Birchcliff Energy: Investors over react to low commodity prices

This creates opportunity for patient investors

I see a lot of chatter on Twitter panning Birchcliff Energy (BIR.TO) for the drop in its stock price of about 40% in the past year and for paying a dividend that is not covered by current cash flow after capital outlays despite the company’s wise decision to reduce its dividend to CDN$0.10 per quarter from CDN$0.20 just released with its 2024 budget. Here is an example of the chatter.

Dividends are a financing decision and natural gas prices have fallen sharply owing to this warm winter, and competent management reacts with changes to capital budgets and dividend policies. Investors who think otherwise should buy bonds.

The actual value of Birchcliff and for that matter every commodity based company is best estimated using a modified Black Scholes recognizing that commodity reserves are a call option on future commodity prices. With 986 million Boe of proven reserves and 669 Boe of probably reserves, the value of Birchcliff estimated with Black Scholes is over CDN$18 a share.

Investing in commodity based companies carries risk. The best outcomes arrive from buying shares in those companies when commodity prices are low and patiently waiting. Avoid those with too much debt or those are so focused on quarterly results and stock price they squander resources buying back stock or lack the courage to adust their dividend policies to the state of the industry and their individual economics.

I hold 150,000 shares of Birchcliff which I started buying at $0.88 a share and after receiving CDN$1.00 in dividends in the past year often think of the holding as a “carried interest”. Investors who think of themselves as “traders” and believe they can “time the market” get upset when reality dashes their hopes, while patient investors look past the market weakness. Birchcliff is deeply undervalued in my opinion and I will likely add to my holding.