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Birchcliff Energy Ltd. Announces Filing Its 2019 Year-End Audited Financial Statements and Disclosure Documents and Reduced Capital Spending


CALGARY, Alberta – Birchcliff Energy Ltd. (“Birchcliff” or the “Corporation”) (TSX: BIR) is pleased to announce that it has filed its audited annual financial statements and related management’s discussion and analysis (the “MD&A”) and its annual information form (the “AIF”) for the financial year ended December 31, 2019 (collectively, the “Annual Filings”) on the System for Electronic Document Analysis and Retrieval (“SEDAR”).

The audited annual financial statements are consistent with the unaudited financial results disclosed in the press release issued by Birchcliff on February 12, 2020. The AIF includes the disclosure and reports relating to reserves data and other oil and gas information required pursuant to National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities (“NI 51-101”), as well as supplemental information relating to Birchcliff’s contingent and prospective resources. The Annual Filings are available electronically on Birchcliff’s website at www.birchcliffenergy.com and on SEDAR at www.sedar.com.

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”, “free funds flow”, “total debt” and “transportation and other expense”, which do not have standardized meanings prescribed by GAAP. For further information regarding these non-GAAP measures, see “Non-GAAP Measures”. With respect to the disclosure of Birchcliff’s production contained in this press release, see “Advisories – Production”.

REDUCED CAPITAL SPENDING AND REVISED 2020 GUIDANCE

Birchcliff is immediately deferring approximately $65 million of capital expenditures (approximately 19% of its previously announced capital budget) as a result of weakening and volatile oil prices. Birchcliff is focused on maintaining its strong balance sheet and financial flexibility. By immediately deferring these capital expenditures, Birchcliff is bringing its anticipated 2020 capital expenditures more in-line with its targeted annual adjusted funds flow, which may vary materially from the Corporation’s expectations as a result of world events and other factors. As at December 31, 2019, the Corporation had drawn $611.5 million of its $1.0 billion credit facilities, which currently extend to May 11, 2022 and contain no financial covenants. Birchcliff has very low operating costs as a result of owning the majority of its infrastructure, with low production declines, estimated to be approximately 22%, which allows Birchcliff to withstand weakening and volatile commodity prices.

Consistent with the above, Birchcliff’s board of directors has approved a reduced capital budget of $275 million to $295 million for 2020, as compared to the previous budget of $340 million to $360 million. The reduction in capital spending primarily relates to the deferral of 10 (10.0 net) oil wells that were previously planned to be drilled and brought on production in Gordondale in 2020. Birchcliff anticipates that these wells will be deferred until commodity prices improve.

Birchcliff’s revised capital program for 2020 (the “2020 Capital Program”) now contemplates the drilling of a total of 28 (28.0 net) wells (as compared to the 38 (38.0 net) wells previously planned) and the bringing on production of a total of 34 (34.0 net) wells (as compared to the 44 (44.0 net) wells that were previously planned).

Facilities and infrastructure spending is largely unchanged at $71 million to $75 million, as compared to the previous range of $72 million to $76 million. Birchcliff is committed to finishing its 20,000 bbls/d (50% condensate, 50% water) inlet liquids-handling facility in Pouce Coupe (the “Inlet Liquids-Handling Facility”) and other infrastructure projects in Gordondale as such projects are nearing completion. These projects are expected to provide numerous long-term benefits to Birchcliff, including the ability to increase its condensate production in the Pouce Coupe area.

Revised 2020 Guidance and 2019 Actual Results

Birchcliff has revised its 2020 guidance and commodity price assumptions to reflect the revised 2020 Capital Program and current economic conditions. The following table sets forth Birchcliff’s previous and revised guidance and commodity price assumptions for 2020, as well as its 2019 actual audited results and 2019 guidance for comparative purposes:

  New 2020 guidance and assumptions(1) Old 2020 guidance and assumptions(2) 2019 actual results 2019 guidance
Production
Annual average production (boe/d) 78,000 – 80,000 80,000 – 82,000 77,977 77,000 – 79,000
% Light oil 7 % 8 % 6 % 6 %
% Condensate 8 % 8 % 7 % 7 %
% NGLs 9 % 8 % 9 % 9 %
% Natural gas 76 % 76 % 78 % 78 %
Q4 average production (boe/d) 81,000 – 83,000 87,000 – 89,000 77,962 N/A
 
