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Birchcliff Energy Ltd. announces Q2 2020 financial and operational results


CALGARY, Alberta – Birchcliff Energy Ltd. (“Birchcliff” or the “Corporation”) (TSX: BIR) is pleased to announce its financial and operational results for the three and six months ended June 30, 2020. Birchcliff’s unaudited interim condensed financial statements for the three and six months ended June 30, 2020 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.

PRESIDENT’S MESSAGE TO SHAREHOLDERS

I am pleased to advise that we were approximately 50% ahead of our internal estimates for adjusted funds flow in Q2 2020, as our operating costs were reduced by 8% from Q1 2020 and commodity prices were stronger than we anticipated, notwithstanding the myriad of issues presented by the COVID-19 pandemic. Based on current strip prices, we expect to return to free funds flow generation in 2021. For the remainder of 2020 and into 2021, our priorities continue to be on debt reduction, free funds flow generation and ensuring our long-term sustainability. We remain on track to meet our 2020 guidance for production and capital expenditures and we have increased our target for adjusted funds flow to $185 million as a result of an improved outlook for oil prices. As a result of executing the majority of our capital program in the first half of 2020, our total debt is expected to peak early in Q3 2020 and decrease throughout the remainder of 2020, with total debt at year end now expected to be in the range of $750 million to $770 million. In May 2020, the borrowing base limit under our credit facilities was confirmed at $1 billion. These credit facilities, which do not contain any financial maintenance covenants and do not mature until May 2022, provide us with significant liquidity, especially as we return to free funds flow in Q3 2020.

We continue to focus on the disciplined and efficient execution of our business and continuing to reduce our costs. We believe that our strong financial position, low operating cost structure and asset base provide us with the ability to withstand the challenges that our industry is facing and remain in a position of financial strength. Our high-quality, low-decline assets allow us to maintain production at or near current levels with less F&D capital each year. We believe that commodity prices for natural gas will continue to strengthen towards the end of 2020 and into 2021 as a result of the massive reductions in capital spending throughout North America due to the reduced demand for oil and volatile commodity prices. Our owned-and-operated infrastructure, diverse portfolio of assets and production commodity mix provide us with significant optionality, allowing us to target natural gas, liquids-rich natural gas or oil depending on commodity prices.

We have now completed the vast majority of our 2020 capital program, with the remaining wells recently brought on production and all major facilities and infrastructure projects successfully completed. In Pouce Coupe, we recently brought the production on from our 14-well pad, which used multi-interval cube-style development to maximize operational efficiencies through scale and repeatability. Due to these efficiencies and the excellent execution of this pad, we were able to realize substantial per well cost savings of 24% as compared to our 2018 multi-well pads. In addition, our inlet liquids-handling facility at our Pouce Coupe gas plant was brought on-stream in late July 2020 in anticipation of the 14-well pad being brought on production. This facility was completed ahead of schedule and under budget and it represents an important milestone for Birchcliff as it gives us the ability to grow our condensate production in Pouce Coupe to approximately 10,000 bbls/d. With the successful completion of all of these projects, the execution risk of our 2020 capital program is now behind us.

A. Jeffery Tonken
President and Chief Executive Officer

Q2 2020 HIGHLIGHTS

  • Achieved quarterly average production of 74,950 boe/d in Q2 2020, a 2% increase from Q1 2020 and a 4% decrease from Q2 2019.
  • Liquids accounted for approximately 24% of Birchcliff’s total production in Q2 2020 as compared to approximately 22% in Q1 2020 and Q2 2019.
  • Delivered adjusted funds flow of $21.7 million ($0.08 per basic common share), a 41% decrease from Q1 2020 and a 71% decrease from Q2 2019.
  • Achieved low operating expense of $2.89/boe in Q2 2020, an 8% decrease from Q1 2020 and a 9% decrease from Q2 2019.
  • Recorded G&A expense of $0.84/boe in Q2 2020, a 7% decrease from Q1 2020 and a 3% decrease from Q2 2019.
  • Recorded interest expense of $0.69/boe in Q2 2020, a 22% decrease from Q1 2020 and a 25% decrease from Q2 2019.
  • Realized an operating netback of $6.84/boe in Q2 2020, a 27% decrease from Q1 2020 and a 40% decrease from Q2 2019.
  • Confirmed the borrowing base limit under Birchcliff’s extendible revolving credit facilities (the “Credit Facilities”) at $1.0 billion, providing the Corporation with significant liquidity.
  • Continued with the successful and efficient execution of its 2020 capital program (the “2020 Capital Program”), drilling 10 (10.0 net) wells, completing 6 (6.0 net) wells and bringing 16 (16.0 net) wells on production in Q2 2020. Total F&D capital expenditures were $83.5 million in the quarter.
  • There were no indicators of impairment on Birchcliff’s petroleum and natural gas properties and equipment at June 30, 2020.
  • Birchcliff’s Board of Directors approved the declaration of a cash dividend in the amount of $0.005 per common share for the quarter ending June 30, 2020, which represented an 81% reduction from the prior quarter. This dividend was paid on June 30, 2020 to shareholders of record at the close of business on June 15, 2020.
  • All of Birchcliff’s natural gas production and the vast majority of its liquids production is currently unhedged to benchmark commodity index prices, which will allow Birchcliff to take advantage of strengthening commodity prices.

