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Birchcliff Energy Fourth Quarter, Full Year 2020 Results

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   |    Friday,February 12,2021

Birchcliff Energy Ltd. reported its Q4 and full year 2020 results.

Jeff Tonken, President and Chief Executive Officer of Birchcliff commented: “Birchcliff is proud to announce its fourth quarter and full-year 2020 results. 2020 was a challenging year for Birchcliff and for the industry as a whole. Despite the economic damage and pricing uncertainty caused by the COVID-19 pandemic, we were able to efficiently execute our 2020 capital program, generating annual adjusted funds flow of $185 million, with annual average production of 76,401 boe/d and record low annual operating costs of $2.95 per/boe. Birchcliff also returned to free funds flow generation in the second half of 2020, with free funds flow of $25 million in Q4 2020. These achievements speak to the strong performance of our assets and the significant efforts of our team to remain one of industry’s lowest-cost producers.

"Looking forward to 2021, we are focused on maximizing free funds flow and strengthening our balance sheet, while maintaining a relatively flat production profile. We expect to generate approximately $360 million of adjusted funds flow in 2021¹, with F&D capital expenditures of between $210 million and $230 million, resulting in significant free funds flow for the year as set forth in our press release dated January 20, 2021. As none of Birchcliff’s production is currently subject to fixed price commodity hedges, we are excited about the undersupplied natural gas market that is emerging and being accelerated by cold weather in North America, Europe and Asia, which sets up a strong outlook for forward natural gas pricing.”

Q4 2020 Highlights:

• Achieved quarterly average production of 78,649 boe/d, a 1% increase from Q4 2019.
• Liquids accounted for approximately 24% of Birchcliff’s total production in Q4 2020, as compared to approximately 22% in Q4 2019, with total liquids production increasing by 8% from Q4 2019.
• Delivered $66.5 million of adjusted funds flow, or $0.25 per basic common share, an 18% decrease and a 17% decrease, respectively, from Q4 2019.
• Generated $25.2 million of free funds flow in Q4 2020, a 4% increase from $24.1 million in Q4 2019.
• Recorded net income to common shareholders of $40.4 million, or $0.15 per basic common share, as compared to a net loss to common shareholders of $19.0 million and $0.07 per basic common share in Q4 2019.
• Achieved operating expense of $3.03/boe, a 1% decrease from Q4 2019.
• Realized an operating netback of $13.01/boe, a 9% decrease from Q4 2019.
• F&D capital expenditures of $41.3 million. During the quarter, Birchcliff drilled 6 (6.0 net) wells to help ensure the efficient execution of the Corporation’s 2021 capital program
• Redeemed 364,655 Series C preferred shares in Q4 2020 for an aggregate of $9.1 million.

2020 Year-End Highlights:

• Achieved annual average production of 76,401 boe/d, a 2% decrease from 2019.
• Liquids accounted for approximately 23% of Birchcliff’s total production in 2020, as compared to approximately 22% in 2019, with total liquids production increasing by 4% from 2019.
• Delivered $184.5 million of adjusted funds flow, or $0.69 per basic common share, each a 45% decrease from 2019.
• Recorded a net loss to common shareholders of $62.0 million, or $0.23 per basic common share, as compared to a net loss to common shareholders of $59.6 million and $0.22 per basic common share in 2019.
• Achieved record low annual operating expense of $2.95/boe, a 5% decrease from 2019.
• Realized an operating netback of $10.37/boe, a 21% decrease from 2019.
• Successfully executed the Corporation’s 2020 capital program drilling and bringing on production a total of 34 (34.0 net) wells. F&D capital expenditures were $288.0 million in 2020.
• Redeemed 402,820 Series C preferred shares during 2020. At December 31, 2020, the Corporation had 1,597,180 Series C preferred shares outstanding, with an aggregate redemption value of approximately $39.9 million.
• Total debt at December 31, 2020 was $762.0 million, as compared to $632.6 million at December 31, 2019.

