Birchcliff: Balance Sheet Hit Will Be Bigger Than Expected (TSX:BIR:CA)

Be aware: All quantities mentioned are in Canadian {dollars} until in any other case famous.

In our earlier protection of Birchcliff Power Ltd. (TSX:BIR:CA), we have now laid out the details. The corporate’s dividend coverage was not backed by money is flowing and was constructed with the hope that pure fuel costs will stay flat till 2025. We didn’t see a bullish case and believed that there have been a number of higher choices for traders.

Whereas we assist Birchcliff Power Ltd. in “maintain” mode, however the dangers are excessive if the 2025 band weakens and the corporate insists on sustaining the dividend.

Supply: This dividend could have to be minimize once more

Clearly the market had different concepts and the inventory, like many different fuel corporations, had a shocking run.

Let’s take a look at the outcomes for the primary quarter of 2024 and see if they’re extra constructive the prospect is certainly warranted.

1 quarter-2024

There weren’t many surprises for traders within the newest earnings report. With pure fuel costs within the dumps and Birchcliff oil manufacturing trying near a rounding error, it was clear that money move could be weak. With adjusted money move of $66 million, Birchcliff spent almost $103 million, or about 155% of that. This quantity and curiosity earlier than dividends.

The whole payout ratio for Q1-2024 was near 200%. Clearly, the primary nuance is that capital expenditures don’t comply with a straight line by way of the calendar 12 months. Specifically, the second quarter is extraordinarily weak as snow melts in Canada and drilling operations are curtailed. There have been a few constructive factors within the report. Manufacturing rose about 1% forward of consensus estimates. Birchcliff additionally up to date its 2024 drilling steering. Two fewer wells got here on stream in 2024 than within the earlier report. This won’t have an effect on the general anticipated degree of manufacturing.

General, it was a very good quarter contemplating how weak pure fuel costs have been.

Prospects

Birchcliff’s 2024 forecast exhibits adjusted money move of $270 million, capex of $250 million (within the center) and year-end internet debt of $475 million.

We have all been by way of the odd setup, clearly, the place 80%-90% of the dividend is funded from the steadiness sheet. Mainly, that is what’s occurring right here. With solely $20 million left after the capital funding, Birchcliff continues to be pushing for a $107 million dividend. Generally you possibly can break capital prices into development and upkeep classes and declare that dividends are “lined” when you exclude the expansion element. Nicely, we and the corporate can guarantee you that nothing like that’s occurring right here. In the midst of the forecast, manufacturing in 2024 will likely be barely decrease in comparison with the identical interval final 12 months. Birchcliff manufacturing has remained in place since 2018.

We’re not likely complaining in regards to the flat manufacturing. If extra corporations had that self-discipline, possibly pure fuel costs would not be so low. However the level is that Birchcliff insists on canceling its steadiness sheet. Additionally, in all chance, it may turn into worse than anticipated. The corporate expects the product deck for 2024 to be as follows.

With respect to Burchcliffe’s 2024 steering (up to date on Might 15, 2024), such steering assumes the next commodity costs and trade charges: a mean WTI value of US$82.50 per barrel; common WTI-MSW differential is 6.00 CDN/bbl; common AECO value 2.05 CDN/GJ; common Daybreak value is US$2.15/MMBtu; the NYMEX HH common value is US$2.40 per million baht; and the trade price (CDN$ to US$1) is 1.36.

Supply: Q1-2024 presentation

Oil is a small a part of the income base, however is a really excessive margin commodity for Birchcliff in comparison with pure fuel. This type of pricing does not appear to be cooperation.

AECO costs look lifeless. Listed here are the numbers for early June.

The June-October band fell from a month in the past and was erased from ranges seen a 12 months in the past.

We may also draw your consideration to the costs of the 2025 band. They’re down a bit from a month in the past, however the drop is critical from a 12 months in the past. We additionally noticed comparable easing in NYMEX 2025 futures. To this point, analysts have solely adjusted the 2024 numbers to match this. Estimates for 2025 nonetheless hover round $450 million.

Dividends are due to this fact nonetheless supported by excessive hopes for value restoration going ahead. We count on Birchcliff’s internet debt to exceed $500 million at present costs if the dividend is maintained.

Judgment

Numbers are numbers. There isn’t a room for “however administration stated”. You’ll be able to actually settle for that pure fuel costs are prone to rise and hope for it. The fact is that there was greater than sufficient drilling in Canada to maintain costs down and up. This, sadly, is a symptom of the complete North American pure fuel trade. All of them have a look at demand forecasts with fascination. They’re additionally all stunned when costs do not rise after they drill greater than sufficient to satisfy demand. Not less than these with sufficient oil and hedges deserve extra consideration from traders. Burchcliffe has negligible oil reserves and nothing to talk of. That they had an opportunity in 2022 if you bought ahead strips a lot bigger than $3.50 on AECO. Now they will be fortunate to get half of that. We consider a dividend minimize is imminent and if credit score markets weaken, Birchcliff will take the dividend and minimize it. Birchcliff would obtain an “Excessive” degree of threat from distribution cuts on our proprietary Kenny Loggins scale.

This ranking implies a 50-75% likelihood of a distribution minimize within the subsequent 12 months. We price it a promote at this level.

Please notice that this isn’t monetary recommendation. It might sound prefer it, however surprisingly, it is not. Traders are anticipated to conduct their very own due diligence and seek the advice of with knowledgeable who understands their targets and limitations.

Editor’s Be aware: This text discusses a number of securities that aren’t traded on a serious US trade. Pay attention to the dangers related to these shares.