CALGARY, Alberta – Birchcliff Energy Ltd. (“Birchcliff” or the “Corporation”) (TSX: BIR) is pleased to announce its 2022 budget, guidance and updated five year plan.
“Birchcliff remains committed to increasing shareholder value, which we intend to accomplish by maximizing free funds flow generation and significantly reducing indebtedness. In alignment with these priorities, our board of directors has approved a new five year plan for 2022 to 2026 that provides for potential cumulative free funds flow(1) of approximately $1.9 billion by the end of the five year period and the potential to reduce our total debt(2) to zero in 2023(3)(4). We believe that significantly reducing our indebtedness will reduce the risks to our business and create optionality when considering sustainable increases to our common share dividend and common share buybacks over the next five years,” commented Jeff Tonken, Chief Executive Officer of Birchcliff.
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Mr. Tonken continued: “With respect to 2022, our board of directors has approved an F&D capital budget of $240 million to $260 million, which is expected to deliver annual average production of 78,000 to 80,000 boe/d. Based on this targeted annual average production, we expect to generate approximately $590 million of adjusted funds flow(1) and $330 million to $350 million of free funds flow in 2022(3)(5). Free funds flow generated in 2022 will be primarily allocated towards debt reduction and we are targeting total debt of approximately $175 million to $195 million at December 31, 2022(3)(5), which represents a reduction of up to $587 million (77%) from our total debt of $762 million at December 31, 2020.”
“We had an excellent year in 2021 which saw us successfully and safely execute our 2021 capital program, significantly reduce our total debt and double our common share dividend. We look forward to announcing our unaudited results for the year ended December 31, 2021 on February 9, 2022.”
2022 GUIDANCE
The following tables set forth Birchcliff’s guidance, commodity price assumptions and free funds flow sensitivity for 2022:
2022 Guidance and Commodity Price Assumptions
2022 guidance and assumptions(1) Production Annual average production (boe/d) 78,000 – 80,000 % Light oil 3% % Condensate 7% % NGLs 10% % Natural gas 80% Q4 average production (boe/d) 81,000 – 83,000 Average Expenses ($/boe) Royalty(2) 3.10 – 3.30 Operating(2) 3.15 – 3.35 Transportation and other(3) 4.90 – 5.10 Interest(2) 0.50 – 0.60 Adjusted Funds Flow ($ millions)(4)(5) 590 F&D Capital Expenditures ($ millions)(6) 240 – 260 Free Funds Flow ($ millions)(4)(7) 330 – 350 Total Debt at Year End ($ millions)(8) 175 – 195 Natural Gas Market Exposure(9) AECO exposure as a % of total natural gas production 19% Dawn exposure as a % of total natural gas production 42% NYMEX HH exposure as a % of total natural gas production 38% Alliance exposure as a % of total natural gas production 1% Commodity Prices Average WTI price (US$/bbl) 76.00 Average WTI-MSW differential (CDN$/bbl) 5.00 Average AECO price (CDN$/GJ) 3.50 Average Dawn price (US$/MMBtu) 3.90 Average NYMEX HH price (US$/MMBtu) 4.00 Exchange rate (CDN$ to US$1) 1.26
Free Funds Flow Sensitivity(10)
Estimated change to 2022 free funds flow ($ millions) Change in WTI US$1.00/bbl 4.2 Change in NYMEX HH US$0.10/MMBtu 6.5 Change in Dawn US$0.10/MMBtu 7.3 Change in AECO CDN$0.10/GJ 3.1 Change in CDN/US exchange rate CDN$0.01 6.1
Stress Testing Adjusted Funds Flow
Birchcliff’s 2022 capital program would remain fully funded from adjusted funds flow at an average AECO price of CDN$1.28/GJ and average Dawn and NYMEX prices of US$2.44/MMBtu and assuming an average WTI price of US$65.00/bbl, demonstrating the profitability of Birchcliff’s business through its low-cost structure, low-decline asset base and efficient 2022 capital program.
Changes in assumed commodity prices and variances in production estimates can have an impact on the Corporation’s estimates of adjusted and free funds flow and the Corporation’s other guidance, which impact may be material. In addition, any acquisitions and dispositions completed over the course of 2022 could have an impact on Birchcliff’s production, adjusted funds flow, free funds flow, expenses and total debt, which impact could be material. For further information, see “Advisories – Forward-Looking Statements”.
