Birchcliff Energy Ltd. is pleased to announce that its board of directors has declared a quarterly cash dividend of $0.20 per common share for the quarter ending March 31, 2023. Birchcliff is also pleased to announce its five-year plan for 2023 to 2027 and its 2023 budget and guidance.
“Our board of directors has approved a new five-year plan for 2023 to 2027, which is designed to generate substantial free funds flow, deliver significant returns to shareholders and establish a meaningful cash position, while achieving disciplined production growth of 10% over the five-year period(1). The five-year plan provides for potential cumulative free funds flow(2) of approximately $2.0 billion by the end of the five-year period, which provides us with the ability to deliver significant shareholder returns. Our board of directors has also approved the previously announced increase to our annual base dividend to $0.80 per common share for 2023, which will be declared and paid quarterly at the rate of $0.20 per common share. The five-year plan contemplates potential significant excess free funds flow after our targeted finding and development (“F&D”) capital expenditures and the payment of the base dividend, providing us with significant flexibility to further increase shareholder returns and invest in our business, depending on commodity prices,”(3) commented Jeff Tonken, Chief Executive Officer of Birchcliff.
“With respect to 2023, our board of directors has approved an F&D capital budget of $260 million to $280 million, which is expected to deliver 5% production growth over 2022(4). Based on this targeted production and current strip prices(5), we expect to generate approximately $570 million of adjusted funds flow(2) and $290 million to $310 million of free funds flow in 2023 and pay dividends to our shareholders of approximately $213 million(6), resulting in excess free funds flow(2) of approximately $77 million to $97 million in 2023.”(7)
“We had an excellent year in 2022 which saw us safely and successfully execute our 2022 capital program, significantly reduce our indebtedness and redeem all of our issued and outstanding preferred shares for approximately $88.2 million, while returning $128.9 million to our common shareholders through dividends and common share buybacks. We look forward to announcing our unaudited results for the year ended December 31, 2022 on February 15, 2023.”
2023 DIVIDEND INCREASE AND DECLARATION OF Q1 2023 QUARTERLY DIVIDEND
As part of its commitment to increasing shareholder returns, Birchcliff’s board of directors (the “Board”) has approved the previously announced increase to the Corporation’s annual base dividend to $0.80 per common share for 2023. This annual base dividend will be declared and paid quarterly at the rate of $0.20 per common share, at the discretion of the Board.
In connection therewith, the Board has declared a quarterly cash dividend of $0.20 per common share for the quarter ending March 31, 2023, which represents a 10-fold increase over the previous quarterly dividend of $0.02 per common share. The dividend will be payable on March 31, 2023 to shareholders of record at the close of business on March 15, 2023. The ex-dividend date is March 14, 2023. The dividend has been designated as an eligible dividend for the purposes of the Income Tax Act (Canada).
In Q4 2022, Birchcliff paid a special dividend of $0.20 per common share. Together with the $0.20 dividend for Q1 2023, this will be the second consecutive quarter in which Birchcliff has paid a cash dividend of $0.20 to its shareholders.
FIVE-YEAR PLAN
The Board has approved a new five-year plan for 2023 to 2027 (the “Five-Year Plan”), which is designed to generate substantial free funds flow, deliver significant returns to shareholders and establish a meaningful cash position, while achieving disciplined production growth to fully utilize the Corporation’s existing processing and transportation capacity. The Five-Year Plan takes a balanced approach to increasing returns to shareholders, while investing in the long-term sustainability and profitability of the Corporation.
Highlights of the Five-Year Plan
Substantial Free Funds Flow and Capital Discipline
- Based on the Corporation’s forecasted adjusted funds flow, F&D capital spending and commodity price assumptions, the Five-Year Plan projects that substantial free funds flow will be generated in each year of the plan, with the potential for cumulative free funds flow of approximately $2.0 billion by the end of the five-year period.
