Birchcliff Energy Ltd. Announces Solid Q3 2019 Results and Preliminary Outlook for 2020

Birchcliff Energy Ltd. (“Birchcliff” or the “Corporation”) (TSX: BIR) is pleased to announce its financial and operational results for the three and nine months ended September 30, 2019 and its preliminary outlook for 2020. Birchcliff’s unaudited interim condensed financial statements for the three and nine months ended September 30, 2019 and related management’s discussion and analysis (the “MD&A”) will be available on its website at www.birchcliffenergy.com and on SEDAR at www.sedar.com. Birchcliff is also pleased to provide an operational update.

“We had solid results in the third quarter, which were underpinned by the strong performance of our assets, our low-cost structure and the successful execution of our capital program. We had record quarterly average production of 80,548 boe/d and record low operating costs of $2.75/boe. We generated $63 million of adjusted funds flow and $23 million of free funds flow in the quarter. We are currently seeing the benefit of recently improved prices at AECO and we are on track to achieve our 2019 annual average production guidance of 77,000 to 79,000 boe/d,” commented Jeff Tonken, President and Chief Executive Officer of Birchcliff. “Over the next two years, we plan to utilize the excess capacity of our 100% owned and operated natural gas processing plant in Pouce Coupe to drive free funds flow generation and maximize efficiencies. We are committed to protecting our balance sheet and our capital spending in 2020 will be targeted to either approximate or be less than our forecast of adjusted funds flow. Although we have not yet finalized our 2020 plans, we currently expect F&D capital spending to be in the range of $250 to $350 million with annual average production expected to be 78,000 to 82,000 boe/d.”

Highlights

• Achieved record quarterly average production of 80,548 boe/d in Q3 2019, a 2% increase from Q3 2018.
• Liquids accounted for approximately 23% of Birchcliff’s total production in Q3 2019 as compared to approximately 19% in Q3 2018. Birchcliff’s total liquids production increased by 18% from Q3 2018.
• Delivered adjusted funds flow of $63.0 million, or $0.24 per basic common share, in Q3 2019, a 16% decrease and a 14% decrease, respectively, from Q3 2018.
• Generated $22.8 million of free funds flow in Q3 2019 and $54.0 million in the nine months ended September 30, 2019.
• Achieved record low operating expense of $2.75/boe in Q3 2019, a 20% decrease from Q3 2018.
• Realized an operating netback of $9.77/boe in Q3 2019, a 25% decrease from Q3 2018.
• Continued with the successful and efficient execution of its 2019 capital program, drilling 6 (6.0 net) wells and bringing 4 (4.0 net) wells on production in Q3 2019. F&D capital expenditures were $40.2 million in the quarter.
• Paid $7.0 million in common share dividends in the quarter, with $20.9 million in dividends paid to common shareholders in the nine months ended September 30, 2019.

This press release contains forward-looking statements within the meaning of applicable securities laws. For further information regarding the forward-looking statements contained herein, see “Advisories – Forward-Looking Statements”. In addition, this press release contains references to “adjusted funds flow”, “adjusted funds flow per basic common share”, “free funds flow”, “operating netback”, “adjusted funds flow netback”, “total cash costs” and “total debt”, which do not have standardized meanings prescribed by GAAP and therefore may not be comparable to similar measures presented by other companies where similar terminology is used. For further information regarding these non-GAAP measures, see “Non-GAAP Measures”.

FINANCIAL AND OPERATIONAL HIGHLIGHTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019

Q3 2019 FINANCIAL AND OPERATIONAL RESULTS

Production

Birchcliff’s production averaged 80,548 boe/d in Q3 2019, a 2% increase from 79,331 boe/d in Q3 2018. The increase was primarily attributable to the incremental production from new horizontal oil wells in Gordondale and horizontal condensate-rich natural gas wells in Pouce Coupe that were brought on production in Q3 2019.

Liquids accounted for approximately 23% of Birchcliff’s total production in Q3 2019 as compared to approximately 19% in Q3 2018, with total liquids production increasing by 18% from Q3 2018. The change in the commodity production mix was primarily attributable to the addition of condensate-rich natural gas wells in Pouce Coupe and an increase in C3+ extracted from the natural gas stream at Birchcliff’s 100% owned and operated natural gas processing plant located in Pouce Coupe (the “Pouce Coupe Gas Plant”).

