fbpx

Birchcliff Energy (TSX: BIR) Analysis and Valuation

DISCLAIMER: The following is an outdated article on Birchcliff Energy (TSX: BIR) when the price was $3.70, today it is $4.59. Givent the increased attention on the stock we have decided to upload it today as we think the assesment is still relevant.

 

Image result for birchcliff energy

TSX: BIR

Price today: $3.10

Recommendation: BUY

Upside Potential 27.97%

Forecasted Price $3.98

Highlights

Analysis for Birchcliff Energy (BIR) has lead to a buy recommendation with a 1-Year target price of $3.98; which attributes to a 27.97% upside potential from its current market price of $3.10.

  • Current Pricing of BIR is at a 5-year low due to an energy sector low on commodity pricing and market uncertainty on their financials.
  • Future statements estimate a positive trend with the promise of site expansion and rising commodity prices. If holds, would lead to a turn around of investor confidence leading to a price increase.
  • A strong management presence with decades of experience in the field is bought in for the long haul.
  • An increase of reserves which leads to an increased availability of funding for managements ambitious projects.

Business Description:

Birchcliff Energy Ltd. is a Calgary, Alberta based intermediate oil and gas company that explores for, develops and produces natural gas, light oil and natural gas liquids. All Birchcliff’s operations are concentrated in the Peace River Arch area of Alberta, which is considered by management to be on of the most desirable natural gas and light oil drilling areas in North America. This area also bodes a large area for them to provide an extensive inventory of repeatable and low-cost drilling opportunities that will provide long term production and reserve growth. The company is focused on achieving controlled growth, while maintaining financial flexibility and providing a sustainable quarterly dividend to shareholders. They also intend to maintain a low capital and operating costs. Birchcliff trades on the S&P/TSX Composite Index under the ticker symbol “BIR”. They also have series A and series C preferred shares listed under the ticker BIR.PR.A and BIR.PR.C respectively. They aim to create superior growth in shareholder value through the exploitation, development, exploration, acquisition, production and marketing of oil and gas opportunities in Western Canada Sedimentary Basin.

Operations:

Drilling, primarily focused on their Montney/Doig resource play; utilizes the evolving technology in the industry for both horizontal well drilling and multi-stage fracture stimulation. The drilling program in 2016, added 22 horizontal wells which utilized multi-stage fracture stimulation technology. Thus, allowing the company to efficiently extract reservoir materials at a cost-effective and timely matter, in one single continuous operation. 96% of natural gas production and 97% of their natural gas liquid, comes from this play. Their PC gas plant located in the middle of the play is 100% owned by the company and has recently doubled in size to 260MMcf/d. This plant allows the corporation to control and operate all essential infrastructure from wellhead to sales point. The low operating costs of the plant as well with its sole ownership allow the company to competitively position themselves against their competitors who must compete for 3rd party processing; allowing BIR to gain a cost advantage in their product. BIR has 100% ownership in a separate plant and three oil batteries (used for processing oil); they also have working interests in numerous other infrastructure. The Peace River Arch allows a year-round operation and BIR holds 454002 acres of undeveloped land with a 93% average working interest. As of December 31, 2016, BIR had 880.5 MMboe of proved plus probable reserves and 572.9 MMboe of proved reserves. Thus, proving that the current play can sustain business operations for years to come.

Management:

Birchcliff has an executive team that boasts years of experience in the field, as well the majority having been together for over 10 years at BIR. They are deeply invested in the company and are in strong standing for its success; both as a company and for its shareholders. A. Jeffery Tonken, Myles R. Bosman, Bruno P. Geremia and David M. Humphreys all bring over 20+ years of oil and natural gas experience to the firm as well as very diverse technical backgrounds. The first 3 executives mentioned were founders of the company and continue to front its operations.

Directors and executive officers (and their families), collectively exercise control over 2.6% of the total shares outstanding and 5.1% of the fully diluted common shares. Total insider ownership currently sits at 7.45% (Institutional 39.16% and public 53.39%). Inside ownership is on an upward trend as executive officers are taking advantage of a declining stock price primarily due to declining commodity prices.

The team is investing heavily in plant and play expansion; with current scheduled expansions in 2018, 2020, 2021 and 2022; which is projected to have significant positive impacts on the company’s revenue as the projected energy commodity prices rebound in to 2018.