• Proved developed producing reserves increased by 28,344.9 Mboe during 2020, before including the effects of acquisitions and dispositions and adding back 2020 actual production of 27,962.6 Mboe².
• Proved developed producing reserves increased by 1.01 boe for each boe that was produced in 2020, before including the effects of acquisitions and dispositions and adding back 2020 actual production.
• NGLs reserves, which include condensate, increased by 14% on a proved developed producing basis, 4% on a proved basis and 9% on a proved plus probable basis as a result of: (i) the discovery of condensate-rich natural gas trends in the northern area of Pouce Coupe; and (ii) Birchcliff’s focus on extracting more high-value NGLs in 2020 from its natural gas stream.
• Total light and medium crude oil and NGLs weighting of its proved developed producing, proved and proved plus probable reserves increased to 22%, 16% and 18% of total reserves in each category, respectively.
• The estimated net present value at December 31, 2020 (before income taxes, discounted at 10%) was $1.9 billion for Birchcliff’s proved developed producing reserves (December 31, 2019: $1.9 billion), $3.7 billion for its proved reserves (December 31, 2019: $4.1 billion) and $4.8 billion for its proved plus probable reserves (December 31, 2019: $5.3 billion).
• The net asset value of Birchcliff’s proved developed producing reserves at December 31, 2020, before income taxes discounted at 10% and after deducting total debt and the redemption value of the Corporation’s outstanding Series A and Series C preferred shares, is estimated to be $3.83 per common share, which is 43% above the closing trading price of its common shares of $2.68 on February 9, 2021.

Proved Reserve Highlights:

• Reserves life index of 7.2 years on a proved developed producing basis, 24.2 years on a proved basis and 36.1 years on a proved plus probable basis, based on a forecast production rate of 79,000 boe/d (which represents the mid-point of Birchcliff’s annual average production guidance range for 2021).
• During 2020, Birchcliff’s F&D capital expenditures were $288.0 million, which included $74.8 million of facilities and infrastructure capital spent in 2020 that did not result in the addition of proved developed producing reserves at year-end 2020. FD&A capital expenditures were $275.1 million in 2020.
• The following table sets forth Birchcliff’s F&D costs and FD&A costs per boe for its proved developed producing, total proved and total proved plus probable reserves for 2020, 2019 and 2018, including FDC:

• Due to the unprecedented effects of the COVID-19 pandemic, the Corporation believes that its 2020 adjusted funds flow netback does not properly reflect the future profitability of the proved developed producing reserves added in 2020. Birchcliff anticipates that as a result of improved commodity prices, the Corporation’s netbacks and recycle ratios will improve in 2021 to be more comparable to its historical recycle ratios prior to COVID-19.

Operations Update

Birchcliff currently has 3 drilling rigs at work, consisting of 2 rigs drilling a 10-well pad in Pouce Coupe and 1 rig drilling a 4-well pad in Gordondale.

Birchcliff has successfully completed its 7-well 04-04 pad in Pouce Coupe, which was drilled in late Q4 2020 and early January 2021. Flowback operations have commenced to achieve stabilized production rates prior to installing permanent production facilities. The majority of the wells on the pad are expected to be onstream in mid-March 2021. Six wells on the 04-04 pad were drilled in the Basal Doig interval, offsetting recent successful third-party drilling results, and one well was drilled in the Montney D1 interval, offsetting several of Birchcliff’s existing high-productivity, low-cost natural gas wells. Production from the 04-04 pad will flow into Birchcliff’s existing owned and operated infrastructure.

Financial & Operational Results - Q4 and Full Year 2020

Production

Birchcliff’s production averaged 78,649 boe/d in Q4 2020, which was a 1% increase from Q4 2019 and within its guidance of 78,000 to 79,000 boe/d. Birchcliff’s full-year 2020 production averaged 76,401 boe/d, a 2% decrease from 77,977 boe/d in 2019 and within its guidance of 76,000 to 77,000 boe/d. Birchcliff’s Q4 2020 and full-year 2020 production was positively impacted by new horizontal light oil and condensate-rich natural gas wells brought on production in 2020, including incremental production from the 14‐well pad brought on production in Pouce Coupe in Q3 2020 and negatively impacted by natural production declines and the ongoing impacts of frac driven interaction. Additionally, in order to manage the higher condensate and frac water flowback volumes associated with the 14‐well pad, Birchcliff proactively and temporarily restricted production of existing wells in Pouce Coupe during Q3 2020, which negatively impacted Q4 2020 and full-year 2020 production.