Adjusted Funds Flow

Birchcliff’s adjusted funds flow for Q3 2019 was $63.0 million, or $0.24 per basic common share, a 16% decrease and a 14% decrease, respectively, from $75.4 million and $0.28 per basic common share in Q3 2018. The decreases were primarily due to lower reported revenue and an increase in transportation and other expense as a result of Birchcliff’s increased Dawn and AECO firm service, partially offset by lower operating and royalty expenses and a realized gain on financial instruments in Q3 2019 as compared to a realized loss on financial instruments in Q3 2018. Revenue received by the Corporation was lower mainly due to an 18% decrease in the corporate average realized sales price, partially offset by higher total liquids production.

Net Loss to Common Shareholders

Birchcliff recorded a net loss to common shareholders of $46.9 million, or $0.18 per basic common share, in Q3 2019 as compared to net income to common shareholders of $6.7 million and $0.03 per basic common share in Q3 2018. The change to a net loss position from a net income position was primarily due to an unrealized mark-to-market loss on financial instruments of $60.9 million ($46.9 million, net of tax) recorded in Q3 2019 as compared to $7.3 million ($5.4 million, net of tax) in Q3 2018, as well as lower adjusted funds flow.

Operating Expense

Birchcliff’s operating expense was $2.75/boe in Q3 2019, a 20% decrease from $3.45/boe in Q3 2018. The decrease was primarily due to: (i) a step-down reduction in natural gas processing fees which became effective January 1, 2019 at AltaGas’ deep-cut sour gas processing facility in Gordondale; (ii) reduced take-or-pay processing commitments in Pouce Coupe beginning in November 2018 which resulted in natural gas being redirected from third-party facilities to the Pouce Coupe Gas Plant; and (iii) increased operating efficiencies resulting from expanded liquids-handling capabilities in Pouce Coupe.

Operating Netback

Birchcliff’s operating netback was $9.77/boe in Q3 2019, a 25% decrease from $13.03/boe in Q3 2018. The decrease was primarily due to an 18% decrease in the corporate average realized sales price, partially offset by lower per boe operating and royalty expenses.

Total Cash Costs

Birchcliff’s total cash costs were $9.36/boe in Q3 2019, a 7% decrease from $10.09/boe in Q3 2018. The decrease was primarily due to lower per boe operating, interest and royalty expenses, partially offset by higher per boe transportation and other expense.

Pouce Coupe Gas Plant Netbacks

During the nine months ended September 30, 2019, Birchcliff processed approximately 73% of its total corporate natural gas production and 63% of its total corporate production through the Pouce Coupe Gas Plant as compared to 68% and 58%, respectively, during the nine months ended September 30, 2018. The following table sets forth Birchcliff’s average daily production and operating netback for wells producing to the Pouce Coupe Gas Plant for the periods indicated:

Birchcliff’s liquids-to-gas ratio increased by 85% as compared to the nine months ended September 30, 2018 primarily due to: (i) the re-configuration of Phases V and VI of the Pouce Coupe Gas Plant in Q4 2018 which provided for shallow-cut capability, allowing Birchcliff to extract C3+ from the natural gas stream; and (ii) specifically targeted condensate-rich natural gas wells in Pouce Coupe. The amount of condensate from Montney horizontal natural gas wells being produced to the Pouce Coupe Gas Plant increased by 58% to 3,845 bbls/d in the nine months ended September 30, 2019 from 2,438 bbls/d in the nine months ended September 30, 2018. The increase in the liquids-to-gas ratio improved Birchcliff’s average realized sales price and operating netback at the Pouce Coupe Gas Plant.

Debt

At September 30, 2019, Birchcliff had significant liquidity with long-term bank debt of $638.6 million (September 30, 2018: $635.1 million) from credit facilities in the aggregate principal amount of $1.0 billion (September 30, 2018: $950.0 million), leaving $354.6 million of unutilized credit capacity after adjusting for outstanding letters of credit and unamortized interest and fees. Total debt at September 30, 2019 was $644.4 million as compared to $641.5 million at September 30, 2018. Birchcliff’s credit facilities mature on May 11, 2022 and do not contain any financial maintenance covenants.

Commodity Prices

The following table sets forth the average benchmark index prices and Birchcliff’s average realized sales prices for the periods indicated:

Marketing and Natural Gas Market Diversification

Birchcliff’s physical natural gas sales exposure primarily consists of the AECO, Dawn and Alliance markets. Effective November 1, 2019, Birchcliff’s level of firm service on TCPL’s Canadian Mainline to Dawn increased to 175,000 GJ/d from 150,000 GJ/d. In addition, the Corporation has various financial instruments outstanding that provide it with exposure to NYMEX HH pricing.