Risk Factors:

Commodity Price Volatility

  • BIR relies on favourable commodity pricing to enhance their revenues, results, financial condition and to allow for additional funding if need be. Global supply and demand can have large implications on pricing and can be adjusted by policies, production level caps, political standings, weather, reserve levels and global and domestic economic conditions. Each factor has a play on the price of commodities and can fluctuate prices rapidly. The lowering of prices can thus cause the company to withdraw current levels of extraction from wells which bumps the bottom line. In return, the company can forego expansion and exploration activities as they are no longer financially viable; which decreases short and long run expectation. This can lead to financial instability which can lead to a drawback of shareholder dividends which finally can cause an asset devaluation.

Oil and Gas Industry

  • Overcoming economic lows and the over supply of commodities, projection has prices staying relatively stagnant for the upcoming years as volatility decreases from previous levels. Western Canada has a stronger outlook on the industry and thus leads to the company having a stronger opportunity at locking down additional funds, project completion and continued planned exploration. With this upward trend, the company should have an easier time sticking to their deadlines and continuing with managements ambitious plans of expansion; which will have a positive reaction for shareholders and the companies stock price.

Commodity Price Hedging

  • BIR can enter in to contracts that hold a set price for the desired commodity. This can have both positive and negative affects depending on the price movements. If you’re locked in and prices trend upwards, then you lose out on potential profits. But vise versa applies and you could lock in profits that would otherwise not be realized if prices decline. BIR can also lose out on profits if their production fails to fulfill hedged volumes. With hedged risk aversion being a factor of the price, the forecasted stability of oil prices lowers the financial risk imposed by the company’s potential contracts.

Foreign Exchange Rates and Interest Rates

  • With oil and gas prices being denominated in US Dollars, there is a forex risk associated with the company. A low CAD/USD rate can be favourable to the company as the cash received translates to a higher value in Canadian Dollars; it can also have an adverse effect when they need to purchase products for operation that are denominated in foreign currency. Depending on the variability of goods sold and purchases, a low exchange rate which looks good for the sale of commodities can come around and hurt the company in the short run operation purchases. Interest rate increases can also have a negative effect on the company’s financials as they would owe more, and thus have less cash available for use.

Credit Availability

  • The funds that are available from outside sources are capped at a “base”. This value is determined by factors such as: reserves, commodity pricing, discount rate and others to determine the borrowing base which is reviewed by the creditors on a semi-annual basis. Lenders are allowed one annual “in-between” inspection (where a base is determined in between the semi-annual audits) which can also adjust the company’s base availability. This value has positive and negative effects on the company’s ability to receive funds for business activities depending on the internal and external factors used by the lenders. With prices on the rise, and operations increasing; Birchcliff projected base should rise in the future allowing for more capital availability for desired exploration and expansion.

Price Projections:

Projections for commodity pricing and exchange rates are constructed by Deloitte on factors and information available to them from government agencies, oil refineries, natural gas marketers, industry publication and trends. Projections shown represent a market recovery followed by steady increases in a 19-year outlook calculated by the company.

WTI at Cushing

  • Raising to $55 a barrel to end off 2017, projections show a 10-year increase to $91.40 (66% increase). If true, BIR will have a favourable standing in their oil operations; benefiting the bottom line and shareholders.

Natural Gas at AECO

  • A similar trend is seen with natural gas; final year projections are shown at $3.25 while the 10-year outlook holds at $5.00. With the expansion plans put in place by management for their gas operations, the 54% price increase also shows a positive movement in the company’s financials in the years to come.

Edmonton Butane

  • This price increase sweeps the board with a 48% 10-year price outlook for the gas-liquid; moving from $41.35 to $61.15.

BIR Reserves

Deloitte continues with a consolidated report of reserves. Their report shows a 1-year increase in light and medium crude, shale gas, NGL’s and oil equivalent; while conventional natural gas dips very slightly. These numbers are true for all 3 reserves (proved, probable, proved plus probable). This reserve report coupled with the price outlooks previously stated, shows a positive projection to the company’s credit base. Following standards and procedures in the COGE Handbook, proved and probable undeveloped reserves follow the same trends as reserves above, with conventional natural gas the only commodity with lower numbers compared to the previous year.

Valuation

The target price for BIR is conducted by a discounted cash flow analysis, modeled from a 10-year cash flow estimate based on 10-year historical values, energy commodity price movements and the expected completion of planned projects and expansions. Revenue growth is based on 10, 5 and 3 year weighted moving average adjusted for recent reporting significance.

Note: Historic number date back 10 years but only previous year is shown in models below. Information shown, is information available by the company that I can gain access to without a subscription to a major finance software player.



Categories: International Stocks & Other

Tags: , , ,

%d bloggers like this: