One Small-Cap Energy Stock to Hold- BIR

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 Updates:

• Robust profitability margins: In FY21, 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 66.2% and 42%, respectively, in FY21, as compared to the industry median of 42.7% and 21.6%, respectively. Additionally, the company reported its net margin at 35.8% in FY21, as compared to the industry median of 10.3%.

• Higher operating netbacks: For both Q4FY21 and FY21, the company posted a higher operating netback of CAD 27.53/boe and CAD 21.50/boe, respectively, compared to 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.

• Improved cash conversion period: In FY21, the company posted its cash conversion period of 32.7 days, as compared to 44.8 days in FY20. A declining cash conversion period illustrates that the company is taking lower time to convert its investments to cash flows.

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:

Source: Company Report

• BIR announces its full year result, wherein the company posted its revenue of CAD 941.8 million, significantly higher than CAD 433.8 million in FY20. The surge was driven by higher Petroleum and natural gas revenue on account of increase in average realization prices.
• Total expenses stood higher at CAD 532.8 million, as compared to CAD 505.0 million in FY20, due to increase in Operating costs and Transportation expenses. Income before taxes stood at CAD 408.9 million versus a loss of CAD 71.2 million in FY20.
• The company turned profitable and registered a net income of CAD 314.6 million in FY21, as compared to a loss of CAD 57.8 million in FY20. This was due to higher income before taxes partially offset by an income taxes of CAD 94.2 million v/s an income tax recovery of CAD 13.4 million in pcp.

  Valuation Methodology (Illustrative): EV to Sales based methodology

Analysis by Kalkine Group

Stock Recommendation:

For FY22, the company expects its average production rate of 78,000 to 80,000 boe/day, which is higher than the average production of 78,520 boe/day in FY21. The free fund flow is expected in between CAD 330 million to CAD 350 million, which is higher than CAD 309.3 in FY21. We have valued the stock using the EV to Sales based relative valuation method and arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Crew Energy Inc, Advantage Energy Ltd etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of BIR at the last closing price of CAD 7.32 on March 22, 2022.

One-Year Technical Price Chart (as on March 22, 2022). Source: REFINITIV, Analysis by Kalkine Group

Disclaimer

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