Birchcliff Energy: One bad quarter for commodity prices won’t hurt our company

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:

We plan to be debt free by Q4 with lots of excess cash for dividends: Birchcliff Energy CEO

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.

3 comments on “Birchcliff Energy: One bad quarter for commodity prices won’t hurt our company”

  1. Well…
    I’ve shorted Birchcliff Energy at an average price of C$8.37/share and covered at an average price of C$8.15/share.
    Better than my shorting of Cascades, but pretty poor results anyway.
    My expectation was for a big dip after the quarterly report, but no one got scared of BIR losses and an extra C$90M of debt.
    For now.

  2. Birchcliff Energy Ltd. (“Birchcliff” or the “Corporation”) (TSX: BIR) announces that, as part of its orderly and planned leadership succession process, Jeff Tonken will retire as Chief Executive Officer effective December 31, 2023 and Chris Carlsen, currently the President and Chief Operating Officer of Birchcliff, has been appointed as President and Chief Executive Officer effective January 1, 2024. Mr. Tonken will remain as the Chairman of the Board of Directors (the “Board”).

    Source: Birchcliff Energy Ltd. Announces Retirement of Jeff Tonken as Chief Executive Officer and Appointment of Chris Carlsen as President and Chief Executive Officer

    If anything, Jeff Tonken was an interesting CEO, and his interviews with Bloomberg were fun to watch.
    Two executives are also leaving:

    As part of the Corporation’s leadership succession process, Myles Bosman, Executive Vice President, Exploration, and David Humphreys, Executive Vice President, Operations, have chosen to retire effective December 31, 2023. They have agreed to stay on as executive advisors to the Corporation for a period of time, to help ensure a seamless transition.

    Me thinking that with this change, Birchcliff will cut dividends in 2024 (or before?), even though natural gas prices are above $3 now.

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