Average Expenses ($/boe)
Royalty 1.00 – 1.20 1.40 – 1.60 0.96 1.10 – 1.30
Operating 3.05 – 3.25 3.10 – 3.30 3.09 3.15 – 3.35
Transportation and other 4.90 – 5.10(3) 4.90 – 5.10 4.44 4.65 – 4.85
Adjusted Funds Flow (MM$) 252(4) 370 334.5 335
 
F&D Capital Expenditures (MM$) 275 – 295(5) 340 – 360 256.4 242
 
Free Funds Flow (MM$)(6) (23) – (43) 10 – 30 78.1 93
 
Total Debt at Year End (MM$) 700 – 720(7) 645 – 665 632.6 N/A
 
Natural Gas Market Exposure
AECO exposure as a % of total natural gas production 20 %(8) 22 % 33 % 34 %
Dawn exposure as a % of total natural gas production 45 %(8) 44 % 38 % 38 %
NYMEX HH exposure as a % of total natural gas production 34 %(8) 33 % 25 % 25 %
Alliance exposure as a % of total natural gas production 1 %(8) 1 % 4 % 3 %
 
Commodity Prices
Average WTI spot price (US$/bbl) 48.00 60.00 57.03 57.50
Average WTI-MSW differential (CDN$/bbl) 5.70 8.50 6.97 7.50
Average AECO 5A spot price (CDN$/GJ) 1.90 2.10 1.67 1.50
Average Dawn spot price (US$/MMBtu)(9) 2.15 2.50 2.40 2.44
Average NYMEX HH spot price (US$/MMBtu)(9) 2.20 2.50 2.63 2.70
Exchange rate (CDN$ to US$1) 1.34 1.32 1.33 1.32

 

(1) Birchcliff’s revised guidance for its commodity mix, adjusted funds flow and natural gas market exposure in 2020 is based on an annual average production rate of 79,000 boe/d during 2020, which is the mid-point of Birchcliff’s revised annual average production guidance for 2020.
(2) As disclosed on January 22, 2020. Birchcliff’s previous guidance for its commodity mix, adjusted funds flow and natural gas market exposure in 2020 was based on an annual average production rate of 81,000 boe/d during 2020, which was the previous mid-point of Birchcliff’s annual average production guidance for 2020.
(3) Includes transportation tolls for 175,000 GJ/d of natural gas sold at the Dawn price and includes any unused firm transportation costs associated with Birchcliff’s commitments on the NGTL system.
(4) Birchcliff’s estimate of adjusted funds flow takes into account the effects of its commodity risk management contracts outstanding as at March 11, 2020.
(5) Birchcliff’s estimate of F&D capital expenditures excludes any net potential acquisitions and dispositions and corresponds to Birchcliff’s revised 2020 F&D capital budget. See “Advisories – Capital Expenditures”.
(6) Free funds flow is calculated as adjusted funds flow less F&D capital expenditures and is prior to acquisitions and dispositions, dividend payments, abandonment and reclamation obligations, administrative assets, financing fees and capital lease obligations. See “Non-GAAP Measures”.
(7) The total debt amount set forth in the table above assumes the following: (i) that the timing and amount of common share and preferred share dividends paid by the Corporation remains consistent with previous years, with the dividend rates remaining flat; (ii) that there are 2,000,000 series C preferred shares outstanding, with no series C preferred shares redeemed in 2020; (iii) that the 2020 Capital Program will be carried out as currently contemplated and the level of capital spending set forth herein will be achieved; and (iv) the targets for production, commodity mix, capital expenditures, adjusted funds flow, free funds flow and natural gas market exposure and the commodity price and exchange rate assumptions set forth herein are met. The amount set forth in the table above does not include annual cash incentive payments.
(8) Birchcliff’s guidance regarding its natural gas market exposure in 2020 assumes: (i) 175,000 GJ/d being sold at the Dawn index price; (ii) 5 MMcf/d being sold at Alliance’s Trading Pool daily index price until October 31, 2020; and (iii) 132,500 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.
(9) $1.00 per MMBtu equals $1.00 per Mcf based on a standard heat value of 37.4 MJ/m3 or a heat uplift of 1.055 when converting from $/GJ.

