OPEN LETTER FROM TOM CLAUGUS, PRESIDENT OF GMT CAPITAL CORP., FOR WHY HE OPPOSES PROPOSED ACQUISITION OF PIPESTONE ENERGY CORP. (TSX: PIPE) BY STRATHCONA RESOURCES LTD.

Tom Claugus of GMT Capital Corp. has released a letter to shareholders of Pipestone Energy Corp.

After discussions with shareholders and potential suitors for Pipestone, I am providing you with my final update before the shareholder vote on the Strathcona-Pipestone merger. We remind you that although the shareholder meeting is on Wednesday, Sept. 27, 2023, the cut-off for providing your proxies to the transfer agent is 10 a.m. MT on Monday, Sept. 25. Beneficial shareholders may have an earlier cut-off. The Monday deadline is what most shareholders will need to meet. Please feel free to contact our proxy solicitation firm, Morrow Sodali, for assistance with voting logistics at 1-800-607-0088 or 1-289-695-3075. We highly recommend you vote against the proposed merger (preferably by Friday) for the following reasons:

1. The exchange ratio is much too low for Pipestone shareholders. Based on production and cash flow numbers, we believe it represents a minimum 30-per-cent dilution, but probably more. We believe the shares will continue to underperform should the deal close:
   1. In our dissident circular, we used what we thought was a very generous five-times EV (enterprise value)/EBITDA (earnings before interest, taxes, depreciation and amortization) multiple for Strathcona and the combined entity versus a conservative 3.5-times EV/EBITDA assumed for Pipestone. Since that time, we have had a number of conversations with other disgruntled shareholders who have convinced us that based on Strathcona's high levels of debt with a substantial near-term maturity, and a recent oil sands deal with comparable key metrics to Strathcona, the multiple could be considerably worse. If the combined company trades at four-times EV/2023 EBITDA, the equity would be valued at $1.804 per share. In contrast, Pipestone stand-alone would be valued at $4.06 per share (assuming four-times EV/2023 EBITDA multiple).
   2. The only way this merger works for the average Pipestone shareholder is if you assume a significantly higher multiple for the combined entity. We think the most relevant comparable companies postmerger would be Crescent Point Energy, which trades at approximately 3.5 times, and NuVista Energy, an adjacent Montney property, which trades at approximately four times. We now think the combined entity would likely trade at approximately 3.5-times to approximately four-times EBITDA. We would be happy to share the thought process behind our valuations should you give us a call.
2. The share overhang will be enormous with Strathcona owners and Riverstone holding approximately 90 per cent of the combined company. We believe postdeal-closing, both entities are sellers.
3. I believe there are numerous parties interested in bidding for Pipestone, but they are dissuaded by the Riverstone lockup, termination fee and Strathcona's right to match any superior bids. The Pipestone circular itself mentions a recent rival offer but disclosed no details about the offer. Ask yourself why that might be? Since this deal was announced, I have personally talked to chief executive officers of four other companies that are interested in making an offer. All of them have processing assets and producing acreage near Pipestone, and significantly more operational synergies and stronger balance sheets/lower debt levels than Strathcona. I believe that should this deal be voted down, these companies would emerge as bidders at price levels significantly above the Strathcona deal. Also, three of them expressed a willingness to structure a deal that would be part cash and part stock. The cash portion would eliminate a significant part of the overhang from the Riverstone funds that we believe desire an investment exit. In addition, all four of these companies are publicly traded already, and have significantly more liquidity than Pipestone, so trading in their shares after a deal should be much better.
4. I believe the market for oil and gas deals in Calgary should improve rapidly from here for a few reasons. First, oil prices have rebounded while at the same time multiples have expanded a turn. With the large North American LNG (liquefied natural gas) expansion and tightening inventories (coupled with ample demand for LNG abroad), natural gas prices should also rebound in the next year. In addition, recent Montney and Duvernay land sales have come at prices of $1-million to $4-million per section, up materially from just a few months ago. As the availability of drill-ready inventory tightens, prices may reach levels of 20 per cent of capital invested. Since Pipestone will probably have capacity for six wells a section with capital of $42-million per section, one could see land values hit $8-million to $14-million per section. With 140 sections that are half undeveloped, the acreage alone could easily be worth half the current deal value.
5. There are a number of value-add initiatives that Pipestone could undergo, including delineation of the eastern half of the acreage, finding a way to manage the H2S (hydrogen sulphide), and securing more and better-priced takeaway capacity. For these reasons and the improving oil and gas market, we believe the best strategy is to run Pipestone stand-alone for a couple years to cleanse the psychology of the low deal price, improve operations and then sell into a much stronger market. With Pipestone's strong free cash flow and low debt, it does not need to sell itself to generate returns for shareholders. But to be clear, we would be supportive of a deal to sell the company if a strong offer emerges in the near term.
6. Pipestone drilled two wells in the southeastern corner of its acreage that we thought would be connected and producing by now. These are offsetting some extremely prolific Crescent Point Energy wells. We expect they could prove up significant value in the eastern half of the acreage. Why did the Pipestone board not defer the sale to see how these wells perform, and why is it taking months to connect them?
7. The carbon intensity that Strathcona has on its heavy and thermal oil assets is massively greater than Pipestone's Montney assets. This sale would be a large step backward for Pipestone from an ESG (environmental, social and governance) perspective.
8. Lastly, the Pipestone board, in its rebuttal of our dissident circular, tried to sell a narrative that essentially everybody supported the deal. I would point out that most of those supporting actors are getting paid cash from the deal, including the underwriters, rating agencies, firms providing fairness opinions, management team and board members. In particular, I emphasize that the equity incentive awards awarded to management and the board over the years for their service to Pipestone are not being paid out in Strathcona stock under the proposed deal, which is what they are asking Pipestone shareholders to take. The Pipestone circular indicates the executive management team and board members will receive $10.7-million in cash payments in exchange for their awards and to go along with the change in control. Not a bad goodbye kiss. I will leave it to you to infer whether the board and management think the stock in the combined entity would be a good deal for Pipestone shareholders. I would point out that GMT is paying for the costs of our opposition out of our own pocket. We are not activists. Like many of you, we have been long-term Pipestone shareholders. Again, you can conclude what you will about who is more aligned with your interests.
9. Last but not least, as mentioned earlier, Strathcona is highly leveraged at 2.1-times net debt/TTM (trailing 12 month) adjusted EBITDA. As recently as December, 2022, its 2026 bonds traded at 74 cents on the dollar. Strathcona has a $675-million term loan due in just five months, in February, 2024, and since it has nil cash as of June 30, 2023, we think Strathcona will have to borrow to pay it off. Pipestone, by contrast, has a net debt/TTM adjusted EBITDA of 0.5 times.

In summary, we think there is almost nothing to like about the Strathcona merger terms. The merger would result in a combined entity that trades at a lower valuation, suffers from a huge share overhang, is dangerously levered and has a poorer ESG profile. I once again recommend that all Pipestone shareholders vote against the proposed merger. I believe we can create much more value in a stand-alone Pipestone, and if not, it appears to us that there will be a number of suitors at much better valuations. Feel free to call us at 770-989-8250 to discuss any aspect of this transaction.

Pipestone shareholders are encouraged to review our dissident circular dated Sept. 15, 2023, which is available on Pipestone's profile on SEDAR+.

For further information or to receive a copy of the dissident circular, please contact:

• GMT Capital Corp.:
  • 2300 Windy Ridge Parkway, Suite 550 S., Atlanta, Ga., 30339.