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.
Hi Michael, I added BIR today. I’m curious how your model values the company at todays lower commodity prices? Thanks for all your work.
Hi Michael,
Wanted to thank you for sharing your insights to everyone for free. You are an incredible asset for small retail investors like me. Thank you for all you do. Merry Christmas and a Happy New Year.
Cheers!