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”, “transportation and other expense”, “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”. With respect to the disclosure of Birchcliff’s production contained in this press release, see “Advisories – Production”.

 

FINANCIAL AND OPERATIONAL HIGHLIGHTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020

  Three months ended
June 30,
 Six months ended
June 30,
  2020 2019 2020 2019
OPERATING
Average production
  Light oil (bbls/d) 5,744 4,853 4,849 4,827
  Condensate (bbls/d) 4,825 5,505 4,675 4,963
  NGLs (bbls/d) 7,455 6,923 7,709 6,834
  Natural gas (Mcf/d) 341,558 367,033 342,195 360,327
  Total (boe/d) 74,950 78,453 74,265 76,678
Average realized sales price (CDN$)(1)
  Light oil (per bbl) 25.72 72.25 36.92 69.20
  Condensate (per bbl) 31.09 71.69 44.35 68.93
  NGLs (per bbl) 12.05 11.13 12.04 14.36
  Natural gas (per Mcf) 2.22 1.95 2.25 2.73
  Total (per boe) 15.27 19.59 16.83 22.92
 
NETBACK AND COST ($/boe)
  Petroleum and natural gas revenue(1) 15.27 19.59 16.83 22.93
  Royalty expense (0.20) (0.75) (0.57) (0.98)
  Operating expense (2.89) (3.17) (3.01) (3.28)
  Transportation and other expense (5.34) (4.29) (5.18) (4.45)
Operating netback ($/boe) 6.84 11.38 8.07 14.22
  G&A expense, net (0.84) (0.87) (0.87) (0.89)
  Interest expense (0.69) (0.92) (0.79) (0.97)
  Realized gain (loss) on financial instruments (2.51) 0.74 (2.32) 1.34
  Other income 0.39 0.03 0.25 0.03
Adjusted funds flow netback ($/boe) 3.19 10.36 4.34 13.73
  Depletion and depreciation expense (7.66) (7.40) (7.68) (7.47)
  Unrealized loss on financial instruments (1.86) (6.50) (3.85) (6.14)
  Other expenses(2) (0.64) (1.17) (0.47) (0.76)
  Dividends on preferred shares (0.28) (0.27) (0.28) (0.28)
  Income tax recovery 1.46 3.65 1.67 1.37
Net income (loss) to common shareholders ($/boe) (5.79) (1.33) (6.27) 0.45
 
FINANCIAL
Petroleum and natural gas revenue ($000s)(1) 104,180 139,857 227,443 318,212
Cash flow from operating activities ($000s) 13,221 97,857 63,772 192,601
Adjusted funds flow ($000s) 21,746 73,957 58,640 190,605
  Per basic common share ($) 0.08 0.28 0.22 0.72
Net income (loss) to common shareholders ($000s) (39,522) (9,505) (84,723) 6,294
  Per basic common share ($) (0.15) (0.04) (0.32) 0.02
End of period basic common shares (000s) 265,935 265,935 265,935 265,935
Weighted average basic common shares (000s) 265,935 265,933 265,935 265,924
Dividends on common shares ($000s) 1,327 6,981 8,308 13,961
Dividends on preferred shares ($000s) 1,922 1,922 3,844 3,844
Total capital expenditures ($000s)(3) 83,974 68,532 216,814 200,490
Long-term bank debt ($000s) 753,092 622,282 753,092 622,282
Total debt ($000s) 807,573 654,709 807,573 654,709

(1) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.
(2) Includes non-cash expenses such as compensation, accretion, amortization of deferred financing fees and other income or losses.
(3) See “Advisories – Capital Expenditures”.

OUTLOOK AND GUIDANCE

Business Outlook

On January 30, 2020, the World Health Organization declared the novel Coronavirus disease (“COVID-19”) outbreak a public health emergency of international concern and, on March 10, 2020, declared it to be a pandemic. The outbreak of the COVID-19 pandemic has had a significant negative impact on global economic conditions. This has included a sharp decrease in crude oil demand which, combined with other macro-economic conditions, has resulted in significant volatility in oil and natural gas commodity prices, as well as increased economic uncertainty. Birchcliff has taken decisive action to strengthen its liquidity, financial flexibility and long-term sustainability and believes that its strong financial position and other attributes provide it with the ability to withstand the challenges that industry is facing and remain in a position of financial strength.