2022 BUDGET
Birchcliff’s board of directors has approved an F&D capital budget of $240 million to $260 million for 2022 which is designed to maximize free funds flow generation and significantly reduce indebtedness in 2022, while maintaining capital discipline and a flat annual average production profile year-over-year. F&D capital spending is targeted to be less than adjusted funds flow each quarter, which would result in free funds flow generation on a quarterly basis. Birchcliff’s F&D capital budget for 2022 has taken into account expected increases in materials, labour and services costs as compared to 2021.
Birchcliff’s 2022 capital program builds off the technical and operational knowledge Birchcliff gained from its previous capital programs, which will help it to continue to refine its drilling and completions operations and improve well performance. Furthermore, Birchcliff’s focused drilling activities and large-scale well pad designs are expected to maximize capital efficiencies.
Highlights of the 2022 Budget
The key highlights of the 2022 budget are as follows:
Wells and Production
- The 2022 capital program contemplates that Birchcliff will drill 30 wells and bring 35 wells on production in 2022, all of which will be 100% working interest.
- The program has been designed to utilize two drilling rigs in order to bring new wells onto production throughout the year, which will allow for a more consistent production profile and be more operationally efficient for the Corporation. Birchcliff anticipates that this will result in comparable annual average production rates year-over-year and strong production in Q4 2022, with targeted annual average production of 78,000 to 80,000 boe/d and Q4 2022 average production of 81,000 to 83,000 boe/d.
- Birchcliff’s production guidance takes into account planned turnarounds that have been scheduled to occur in Q2 2022 at part of its 100% owned and operated natural gas processing plant in Pouce Coupe (the “Pouce Coupe Gas Plant”) and at AltaGas’ deep-cut sour gas processing facility in Gordondale (the “AltaGas Facility”).
Adjusted Funds Flow and Free Funds Flow
- Birchcliff does not have any fixed price commodity hedges in place and does not currently intend to enter into any, which gives it the ability to participate in any strengthening of commodity prices in 2022.
- Adjusted funds flow of approximately $590 million is expected to be generated in 2022 (based on the mid-point of the Corporation’s 2022 annual average production guidance range).
- Free funds flow of approximately $330 million to $350 million is expected to be generated in 2022.
- Free funds flow generated in 2022 will be primarily allocated towards debt reduction. Total debt at December 31, 2022 is targeted to be approximately $175 million to $195 million, resulting in a total debt to full-year 2022 adjusted funds flow ratio of 0.30x – 0.33x(6).
- While free funds flow is currently prioritized towards debt reduction, Birchcliff will consider sustainable increases to its common share dividend and common share purchases under its normal course issuer bid over the course of 2022, depending on commodity prices and free funds flow and debt levels.
- Consideration may also be given to opportunities that would complement or otherwise improve the Corporation’s business and enhance long-term shareholder value, such as strategic acquisitions.
- The Series A Preferred Shares are redeemable by the Corporation on September 30, 2022. Should the Corporation decide to redeem all or a portion of the Series A Preferred Shares, the Corporation currently expects it would use free funds flow to redeem such shares, which would increase the Corporation’s adjusted funds flow and total debt. No such decision has yet been made by the Corporation. If the Corporation makes the decision to redeem the Series A Preferred Shares, notice will be given to the holders thereof in accordance with the provisions of the Series A Preferred Shares.
See “2022 Guidance” and “Advisories – Forward-Looking Statements” for additional information regarding Birchcliff’s guidance for adjusted funds flow, F&D capital expenditures, free funds flow and total debt in 2022.
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(6) Non-GAAP ratio. See “Non-GAAP and Other Financial Measures”.
Capital Activities and Allocation
The following table sets forth further details regarding Birchcliff’s expected capital spending allocation in 2022:
Classification Capital (millions) DCCET Pouce Coupe(1) $103 – $112 Gordondale(1) $35 – $38 Additional Well Completions Capital(2) $16 – $18 Total DCCET $154 – $168 Facilities and Infrastructure(3) $34 – $37 Maintenance and Optimization(4) $30 – $32 Land and Seismic(5) $6 Other(6) $16 – $17 Total F&D Capital Expenditures(7) $240 – $260
(1) On a DCCET basis, the average well cost in 2022 is estimated to be approximately $5.2 million for each of Pouce Coupe and Gordondale. These costs can vary depending on factors such as the size of the associated multi-well pads, horizontal well length, the costs of construction, the existence of pipelines and other infrastructure and the distance to existing or planned pipelines and other infrastructure.