- In order to enhance its ability to generate free funds flow, Birchcliff will focus on maintaining capital discipline over the course of the Five-Yea- Plan, with F&D capital expenditures targeted to be significantly lower than the Corporation’s forecasted adjusted funds flow each year.
Delivering Significant Shareholder Returns and Establishing a Cash Position
- Birchcliff’s anticipated free funds flow over the course of the Five-Year Plan provides it with the ability to deliver significant shareholder returns.
Birchcliff currently expects to use its base dividend as its primary mechanism for delivering shareholder returns over the course of the Five-Year Plan, which may be supplemented with special dividends.
- Birchcliff’s annual base dividend of $0.80 per common share in 2023 ($213 million annually) represents an annual dividend yield of approximately 9% in 2023, based on the closing price of the common shares of $9.13 on January 17, 2023.
- The potential significant excess free funds flow after the Corporation’s targeted F&D capital expenditures and the payment of the base dividend on the common shares provides the Corporation with significant flexibility, allowing it to focus on ways to further increase shareholder returns and enhance long-term shareholder value. Birchcliff will continue to strategically evaluate the potential uses for its excess free funds flow, which may include special dividends, increases to the base dividend, building cash on the balance sheet and/or further investment in its business, taking into account the business environment, commodity prices and the amount of excess free funds flow available.
- Although the Five-Year Plan contemplates an annual base dividend of $0.80 per common share, it also illustrates that the Corporation has the potential capacity to increase the base dividend, subject to strong commodity prices and the discretion of the Board.
- In addition, Birchcliff currently expects to use a portion of its excess free funds flow to establish a meaningful cash position, subject to strong commodity prices. This will help to protect the Corporation’s base dividend and capital programs in the event of a downturn in commodity prices and/or economic conditions and provide the Corporation with optionality to pursue various opportunities to enhance long-term shareholder value.
- Depending on commodity prices, the Corporation will consider further investment in its business and accelerating the production growth contemplated in the Five-Year Plan, as well as strategic acquisitions and other opportunities that would enhance long-term shareholder value.
Birchcliff currently anticipates that it will continue to repurchase its common shares to help offset the dilution resulting from the exercise of stock options and will continue to evaluate opportunistic share buybacks.
Disciplined Production Growth Utilizing Existing Available Processing and Transportation Capacity
- The Five-Year Plan is focused on organically growing the Corporation’s production utilizing its existing available processing and transportation capacity. The Corporation is targeting production growth of 10% from 2023 to 2027, with a targeted annual average production rate of approximately 90,000 boe/d in 2027, subject to commodity prices.
- The Five-Year Plan contemplates that Birchcliff will fill its existing available processing capacity at its 100% owned and operated natural gas processing plant in Pouce Coupe (the “Pouce Coupe Gas Plant”) and utilize all of its available processing capacity at AltaGas’ deep-cut sour gas processing facility in Gordondale (the “AltaGas Facility”) by the end of 2025. The Five-Year Plan forecasts that a total of 182 wells will be brought on production over the course of the five-year period. Birchcliff expects that its rate of drilling will increase in 2024 and 2025 in order to bring on production the wells necessary to fill the existing processing capacity.
- Fully utilizing the available processing capacity of the Corporation’s existing infrastructure is expected to drive down its per unit operating and other cash costs as production steadily increases, which should result in increased netbacks. In addition, increasing the Corporation’s production to fully utilize its existing available processing and transportation capacity will further drive its ability to generate free funds flow.
Extensive Drilling Inventory
Birchcliff’s extensive inventory of low-risk, potential future horizontal drilling locations supports its targeted production growth to 90,000 boe/d during the Five-Year Plan and beyond, without the need to rely on acquisitions of assets or Crown land. All of the Corporation’s lands are located within the Province of Alberta.
