A Mid Cap Energy Stock to Sell- Birchcliff Energy Ltd.

Birchcliff Energy Ltd. (TSX: BIR) is engaged in the exploration for and the development, production and acquisition of oil and gas reserves in Western Canada.

Key Updates:

• Weak liquidity profile: In FY21, the company reported a its current ratio of 0.65x, significantly lower than the industry median of 1.04x. This indicates a poor working capital management and illustrates that the company’s current assets are not sufficient to fund its current liabilities. This might lead to a liquidity concern and is a key concern for the group.

• Higher Cash conversion period: The company reported a higher cash conversion period of 32.7 days in FY21, as compared to the industry median of 3.9 days. This indicates that the company lakes higher time to convert its investments to cash flows, which is an operational drawback.

• Lower Q4FY21 Production: In Q4FY21, the company reported its average production of 78,716 boe/day, which is significantly lower than third quarter FY21 production of 84,924 boe/day and company’s guidance of 82,000 to 83,000 boe/day. Continuation of the above trend might dampen the company’s upcoming performance.

  Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group

Stock Recommendation:

For FY22, the company expects its average royalty expense and average operating expense in between CAD 3.10 to 3.30/ boe and CAD 3.15 to 3.35/boe, respectively, which is higher than CAD 2.66 and CAD 3.19, respectively, in FY21. This might lead to a decline in the company’s operating margins. We have valued the stock using the EV to Sales-based relative valuation method and have arrived at a double-digit downside (in percentage terms). For the said purposes, we have considered peers like Advantage Energy Ltd, Peyto Exploration & Development Corp etc. Considering the aforesaid facts, we recommend a ‘Sell’ rating on the stock of BIR at the last closing price of CAD 8.32 on March 28, 2022.

One-Year Technical Price Chart (as on March 28, 2022). Source: REFINITIV, Analysis by Kalkine Group

Disclaimer

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