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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

  Three months ended
September 30,
Nine months ended
September 30,
  2019 2018(5) 2019 2018(5)
OPERATING
Average production
Light oil – (bbls/d) 4,882 4,959 4,845 4,901
Condensate – (bbls/d)(1) 5,744 4,456 5,226 4,026
NGLs – (bbls/d)(1) 7,559 6,036 7,078 5,890
Natural gas – (Mcf/d) 374,180 383,279 364,996 375,059
Total – boe/d 80,548 79,331 77,982 77,327
Average realized sales price (CDN$)(2)
Light oil – (per bbl) 67.15 80.16 68.50 77.64
Condensate – (per bbl)(1) 65.94 84.10 67.82 84.89
NGLs – (per bbl)(1) 9.75 23.39 12.70 23.43
Natural gas – (per Mcf) 1.71 2.06 2.38 2.26
Total – per boe 17.62 21.45 21.08 22.10
 
NETBACK AND COST ($/boe)
Petroleum and natural gas revenue(2) 17.62 21.46 21.08 22.11
Royalty expense (0.76) (1.52) (0.90) (1.49)
Operating expense (2.75) (3.45) (3.10) (3.53)
Transportation and other expense (4.34) (3.46) (4.41) (3.55)
Operating netback ($/boe) 9.77 13.03 12.67 13.54
G&A expense, net (0.74) (0.67) (0.84) (0.80)
Interest expense (0.77) (0.99) (0.90) (0.97)
Realized gain (loss) on financial instruments 0.22 (1.08) 0.95 (0.83)
Other income 0.02 0.04 0.03 0.02
Adjusted funds flow netback ($/boe) 8.50 10.33 11.91 10.96
Depletion and depreciation expense (7.57) (7.40) (7.51) (7.47)
Unrealized loss on financial instruments (8.22) (1.01) (6.87) (0.63)
Other expenses(3) (0.28) (0.26) (0.59) (0.66)
Dividends on preferred shares (0.26) (0.27) (0.27) (0.27)
Income tax recovery (expense) 1.50 (0.48) 1.42 (0.65)
Net income (loss) to common shareholders ($/boe) (6.33) 0.91 (1.91) 1.28
 
FINANCIAL
Petroleum and natural gas revenue ($000s)(2) 130,588 156,609 448,800 466,701
Cash flow from operating activities ($000s) 48,908 68,556 241,509 232,234
Adjusted funds flow ($000s) 62,958 75,378 253,563 231,405
Per basic common share ($) 0.24 0.28 0.95 0.87
Net income (loss) to common shareholders ($000s) (46,889) 6,657 (40,595) 27,125
Per basic common share ($) (0.18) 0.03 (0.15) 0.10
End of period basic common shares (000s) 265,935 265,885 265,935 265,885
Weighted average basic common shares (000s) 265,935 265,877 265,928 265,832
Dividends on common shares ($000s) 6,981 6,647 20,942 19,938
Dividends on preferred shares ($000s) 1,921 1,921 5,765 5,765
Total capital expenditures ($000s)(4) 41,621 45,524 242,111 245,132
Long-term debt ($000s) 638,631 635,120 638,631 635,120
Total debt ($000s) 644,407 641,484 644,407 641,484

 

(1) Beginning in Q1 2019, Birchcliff began presenting condensate and NGLs separately. Prior period sales and volumes have been adjusted to conform to this current period presentation.
(2) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.
(3) Includes non-cash expenses such as compensation, accretion, amortization of deferred financing fees and other losses.
(4) See “Advisories – Capital Expenditures”. Total capital expenditures for the nine months ended September 30, 2019 include the $39 million asset acquisition in Pouce Coupe completed by the Corporation in Q1 2019 (the “Acquisition”).
(5) Birchcliff adopted IFRS 16: Leases effective January 1, 2019 using the modified retrospective approach; therefore 2018 comparative information has not been restated.

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:

  Nine months ended
September 30, 2019

Nine months ended
September 30, 2018

Average production:
Condensate (bbls/d) 3,845 2,438
NGLs (bbls/d) 871
Natural gas (Mcf/d) 264,699 253,360
Total (boe/d) 48,832 44,665
Liquids-to-gas ratio (bbls/MMcf)   17.8   9.6
Netback and cost: $/Mcfe $/boe
$/Mcfe $/boe
Petroleum and natural gas revenue(1) 3.09 18.55 2.87 17.20
Royalty expense (0.05) (0.32) (0.05) (0.29)
Operating expense(2) (0.35) (2.10) (0.35) (2.08)
Transportation and other expense (0.75) (4.47) (0.56) (3.37)
Operating netback $1.94 $11.66 $1.91 $11.46
Operating margin(3) 63% 63% 67% 67%

 

(1) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.
(2) Represents plant and field operating expense.
(3) Operating margin is calculated by dividing the operating netback for the period by the petroleum and natural gas revenue for the period.