The following table illustrates the expected impact of changes in commodity prices and the CDN/US exchange rate on the Corporation’s revised estimate of adjusted funds flow for 2020 of $252 million, after taking into account the effects of its commodity risk management contracts outstanding as at March 11, 2020:

    Estimated change to 2020 adjusted funds flow (MM$)(1)(2)
Change in WTI US$1.00/bbl 5.8
Change in NYMEX HH US$0.10/MMBtu 6.0
Change in Dawn US$0.10/MMBtu 8.1
Change in AECO CDN$0.10/GJ 3.4
Change in CDN/US exchange rate CDN$0.01 2.5

 

(1)
(2)
See the guidance table above.
The calculated impact on adjusted funds flow is only applicable within the limited range of change indicated. Calculations are performed independently and may not be indicative of actual results. Actual results may vary materially when multiple variables change at the same time.

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”.

Key Highlights of the Revised 2020 Capital Program

  • Annual average production in 2020 is now expected to be in the range of 78,000 to 80,000 boe/d, which represents a 1% increase over Birchcliff’s 2019 annual average production of 77,977 boe/d.
    • Q4 2020 average production is now expected to be in the range of 81,000 to 83,000 boe/d, which represents a 5% increase over Birchcliff’s Q4 2019 average production.
    • Production is expected to increase in Q3 2020 as the majority of Birchcliff’s wells are planned to be brought on production in that quarter, which will coincide with the bringing on-stream of the Inlet Liquids-Handling Facility at Birchcliff’s 100% owned and operated natural gas processing plant in Pouce Coupe.
    • In order to minimize frac-driven interaction associated with offset drilling and completions activities, Birchcliff has proactively and temporarily shut-in some production in order to protect its existing wells. As a result, Q1 2020 production is anticipated to decline from Q4 2019 levels and average approximately 72,000 to 74,000 boe/d (as compared to Birchcliff’s previous guidance of 71,000 to 74,000 boe/d). Birchcliff actively works to mitigate the impact of frac-driven interaction on its operations.
  • Adjusted funds flow of approximately $252 million is based on the mid-point of Corporation’s revised annual average production guidance and revised commodity price assumptions for 2020.
  • Reduced F&D capital expenditures of $275 million to $295 million for 2020.
  • In line with Birchcliff’s objective of growing its high-value liquids production in 2020, drilling will target condensate-rich natural gas wells in Pouce Coupe and oil wells in Gordondale.
    • Funds will also be directed towards completing the Inlet Liquids-Handling Facility in order to handle increased condensate volumes in Pouce Coupe.
    • Liquids are expected to increase to approximately 24% of Birchcliff’s production commodity mix in 2020 (15% condensate and light oil and 9% NGLs), as compared to 22% in 2019.
  • The program is heavily weighted towards the first half of the year, with the majority of F&D capital expected to be spent by the end of Q2 2020.

For the commodity price and exchange rate assumptions used by the Corporation in planning its 2020 Capital Program, see “– Revised 2020 Guidance and 2019 Actual Results”.

Revised 2020 Capital Expenditures Allocation

The following tables set forth further details regarding Birchcliff’s expected capital spending allocation and the number and types of wells expected to be drilled and brought on production under the Corporation’s revised 2020 Capital Program:

Revised 2020 Capital Program – Capital Expenditures by Classification

Classification Capital – NEW (MM) Capital – OLD (MM) Change in Capital(1)
DCCET
Pouce Coupe(2) $101 – $107 $104 – $110 (3 %)
Gordondale(2) $40 – $43 $95 – $100 (57 %)
Additional Well Completions Capital(3) $21 – $22 $21 – $22
Total DCCET $162 – $172  $220 – $232 (26 %)
Facilities and Infrastructure(4) $71 – $75 $72 – $76 (1 %)
Maintenance and Optimization $21 – $23 $25 – $27 (15 %)
Land and Seismic(5) $4 – $6 $5 – $6 (9 %)
Other $17 – $19 $18 – $19 (3 %)
TOTAL F&D Capital Expenditures(6) $275 – $295(7)  $340 – $360 (19 %)

 

