Birchcliff Energy Ltd T.BIR

Scotia comments on results

[incomedreamer11]

Q3/23 Cash Flow Behind Expectations; 2023 Capex Increased

OUR TAKE: Negative. BIR’s Q3/23 cash flows came in behind expectations on lower realizations, higher cash costs, and higher capex. The company increased its 2023 capital budget by ~9%, with higher production expected in Q1/24, while preliminary 2024 guidance is in line with expectations. While we understand the logic behind the 2023 capex bump (i.e., adding volumes early in 2024, holding rigs), we expect a negative market reaction on it and the Q3/23 cash flow. Near term, we see strong natural gas prices as the key catalyst for BIR. Longer-term, we see successful balancing of moderate growth with the high dividend payout (within cash flow) as a key hurdle to clear.

Q3/23 cash flow behind on lower realizations / higher costs. Production of ~74.1 mboe/d (81% gas) was in line with expectations, while post-hedging realizations of $25.15/boe were ~5% behind consensus on lower-than-expected oil revenues. Cash costs of $14.56/boe were ~2% above the Street (largely on higher opex and transportation costs [including a marketing loss on a new propane supply deal with a polypropylene producer]), while AFF of $72M ($0.27/sh) came in ~13% below consensus on the lower realizations and higher costs. Capex of $67M was ~6% ahead of the Street, resulting in FCF of ~$5M coming in well below consensus expectations of $19M (and well below the $53.3M dividend obligation). See Exhibit 1 for detailed results versus consensus expectations (Negative).2023 production guidance tightened, capex increased. BIR tightened its 2023 production guidance to 77 mboe/d (from the lower end of 77 mboe/d to 80 mboe/d; vs. us and the Street at ~77 mboe/d) due to unplanned third party downtime in 1H/23 and the deferral of nine wells from Q2/23 into Q3/23. The company also increased its full year capital budget by ~$25M (9%) to $300M (we were at ~$291 and the Street was at ~$289M) to accelerate five drills into Q4/23 and maintain its two-rig fleet. The company plans to complete and tie-in the wells in early Q1/24 to benefit from the (typically) higher winter gas prices. BIR also increased its opex and transportation cost guidance by ~45¢ (~5%) to ~$9.55/boe (combined). (Negative on the capex and cash cost increases).Preliminary 2024 guidance largely in line (but we think capex will end up higher). BIR announced preliminary 2024 production guidance of 77 mboe/d to 79 mboe/d (in line with us / the Street at 77.5 mboe/d / 78.1 mboe/d) on capex of $240M to $260M (vs. us / the Street at $280M / $268M). However, given the company’s trend of setting very low Q4 budgets and adding capital later in the year, we have bumped our 2024 capex forecast to $295M and expect several other Street estimates to move up. BIR expects AFF to come in at $500M based on US$80/bbl WTI and US$3.40/mmBtu NYMEX, resulting in a $27M to $47M post dividend cash flow surplus. The company noted that FCF exceeding the base dividend will be reinvested in the business (including for production growth to fill exisiting infrastructure capacity). Our updated cash flow forecast (US$80/bbl WTI and US$3.50/mmBtu NYMEX) is in line with BIR’s guidance; however, our higher capex estimate points to a capex + dividend break-even NYMEX price of ~US$3.60/mmBtu (see Exhibit 3 for our break-even estimate vectors) (Mixed).

Exhibit 3 - Our 2024 Break-Even Estimate Vectors (at $295M Capex)

Dashed lines represent the 2024 strips.

Source: Company Reports; FactSet; NGI; Scotiabank GBM Estimates.

Shareholder returns update. During Q3/23, BIR distributed ~$53.3M to shareholders via its 20¢/share dividend. The company did not repurchase any shares during the quarter, but has bought back ~0.16M shares for ~$1.2M (~$7.37/share) in Q4/23 to date (Neutral).

[Maxmoe]

Don't you love Bay Street analyst timing? The stock has been bouncing along its 52 week low for almost all of the last year, the dividend yield has increased with the weak stock price to over 10%. And NOW? They decide to issue negative comments. At the bottom. Or darn close to it. They even are expecting near term strength in nat gas pricing. This is why the best money managers do not work at