As at December 31, 2021, Birchcliff had 730.7 potential net future horizontal drilling locations(8) in its core areas of Pouce Coupe and Gordondale to which proved plus probable reserves have been attributed by the Corporation’s independent qualified reserves evaluator. Assuming an average of 30 net wells required per year, these booked potential locations provide the Corporation with approximately 23 years of drilling inventory(9).
In addition, Birchcliff has identified in Pouce Coupe and Gordondale approximately 3,084 unbooked potential net future horizontal drilling locations(8) as at December 31, 2021, which provide the Corporation with further optionality for future growth.
Optionality for Further Growth at Pouce Coupe and Gordondale
- Birchcliff’s drilling inventory provides it with optionality to consider additional growth beyond its targeted production rate of 90,000 boe/d, to approximately 105,000 boe/d, subject to strong commodity prices.
- Birchcliff has agreed to acquire an additional 80 MMcf/d of firm receipt service on the NGTL system with an estimated in-service date in Q4 2026. This additional service, together with Birchcliff’s existing firm receipt service, gives it the ability to grow its production as outlined above, should commodity prices and market conditions meet Birchcliff’s expectations for growth. In the event market conditions are not favourable for further growth, Birchcliff can, with one year’s notice, reduce its existing firm receipt service to keep its production flat at approximately 90,000 boe/d.
- This optionality for further growth in 2026 roughly coincides with the anticipated timing for the commencement of Phase 1 of LNG Canada’s LNG export facility(10), which Birchcliff believes will have a long-term positive impact on natural gas prices in Western Canada.
- The Five-Year Plan set forth herein does not reflect any potential special dividends, increases to the Corporation’s base dividend, common share buybacks or further investment in its business, all of which may receive consideration, and could have an impact on the Corporation’s forecast metrics. Changes in assumed commodity prices and variances in production forecasts can have an impact on the Corporation’s forecasts of adjusted funds flow and free funds flow and the Corporation’s other metrics for the Five-Year Plan, which impact could be material. In addition, any acquisitions or dispositions completed over the course of the Five-Year Plan could have an impact on Birchcliff’s forecasts and assumptions set forth herein, which impact could be material.
2023 F&D CAPITAL BUDGET
The Board has approved a disciplined F&D capital budget of $260 million to $280 million for 2023, which is designed to deliver 5% production growth over 2022 and generate free funds flow of $290 million to $310 million.
The budget is fully funded, with the Corporation’s F&D capital expenditures representing approximately 47% of Birchcliff’s anticipated 2023 adjusted funds flow(11). Birchcliff’s F&D capital budget and base dividend of $0.80 per common share for 2023 would remain fully funded at an average WTI price of US$70.00/bbl, an average AECO price of CDN$3.00/GJ, an average Dawn price of US$3.25/MMBtu and an average NYMEX HH price of US$3.35/MMBtu(11)(12).
Highlights of the 2023 F&D Capital Budget and Guidance
Disciplined Production Growth
Based on its targeted F&D capital expenditures, Birchcliff expects to deliver annual average production of 81,000 to 83,000 boe/d in 2023, which represents a 5% increase over Birchcliff’s anticipated 2022 annual average production.
Efficient Two-Drilling Rig Program
- The 2023 capital program contemplates that Birchcliff will drill 23 wells and bring 32 wells on production in 2023, all of which will be 100% working interest.
- Similar to 2022, the 2023 capital program has been designed to utilize multi-well pads and two drilling rigs, which is more operationally efficient for the Corporation. Birchcliff has secured multi-year contracts with its key service providers and ordered various long-lead items, which will help to ensure the efficient execution of the Corporation’s 2023 capital program, as well as help Birchcliff mitigate inflationary pressures and manage supply chain constraints by ensuring security of equipment and services.
Significant Adjusted Funds Flow and Free Funds Flow
- Birchcliff expects to generate adjusted funds flow of approximately $570 million in 2023(13) and free funds flow of approximately $290 million to $310 million in 2023, based on current strip prices.
- 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 fully participate in any strengthening of commodity prices in 2023 above current strip prices.