(1) Based on the mid-point of the capital ranges.
(2) On a DCCET basis, the average well cost in 2020 is estimated to be $5.4 million for Pouce Coupe (previously $5.5 million) and $5.5 million for Gordondale (previously $5.6 million). These costs can vary depending on factors such as the size of the associated multi-well pads, the costs of construction, the existence of pipelines and other infrastructure and the distance to existing or planned pipelines and other infrastructure.
(3) Represents the estimated completion, equipping and tie-in costs associated with the 6 (6.0 net) wells that were drilled and rig released in Q4 2019.
(4) Includes approximately $35 million for the completion of the Inlet Liquids-Handling Facility and approximately $25 million for the addition of natural gas compression and a significant trunk line in Gordondale.
(5) Includes capital for crown sales and rental payments but does not include other property acquisitions and dispositions.
(6) Net property acquisitions and dispositions have not been included in the table above as these amounts are generally unbudgeted. Birchcliff makes acquisitions and dispositions in the ordinary course of business and any acquisitions and dispositions completed during 2020 could have an impact on Birchcliff’s capital expenditures, production, adjusted funds flow, free funds flow, costs and total debt, which impact could be material. See “Advisories – Capital Expenditures”.
(7) Approximately 60% of the revised 2020 Capital Program is directed towards Birchcliff’s Pouce Coupe area (previously 50%), approximately 30% towards Birchcliff’s Gordondale area (previously 40%), approximately 59% towards DCCET activities (previously 65%) and approximately 26% towards facilities and infrastructure (previously 21%).

Revised 2020 Capital Program – Wells to be Drilled


Area
Total wells to be drilled in 2020 – NEW Total wells to be drilled in 2020 – OLD
Pouce Coupe
Montney D1 horizontal natural gas wells 4 4
Montney D2 horizontal natural gas wells 9 9
Montney C horizontal natural gas wells 7 7
Total – Pouce Coupe 20 20
 
Gordondale
Montney D1 horizontal oil wells 4 8
Montney D2 horizontal oil wells 4 9
Montney C horizontal oil wells 0 1
Total – Gordondale 8 18
TOTAL – COMBINED 28 38

Revised 2020 Capital Program – Wells to be Brought on Production


Area
Total wells to be brought on production in 2020 – NEW(1) Total wells to be brought on production in 2020 – OLD(1)
Pouce Coupe
Montney D1 horizontal natural gas wells 4 4
Montney D2 horizontal natural gas wells 12 12
Montney C horizontal natural gas wells 8 8
Total – Pouce Coupe 24 24
 
Gordondale
Montney D1 horizontal oil wells 5 9
Montney D2 horizontal oil wells 4 9
Montney D4 horizontal oil wells 1 1
Montney C horizontal oil wells 0 1
Total – Gordondale 10 20
TOTAL – COMBINED 34 44

(1) Includes the 6 (6.0 net) wells that were drilled and rig released in Q4 2019.

Birchcliff will continue to closely monitor economic conditions and commodity prices and, where deemed prudent, will further adjust the 2020 Capital Program to respond to changes in commodity prices and other material changes in the assumptions underlying such program. If commodity prices and economic conditions improve later in the year, the Corporation may give consideration to increasing its drilling and capital spending in order to further advance its long-term plan of filling its infrastructure by the end of 2021. Birchcliff will review its five year plan in the fall of 2020 in connection with its normal budgeting process for 2021.

ACTIVITIES YEAR-TO-DATE

Pouce Coupe

Birchcliff currently has 2 drilling rigs at work, each drilling 7 wells on its 14-well pad in the Pouce Coupe area. This 14-well pad is using multi-interval cube-style development to maximize operational efficiencies through scale and repeatability, which in turn is expected to lead to further savings on a per well basis. This pad is located at 14-19-079-12W6, which is adjacent to the successful condensate-rich wells drilled by Birchcliff in 2019 in the Montney D1, D2 and C intervals at its 14-06-079-12W6 pad. Notwithstanding the current weakness in commodity prices, these 14 wells have excellent economics due to their high condensate and natural gas rates and low capital costs. Birchcliff has also completed drilling the first 10 wells in Pouce Coupe on its 4 and 6-well pads. These two pads are at various stages of completion and flow testing operations and are expected to be brought on production in Q2 2020. These two pads are targeting the Montney D2 and C intervals.

As previously disclosed, Birchcliff has initiated construction of the Inlet Liquids-Handling Facility. 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. Fabrication of the various components is underway and site preparation has commenced. The facility is anticipated to be on-stream in Q3 2020.