(2) Represents the estimated completion, equipping and tie-in costs associated with 5 wells that were drilled and rig released in Q4 2021.
(3) Facilities and infrastructure includes approximately $1.5 million for various emissions reduction initiatives. See “2022 Budget – Capital Activities and Allocation – Environmental Stewardship”.
(4) Maintenance and optimization includes capital for the planned turnarounds at the Pouce Coupe Gas Plant and the AltaGas Facility.
(5) Land and seismic includes capital for crown sales and rental payments but does not include other property acquisitions and dispositions.
(6) Other primarily includes capitalized G&A.
(7) Net property acquisitions and dispositions have not been included in the table above as these amounts are generally unbudgeted. See “Advisories – Capital Expenditures” and “Advisories – Forward-Looking Statements”.
Based on the mid-point of the Corporation’s F&D capital expenditures guidance range, approximately 64% of the program is directed towards drilling, casing, completions, equipping and tie-in activities and approximately 14% of the program is directed towards facilities and infrastructure, with investments in large 16″ and 20″ diameter trunk lines to accommodate incremental production and maintain ample pipeline capacity for the existing base production, helping to minimize any adverse backout.
Drilling and Completions
Birchcliff’s 2022 drilling program is focused on high rate-of-return targets and developing its low-cost natural gas and liquids production in Pouce Coupe and Gordondale. Wells will be brought on production from 4 separate multi-well pads, which allows Birchcliff to reduce its environmental footprint and keep its per well costs low.
The following table sets forth the number and types of wells expected to be drilled and brought on production in 2022:
Area Total wells to be drilled in 2022 Total wells to be brought on
production in 2022(1)Pouce Coupe Montney D1 horizontal natural gas wells 9 12 Montney C horizontal natural gas wells 2 2 Basal Doig/Upper Montney horizontal natural gas wells 10 12 Total – Pouce Coupe 21 26 Gordondale Montney D1 horizontal oil wells 4 4 Montney D2 horizontal oil wells 5 5 Total – Gordondale 9 9 TOTAL – COMBINED 30 35
(1) Includes 5 wells that were drilled and rig released in Q4 2021.
Pouce Coupe
Birchcliff plans to drill 21 wells and bring 26 wells on production in Pouce Coupe in 2022. As described in further detail below, the wells will be brought on production from 3 separate multi-well pads.
- 6-Well Pad (13-29-77-12W6): This pad was drilled by Birchcliff in Q4 2021 and early January 2022. Wells were drilled in 2 different intervals (4 in the Montney D1 and 2 in the Basal Doig/Upper Montney) and targeted condensate-rich natural gas. The wells on this pad are currently undergoing completions operations and are expected to be onstream sometime in March 2022.
- 10-Well Pad (01-08-78-13W6): Birchcliff plans to drill this pad in Q1 2022. Wells will be drilled in 3 different intervals (5 in the Montney D1, 4 in the Basal Doig/Upper Montney and 1 in the Montney C) and target condensate-rich natural gas. This pad is a follow up from Birchcliff’s successful pad at 04-04-78-13W6 that was brought on production in 2021. This pad saw a step change in production from the Basal Doig/Upper Montney and Montney D1 intervals as a result of enhanced field development practices. Furthermore, the well targeting the Montney C interval is designed to further delineate the condensate-rich trends in this interval.
- 10-Well Pad (04-04-78-13W6): Birchcliff plans to drill this pad in Q1 and Q2 2022. Wells will be drilled in 3 different intervals (6 in the Basal Doig/Upper Montney, 3 in the Montney D1 and 1 Montney C) and target condensate-rich natural gas. Similar to the 01-08-78-13W6 pad, this pad is a follow up from Birchcliff’s successful 2021 program in this township. This pad is specifically designed to optimize brownfield infill field development, while minimizing the effects of fracture driven interaction (FDI).
Gordondale
- 9-Well Pad (06-35-77-11W6): Birchcliff plans to drill this pad in the southeast area of Gordondale in Q2 and Q3 2022. Wells will be drilled in 2 different intervals (4 in the Montney D1 and 5 in the Montney D2) and target light oil. These wells are offsetting high-rate light oil and natural gas producing wells drilled by Birchcliff in the southeastern portion of Gordondale over the last three years.