The following table details Birchcliff’s effective sales, production and average realized sales price for natural gas and liquids for Q3 2019, after taking into account the Corporation’s financial instruments:

Effectively 92% of the Corporation’s sales revenue, representing 64% of its total natural gas production and 72% of its total corporate production, was generated from markets outside of AECO in Q3 2019, after taking into account its liquids sales and long-term financial NYMEX/AECO basis swap position.

The following tables set forth Birchcliff’s sales, production, average realized sales price, transportation costs and natural gas sales netback by natural gas market for the periods indicated, before taking into account the Corporation’s financial instruments:

The Corporation’s average realized natural gas sales price was $1.71/Mcf in Q3 2019, an 88% premium to the average AECO 5A benchmark price of $0.91/Mcf in the quarter.

During Q3 2019, approximately 66% of Birchcliff’s natural gas sales revenue, representing approximately 40% of its total natural gas production, was generated from the Dawn and Alliance markets with an average realized natural gas sales price of $2.82/Mcf, a 188% premium to Birchcliff’s average realized natural gas sales price of $0.98/Mcf from the AECO market in Q3 2019.

Birchcliff’s average realized natural gas sales netback from the Dawn and Alliance markets was $1.57/Mcf, a 135% premium to its realized natural gas sales netback of $0.67/Mcf from the AECO market in Q3 2019.

Capital Activities and Investment

During Q3 2019, Birchcliff continued with the successful execution of its 2019 capital program (the “2019 Capital Program”), drilling 6 (6.0 net) wells and bringing 4 (4.0 net) wells on production. Total capital expenditures in the quarter were $41.6 million, with total capital expenditures of $18.8 million in Pouce Coupe and $22.8 million in Gordondale. F&D capital expenditures in Q3 2019 were $40.2 million. For further information regarding Birchcliff’s operational activities year-to-date, see “Operational Update” below.

OPERATIONAL UPDATE

Update on the 2019 Capital Program

The 2019 Capital Program is focused on Birchcliff’s high-value light oil assets in Gordondale and its condensate-rich assets in Pouce Coupe, with the majority of capital investment directed towards the drilling of horizontal condensate-rich natural gas wells in Pouce Coupe and horizontal oil wells in Gordondale. In addition, the 2019 Capital Program advances the Corporation’s inlet liquids-handling facility at the Pouce Coupe Gas Plant and directs funds towards other infrastructure enhancement projects. By early November 2019, Birchcliff had drilled and brought on production all wells that were planned under the 2019 Capital Program. Birchcliff has been encouraged with the results of the wells brought on production year-to-date, with strong condensate rates from its Pouce Coupe wells and strong oil and natural gas rates from its Gordondale wells.

Birchcliff has been able to realize numerous capital cost savings over the past year as a result of its strategic planning and efficient execution of the 2019 Capital Program. Given these cost savings and the success of the 2019 Capital Program, Birchcliff is drilling six additional horizontal wells and proceeding with other ancillary drilling operations in Q4 2019. None of the wells will be completed this year and all are expected to be completed and brought on production in late Q1 2020 or early Q2 2020. As none of the wells will be completed in 2019, no new production or reserves will be added this year as a result. Accordingly, the Corporation is maintaining its annual average production guidance at 77,000 to 79,000 boe/d. See “2019 Guidance”.

Birchcliff expects that this capital activity in Q4 2019 will result in more efficient capital spending and production profiles in 2020 and reduce the amount of capital needed to be spent by the Corporation in 2020. In addition, Birchcliff anticipates that it will be able to secure lower rates for services and benefit from the efficiencies associated with commencing field activities outside of the most active season.

As a result of the capital cost savings realized by the Corporation year-to-date, Birchcliff expects that it will be able to execute this additional capital activity in Q4 2019 within or close to its 2019 F&D capital budget of $242 million. Accordingly, the Corporation is maintaining its 2019 capital expenditures guidance. See “2019 Guidance”.

The following tables summarize the wells that Birchcliff has drilled and brought on production year-to-date and the remaining and total number of wells to be drilled in 2019:

Wells Drilled – 2019

Wells Brought on Production – 2019

Pouce Coupe

Key focus areas for Pouce Coupe in 2019 are the drilling of condensate-rich natural gas wells and the further exploitation and delineation of condensate-rich trends in the Montney D1, D2 and C intervals. In early November 2019, the Corporation brought on production a three-well pad located at 06-32-078-12W6. All of the wells are Montney D1 wells and are located adjacent to Birchcliff’s previously successful condensate-rich drilling in Pouce Coupe. These wells are benefiting from recently improved prices at AECO and will help the Corporation to maintain a consistent production profile throughout Q1 2020.

