As expected, Birchcliff Energy (BIR.TO) announced it has upped its annual dividend to CAD$0.80 per share paid quarterly. The dividend and maintainance capital are more than covered by cash flow from operations at current commodity prices with a small surplus. The company has increased its capital budget to reflect anticipated cost inflation and realize enough growth to fully utilize its processing facilities, both wholly owned and sourced from Altagas (ALA.TO). By modestly expanding output, Birchcliff will realize operating costs savings.
The company published its 5-year plan with enough detail all investors are able to transparently see how management views the future and how they plan to cope with any decline in commodity prices. This level of transparency is a model for all Canadian E&P companies. Here is the recently released 5-year plan.
I have been a shareholder of Birchcliff since early 2020 when I was able to buy shares at CAD$0.88 a share. I buy and hold. I have added over time and now hold 127,000 shares and will realize dividend income of CAD$101,600 annually unless the company changes its dividend policy. With the expectation of a growing level of surplus cash flow, I am willing to bet the dividend will increase over time. Management wisely limits share repurchases to an amount that offsets share-based compensation, keeping the share count steady.
I value the shares today at ~CAD$13.00 using the Gordon dividend growth model and assuming a market return of 9.5% and a 3% annual rate of dividend growth [ $080/(.095 -.03) = $13.33]. The Gordon model is simple but has limitations, especially for cyclical companies where commodity prices (not under the control of management) can be subject to wide swings.
An alternate method of valuation is to use a modified Black Scholes approach valuing the company’s reserves as a call option on future commodity prices. Using that methodology, I find the company has a value equivalent to about CAD$15 a share. I would be cautious about relying on the Black Scholes approach owing to its assumption that commodity prices are log-normally distributed and implicitly that the current commodity prices are the mean of that distribution. With a high risk of a near-term recession such an assumption may be on the aggressive side.
I see little risk of a dividend cut unless natural gas prices fall to about CAD$2.00 a gigajoule. The Kitimat LNG facility nearing its in-service date of 2024 or 2025, and a shortage of natural gas globally leading to sizeable exports from North America to Europe and Asia, I think there is more chance of higher natural gas prices than a significant and persistent decline.
In any event, the prospect of many years of CAD$100,000 plus dividend income compel me to hold my shares for the long term and ignore the daily news about recession, recovery, the level of interest rates, etc. With Birchcliff’s pristine balance sheet I am unconcerned about the macroeconomic picture.