - 8,014 1,733 6,314 (2,863) (10,020)
	57,095 58,225
	4,752 4,665 52,343 53,560

Leases are negotiated on an individual basis and contain a range of terms and conditions. The discount rates used to determine lease liabilities for the Company’s major compressors, office leases and other field equipment was 12.0 percent, 8.0 percent and 8.0 percent, respectively.

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Pipestone Energy Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at and for the three months ended March 31, 2021 and 2020

(tabular amounts in thousands of Canadian dollars unless otherwise indicated) (unaudited)

The following table details the undiscounted cash flows and contractual maturities of Pipestone Energy’s lease liabilities, as at March 31, 2021:

Within 1 year Year 2 Year 3 Year 4 Year 5 Thereafter Total undiscounted future lease payments Amounts representing lease interest expense over the term of the lease Present value of net lease payments	$ 11,317 10,752 10,752 10,683 10,342 37,059
	90,905 (33,810)
	57,095

The Company included extension options in the calculation of lease liabilities, where Pipestone Energy has the right to extend the lease term at its discretion and is more than likely to exercise the extension option. The Company does not have any significant termination options and the residual amounts are not material.

8. Decommissioning provisions

The Company’s decommissioning provisions result from its ownership interest in liquids and natural gas assets, including well sites, facilities and gathering systems. The total decommissioning provision is estimated based on the Company’s net ownership interest, estimated costs to reclaim and abandon its wells, facilities and gathering systems and the estimated timing of the costs to be incurred in future years. The estimated cash flows required to settle the provisions are approximately $9.8 million at March 31, 2021 (December 31, 2020 – $8.7 million). This was inflated using a weightedaverage rate of 1.7 percent (December 31, 2020 – 1.5 percent) to arrive at undiscounted future cash flows of approximately $15.1 million (December 31, 2020 – $12.6 million) and then discounted using a weighted-average risk-free rate of 2.0 percent at March 31, 2021 (December 31, 2020 – 1.2 percent) to arrive at the present value of the decommissioning provision as disclosed below. The inflation rate was determined using the Fisher equation, which is calculated as the difference between the Government of Canada nominal rate of interest (2.0 percent) and the real rate of interest (0.3 percent) at March 31, 2021, and was treated as a change in estimates from the prior period. The weightedaverage risk-free rate is based on Government of Canada benchmark bond rates. These obligations are to be settled based on the estimated economic lives of the underlying assets, which currently extend up to 34 years, with the majority of the costs expected to be incurred between 2045 and 2055 and will be funded from general corporate resources at the time of abandonment.

The following reconciles the decommissioning provisions:

he following reconciles the decommissioning provisions:
Balance, beginning of period Additions Accretion Changes in estimates Change in discount rates Costs incurred Balance, end of period	March 31, 2021 December 31, 2020
	$ $ 9,239 6,722 914 1,083 27 93 449 521 (1,504) 838 - (18)
	9,125 9,239

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Pipestone Energy Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at and for the three months ended March 31, 2021 and 2020

(tabular amounts in thousands of Canadian dollars unless otherwise indicated) (unaudited)

9. Convertible preferred shares

Balance, beginning of period Dividends paid in-kind Discount accretion Amortization of share issuance costs Balance, end of period	Preferred shares	Face value Discount Issuance costs Accrued dividends	Carrying value
	(000s) 70	$ $ $ $ 70,000 (2,014) (1,184) 1,330	$
			68,132
	-	- - - 1,159	1,159
	- -	- 62 - - - - 42 -	62
			42
	70	70,000 (1,952) (1,142) 2,489	69,395

On September 15, 2020, Pipestone Energy issued 70,000 convertible preferred shares (“CP Shares”) to existing shareholders at a price of $970 per share for gross proceeds of $67.9 million. The Company incurred $1.2 million of issuance costs related to the transaction for net proceeds received of $66.7 million. The CP Shares have a face value of $1,000 per share or $70.0 million (issued at a 3.0 percent or $2.1 million discount) and entitle the holders to an annual dividend of 6.5 percent per year that is payable quarterly in-kind, or in cash after 2 years from issuance, at the sole option of Pipestone Energy. Dividends paid in-kind are accrued and compounded on a quarterly basis using a twelve-month calendar consisting of 30-day months. The CP Shares have a term of five years which ends on September 15, 2025.

