Hi Michael, I am a new subscriber to yours substack. Many thanks in advance for all the valuable knowledge you are imparting. Few questions on your thesis on Birchcliff.
1) Why do you think that Birchcliff has one of the best management teams in the industry? Can you give some of the reasons for that? What have they done historically to merit that high praise?
2) Being unhedged looks great when the gas price is high. However, they can go down as well in the near future (like WTI has been in a downtrend for the past few days). From my novice point of view, I have always think of hedging as a downside protection but capping the upside benefit as well. What are some of the best practices for hedging that the companies should employ?
3) It seems like Birchcliff can get debt free at the end of the year if the strip prices remain close to where we are? Based on that, Birchcliff promises to 10x its dividend. WOW!! Have you seen that happen before with other companies, and how do you analyze such claims? (I have been dinged by Shell before, so just want to be cautious with these high dividend yield players, Birchcliff's yield will go to 8-9% when they 10x the dividend in Q1'2023)
4) In the worst case scenario for gas price, can you guide us with an easy 'thumb of rule' or 'back of envelope' calculation, that gives us a rough estimation of what Birchcliff could make in such a scenario?
5) What is the lowest gas price you expect based on worsening fundamentals and supply/demand data?
The only things management of resource companies can control is costs and drilling programs and the degree to which they use financial leverage. Birchcliff under Tonken has industry leading costs (comparable to rival Peyto) and wisely decided to avoid excess financial leverage and eschew hedging. Being unhedged looks great at all times for debt free oil & gas companies with the ability to buy reserves from failing competitors when prices are low at a lower cost than drilling. The best practices are to stay out of the hedging casino and stick to your last - geology, petroleum engineering, etc.
I don't forecast natural gas prices which have been found to be log normally distributed.
Gas prices have low friction and can rise and fall sharply on minor supply-demand balances. Low prices curtail drilling and supply quickly becomes negative and prices rebound quickly with natural decine rates over 20% for most producers.
Birchcliff's costs are so low it is cash flow positive down to about US$1.25 a gigajoule and at lower prices has the balance sheet strength to simply shut in the gas and wait. With only 230 employees the company's overhead costs are less than $30 million.
Thanks a lot for your detailed reply, Michael. Few follow-up questions/comments
1) I understand that you dont forecast natural gas price in your models. However, it is an input into the revenue calculation. What would you recommend then?
2) In what scenarios do you think hedging is a good choice for oil and gas companies?
I don't make recommendations. By publishing my models, readers can make their own models and assess what outcomes happen at different prices.
I don't think hedging is ever a good choice for commodity companies. If they can predict commodity prices, they can make billions on the CME. If they can't they are gambling with my money and I prefer to make my own bets.
Michael, I've been digging into the numbers more and looked at the numbers in RBC base case. I created this dashboard to look at various dimensions of valuation and found $BIR.TO to be the best valuation right now in Canadian E&P
Tonken has it right! My top long position is BIR.TO ! I am enthusiastic about planned dividend increase in 2023 (80cents/share/year).
Hi Michael, I am a new subscriber to yours substack. Many thanks in advance for all the valuable knowledge you are imparting. Few questions on your thesis on Birchcliff.
1) Why do you think that Birchcliff has one of the best management teams in the industry? Can you give some of the reasons for that? What have they done historically to merit that high praise?
2) Being unhedged looks great when the gas price is high. However, they can go down as well in the near future (like WTI has been in a downtrend for the past few days). From my novice point of view, I have always think of hedging as a downside protection but capping the upside benefit as well. What are some of the best practices for hedging that the companies should employ?
3) It seems like Birchcliff can get debt free at the end of the year if the strip prices remain close to where we are? Based on that, Birchcliff promises to 10x its dividend. WOW!! Have you seen that happen before with other companies, and how do you analyze such claims? (I have been dinged by Shell before, so just want to be cautious with these high dividend yield players, Birchcliff's yield will go to 8-9% when they 10x the dividend in Q1'2023)
4) In the worst case scenario for gas price, can you guide us with an easy 'thumb of rule' or 'back of envelope' calculation, that gives us a rough estimation of what Birchcliff could make in such a scenario?
5) What is the lowest gas price you expect based on worsening fundamentals and supply/demand data?
Many thanks for your guidance in advance.
The only things management of resource companies can control is costs and drilling programs and the degree to which they use financial leverage. Birchcliff under Tonken has industry leading costs (comparable to rival Peyto) and wisely decided to avoid excess financial leverage and eschew hedging. Being unhedged looks great at all times for debt free oil & gas companies with the ability to buy reserves from failing competitors when prices are low at a lower cost than drilling. The best practices are to stay out of the hedging casino and stick to your last - geology, petroleum engineering, etc.
I don't forecast natural gas prices which have been found to be log normally distributed.
Gas prices have low friction and can rise and fall sharply on minor supply-demand balances. Low prices curtail drilling and supply quickly becomes negative and prices rebound quickly with natural decine rates over 20% for most producers.
Birchcliff's costs are so low it is cash flow positive down to about US$1.25 a gigajoule and at lower prices has the balance sheet strength to simply shut in the gas and wait. With only 230 employees the company's overhead costs are less than $30 million.
Thanks a lot for your detailed reply, Michael. Few follow-up questions/comments
1) I understand that you dont forecast natural gas price in your models. However, it is an input into the revenue calculation. What would you recommend then?
2) In what scenarios do you think hedging is a good choice for oil and gas companies?
I don't make recommendations. By publishing my models, readers can make their own models and assess what outcomes happen at different prices.
I don't think hedging is ever a good choice for commodity companies. If they can predict commodity prices, they can make billions on the CME. If they can't they are gambling with my money and I prefer to make my own bets.
Michael, I've been digging into the numbers more and looked at the numbers in RBC base case. I created this dashboard to look at various dimensions of valuation and found $BIR.TO to be the best valuation right now in Canadian E&P
https://datastudio.google.com/u/1/reporting/16bc952b-633f-4a14-ad85-0032f7ba9306/page/sw7BB
Agree.
Thank-you for all your sharing of insights. I really appreciate you taking the time to write up your thoughts