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Meridian Mining — Management Reports 2022
Nov 9, 2022
47387_rns_2022-11-09_d9d252b0-8ab0-4320-86ce-3f36e80c53bd.pdf
Management Reports
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MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
This Management's Discussion and Analysis ("MD&A") for Birchcliff Energy Ltd. ("Birchcliff" or the "Corporation") dated November 9, 2022 is with respect to the three and nine months ended September 30, 2022 (the "Reporting Periods") as compared to the three and nine months ended September 30, 2021 (the "Comparable Prior Periods"). This MD&A has been prepared by management and approved by the Corporation's audit committee and board of directors and should be read in conjunction with the unaudited interim condensed financial statements for the Reporting Periods (the "financial statements") and the annual audited financial statements of the Corporation and related notes for the year ended December 31, 2021, which have been prepared in accordance with IFRS. All dollar amounts are expressed in Canadian currency unless otherwise stated.
This MD&A uses various "non-GAAP financial measures", "non-GAAP ratios", "supplementary financial measures" and "capital management measures" as such terms are defined in National Instrument 52-112 – Non-GAAP and Other Financial Measures Disclosure ("NI 52-112"). Non-GAAP financial measures and non-GAAP ratios are not standardized financial measures under GAAP and might not be comparable to similar financial measures disclosed by other issuers where similar terminology is used. For further information, including reconciliations to the most directly comparable GAAP measures where applicable, see "Non-GAAP and Other Financial Measures" in this MD&A.
This MD&A contains forward-looking statements and information (collectively, "forward-looking statements") within the meaning of applicable Canadian securities laws. Such forward-looking statements are based upon certain expectations and assumptions and actual results may differ materially from those expressed or implied by such forward-looking statements. For further information regarding the forward-looking statements contained herein, see "Advisories – Forward-Looking Statements" in this MD&A. All boe amounts have been calculated by using the conversion ratio of 6 Mcf of natural gas to 1 bbl of oil. For further information, see "Advisories – Boe Conversions" in this MD&A.
With respect to the disclosure of Birchcliff's production contained in this MD&A: (i) references to "light oil" mean "light crude oil and medium crude oil" as such term is defined in National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities ("NI 51-101"); (ii) unless otherwise indicated, references to "liquids" mean "light crude oil and medium crude oil" and "natural gas liquids" (including condensate) as such terms are defined in NI 51-101; and (iii) references to "natural gas" mean "shale gas", which also includes an immaterial amount of "conventional natural gas", as such terms are defined in NI 51-101. In addition, NI 51-101 includes condensate within the product type of "natural gas liquids". Birchcliff has disclosed condensate separately from other natural gas liquids as the price of condensate as compared to other natural gas liquids is currently significantly higher and Birchcliff believes presenting the two commodities separately provides a more accurate description of its operations and results therefrom.
ABOUT BIRCHCLIFF
Birchcliff is a Calgary, Alberta based intermediate oil and natural gas company with operations focused on the Montney/Doig Resource Play in Alberta. Birchcliff's common shares are listed for trading on the Toronto Stock Exchange (the "TSX") under the symbol "BIR". Additional information relating to the Corporation, including its Annual Information Form for the financial year ended December 31, 2021 (the "AIF"), is available on the SEDAR website at www.sedar.com and on the Corporation's website at www.birchcliffenergy.com.
Birchcliff publishes an annual Environmental, Social and Governance ("ESG") Report containing comprehensive information relating to its ESG performance, which can be found on the Corporation's website at www.birchcliffenergy.com.
BIRCHCLIFF ENERGY LTD
CURRENT OPERATING ENVIRONMENT
Benchmark oil and natural gas prices have remained volatile during 2022 primarily due to supply and demand uncertainty that has resulted from the novel coronavirus COVID-19 ("COVID-19") pandemic, the potential for a global economic slowdown attributed to rising inflation and interest rates, geopolitical tensions arising from the Russian invasion of Ukraine and global commodity supply constraints and labour shortages which have increased inflationary pressures. Birchcliff has incorporated the current and anticipated impacts of the COVID-19 pandemic, the Russian invasion of Ukraine and these other negative conditions in its preparation of this MD&A and the financial statements. See Note 2 "Basis of Preparation – Current Environment and Estimation Uncertainty" in the financial statements.
THREE MONTH REPORTING PERIOD HIGHLIGHTS
- Achieved quarterly average production of 78,079 boe/d, an 8% decrease from the three month Comparable Prior Period. Liquids accounted for 19% of Birchcliff's total production in the three month Reporting Period, consistent with the Comparable Prior Period.
- Generated record Q3 adjusted funds flow(1) of $267.4 million, or $1.01 per basic common share(2), a 59% and 60% increase, respectively, from the three month Comparable Prior Period. Quarterly cash flow from operating activities was $273.0 million, a 75% increase from the three month Comparable Prior Period.
- Delivered record Q3 free funds flow(1) of $182.0 million, or $0.69 per basic common share(2), a 21% and 23% increase, respectively, from the three month Comparable Prior Period.
- Earned record quarterly net income to common shareholders of $244.6 million, or $0.92 per basic common share, each a 77% increase from the three month Comparable Prior Period.
- F&D capital expenditures were $85.3 million in the three month Reporting Period, which included drilling 8 (8.0 net) wells and bringing 19 (19.0 net) wells on production.
- Achieved an operating netback(2) of $32.31/boe, a 37% increase from the Comparable Prior Period.
- Achieved adjusted funds flow per boe(2) of $37.22, a 73% increase from the Comparable Prior Period.
- Realized an operating expense(3) of $3.50/boe, an 18% increase from the Comparable Prior Period.
- Redeemed all of its issued and outstanding cumulative redeemable preferred shares, Series A (the "Series A Preferred Shares") and Series C (the "Series C Preferred Shares") on September 30, 2022 for an aggregate redemption price of $88.2 million.
- Significantly reduced total debt(4) at September 30, 2022 to $186.1 million, a reduction of $451.8 million (71%) from September 30, 2021 and $80.8 million (30%) from June 30, 2022. The Corporation retired approximately $169.0 million of total debt and preferred shares in the three month Reporting Period.
- In the three month Reporting Period, Birchcliff returned $10.3 million to common shareholders through dividends and purchases under its normal course issuer bid (the "NCIB"), including the purchase of 525,400 common shares under the NCIB at an average price of $9.44 per share (before fees). In the nine month Reporting Period, Birchcliff returned $67.7 million to common shareholders through dividends and the purchase of 6,040,192 common shares under the NCIB at an average price of $9.00 per share (before fees).
See "Cash Flow From Operating Activities and Adjusted Funds Flow", "Net Income to Common Shareholders", "Discussion of Operations", "Capital Expenditures" and "Capital Resources and Liquidity" in this MD&A for further information regarding the financial and operational results for the Reporting Periods and Comparable Prior Periods.