Environmental Stewardship
- In an effort to continue reducing Birchcliff’s overall carbon footprint, approximately $1.5 million will be directed towards various emissions reduction initiatives. Birchcliff has developed a comprehensive Methane Reduction and Retrofit Compliance Plan (the “MRRCP”) to retrofit or remove all remaining high-bleed pneumatic devices by the end of 2022. Upon completion of this project, Birchcliff expects to receive carbon offset credits over the next eight years.
- In addition, Birchcliff anticipates spending approximately $3.5 million in 2022 on its abandonment and reclamation activities, which are separate from the 2022 capital program. Birchcliff is in an enviable position as it has a focused asset base with minimal abandonment and reclamation obligations compared to the industry average.
FIVE YEAR PLAN
The Corporation’s board of directors has approved a new five year plan for 2022 to 2026 (the “Five Year Plan”) which is designed to increase shareholder value by: (i) maximizing free funds flow and reducing the Corporation’s indebtedness; (ii) increasing shareholder returns; and (iii) fully utilizing the available processing capacity of the Corporation’s existing infrastructure.
Targeted Key Metrics
The following tables set forth the targeted key metrics, commodity price assumptions and cumulative free funds flow sensitivity for the Five Year Plan(1):
Production and Financial Metrics
2022 2023 2024 2025 2026 Average Production (boe/d) 78,000 – 80,000 81,000 86,000 90,000 90,000 Liquids (%) 20% 20% 20% 19% 18% Adjusted Funds Flow (millions)(2)(3) $590 $640 $660 $620 $620 F&D Capital Expenditures (millions)(4) $240 – $260 $260 $255 $245 $225 Free Funds Flow (millions)(2) $330 – $350 $380 $405 $375 $395 Free Funds Flow per Basic Common Share(5) $1.25 – $1.32 $1.43 $1.53 $1.42 $1.49 Cumulative Free Funds Flow (millions)(2)(6) $330 – $350 $720 $1,125 $1,500 $1,895 (Total Debt) Cash at Year End (millions)(6)(7) ($175 – $195) $160 $540 $885 $1,250
Average Expenses and Commodity Price Assumptions
2022 2023 2024 2025 2026 Average Expenses ($/boe) Royalty(8) 3.10 – 3.30 3.20 3.25 3.10 3.10 Operating(8) 3.15 – 3.35 3.15 3.00 2.90 2.90 Transportation and other(5) 4.90 – 5.10 4.85 4.60 4.40 4.40 Interest(8) 0.50 – 0.60 0.02 – – – Income tax expense(8)(9) – – 1.75 3.25 3.30 Commodity Prices Average WTI price (US$/bbl) 76.00 76.00 76.00 76.00 76.00 Average WTI-MSW differential (CDN$/bbl) 5.00 5.00 5.00 5.00 5.00 Average AECO price (CDN$/GJ) 3.50 3.50 3.50 3.50 3.50 Average Dawn price (US$/MMBtu) 3.90 3.90 3.90 3.90 3.90 Average NYMEX HH price (US$/MMBtu) 4.00 4.00 4.00 4.00 4.00 Exchange rate (CDN$ to US$1) 1.26 1.26 1.26 1.26 1.26
Cumulative Free Funds Flow Sensitivity(10)
Estimated change to 2022 to 2026 cumulative free funds flow ($ millions) Change in WTI US$1.00/bbl 19.0 Change in NYMEX HH US$0.10/MMBtu 21.0 Change in Dawn US$0.10/MMBtu 29.2 Change in AECO CDN$0.10/GJ 18.5 Change in CDN/US exchange rate CDN$0.01 24.7
(1) For illustrative purposes only and should not be relied upon as indicative of future results. The internal projections, expectations and beliefs underlying the Five Year Plan are subject to change in light of ongoing results and prevailing economic and industry conditions. Birchcliff’s F&D capital budgets for 2023 to 2026 have not been finalized and are subject to approval by Birchcliff’s board of directors. Accordingly, the levels of F&D capital expenditures set forth herein are subject to change, which would have an impact on the targeted production, production commodity mix, adjusted funds flow, free funds flow, total debt and expenses set forth herein. See “Advisories – Forward-Looking Statements”.
(2) Non-GAAP financial measure. See “Non-GAAP and Other Financial Measures”.
(3) Birchcliff’s estimates of adjusted funds flow take into account the effects of its physical and financial basis swap contracts outstanding as at January 19, 2022 and exclude annual cash incentive payments that have not been approved by Birchcliff’s board of directors.
