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Birchcliff Energy Third Quarter 2020 Results

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   |    Thursday,November 12,2020

Birchcliff Energy Ltd. reported its Q3 2020 results.

Q3 2020 Highlights

  • Delivered adjusted funds flow of $59.4 million ($0.22 per basic common share) in Q3 2020, a 174% increase from Q2 2020 and a 6% decrease from Q3 2019.
  • Free funds flow of $28.5 million ($0.11 per basic common share) in Q3 2020, a 146% increase from Q2 2020 and a 25% increase from Q3 2019.
  • Achieved quarterly average production of 78,376 boe/d in Q3 2020, a 5% increase from Q2 2020 and a 3% decrease from Q3 2019.
  • Achieved record low operating expense of $2.73/boe in Q3 2020, a 6% decrease from Q2 2020 and a 1% decrease from Q3 2019.
  • Realized an operating netback of $12.03/boe in Q3 2020, a 76% increase from Q2 2020 and a 23% increase from Q3 2019.
  • Reduced total debt at September 30, 2020 by $23.2 million from June 30, 2020.
  • Continued with the successful execution of its 2020 capital program (the “2020 Capital Program”), completing and bringing on production 14 (14.0 net) wells. F&D capital expenditures in Q3 2020 were $30.8 million.

Jeff Tonken, President and Chief Executive Officer of Birchcliff, said: “Birchcliff delivered excellent third quarter results, highlighted by quarterly adjusted funds flow of $59.4 million and free funds flow of $28.5 million, with quarterly average production of 78,376 boe/d. Our ability to drive significant cash flow in the current operating environment speaks to the strong performance of our assets and our low-cost structure. During the third quarter, we brought our 14-well pad on production in Pouce Coupe. The 14 wells are producing significantly more condensate/light oil and less natural gas than we previously forecast and we believe we have discovered an extension to the Gordondale light oil pool into the northeastern area of Pouce Coupe. The increased condensate/light oil rates make these 14 wells more economic than we had anticipated. In addition, our new inlet liquids-handling facility in Pouce Coupe that we completed in the third quarter of 2020 allows us to process and sell the condensate/light oil from these wells in Pouce Coupe to achieve a premium price.

"We are increasing our 2020 adjusted funds flow guidance to $195 million from $185 million and reducing our 2020 annual average production guidance to 76,000 to 77,000 boe/d from 78,000 to 80,000 boe/d.

"For 2021, we are committed to free funds flow generation and debt reduction. Although we have not yet finalized our 2021 plans, we are targeting F&D capital spending to be in the range of $200 million to $220 million with annual average production expected to be 78,000 to 80,000 boe/d, which would generate free funds flow of approximately $140 million at today’s strip prices. None of our production is currently subject to fixed price commodity hedges, which will allow us to take advantage of strengthening natural gas prices.”

Preliminary Outlook for 2021

Based on current strip prices, Birchcliff expects to generate free funds flow of approximately $140 million in 2021(1), with priority being given to debt reduction. Although Birchcliff has not yet finalized its 2021 capital spending plans, it is currently targeting F&D capital spending of $200 million to $220 million and an annual average production rate of 78,000 to 80,000 boe/d. Birchcliff expects to be able to maintain its production at or near 2020 levels with less F&D capital due to the Corporation’s high-quality, low-decline assets. Birchcliff expects facilities and infrastructure spending in 2021 to decrease by approximately 70%, from approximately $75 million in 2020 to approximately $20 million in 2021 as a result of one-time facilities and infrastructure projects completed in 2020.

The 2021 capital program will be designed to provide Birchcliff with significant optionality to take advantage of volatile commodity prices. As a result of Birchcliff’s large inventory of potential future drilling locations, the Corporation has the ability to focus on natural gas, liquids-rich natural gas or light oil drilling, depending on its outlook for commodity prices.

Birchcliff believes that generating free funds flow and the repayment of debt in 2021 will provide it with the most optionality to take advantage of future opportunities in its industry and give Birchcliff the ability to maximize future shareholder returns. Birchcliff continues to work through its plans for 2021 and expects to announce details of its 2021 capital program and guidance in January 2021.

Revised 2020 Guidance

As noted above, Birchcliff is revising its adjusted funds flow guidance to $195 million from $185 million and its annual average production guidance to 76,000 to 77,000 boe/d from 78,000 to 80,000 boe/d. Average production in Q4 2020 is now expected to be 78,000 to 79,000 boe/d (previously 81,000 to 83,000 boe/d). Birchcliff expects to generate significant free funds flow in Q4 2020, which will be directed towards debt reduction. Birchcliff’s F&D capital expenditures are expected to be approximately $285 million, which is the mid-point of Birchcliff’s previous guidance range of $275 million to $295 million. Birchcliff now anticipates that total debt at year end will be $740 million to $760 million (previously $750 million to $770 million), a further reduction of $24 million to $44 million from total debt at September 30, 2020.

Q3 2020 Results

Production

Birchcliff’s production averaged 78,376 boe/d in Q3 2020, a 5% increase from 74,950 boe/d in Q2 2020. The increase was primarily due to the new 14-well pad brought on production in Pouce Coupe during Q3 2020, partially offset by natural production declines and ongoing impacts of frac-driven interaction. 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.

