Scalper1 News
Summary Birchcliff’s production rate is higher than anticipated and has reached a new quarterly record. This allows the company to increase its production guidance and to reduce its capex guidance. I’m hoping for a long and harsh winter that will cause the natgas prices to spike, providing relief for Birchcliff’s balance sheet. Introduction As I remain convinced the oil and gas price won’t stay forever at the current levels (I even expect the gas price to increase a bit due to the construction of LNG plants to ship the gas to Europe and Asia where the price is 3-4 times higher), I have started to look for some interesting oil and gas companies. I came across Birchcliff Energy (OTCPK: BIREF ), a Canadian gas company (with some oil production as well) and decided to dig a bit deeper in this relatively large producer. Birchcliff is a Canadian company and has its main listing on the Toronto Stock Exchange with BIR as its ticker symbol. The average daily volume is almost 300,000 shares and the current market capitalization is approximately US$610M. The production rate continues to increase, but so does is the net debt Birchcliff had a pretty decent second quarter of this year as the average production during the quarter was almost 38,500 boe per day at an operating cost of just $4.53 per boe. This production rate is a new record for the company and emphasizes it’s still very focusing on expanding its production rate in order to build shareholder value. Source: press release In fact, the production growth was so impressive, Birchcliff’s management team has now increased the average production guidance for the fourth quarter of this year. Instead of producing an average of 39,000 boe per day, Birchcliff now expects to produce 41,000 barrels per day, a 5% increase. On top of that, I’m also expecting the production cost to continue to decrease a bit. I’m not complaining at all about the current cost of C$4.53 (US$3.4) per boe (which is an amazing result compared to the $5.25/boe in Q2 2014 and the $5.11/boe in Q1 2015), as the weak Canadian Dollar is definitely an advantage for Birchcliff Energy. (click to enlarge) Source: press release Despite the crash in the oil price (and the weaker gas price which is more important for the company as 86% of its production is natural gas), Birchcliff was able to realize a funds flow netback of just over $13 per boe which isn’t bad at all, considering the circumstances. Additionally, Birchcliff has now reduced its capital expenditure guidance from C$267M to C$250M (US$190M). This won’t be covered by the operating cash flow though as I’m not expecting the operating cash flow to be higher than C$175M (US$130M), so Birchcliff’s debt will very likely continue to increase. As of at the end of the second quarter, Birchcliff had drawn down roughly C$600M from its C$800M ($600M) credit facility, so it can draw down another C$200M (US$150M) to cover for the shortfall. The stronger-than-expected output provides a solid basis for next year Not only was Birchcliff able to increase its production guidance for the fourth quarter of the current year, this also bodes very well for next year. The increased production guidance for Q4 of 41,000 barrels per day is an ‘average’ daily production, and Birchcliff is expecting the exit production to be 41,000-42,000 boe per day, and this production increase will be underpinned by an updated of the company’s oil and gas reserves after seeing excellent production results from the horizontal wells drilled in the past 18 months. In fact, Birchcliff isn’t just hinting at a reserve increase, it says it expects the reserve increase to be ‘material’, so that should also have a positive impact on the NPV of the company as a whole. The winter season is coming closer, and those months are usually the best months for the gas price which could see a substantial price increase, boosting Birchcliff’s financial performance. It will be very interesting to see how the gas price will behave in the run-up to 2016, as a weak gas price will probably mean Birchcliff might have to defer some more capital expenditures as it knows it cannot stretch its balance sheet too much. Investment thesis Birchcliff’s financial performance will almost entirely be determined by the strength of the gas price in the upcoming winter. Whereas the gas price (Henry Hub) for delivery in September is trading at $2.64 , the futures for natural gas with delivery for January and February is trading at $3 and this will help Birchcliff’s financial performance. (click to enlarge) Source: CME Group I like Birchcliff’s limited exposure to oil (10% of its production) and focus on natural gas (86% of its output) and the next few quarters will be crucial for the company. I’m hoping for a long and harsh winter as that should bode well for all natural gas producers and result in a decent relief for its balance sheets. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BIREF over the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
Scalper1 News