The Corporation recently brought the production on from its 14-well pad in Pouce Coupe and brought on-stream its 20,000 bbls/d (50% condensate, 50% water) inlet liquids-handling facility (the “Inlet Liquids-Handling Facility”) at the Corporation’s 100% owned and operated natural gas processing plant in Pouce Coupe (the “Pouce Coupe Gas Plant”). Both projects were completed ahead of schedule and under budget. Birchcliff has now completed the drilling and bringing on production of all wells planned under its 2020 Capital Program (see “Operational Update” below). As all such wells are now on production, Birchcliff’s average production in Q3 and Q4 2020 is expected to increase from Q1 and Q2 2020 levels.

Birchcliff expects that its higher production in Q3 and Q4 of 2020 will drive higher adjusted funds flow, as natural gas prices are anticipated to continue to strengthen towards the end of 2020 and into 2021. As a result of executing the majority of the 2020 Capital Program in the first half of 2020, total debt is expected to peak early in Q3 2020 and decrease throughout the remainder of 2020. Birchcliff expects to exit 2020 in a strong position as a result of its higher production and low-cost structure. In addition, the anticipated proved developed producing reserves additions resulting from the 2020 Capital Program should position the Corporation well for the future.

The Corporation has initiated its formal budgeting process for 2021, which will prioritize debt reduction, free funds flow generation and ensuring the Corporation’s long-term sustainability. The 2021 capital program will be designed to provide Birchcliff with significant optionality to take advantage of volatile commodity prices. As a result of Birchcliff’s large inventory of potential future drilling locations, the Corporation has the ability to focus on natural gas, liquids-rich natural gas or light oil drilling, depending on its outlook for commodity prices. Facilities and infrastructure spending in 2021 is expected to be significantly lower than in 2020 given that Birchcliff has now completed the Inlet Liquids-Handling Facility and other major facilities and infrastructure projects in Gordondale. The Corporation expects to release preliminary guidance regarding its 2021 capital program in November 2020.

Corporate Guidance

Birchcliff is maintaining its previous guidance for production and capital expenditures that was issued on May 13, 2020 and has updated its other guidance, all of which is set forth in the table below. Birchcliff has also updated its full year commodity price assumptions for 2020. Significant changes to Birchcliff’s guidance include the following:

  • Adjusted funds flow guidance has been increased to $185 million from $161 million with a corresponding change to free funds flow guidance, primarily due to the improved price forecast for oil.
  • Total debt guidance has been decreased to $750 million – $770 million from $770 million – $790 million, primarily due to higher anticipated adjusted funds flow in 2020.
  • Average operating expense guidance has been decreased to $2.85/boe – $3.05/boe from $3.05/boe – $3.25/boe, primarily due to increased optimization and efficiencies.
  • Average royalty expense guidance has been increased to $0.70/boe – $0.90/boe from $0.65/boe – $0.85/boe, primarily due to the improved price forecast for oil.
  • Average transportation and other expense guidance has been increased to $5.00/boe – $5.20/boe from $4.90/boe – $5.10/boe, primarily due to higher transportation costs associated with increased AECO and Dawn firm service.

The following table sets forth Birchcliff’s revised and previous guidance and commodity price assumptions for 2020:

  Revised 2020 guidance and
assumptions
(1)
Previous 2020 guidance and
assumptions
(1)(2)
Production
Annual average production (boe/d) 78,000 – 80,000 78,000 – 80,000
  % Light oil 7% 7%
  % Condensate 8% 8%
  % NGLs 9% 9%
  % Natural gas 76% 76%
Q4 average production (boe/d) 81,000 – 83,000 81,000 – 83,000
 
Average Expenses ($/boe)
Royalty 0.70 – 0.90 0.65 – 0.85
Operating 2.85 – 3.05 3.05 – 3.25
Transportation and other(3) 5.00 – 5.20 4.90 – 5.10
Adjusted Funds Flow (MM$) 185(4) 161
 
F&D Capital Expenditures (MM$) 275 – 295(5) 275 – 295(5)
 
Free Funds Flow (MM$)(6) (90) – (110) (114) – (134)
 
Total Debt at Year End (MM$) 750 – 770(7) 770 – 790
 
Natural Gas Market Exposure(8)
AECO exposure as a % of total natural gas production 19% 20%
Dawn exposure as a % of total natural gas production 44% 45%
NYMEX HH exposure as a % of total natural gas production 34% 34%
Alliance exposure as a % of total natural gas production 3% 1%
 
