Birchcliff Energy Ltd. — Interim / Quarterly Report 2021

Nov 10, 2021

BIRCHCLIFF ENERGY LTD.

CONDENSED STATEMENTS OF FINANCIAL POSITION

Unaudited (Expressed in thousands of Canadian dollars)
As at,	September 30, 2021	December 31, 2020
ASSETS Current assets: Cash Accounts receivable Prepaid expenses and deposits Financial Instruments_(Note 12)_	63 100,433 9,481 17,565	60 64,691 2,177 -
	127,542	66,928
Non-current assets: Investments_(Note 13) Petroleum and naturalgasproperties and equipment(Note 3)_	7,060 2,858,325	1,805 2,833,310
	2,865,385	2,835,115
Total assets	2,992,927	2,902,043
LIABILITIES Current liabilities: Accounts payable and accrued liabilities Financial instruments_(Note 12) Capital securities(Note 6)_	99,555 5,717 38,328	97,507 23,479 39,930
	143,600	160,916
Non-current liabilities: Revolving term credit facilities_(Note 4) Decommissioning obligations(Note 5) Deferred income taxes Other liabilities(Note 9) Financial instruments(Note 12)_	648,327 131,250 125,577 25,593 95,672	731,372 146,232 65,192 26,207 144,557
	1,026,419	1,113,560
Total liabilities	1,170,019	1,274,476
SHAREHOLDERS’ EQUITY Share capital_(Note 6) Common shares Preferred shares(perpetual)_ Contributed surplus Retained earnings	1,472,409 41,434 90,700 218,365	1,478,294 41,434 89,868 17,971
	1,822,908	1,627,567
Total shareholders’ equity and liabilities	2,992,927	2,902,043

The accompanying notes are an integral part of these interim condensed financial statements.

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BIRCHCLIFF ENERGY LTD. CONDENSED STATEMENTS OF NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

Unaudited (Expressed in thousands of Canadian dollars, except per share information)

	Three months ended September 30,	Nine months ended September 30,
	2021 2020	2021 2020
REVENUE Petroleum and natural gas revenue_(Note 8) Marketing revenue(Note 8) Royalties Realized loss on financial instruments(Note 12) Unrealized gain (loss) on financial instruments(Note 12)_ Other cash income(expense)	263,348 142,779 9,861 4,422 (19,500) (3,935) (2,469) (16,440) 70,493 (25,632) (540) 640	642,600 370,222 14,553 11,798 (47,819) (11,682) (31,359) (47,846) 84,213 (77,683) 2,114 4,064
	321,193 101,834	664,302 248,873
EXPENSES Operating Transportation Marketing purchases_(Note 8) Administrative, net Depletion and depreciation(Note 3) Finance Dividends on capital securities(Note 6)_ Other losses(gains)	23,164 19,668 37,960 33,349 8,840 3,532 6,058 5,376 57,085 54,374 8,300 7,612 671 859 (2,127) (1,100)	66,200 60,415 113,809 104,147 12,621 9,975 19,439 18,454 158,841 158,205 26,876 20,582 2,048 2,609 (5,520) 1,563
	139,951 123,670	394,314 375,950
Net income (loss) before taxes Income tax recovery (expense)	181,242 (21,836) (41,829) 5,190	269,988 (127,077) (62,461) 27,802
NET INCOME(LOSS) AND COMPREHENSIVE INCOME(LOSS)	139,413 (16,646)	207,527 (99,275)
Net income (loss) per common share_(Note 7)_ Basic Diluted	$0.52 $(0.07) $0.50 $(0.07)	$0.77 $(0.39) $0.75 $(0.39)

The accompanying notes are an integral part of these interim condensed financial statements.

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BIRCHCLIFF ENERGY LTD.

CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Unaudited (Expressed in thousands of Canadian dollars)

	Share	Capital
	Common	Preferred	Contributed	Retained
	Shares	Shares	Surplus	**Earnings **	Total
As at December 31, 2019	1,478,356	41,434	84,884	90,947	1,695,621
Dividends on common shares_(Note 6)_	-	-	-	(9,638)	(9,638)
Dividends on perpetual preferred shares_(Note 6)_	-	-	-	(3,140)	(3,140)
Conversion of Series C preferred shares	530	-	-	-	530
Repurchase of common shares	(610)	-	-	-	(610)
Stock-based compensation_(Notes 10)_	-	-	3,821	-	3,821
Net loss and comprehensive loss	-	-	-	(99,275)	(99,275)
As at September 30, 2020	1,478,276	41,434	88,705	(21,106)	1,587,309
As at December 31, 2020	1,478,294	41,434	89,868	17,971	1,627,567
Dividends on common shares_(Note 6)_	-	-	-	(3,993)	(3,993)
Dividends on perpetual preferred shares_(Note 6)_	-	-	-	(3,140)	(3,140)
Exercise of stock options_(Note 10)_	11,482	-	(2,734)	-	8,748
Repurchase of common shares	(17,367)	-	-	-	(17,367)
Stock-based compensation_(Note 10)_	-	-	3,566	-	3,566
Net income and comprehensive income	-	-	-	207,527	207,527
As at September 30, 2021	1,472,409	41,434	90,700	218,365	1,822,908

The accompanying notes are an integral part of these interim condensed financial statements.