BIRCHCLIFF ENERGY LTD
OUTLOOK AND GUIDANCE
Birchcliff is maintaining its guidance for 2022 as previously disclosed on October 13, 2022. Birchcliff is on track to achieve its 2022 annual average production guidance of 78,000 boe/d, which is expected to generate approximately $1.02 billion of adjusted funds flow and $655 million to $665 million of free funds flow, based on the assumptions set forth herein. The Corporation anticipates F&D capital expenditures to be between $355 million and $365 million, which includes $80 million being spent to prepare for the efficient execution of the Corporation's 2023 capital program. The following table sets forth Birchcliff's guidance and commodity price assumptions for 2022, as well as its free funds flow sensitivity:
2022 Guidance and Commodity Price Assumptions
| 2022 guidance and assumptions(1) | |
|---|---|
| Production | |
| Annual average production (boe/d) | 78,000 |
| % Light oil | 3% |
| % Condensate | 6% |
| % NGLs | 10% |
| % Natural gas | 81% |
| Q4 average production (boe/d) | 81,000 – 83,000 |
| Average Expenses ($/boe) | |
| Royalty(2) | 6.70 – 6.80 |
| Operating(3) | 3.40 – 3.50 |
| Transportation and other(3) | 5.40 – 5.50 |
| Interest(2) | 0.40 – 0.50 |
| Adjusted Funds Flow (millions)(4) | $1,020 |
| F&D Capital Expenditures (millions)(5) | $355 – $365 |
| Free Funds Flow (millions)(4) | $655 – $665 |
| Common Share Dividends (millions)(6) | $72 |
| Excess Free Funds Flow (millions)(4)(6) | $585 – $595 |
| Total Debt at Year End (millions)(7) | $60 – $70 |
| Natural Gas Market Exposure | |
| AECO exposure as a % of total natural gas production | 15% |
| Dawn exposure as a % of total natural gas production | 42% |
| NYMEX HH exposure as a % of total natural gas production | 38% |
| Alliance exposure as a % of total natural gas production | 5% |
| Commodity Prices | |
| Average WTI price (US$/bbl) | 95.00 |
| Average WTI-MSW differential (CDN$/bbl) | 2.50 |
| Average AECO price (CDN$/GI) | 5.25 |
| Average Dawn price (US$/MMBtu) | 6.35 |
| Average NYMEX HH price (US$/MMBtu) | 6.85 |
| Exchange rate (CDN$ to US$1) | 1.30 |
Forward Three Months' Free Funds Flow Sensitivity(8)
| Forward three months' sensitivity | Estimated change to 2022 free funds flow (millions) |
|---|---|
| Change in WTI US$1.00/bbl | $1.0 |
| Change in NYMEX HH US$0.10/MMBtu | $1.3 |
| Change in Dawn US$0.10/MMBtu | $1.8 |
| Change in AECO CDN$0.10/GJ | $1.2 |
| Change in CDN/US exchange rate CDN$0.01 | $1.3 |
(1) For further information regarding the risks and assumptions relating to the Corporation's guidance, see "Advisories – Forward-Looking Statements" in this MD&A.
(2) Supplementary financial measure. See "Non-GAAP and Other Financial Measures" in this MD&A.
(3) Non-GAAP ratio. See "Non-GAAP and Other Financial Measures" in this MD&A.
(4) Non-GAAP financial measure. See "Non-GAAP and Other Financial Measures" in this MD&A.
BIRCHCLIFF ENERGY LTD
(5) Birchcliff's estimate of F&D capital expenditures excludes any net potential acquisitions and dispositions and the capitalized portion of annual cash incentive payments that have not been approved by Birchcliff's board of directors. See "Advisories – F&D Capital Expenditures" in this MD&A.
(6) Assumes that a dividend of $0.02 per common share is paid for the quarter ending December 31, 2022 and that there are 266 million common shares outstanding. The declaration of dividends is subject to the approval of the board of directors and is subject to change. See "Advisories – Forward-Looking Statements" in this MD&A.
(7) Capital management measure. See "Non-GAAP and Other Financial Measures" in this MD&A. Birchcliff's estimate of total debt at December 31, 2022 is expected to be comprised of any amounts outstanding under the Credit Facilities and adjusted working capital, which is expected to be largely comprised of cash, accounts receivable and accounts payable and accrued liabilities at the end of the year.
(8) Illustrates the expected impact of changes in commodity prices and the CDN/US exchange rate on the Corporation's estimate of free funds flow for 2022 of $655 million to $665 million, holding all other variables constant. The sensitivity is based on the commodity price and exchange rate assumptions set forth in the table above. The calculated impact on free funds flow is only applicable within the limited range of change indicated. Calculations are performed independently and may not be indicative of actual results. Actual results may vary materially when multiple variables change at the same time and/or when the magnitude of the change increases.
CASH FLOW FROM OPERATING ACTIVITIES AND ADJUSTED FUNDS FLOW
The following table sets forth the Corporation's cash flow from operating activities and adjusted funds flow for the periods indicated:
| Three months ended September 30, | Nine months ended September 30, | |||
|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |
| Cash flow from operating activities ($000s) | 272,965 | 155,606 | 700,828 | 319,227 |
| Adjusted funds flow ($000s)(1) | 267,350 | 168,076 | 736,584 | 346,084 |
| Per common share – basic ($)(2) | 1.01 | 0.63 | 2.78 | 1.30 |
| Per common share – diluted ($)(2) | 0.97 | 0.61 | 2.67 | 1.27 |
| Adjusted funds flow ($/boe)(2) | 37.22 | 21.51 | 35.52 | 16.16 |
(1) Non-GAAP financial measure. See "Non-GAAP and Other Financial Measures" in this MD&A.
(2) Non-GAAP ratio. See "Non-GAAP and Other Financial Measures" in this MD&A.
Adjusted funds flow in the three and nine month Reporting Periods increased by 59% and 113%, respectively, from the Comparable Prior Periods. Cash flow from operating activities increased by 75% and 120%, respectively, from the Comparable Prior Periods. The increases were primarily due to higher petroleum and natural gas revenue and realized gains on financial instruments of $45.5 million and $62.0 million in the three and nine month Reporting Periods, respectively, as compared to realized losses on financial instruments of $2.5 million and $31.4 million in the Comparable Prior Periods, partially offset by higher royalty expenses in the Reporting Periods. The increases in petroleum and natural gas revenue and royalty expense were largely the result of a 40% and 64% increase in the average realized sales price received for Birchcliff's production in the three and nine month Reporting Periods, respectively, as compared to the Comparable Prior Periods. The Corporation's average realized sales price in the Reporting Periods benefited from significant increases in benchmark oil and natural gas prices as compared to the Comparable Prior Periods.
See "Discussion of Operations – Petroleum and Natural Gas Revenue" and "Discussion of Operations – Royalties" in this MD&A for further information regarding the period-over-period movement in revenue, commodity prices, realized gains and losses on financial instruments and royalties.
NET INCOME TO COMMON SHAREHOLDERS
The following table sets forth the Corporation's net income to common shareholders for the periods indicated:
| Three months ended September 30, | Nine months ended September 30, | |||
|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |
| Net income to common shareholders ($000s) | 244,582 | 138,367 | 584,229 | 204,387 |
| Per common share – basic ($) | 0.92 | 0.52 | 2.20 | 0.77 |
| Per common share – diluted ($) | 0.89 | 0.50 | 2.12 | 0.75 |
| Net income to common shareholders ($/boe)(1) | 34.05 | 17.71 | 28.17 | 9.54 |
(1) Supplementary financial measure. See "Non-GAAP and Other Financial Measures" in this MD&A.
Net income to common shareholders in the three and nine month Reporting Periods increased by 77% and 186%, respectively, from the Comparable Prior Periods. The increases were primarily due to higher adjusted funds flow and higher unrealized mark-to-market gains on financial instruments of $109.9 million and $192.1 million in the three and nine month Reporting Periods, respectively, as compared to $70.5 million and $84.2 million in the Comparable Prior
BIRCHCLIFF ENERGY LTD
Periods. Net income to common shareholders was negatively impacted by an increase in deferred income tax expenses of $32.6 million and $115.6 million in the three and nine month Reporting Periods, respectively.
See "Discussion of Operations – Risk Management" and "Discussion of Operations – Income Taxes" in this MD&A for further details regarding the period-over-period movement in unrealized gains on financial instruments and deferred income tax expense.