(4) The Five Year Plan contemplates that approximately 170 to 180 wells will be brought on production by the Corporation over 2022 to 2026.
(5) Non-GAAP ratio. See “Non-GAAP and Other Financial Measures”. Assumes 265 million common shares outstanding.
(6) The Corporation has used the mid-point of its 2022 guidance for free funds flow and total debt at year end in determining the cumulative free funds flow and (total debt) cash at year end for 2023 to 2026.
(7) Total debt is a capital management measure. See “Non-GAAP and Other Financial Measures”. The total debt amounts set forth in the table above assume the following: (i) that any free funds flow remaining after the payment of dividends, ARO and other amounts for administrative assets, financing fees and capital lease obligations is allocated towards debt reduction; (ii) that the timing of common share and preferred share dividends paid by the Corporation remains consistent with previous years, with the dividend rates and applicable taxes remaining unchanged; (iii) that there are approximately 265 million common, 2,000,000 Series A and 1,530,709 Series C Preferred Shares outstanding, with no redemptions of the Series A or the Series C Preferred Shares or buybacks of common shares occurring during 2022 to 2026; (iv) that no significant acquisitions are completed by the Corporation and there is no repayment of debt using the proceeds from asset dispositions or equity issuances; (v) that there are no proceeds received from the exercise of stock options or performance warrants; (vi) that the capital programs for each year will be carried out as currently contemplated and the level of capital spending set forth herein will be achieved; and (vii) the targets for production, production commodity mix, capital expenditures, adjusted funds flow, free funds flow and the commodity price and exchange rate assumptions set forth herein are met. The amounts set forth in the table above do not include annual cash incentive payments that have not been approved by Birchcliff’s board of directors.
(8) Supplementary financial measure. See “Non-GAAP and Other Financial Measures”.
(9) The Corporation currently expects that it will be required to pay Canadian income taxes starting in 2024.
(10) Illustrates the expected impact of changes in commodity prices and the CDN/US exchange rate on the Corporation’s target of potential cumulative free funds flow of $1.9 billion generated during 2022 to 2026. The calculated impact on cumulative free funds flow is only applicable within the limited range of change indicated. Calculations are performed independently and may not be indicative of actual results. Actual results may vary materially when multiple variables change at the same time and/or when the magnitude of the change increases.
Changes in assumed commodity prices and variances in production estimates can have an impact on the Corporation’s estimates of adjusted and free funds flow and the Corporation’s other metrics for the Five Year Plan, which impact may be material. In addition, any acquisitions and dispositions completed over the course of the Five Year Plan could have an impact on Birchcliff’s production, adjusted funds flow, free funds flow, expenses and total debt, which impact could be material. For further information, see “Advisories – Forward-Looking Statements”.
Details of the Five Year Plan29dk2902lhttps://boereport.com/29dk2902l.html
Maximizing Free Funds Flow and Reducing Indebtedness
The Five Year Plan is geared towards maximizing Birchcliff’s ability to generate free funds flow, which will allow the Corporation to significantly reduce indebtedness while also increasing shareholder value. Based on the Corporation’s targeted adjusted funds flow and F&D capital spending, the Five Year Plan projects that significant free funds flow will be generated in each year of the plan, with potential cumulative free funds flow of approximately $1.9 billion and annual free funds flow per basic common share of approximately $1.49 by the end of the five year period. In order to enhance Birchcliff’s ability to generate free funds flow, Birchcliff will focus on maintaining capital discipline over the course of the Five Year Plan, with F&D capital expenditures targeted to be significantly less than the Corporation’s targeted adjusted funds flow each year.
Birchcliff believes that continuing to reduce its indebtedness will reduce the risks to its business and increase shareholder value, while at the same time save the Corporation significant interest costs. Building off its significant debt reduction in 2021, free funds flow generated by Birchcliff will initially be prioritized towards debt reduction as it continues to focus on reducing its total debt over the course of 2022 and 2023. As illustrated above, the Corporation’s total debt could potentially be reduced to zero in 2023.
The potential to achieve zero total debt in 2023 is based on the assumptions set forth in note 7 to the table above under “Five Year Plan – Targeted Key Metrics”. The Five Year Plan set forth herein does not reflect any potential increases to the Corporation’s common share dividend, common share buybacks, redemptions of the Series A or Series C Preferred Shares or strategic acquisitions, all of which may receive consideration and could have an impact on the Corporation’s total debt levels and other metrics.
