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Birchcliff Energy Second Quarter 2022 Results

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   |    Wednesday,August 10,2022

Birchcliff Energy Ltd. reported its second quarter 2022 results.

Jeff Tonken, Chief Executive Officer of Birchcliff, said: “Birchcliff had a record quarter in Q2 2022. We remain confident that Birchcliff will reach zero total debt and be in a cash surplus position in Q4 2022, based on the strength of forward commodity prices. We continue to target increasing our annual common share dividend in 2023 to at least $0.80 per share ($212 million annually), subject to commodity prices and the approval of our board of directors. We have initiated our formal budgeting process for 2023 and plan on providing a corporate update and releasing our preliminary 2023 budget on October 13, 2022.”

Mr. Tonken continued: “Birchcliff’s quarterly average production was 73,746 boe/d, resulting in record quarterly adjusted funds flow⁽¹⁾ of $285.5 million ($1.08 per basic common share⁽²⁾) and record quarterly free funds flow⁽¹⁾ of $201.3 million ($0.76 per basic common share⁽²⁾). To illustrate this accomplishment, our free funds flow in Q2 2022 was $17.6 million higher than our adjusted funds flow in Q1 2022, a quarterly record at the time. These results allowed us to significantly reduce our total debt⁽³⁾ at June 30, 2022 to $266.9 million, a decrease of $504.0 million (65%) from June 30, 2021 and $142.1 million (35%) from March 31, 2022.”

Q2 2022 Highlights:

• Achieved quarterly average production of 73,746 boe/d, which included the impact of planned turnarounds and maintenance activities, a 2% decrease from Q2 2021. Liquids accounted for 17% of Birchcliff’s total production in Q2 2022 as compared to 22% in Q2 2021.
• Generated record quarterly adjusted funds flow of $285.5 million, or $1.08 per basic common share, a 217% and 218% increase, respectively, from Q2 2021. Cash flow from operating activities was $273.7 million, a 238% increase from Q2 2021.
• Delivered record quarterly free funds flow of $201.3 million, or $0.76 per basic common share, an increase of $192.0 million from Q2 2021.
• Earned record quarterly net income to common shareholders of $213.9 million, or $0.81 per basic common share, a 388% and 406% increase, respectively, from Q2 2021.
• F&D capital expenditures were $84.2 million in Q2 2022, which included drilling 12 (12.0 net) wells and bringing 10 (10.0 net) wells on production.
• Significantly reduced total debt at June 30, 2022 to $266.9 million, a reduction of $504.0 million (65%) from June 30, 2021.
• Achieved an operating netback⁽²⁾ of $41.73/boe, a 143% increase from Q2 2021.
• Achieved adjusted funds flow per boe⁽²⁾ of $42.55, a 223% increase from Q2 2021.
• Realized an operating expense⁽⁴⁾ of $3.40/boe, an 8% increase from Q2 2021.
• In Q2 2022, Birchcliff returned $46.0 million to common shareholders through dividends and purchases under its normal course issuer bid (the “NCIB”), including the doubling of its common share dividend and the purchase of 4,211,596 common shares under the NCIB at an average price of $9.67 per share (before fees). In the first six months of 2022, Birchcliff returned $57.4 million to common shareholders through dividends and the purchase of 5,514,792 common shares under the NCIB at an average price of $8.96 per share (before fees).

Outlook and Guidance

2023 Budgeting Process

The Corporation has initiated its formal budgeting process for 2023, which will be geared towards maximizing Birchcliff’s ability to generate free funds flow, increasing shareholder returns and fully utilizing the processing capacity of the Corporation’s existing infrastructure. Birchcliff plans to provide a corporate update and release its preliminary 2023 budget on October 13, 2022 after the completion of the Corporation’s preliminary 2023 budget planning process.