Commodity Prices
Average WTI price (US$/bbl) 39.00 33.00
Average WTI-MSW differential (CDN$/bbl) 8.75 11.00
Average AECO 5A price (CDN$/GJ) 2.10 2.20
Average Dawn price (US$/MMBtu)(9) 1.90 2.00
Average NYMEX HH price (US$/MMBtu)(9) 2.10 2.25
Exchange rate (CDN$ to US$1) 1.35 1.38

(1) Birchcliff’s 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 annual average production guidance for 2020.
(2) As previously issued on May 13, 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 physical and financial commodity risk management contracts outstanding as at August 12, 2020. See “Discussion of Operations – Risk Management” in the MD&A.
(5) Birchcliff’s estimate of F&D capital expenditures excludes any net potential acquisitions and dispositions and corresponds to Birchcliff’s 2020 F&D capital budget. For further details regarding Birchcliff’s 2020 Capital Program, see “Operational Update”. See also “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 preferred share dividends paid by the Corporation remains consistent with previous years, with the dividend rates remaining flat; (ii) that a common share dividend of $0.005 per share is paid for the quarters ending September 30, 2020 and December 31, 2020; (iii) that there are 265,935,229 common shares outstanding; (iv) that there are 2,000,000 cumulative redeemable preferred shares, Series C (“Series C Preferred Shares”) outstanding for the period from January 1, 2020 to June 29, 2020 and 1,962,835 Series C Preferred Shares outstanding for the remainder of 2020; (v) 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 (vi) 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) See “Advisories – MMBtu Pricing Conversions”.

Adjusted Funds Flow Sensitivity

The following table illustrates the expected impact of changes in commodity prices and the CDN/US exchange rate on the Corporation’s estimate of adjusted funds flow for 2020 of $185 million, after taking into account the effects of its commodity risk management contracts outstanding as at August 12, 2020:

Forward Six Months’ Sensitivity(1) Estimated change to 2020 adjusted funds flow (MM$)(2)(3)
Change in WTI US$1.00/bbl 5.7
Change in NYMEX HH US$0.10/MMBtu 4.4
Change in Dawn US$0.10/MMBtu 7.9
Change in AECO CDN$0.10/GJ 4.7
Change in CDN/US exchange rate CDN$0.01 2.1

(1) Adjusted funds flow sensitivities take into account actual prices and exchange rates from January 1, 2020 to June 30, 2020.
(2) See the guidance table above.
(3) 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.

Ongoing weakness in commodity prices resulting from the COVID-19 pandemic and market volatility may adversely and materially impact the Corporation’s future financial and operational results. Changes in assumed commodity prices and variances in production estimates can have a significant impact on the Corporation’s estimates of adjusted funds flow and free funds flow and the Corporation’s other guidance, which impact may be material. For further information, see “Advisories – Forward-Looking Statements” in this press release and “Risk Factors and Risk Management” in the MD&A.

Q2 2020 FINANCIAL AND OPERATIONAL RESULTS

Production

Birchcliff’s production averaged 74,950 boe/d in Q2 2020, a 2% increase from 73,580 boe/d in Q1 2020. The increase was primarily due to incremental production from new horizontal oil and condensate-rich natural gas wells brought on production since Q1 2020, partially offset by planned production shut-in and facility maintenance activities in Pouce Coupe and natural production declines. In order to minimize frac-driven interaction associated with offset drilling and completions activities in Pouce Coupe, Birchcliff proactively and temporarily shut-in some production during Q2 2020 in order to protect its existing wells. Birchcliff’s average production in Q3 and Q4 2020 is expected to increase from Q1 and Q2 2020 levels, with production expected to average 81,000 – 83,000 boe/d in Q4 2020 and 78,000 – 80,000 boe/d in full year 2020. See “Outlook and Guidance”.

Birchcliff’s production in Q2 2020 decreased by 4% from 78,453 boe/d in Q2 2019. The decrease was primarily due to the planned production shut-in and facility maintenance activities in Pouce Coupe and natural production declines, partially offset by incremental production from new horizontal oil and condensate-rich natural gas wells brought on production since Q2 2019.

Liquids accounted for approximately 24% of Birchcliff’s total production in Q2 2020 as compared to approximately 22% in Q1 2020 and Q2 2019, with total liquids production increasing by 10% from Q1 2020 and by 4% from Q2 2019. The increases were primarily attributable to the successful addition of oil wells brought on production in Gordondale and condensate-rich natural gas wells in Pouce Coupe.

