CIBC downgradeOur Conclusion
We were expecting a 40%-50% dividend cut, but this announcement could put additional selling pressure on the stock in the near term. Birchcliff lowered its production guidance for the year after weighting its capital program towards H2/24 in response to weak natural gas pricing. The revised dividend and our capital spending estimates for 2024 compute to a total payout ratio of 121% on strip, where we estimate YE 2024 net debt to cash flow of 1.6x versus peers at 0.7x. The company’s torque to natural gas prices make it an intriguing trade into better gas fundamentals in 2025, although we expect a focus on debt repayment after a tumultuous year that puts a cap on additional shareholder returns. The stock is trading at 6.0x 2024E EV/DACF versus peers at 4.8x and a free cash flow yield of 3%, in line with peers at 3% on strip. We believe 2024 will be a challenging year for natural gas pricing, but a lower dividend level provides additional capital flexibility. With this update we lower our price target to $5.00 from $6.50 prior, which is based on 2024E EV/DACF of 5.5x, in line with our peer average target multiple of 5.6x.
Key Points
Budget 2024 sees lower production, capital spending unchanged. Midpoint production of 75.5 MBoe/d (19% liquids) was moved lower from Birchcliff’s preliminary budget of 78 MBoe/d as the company shifted capital spending to Q3/24 from Q2/24. This guidance is in line with our estimate of 75.7 MBoe/d and below Street at 77.7 MBoe/d.
Capital spending guidance is unchanged, in the range of $240MM - $260MM, with a midpoint of $250MM which is below our prior estimate of $280MM and Street at $259MM.
Dividend reduced by 50% offering some balance sheet protection, but total payout remains above 100%. Despite the dividend reduction, we estimate YE 2024 net debt to cash flow of 1.6x versus peers at 0.7x on strip. Given the company’s torque to gas pricing, we believe that more constructive gas fundamentals in 2025 offer intriguing upside for the shares, but expect that excess free cash flow will be put towards the balance sheet in the near term.
Capital spending profile should see strong production volumes for Q4/24 when commodity prices look more constructive. The company carried five drilled but uncompleted wells from 2023 into 2024, which will be brought online in January, followed by a second five-well pad slated for late Q1/24. The company’s well design in 2024 will feature longer laterals and higher intensity completions, which it expects will deliver a stronger type-curve. Fourth quarter production impacted by third-party outages. The company indicated that Q4/23 production is expected to be 76 MBoe/d – 77 MBoe/d versus our previous estimate of 77.0 MBoe/d and Street at 80.6 MBoe/d. Capital spending of $305MM in 2023 was in line with our estimate of $300MM and Street at $301MM.