DISCUSSION OF OPERATIONS
Petroleum and Natural Gas Revenue
The following table sets forth Birchcliff's P&NG revenue by product category for the Corporation's Pouce Coupe operating assets geologically situated in the dry natural gas and liquids-rich natural gas trends of the Montney/Doig Resource Play (the "Pouce Coupe assets"), the Corporation's Gordondale operating assets geologically situated in the light oil and liquids-rich trends of the Montney/Doig Resource Play (the "Gordondale assets") and on a corporate basis for the periods indicated:
| Three months ended September 30, 2022 | Three months ended September 30, 2021 | |||||
|---|---|---|---|---|---|---|
| ($000s) | Pouce Coupe assets | Gordondale assets | Corporate(1) | Pouce Coupe assets | Gordondale assets | Corporate(1) |
| Light oil | 179 | 23,832 | 24,037 | 150 | 21,943 | 22,112 |
| Condensate | 32,189 | 16,827 | 49,031 | 34,469 | 14,048 | 48,517 |
| NGLs | 8,199 | 18,460 | 26,673 | 6,497 | 15,770 | 22,267 |
| Natural gas | 181,054 | 58,418 | 239,773 | 122,090 | 48,351 | 170,441 |
| P&NG sales(2) | 221,621 | 117,537 | 339,514 | 163,206 | 100,112 | 263,337 |
| Royalty income | 2 | 2 | 17 | 1 | 3 | 11 |
| P&NG revenue | 221,623 | 117,539 | 339,531 | 163,207 | 100,115 | 263,348 |
| % of corporate P&NG revenue | 65% | 35% | 62% | 38% | ||
| Nine months ended September 30, 2022 | Nine months ended September 30, 2021 | |||||
| ($000s) | Pouce Coupe assets | Gordondale assets | Corporate(1) | Pouce Coupe assets | Gordondale assets | Corporate(1) |
| Light oil | 634 | 70,883 | 71,597 | 435 | 61,113 | 61,605 |
| Condensate | 106,612 | 51,360 | 158,116 | 91,203 | 39,071 | 130,274 |
| NGLs | 28,566 | 57,220 | 85,825 | 16,919 | 42,336 | 59,256 |
| Natural gas | 529,623 | 173,883 | 704,238 | 281,792 | 109,641 | 391,438 |
| P&NG sales(2) | 665,435 | 353,346 | 1,019,776 | 390,349 | 252,161 | 642,573 |
| Royalty income | 5 | 7 | 46 | 4 | 6 | 27 |
| P&NG revenue | 665,440 | 353,353 | 1,019,822 | 390,353 | 252,167 | 642,600 |
| % of corporate P&NG revenue | 65% | 35% | 61% | 39% |
(1) Includes other minor oil and natural gas properties that were not individually significant during the respective periods.
(2) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.
On a corporate basis, P&NG revenue increased by 29% and 59% from the three and nine month Comparable Prior Periods, respectively. The increases were primarily due to a $69.3 million (41%) and $312.8 million (80%) increase in natural gas revenue from the three and nine month Comparable Prior Periods, respectively, that largely resulted from a significantly higher average realized natural gas sales price in the Reporting Periods. The increase in natural gas revenue in the three month Reporting Period was partially offset by lower natural gas production. See "Discussion of Operations – P&NG Revenue – Production" and "Discussion of Operations – P&NG Revenue – Commodity Prices" in this MD&A for further details regarding the period-over-period movement in Birchcliff's production and the average realized sales price for its natural gas.
BIRCHCLIFF ENERGY LTD
Production
The following table sets forth Birchcliff's production by product category for the Pouce Coupe assets, the Gordondale assets and on a corporate basis for the periods indicated:
| Three months ended September 30, 2022 | Three months ended September 30, 2021 | |||||
|---|---|---|---|---|---|---|
| Pouce Coupe assets | Gordondale assets | Corporate(1) | Pouce Coupe assets | Gordondale assets | Corporate(1) | |
| Light oil (bbls/d) | 17 | 2,234 | 2,254 | 19 | 2,856 | 2,878 |
| Condensate (bbls/d) | 2,997 | 1,602 | 4,601 | 4,280 | 1,710 | 5,990 |
| NGLs (bbls/d) | 1,860 | 5,732 | 7,593 | 1,696 | 5,193 | 6,889 |
| Natural gas (Mcf/d) | 287,947 | 93,353 | 381,788 | 295,880 | 119,121 | 415,005 |
| Production (boe/d) | 52,865 | 25,127 | 78,079 | 55,309 | 29,612 | 84,924 |
| Liquids-to-gas ratio (bbls/MMcf) | 16.9 | 102.5 | 37.8 | 20.3 | 81.9 | 38.0 |
| % of corporate production | 68% | 32% | 65% | 35% | ||
| Nine months ended September 30, 2022 | Nine months ended September 30, 2021 | |||||
| Pouce Coupe assets | Gordondale assets | Corporate(1) | Pouce Coupe assets | Gordondale assets | Corporate(1) | |
| Light oil (bbls/d) | 19 | 2,137 | 2,159 | 21 | 2,974 | 2,998 |
| Condensate (bbls/d) | 3,094 | 1,533 | 4,631 | 4,121 | 1,723 | 5,844 |
| NGLs (bbls/d) | 1,809 | 5,494 | 7,305 | 1,831 | 5,919 | 7,750 |
| Natural gas (Mcf/d) | 276,391 | 94,365 | 371,174 | 264,613 | 106,554 | 371,175 |
| Production (boe/d) | 50,987 | 24,893 | 75,957 | 50,075 | 28,375 | 78,454 |
| Liquids-to-gas ratio (bbls/MMcf) | 17.8 | 97.1 | 38.0 | 22.6 | 99.6 | 44.7 |
| % of corporate production | 67% | 33% | 64% | 36% |
(1) Includes other minor oil and natural gas properties that were not individually significant during the respective periods.
On a corporate basis, Birchcliff's production decreased by 8% and 3% from the three and nine month Comparable Prior Periods.
The decrease in the three month Reporting Period was primarily due to the timing of new wells brought on production in the period as compared to the Comparable Prior Period, which resulted from scheduling differences in Birchcliff's drilling and completions program year-over-year. During the three month Reporting Period, the Corporation brought a total of 19 wells on production, which included the 10-well 04-04 pad brought onstream in August 2022 and the 9-well 06-35 pad brought onstream in late September 2022, as compared to 22 wells in the three month Comparable Prior Period, the majority of which were brought on production earlier in that period. Production was positively impacted by incremental production volumes from new Montney/Doig wells brought on production since September 30, 2021, partially offset by natural production declines.
Production in the nine month Reporting Period was also negatively impacted by a major scheduled turnaround in the second quarter of 2022 at AltaGas' deep-cut sour gas processing facility in Gordondale (the "AltaGas Facility") that decreased liquids and natural gas production in Gordondale by approximately 1,200 boe/d during the nine month Reporting Period.