Adjusted Funds Flow

Birchcliff’s adjusted funds flow for Q2 2020 was $21.7 million, or $0.08 per basic common share, a 41% and a 43% decrease, respectively, from $36.9 million and $0.14 per basic common share in Q1 2020. The decreases were primarily due to lower reported revenue as compared to Q1 2020. Petroleum and natural gas revenue decreased by 15% as compared to Q1 2020, largely due to lower average realized light oil and condensate sales prices in Q2 2020. Birchcliff’s light oil and condensate revenue in Q2 2020 was negatively impacted by the significant weakness and volatility in oil prices as a result of the COVID-19 pandemic and ensuing global demand destruction. Adjusted funds flow was also negatively impacted by higher realized losses on financial instruments and higher transportation and other expense as a result of Birchcliff’s increased Dawn and AECO firm service, and positively impacted by lower operating, royalty and interest expenses as compared to Q1 2020.

Birchcliff’s adjusted funds flow in Q2 2020 decreased by 71% from $74.0 million and $0.28 per basic common share in Q2 2019. The decreases were primarily due to lower reported revenue and a realized loss on financial instruments of $17.1 million in Q2 2020 as compared to a realized gain on financial instruments of $5.3 million in Q2 2019. Petroleum and natural gas revenue decreased by 26% as compared to Q2 2019, largely due to lower average realized light oil and condensate sales prices in Q2 2020. Adjusted funds flow was also negatively impacted by higher transportation and other expense as a result of Birchcliff’s increased Dawn and AECO firm service, and positively impacted by lower operating, royalty and interest expenses as compared to Q2 2019.

Net Loss to Common Shareholders

Birchcliff recorded a net loss to common shareholders of $39.5 million, or $0.15 per basic common share, in Q2 2020, a decrease from $45.2 million and $0.17 per basic common share in Q1 2020. The decreases were primarily due to lower unrealized mark-to-market losses on financial instruments as compared to Q1 2020, partially offset by a decrease in adjusted funds flow as described above and a decrease in income tax recovery.

Birchcliff’s net loss to common shareholders in Q2 2020 increased from $9.5 million and $0.04 per basic common share in Q2 2019. The increases were primarily due to lower adjusted funds flow as described above and a decrease in income tax recovery, partially offset by lower unrealized mark-to-market losses on financial instruments as compared to Q2 2019.

Operating Expense

Birchcliff’s operating expense was $2.89/boe in Q2 2020, an 8% decrease from $3.14/boe in Q1 2020 and a 9% decrease from $3.17/boe in Q2 2019. The decreases were primarily due to various field optimization and cost-saving initiatives in Pouce Coupe and Gordondale, which included the Corporation’s expanded liquids-handling capabilities in Pouce Coupe.

Operating Netback

Birchcliff’s operating netback was $6.84/boe in Q2 2020, a 27% decrease from $9.32/boe in Q1 2020 and a 40% decrease from $11.38/boe in Q2 2019. The decreases were primarily due to lower average realized light oil and condensate prices and higher per boe transportation and other expense, partially offset by lower per boe operating and royalty expenses as compared to Q1 2020 and Q2 2019.

Total Cash Costs

Birchcliff’s total cash costs were $9.96/boe in Q2 2020, an 8% decrease from $10.88/boe in Q1 2020. The decrease was primarily due to lower per boe operating, royalty, interest and G&A expenses, partially offset by higher per boe transportation and other expense. Birchcliff’s total cash costs on a per boe basis in Q2 2020 were comparable to $10.00/boe in Q2 2019.

Debt and Credit Facilities

Birchcliff has significant liquidity from its Credit Facilities which have an aggregate principal amount of $1.0 billion and which are comprised of an extendible revolving syndicated term credit facility (the “Syndicated Credit Facility”) of $900.0 million and an extendible revolving working capital facility (the “Working Capital Facility”) of $100.0 million. At June 30, 2020, Birchcliff had long-term bank debt of $753.1 million (March 31, 2020: $619.0 million; June 30, 2019: $622.3 million), leaving $241.0 million of unutilized credit capacity after adjusting for outstanding letters of credit and unamortized interest and fees. Total debt at June 30, 2020 was $807.6 million as compared to $739.6 million at March 31, 2020 and $654.7 million at June 30, 2019. Total debt is expected to peak in early Q3 2020 and decrease throughout the remainder of 2020, with total debt at year end 2020 expected to be in the range of $750 million to $770 million. See “Outlook and Guidance”.

The Credit Facilities are subject to semi-annual reviews of the borrowing base limit by Birchcliff’s syndicate of lenders, which limit is directly impacted by the value of Birchcliff’s oil and natural gas reserves. In May 2020, Birchcliff’s syndicate of lenders completed its review and the borrowing base limit was confirmed at $1.0 billion. The next regularly scheduled review of the borrowing base limit is expected to occur in November 2020.