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BIRCHCLIFF ENERGY LTD.

CONDENSED STATEMENTS OF CASH FLOWS

Unaudited (Expressed in thousands of Canadian dollars)

Unaudited (Expressed in thousands of Canadian dollars)
	Three months ended September 30,	Nine months ended September 30,
	2021 2020	2021 2020
Cash provided by (used in): OPERATING Net income (loss) Adjustments for items not affecting operating cash: Unrealized loss (gain) on financial instruments_(Note 12) Depletion and depreciation(Note 3) Other compensation Finance Other (gains) losses Income tax (recovery) expense Interest paid Dividends on capital securities(Note 6) Decommissioning expenditures(Note 5)_ Changes in non-cash workingcapital	139,413 (16,646) (70,493) 25,632 57,085 54,374 552 572 8,300 7,612 (2,127) (1,100) 41,829 (5,190) (7,154) (6,736) 671 859 (165) (180) (12,305) (6,220)	207,527 (99,275) (84,213) 77,683 158,841 158,205 1,677 1,867 26,876 20,582 (5,520) 1,563 62,461 (27,802) (23,613) (17,415) 2,048 2,609 (1,441) (976) (25,416) (292)
	155,606 52,977	319,227 116,749
FINANCING Issuance (repurchase) of common shares_(Note 6) Repurchase of capital securities(Note 6) Financing fees paid Lease payments(Note 9) Dividend distributions(Note 6) Net change in revolvingterm credit facilities(Note 4)_	(11,557) - - (25) - - (615) (573) (3,047) (3,235) (72,832) 18,365	(8,619) (610) (1,602) (25) (3,454) - (1,830) (1,719) (9,181) (15,387) (80,320) 161,703
	(88,051) 14,532	(105,006) 143,962
INVESTING Exploration and development of petroleum and natural gas assets_(Note 3) Investments Acquisitions(Note 3)_ Changes in non-cash workingcapital	(18,394) (31,193) (155) - (228) - (48,732) (36,343)	(196,179) (248,006) (155) - (228) - (17,656) (12,742)
	(67,509) (67,536)	(214,218) (260,748)
Net change in cash Cash,beginningofperiod	46 (27) 17 60	3 (37) 60 70
CASH, END OF PERIOD	63 33	63 33

The accompanying notes are an integral part of these interim condensed financial statements.

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BIRCHCLIFF ENERGY LTD.

NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021

Unaudited (Expressed In Thousands Of Canadian Dollars, Unless Otherwise Stated)

1. NATURE OF OPERATIONS

Birchcliff Energy Ltd. (“ Birchcliff ” or the “ Corporation ”) is domiciled and incorporated in Alberta, Canada. Birchcliff is engaged in the exploration for and the development, production and acquisition of oil and gas reserves in Western Canada. The Corporation’s financial year end is December 31. The address of the Corporation’s registered office is Suite 1000, 600 – 3[rd] Avenue S.W., Calgary, Alberta, Canada T2P 0G5. Birchcliff’s common shares, cumulative redeemable preferred shares, Series A (the “ Series A Preferred Shares ”) and cumulative redeemable preferred shares, Series C (the “ Series C Preferred Shares ”) are listed for trading on the Toronto Stock Exchange (the “ TSX ”) under the symbols “BIR”, “BIR.PR.A” and “BIR.PR.C”, respectively.

These unaudited interim condensed financial statements were approved and authorized for issuance by the Board of Directors on November 10, 2021.

2. BASIS OF PREPARATION

These unaudited interim condensed financial statements present Birchcliff’s financial results of operations and financial position under International Financial Reporting Standards (“ IFRS ”) as at and for the three and nine months ended September 30, 2021, including the 2020 comparative periods. The financial statements have been prepared in accordance with International Accounting Standard (“ IAS ”) 34: Interim Financial Reporting , as issued by the International Accounting Standards Board (“ IASB ”).

These unaudited interim condensed financial statements have been prepared following the same IFRS accounting policies and methods of computation as disclosed in the annual audited financial statements for the year ended December 31, 2020. Certain information and disclosures normally required to be included in the notes to the annual audited financial statements have been condensed, omitted or have been disclosed on an annual basis only. Accordingly, these financial statements should be read in conjunction with the annual audited financial statements and the notes thereto for the year ended December 31, 2020.

Birchcliff’s unaudited interim condensed financial statements are prepared on a historical cost basis, except for certain financial and non-financial assets and liabilities which have been measured at fair value. The Corporation’s unaudited interim condensed financial statements include the accounts of Birchcliff only and are expressed in Canadian dollars, unless otherwise stated. Birchcliff does not have any subsidiaries.

Current Environment and Estimation Uncertainty

Management makes judgements and assumptions about the future in deriving estimates used in preparation of these unaudited interim condensed financial statements in accordance with IFRS. Sources of estimation uncertainty include estimates used to determine economically recoverable oil, natural gas, and natural gas liquids reserves, the recoverable amount of long-lived assets or cash generating units, the fair value of financial derivatives, the provision for asset retirement obligations and the provision for income taxes and the related deferred tax assets and liabilities.