Liquids accounted for approximately 24% of Birchcliff’s total production in Q4 2020, as compared to approximately 22% in Q4 2019, with total liquids production increasing by 8% from Q4 2019. For full-year 2020, liquids accounted for approximately 23% of Birchcliff’s total production, as compared to approximately 22% in 2019. Total liquids production for full-year 2020 increased by 4% from 2019. The change in the commodity production mix was primarily due to incremental production from new liquids-rich natural gas wells brought on production in 2020.

Birchcliff’s adjusted funds flow for Q4 2020 was $66.5 million, or $0.25 per basic common share, an 18% decrease and a 17% decrease, respectively, from $80.9 million and $0.30 per basic common share in Q4 2019. Birchcliff’s full-year 2020 adjusted funds flow was $184.5 million, or $0.69 per basic common share, each a 45% decrease from $334.5 million and $1.26 per basic common share in 2019. Full-year 2020 adjusted funds flow was below Birchcliff’s guidance of $195 million primarily due to a lower than anticipated average realized natural gas sales price in Q4 2020.

The decrease in adjusted funds flow from the comparative prior periods was primarily due to lower reported revenue and a realized loss on financial instruments recorded in Q4 2020 and full-year 2020. Revenue decreased largely due to a 24% decrease in the average realized light oil and condensate sales price (combined) in Q4 2020 and a 33% decrease in full-year 2020, as compared to the comparative prior periods. Birchcliff’s light oil and condensate sales revenue in 2020 was negatively impacted by the significant weakness and volatility in benchmark oil prices as a result of the COVID-19 pandemic and ensuing global demand destruction.

Birchcliff recorded a realized loss on financial instruments of $11.8 million in Q4 2020 and $59.7 million in full-year 2020, as compared to a realized loss on market diversification financial contracts of $6.6 million in Q4 2019 and a realized gain on market diversification financial contracts of $13.7 million in full-year 2019. Birchcliff’s realized gains and losses on financial instruments were primarily due to the settlement of NYMEX/AECO basis swap contracts in the periods indicated.

Adjusted funds flow in Q4 2020 and full-year 2020 was also negatively impacted by higher interest and transportation and other expenses, and positively impacted by lower royalty, operating and G&A expenses.

Birchcliff recorded net income to common shareholders of $40.4 million, or $0.15 per basic common share, in Q4 2020, as compared to a net loss to common shareholders of $19.0 million and $0.07 per basic common share in Q4 2019. The change to a net income position was primarily due to an unrealized after-tax mark‐to‐market gain on financial instruments of $32.5 million in Q4 2020, as compared to an unrealized after-tax mark-to-market loss of $35.9 million in Q4 2019, partially offset by lower adjusted funds flow in Q4 2020 as described above.

Birchcliff recorded a net loss to common shareholders of $62.0 million, or $0.23 per basic common share, in full-year 2020, as compared to a net loss to common shareholders of $59.6 million and $0.22 per basic common share in 2019. The increase in net loss was primarily due to lower adjusted funds flow as described above, partially offset by a lower unrealized after-tax mark-to-market loss on financial instruments. Birchcliff recorded an unrealized after-tax mark‐to‐market loss on financial instruments of $26.5 million in 2020, as compared to an unrealized after-tax mark-to-market loss of $148.4 million in 2019. Birchcliff’s unrealized gains and losses for the periods indicated were due to changes in the fair value of its market diversification financial contracts. The changes in the fair value of market diversification financial contracts were primarily due to: (i) fluctuations in the forward basis spread between NYMEX HH and AECO 7A contracts outstanding at December 31, 2020, as compared to the fair value previously assessed at September 30, 2020 and December 31, 2019; and (ii) the settlement of financial NYMEX/AECO basis swap contracts in the periods.

Operating Expense

The Corporation remained focused on reducing its operating costs in 2020, resulting in an operating expense of $3.03/boe in Q4 2020, a 1% decrease from $3.06/boe in Q4 2019, and record low operating expense for full-year 2020 of $2.95/boe, a 5% decrease from $3.09/boe in 2019. Birchcliff’s full-year annual operating expense was within its guidance of $2.85/boe to $3.05/boe. The decreases were primarily due to various field optimization and cost saving initiatives in Pouce Coupe and Gordondale, which included the Corporation’s expanded liquids‐handling capabilities in Pouce Coupe.

Operating Netback

Birchcliff’s operating netback was $13.01/boe in Q4 2020, a 9% decrease from $14.25/boe in Q4 2019. Birchcliff’s full-year 2020 operating netback was $10.37/boe, a 21% decrease from $13.07/boe in 2019. The decreases were primarily due to lower average realized light oil and condensate sales prices in 2020.