The maturity dates of the Credit Facilities are currently May 11, 2022. The Corporation may each year, at its option, request an extension to the maturity date of the Syndicated Credit Facility and the Working Capital Facility, or either of them, for an additional period of up to three years from May 11 of the year in which the extension request is made. In connection with the most recently completed borrowing base review, Birchcliff chose to not extend the maturity dates of the Credit Facilities by another year given that the Credit Facilities do not mature for another two years and the increased costs of credit in the current environment.

Pouce Coupe Gas Plant Netbacks

Birchcliff processed approximately 66% of its total corporate natural gas production and 55% of its total corporate production through the Pouce Coupe Gas Plant in the six months ended June 30, 2020 as compared to 69% and 59%, respectively, in the six months ended June 30, 2019. 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:

  Six months ended
June 30, 2020
Six months ended
June 30, 2019
Average production:
  Condensate (bbls/d) 2,872 3,272
  NGLs (bbls/d) 940 753
  Natural gas (Mcf/d) 224,354 246,920
Total (boe/d) 41,204 45,178
Liquids-to-gas ratio(1) (bbls/MMcf)   17.0   16.3
Netback and cost: $/Mcfe $/boe $/Mcfe $/boe
  Petroleum and natural gas revenue(2) 2.68 16.10 3.38 20.30
  Royalty expense (0.06) (0.35) (0.06) (0.35)
  Operating expense(3) (0.41) (2.47) (0.39) (2.34)
  Transportation and other expense (0.90) (5.44) (0.75) (4.55)
Operating netback $1.31 $7.84 $2.18 $13.06
Operating margin(4) 49% 49% 64% 64%

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

The liquids-to-gas ratio at the Pouce Coupe Gas Plant increased by 4% to 17.0 bbls/MMcf in the six months ended June 30, 2020 as compared to 16.3 bbls/MMcf in the six months ended June 30, 2019 primarily due to specifically targeted condensate-rich natural gas wells in Pouce Coupe.

Commodity Prices

The following table sets forth the average benchmark index prices for the periods indicated:

  Three months ended
June 30, 2020
Three months ended
June 30, 2019
 
% Change
Light oil – WTI Cushing (US$/bbl) 26.61 59.82 (56)
Light oil – MSW (Mixed Sweet) (CDN$/bbl) 25.15 73.26 (66)
Natural gas – NYMEX HH (US$/MMBtu)(1) 1.64 2.64 (38)
Natural gas – AECO 5A Daily (CDN$/GJ) 1.89 0.98 93
Natural gas – AECO 7A Month Ahead (US$/MMBtu)(1) 1.33 0.87 53
Natural gas – Dawn Day Ahead (US$/MMBtu)(1) 1.63 2.34 (30)
Natural gas – ATP 5A Day Ahead (CDN$/GJ) 1.68 1.17 44
Exchange rate (CDN$ to US$1) 1.3860 1.3376 4
Exchange rate (US$ to CDN$1) 0.7215 0.7476 (3)

(1) See “Advisories – MMBtu Pricing Conversions”.

Marketing and Natural Gas Market Diversification

Birchcliff’s physical natural gas sales exposure primarily consists of the AECO, Dawn and Alliance markets. 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 Q2 2020, after taking into account the Corporation’s financial instruments:

Three months ended June 30, 2020
   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) 10,866 13 56,322 Mcf 16 13 2.12/Mcf
Dawn(2) 34,402 38 159,338 Mcf 47 35 2.37/Mcf
Alliance(3) 665 1 5,112 Mcf 1 1 1.43/Mcf
NYMEX HH(1) 8,867 9 120,786 Mcf 36 27 0.81/Mcf
Total natural gas 54,800 61 341,558 Mcf 100 76 1.76/Mcf
Light oil 13,445 15 5,744 bbls 8 25.72/bbl
Condensate 13,649 15 4,825 bbls 6 31.09/bbl
NGLs 8,176 9 7,455 bbls 10 12.05/bbl
Total liquids 35,270 39 18,024 bbls   24 21.50/bbl
Total corporate 90,070 100 74,950 boe   100 13.21/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 132,500 MMBtu/d at an average contract price of NYMEX HH less US$1.234/MMBtu during Q2 2020.
(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 until October 31, 2020. Alliance sales are recorded net of transportation tolls.