During 2021, the global economy has shown signs of strong recovery from the impacts of the COVID-19 pandemic. The outlook for oil and natural gas commodity prices and general market and industry conditions have improved due to the easing of government restrictions and increase in COVID-19 vaccination rates. While Birchcliff has benefited from these recent improvements in commodity prices there is a degree of uncertainty related to the COVID-19 pandemic that has been considered in our estimates for the period ended September 30, 2021.

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3. PETROLEUM AND NATURAL GAS PROPERTIES AND EQUIPMENT

The continuity for petroleum and natural gas (“ P&NG ”) properties and equipment is as follows:

($000s)	Exploration & Evaluation Assets Developed & Producing Assets Lease Assets Corporate Assets	Total
Cost: As at December 31, 2019 Additions Dispositions(1)	321 3,850,089 19,931 20,217 33 315,200 - 1,713 - (17,563) - -	3,890,558 316,946 (17,563)
As at December 31, 2020 Additions Acquisitions	354 4,147,726 19,931 21,930 - 181,474 147 1,425 - 810 - -	4,189,941 183,046 810
As at September 30,2021(2)	354 4,330,010 20,078 23,355	4,373,797
Accumulated depletion and depreciation: As at December 31, 2019 Dispositions(1) Depletion and depreciation expense(3)	- (1,130,238) (1,925) (15,317) - 3,253 - - - (208,137) (2,021) (2,246)	(1,147,480) 3,253 (212,404)
As at December 31, 2020 Depletion and depreciation expense(3)	- (1,335,122) (3,946) (17,563) - (155,874) (1,526) (1,441)	(1,356,631) (158,841)
As at September 30,2021	- (1,490,996) (5,472) (19,004)	(1,515,472)
Net book value:
As at December 31, 2020	354 2,812,604 15,985 4,367	2,833,310
As at September 30, 2021	354 2,839,014 14,606 4,351	2,858,325

(1) Birchcliff completed the disposition of various Gordondale lands and assets on December 22, 2020, with a net book value totaling $14.3 million, relinquished $5.9 million related to decommissioning obligations (see Note 5) and received cash consideration of $12.7 million. Birchcliff recognized a gain on sale of $4.2 million for the year ended December 31, 2020.

(2) The Corporation’s P&NG properties and equipment were pledged as security for its Credit Facilities. Although the Corporation believes that it has title to its P&NG properties, it cannot control or completely protect itself against the risk of title disputes and challenges. There were no borrowing costs capitalized to P&NG properties and equipment.

(3) Future development costs required to develop and produce proved and probable oil and gas reserves totalled $4.3 billion at September 30, 2021 (December 31, 2020 – $4.4 billion) and are included in the depletion expense calculation.

Impairment Assessment

In accordance with IFRS, an impairment test is performed if Birchcliff identifies an indicator of impairment at the end of the reporting period. At September 30, 2021 and December 31, 2020, Birchcliff determined there were no impairment indicators present and therefore an impairment test was not required. Current and forward commodity prices for oil and natural gas have improved and market capitalization have increased since March 31, 2020, when impairment indicators were last identified.

4. REVOLVING TERM CREDIT FACILITIES

The components of the Corporation’s credit facilities include:

The components of the Corporation’s credit facilities include:
As at,($000s)	September 30, 2021	December 31, 2020
Syndicated credit facility Workingcapital facility	649,694 2,589	727,645 4,958
Drawn revolving term credit facilities Unamortized deferred financingfees	652,283 (3,956)	732,603 (1,231)
Revolving term credit facilities	648,327	731,372

At September 30, 2021, the aggregate principal amount of the Corporation’s credit facilities was $850.0 million with maturity dates of May 11, 2024 which were comprised of: (i) an extendible revolving syndicated term credit facility (the “ Syndicated Credit Facility ”) of $750.0 million; and (ii) an extendible revolving working capital facility (the “ Working Capital Facility ”) of $100.0 million (collectively, the “ Credit Facilities .”)

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Effective May 6, 2021, the agreement governing the Credit Facilities was amended to: (i) extend the maturity dates of each of the Syndicated Credit Facility and the Working Capital Facility from May 11, 2022 to May 11, 2024; and (ii) reduce the borrowing base limit to $850.0 million from $1.0 billion, with the Syndicated Credit Facility being reduced to $750.0 million and the Working Capital Facility remaining at $100.0 million. With the exception of the changes to the borrowing base limit and maturity date, the Credit Facilities were renewed under similar terms and conditions as those described in Note 7 of the Corporation’s financial statements for the year ended December 31, 2020. The maturity date of the Credit Facilities may, at the request of the Corporation and with consent of the lenders, be extended on an annual basis, for an additional period of up to three years from May 11 of the year in which the extension request is made. The Credit Facilities do not contain any financial maintenance covenants.