BIRCHCLIFF ENERGY LTD
The following table sets forth Birchcliff's production weighting by product category for the Pouce Coupe assets, the Gordondale assets and on a corporate basis for the periods indicated:
| Three months ended September 30, 2022 | Three months ended September 30, 2021 | |||||
|---|---|---|---|---|---|---|
| Pouce Coupe assets | Gordondale assets | Corporate(1) | Pouce Coupe assets | Gordondale assets | Corporate(1) | |
| % Light oil production | - | 9% | 3% | - | 10% | 3% |
| % Condensate production | 6% | 6% | 6% | 8% | 6% | 8% |
| % NGLs production | 4% | 23% | 10% | 3% | 18% | 8% |
| % Natural gas production | 90% | 62% | 81% | 89% | 66% | 81% |
| Nine months ended September 30, 2022 | Nine months ended September 30, 2021 | |||||
| Pouce Coupe assets | Gordondale assets | Corporate(1) | Pouce Coupe assets | Gordondale assets | Corporate(1) | |
| % Light oil production | - | 9% | 3% | - | 10% | 4% |
| % Condensate production | 6% | 6% | 6% | 8% | 6% | 7% |
| % NGLs production | 4% | 22% | 10% | 4% | 21% | 10% |
| % Natural gas production | 90% | 63% | 81% | 88% | 63% | 79% |
(1) Includes other minor oil and natural gas properties that were not individually significant during the respective periods.
Liquids accounted for $19\%$ of Birchcliff's total production in the three and nine month Reporting Periods as compared to $19\%$ and $21\%$ in the Comparable Prior Periods, with a liquids-to-gas ratio in the three and nine month Reporting Periods of 37.8 bbls/MMcf and 38.0 bbls/MMcf (47% and $48\%$ high-value light oil and condensate), respectively. The decrease in liquids weighting in the nine month Reporting Period was primarily due to a combination of: (i) lower liquids production in the Gordondale area as a result of the AltaGas Facility turnaround in the second quarter of 2022; (ii) the Corporation specifically targeting horizontal natural gas wells in liquids-rich zones in the Pouce Coupe area; and (iii) natural production declines from light oil an liquids-rich natural gas wells producing since the Comparable Prior Period.
Commodity Prices
The following table sets forth the average benchmark commodity index prices and exchange rates for the periods indicated:
| Three months ended September 30, | |||
|---|---|---|---|
| 2022 | 2021 | % Change | |
| Light oil – WTI Cushing (US$/bbl) | 91.55 | 71.06 | 29% |
| Light oil – MSW (Mixed Sweet) (CDN$/bbl) | 116.82 | 83.32 | 40% |
| Natural gas – NYMEX HH (US$/MMBtu) | 8.20 | 4.01 | 104% |
| Natural gas – AECO 5A Daily (CDN$/GJ) | 3.95 | 3.41 | 16% |
| Natural gas – AECO 7A Month Ahead (US$/MMBtu) | 4.46 | 2.83 | 58% |
| Natural gas – Dawn Day Ahead (US$/MMBtu) | 7.37 | 4.07 | 81% |
| Natural gas – ATP 5A Day Ahead (CDN$/GJ) | 3.96 | 4.01 | (1%) |
| Exchange rate (CDN$ to US$1) | 1.3054 | 1.2504 | 4% |
| Exchange rate (US$ to CDN$1) | 0.7660 | 0.7997 | (4%) |
| Nine months ended September 30, | |||
| 2022 | 2021 | % Change | |
| Light oil – WTI Cushing (US$/bbl) | 98.20 | 65.01 | 51% |
| Light oil – MSW (Mixed Sweet) (CDN$/bbl) | 123.20 | 75.52 | 63% |
| Natural gas – NYMEX HH (US$/MMBtu) | 6.77 | 3.18 | 113% |
| Natural gas – AECO 5A Daily (CDN$/GJ) | 5.10 | 3.11 | 64% |
| Natural gas – AECO 7A Month Ahead (US$/MMBtu) | 4.34 | 2.48 | 75% |
| Natural gas – Dawn Day Ahead (US$/MMBtu) | 6.33 | 3.27 | 94% |
| Natural gas – ATP 5A Day Ahead (CDN$/GJ) | 5.34 | 3.79 | 41% |
| Exchange rate (CDN$ to US$1) | 1.2814 | 1.2517 | 2% |
| Exchange rate (US$ to CDN$1) | 0.7804 | 0.7989 | (2%) |
BIRCHCLIFF ENERGY LTD
Birchcliff physically sells substantially all of its liquids production based on the MSW benchmark price and substantially all of its natural gas production based on the AECO 5A and Dawn benchmark prices. Birchcliff has agreements for the firm service transportation of an aggregate of 175,000 GJ/d of natural gas on TCPL's Canadian Mainline, whereby natural gas is transported to the Dawn trading hub in Southern Ontario. Birchcliff has also diversified a portion of its AECO production to NYMEX HH-based pricing, predominantly on a financial basis, with various terms ending no later than December 31, 2027. Birchcliff sold financial NYMEX HH/AECO 7A basis swap contracts for 147,500 MMBtu/d at an average contract price of NYMEX HH less US$1.227/MMBtu during the Reporting Periods and Comparable Prior Periods. See "Discussion of Operations – Risk Management" in this MD&A.
The average realized sales prices the Corporation receives for its liquids and natural gas production depend on a number of factors, including, but not limited to, the average benchmark prices for crude oil and natural gas, the US to Canadian dollar exchange rate, transportation costs, product quality differentials and the heat premium on its natural gas production.
The benchmark prices for crude oil are impacted by global and regional events that dictate the level of supply and demand for crude oil. The principal benchmark index prices that Birchcliff compares its oil price to are the WTI price and the MSW price. The WTI price and the MSW price can fluctuate due to a number of factors, including, but not limited to, domestic oil supply and demand balance, North American refinery utilization rates, inventory levels and pipeline infrastructure capacity connecting key oil consuming markets. The WTI benchmark oil index price increased significantly from the Comparable Prior Periods primarily due to the continued recovery from the COVID-19 pandemic and geopolitical tensions arising from the Russian invasion of Ukraine that has resulted in increased demand for North American crude oil.
Canadian natural gas prices are influenced by local, regional and global supply and demand fundamentals which can be impacted by a number of factors, including, but not limited to, production growth levels, weather-related conditions in key natural gas consuming markets, changing demographics, economic growth, inventory levels, access to underground storage, net import and export of LNG, pipeline supply takeaway capacity, maintenance on key natural gas infrastructure, costs of competing renewable and non-renewable energy alternatives, drilling and completion rates and efficiencies in extracting natural gas from North American natural gas basins. Natural gas benchmark prices increased significantly from the Comparable Prior Periods predominantly due to higher weather-related global demand for natural gas, higher US LNG exports and geopolitical tensions arising from the Russian invasion of Ukraine, all of which have resulted in a supply and demand imbalance for North American natural gas.
Volatility in benchmark oil and natural gas prices has persisted throughout the Reporting Periods primarily due to supply and demand uncertainty that has resulted from the COVID-19 pandemic, the potential for a global economic slowdown attributed to rising inflation and interest rates, geopolitical tensions arising from the Russian invasion of Ukraine and global commodity supply constraints and labour shortages that have increased inflationary pressures.
BIRCHCLIFF ENERGY LTD
The following table sets forth Birchcliff's average realized light oil, condensate, NGLs and natural gas sales prices for the periods indicated:
| Three months ended September 30, | |||
|---|---|---|---|
| 2022 | 2021 | % Change | |
| Light oil ($/bbl) | 115.94 | 83.52 | 39% |
| Condensate ($/bbl) | 115.84 | 88.04 | 32% |
| NGLs ($/bbl) | 38.18 | 35.13 | 9% |
| Natural gas ($/Mcf) | 6.83 | 4.46 | 53% |
| Average realized sales price ($/boe)(1)(2) | 47.26 | 33.70 | 40% |
| Nine months ended September 30, | |||
| 2022 | 2021 | % Change | |
| Light oil ($/bbl) | 121.49 | 75.28 | 61% |
| Condensate ($/bbl) | 125.06 | 81.65 | 53% |
| NGLs ($/bbl) | 43.04 | 28.01 | 54% |
| Natural gas ($/Mcf) | 6.95 | 3.86 | 80% |
| Average realized sales price ($/boe)(1)(2) | 49.18 | 30.00 | 64% |
(1) Supplementary financial measure. See "Non-GAAP and Other Financial Measures" in this MD&A.
