CIBCMaintain their $13.50 target which has always been one of the lower ones. GLTA
EQUITY RESEARCH
October 20, 2022 Earnings Update
BIRCHCLIFF ENERGY LTD.
Desk Update: Honing Our Estimates Following 2023 Guidance
Our Conclusion
We recently hosted management for a desk update where we walked
through free cash flow allocation, the 2023 outlook, and inflation
assumptions. Under our revised spending assumptions, Birchcliff generates meaningful free cash flow on strip after regular dividends, and we believe special dividends could also be a recurring part of the company’s return of capital framework. It’s 2023E dividend yield is currently ~8% while its free cash flow yield is 21% vs. peers at 18%. We believe a portion of the incremental free cash flow will be available for shareholders through special dividends during 2023 while the rest will be put towards the balance sheet or redeployed into modest growth projects. With this update, our 2023E CFPS increases by 4% to $2.81/sh from $2.69/sh prior. Our price target is unchanged and computes to 3.9x 2023E EV/DACF on strip vs. peers at 3.8x.
Our revised estimates see the shares currently trading at 2.9x 2023E
EV/DACF on strip (peers 2.6x), though absent our changes to cash taxes
and inclusive of our new production and spending estimates, the shares
would be trading at 3.0x and 3.7x 2023E and 2024E EV/DACF respectively. We maintain our Neutral rating as we see higher return potential in other stocks at this juncture.
Key Points
We expect inflation to put upward pressure on forward spending in
2024. In the company’s recent corporate presentation, management
highlights a 15%-20% increase in drill, complete, equip, and tie-in (DCET)
costs in 2022. We believe a more conservative stance on forward budgets is reasonable to account for inflation. With increased drilling activity in Q4/22, we estimate that the 2023 budget of $240MM - $270MM can achieve annual production of ~82 MBoe/d, but we estimate that the business requires ~$300MM in annual spending to keep production flat. We have therefore taken our 2023 capital spending estimate to $285MM versus Street at $274MM, and 2024 to $305MM versus Street at $285MM. Management expects to release its multi-year outlook in early 2023, which we believe will take a similar step higher on spending and lower on production.
We estimate Birchcliff to generate $362MM in free cash flow on strip
after regular dividends, which could be allocated to shareholders via
special dividends or put towards the balance sheet. On strip, we estimate
Birchcliff will reach its net cash target of $200MM by Q3/23, leaving a
~$100MM surplus by year-end 2023 that could be a special dividend
candidate and computes to ~$0.43/sh.
We have fine-tuned our cash tax assumption for 2023 and 2024, which
drives an increase in our cash flow estimate. Our revisions see cash flow
increasing by 4% in 2023 and 7% in 2024. Our 2023 production estimate of 81.9 MBoe/d compares to Street at 82.3 MBoe/d, while our 2024 production estimate of 82.1 MBoe/d is below Street at 85.8 MBoe/d.