Birchcliff Energy Ltd. (TSX: BIR) is an intermediate oil and gas company that is engaged in the production and exploration of natural gas, light oil, and natural gas liquids. The group conducts its drilling program in resource plays which is situated in the Peace River Arch region of Alberta. 

Key Investment Rationales:

• Strong Operating performance: For FY21, the company reported total production of 78,520 boe/day, which is higher than 76,401 boe/day in FY20. Additionally, the company also reported a higher realization price of CAD 32.53/boe, which is significantly higher than CAD 18.90/ boe in FY20. This has contributed immensely to the company’s income and cash flow growth.

• Growth in Cash flows and Adjusted Fund flows: For FY21, the company reported its cash flow from operations of CAD 515.4 million, reflecting a 174% y-o-y growth over FY20. Moreover, the company reported its adjusted fund flow of CAD 539.7 million in FY21, surged 192% y-o-y growth from FY20 at CAD 184.5 million. These spectacular performances were primarily driven by higher reported petroleum and natural gas revenue due to higher average realized, aided by significant increases in benchmark oil and natural gas prices.

Source: Company Reports

• Higher operating netbacks: For both Q4FY21 and FY21, the company reported its operating netback of CAD 27.53/boe and CAD 21.50/boe, respectively, which is significantly higher than CAD 13.01/boe and CAD 10.37/boe in Q4FY20 and FY20, respectively. An operating netback denotes gross profit per barrel, and hence a higher operating netback indicates higher operational efficiencies.

• Decline in debt on y-o-y basis: At the end of FY21, the company posted its debt of CAD 499.4 million, which is ~34% lower than CAD 762 million in FY20. A lower debt level indicates higher financial flexibility and resulted in lower financial expenses supporting the company’s profitability.

• Impressive long-term guidance: For FY22, the company expects its average production of 78,000 to 80,000 boe/day, which is higher than the average production of 78,520 boe/day in FY21. The company expects its average production to remain between 80,000 boe/ day to 90,000 boe/day till FY26. The company also expects its adjusted funds flow of around CAD 590 million, which is higher than CAD 539.7 million in FY20. The free fund flow is expected in between CAD 330 million to CAD 350 million.

Source: Company Report

• Robust profitability margins: In Q3FY21, the company showcased improved operational efficiencies, which has resulted in higher profitability margins as compared to the industry median. Notably, EBITDA margin and operating margin stood at 69.4% and 46.9%, respectively, in Q3FY21, as compared to the industry median of 47.5% and 28.4%, respectively. Additionally, the company reported its net margin at 55.1% in Q3FY21, as compared to the industry median of 12.2%.

Risks associated with the investment:

The company’s operations might be impacted due to extreme heat conditions in the summer months, which would lead to reduced production processing capabilities in the field, impacting the overall sales volumes.

FY21 Financial Highlights:

Q4FY21 and FY21 Financial Snapshot (Source: Company Report)

• Higher Petroleum & Natural gas income: In FY21, the company reported its petroleum and natural gas revenue of CAD 932.4 million, significantly higher than CAD 528.5 million in FY20. The growth was aided by elevated commodity prices, which resulted in a higher realization price.

• Surge in input costs: The company reported a 13% surge in its general & administrative expenses, primarily due to higher employee-related expenses, which included employee retirement costs incurred in Q4FY21 and an increase in general business expenditures. Notably, G&A expense stood at CAD 0.99/boe in FY21, as compared to CAD 0.88/boe in FY20. Operating expense, and Transportation & other expense stood at CAD 3.19/boe and CAD 5.18/boe, respectively, in FY21, as compared to CAD 2.95/boe and CAD 4.93/boe in FY20.

• Increase in royalty expense: The corporation’s royalty expense/ boe surged 309% to CAD 2.66 in FY21 from CAD 0.65 in FY20, due to a significant increase in the average realized sales price received for production. Notably, BIR’s royalty expense stood in between its guidance of CAD 2.60/boe to CAD 2.80/boe.

• Impressive bottom-line: The company turned profitable and posted a net profit of CAD 310.4 million in FY21, as compared to a net loss of CAD 62.0 million in FY20. The company reported an unrealized mark-to-market gain on financial instruments of CAD 84.2 million in FY21, as compared to an unrealized mark-to-market loss on financial instruments of CAD 35.4 million in FY20.

Top-10 Shareholders:  Top ten shareholders of the company together hold approximately 19.33% stake, Letko, Brosseau & Associates Inc., Dimensional Fund Advisors, L.P. are the major shareholders in the company with an outstanding position of 8.04% and 3.20%, respectively.

Source: REFINITIV, Analysis by Kalkine Group.  

Valuation Methodology (Illustrative): EV/ Sales based

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation:

The company intends to utilize its free funds flow from operations towards the reduction of total debt to CAD 195 million in December 2022 from CAD 499.4 million in FY21. This is impressive and would lead to higher financial flexibility and indicates prudent capital management. We have valued the stock using the EV to Sales-based relative valuation method and have arrived at a double-digit upside (in percentage terms). Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of BIR at the closing price of CAD 6.44 on February 24, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on February 24, 2022). Analysis by Kalkine Group

*Recommendation is valid on February 25, 2022, price as well. 

Technical Analysis Summary

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest. 

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices 

Note 1: The reference data in this report has been partly sourced from REFINITIV. 

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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