Banque Nationale's BulletinBirchcliff Energy Ltd. Cascading Returns BIR (TSX) STOCK RATING TARGET EST. TOTAL RETURN C$9.81 Outperform (Unchanged) C$13.50 (Unchanged) 38.4% Q2/22
Operating & Financial Results
The company reported second-quarter operating & financial results in line with expectations, with average production of 73.7 mboe/d (17% liquids) and associated CFPS of $1.03 (vs. consensus $1.02). During the quarter, the company’s paced capital program, in association with the strength of its cash netback (+58% sequentially; top performer), as backstopped by strong realizations (+41% Q/Q; 47% incl. hedging) and still very reasonable cash costs (+25% Q/Q), supported a 30% payout and 30% associated FCF yield. Critical attributes to note, include:
• The majority of its gas production is processed through its 100% owned PCS gas plant, at which, through a strong gas price environment its margin should be trending in the range of ~85% (vs. ~70% historical).
• Owing to basis hedges in-place (~150 mmcf/d @ -$1.20/mcf discount to NYMEX), in the prevailing basis environment (strip -$3/mcf), it is reaping significant rewards ($16.7 mln, or $2.49/boe, realized gain in Q2/22, and expanding at present) as a substantial asset for the otherwise unhedged producer.
A Debt Beat Down
Its operational program remains intact and advancing, while its capital program has been expanded to account for inflation (+5-10%), with +$275 mln in spending set to deliver average production of 79 mboe/d (19% liquids) under a ~25% payout to imply a MASSIVE 32% FCF yield. Again, the proceeds of its program will continue to be directed towards extinguishing debt (through Q4/22, incl. preferred shares), while supporting its 1% cash yield (which was complemented by the buyback of 2% of shares o/s during the quarter), and providing visibility towards massive cash dividend growth (10x; 8% cash yield on a ~20-30% payout) in 2023e and beyond.
Maintain Outperform Rating & $13.50/sh Target Price Massive free cash has emerged and is expected to grow, in support of significant cash yield & value expansion through 2023e and beyond. BIR is poised for a 47% return profile (vs. peers 52%) on leverage of -0.8x (vs. peers 0.0x), while trading at 2.9x 2023e EV/DACF (vs. peers 1.7x).