(2) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.
The Corporation's average realized sales price increased by 40% and 64% from the three and nine month Comparable Prior Periods, respectively, primarily due to significant increases in benchmark oil and natural gas prices which positively impacted the sales prices Birchcliff received for its production in the Reporting Periods.
Natural Gas Sales, Production and Average Realized Sales Price
The following table sets forth Birchcliff's sales, average daily production and average realized sales price by physical natural gas market for the periods indicated, before taking into account the Corporation's financial instruments:
| Three months ended September 30, 2022 | Three months ended September 30, 2021 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Natural gas sales ($000s)(1) | (%) | Natural gas production (Mcf/d) | (%) | Average realized sales price ($/Mcf)(1)(2) | Natural gas sales ($000s)(1) | (%) | Natural gas production (Mcf/d) | (%) | Average realized sales price ($/Mcf)(1)(2) | |
| AECO | 83,550 | 35 | 203,296 | 53 | 4.50 | 65,886 | 39 | 186,718 | 45 | 3.87 |
| Dawn | 148,258 | 62 | 160,526 | 42 | 10.04 | 78,554 | 46 | 158,631 | 38 | 5.38 |
| Alliance(3) | 7,965 | 3 | 17,966 | 5 | 4.82 | 26,001 | 15 | 69,656 | 17 | 4.06 |
| Total | 239,773 | 100 | 381,788 | 100 | 6.83 | 170,441 | 100 | 415,005 | 100 | 4.46 |
| Nine months ended September 30, 2022 | Nine months ended September 30, 2021 | |||||||||
| Natural gas sales ($000s)(1) | (%) | Natural gas production (Mcf/d) | (%) | Average realized sales price ($/Mcf)(1)(2) | Natural gas sales ($000s)(1) | (%) | Natural gas production (Mcf/d) | (%) | Average realized sales price ($/Mcf)(1)(2) | |
| AECO | 286,973 | 41 | 183,021 | 49 | 5.79 | 148,998 | 38 | 155,857 | 42 | 3.50 |
| Dawn | 373,232 | 53 | 160,550 | 43 | 8.52 | 185,449 | 47 | 159,414 | 43 | 4.26 |
| Alliance(3) | 44,033 | 6 | 27,603 | 8 | 5.84 | 56,991 | 15 | 55,904 | 15 | 3.73 |
| Total | 704,238 | 100 | 371,174 | 100 | 6.95 | 391,438 | 100 | 371,175 | 100 | 3.86 |
(1) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.
(2) Supplementary financial measure. See "Non-GAAP and Other Financial Measures" in this MD&A.
(3) Birchcliff has short-term physical sales agreements with third-party marketers to sell and deliver into the Alliance pipeline system. Alliance sales are recorded net of transportation tolls.
BIRCHCLIFF ENERGY LTD
Risk Management
Birchcliff engages in risk management activities by utilizing various financial instruments and physical delivery contracts to diversify its sales points or fix commodity prices and market interest rates. The board of directors has authorized the Corporation to execute a risk management strategy whereby Birchcliff is authorized, subject to compliance with the agreement governing the Corporation's extendible revolving credit facilities (the "Credit Facilities"), to enter into agreements and financial or physical transactions with one or more counterparties from time to time that are intended to reduce the risk to the Corporation from volatility in future commodity prices, foreign exchange rates and/or interest rates.
Financial Derivative Contracts
Birchcliff has not designated its financial derivative contracts as effective accounting hedges, even though the Corporation considers all commodity price contracts to be effective economic hedges. As a result, all such financial instruments are recorded on the statements of financial position on a mark-to-market fair value basis at September 30, 2022, with the changes in fair value being recognized as a non-cash unrealized gain or loss in profit or loss and realized upon settlement. These contracts are not entered into for trading or speculative purposes.
Birchcliff's average notional quantity and contract price for its financial NYMEX HH/AECO 7A basis swap contracts outstanding at September 30, 2022 are set forth below:
| Product | Type of Contract | Average Notional Quantity | Period(1) | Average Contract Price |
|---|---|---|---|---|
| Natural gas | AECO 7A basis swap(2) | 147,500 MMBtu/d | Oct. 1, 2022 – Dec. 31, 2022 | NYMEX HH less US$1.227/MMBtu |
| Natural gas | AECO 7A basis swap(2) | 147,500 MMBtu/d | Jan. 1, 2023 – Dec. 31, 2023 | NYMEX HH less US$1.227/MMBtu |
| Natural gas | AECO 7A basis swap(2) | 147,500 MMBtu/d | Jan. 1, 2024 – Dec. 31, 2024 | NYMEX HH less US$1.120/MMBtu |
| Natural gas | AECO 7A basis swap(2) | 147,500 MMBtu/d | Jan. 1, 2025 – Dec. 31, 2025 | NYMEX HH less US$1.088/MMBtu |
| Natural gas | AECO 7A basis swap(2) | 5,000 MMBtu/d | Jan. 1, 2027 – Dec. 31, 2027 | NYMEX HH less US$0.620/MMBtu |
(1) Transactions with common terms have been aggregated and presented at the weighted average price.
(2) Birchcliff sold AECO basis swap.
The following financial derivative contracts were entered into subsequent to September 30, 2022 to manage commodity price risk:
| Product | Type of Contract | Quantity | Remaining Term | Contract Price |
|---|---|---|---|---|
| Natural gas | AECO 7A basis swap(1) | 10,000 MMBtu/d | Jan. 1, 2026 – Dec. 31, 2026 | NYMEX HH less US$0.895/MMBtu |
| Natural gas | AECO 7A basis swap(1) | 10,000 MMBtu/d | Jan. 1, 2027 – Dec. 31, 2027 | NYMEX HH less US$0.760/MMBtu |
(1) Birchcliff sold AECO basis swap.
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, 2022, the Corporation had the following physical delivery contract in place:
| Product | Type of Contract | Quantity | Remaining Term | Contract Price |
|---|---|---|---|---|
| Natural gas | AECO 7A basis swap(1) | 5,000 MMBtu/d | Oct. 1, 2022 – 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, 2022 to manage commodity price risk.
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, 2022, Birchcliff had the following financial derivative contracts in place to manage interest rate risk:
| Type of Contract | Index | Remaining Term(1) | Notional value | Fixed Rate |
|---|---|---|---|---|
| Interest rate swap | One-month banker's acceptance – CDOR(2) | Oct. 1 2022 – Mar. 1, 2024 | $350 million | 2.215% |
(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").
BIRCHCLIFF ENERGY LTD
There were no financial derivative contracts entered into subsequent to September 30, 2022 to manage interest rate risk.
Realized and Unrealized Gains and Losses on Financial Instruments
The following table provides a summary of the realized and unrealized gains and losses on financial instruments for the periods indicated:
| Three months ended September 30, | Nine months ended September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |||||
| ($000s) | ($/boe)(1) | ($000s) | ($/boe)(1) | ($000s) | ($/boe)(1) | ($000s) | ($/boe)(1) | |
| Realized gain (loss) | 45,490 | 6.33 | (2,469) | (0.32) | 61,978 | 2.99 | (31,359) | (1.46) |
| Unrealized gain | 109,927 | 15.30 | 70,493 | 9.02 | 192,055 | 9.26 | 84,213 | 3.93 |
(1) Supplementary financial measure. See "Non-GAAP and Other Financial Measures" in this MD&A.