Birchcliff’s production in Q3 2020 decreased by 3% from 80,548 boe/d in Q3 2019. The decrease was primarily due to the on-stream timing of incremental production from new horizontal oil and condensate-rich natural gas wells in Gordondale and Pouce Coupe during Q3 2020 being later as compared to Q3 2019, as well as natural production declines and ongoing impacts of frac-driven interaction.

Liquids accounted for approximately 24% of Birchcliff’s total production in Q3 2020, which was the same as Q2 2020 and up from 23% in Q3 2019. Liquids weighting increased from Q3 2019 primarily due to incremental production from new liquids-rich natural gas wells in 2020.

Adjusted Funds Flow

Birchcliff’s adjusted funds flow for Q3 2020 was $59.4 million, or $0.22 per basic common share, a 174% and 175% increase, respectively, from $21.7 million and $0.08 per basic common share in Q2 2020. The increases were primarily due to higher reported revenue as compared to Q2 2020. Petroleum and natural gas revenue increased by 37% as compared to Q2 2020, primarily due to a higher average realized sales price in Q3 2020 and an increase in production. Adjusted funds flow was also positively impacted by lower transportation and other expense and a lower realized loss on financial instruments and negatively impacted by higher royalty and interest expenses as compared to Q2 2020.

Birchcliff’s adjusted funds flow in Q3 2020 decreased by 6% and 8% from $63.0 million and $0.24 per basic common share in Q3 2019. The decreases were primarily due to a realized loss on financial instruments of $16.4 million in Q3 2020 as compared to a realized gain on financial instruments of $1.6 million in Q3 2019, partially offset by higher reported revenue. Petroleum and natural gas revenue increased by 9% as compared to Q3 2019, largely due to a higher average realized natural gas sales price in Q3 2020, partially offset by a decrease in the average realized light oil and condensate sales prices and a decrease in corporate production. Birchcliff’s light oil and condensate revenue was negatively impacted by the significant weakness and volatility in oil prices as a result of the COVID-19 pandemic and ensuing global demand destruction. Adjusted funds flow was also negatively impacted by higher interest and transportation and other expenses, and positively impacted by lower operating and royalty expenses as compared to Q3 2019.

Net Loss to Common Shareholders

Birchcliff recorded a net loss to common shareholders of $17.7 million, or $0.07 per basic common share, in Q3 2020, a decrease from $39.5 million and $0.15 per basic common share in Q2 2020. The decreases were primarily due to higher adjusted funds flow as described above, partially offset by higher unrealized mark-to-market losses on financial instruments and a decrease in income tax recovery as compared to Q2 2020.

Birchcliff’s net loss to common shareholders in Q3 2020 decreased from $46.9 million and $0.18 per basic common share in Q3 2019. The decreases were primarily due to lower unrealized mark-to-market losses on financial instruments, partially offset by lower adjusted funds flow as described above and a decrease in income tax recovery as compared to Q3 2019.

Operating Expense

Birchcliff’s record low operating expense was $2.73/boe in Q3 2020, a 6% decrease from $2.89/boe in Q2 2020 and a 1% decrease from $2.75/boe in Q3 2019. 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 $12.03/boe in Q3 2020, a 76% and 23% increase from $6.84/boe in Q2 2020 and $9.77/boe in Q3 2019. The increase from Q2 2020 was primarily due to a higher average realized sales price and lower per boe operating and transportation and other expenses, partially offset by a higher per boe royalty expense. The increase from Q3 2019 was primarily due to a higher average realized sales price and lower per boe operating and royalty expenses, partially offset by higher per boe transportation and other expense.

Total Cash Costs

Birchcliff’s total cash costs were $9.37/boe in Q3 2020, a 6% decrease from $9.96/boe in Q2 2020. The decrease was primarily due to lower per boe operating, G&A and transportation and other expenses, partially offset by higher per boe royalty and interest expenses. Birchcliff’s total cash costs on a per boe basis in Q3 2020 were comparable to $9.36/boe in Q3 2019.

Debt and Credit Facilities

Birchcliff has significant 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 September 30, 2020, Birchcliff had long-term bank debt of $771.7 million (June 30, 2020: $753.1 million; September 30, 2019: $638.6 million), leaving $222.6 million of unutilized credit capacity after adjusting for outstanding letters of credit and unamortized interest and fees. Total debt at September 30, 2020 was $784.4 million as compared to $807.6 million at June 30, 2020 and $644.4 million at September 30, 2019. Total debt peaked in early Q3 2020 and is expected to decrease throughout the remainder of 2020, with total debt at year end 2020 anticipated to be $740 million to $760 million, a reduction of $24 million to $44 million from total debt at September 30, 2020. See “Outlook and Guidance – Revised 2020 Guidance”.

Pouce Coupe Gas Plant Netbacks

Birchcliff processed approximately 69% of its total corporate natural gas production and 59% of its total corporate production through Birchcliff’s 100% owned and operated natural gas processing plant in Pouce Coupe (the “Pouce Coupe Gas Plant”) in the nine months ended September 30, 2020 as compared to 73% and 63%, respectively, in the nine months ended September 30, 2019.


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