The face value of the CP Shares plus any accrued dividends paid in-kind at a point in time forms the “Liquidation Preference” of the CP Shares. The Liquidation Preference of the CP Shares is convertible into common shares of the Company at a price of $0.85 per common share, subject to customary adjustments, at the discretion of the holders at any time. After two years, if among other things, the closing price of Pipestone Energy common shares is above $1.70 for 20 days over a 30-day trading period, the Liquidation Preference of the CP Shares will automatically convert into common shares at $0.85 per common share. In the event that there are CP Shares outstanding at the end of the five year term the Liquidation Preference of the CP Shares will automatically convert into common shares at either $0.85 per common share, if Pipestone Energy common shares are trading at a price at or in excess of $0.85 per share, or otherwise at a price equal to 95 percent of the previous 20-day volume weighted average common share price.

At March 31, 2021, the CP Shares had a Liquidation Preference of $72.5 million. If converted by the holders of the CP Shares at $0.85, this would result in the issuance of 85,281,505 common shares. At March 31, 2021, Pipestone Energy’s common shares were trading at a price in excess of $0.85 per share.

Other than the dividends which may be paid in cash at the sole election of the Company after 2 years from the issuance of the CP Shares, under all circumstances the CP Shares will convert to common shares and will not result in any additional cash obligations payable at a future date.

Holders of the CP Shares are entitled to vote on all shareholder matters and receive dividends paid on common shares, if any, alongside existing holders of the common shares on an “as-converted” basis. The CP Shares rank in priority to common shares as to the payment of dividends and the distribution of assets on dissolution, liquidation or winding-up.

As certain conversion features may result in the Company issuing a variable number of its own common shares upon settlement of the CP Shares, they are accounted for as a financial liability.

The related discount and issuance costs reduce the carrying amount of the liability. The discount is accreted and the issuance costs are amortized over the term of the CP Shares using the effective interest rate method so that the liability equals the face value of the CP Shares upon maturity, both of which are included as a non-cash financing expense in the statement of operations. Any dividends paid in-kind are accrued and added to the carrying value of the liability with the associated expense presented as a non-cash financing expense on the statement of operations. At settlement, the face value of the CP Shares plus any accrued dividends paid in-kind will be reclassified from a liability into equity of the

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Pipestone Energy Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at and for the three months ended March 31, 2021 and 2020

(tabular amounts in thousands of Canadian dollars unless otherwise indicated) (unaudited)

Company on its statement of financial position upon determination of the conversion price and the number of common shares issuable to satisfy the contractual obligation. If dilutive, the impact of the CP Shares is factored into the Company’s calculation of diluted earnings per share.

10. Share capital

• a) Authorized – Unlimited number of common shares with no par value.

b) Income (loss) per share

The following sets forth the computation of per-share amounts:

Three months ended March 31, Numerator Income (loss) attributable to common shares ($) Denominator Weighted-average number of shares outstanding for basic per-share calculation (000s) Weighted-average number of shares outstanding for diluted per- share calculation (000s) Basic and diluted income (loss) per share attributable to common shares ($/share)	2021 2020
	(954) 15,541 190,891 189,820 190,891 189,942
	(0.00) 0.08

All potentially dilutive instruments were considered anti-dilutive in the three months ended March 31, 2021 as the Company was in a loss position (three months ended March 31, 2020 – dilutive instruments included in the diluted weighted-average share calculation as they were dilutive to income for the period).

c) Warrants

At March 31, 2021, there are 17,518,809 warrants outstanding (December 31, 2020 – 17,518,809) that were continued from a historical corporate acquisition. Each warrant is exercisable for 1 common share at a price of $3.00 (exercisable for 0.1 common share at a price of $0.30 prior to the 10:1 common share consolidation that took place on January 4, 2019) and expires on May 19, 2021 if not previously exercised.

d) Share-based compensation

Pipestone Energy’s long-term incentive plan (“LTIP”) allows for the granting of equity incentive units to its employees, officers and directors. The Company’s current share-based compensation plan consists of stock options, performance share units (“PSUs”) and restricted share units (“RSUs”).

The Company also has an employee share purchase plan (“ESPP”) which allows employees to voluntarily contribute up to 10 percent of their base salary, which is then matched by the Company, and exchanged for Pipestone Energy common shares. To date all common shares have been issued from treasury for funding the ESPP. Effective June 1, 2020, the Company administratively capped the maximum contribution to the ESPP to 5 percent of base salary for all participants to limit common share dilution. During the three months ended March 31, 2021, the Company issued 90,083 common shares at an average price of $1.03 per share (three months ended March 31, 2020 – 122,525 common shares at an average price of $1.26 per share) pursuant to the ESPP.

