$20Birchcliff mentioned in this newsletter, has my attention. Wasn't easy pasting it here, should read okay.
January 30, 2015 www.valueinvestorinsight.com Value Investor Insight 20
The plunge in oil prices has value investors searching far and wide for energy-related stocks whose prospects are
far better than their share prices would indicate. Why Birchcliff Energy is Brian Boyle’s first-choice candidate.
UNCOVERING V ALUE: Birchcliff Energy
The steep decline in energy-company
stock prices has naturally set off a flurry of
activity among bargain-hunting investors.
There’s little evidence so far they’re jumping
in feet first to buy, but the breadth and
depth of the correction is the type of babythrown-
out-with-the-bathwater situation
that at least calls for research attention
and can create interesting opportunities.
Brian Boyle of Boyle Capital contends
that Birchcliff Energy is one such opportunity.
The company develops and produces
primarily natural gas from the Peace River
Arch region of Alberta, Canada. It was
founded in 2004 by a management team
led by CEO Jeffery Tonken to follow an
established playbook: assemble high-potential
resources, efficiently develop those
resources and the infrastructure to produce
them, and then sell out to a larger
player at a favorable point in the cycle.
A key partner in the effort is Canadian
billionaire Seymour Schulich, who owns
more than 25% of the company.
Despite Birchcliff surely not being at a
favorable point in the cycle, Boyle believes
it continues to build value through a wellconceived
production plan. Tapping what
it considers low-risk reserves, it plans to
increase production from 40,000 barrels
of oil equivalent in 2014 to 100,000
by the end of 2019. That growth, to be
funded by cash flow and current bank
lines, should also continue to drive down
incremental costs. Operating costs before
transportation and marketing expenses
last year were around $5 per barrel equivalent,
nearly half the level of six years ago.
The company’s efficiency allows it to make
money even in bad markets, as when natural
gas prices averaged less than $2.80 per
Mcf (thousand cubic feet) in 2012.
Even with the best-laid plans, Birchcliff
is unlikely to prosper if natural gas prices,
again around $2.80 per Mcf, remain perpetually
weak. While North America is
awash in natural-gas supply, Boyle argues
that the long-term demand picture for
natural gas is bright enough to result in
firming prices over time – driven primarily
by gas usurping coal for electricity generation,
an ongoing industrial renaissance in
the U.S., and the potential expansion of
liquefied-natural-gas exports. Over his investment
horizon for Birchcliff, he expects
natural gas prices to average $4 per Mcf.
Assuming that average gas price, that
the company hits its five-year production
targets, and that its operating costs
just stay even with 2014 levels, Boyle arrives
at an intrinsic value for Birchcliff’s
shares of around C$20, more than three
times today’s share price. On top of that,
he sees significant additional value in untapped
reserves the company is just starting
to develop in the area known as the
Middle Montney, in between its initial Upper
and Lower Montney plays. In its latest
reported quarter, the company upped
its estimate of future drilling locations by
50% due to early successes in the Middle
Montney. “This management team has
in the past underpromised and overdelivered,”
says Boyle. “In this case, just delivering
what they say they can should leave
shareholders very well served.”
Drilling Down
Birchcliff Energy
(Toronto: BIR:CN)
Business: Exploration, development and
production of natural gas and light oil from
company-owned acreage located in the
Peace River Arch area of Alberta, Canada.
Share Information
(@1/29/15, Exchange Rate: $1 = C$1.261):
Price C$6.30
52-Week Range C$6.05 – C$14.97
Dividend Yield 0.0%
Market Cap C$958.9 million
Financials (9 mo. thru 9/30, annualized):
Net Revenue C$448.2 million
Pre-Tax Margin 39.4%
Net Profit Margin 28.9%
Valuation Metrics
(@1/29/15):
BIR:CN Russell 2000
P/E (TTM) 8.6 58.6
I NVE STM E N T S NAP SHOT
BIR:CN PRICE HISTORY
THE BOTTOM LINE
Following a playbook with which it’s had considerable past success, the company’s
management has laid out a credible production growth plan that the market is largely
ignoring, says Brian Boyle. Assuming it hits its targets and that natural gas prices average
around $4 per Mcf in coming years, he pegs intrinsic share value at close to C$20.
Sources: Company reports, other publicly available information