Birchcliff continues to expect to reach zero total debt and be in a cash surplus position in Q4 2022, which takes into account the redemption of all of its issued and outstanding cumulative redeemable preferred shares, Series A (the “Series A Preferred Shares”) and cumulative redeemable preferred shares, Series C (the “Series C Preferred Shares”) on September 30, 2022 for an aggregate redemption price of approximately $88.2 million, which redemption was announced by the Corporation on August 4, 2022. Birchcliff is able to take full advantage of strong commodity prices because it has no fixed price commodity hedges in place and it does not currently intend to hedge any future production.

Birchcliff is updating its 2022 guidance to reflect the current commodity price environment and the impacts of inflation on its business. The Corporation anticipates significant production additions in the second half of 2022 and is maintaining its previous guidance for annual average production at 78,000 to 80,000 boe/d. Significant changes to Birchcliff’s guidance include the following:

• Adjusted funds flow for 2022 is now anticipated to be $1.1 billion, primarily as a result of the revised commodity price forecast.
• F&D capital expenditures in 2022 are now anticipated to be $275 million to $285 million, primarily as a result of increased inflation and the procurement of certain long-lead capital items to prepare for the efficient execution of Birchcliff’s 2023 capital program.
• Free funds flow for 2022 is now anticipated to be $830 million to $840 million and excess free funds flow for 2022 is now anticipated to be $810 million to $820 million, both as a result of the changes to Birchcliff’s adjusted funds flow and F&D capital expenditures guidance.
• Birchcliff is now forecasting that it will have a surplus of $160 million to $170 million at December 31, 2022.
• Average royalty expense for 2022 is now anticipated to be $6.60/boe to $6.80/boe, primarily as a result of the revised commodity price forecast.
• Average operating expense for 2022 is now anticipated to be $3.30/boe to $3.50/boe, primarily as a result of anticipated inflationary pressures continuing to impact power and other fuel supply costs.

2Q 2022 Operational Results

Production

Birchcliff’s production averaged 73,746 boe/d in Q2 2022, a 2% decrease from 75,265 boe/d in Q2 2021. The decrease in production was primarily due to a major scheduled turnaround in May and June 2022 at AltaGas’ deep-cut sour gas processing facility in Gordondale (the “AltaGas Facility”) that decreased quarterly liquids and natural gas production in Gordondale by approximately 3,600 boe/d. Production was positively impacted by incremental production volumes from the new Montney/Doig wells brought on production since Q2 2021, including the new 10-well (01-08) pad in Pouce Coupe brought on production in May 2022 and the new 6-well (13-29) pad in Pouce Coupe brought on production in February 2022, partially offset by natural production declines.

Birchcliff is on target to meet is annual average production guidance of 78,000 to 80,000 boe/d due to significant production additions expected in the second half of 2022.

Liquids accounted for 17% of Birchcliff’s total production in Q2 2022 as compared to 22% in Q2 2021, with a liquids-to-gas ratio in Q2 2022 of 34.7 bbls/MMcf (50% high-value light oil and condensate). The decrease in liquids weighting was primarily due to a combination of lower liquids production in Gordondale as a result of the AltaGas Facility turnaround, the Corporation specifically targeting horizontal natural gas wells in liquids-rich zones in the Pouce Coupe and Gordondale areas since Q2 2021 and natural production declines from light oil and liquids-rich natural gas wells producing since Q2 2021.

Birchcliff achieved record quarterly adjusted funds flow of $285.5 million, or $1.08 per basic common share, in Q2 2022, a 217% and 218% increase, respectively, from $90.2 million and $0.34 per basic common share in Q2 2021. Birchcliff’s cash flow from operating activities was $273.7 million in Q2 2022, a 238% increase from $81.0 million in Q2 2021. The increases were primarily due to higher reported petroleum and natural gas revenue and a realized gain on financial instruments of $16.7 million in Q2 2022 as compared to a realized loss on financial instruments of $13.4 million in Q2 2021, partially offset by a higher royalty expense in Q2 2022. The increases in petroleum and natural gas revenue and royalty expense were largely the result of a 108% increase in the average realized sales price received for Birchcliff’s production in Q2 2022. The Corporation’s average realized sales price in Q2 2022 benefited from significant increases in benchmark oil and natural gas prices since Q2 2021. See “Q2 2022 Financial and Operational Results – Commodity Prices”.