Birchcliff realized gains on its financial instruments of $45.5 million and $62.0 million in the three and nine month Reporting Periods, respectively, due to the settlement of the Corporation's financial NYMEX HH/AECO 7A basis swap contracts and interest rate swap contracts in the Reporting Periods. In the three and nine month Comparable Prior Periods, Birchcliff realized losses on financial instruments of $2.5 million and $31.4 million, respectively. The change to realized gains on the Corporation's financial instruments in the Reporting Periods from realized losses on financial instruments in the Comparable Prior Periods was primarily due to the settlement price (average spread between NYMEX HH and AECO 7A) being higher than the average contract price for the Corporation's financial NYMEX HH/AECO 7A basis swap contracts in the Reporting Periods.
The unrealized gains on financial instruments of $109.9 million and $192.1 million in the three and nine month Reporting Periods, respectively, resulted from the change to a fair value net asset position of $108.3 million at September 30, 2022 from a net liability position of $83.8 million at December 31, 2021 on the Corporation's financial instruments. The change in the fair value of the Corporation's financial instruments in the Reporting Periods was primarily due to: (i) the increase (or widening) in the forward basis spread between the Corporation's financial NYMEX HH/AECO 7A basis swap contracts outstanding at September 30, 2022 as compared to the fair value previously assessed at December 31, 2021; and (ii) the settlement of the Corporation's financial NYMEX HH/AECO 7A basis swap contracts in the Reporting Periods.
Unrealized gains and losses on financial instruments can fluctuate materially from period to period due to movement in the forward strip commodity prices and interest rates. Unrealized gains and losses on financial instruments do not impact adjusted funds flow and may differ materially from the actual gains or losses realized on the eventual cash settlement of financial contracts in a period.
Royalties
The following table sets forth Birchcliff's royalty expense for the periods indicated:
| Three months ended September 30, | Nine months ended September 30, | |||
|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |
| Royalty expense ($000s)(1) | 43,379 | 19,500 | 125,547 | 47,819 |
| Royalty expense ($/boe)(2) | 6.04 | 2.50 | 6.05 | 2.23 |
| Effective royalty rate (%)(2)(3) | 13% | 7% | 12% | 7% |
(1) Royalties are paid primarily to the Government of Alberta.
(2) Supplementary financial measure. See "Non-GAAP and Other Financial Measures" in this MD&A.
(3) The effective royalty rate is calculated by dividing the aggregate royalties into P&NG sales for the period.
Royalty expense per boe increased by 142% and 171% from the three and nine month Comparable Prior Periods, respectively, primarily due to increases in the average realized sales price received for Birchcliff's liquids and natural gas production in the Reporting Periods.
BIRCHCLIFF ENERGY LTD
Operating Expense
The following table sets forth a breakdown of Birchcliff's operating expense for the periods indicated:
| Three months ended September 30, | Nine months ended September 30, | |||
|---|---|---|---|---|
| ($000s) | 2022 | 2021 | 2022 | 2021 |
| Field operating expense | 26,514 | 24,715 | 75,251 | 70,326 |
| Recoveries | (1,359) | (1,551) | (3,453) | (4,126) |
| Operating expense | 25,155 | 23,164 | 71,798 | 66,200 |
| Operating expense per boe(1) | $3.50 | $2.96 | $3.46 | $3.09 |
(1) Supplementary financial measure. See "Non-GAAP and Other Financial Measures" in this MD&A.
Operating expense per boe increased by 18% and 12% from the three and nine month Comparable Prior Periods, respectively, primarily due to inflationary pressures on power and other fuel supply costs, which together increased by 71% and 36%, respectively, on a per boe basis. Operating expenses per boe in the Reporting Periods was also negatively impacted by higher municipal property taxes and regulatory fees.
Operating expense per boe in the nine month Reporting Period was further negatively impacted by higher field labour costs, partially offset by lower third-party natural gas processing fees resulting from the turnaround at the AltaGas Facility in the second quarter of 2022.
Transportation and Other
The following table sets forth Birchcliff's transportation and other expense for the periods indicated:
| Three months ended September 30, | Nine months ended September 30, | |||
|---|---|---|---|---|
| ($000s) | 2022 | 2021 | 2022 | 2021 |
| Natural gas transportation | 28,158 | 28,913 | 87,555 | 86,319 |
| Liquids transportation | 8,414 | 6,870 | 21,521 | 21,018 |
| Fractionation | 2,797 | 2,122 | 7,924 | 6,343 |
| Other fees | 10 | 55 | 71 | 129 |
| Transportation expense | 39,379 | 37,960 | 117,071 | 113,809 |
| Transportation expense per boe(1) | $5.48 | $4.86 | $5.65 | $5.31 |
| Marketing purchases(2) | 2,124 | 8,840 | 8,337 | 12,621 |
| Marketing revenue(2) | (2,613) | (9,861) | (9,890) | (14,553) |
| Marketing gain(3) | (489) | (1,021) | (1,553) | (1,932) |
| Marketing gain per boe(4) | ($0.07) | ($0.13) | ($0.07) | ($0.09) |
| Transportation and other expense(3) | 38,890 | 36,939 | 115,518 | 111,877 |
| Transportation and other expense per boe(4) | $5.41 | $4.73 | $5.58 | $5.22 |
(1) Supplementary financial measure. See "Non-GAAP and Other Financial Measures" in this MD&A.
(2) Marketing purchases and marketing revenue primarily represent the volumes purchased and sold to third parties, which are recorded on a gross basis for financial statement presentation purposes. Birchcliff enters into certain marketing purchase and sales arrangements to reduce its take-or-pay fractionation fees associated with third-party commitments. Any gains or losses from the purchase and sale of third-party products primarily relate to the commodity price differential.
(3) Non-GAAP financial measure. See "Non-GAAP and Other Financial Measures" in this MD&A.
(4) Non-GAAP ratio. See "Non-GAAP and Other Financial Measures" in this MD&A.
On a per boe basis, transportation and other expense increased by 14% and 7% from the three and nine month Comparable Prior Periods, respectively. The increases in the Reporting Periods were primarily due to higher liquids transportation costs as a result of inflationary pressures that increased liquids-handling costs and higher fractionation processing fees and take-or-pay commitments.