During the three months ended March 31, 2021, Pipestone Energy recognized $0.6 million of share-based compensation expense (three months ended March 31, 2020 - $0.5 million).

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Pipestone Energy Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at and for the three months ended March 31, 2021 and 2020

(tabular amounts in thousands of Canadian dollars unless otherwise indicated) (unaudited)

The following provides information with respect to outstanding equity compensation units at March 31, 2021:

	Units outstanding Weighted-average remaining contractual life (years) Units outstanding – weighted-average exerciseprice($) Units exercisable Units exercisable – weighted-average exerciseprice($)
Stock options(1) PSUs RSUs Units outstanding	2,305,000 3.6 1.93 871,467 2.96 2,932,267 2.1 2,882,270 2.3 8,119,537 2.6

(1) Quantities and exercise prices of stock options that were continued as part of a historical corporate acquisition are shown post-conversion for every 10 options exchangeable into 1 Pipestone Energy common share to reflect the 10:1 common share consolidation that took place on January 4, 2019.

During the three months ended March 31, 2021, the Company granted 2,985,579 equity compensation units, consisting of 627,000 stock options, 1,013,297 PSUs and 1,345,282 RSUs (three months ended March 31, 2020 – granted 3,279,601 equity compensation units, consisting of 678,600 stock options, 1,270,000 PSUs and 1,331,001 RSUs).

During the three months ended March 31, 2021, 23,800 stock options were exercised, 75,200 stock options were forfeited / cancelled, 434,667 RSUs vested and were converted into common shares and 22,500 RSUs were forfeited / cancelled (three months ended March 31, 2020 – no activity).

The Company estimates the fair value of stock options granted using the Black-Scholes pricing model. The weighted average inputs used in the Black-Scholes pricing model during the three months ended March 31, 2021 were as follows:

Exercise / share price ($)	1.80
Risk-free interest rate (%)	0.6
Expected life (years)	3.5
Expected forfeiture rate (%)	5.0
Expected volatility (%)	75.5

The fair value of PSUs and RSUs granted is determined with reference to the preceding 5-day volume weighted average trading price of Pipestone Energy common shares on the TSX from their grant date and, in the case of PSUs, is adjusted for the estimated performance multiple required to settle them.

During the three months ended March 31, 2021, the weighted-average fair value of stock options, PSUs and RSUs granted was $0.94, $1.88 and $1.58, respectively (three months ended March 31, 2020 - weighted-average fair value of stock options, PSUs and RSUs granted was $0.32, $0.44 and $0.50, respectively).

11. Sales of liquids and natural gas

Three months ended March 31, Product type Condensate Other natural gas liquids Total natural gas liquids Crude oil Natural gas Sales of liquids and natural gas	2021 2020
	$ $ 40,986 19,033 6,619 2,068
	47,605 21,101 486 325 23,394 10,591
	71,485 32,017

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Pipestone Energy Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at and for the three months ended March 31, 2021 and 2020

(tabular amounts in thousands of Canadian dollars unless otherwise indicated) (unaudited)

Pipestone Energy’s sales are comprised of liquids and natural gas to various customers. Sales from the transfer of liquids and natural gas volumes to customers are recognized at the time when Pipestone Energy’s performance obligations are fully satisfied upon transfer of these volumes to customers.

Included in accounts receivable at March 31, 2021 is $28.1 million (December 31, 2020 - $16.0 million) of accrued liquids and natural gas sales which have been settled subsequent to the period end.

12. Financing expense

Three months ended March 31, Lease liabilities interest expense (note 7) Interest on bank debt Letter of credit fees Bank charges Foreign exchange loss on U.S. denominated debt Realized gain on cross-currency swaps Cash financing expense Preferred share dividends paid in-kind (note 9) Accretion of preferred share discount (note 9) Amortization of preferred share issuance costs (note 9) Amortization of bank debt issuance costs Accretion on decommissioning provisions (note 8) Non-cash financing expense Total financing expense	2021 2020
	$ $ 1,733 1,609 1,857 1,597 181 110 250 2 - 5,806 - (5,806)
	4,021 3,318
	1,159 - 62 - 42 - 351 - 27 29
	1,641 29
	5,662 3,347

13. Income tax

Deferred income tax expense (recovery)

The following table reconciles income taxes calculated at the Canadian federal-provincial statutory rate with the recorded income tax provision included in profit or loss:

