TD down target priceEvent
Preliminary Q4/23 Results, Firms 2024 Guidance, Cuts Dividend.
Impact: NEGATIVE
Q4/23 Production Falls Shy of TD/Street Expectations: Q4/23 production was indicated to be 76-77 mBOE/d. This fell shy of TD (81.7 mBOE/d) and consensus (81.0 mBOE/d). This was, in part, attributed to third-party outages. FY-2023 capex of $305mm was in line with the $300mm budget. 2024 Volume Guidance Lower than Anticipated, which Drives TD 2024E CFPS Lower: Birchcliff has deferred drilling 13 wells planned for Q2 into Q3 (capital budget unchanged). Given the later on-stream timing of these wells, 2024 production guidance has been lowered to 74-77 mBOE/d, from the preliminary guidance of 77-79 mBOE/d in November. This is also below TD (78 mBOE/d) and consensus (78 mBOE/d). The 2024 budget was as anticipated at $240 million-$260 million. The lower production volumes result in a 7% reduction in our 2024E CFPS forecast.
Dividend Cut Prudent, but Higher Gas Prices Still Required to Fund with FCF: Birchcliff announced a 50% reduction in its dividend to $0.10/q (from $0.20/q).
Recall, natural-gas prices deteriorated shortly after the prior dividend was announced. We calculate that the new dividend is sustainable down to HH of US$3.10/mcf in 2024E. See Exhibit 5 for payout/balance-sheet sensitivities
. Our View: Although the market is likely to react negatively to the decision, we strongly believe a cut now is more prudent than paying the dividend with debt in hopes that higher gas prices will materialize. However, at current spot pricing, the payout ratio remains above 100%. Meanwhile, the company is still leaning on some, albeit less, debt to fund it through 2024E at current strip pricing.
TD Investment Conclusion
In our view, the previously unsustainable dividend was supporting a valuation higher than its peers, despite lagging operational performance relative to expectations over the past several years. Since 2021, the company will spend ~25% more than it had originally anticipated through 2024E to see volumes contract ~4% over this period (versus plans to grow 10%). Although rightsizing the dividend is a solid first step, we believe confidence in the go-forward plan and operational execution will take time and find more compelling value in other equities.