Birchcliff Energy Ltd. 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.
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.”
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”.
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.
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.
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).
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.
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
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.
Details of the Five Year Plan
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.
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.