Three months ended March 31, Income (loss) before income taxes Canadian federal-provincial statutory tax rate Expected income tax expense (recovery) Share-based compensation Rate change and other Recognition of previously unrecognized deferred tax asset Actual deferred income tax expense (recovery)	2021 2020
	$ $ (1,068) 20,198 23.0% 25.0%
	(246) 5,050 132 113 - (412) - (94)
	(114) 4,657

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Pipestone Energy Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at and for the three months ended March 31, 2021 and 2020

(tabular amounts in thousands of Canadian dollars unless otherwise indicated) (unaudited)

14. Supplemental cash flow information

Changes in non-cash working capital are comprised of:

Three months ended March 31, Cash flows relating to: Accounts receivable Prepaid expenses and deposits Accounts payable and accrued liabilities Changes in non-cash working capital Changes in non-cash working capital relating to: Operating activities Investing activities	2021 2020
	$ $ (15,337) 10,519 (1,146) (349) 2,874 (20,230)
	(13,609) (10,060)
	(10,145) 19,263 (3,464) (29,323)
	(13,609) (10,060)

During the three months ended March 31, 2021, the Company paid $Nil in income taxes (three months ended March 31, 2020 - $Nil). See note 12 for details of interest paid during the three months ended March 31, 2021 and 2020.

15. Related-party transactions

At March 31, 2021, CNOR LP held approximately 54 percent of Pipestone Energy’s issued and outstanding common shares. During the three months ended March 31, 2021 and 2020, Pipestone Energy incurred $Nil of general and administrative expenses from CNOR LP for management and related services as the Services Agreement between Pipestone Energy and CNOR LP expired on December 31, 2019. At March 31, 2021, $1.3 million (December 31, 2020 –$1.7 million) was included in accounts payable and accrued liabilities which was paid subsequent to the period end. All related-party transactions are recorded at the exchange amount.

16. Commitments, contingencies and insurance proceeds

In addition to those recorded on the Company’s statement of financial position, the following is a summary of Pipestone Energy’s contractual obligations and commitments that it has entered as part of its normal operations at March 31, 2021:

Gathering commitments Processing commitments Transportation commitments Total payments	2021 2022 2023 2024 2025 Thereafter
	$ $ $ $ $ $ 10,899 18,150 18,245 18,348 18,442 90,400 20,502 33,512 39,381 39,629 39,669 181,354 14,280 20,167 18,363 18,425 18,386 100,904
	45,681 71,829 75,989 76,402 76,497 372,658

Pipestone Energy’s commitments related to its accounts payable and accrued liabilities and bank debt are disclosed in note 4(c), risk management program in note 4(d) and lease liabilities in note 7.

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Pipestone Energy Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at and for the three months ended March 31, 2021 and 2020

(tabular amounts in thousands of Canadian dollars unless otherwise indicated) (unaudited)

Legal

Lawsuits may be filed against the Company from time to time for incidents which arise in the ordinary course of business. In the opinion of management, the outcome of any of the lawsuits, currently pending, are not determinable and in total not material to the Company’s operations. Should any loss result from the resolution of these claims, such loss will be charged to earnings in the period of resolution.

Insurance proceeds

During the year ended December 31, 2020, Pipestone Energy initiated a Contingent Business Interruption claim with its insurers in relation to an unplanned and extended outage that the Company experienced at one of its third-party processing facilities. As the insurance claim represented a contingent asset at that time, the Company did not recognize any financial impact during 2020. During the three months ended March 31, 2021, the Company settled this insurance claim for total proceeds of $1.9 million which has been recognized as a recovery netted against operating expense in the period.

17. Subsequent events

RBL redetermination

Subsequent to March 31, 2021, the Company successfully redetermined its RBL and maintained its borrowing capacity at $225.0 million. With the redetermination, the RBL became fully conforming as the Company’s previous $70.0 million Additional Facility, established in 2020, was converted back into capacity available under the Senior Facility. This reduces Pipestone Energy’s annual borrowing cost by 2.0 percent on any amounts drawn under this $70.0 million of capacity as the Company’s pricing structure under the Senior Facility is lower than the Additional Facility’s previous rates by this amount. In addition, the Senior Facility and Operating Line pricing was reduced by 0.25 percent with the redetermination which will further reduce the Company’s borrowing cost on all amounts drawn. The revolving period of the RBL was extended to May 30, 2022 with an additional one-year term out period thereafter and the next redetermination is now scheduled for November 30, 2021.

EDC letter of credit facility expansion

Subsequent to March 31, 2021, the capacity of the EDC Letter of Credit Facility was increased from $15.0 million to $22.5 million.

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