Birchcliff Energy continues to protect cash flow by increasing its production and cutting costs. It will also limit spending on exploration and development to make up for falling revenue. Birchcliff Energy has strong potential to grow when oil and gas prices recover; it remains a buy for aggressive investors.
BIRCHCLIFF ENERGY (Toronto symbol BIR; www.birchcliffenergy.com) develops, produces and explores for oil and gas in Western Canada.
Prominent Toronto investor Seymour Schulich is the company’s largest shareholder; he recently bought 2 million shares, bringing his total to 42 million, or 27.6% of the shares outstanding.
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In the quarter ended September 30, 2015, Birchcliff’s cash flow per share dropped 42.0%, to $0.29 from $0.50 a year earlier. Sharply lower oil and gas prices offset a 12.3% production rise.
The company continues to support its cash flow with cost cuts. As well, in response to low prices, Birchcliff cut back on exploration and development spending for 2015. It will likely spend $249 million during the full year, down 45.0% from $451 million in 2014. In 2016, Birchcliff plans to spend less than its funds flow in order to protect its balance sheet.
Birchcliff’s debt of $628.8 million is a high 136% of its currently depressed market cap. However, its cash flow of $44.3 million easily covers its $6.0 million in quarterly interest costs.
Now more than ever, it’s crucial for oil and gas producers to have sound balance sheets that can weather a long downturn.
The stock trades at 3.1 times Birchcliff’s cash flow per share, based on the latest quarter. That’s low for a company with strong potential to grow when oil and gas prices recover.
The direction of oil and gas prices depends on a lot of things, particularly economic growth rates around the world. We assume that oil prices will turn around later this year or in 2017. But if not, junior oil and gas producers like Birchcliff will have difficulty sustaining drilling, and their cash flow will drop even lower.
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