BIRCHCLIFF ENERGY LTD
Operating Netback
The following table sets forth Birchcliff's average production and operating netback for the Pouce Coupe assets, the Gordondale assets and on a corporate basis for the periods indicated:
| Three months ended September 30, | Nine months ended September 30, | |||
|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |
| Pouce Coupe assets: | ||||
| Average production | ||||
| Light oil (bbls/d) | 17 | 19 | 19 | 21 |
| Condensate (bbls/d) | 2,997 | 4,280 | 3,094 | 4,121 |
| NGLs (bbls/d) | 1,860 | 1,696 | 1,809 | 1,831 |
| Natural gas (Mcf/d) | 287,947 | 295,880 | 276,391 | 264,613 |
| Total (boe/d) | 52,865 | 55,309 | 50,987 | 50,075 |
| % of corporate production | 68% | 65% | 67% | 64% |
| Liquids-to-gas ratio (bbls/MMcf) | 16.9 | 20.3 | 17.8 | 22.6 |
| Netback and cost ($/boe)(1) | ||||
| Petroleum and natural gas revenue(2) | 45.57 | 32.07 | 47.81 | 28.55 |
| Royalty expense | (4.55) | (1.89) | (4.73) | (1.76) |
| Operating expense | (2.81) | (2.22) | (2.72) | (2.36) |
| Transportation and other expense(3) | (5.43) | (4.92) | (5.54) | (5.50) |
| Operating netback(3) | 32.78 | 23.04 | 34.82 | 18.93 |
| Gordondale assets: | ||||
| Average production | ||||
| Light oil (bbls/d) | 2,234 | 2,856 | 2,137 | 2,974 |
| Condensate (bbls/d) | 1,602 | 1,710 | 1,533 | 1,723 |
| NGLs (bbls/d) | 5,732 | 5,193 | 5,494 | 5,919 |
| Natural gas (Mcf/d) | 93,353 | 119,121 | 94,365 | 106,554 |
| Total (boe/d) | 25,127 | 29,612 | 24,893 | 28,375 |
| % of corporate production | 32% | 35% | 33% | 36% |
| Liquids-to-gas ratio (bbls/MMcf) | 102.5 | 81.9 | 97.1 | 99.6 |
| Netback and cost ($/boe)(1) | ||||
| Petroleum and natural gas revenue(2) | 50.84 | 36.75 | 52.00 | 32.55 |
| Royalty expense | (9.17) | (3.62) | (8.77) | (3.07) |
| Operating expense | (4.90) | (4.34) | (4.91) | (4.36) |
| Transportation and other expense(3) | (5.38) | (4.38) | (5.67) | (4.74) |
| Operating netback(3) | 31.39 | 24.41 | 32.65 | 20.38 |
| Corporate(4): | ||||
| Average production | ||||
| Light oil (bbls/d) | 2,254 | 2,878 | 2,159 | 2,998 |
| Condensate (bbls/d) | 4,601 | 5,990 | 4,631 | 5,844 |
| NGLs (bbls/d) | 7,593 | 6,889 | 7,305 | 7,750 |
| Natural gas (Mcf/d) | 381,788 | 415,005 | 371,174 | 371,175 |
| Total (boe/d) | 78,079 | 84,924 | 75,957 | 78,454 |
| Liquids-to-gas ratio (bbls/MMcf) | 37.8 | 38.0 | 38.0 | 44.7 |
| Netback and cost ($/boe)(1) | ||||
| Petroleum and natural gas revenue(2) | 47.26 | 33.71 | 49.18 | 30.00 |
| Royalty expense | (6.04) | (2.50) | (6.05) | (2.23) |
| Operating expense | (3.50) | (2.96) | (3.46) | (3.09) |
| Transportation and other expense(3) | (5.41) | (4.73) | (5.58) | (5.22) |
| Operating netback(3) | 32.31 | 23.52 | 34.09 | 19.46 |
(1) The component values of netback and cost set out in the table above are supplementary financial measures unless otherwise indicated. See "Non-GAAP and Other Financial Measures" in this MD&A.
(2) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.
(3) Non-GAAP ratio. See "Non-GAAP and Other Financial Measures" in this MD&A.
(4) Includes other minor oil and natural gas properties which were not individually significant during the respective periods.
BIRCHCLIFF ENERGY LTD
Pouce Coupe Assets
Birchcliff's production from the Pouce Coupe assets in the Reporting Periods decreased by 4% from the three month Comparable Prior Period and remained relatively consistent with the nine month Comparable Prior Period. The decrease in the three month Reporting Period was primarily due to the timing of new wells brought on production in the Pouce Coupe area as compared to the three month Comparable Prior Period, which resulted from scheduling differences in Birchcliff's drilling and completions program year-over-year. Production during the three month Reporting Period was positively impacted by incremental production volumes from the new natural gas wells brought on production in the Pouce Coupe area since September 30, 2021, including the 10 well 04-04 pad brought onstream in August 2022, partially offset by natural production declines.
Birchcliff's liquids-to-gas ratio for the Pouce Coupe assets decreased by 17% and 21% from the three and nine month Comparable Prior Periods, respectively. The decreases were primarily due to the Corporation specifically targeting horizontal natural gas wells in the Pouce Coupe area since the Comparable Prior Periods and natural production declines from liquids-rich natural gas wells producing since the Comparable Prior Periods.
Birchcliff's operating netback for the Pouce Coupe assets increased by 42% and 84% from the three and nine month Comparable Prior Periods, respectively. The increases were primarily due to higher per boe petroleum and natural gas revenue, partially offset by higher per boe royalty expenses, both of which were largely the result of increases in the average realized sales price received for Birchcliff's Pouce Coupe production in the Reporting Periods.
Gordondale Assets
Birchcliff's production from the Gordondale assets decreased by 15% and 12% from the three and nine month Comparable Prior Periods, respectively. The decreases in the Reporting Periods were primarily due to: (i) the timing of new wells brought on production in the Gordondale area as compared to the Comparable Prior Periods, which resulted from scheduling differences in Birchcliff's drilling and completions program year-over-year; and (ii) the major scheduled turnaround in the second quarter of 2022 at the AltaGas Facility that negatively impacted liquids and natural gas production in Gordondale by approximately 1,200 boe/d in the nine month Reporting Period. Additionally, production in Gordondale was positively impacted by incremental production volumes from the new 9-well 06-35 pad brought onstream in late September 2022 and negatively impacted by natural production declines from light oil and liquids-rich natural gas wells producing since September 30, 2021.
Birchcliff's liquids-to-gas ratio for the Gordondale assets increased by 25% from the three month Comparable Prior Period and decreased by 3% from the nine month Comparable Prior Period. The increase in the three month Reporting Period was primarily due to lower natural gas volumes recovered and processed at the AltaGas Facility during the Reporting Period. The decrease in the nine month Reporting Period was primarily due to lower liquids and natural gas production in the Gordondale area as a result of the AltaGas Facility turnaround in the second quarter of 2022.
Birchcliff's operating netback for the Gordondale assets increased by 29% and 60% from the three and nine month Comparable Prior Periods, respectively. The increases were primarily due to higher per boe petroleum and natural gas revenue, partially offset by higher per boe royalty expenses, both of which were largely the result of increases in the average realized sales price received for Birchcliff's Gordondale production in the Reporting Periods.
BIRCHCLIFF ENERGY LTD
Administrative Expense
The following table sets forth the components of Birchcliff's net administrative expense for the periods indicated:
| Three months ended September 30, | Nine months ended September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |||||
| ($000s) | (%) | ($000s) | (%) | ($000s) | (%) | ($000s) | (%) | |
| Cash: | ||||||||
| Salaries and benefits(1) | 6,291 | 60 | 6,392 | 70 | 19,672 | 60 | 19,176 | 67 |
| Other(2) | 4,203 | 40 | 2,795 | 30 | 12,863 | 40 | 9,566 | 33 |
| G&A expense, gross | 10,494 | 100 | 9,187 | 100 | 32,535 | 100 | 28,742 | 100 |
| Operating overhead recoveries | (31) | - | (33) | (1) | (108) | - | (107) | (1) |
| Capitalized overhead(3) | (3,421) | (33) | (3,648) | (39) | (9,987) | (31) | (10,873) | (37) |
| G&A expense, net | 7,042 | 67 | 5,506 | 60 | 22,440 | 69 | 17,762 | 62 |
| G&A expense, net per boe(4) | $0.98 | $0.70 | $1.08 | $0.83 | ||||
| Non-cash: | ||||||||
| Other compensation | 3,120 | 100 | 1,447 | 100 | 8,875 | 100 | 3,979 | 100 |
| Capitalized compensation(3) | (1,670) | (54) | (895) | (62) | (4,580) | (52) | (2,302) | (58) |
| Other compensation, net | 1,450 | 46 | 552 | 38 | 4,295 | 48 | 1,677 | 42 |
| Other compensation, net per boe(4) | $0.20 | $0.07 | $0.21 | $0.08 | ||||
| Administrative expense, net | 8,492 | 6,058 | 26,735 | 19,439 | ||||
| Administrative expense, net per boe(4) | $1.18 | $0.77 | $1.29 | $0.91 |
(1) Includes salaries and benefits paid to officers and employees of the Corporation and retainer fees, meeting fees and benefits paid to directors of the Corporation.
