After doubling its production with a 2016 purchase, this Canadian natural gas producer will reduce its costs thanks to a new 15-year deal with a major utility.
With 27 new wells drilled in the first half of 2018, the company aims to increase cash flow, pay down debt and sustain its relatively new dividend. While cash flow was down in the most recent quarter, output rose by 18%.
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BIRCHCLIFF ENERGY (Toronto symbol BIR;www.birchcliffenergy.com) explores for, develops and produces oil and gas, mainly in the Peace River Arch area of both Alberta and B.C. About 82% of its output is gas. The remaining 18% is oil.
In July 2016, the company bought Encana Corp.’s Gordondale natural gas fields in B.C. for $612.3 million in cash. The deal was big for Birchcliff: Gordondale expanded its overall production by more than 50%.
During the second quarter of 2018, Birchcliff entered into a long-term agreement with AltaGas (Toronto symbol ALA) to process natural gas at AltaGas’ deep-cut sour gas facility in Gordondale, Alberta. Good for at least 15 years, the agreement replaces a short-term deal between the two companies. It also reduces Birchcliff’s fees at the Gordondale facility. The company will not have to build its own deep-cut gas facility,
In the three months ended June 30, 2018, Birchcliff’s cash flow per share fell 18.2%, to $0.27 from $0.33 a year earlier. The decrease came from lower gas prices, which offset higher daily production.
Output rose to an average of 76,296 barrels of oil per day in the second quarter. That was up 18.0% from 64,636 barrels a year earlier.
Energy stocks: Stock trades at just 3.4 times projected cash flow for 2018
Birchcliff spent about $276 million on exploration and development in 2017. That has decreased to $255 million for 2018. However, the company completed that spending in the first two quarters: of the 27 wells planned for the year, 20 were drilled in the first quarter, and the other 7 in the second quarter. That should let the company report rising cash flow for 2018 as those wells come into production.
It will also help reduce debt. The company’s long-term debt of $661.4 million is a high, but manageable 53% of its market cap. However, the company expects its debt to be significantly lower by the end of this year. It’s already completed 78% of its capital expenditure, so it can now pay down debt.
Birchcliff should see cash flow per share of $1.14 for 2018. The stock trades at just 4.3 times that forecast. In March 2017, the company also began paying dividends of $0.025 per quarter for an annual yield of 2.1%.
Recommendation in Stock Pickers Digest: Birchcliff is a buy for aggressive investors
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