(Idea) Birchcliff Energy
Birchcliff Energy (BIR:CA) (OTCPK:BIREF) is a natural gas-weighted Canadian E&P. Its operations are focused in the Montney/Doig play that straddles Alberta and British Columbia.
Source: BIR Investor Presentation, January 2024.
In the third quarter, BIR produced 1,728 boe/d of light oil, 4,850 boe/d of condensate, 7,412 boe/d of NGLs, and 360,924 mmcf/d of natural gas, for a production mix of 2.3% crude, 6.5% condensate, 10.0% NGLs, and 81.1% natural gas.
While BIR shares currently yield 8.6%, we do not consider the stock to be an income play. The company doesn’t hedge, its management has a longstanding track record of not meeting its own guidance, and the dividend is at risk of being cut if commodity prices continue to slump.
We believe the best way to play BIR is as a long-term call option on much higher natural gas prices in a few years. Investors can establish a small position at the current stock price and earn multi-bagger returns in a few years if natural gas prices increase significantly.
For all other intents and purposes, we would avoid the name until management can reestablish credibility with the market.
BIR’s Negatives Outweigh its Positives
BIR has eroded its credibility with investors for years after management regularly missed guidance, underperformed expectations, and pursued ill-conceived capital allocation policies.
All these negatives were on display in 2023. Under former CEO and co-founder Jeff Tonken, BIR increased its quarterly base dividend by 900%, from $0.02 to $0.20 in the first quarter of 2023.
As things turned out, the dividend wasn’t covered in any quarter of 2023, as shown in the following table.
The continuous cash flow deficit throughout 2023 caused BIR to increase its borrowings to fund its common dividend. As a result, its debt balance increased throughout the year.
These incidents alone may be excusable. But CEO Tonken went a step further and took to television interviews to ensure BIR shareholders that the company was committed to the payout. Nevertheless, the market wasn’t convinced. BIR shares continued to trade at a dividend yield of more than 10% over the second half of the year.
On November 15, BIR missed third-quarter analyst estimates, in large part due to lower commodity prices. Instead of hunkering down and reducing production and guidance, management increased production and capex guidance in anticipation of “strength in natural gas pricing that is typically seen in winter months.” The move spooked the market and ignited a steep selloff in BIR shares. Later that day, Tonken—who had already announced his retirement as CEO in October—went on BNN to reassure BIR shareholders that the company would be able to fully fund its capex and dividend while also repaying debt in 2024.
Chris Carlsen, formerly BIR’s Chief Operating Officer, became CEO on January 1. On January 19, BIR put out an ugly press release announcing that fourth-quarter production came in at 76,500 boe/d, short of consensus expectations of 81,000 boe/d. The miss brought full-year 2023 production to approximately 76,000 and capex to $305 million. Both were well below management’s initial guidance of 82,000 boe/d of production and $265 million of capex. BIR also announced it would cut its dividend in half, from $0.20 per share to $0.10.
The market reacted by selling BIR shares down to a two-and-a-half-year low.