The amended agreement governing the Credit Facilities allow for prime rate loans, LIBOR loans, U.S. base rate loans, bankers’ acceptances and, in the case of the Working Capital Facility only, letters of credit, plus applicable margins. Effective December 31, 2021, U.S. dollar LIBOR benchmarks will begin phasing out. The Corporation expects the U.S. LIBOR benchmarks to be replaced with an alternative benchmark that will apply to Birchcliff’s U.S. dollar borrowings to be used at its option. Birchcliff does not expect this change to have a material impact to the Corporation.

5. DECOMMISSIONING OBLIGATIONS

The Corporation estimates the total undiscounted (inflated) amount of cash flow required to settle its decommissioning obligations is approximately $243.1 million at September 30, 2021 (December 31, 2020 – $221.3 million). A reconciliation of the decommissioning obligations is set forth below:

As at,($000s)	September 30, 2021	December 31, 2020
Balance, beginning Obligations incurred Obligations acquired Obligations divested(1) Changes in estimated future cash flows(2) Accretion Decommissioningexpenditures	146,232 3,392 582 (198) (18,974) 1,879 (1,663)	128,128 3,624 258 (5,867) 20,512 1,900 (2,323)
Balance, ending(3)	131,250	146,232

(1) Includes decommissioning obligations from the disposition of various Gordondale lands and assets in December 2020.

(2) Primarily relates to changes in the nominal risk-free rate, inflation rate, abandonment cost and abandonment date estimates of future obligations used to calculate the present value of the decommissioning obligation.

(3) Birchcliff applied a nominal risk-free rate of 2.03% and an inflation rate of 1.78% to calculate the present value of the decommissioning obligation at September 30, 2021 and a nominal risk-free rate of 1.26% and an inflation rate of 1.54% at December 31, 2020.

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6. CAPITAL STOCK

Share Capital

(a) Authorized:

Unlimited number of voting common shares, with no par value.

Unlimited number of preferred shares, with no par value.

The preferred shares may be issued in one or more series and the directors are authorized to fix the number of shares in each series and to determine the designation, rights, privileges, restrictions and conditions attached to the shares of each series.

(b) Number of common shares and perpetual preferred shares issued:

The following table sets forth the number of common shares and perpetual preferred shares issued and outstanding:

As at,(000s)	September 30, 2021	December 31, 2020
Common shares: Outstanding at beginning of period Conversion of Series C Preferred Shares(1) Repurchase of common shares(2) Exercise of stock options	265,943 - (3,200) 2,830	265,935 465 (465) 8
Outstanding at end ofperiod(1)	265,573	265,943
Series A Preferred Shares (perpetual): Outstandingat beginningofperiod	2,000	2,000
Outstanding at end ofperiod	2,000	2,000

(1) See “Capital Securities” below.

(2) On November 18, 2020, Birchcliff announced that the TSX had accepted the Corporation’s notice of intention to make a normal course issuer bid (the “ 2021 NCIB ”). Pursuant to the 2021 NCIB, Birchcliff may purchase up to 13,296,936 of its outstanding common shares over the period from November 25, 2020 to November 24, 2021. Under the 2021 NCIB, common shares may be purchased in open market transactions on the TSX and/or alternative Canadian trading systems at the prevailing market price at the time of such transaction. Pursuant to the rules of the TSX, the total number of common shares that Birchcliff is permitted to purchase is subject to a daily purchase limit of 286,843 common shares. However, Birchcliff may make one block purchase per calendar week which exceeds the daily purchase restriction. All common shares purchased under the 2021 NCIB will be cancelled. The 2021 NCIB effectively renewed the Corporation’s previous normal course issuer bid under which the Corporation was permitted to purchase up to 13,296,761 common shares over the period from November 25, 2019 to November 24, 2020 (the “ 2020 NCIB ”). During 2020, Birchcliff purchased 464,562 common shares under the 2020 NCIB at an average price of $1.31 for an aggregate value of approximately $610,000, before fees. All such common shares were cancelled. During the nine month period ended September 30, 2021, the Corporation purchased 3,200,000 common shares under the 2021 NCIB at an average price of $5.42 for an aggregate value of $17.4 million. All such common shares were cancelled.

Capital Securities

The following table sets forth the number and amount of capital securities outstanding:

As at,(000s)	September 30, 2021	December 31, 2020
	Number Amount($)	Number Amount($)
Outstanding at beginning of period Conversion of Series C Preferred Shares(1)(2) Cash redemption of Series C Preferred Shares(1) Amortization	1,597 39,930 - - (64) (1,602) - -	2,000 49,845 (37) (929) (366) (9,141) - 155
Outstanding at end ofperiod(3)	1,533 38,328	1,597 39,930

(1) Subject to the provisions of the Business Corporations Act (Alberta) and the provisions governing the Series C Preferred Shares (the “ Provisions ”), a holder of Series C Preferred Shares may, at its option, upon giving notice in accordance with the Provisions (the “ Notice of Redemption ”), redeem for cash, all or any number of Series C Preferred Shares held by such holder on the last day of a financial quarter at $25.00 per share, together with all accrued and unpaid dividends to but excluding the date fixed for redemption.