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:

  Three months ended
September 30, 2019
Three months ended
September 30, 2018
% Change
Average benchmark index prices:
Light oil – WTI Cushing (US$/bbl) 56.45 69.50 (19%)
Light oil – MSW (Mixed Sweet) (CDN$/bbl) 67.88 81.59 (17%)
Natural gas – NYMEX HH (US$/MMBtu)(1) 2.23 2.86 (22%)
Natural gas – AECO 5A Daily (CDN$/GJ) 0.86 1.13 (24%)
Natural gas – AECO 7A Month Ahead (US$/MMBtu)(1) 0.79 1.03 (23%)
Natural gas – Dawn Day Ahead (US$/MMBtu)(1) 2.12 2.91 (27%)
Natural gas – ATP 5A Day Ahead (CDN$/GJ) 0.93 1.82 (49%)
Exchange rate (CDN$ to US$1) 1.3207 1.3070 1%
Exchange rate (US$ to CDN$1) 0.7572 0.7651 (1%)
Birchcliff’s average realized sales prices:(2)
Light oil (CDN$/bbl) 67.15 80.16 (16%)
Condensate (CDN$/bbl) 65.94 84.10 (22%)
NGLs (CDN$/bbl) 9.75 23.39 (58%)
Natural gas (CDN$/Mcf) 1.71 2.06 (17%)
Birchcliff’s average realized sales price (CDN$/boe) 17.62 21.45 (18%)

 

(1) $1.00/MMBtu = $1.00/Mcf based on a standard heat value Mcf. See “Advisories – MMBtu Pricing Conversions”.
(2) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.

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:

Three months ended September 30, 2019
   Effective
sales
(CDN$000s)
Percentage of
total sales
(%)
Effective
production
(per day)
Percentage of
total natural gas
production

(%)
Percentage of
total corporate
production

(%)
Effective average
realized

sales price
(CDN$)
Markets
AECO(1) 10,599 8 134,650 Mcf 36 28 0.86/Mcf
Dawn(2) 37,528 28 137,018 Mcf 37 28 2.98/Mcf
Alliance(3) 929 1 11,172 Mcf 3 2 0.90/Mcf
NYMEX HH(1) 11,575 9 91,340 Mcf 24 19 1.38/Mcf
Total natural gas 60,631 46 374,180 Mcf 100 77 1.76/Mcf
Light oil 30,158 22 4,882 bbls 6 67.15/bbl
Condensate 34,846 27 5,744 bbls 8 65.94/bbl
NGLs 6,782 5 7,559 bbls 9 9.75/bbl
Total liquids 71,786 54 18,185 bbls   23 42.91/bbl
Total corporate 132,417 100 80,548 boe   100 17.87/boe

 

(1) A portion of AECO 5A sales and production that effectively received NYMEX HH pricing under Birchcliff’s long-term physical and financial NYMEX/AECO 7A basis swap contracts has been included as effective sales and production in NYMEX HH markets. Birchcliff sold financial and physical AECO 7A basis swaps for 100,000 MMBtu/d at an average contract price of NYMEX less US$1.28/MMBtu during Q3 2019.
(2) Birchcliff has agreements for the firm service transportation of an aggregate of 175,000 GJ/d of natural gas on TCPL’s Canadian Mainline, whereby natural gas is transported to the Dawn trading hub in Southern Ontario. The first tranche of this service (120,000 GJ/d) became available on November 1, 2017, the second tranche (30,000 GJ/d) became available on November 1, 2018 and the third tranche (25,000 GJ/d) became available on November 1, 2019. Each tranche has a 10-year term.
(3) Birchcliff has sales agreements with a third party marketer to sell and deliver into the Alliance pipeline system. Alliance sales are recorded net of transportation tolls.

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:

Three months ended September 30, 2019
Natural gas
sales
(1)
(CDN$000s)
Percentage of
natural gas
sales
(%)
Natural gas
production

(Mcf/d)
Percentage of
natural gas
production

(%)
Average realized
natural gas sales
price(1)
(CDN$/Mcf)
Natural gas
transportation
costs
(2)
(CDN$/Mcf)
Natural gas
sales
netback
(3)
(CDN$/Mcf)
AECO 20,343 34 225,991 60 0.98 0.31 0.67
Dawn 37,528 64 137,018 37 2.98 1.35 1.63
Alliance(4) 929 2 11,171 3 0.90 0.90
Total 58,800 100 374,180 100 1.71 0.69 1.02

 

Three months ended September 30, 2018
Natural gas
sales
(1)
(CDN$000s)
Percentage of
natural gas
sales
(%)
Natural gas
production

(Mcf/d)
Percentage of
natural gas
production

(%)
Average realized
natural gas sales
price(1)
(CDN$/Mcf)
Natural gas
transportation
costs
(2)
(CDN$/Mcf)
Natural gas
sales
netback
(3)
(CDN$/Mcf)
AECO 29,935 41 254,819 66 1.27 0.27 1.00
Dawn 40,248 56 109,614 29 3.99 1.30 2.69
Alliance(4) 2,355 3 18,846 5 1.42 1.42
Total 72,538 100 383,279 100 2.06 0.55 1.51

 

(1) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.
(2) Reflects costs to transport natural gas from the field receipt point to the delivery sales trading hub.
(3) Natural gas sales netback denotes the average realized natural gas sales price less natural gas transportation costs.
(4) Alliance sales are recorded net of transportation tolls.