Delivering Shareholder Returns
Birchcliff plans to pay an annual base dividend of $0.80 per common share in 2023 ($213 million annually). This annual base dividend will be declared and paid quarterly at the rate of $0.20 per common share, at the discretion of the Board.
Excess Free Funds Flow
After the payment of its targeted base dividend of $213 million in 2023, Birchcliff is forecasting that it will have approximately $77 million to $97 million of excess free funds flow in the year, which is expected to be primarily allocated towards debt reduction.
Capital Activities
Birchcliff’s 2023 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 multi-well pads, which allows Birchcliff to reduce its environmental footprint and keep its per well costs low. The program builds off the technical and operational knowledge Birchcliff gained from its previous capital programs. As previously announced on October 13, 2022, Birchcliff accelerated the execution of its 2023 capital program into Q4 2022, drilling 9 wells that will be brought on production in 2023.
In Pouce Coupe, Birchcliff plans to drill 21 wells and bring 30 wells on production in 2023 from 5 pads targeting a mix of liquids-rich and high-rate natural gas wells placed in the lower Montney and upper Montney/Doig intervals. The program is designed to deliver profitable production growth with robust returns that will be further enhanced as Birchcliff progressively fills the processing capacity of its existing available infrastructure. As part of the 2023 program for Pouce Coupe, Birchcliff will continue to make significant investments in gas gathering pipelines to support future field development. In addition, the Corporation plans to install approximately 20 km of fuel gas lines that will provide long-term economic and environmental benefits. By delivering natural gas to existing and future sites, Birchcliff’s adoption of bi-fuel technology will reduce emissions and costs. In addition, the fuel gas will be used to enhance production and reduce future well downtime by installing gas lift systems where appropriate.
In Gordondale, Birchcliff plans to drill and bring 2 wells on production in 2023, which are expected to keep the AltaGas Facility full during the year. The pad is strategically placed to target high-rate, liquids-rich wells in the Montney D1 and D2 intervals.
Environmental Stewardship
Birchcliff anticipates spending approximately $3.5 million in 2023 on its abandonment and reclamation activities. Birchcliff is in an enviable position as it has a focused asset base with minimal abandonment and reclamation obligations compared to the industry average.
Birchcliff’s 2023 guidance for its production is unchanged from its preliminary guidance. Birchcliff’s 2023 guidance for F&D capital expenditures of $260 million to $280 million is slightly higher than its preliminary guidance of $240 million to $270 million as a result of higher inflation and the inclusion of some minor additional capital projects. Primarily as a result of a lower than anticipated commodity price forecast for 2023, Birchcliff’s 2023 guidance for its adjusted funds flow, free funds flow and excess free funds flow is lower than its preliminary guidance of $855 million, $585 million to $615 million and $370 million to $400 million, respectively. Birchcliff’s 2023 guidance for its royalty expense is lower than its preliminary guidance of $4.95 to $5.15 per boe as a result of a lower than anticipated commodity price forecast for 2023.
In addition, the Corporation had previously forecasted that it would have a total surplus of $295 million to $325 million at December 31, 2023 and have a total surplus at the end of the Q1 2023. Primarily as a result of a lower than anticipated commodity price forecast for 2023, the Corporation is now forecasting that it will have total debt of $50 million to $70 million at December 31, 2023. Birchcliff continues to believe that operating with little to no debt is in the best interests of the Corporation over the long-term, as it increases the resiliency and sustainability of the Corporation. Accordingly, Birchcliff will continue to progress towards its goal of reaching zero total debt over the course of 2023.
Changes in assumed commodity prices and variances in production forecasts can have an impact on the Corporation’s forecasts of adjusted funds flow and free funds flow and the Corporation’s other guidance, which impact could be material. In addition, any acquisitions or dispositions completed over the course of 2023 could have an impact on Birchcliff’s 2023 guidance and assumptions set forth herein, which impact could be material.