Upon receipt of the Notice of Redemption, the Corporation may, at its option (subject, if required, to stock exchange approval), upon not less than 20 days’ prior written notice, elect to convert all such Series C Preferred Shares into common shares. The number of common shares into which each Series C Preferred Share may be so converted will be determined by dividing the amount of $25.00, together with all accrued and unpaid dividends to but excluding the date fixed for conversion, by the greater of $2.00 and 95% of the “Current Market Price” (as determined in accordance with the Provisions) of the common shares.

(2) For the period ended December 31, 2020, the Corporation elected to convert 37,165 Series C Preferred Shares into common shares and accordingly issued a total of 464,562 common shares. This increased share capital by approximately $530,000 using an implied value of $1.14 per common share based on the closing price of the common shares on the TSX at the date of conversion.

(3) Each outstanding Series C Preferred Share is recorded at its redemption value of $25.00 per share.

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Dividends

The following table sets forth the dividend distributions by the Corporation for each class of shares:

	Three months ended September 30,	Nine months ended September 30,
	2021 2020	2021 2020
Common shares: Dividend distribution_($000s) Per common share($) _Series A Preferred Shares: Series A dividend distribution_($000s) Per Series A Preferred Share($) _Series C Preferred Shares: Series C dividend distribution_($000s) Per Series C Preferred Share($)_	1,330 1,330 0.0050 0.0050 1,046 1,046 0.5234 0.5234 671 859 0.4375 0.4375	3,993 9,638 0.0050 0.0121 3,140 3,140 0.5234 0.5234 2,048 2,609 0.4375 0.4375

All dividends have been designated as “eligible dividends” for the purposes of the Income Tax Act (Canada).

7. EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of net income (loss) per common share:

	Three months ended September 30,	Nine months ended September 30,
($000s, except forper share information)	2021 2020	2021 2020
Net income (loss) Dividends on Series A Preferred Shares	139,413 (16,646) (1,046) (1,046)	207,527 (99,275) (3,140) (3,140)
Net income(loss)to common shareholders	138,367 (17,692)	204,387 (102,415)
Weighted average common shares (000s): Weighted average basic common shares outstanding Dilutive securities	266,547 265,935 9,735 -	266,258 265,935 5,278 -
Weighted average diluted common shares outstanding(1)	276,282 265,935	271,536 265,935
Net income (loss) per common share: Basic Diluted	$0.52 $(0.07) $0.50 $(0.07)	$0.77 $(0.39) $0.75 $(0.39)

(1) The weighted average diluted common shares outstanding excludes 2,188,000 and 2,637,334 common shares that were anti-dilutive for the three and nine months ended September 30, 2021. As the Corporation reported a loss for the three months and nine months ended September 30, 2020, the basic and diluted weighted average common shares outstanding are the same for the periods and all dilutive securities were considered anti-dilutive.

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8. REVENUE

The following table sets forth Birchcliff’s revenue by source:

	Three months ended September 30,	Nine months ended September 30,
($000s)	2021 2020	2021 2020
Light oil sales Condensate(1) NGLs sales(2) Naturalgas sales	22,112 19,655 48,517 32,263 22,267 8,917 170,441 81,940	61,605 52,238 130,274 69,992 59,256 25,802 391,438 222,180
P&NG sales(3)(4) Royaltyincome	263,337 142,775 11 4	642,573 370,212 27 10
P&NG revenue Marketingrevenue(5)	263,348 142,779 9,861 4,422	642,600 370,222 14,553 11,798
Revenue from contracts with customers	273,209 147,201	657,153 382,020

(1) Includes pentanes plus.

(2) Includes ethane, propane and butane.

• (3) Excludes the effects of financial instruments but includes the effects of any physical delivery contracts outstanding during the period.

• (4) Included in accounts receivable at September 30, 2021 was $96.7 million (September 30, 2020 - $51.2 million) in P&NG sales to be received from its marketers in respect of September 2021 production, which was subsequently received in October 2021.

(5) Marketing revenue primarily represents the sale of commodities purchased from third parties less applicable fees. Birchcliff enters into certain marketing purchase and sales arrangements to reduce its take-or-pay fractionation fees associated with third-party commitments. For the three months and nine months ended September 30, 2021, the Corporation had marketing purchases from third parties of $8.8 million and $12.6 million, respectively (September 30, 2020 - $3.5 million and $10.0 million).

9. OTHER LIABILITIES

Post-Employment Benefit Obligation

The Corporation estimates the total undiscounted (inflated) amount of cash flow required to settle its obligations for all participants meeting the eligibility requirements under the post-employment benefit plan is approximately $14.8 million at September 30, 2021 (December 31, 2020 – $14.8 million).

A reconciliation of the discounted post-employment benefit obligation is set forth below:

As at,($000s)	September 30, 2021	December 31, 2020
Balance, beginning Obligations incurred(1) Accretion	9,177 414 121	8,494 539 144
Balance, ending(2)	9,712	9,177
Current portion Long-termportion	- 9,712	- 9,177

(1) Represents the service costs associated with post-employment benefits.