As previously disclosed, Birchcliff has initiated the construction of a 20,000 bbls/d inlet liquids-handling facility at the Pouce Coupe Gas Plant in order to handle increased condensate volumes in the area. Once completed, this facility will give Birchcliff the ability to increase its condensate production in the Pouce Coupe area to approximately 10,000 bbls/d (Q3 2019: ~4,500 bbls/d). Fabrication of the various components is underway and site preparation has commenced. The facility is anticipated to be online in Q3 2020.

Gordondale

Key focus areas for Gordondale in 2019 are the drilling of crude oil wells and the further exploitation and delineation of oil in the Montney D1 and D2 intervals, specifically in the southeastern part of the Gordondale field. In October 2019, Birchcliff brought on production a four-well pad located at 02-02-078-11W6. The wells consist of two Montney D1 and two Montney D2 wells and are located adjacent to Birchcliff’s previously successful drilling in Gordondale.

Due to the Corporation’s success in the southeastern part of the Gordondale field and the targeted activity expected in 2020, Birchcliff has commenced the engineering and procurement for the addition of natural gas compression at both of its 100% owned and operated oil batteries in Gordondale. The Corporation has also initiated the construction of a significant trunk line to transport oil, natural gas and water to these batteries from the southeastern portion of the field. Both projects are expected to be completed in Q2 2020.

2019 GUIDANCE

Birchcliff is on track to achieve its 2019 annual average production guidance of 77,000 to 79,000 boe/d, which is expected to generate approximately $335 million of adjusted funds flow based on the assumptions set forth herein. The following table sets forth Birchcliff’s guidance and commodity price assumptions for 2019:

Birchcliff is committed to protecting its strong balance sheet and will allocate free funds flow based on what it believes will provide the most value to its shareholders.

Effective November 1, 2019, Birchcliff’s level of firm service on TCPL’s Canadian Mainline to Dawn increased to 175,000 GJ/d from 150,000 GJ/d. Effectively 88% of Birchcliff’s total revenue in 2019, representing 74% of its total production, is expected to be based on non-AECO benchmark prices after taking into account its commodity risk management contracts and expected sales from liquids and based on the commodity price assumptions set forth in the table above.

Changes in assumed commodity prices and variances in production estimates can have a significant impact on the Corporation’s estimate of adjusted funds flow. For further information regarding Birchcliff’s guidance, see “Advisories – Forward-Looking Statements”.

Birchcliff expects to release details regarding its unaudited financial results and reserves for the financial year ended December 31, 2019 on February 12, 2020.

PRELIMINARY OUTLOOK FOR 2020 AND BEYOND

Birchcliff is committed to protecting its balance sheet, its financial flexibility and its common share dividend and will target capital spending over the next two years to either approximate or be less than its forecast of adjusted funds flow each year. Any free funds flow will be allocated by Birchcliff based on what it believes will provide the most value to shareholders, with alternatives that may include debt reduction, the payment of dividends and common share buybacks.

Birchcliff believes that the key to creating shareholder value over the next two years will be through fully utilizing the excess capacity of its existing infrastructure, which in turn will allow the Corporation to maximize its production, its netbacks and its ability to generate free funds flow, as well as drive down its operating and other cash costs on a per unit basis and maximize efficiencies. Accordingly, Birchcliff plans to fill its 100% owned and operated Pouce Coupe Gas Plant in 2020 and 2021 (which is currently operating at approximately 80% of its total processing capacity of 340 MMcf/d), as well as other infrastructure. Birchcliff believes that keeping such infrastructure at or near capacity will help to create additional shareholder value as outlined above and will also allow Birchcliff to leverage its previous capital investment in the Pouce Coupe Gas Plant and reduce its unutilized firm transportation capacity on the NGTL system which the Corporation is currently paying for.

Birchcliff expects that the number of wells required to fill the Pouce Coupe Gas Plant to capacity can be drilled and completed in 2020 and 2021. However, if commodity prices deteriorate materially, Birchcliff has the ability to reduce the rate of drilling and expand the time horizon over which to fill the Pouce Coupe Gas Plant in order to protect its balance sheet and common share dividend. Given current economic and industry conditions, Birchcliff has no plans to invest in further phases of the Pouce Coupe Gas Plant at this time.

With respect to 2020, Birchcliff is currently in the process of finalizing its capital spending plans. Depending on economic conditions, commodity prices and other factors, Birchcliff currently expects F&D capital spending in 2020 to be in the range of $250 to $350 million. Annual average production in 2020 is expected to be in the range of 78,000 to 82,000 boe/d. The Corporation intends to finalize its 2020 capital spending plans in late January 2020. See “Advisories – Forward-Looking Statements”.