Effectively 87% of the Corporation’s sales revenue, representing 84% of its total natural gas production and 87% of its total corporate production, was generated from markets outside of AECO in Q2 2020, 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 June 30, 2020
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(4) 33,840 49 177,108 52 2.12 0.38 1.74
Dawn 34,402 50 159,338 47 2.37 1.43 0.94
Alliance(5) 665 1 5,112 1 1.43 1.43
Total 68,907 100 341,558 100 2.22 0.87 1.35

 

Three months ended June 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(4) 22,049 34 217,353 59 1.11 0.32 0.79
Dawn 41,104 63 135,953 37 3.32 1.38 1.94
Alliance(5) 1,856 3 13,727 4 1.49 1.49
Total 65,009 100 367,033 100 1.95 0.71 1.24

(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) Includes physical AECO 7A basis swaps for 5,000 MMBtu/d at an average contract price of NYMEX less US$1.205 MMBtu.
(5) Alliance sales are recorded net of transportation tolls.

Capital Activities and Investment

During Q2 2020, Birchcliff continued with the successful execution of its 2020 Capital Program, drilling 10 (10.0 net) wells and bringing 16 (16.0 net) wells on production as set forth in the table below:

Area Wells drilled in Q2 2020 Wells brought on production in Q2 2020
Pouce Coupe
Montney D1 horizontal natural gas wells 3 0
Montney D2 horizontal natural gas wells 3 3
Montney C horizontal natural gas wells 4 3
Total – Pouce Coupe 10 6
Gordondale
Montney D1 horizontal oil wells 0 5
Montney D2 horizontal oil wells 0 4
Montney D4 horizontal oil wells 0 1
Total – Gordondale 0 10
TOTAL – COMBINED 10 16

Total F&D capital expenditures in Q2 2020 were $83.5 million, with F&D capital expenditures of $67.5 million in Pouce Coupe and $16.0 million in Gordondale.

OPERATIONAL UPDATE

As at the date hereof, Birchcliff has completed the vast majority of its 2020 Capital Program, with all wells brought on production and all major facilities and infrastructure projects successfully completed. The 2020 Capital Program was strategically front-end loaded, allowing Birchcliff to bring new wells on production relatively early in the year in order to optimize producing days for capital spent.

Due to the excellent execution of Birchcliff’s DCCET program and the various efficiencies resulting from multi-well pad drilling, Birchcliff was able to realize substantial per well cost savings and the program was completed on time and under budget. The Corporation has been able to reduce its DCCET costs as compared to 2018 and 2019 largely due to continued internal technical improvements resulting in reduced drilling and completion pumping times, reduced frac treatment water use and improvements in drilling trajectories.

Total facilities and infrastructure spending under the 2020 Capital Program is targeted at approximately $75 million and 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. As these significant one-time projects have been completed, facilities and infrastructure spending in 2021 is expected to be significantly lower than in 2020. See “Outlook and Guidance”.

Drilling Activities and Results

Birchcliff completed its drilling program in Q2 2020 and subsequent to the end of the quarter, it brought all remaining wells on production. The following table summarizes the wells that Birchcliff has drilled and brought on production this year:

Area Total wells drilled Total wells brought on production(1)
Pouce Coupe
Montney D1 horizontal natural gas wells 4 4
Montney D2 horizontal natural gas wells 9 12
Montney C horizontal natural gas wells 7 8
Total – Pouce Coupe 20 24
Gordondale
Montney D1 horizontal oil wells 4 5
Montney D2 horizontal oil wells 4 4
Montney D4 horizontal oil wells 0 1
Total – Gordondale 8 10
TOTAL – COMBINED 28 34

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

In Pouce Coupe, the Corporation drilled 20 (20.0 net) wells and brought 24 (24.0 net) wells on production. The wells were drilled on three multi-well pads as described below:

  • 06-32-078-12W6 (4-well pad): The first pad is an existing pad site where Birchcliff drilled an additional 2 wells in Q4 2019 and 2 wells in Q1 2020. All of these wells were drilled in the Montney D2 interval and were brought on production in late Q1 2020.
  • 14-06-079-12W6 (6-well pad): The second pad is an existing pad site where Birchcliff drilled an additional 2 wells in Q4 2019 and 4 wells in Q1 2020. These 6 wells were drilled in 2 different intervals (3 in the Montney D2 and 3 in the Montney C) and were all brought on production in Q2 2020. Birchcliff has been encouraged by the results of these wells, which have shown strong condensate and natural gas rates.
  • 14-19-079-12W6 (14-well pad): Birchcliff recently brought the production on from its 14-well pad, which used multi-interval cube-style development to maximize operational efficiencies through scale and repeatability, which led to substantial cost savings on a per well basis. The pad 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. The 14 wells were drilled in 3 different intervals (5 in the Montney D1, 4 in the Montney D2 and 5 in the Montney C).The pad utilized two fit-for-purpose walking style drilling rigs which each drilled 7 wells. Utilizing two drilling rigs allowed for significant shared service-related synergies and resulted in a more efficient cycle time and cost savings. Significant costs saving were also realized during the completion of this pad due to economies of scale and minimal non-productive time.