Increasing Shareholder Returns
Birchcliff remains committed to increasing shareholder returns. In the fourth quarter of 2021, Birchcliff doubled its quarterly common share dividend to $0.01 per share from $0.005 per share. Birchcliff was also active under its normal course issuer bid in 2021, purchasing a total of 5,242,700 common shares during the year at a weighted average price of $6.00 per share.
While free funds flow generated over the course of the Five Year Plan will initially be prioritized towards debt reduction, the potential for significant free funds flow provides the Corporation with optionality to consider additional sustainable increases to its common share dividend and common share buybacks over the course of the plan. The Five Year Plan provides for the potential to generate an average annual free funds flow per basic common share of approximately $1.48 over 2024 to 2026, providing for substantial capacity to further increase shareholder returns.
Any decision by the Corporation to further increase its common share dividend and the number of common shares to be purchased by the Corporation will depend on commodity prices and free funds flow and debt levels, among other things. Consideration may also be given to opportunities that would complement or otherwise improve the Corporation’s business and enhance long-term shareholder value, such as strategic acquisitions.
Fully Utilizing the Available Processing Capacity of the Corporation’s Existing Infrastructure
Birchcliff believes that one of the keys to creating shareholder value is fully utilizing the available processing capacity of its existing infrastructure, which is expected to drive down its operating and other cash costs on a per unit basis and maximize its operational efficiencies. This will result in the Corporation increasing its netbacks. In addition, increasing the Corporation’s production to fully utilize its available processing capacity will further enhance its ability to generate free funds flow.
Accordingly, the Five Year Plan contemplates that Birchcliff will fill its available processing capacity at the Pouce Coupe Gas Plant and utilize all of its available processing capacity at the AltaGas Facility by the end of 2024. Birchcliff believes that keeping such infrastructure at or near capacity will help to create additional shareholder value as outlined above and will also allow Birchcliff to leverage its previous capital investment in the Pouce Coupe Gas Plant and reduce the unutilized firm transportation capacity on the Nova Gas Transmission system which the Corporation is currently paying for. Birchcliff currently has no plans to invest in further phases of the Pouce Coupe Gas Plant.
ESG COMMITMENT
Birchcliff is committed to the responsible development of its assets and is one of the lowest emissions intensity producers in the industry. Continuing Birchcliff’s industry-leading environmental performance and promoting its strong safety culture continue to be top priorities for the Corporation. In addition, Birchcliff continues to invest financial resources and time to support its commitment to further reduce its impact, and the impact of the oil and gas industry as a whole, on the environment. Birchcliff is proud to be a partner in the Natural Gas Innovation Fund (“NGIF”) through two of its entities: NGIF Industry Grants organization and Cleantech Ventures Equity Fund. Birchcliff has been a member of NGIF Industry Grants since 2018 when it was expanded to include natural gas producers and is a founding member of NGIF Cleantech Ventures Equity Fund. Both NGIF initiatives were created by the Canadian Gas Association to support the funding of cleantech innovation in the natural gas value chain.
ABBREVIATIONS
AECO benchmark price for natural gas determined at the AECO ‘C’ hub in southeast Alberta ARO asset retirement obligations bbl barrel boe barrel of oil equivalent boe/d barrel of oil equivalent per day condensate pentanes plus (C5+) DCCET drill, case, complete, equip and tie-in ESG environmental, social and governance F&D finding and development G&A general and administrative GAAP generally accepted accounting principles for Canadian public companies which are currently International Financial Reporting Standards as issued by the International Accounting Standards Board GJ gigajoule GJ/d gigajoules per day HH Henry Hub m3 cubic metres Mcf thousand cubic feet MJ megajoule MMBtu million British thermal units MMBtu/d million British thermal units per day MSW price for mixed sweet crude oil at Edmonton, Alberta NGLs natural gas liquids consisting of ethane (C2), propane (C3) and butane (C4) and specifically excluding condensate NYMEX New York Mercantile Exchange OPEC Organization of the Petroleum Exporting Countries WTI West Texas Intermediate, the reference price paid in U.S. dollars at Cushing, Oklahoma, for crude oil of standard grade
NON-GAAP AND OTHER FINANCIAL MEASURES
This press release uses various “non-GAAP financial measures”, “non-GAAP ratios”, “supplementary financial measures” and “capital management measures” (as such terms are defined in NI 52-112), which are described in further detail below. These measures facilitate management’s comparisons to the Corporation’s historical operating results in assessing its results and strategic and operational decision-making and may be used by financial analysts and others in the oil and natural gas industry to evaluate the Corporation’s performance.