Total Cash Costs

Birchcliff’s total cash costs were $11.18/boe in Q4 2020, a 4% increase from $10.80/boe in Q4 2019. The increase was primarily due to higher per boe interest and transportation and other expenses, partially offset by lower per boe operating, royalty and G&A expenses. Birchcliff’s full-year 2020 total cash costs of $10.34/boe were comparable to $10.31/boe in 2019.

Pouce Coupe Gas Plant Netbacks

During 2020, Birchcliff processed 68% of its total corporate natural gas production and 59% of its total corporate production through its 100% owned and operated natural gas processing plant in Pouce Coupe, as compared to 72% and 62%, respectively, during 2019. The following table sets forth Birchcliff’s average daily production and operating netback for wells producing to the Pouce Coupe Gas Plant for the periods indicated:

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Birchcliff’s liquids-to-gas ratio increased by 26% as compared to 2019 primarily due to: (i) the completion of Birchcliff’s inlet liquids‐handling facility at the Pouce Coupe Gas Plant; and (ii) the addition of the condensate‐rich 14‐well pad brought on production in Pouce Coupe in Q3 2020.

Debt

Birchcliff has sufficient liquidity from its credit facilities which have an aggregate principal amount of $1.0 billion and are comprised of an extendible revolving syndicated term credit facility of $900.0 million and an extendible revolving working capital facility of $100.0 million. Birchcliff’s credit facilities do not contain any financial maintenance covenants and do not mature until May 11, 2022.

At December 31, 2020, Birchcliff had long-term bank debt of $731.4 million (December 31, 2019: $609.2 million) from available credit facilities of $1.0 billion (December 31, 2019: $1.0 billion), leaving $263.2 million of unutilized credit capacity after adjusting for outstanding letters of credit and unamortized interest and fees. Total debt at December 31, 2020 was $762.0 million, as compared to $632.6 million at December 31, 2019, which was slightly above Birchcliff’s guidance of $740 to $760 million, primarily due to the redemption of $9.1 million of Series C preferred shares in December 2020 and a lower than anticipated average realized natural gas sales price in Q4 2020.

Effectively 90% of the Corporation’s sales revenue, representing 85% of its total natural gas production and 89% of its total corporate production, was generated from markets outside of AECO in Q4 2020, after taking into account its liquids sales and long-term financial NYMEX/AECO basis swap position.

The following table sets forth Birchcliff’s sales, production, average realized sales price, transportation costs and natural gas sales netback by natural gas market for the periods indicated, before taking into account the Corporation’s financial instruments:

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Capital Activities and Investment

The 2020 Capital Program was focused on the drilling of high-value light oil wells in Gordondale and low-cost condensate-rich natural gas wells in Pouce Coupe. In addition, the Corporation completed the 20,000 bbls/d (50% condensate, 50% water) Inlet Liquids-Handling Facility and directed funds towards other infrastructure enhancement projects. The 2020 Capital Program was strategically front-end loaded resulting in a more efficient capital spending and production profile during the year. This allowed Birchcliff to realize numerous capital cost savings and bring new wells on production relatively early in the year, optimizing producing days in the year for the capital spent.

Total capital expenditures for 2020 were $276.8 million, which included F&D capital expenditures of $288.0 million as well as a non-core disposition in Q4 2020. F&D capital expenditures for full-year 2020 were in line with Birchcliff’s guidance of $285 million.

DCCET Activities

During 2020, Birchcliff drilled 34 (34.0 net) horizontal wells, 6 (6.0 net) of which were drilled in Q4 2020 to help ensure the efficient execution of the 2021 Capital Program. The Corporation brought on production 34 (34.0 net) wells during 2020, including 6 (6.0 net) wells that were drilled in Q4 2019. All wells drilled in 2020 were drilled on multi-well pads, allowing Birchcliff to reduce its per well costs and environmental footprint. The following table summarizes the number of wells Birchcliff drilled and brought on production in 2020:

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Pouce Coupe

Key focus areas for Pouce Coupe in 2020 were the drilling of condensate-rich natural gas wells and the further exploitation and delineation of condensate-rich trends in the Montney D1, D2 and C intervals.

