Birchcliff sell-off is opportunity

Eight percent plus dividend, steady growth, no debt

Birchcliff Energy (BIR) has sold off in recent weeks and now trades at CAD$9.10 with a CAD$0.80 dividend rate planned for 2023 - at today’s price an 8.8% yield.

Based on management’s projection and my own financial model, I see Birchcliff realizing annual production of ~82,000 Boe/day (primarily natural gas) and a netback after all costs (except income taxes) of about CAD$32.00 per Boe for annual operating cash flow in the range of CAD$970 million. Capital expenditures are planned at CAD$270 million so cash flow before income taxes should amount to CAD$700 million more or less. Dividend at CAD$0.80 is an annual outflow of a bit more than CAD$212 million and income taxes I estimate will come in around CAD$45 million so by year end 2023 Birchcliff should have cash of roughly CAD$170 million and no debt.

Birchcliff has 266 million shares outstanding. I value Birchcliff common equity at ~CAD$5 billion (a higher than average multiple of a bit more than five times EBITDA plus cash balance) putting my valuation of BIR.TO shares in the CAD$18 to $20 range, more than double the current price.

My CAD$32.00 netback is based on the following assumptions (all in Canadian dollars:

$6.00 Natural gas price per gigajoule (77% of output)
$90.00 oil & liquids (23% of output)
$3.60 operating costs
$5.40 transportation (diversified marketing to Dawn, AECO, Alliance and a basis hedge to Henry Hub)
$5.15 royalty expense (this one is not much better than a guess since royalty rates may change)

In my opinion, Birchcliff has become a low risk dividend play with growing production, and by my estimation the shares are undervalued by half. The market seems to be discounting a deep and persistent recession which is a non-trivial risk, but the supply-demand picture suggests it will not tank natural gas prices as much as is implied by the market today.

I like the risk and own 112,000 shares of Birchcliff. I have no plans to sell any.