Non-GAAP Financial Measures
NI 52-112 defines a non-GAAP financial measure as a financial measure that: (i) depicts the historical or expected future financial performance, financial position or cash flow of an entity; (ii) with respect to its composition, excludes an amount that is included in, or includes an amount that is excluded from, the composition of the most directly comparable financial measure disclosed in the primary financial statements of the entity; (iii) is not disclosed in the financial statements of the entity; and (iv) is not a ratio, fraction, percentage or similar representation. The non-GAAP financial measures used in this press release are not standardized financial measures under GAAP and might not be comparable to similar measures presented by other companies where similar terminology is used. Investors are cautioned that non-GAAP financial measures should not be construed as alternatives to or more meaningful than the most directly comparable GAAP measures as indicators of Birchcliff’s performance. Set forth below is a description of the non-GAAP financial measures used in this press release.
Adjusted Funds Flow
Birchcliff defines adjusted funds flow as cash flow from operating activities before the effects of decommissioning expenditures and changes in non-cash operating working capital. Birchcliff eliminates settlements of decommissioning expenditures from cash flow from operating activities as the amounts can be discretionary and may vary from period to period depending on its capital programs and the maturity of its operating areas. The settlement of decommissioning expenditures is managed with Birchcliff’s capital budgeting process which considers available adjusted funds flow. Changes in non-cash operating working capital are eliminated in the determination of adjusted funds flow as the timing of collection and payment are variable and by excluding them from the calculation, the Corporation believes that it is able to provide a more meaningful measure of its operations and ability to generate cash on a continuing basis. Management believes that adjusted funds flow assists management and investors in assessing Birchcliff’s operating performance, as well as its ability to generate cash necessary to fund sustaining and/or growth capital expenditures, repay debt, settle decommissioning obligations and pay common share and preferred share dividends. The most directly comparable financial measure that is disclosed in the primary financial statements of the Corporation is cash flow from operating activities.
Free Funds Flow
Birchcliff defines free funds flow as adjusted funds flow less F&D capital expenditures. Management believes that free funds flow assists management and investors in assessing Birchcliff’s ability to further generate shareholder returns through a number of initiatives, including but not limited to, potential debt repayment, common share repurchases, preferred share redemptions, dividend increases and acquisitions. The most directly comparable financial measure that is disclosed in the primary financial statements of the Corporation is cash flow from operating activities.
Transportation and Other Expense
Birchcliff defines transportation and other expense as transportation expense plus marketing purchases minus marketing revenue. Birchcliff may enter into certain marketing purchase and sales arrangements with the objective of reducing any available transportation and/or fractionation fees associated with its take-or-pay commitments. Management believes that transportation and other expense assists management and investors in assessing Birchcliff’s total cost structure related to transportation activities. The most directly comparable financial measure that is disclosed in the primary financial statements of the Corporation is transportation expense.
Non-GAAP Ratios
NI 52-112 defines a non-GAAP ratio as a financial measure that: (i) is in the form of a ratio, fraction, percentage or similar representation; (ii) has a non-GAAP financial measure as one or more of its components; and (iii) is not disclosed in the financial statements of the entity. The non-GAAP ratios used in this press release are not standardized financial measures under GAAP and might not be comparable to similar measures presented by other companies where similar terminology is used. Set forth below is a description of the non-GAAP ratios used in this press release.
Total Debt to Adjusted Funds Flow Ratio
Birchcliff calculates total debt to adjusted funds flow ratio by dividing year-end total debt by full-year adjusted funds flow. Total debt to adjusted funds flow is a coverage ratio that provides management and investors with the ability to determine how long it would take the Corporation to repay its total debt if it devoted all of its adjusted funds flow to debt repayment.
Transportation and Other Expense Per Boe
Birchcliff calculates transportation and other expense per boe as aggregate transportation and other expense divided by the production (boe) in the applicable period.
Free Funds Flow Per Basic Common Share
Birchcliff calculates free funds flow per basic common share as aggregate free funds flow divided by the basic common shares outstanding in the applicable period.