(2) Birchcliff applied a discount rate of 2.8% and an inflation rate of 3.0% to calculate the present value of the post-employment benefit obligation at September 30, 2021 and December 31, 2020.

Lease Obligation

The Corporation’s total undiscounted (inflated) amount of cash flow required to settle its lease obligations is approximately $18.4 million at September 30, 2021 (December 31, 2020 – $20.0 million). A reconciliation of the discounted lease obligation is set forth below:

discounted lease obligation is set forth below:
As at, ($000s)	September 30, 2021	December 31, 2020
Balance, beginning Lease payments Change in estimate Accretion	17,030 (1,830) 147 534	18,552 (2,292) - 770
Balance, ending(1)	15,881	17,030
Current portion Long-termportion	1,819 14,062	1,596 15,434

(1) Birchcliff applied a discount rate of 4.7% to calculate the discounted value of the lease obligation at September 30, 2021 and December 31, 2020.

64 | BIRCHCLIFF ENERGY LTD.

10. SHARE-BASED PAYMENT

Stock Option

At September 30, 2021, the Corporation’s stock option plan (the “ Option Plan ”) permitted the grant of options in respect of a maximum of 26,557,277 (September 30, 2020 – 26,593,523) common shares. At September 30, 2021, there remained available for issuance options in respect of 7,551,621 (September 30, 2020 – 5,459,022) common shares. For the three months ended September 30, 2021, the weighted average common share trading price on the TSX was $5.72 (September 30, 2020 – $1.47) per common share.

A summary of the outstanding stock options is set forth below:

	Three months ended September 30,	Nine months ended September 30,
	2021 2020	2021 2020
	Number Price($)(_1) Number Price($)(_1)	Number Price($)(_1) Number Price($)(_1)
Outstanding, beginning Granted(2) Exercised Forfeited Expired	20,820,485 3.19 21,139,001 4.00 157,500 5.11 53,000 1.16 (1,819,426) (3.19) - - (16,402) (2.24) (8,500) (1.18) (136,501) (8.70) (49,000) (6.47)	26,134,201 3.56 23,483,368 4.28 253,000 4.38 177,500 1.20 (2,830,039) (3.09) - - (2,063,439) (7.57) (66,067) (2.93) (2,488,067) (3.81) (2,460,300) (6.59)
Outstanding, ending	19,005,656 3.17 21,134,501 3.99	19,005,656 3.17 21,134,501 3.99

(1) Calculated on a weighted average basis.

(2) Each stock option granted entitles the holder to purchase one common share at the exercise price.

The weighted average fair value per option granted during the three months ended September 30, 2021 was $2.36 (September 30, 2020 – $0.48). In determining the stock-based compensation expense for options issued during the three months ended September 30, 2021, the Corporation applied a weighted average estimated forfeiture rate of 8.1% (September 30, 2020 – 9.0%).

The weighted average assumptions used in calculating the Black-Scholes fair values are set forth below:

Three months ended,	September 30, 2021	September 30, 2020
Risk-free interest rate Expected life_(years)_ Expected volatility Dividendyield	0.7% 4.1 61.4% 0.4%	0.3% 4.1 61.2% 1.7%

A summary of the stock options outstanding and exercisable under the Option Plan at September 30, 2021 is set forth below:

below:	below:
Grant Price($)		Awards Outstanding			Awards Exercisable
Low	**High **	Quantity	Weighted Average Remaining Contractual Life (years)	Weighted Average Exercise Price($)	Quantity	Weighted Average Remaining Contractual Life (years)	Weighted Average Exercise Price($)
0.78 3.01 6.01	3.00 6.00 9.43	9,969,221 7,028,435 2,008,000	3.56 1.98 0.46	2.04 3.47 7.71	1,550,972 5,300,394 1,980,500	2.92 1.79 0.40	2.25 3.41 7.73
		19,005,656	2.65	3.17	8,831,866	1.68	4.18

Performance Warrants

On January 18, 2005, Birchcliff issued 4,049,665 performance warrants as part of its initial restructuring to become a public entity. There are 2,939,732 performance warrants outstanding to purchase an equivalent number of common shares and exercisable at September 30, 2021 (December 31, 2020 – 2,939,732) with an expiry date of January 31, 2025. Each performance warrant is exercisable at a price of $3.00 to purchase one common share of Birchcliff.

65 | BIRCHCLIFF ENERGY LTD.

11. CAPITAL MANAGEMENT

The Corporation’s general policy is to maintain a sufficient capital base in order to manage its business in the most effective manner with the goal of increasing the value of its assets and thus its underlying share value. The Corporation’s objectives when managing capital are to maintain financial flexibility in order to preserve its ability to meet financial obligations, to maintain a capital structure that allows Birchcliff to finance its business strategy using primarily internallygenerated cash flow and its available debt capacity and to optimize the use of its capital to provide an appropriate investment return to its shareholders. There were no changes in the Corporation’s approach to capital management during the three and nine months ended September 30, 2021.