In Pouce Coupe, the Corporation drilled 26 (26.0 net) wells and brought 24 (24.0 net) wells on production. The wells were drilled on four multi-well pads as described below:

• 06-32-078-12W6 (4-well pad): An existing pad site where Birchcliff drilled 2 wells in Q4 2019 and 2 wells in Q1 2020. All of these wells were drilled in the Montney D2 interval and were brought on production in late Q1 2020.
• 14-06-079-12W6 (6-well pad): An existing pad site where Birchcliff drilled 2 wells in Q4 2019 and 4 wells in Q1 2020. These 6 wells were drilled in 2 different intervals (3 in the Montney D2 and 3 in the Montney C) and were all brought on production in Q2 2020.
• 14-19-079-12W6 (14-well pad): This 14-well pad used multi-interval cube-style development to maximize operational efficiencies through scale and repeatability, which led to substantial cost savings on a per well basis. The pad is adjacent to the successful condensate-rich wells drilled by Birchcliff in 2019 in the Montney D1, D2 and C intervals at its 14-06-079-12W6 pad. The 14 wells were drilled in 3 different intervals (5 in the Montney D1, 4 in the Montney D2 and 5 in the Montney C). The pad utilized two fit-for-purpose walking style drilling rigs which each drilled 7 wells. Utilizing two drilling rigs allowed for significant shared service-related synergies and resulted in a more efficient cycle time and cost savings. Significant cost saving were also realized during the completion of this pad due to economies of scale and minimal non-productive time. Birchcliff collected high-value diagnostic data that is expected to further improve the next round of multi-interval cube-style development planned for 2021. The results from the 14-well pad demonstrate the extension of the Gordondale light oil pool into the northeastern area of Pouce Coupe, which provides the Corporation with significantly more potential condensate/light oil drilling opportunities.
• 04-04-78-13W6 (7-well pad): Birchcliff drilled 6 of 7 wells on this pad in Q4 2020 in order to help ensure the efficient execution of the Corporation’s 2021 Capital Program. This pad consists of 6 wells in the Basal Doig interval and one well in the Montney D1 interval, which was rig released in early 2021. Flowback operations have commenced on the wells to achieve stabilized production rates prior to installing permanent production facilities. The majority of the wells on the pad are expected to be onstream in mid-March 2021.

At the Pouce Coupe Gas Plant, the Inlet Liquids-Handling Facility was brought on-stream in late July 2020. This facility was completed ahead of schedule and under budget and it represents an important milestone for Birchcliff as it gives the Corporation the ability to optimize its condensate and NGLs product streams and pricing, as well as grow its condensate production in Pouce Coupe to approximately 10,000 bbls/d.

Gordondale

Key focus areas for Gordondale in 2020 were the drilling of crude oil wells and the further exploitation and delineation of oil in the Montney D1 and D2 intervals, specifically in the southeastern part of the Gordondale field.

In Gordondale, the Corporation drilled 8 (8.0 net) wells and brought 10 (10.0 net) wells on production. Birchcliff used multi-interval cube-style development to drill the 10 wells, using two drilling rigs on two proximal pads targeting the Montney D1, D2 and D4 intervals. Two wells were drilled in Q4 2019 and the remaining 8 wells were drilled in Q1 2020.

• 06-35-077-11W6 (4-well pad): Birchcliff drilled 4 wells on this pad in Q1 2020. These 4 wells were drilled in 2 different intervals (2 in the Montney D1 and 2 in the Montney D2) and were all brought on production in Q2 2020.
• 02-02-078-11W6 (6-well pad): Birchcliff drilled 6 wells on this pad, which is adjacent to an existing pad site. Two of the wells were drilled in Q4 2019 and 4 wells were drilled in Q1 2020. These 6 wells were drilled in 3 different intervals (3 in the Montney D1, 2 in the Montney D2 and 1 in the Montney D4). All of the wells were brought on production in Q2 2020.

In Gordondale, Birchcliff completed the addition of natural gas compression at both of its 100% owned and operated oil batteries and the construction of its significant trunk line to transport oil, natural gas and water to these batteries from the southeastern portion of the field. Both projects were completed in Q2 2020. The addition of natural gas compression at both batteries allows the existing wells to produce against lower wellhead pressures, which in turn has increased production rates. The addition of the new trunk line allows the compression to become even more effective and handle both the new and existing volumes in the area.