TD comment on dividend decisionEvent Dividend Maintained, 2023 Production Guidance Down, No Growth in 2024
Impact: NEGATIVE
Birchcliff previously provided 2023 guidance (January 18, 2023) along with Q4/22 production, CF, and year-end reserves (February 16, 2023). Last night, the company formally filed audited financial statements and used this as an opportunity to: Restate its Commitment to the Current Dividend: Birchcliff reiterated its commitment to the $0.80/share annual dividend. We appreciate that Birchcliff's commitment to the dividend comes from shareholder requests, relative YTD outperformance, and its view that gas prices will recover from spot levels.
Our View
We previously stated that Birchcliff requires ~US$3.15/mcf HH to sustain production and the dividend within CF. Below this level, the company would likely have to adjust its dividend, reduce capex/production, and/or add debt to its balance sheet.
We recognize that the dividend can be maintained by pulling other levers, although it strikes us as odd that Birchcliff is maintaining a dividend level that we believe was initially set too high. Arguments around near-term dividend maintenance with debt or capital cuts remind us of justifications used by producers with unsustainable dividends in past cycles.
Lower 2023 Production Guidance (2023 Capex Unchanged): Due to continued Pembina outages, combined with deferral of 2023 development, Birchcliff has reduced its guidance to 77-80 mBOE/d (from 81-83 mBOE/d).
Lower Production & Capex in 2024: For 2024, Birchcliff anticipates capex of $255mm (down from $355mm). Rather than growing to 83 mBOE/d in 2024, production guidance has been reduced by ~5% — now flat to the midpoint of the reduced 2023 guidance.
TD Investment Conclusion
We are reducing our target multiple to Birchcliff's trailing three-year average of 3.5x EV/DACF (from 5x) as we do not believe a premium CF multiple is warranted, given the risk around dividend stability, pivoting from debt elimination to adding leverage, flat production, and our price deck that is 55% higher than spot gas. Although this results in a total return sufficient to maintain our BUY rating (at US$4/mcf HH), this is the lowest return in our gas-weighted coverage universe.