The following table sets forth the Corporation’s total available credit:

As at,($000s)	September 30, 2021	December 31, 2020
Maximum borrowing base limit(1): Revolving term credit facilities Principal amount utilized: Drawn revolving term credit facilities Outstandingletters of credit(2)	850,000 (652,283) (4,185)	1,000,000 (732,603) (4,185)
	(656,468)	(736,788)
Unused credit	193,532	263,212

(1) The Credit Facilities are subject to a semi-annual review of the borrowing base limit, which is directly impacted by the value of Birchcliff’s oil and gas reserves.

In connection with the most recent semi-annual review of the borrowing base limit under the Credit Facilities, which was completed by the Corporation’s syndicate of lenders in May 2021, the borrowing base limit under the Credit Facilities was reduced from $1.0 billion to $850.0 million and the maturity date was extended to May 11, 2024.

(2) Letters of credit are issued to various service providers. The letters of credit reduce the amount available under the Corporation’s Working Capital Facility.

The capital structure of the Corporation is as follows:

The capital structure of the Corporation is as follows:
As at,($000s)	September 30, 2021	December 31, 2020 % Change
Shareholders’ equity(1) Capital securities	1,822,908 38,328	1,627,567 39,930
Shareholders’ equity& capital securities	1,861,236	1,667,497 12%
Shareholders’ equity& capital securities as a % of total capital(2)	74%	69%
Working capital (surplus) deficit(3) Drawn revolvingterm credit facilities	(10,422) 652,283	30,579 732,603
Drawn debt	641,861	763,182 (16)%
Drawn debt as a % of total capital	26%	31%
Total capital	2,503,097	2,430,679 3%

(1) Shareholders’ equity is defined as share capital plus contributed surplus plus retained earnings, less any deficit.

(2) Of the 74%, approximately 94% relates to common capital stock and 4% relates to preferred capital stock.

(3) Working capital is defined as current assets less current liabilities (excluding fair value of financial instruments and capital securities).

12. RISK MANAGEMENT

Birchcliff is exposed to credit risk, liquidity risk and market risk as part of its normal course of business. The Board of Directors has overall responsibility for the establishment and oversight of the Corporation’s financial risk management framework and periodically reviews the results of all risk management activities and all outstanding positions.

The following table provides a summary of the realized and unrealized gains and losses on financial instruments:

($000s)	Three months ended September 30,	Nine months ended September 30,
	2021 2020	2021 2020
Realized loss on financial instruments Unrealizedgain(loss)on financial instruments	(2,469) (16,440) 70,493 (25,632)	(31,359) (47,846) 84,213 (77,683)

Commodity Price Risk

Commodity price risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in commodity prices. Significant changes in commodity prices can materially impact cash flows and the Corporation’s borrowing base

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limit. Lower commodity prices can also reduce the Corporation’s ability to raise capital. Commodity prices for petroleum and natural gas are not only influenced by demand in Canada and the United States, but also by world events that dictate the levels of supply and demand globally.

Financial Derivative Contracts

At September 30, 2021, Birchcliff had certain financial derivative contracts outstanding in order to manage commodity price risk. These instruments are not used for trading or speculative purposes. Birchcliff has not designated its financial instruments as effective accounting hedges, even though the Corporation considers all commodity contracts to be effective economic hedges. As a result, all such financial instruments are recorded on the statements of financial position at fair value, with the changes in fair value being recognized as an unrealized gain or loss in profit or loss and realized upon settlement.

At September 30, 2021, Birchcliff had the following financial derivative contracts in place in order to manage commodity price risk:

price risk:
		Notional			Liability
Product	Type of Contract	Quantity	Remaining Term(1)	Contract Price	($000s)
Natural gas	AECO 7A basis swap(2)	30,000 MMBtu/d	Oct. 1, 2021 – Dec. 31, 2023	NYMEX HH less US$1.298/MMBtu	5,377
Natural gas	AECO 7A basis swap(2)	10,000 MMBtu/d	Oct. 1, 2021 – Dec. 31, 2023	NYMEX HH less US$1.320/MMBtu	2,012
Natural gas	AECO 7A basis swap(2)	30,000 MMBtu/d	Oct. 1, 2021 – Dec. 31, 2023	NYMEX HH less US$1.330/MMBtu	6,030
Natural gas	AECO 7A basis swap(2)	15,000 MMBtu/d	Oct. 1, 2021 – Dec. 31, 2024	NYMEX HH less US$1.185/MMBtu	4,141
Natural gas	AECO 7A basis swap(2)	5,000 MMBtu/d	Oct. 1, 2021 – Dec. 31, 2024	NYMEX HH less US$1.200/MMBtu	1,499
Natural gas	AECO 7A basis swap(2)	5,000 MMBtu/d	Oct. 1, 2021 – Dec. 31, 2024	NYMEX HH less US$1.200/MMBtu	1,477
Natural gas	AECO 7A basis swap(2)	12,500 MMBtu/d	Oct. 1, 2021 – Dec. 31, 2025	NYMEX HH less US$1.108/MMBtu	4,824
Natural gas	AECO 7A basis swap(2)	10,000 MMBtu/d	Oct. 1, 2021 – Dec. 31, 2025	NYMEX HH less US$1.115/MMBtu	3,919
Natural gas	AECO 7A basis swap(2)	10,000 MMBtu/d	Oct. 1, 2021 – Dec. 31, 2025	NYMEX HH less US$1.050/MMBtu	2,984
Natural gas	AECO 7A basis swap(2)	5,000 MMBtu/d	Oct. 1, 2021 – Dec. 31, 2025	NYMEX HH less US$1.178/MMBtu	2,579
Natural gas	AECO 7A basis swap(2)	10,000 MMBtu/d	Oct. 1, 2021 – Dec. 31, 2025	NYMEX HH less US$1.175/MMBtu	5,160
Natural gas	AECO 7A basis swap(2)	5,000 MMBtu/d	Oct. 1, 2021 – Dec. 31, 2025	NYMEX HH less US$1.190/MMBtu	2,689
Natural gas	AECO 7A basis swap(2)	30,000 MMBtu/d	Jan. 1, 2024 – Dec. 31, 2025	NYMEX HH less US$1.114/MMBtu	12,407
Natural gas	AECO 7A basis swap(2)	35,000 MMBtu/d	Jan. 1, 2024 – Dec. 31, 2025	NYMEX HH less US$1.081/MMBtu	13,285
Natural gas	AECO 7A basis swap(2)	5,000 MMBtu/d	Jan. 1, 2024 – Dec. 31, 2025	NYMEX HH less US$1.013/MMBtu	1,567
Natural gas	AECO 7A basis swap(2)	20,000 MMBtu/d	Jan. 1, 2025 – Dec. 31, 2025	NYMEX HH less US$1.005/MMBtu	3,487
Naturalgas	AECO 7A basis swap(2)	5,000 MMBtu/d	Jan. 1,2025 – Dec. 31,2025	NYMEX HH less US$0.990/MMBtu	855
				Fair value	74,292

(1) Transactions with common terms and the same counterparty have been aggregated and presented at the weighted average price.

(2) Birchcliff sold AECO basis swap.

At September 30, 2021 if the future AECO/NYMEX basis changed by US$0.10/MMBtu, with all other variables held constant, after-tax net income in the nine months ended September 30, 2021 would have changed by approximately $23.1 million.

There were no financial derivative contracts entered into subsequent to September 30, 2021 to manage commodity price risk.

Physical Delivery Contracts

Birchcliff also enters into physical delivery contracts to manage commodity price risk. These contracts are considered normal executory sales contracts and are not recorded at fair value through profit or loss.

At September 30, 2021 the Corporation had the following physical delivery contract in place:

Product	Type of Contract	Quantity	Remaining Term	Contract Price
Naturalgas	AECO 7A basis swap(1)	5,000 MMBtu/d	Oct. 1,2021 – Dec. 31,2023	NYMEX HH less US$1.205/MMBtu

(1) Birchcliff sold AECO basis swap.

There were no physical delivery contracts entered into subsequent to September 30, 2021 to manage commodity price risk.

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Interest Rate Risk

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Corporation’s Credit Facilities are exposed to interest rate risk. The remainder of Birchcliff’s financial assets and liabilities are not directly exposed to interest rate risk.

At September 30, 2021, Birchcliff had the following financial derivative contracts in place in order to manage interest rate risk:

rate risk:
			Notional	Fixed	Fair
			Amount	Rate	Value Liability
Type of Contract	Index	Remaining Term(1)	($million)	(%)	($000s)
Interest rate swap	One-month banker’s acceptance – CDOR(2)	Oct. 1, 2021 – Mar. 1, 2024	350	2.215	9,532

(1) Transactions with common terms and the same counterparty have been aggregated and presented at the weighted average price.

(2) Canadian Dollar Offered Rate (“ CDOR ”).

At September 30, 2021 if the one-month banker’s acceptance CDOR index changed by 0.10%, with all other variables held constant, after-tax net income in the nine months ended September 30, 2021 would have changed by approximately $0.3 million.

There were no financial derivative contracts entered into subsequent to September 30, 2021 to manage interest rate risk.

Foreign Currency Risk

Foreign currency risk is the risk that future cash flows will fluctuate as a result of changes in foreign currency exchange rates. The exchange rate effect cannot be quantified but generally an increase in the value of the CDN dollar as compared to the US dollar will reduce the CDN dollar prices received by Birchcliff for its petroleum and natural gas sales. The Corporation had no long-term forward exchange rate contracts in place as at or during the period ended September 30, 2021.

13. INVESTMENTS

On August 31, 2017, Birchcliff acquired securities consisting of 4,500,000 common A units in a limited partnership and 10,000,000 preferred units in a trust (collectively, the “ Securities ”) at a combined value of $10 million. The Securities are not publicly listed and do not constitute a significant investment.

As at September 30, 2021, the Corporation’s investments primarily consisted of Securities that had a fair value of $6.9 million (December 31, 2020 - $1.8 million). Birchcliff recorded a gain on investment of $1.8 and $5.1 million during the three and nine months ended September 30, 2021 compared to a gain on investment of $1.1 million during the three months ended September 30, 2020 and a loss on investment of $2.0 million during the nine months ended September 30, 2020.

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