Gordondale

Birchcliff has completed its drilling program in Gordondale where it used multi-interval cube-style development to drill 10 wells using two drilling rigs on two proximal pads targeting the Montney D1, D2 and D4 intervals. These wells are being prepped for completion operations and are expected to be brought on production in Q2 2020. Birchcliff continues to be excited and encouraged about the Montney D4 interval in the Gordondale area. This Montney D4 interval has been proven commercial in the Pouce Coupe area (12 producing wells) and now extending the Montney D4 into Gordondale will add more liquids-rich inventory utilizing the Corporation’s existing infrastructure.

Birchcliff continues to be on schedule and on budget regarding the previously disclosed addition of natural gas compression at both of its 100% owned and operated oil batteries in Gordondale and the construction of its significant trunk line to transport oil, natural gas and water to these batteries from the southeastern portion of the field. The addition of natural gas compression at both batteries will allow the existing wells to produce against lower wellhead pressures, which in turn is expected to increase production. The addition of the new trunk line allows the compression to become even more effective and handle both the new and existing volumes in the area. Both projects are expected to be completed in Q2 2020.

ABBREVIATIONS

AECO benchmark price for natural gas determined at the AECO ‘C’ hub in southeast Alberta
bbl barrel
bbls/d barrels per day
boe barrel of oil equivalent
boe/d barrel of oil equivalent per day
condensate pentanes plus (C5+)
DCCET drilling, casing, completions, equipping and tie-in
F&D finding and development
GAAP generally accepted accounting principles for Canadian public companies which are currently International Financial Reporting Standards as issued by the International Accounting Standards Board
GJ gigajoule
GJ/d gigajoules per day
HH Henry Hub
m3 cubic metres
Mcf
MJ
thousand cubic feet
megajoule
MM millions
MM$ millions of dollars
MMBtu million British thermal units
MMBtu/d million British thermal units per day
MMcf/d million cubic feet per day
MSW price for mixed sweet crude oil at Edmonton, Alberta
NGLs natural gas liquids excluding condensate
NGTL NOVA Gas Transmission Ltd.
NYMEX New York Mercantile Exchange
WTI West Texas Intermediate, the reference price paid in U.S. dollars at Cushing, Oklahoma, for crude oil of standard grade

NON-GAAP MEASURES

This press release uses “adjusted funds flow”, “free funds flow”, “total debt” and “transportation and other expense”. These measures 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. “Adjusted funds flow” denotes cash flow from operating activities before the effects of decommissioning expenditures and changes in non-cash operating working capital. “Free funds flow” denotes adjusted funds flow less F&D capital expenditures. “Total debt” is calculated as the revolving term credit facilities plus adjusted working capital deficit. “Transportation and other expense” denotes transportation expense plus marketing purchases minus marketing revenue. Management believes that these non-GAAP measures assist management and investors in assessing Birchcliff’s profitability, efficiency, liquidity and overall performance. For additional information regarding these non-GAAP measures, including reconciliations to the most directly comparable GAAP measures, see “Non-GAAP Measures” in the MD&A.

ADVISORIES

Currency

Unless otherwise indicated, all dollar amounts are expressed in Canadian dollars and all references to “$” and “CDN$” are to Canadian dollars and all references to “US$” are to United States dollars.

Boe Conversions

Boe amounts have been calculated by using the conversion ratio of 6 Mcf of natural gas to 1 bbl of oil. Boe amounts may be misleading, particularly if used in isolation. A boe conversion ratio of 6 Mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.

MMBtu Pricing Conversions

$1.00 per MMBtu equals $1.00 per Mcf based on a standard heat value Mcf.

Production

With respect to the disclosure of Birchcliff’s production contained in this press release: (i) references to “light oil” mean “light crude oil and medium crude oil” as such term is defined in NI 51-101; (ii) references to “liquids” mean “light crude oil and medium crude oil” and “natural gas liquids” (including condensate) as such terms are defined in NI 51-101; and (iii) references to “natural gas” mean “shale gas”, which also includes an immaterial amount of “conventional natural gas”, as such terms are defined in NI 51-101. In addition, NI 51-101 includes condensate within the product type of natural gas liquids. Birchcliff has disclosed condensate separately from other natural gas liquids as the price of condensate as compared to other natural gas liquids is currently significantly higher and Birchcliff believes presenting the two commodities separately provides a more accurate description of its operations and results therefrom.

Capital Expenditures

Unless otherwise stated, references in this press release to “F&D capital” denotes capital for land, seismic, workovers, drilling and completions and well equipment and facilities.



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