Birchcliff's new capital schedule adds value as I see it

The Twittersphere anxiety over the change is likely wrong.

In the release where Birchcliff Energy (BIR.TO) announced the CAD$0.20 special dividend, the company shifted Q1 2023 capital expenditures into Q4 2022 but did not show any material change in projected 2023 production. Led by @peterlinder the Twittersphere went into apoplexy based on his conclusion this signaled either a decline in capital efficiency or a higher decline rate or inflated drilling costs, and Linder demanded an explanation from Birchcliff. I challenged Peter’s conclusion and his response was typical of those cornered - he blocked me.

When did Birchcliff become obliged to answer a Twitter question from an investor who touted the coming dividend announcement before it was made and likely got himself on the wrong side of a trade when the market didn’t greet the announcement with a higher share price? If that happened to Peter, he has no one to blame but himself.

Why did the changed guidance confuse Linder and others? Here’s a clip of the 2022 guidance changes which show a bump in capital outlays of CAD$80 million, and a decline in adjusted funds flow of CAD$95 million, with slight changes to commodity prices, royalties, operating costs and transportation costs making up the CAD$15 million balance. Nothing to see there.

The changes to 2023 guidance became the issue since production guidance was essentially unchanged despite the CAD$80 million bump in 2024 capital outlays. Here is that guidance which shows a 3,000 to 5,000 increase in annual average production, something already expected based on prior guidance without the scheduling change.

In a nutshell, the issue is this - production for 2023 is projected at 81,000 to 83,000 versus 78,000 boe/day in 2022, unchanged from prior 2023 guidance. Why no increase?

The answer may lie in the DCCET schedule. Q4 2022 capital expenditures will show up in Q1 2023 production, and not impact 2022. The same will happen in 2023 if the 2023 capital budget is shifted towards Q4. Birchcliff has traditionally weighted its capital expenditures to the first three quarters of each year shown below

Now the company plans double or triple Q4 drilling. With a change to higher Q4 capital expenditures, production increases shift forward. The ET part of DCCET takes place at the end of drilling and production follows. Q4 capital outlays result in Q1 production increases. Spring break up affects drilling times and weighting capital expenditures to the following weeks will show increased production in the same year as the capital is deployed, but capital spent in Q4 of a given year will affect the following year’s results.

What I believe Birchcliff has done is rescheduled its capital not only for 2022 but also for 2023 and future years, and by shifting capital outlays to Q4 will achieve two things - first, production increases will come on during the winter when prices are higher and second, the shift will manifest itself in 2023 (the first year of this change) in an apparent decline in capital efficiency since the calendar year does not match the drilling cycle and the drilling cycle has been changed.

I believe this since there is no reason whatsoever to believe the economics of Montney-Doig drilling have changed materially and Birchcliff has a great record of cost control and capital efficiency. Knee jerk reactions to changed schedules are unwarranted and in my opinion display an amateurish level of analysis from people who should know better.

If the company had seen a decline in reservoir quality, drilling efficiency or costs it would have said so under Canada’s continuous disclosure laws and given the level of transparency we see from Birchcliff and the materiality of such an occurrence. I would be surprised if that happened and I don’t buy the anxiety displayed by Peter Linder or anyone else. Time will tell.