Supplementary Financial Measures
NI 52-112 defines a supplementary financial measure as a financial measure that: (i) is, or is intended to be, disclosed on a periodic basis to depict the historical or expected future financial performance, financial position or cash flow of an entity; (ii) is not disclosed in the financial statements of the entity; (iii) is not a non-GAAP financial measure; and (iv) is not a non-GAAP ratio. The supplementary financial measures used in this press release include “royalty expense per boe”, “operating expense per boe”, “interest expense per boe” and “income tax expense per boe”. Such measures are calculated by dividing the applicable aggregate expense by the production (boe) in the applicable period.
Capital Management Measures
NI 52-112 defines a capital management measure as a financial measure that: (i) is intended to enable an individual to evaluate an entity’s objectives, policies and processes for managing the entity’s capital; (ii) is not a component of a line item disclosed in the primary financial statements of the entity; (iii) is disclosed in the notes to the financial statements of the entity; and (iv) is not disclosed in the primary financial statements of the entity. Set forth below is a description of the capital management measure used in this press release.
Total Debt
Birchcliff calculates total debt as the amount outstanding under the Corporation’s credit facilities plus adjusted working capital deficit (surplus). Management believes that total debt assists management and investors in assessing Birchcliff’s liquidity. Birchcliff previously classified total debt as a non-GAAP measure under CSA Staff Notice 52-306 – Non-GAAP Financial Measures.
ADVISORIES
Currency
Unless otherwise indicated, all dollar amounts are expressed in Canadian dollars and all references to “$” and “CDN$” are to Canadian dollars and all references to “US$” are to United States dollars.
MMBtu Pricing Conversions
$1.00 per MMBtu equals $1.00 per Mcf based on a standard heat value of 37.4 MJ/m3 or a heat uplift of 1.055 when converting from $/GJ.
Boe Conversions
Boe amounts have been calculated by using the conversion ratio of 6 Mcf of natural gas to 1 bbl of oil. Boe amounts may be misleading, particularly if used in isolation. A boe conversion ratio of 6 Mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.
Production
With respect to the disclosure of Birchcliff’s production contained in this press release: (i) references to “light oil” mean “light crude oil and medium crude oil” as such term is defined in National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities (“NI 51-101”); (ii) references to “liquids” mean “light crude oil and medium crude oil” and “natural gas liquids” (including condensate) as such terms are defined in NI 51-101; and (iii) references to “natural gas” mean “shale gas”, which also includes an immaterial amount of “conventional natural gas”, as such terms are defined in NI 51-101. In addition, NI 51-101 includes condensate within the product type of natural gas liquids. Birchcliff has disclosed condensate separately from other natural gas liquids as the price of condensate as compared to other natural gas liquids is currently significantly higher and Birchcliff believes presenting the two commodities separately provides a more accurate description of its operations and results therefrom.
Capital Expenditures
References in this press release to “F&D capital” denotes capital for land, seismic, workovers, drilling and completions and well equipment and facilities. Birchcliff’s F&D capital expenditures excludes any net acquisitions and dispositions, administrative asset expenditures and the capitalized portion of annual cash incentive payments that have not been approved by the board of directors.
Forward-Looking Statements
Certain statements contained in this press release constitute forward‐looking statements and forward-looking information (collectively referred to as “forward‐looking statements”) within the meaning of applicable Canadian securities laws. The forward-looking statements contained in this press release relate to future events or Birchcliff’s future plans, strategy, operations, performance or financial position and are based on Birchcliff’s current expectations, estimates, projections, beliefs and assumptions. Such forward-looking statements have been made by Birchcliff in light of the information available to it at the time the statements were made and reflect its experience and perception of historical trends. All statements and information other than historical fact may be forward‐looking statements. Such forward‐looking statements are often, but not always, identified by the use of words such as “seek”, “plan”, “focus”, “future”, “outlook”, “position”, “expect”, “project”, “intend”, “believe”, “anticipate”, “estimate”, “forecast”, “guidance”, “potential”, “proposed”, “predict”, “budget”, “continue”, “targeting”, “may”, “will”, “could”, “might”, “should”, “would”, “on track” and other similar words and expressions.
By their nature, forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward‐looking statements. Accordingly, readers are cautioned not to place undue reliance on such forward-looking statements. Although Birchcliff believes that the expectations reflected in the forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct and Birchcliff makes no representation that actual results achieved will be the same in whole or in part as those set out in the forward-looking statements.