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

Area Wells drilled
year-to-date
Remaining wells to be
drilled in 2019
Total wells to be
drilled in 2019
Pouce Coupe
Montney D1 horizontal natural gas wells 9 0 9
Montney D2 horizontal natural gas wells 2 3 5
Montney C horizontal natural gas wells 1 1 2
Total – Pouce Coupe 12 4 16
Gordondale
Montney D4 horizontal oil wells 0 1 1
Montney D2 horizontal oil wells 7 0 7
Montney D1 horizontal oil wells 5 1 6
Total – Gordondale 12 2 14
TOTAL – COMBINED 24 6 30

Wells Brought on Production – 2019

Area Wells brought on
production year-to-date
Remaining wells to be
brought on production
in 2019
Total wells to be brought
on production in 2019
(1)
Pouce Coupe
Montney D1 horizontal natural gas wells 14 0 14
Montney D2 horizontal natural gas wells 2 0 2
Montney C horizontal natural gas wells 1 0 1
Total – Pouce Coupe 17 0 17
Gordondale
Montney D2 horizontal oil wells 9 0 9
Montney D1 horizontal oil wells 7 0 7
Total – Gordondale 16 0 16
TOTAL – COMBINED 33 0 33

 

(1) Includes 9 (9.0) net wells that were drilled and rig released in Q4 2018.

 

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:

  2019 Guidance and Assumptions(1)
Production
Annual average production (boe/d) 77,000 – 79,000
% Light oil 6%
% Condensate 7%
% NGLs 9%
% Natural gas 78%
 
Average Expenses ($/boe)
Royalty 1.10 – 1.30
Operating 3.15 – 3.35
Transportation and other 4.65 – 4.85(2)
Adjusted Funds Flow (MM$) 335(3)
 
F&D Capital Expenditures (MM$) 242(4)
 
Free Funds Flow (MM$) 93(5)
 
Total Capital Expenditures (MM$) 283(4)
 
Natural Gas Market Exposure(6)
AECO exposure as a % of total natural gas production 34%
Dawn exposure as a % of total natural gas production 38%
NYMEX HH exposure as a % of total natural gas production 25%
Alliance exposure as a % of total natural gas production 3%
 
Commodity Prices
Average WTI spot price (US$/bbl) 57.50
Average WTI-MSW differential (CDN$/bbl) 7.50
Average AECO 5A spot price (CDN$/GJ) 1.50
Average Dawn spot price (CDN$/GJ) 3.05
Average NYMEX HH spot price (US$/MMBtu)(7) 2.70
Exchange rate (CDN$ to US$1) 1.32

 

(1) As previously disclosed on August 14, 2019. Birchcliff’s guidance for its commodity mix, average expenses, funds flow, capital expenditures and natural gas market exposure in 2019 is based on an annual average production rate of 78,000 boe/d during 2019, which is the mid-point of Birchcliff’s annual average production guidance for 2019.
(2) Includes transportation tolls for 150,000 GJ/d of natural gas sold at the Dawn price from January 1, 2019 to October 31, 2019 and 175,000 GJ/d from November 1, 2019 to December 31, 2019. Also includes any unused firm transportation costs associated with Birchcliff’s commitments on the NGTL system.
(3) Birchcliff’s estimate of adjusted funds flow takes into account the settlement of financial and physical commodity risk management contracts outstanding as at August 14, 2019. See “Discussion of Operations – Risk Management” in the MD&A.
(4) Birchcliff’s estimate of F&D capital expenditures excludes the purchase price for the Acquisition and any other net potential acquisitions and dispositions. Birchcliff’s estimate of total capital expenditures includes the purchase price for the Acquisition and other acquisitions and dispositions completed year-to-date; however, this estimate does not take into account any other potential acquisitions or dispositions as these amounts are unbudgeted. The estimate of total capital expenditures also includes minor administrative assets. See “Advisories – Capital Expenditures”.
(5) Free funds flow is calculated as adjusted funds flow less F&D capital expenditures and is prior to administrative assets, acquisitions, dispositions, dividend payments and abandonment and reclamation obligations. See “Non-GAAP Measures”.
(6) Birchcliff’s guidance regarding its natural gas market exposure in 2019 assumes: (i) 150,000 GJ/d being sold at the Dawn index price from January 1, 2019 to October 31, 2019 and 175,000 GJ/d from November 1, 2019 to December 31, 2019; (ii) 5 MMcf/d being sold at Alliance’s Trading Pool daily index price; and (iii) 100,000 MMBtu/d being hedged on a financial and physical basis at a fixed basis differential between the AECO 7A price and the NYMEX HH price.
(7) $1.00 per MMBtu equals $1.00 per Mcf based on a standard heat value of 37.4 MJ/mor a heat uplift of 1.055 when converting from $/GJ.

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”.



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