In Gordondale, the Corporation drilled 8 (8.0 net) wells and brought 10 (10.0 net) wells on production. Birchcliff used multi-interval cube-style development to drill the 10 wells, using two drilling rigs on two proximal pads targeting the Montney D1, D2 and D4 intervals. Two wells were drilled in Q4 2019 and the remaining 8 wells were drilled in Q1 2020.

  • 06-35-077-11W6 (4-well pad): Birchcliff drilled 4 wells on this pad in Q1 2020. These 4 wells were drilled in 2 different intervals (2 in the Montney D1 and 2 in the Montney D2) and were all brought on production in Q2 2020. Birchcliff has been encouraged by the results of these wells, which have shown strong light oil and natural gas rates.
  • 02-02-078-11W6 (6-well pad): Birchcliff drilled 6 wells on this pad, which is adjacent to an existing pad site. Two of the wells were drilled in Q4 2019 and 4 wells were drilled in Q1 2020. These 6 wells were drilled in 3 different intervals (3 in the Montney D1, 2 in the Montney D2 and 1 in the Montney D4). All of the wells were brought on production in Q2 2020. Birchcliff has been encouraged by the results of these wells, which include production rates from the first Montney D4 well that the Corporation has drilled in Gordondale. The Montney D4 interval has been proven commercial in the Pouce Coupe area (with 12 producing wells) and Birchcliff anticipates that the extension of the Montney D4 into Gordondale will add more light oil inventory utilizing the Corporation’s existing infrastructure.

Multi-Interval Cube-Style Development and Continuous Performance Improvement

The 14-well pad in Pouce Coupe highlights the progress Birchcliff has made with its DCCET best practices. Through its many years of exploration and development, Birchcliff has acquired significant proprietary knowledge respecting all aspects of the Montney/Doig Resource Play in its areas of focus. This competitive advantage has resulted from Birchcliff’s commitment to science and technology and striving for continuous performance improvement, as well as the knowledge gained from the drilling, completing and bringing on production of over 364 wells since its first Montney/Doig horizontal well was drilled in 2007. Building off of the success of its science and technology pad in 2018 that targeted three different intervals (the Montney D1, D2 and C), Birchcliff continues to refine its multi-interval cube-style DCCET practices to improve resource recovery and cost efficiency in both Pouce Coupe and Gordondale. This cube-style of development has various benefits, including: (i) it reduces Birchcliff’s environmental footprint; (ii) it allows Birchcliff to fracture stimulate (complete) a large number of wells in several different intervals all at once to leverage the rock mechanics and achieve better resource recovery; (iii) it helps to minimize frac-driven interaction with offsetting wells; (iv) it reduces per well costs through common well equipment and pipelines; and (v) it maximizes operational scale and repeatability.

Birchcliff’s investment in science and technology is critical to its continuous performance improvement. The 14-well pad provided an excellent opportunity to utilize leading-edge diagnostic technology to enhance the Corporation’s learnings. The diagnostics on this pad include: (i) surface microseismic; (ii) downhole whip array microseismic; (iii) fibre distributed acoustic sensing (“DAS”), which was used for microseismic and cross-strain measurements; (iv) sealed wellbore pressure monitoring to monitor offsetting well interactions; (v) full-cycle geochemistry sampling; and (vi) accelerated and conventional diagnostic fracture injection testing and interference testing. Birchcliff also plans to evaluate the use of fibre DAS production profiling on one or two wells on the 14-well pad.

The utilization of these diagnostic technologies has provided Birchcliff with significant insights into its DCCET best practices at the stage, well and pad level, including:

  • At the stage level: optimal cluster design, including the number of clusters per stage, stage length, tonnes per metre of proppant and proppant concentrations.
  • At the well level: optimal number of stages per well, well lengths and wellbore landing depths.
  • At the pad level: optimal frac order, flowback order and well spacing, both laterally and vertically.

Facilities and Infrastructure

At the Pouce Coupe Gas Plant, the Inlet Liquids-Handling Facility was brought on-stream in late July 2020. This facility was completed ahead of schedule and under budget and it represents an important milestone for Birchcliff as it gives the Corporation the ability to grow its condensate production in Pouce Coupe to approximately 10,000 bbls/d.

In Gordondale, Birchcliff completed the addition of natural gas compression at both of its 100% owned and operated oil batteries 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. Both projects were completed in Q2 2020. The addition of natural gas compression at both batteries allows the existing wells to produce against lower wellhead pressures, which in turn has increased production rates. 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.



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