Birchcliff Energy Ltd. is a dividend-paying Calgary, Alberta based intermediate oil and gas company that explores for, develops and produces natural gas, light oil and natural gas liquids.
Source: Birchcliff Energy website
Business was booming for Birchcliff Energy Ltd. (TSX:BIR) back in 2022 because natural gas prices were going through the roof.
Here is one of the interviews Birchcliff‘s CEO gave to Bloomberg:
Back then, BIR decided to increase dividends 10-fold to C$0.80/year, which is like ~C$213M a year.
That was a reckless (imho) decision betting that natural gas prices would stay elevated in the future.
On top of that, Birchcliff is 100% unhedged and, according to the CEO “the road to hell is paved with hedges”.
But prices started to go down at the end of 2022, and you can kind of “track” the change in mood of Birchcliff’s CEO.
If commodity prices fall, we’ll cut capital spending before we cut the dividend: Birchcliff CEO
There are two important details in this video:
- According to the CEO, Birchcliff is practically break-even at the $3 gas price.
Using some highly sophisticated logical process, I came to the conclusion that they will be losing money with the NG prices below $3. 😀
- Management got very fixated on keeping these stupidly high dividends, and it might cost them a leg and an arm.
In Q1’23, the price of natural gas fell from $4 to somewhere below $3.
And in Q1’23 Brichcliff already reported a loss.
The CEO promised not to cut the dividends and to use the balance sheet (debt) to buffer shareholders.
We’ll use our balance sheet to buffer our shareholders during tough times: Birchcliff Energy CEO
So, C$53.4M of dividends were basically financed with C$59M of new debt:
Since February 2023, natural gas has traded below $3…
Which leads us to the latest interview BIR’s CEO gave to Bloomberg on May 11, 2023:
One bad quarter for commodity prices won’t hurt our company: Birchcliff Energy CEO
One bad quarter won’t hurt.
Well, what about two bad quarters or the whole year?
Q2’23 results will most likely be bad: more losses, more debt.
The only way they can preserve cash is to cut capex, but even with lower losses this quarter, they will provide a much worse outlook.
I have doubts they will cut dividends, even though it’s the right thing to do!
But if they do, even partially… Look out below! 😮
I’m thinking of shorting Birchliff Energy before the Q2 report on August 10.
Let’s see, if I’m right this time.