Birchcliff delivered record quarterly free funds flow of $201.3 million, or $0.76 per basic common share, in Q2 2022, as compared to $9.3 million and $0.03 per basic common share in Q2 2021. The increases were primarily due to significantly higher adjusted funds flow and comparable F&D capital expenditures in Q2 2022 as compared to Q2 2021.

Birchcliff earned record quarterly net income to common shareholders of $213.9 million, or $0.81 per basic common share, in Q2 2022, a 388% and 406% increase, respectively, from $43.9 million and $0.16 per basic common share in Q2 2021. The increases were primarily due to higher adjusted funds flow and a higher unrealized mark-to-market gain on financial instruments, partially offset by an increase in deferred income tax expense in Q2 2022. Birchcliff recorded an unrealized mark-to-market gain on financial instruments of $47.5 million in Q2 2022, as compared to $21.3 million in Q2 2021.

In Q2 2022, Birchcliff’s operating netback was $41.73/boe, a 143% increase from $17.19/boe in Q2 2021. The increase was primarily due to higher per boe petroleum and natural gas revenue, partially offset by a higher per boe royalty expense, both of which were both largely impacted by a 108% increase in the average realized sales price received for Birchcliff’s production in Q2 2022.

The following table sets forth Birchcliff’s selected cash costs for the periods indicated:

^{(1)   Supplementary financial measure. See “Non-GAAP and Other Financial Measures”.
(2)   Non-GAAP ratio. See “Non-GAAP and Other Financial Measures”.}

Royalty expense per boe increased by 218% from Q2 2021, primarily due to the significant increase in the average realized sales price received for Birchcliff’s liquids and natural gas production in Q2 2022.

Operating expense per boe increased by 8% from Q2 2021, primarily due to higher inflationary pressures on power and other fuel supply costs which together increased by 45% on a per boe basis. Operating expense per boe was also negatively impacted by higher field labour costs, road and lease maintenance costs, municipal property taxes and regulatory fees, and was partially offset by lower third-party natural gas processing fees resulting from the turnaround at the AltaGas Facility in Q2 2022.

Transportation and other expense per boe increased by 7% from Q2 2021, primarily due to higher natural gas transportation costs which resulted from increased natural gas production and higher firm NGTL tolling charges. Notwithstanding lower liquids production, liquids transportation and fractionation costs also increased in Q2 2022, primarily due to inflationary pressures that resulted in higher pipeline tariffs, higher trucking and hauling costs and higher variable operating, power, fuel and service costs.

Net G&A expense per boe increased by 31% from Q2 2021, primarily due to higher employee-related expenses, higher corporate costs due to the easing of Birchcliff’s COVID-19 restrictions and higher general business expenditures due to inflationary pressures.

Interest expense per boe decreased by 59% from Q2 2021, primarily due to a decrease in the Corporation’s average effective interest rate and a lower average outstanding balance under its extendible revolving credit facilities (the “Credit Facilities”) in Q2 2022.

Total debt at June 30, 2022 was $266.9 million, a decrease of 65% from $770.9 million at June 30, 2021. At June 30, 2022, Birchcliff had long-term bank debt under the Credit Facilities of $276.0 million (June 30, 2021: $720.9 million) from available Credit Facilities of $850.0 million (June 30, 2021: $850.0 million), leaving $569.4 million of unutilized credit capacity after adjusting for outstanding letters of credit and unamortized fees.

During Q2 2022, Birchcliff’s syndicate of lenders completed its regular semi-annual review of the borrowing base limit under the Credit Facilities. As a result of this review, the agreement governing the Credit Facilities was amended effective May 3, 2022 to extend the maturity dates of each of the syndicated extendible revolving term credit facility and the extendible revolving working capital facility from May 11, 2024 to May 11, 2025. In addition, the lenders confirmed the borrowing base limit at $850.0 million. The Credit Facilities do not contain any financial maintenance covenants.