(2) Includes costs such as corporate travel, rent, legal fees, taxes, insurance, computer hardware and software and other business expenses incurred by the Corporation.
(3) Includes a portion of gross G&A expenses and other compensation directly attributable to the exploration and development activities of the Corporation which have been capitalized.
(4) Supplementary financial measure. See "Non-GAAP and Other Financial Measures" in this MD&A.
Net administrative expense on an aggregate basis increased by 40% and 38% from the three and nine month Comparable Prior Periods, respectively, primarily due to increases in net G&A expense and other compensation expense. Net G&A expense increased primarily due to higher employee-related expenses, higher corporate costs due to the easing of Birchcliff's COVID-19 restrictions and higher general business expenditures due to inflationary pressures. Other compensation expense increased primarily due to a higher fair value expense associated with stock options granted by Birchcliff in the Reporting Periods.
The following table sets forth the Corporation's outstanding stock options for the periods indicated:
| Three months ended September 30, | Nine months ended September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |||||
| Number | Price ($)(1) | Number | Price ($)(1) | Number | Price ($)(1) | Number | Price ($)(1) | |
| Outstanding, beginning | 15,521,053 | 3.95 | 20,820,485 | 3.19 | 23,116,919 | 3.96 | 26,134,201 | 3.56 |
| Granted(2) | 81,000 | 9.70 | 157,500 | 5.11 | 311,400 | 9.24 | 253,000 | 4.38 |
| Exercised | (388,771) | (2.99) | (1,819,426) | (3.19) | (6,317,135) | (3.08) | (2,830,039) | (3.09) |
| Forfeited | (98,868) | (4.76) | (16,402) | (2.24) | (353,670) | (4.50) | (2,063,439) | (7.57) |
| Expired | - | - | (136,501) | (8.70) | (1,643,100) | (7.84) | (2,488,067) | (3.81) |
| Outstanding, ending | 15,114,414 | 4.00 | 19,005,656 | 3.17 | 15,114,414 | 4.00 | 19,005,656 | 3.17 |
(1) Calculated on a weighted average basis.
(2) Each stock option granted entitles the holder to purchase one common share at the exercise price.
On January 18, 2005, Birchcliff issued 4,049,665 performance warrants as part of its initial restructuring to become a public entity. Each performance warrant is exercisable at a price of $3.00 to purchase one common share of Birchcliff.
During the three month Reporting Period, 809,933 performance warrants were exercised at a price of $3.00 per common share. On May 26, 2022, the Corporation purchased 1,724,832 performance warrants for a total cash cost of $14.5 million. As at September 30, 2022, 404,967 performance warrants (December 31, 2021 – 2,939,732) remained outstanding with an expiry date of January 31, 2025.
BIRCHCLIFF ENERGY LTD
Depletion and Depreciation Expense
Depletion and depreciation ("D&D") expense is a function of the estimated proved and probable reserves additions, the F&D costs attributable to those reserves, the associated future development capital required to recover those reserves and the actual production in the relevant period. The Corporation determines its D&D expense on a field area basis. The following table sets forth Birchcliff's D&D expense for the periods indicated:
| Three months ended September 30, | Nine months ended September 30, | |||
|---|---|---|---|---|
| ($000s) | 2022 | 2021 | 2022 | 2021 |
| Depletion and depreciation expense | $3,730 | $7,085 | $155,318 | $158,841 |
| Depletion and depreciation expense per boe(1) | $7.48 | $7.31 | $7.49 | $7.42 |
(1) Supplementary financial measure. See "Non-GAAP and Other Financial Measures" in this MD&A.
D&D expense per boe remained relatively consistent with the Comparable Prior Periods.
Finance Expense
The following table sets forth the components of the Corporation's finance expense for the periods indicated:
| Three months ended September 30, | Nine months ended September 30, | |||
|---|---|---|---|---|
| ($000s) | 2022 | 2021 | 2022 | 2021 |
| Cash: | ||||
| Interest expense(1) | 3,235 | 7,154 | 9,882 | 23,613 |
| Interest expense per boe(1)(2) | $0.44 | $0.92 | $0.48 | $1.10 |
| Non-cash: | ||||
| Accretion(3) | 1,095 | 907 | 3,034 | 2,533 |
| Amortization of deferred financing fees | 426 | 239 | 1,025 | 730 |
| Other finance expenses | 1,521 | 1,146 | 4,059 | 3,263 |
| Other finance expenses per boe(2) | $0.21 | $0.15 | $0.20 | $0.15 |
| Finance expense | 4,756 | 8,300 | 13,941 | 26,876 |
| Finance expense per boe(2) | $0.65 | $1.07 | $0.68 | $1.25 |
(1) Birchcliff's interest expense consists of interest incurred on amounts drawn under the Corporation's Credit Facilities and standby charges. Standby charges reflect fees paid by Birchcliff on the undrawn portion of its Credit Facilities. For a description of the Credit Facilities, see "Capital Resources and Liquidity" in this MD&A.
(2) Supplementary financial measure. See "Non-GAAP and Other Financial Measures" in this MD&A.
(3) Includes accretion on decommissioning obligations, lease obligations and post-employment benefit obligations.
Finance expense on an aggregate basis decreased by 43% and 48% from the three and nine month Comparable Prior Periods, respectively, primarily due to a decrease in interest expense. Birchcliff's aggregate interest expense decreased by 55% and 58% from the three and nine month Comparable Prior Periods, respectively, primarily due to a lower average outstanding balance under its Credit Facilities in the Reporting Periods.
The average outstanding balance under the Syndicated Credit Facility (as defined herein) was approximately $199.9 million and $320.8 million in the three and nine month Reporting Periods, respectively, as compared to $694.1 million and $709.2 million in the Comparable Prior Periods, calculated as the simple average of the month-end amounts.
The following table sets forth the Corporation's average effective interest rates under the Credit Facilities for the periods indicated:
| Three months ended September 30, | Nine months ended September 30, | |||
|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |
| Working Capital Facility | 5.9% | 5.0% | 6.9% | 5.0% |
| Syndicated Credit Facility(1)(2)(3) | 4.6% | 3.7% | 3.1% | 4.0% |
(1) The average effective interest rate under the Syndicated Credit Facility was determined primarily based on: (i) the market interest rate for LIBOR and SOFR loans; and (ii) the pricing margin applicable to LIBOR and SOFR loans. Birchcliff's pricing margin will change as a result of the ratio of outstanding indebtedness to the trailing four quarter EBITDA as calculated in accordance with the Corporation's agreement governing the Credit Facilities. EBITDA is defined as earnings before interest and non-cash items, including (if any) deferred income taxes, other compensation, gains and losses on sale of assets and securities, unrealized gains and losses on financial instruments, depletion, depreciation and amortization and impairment charges. The effective interest rate excludes the impact of standby charges.
(2) Effective May 3, 2022, the agreement governing the Credit Facilities was amended to, among other things, convert any outstanding LIBOR loans into SOFR loans. The SOFR rates increased during the Reporting Periods primarily due to increases in the prime lending rates by the Bank of Canada.
BIRCHCLIFF ENERGY LTD
(3) The Comparable Prior Periods have been restated to exclude standby charges. During the three and nine month Reporting Periods, standby charges were $0.8 million and $1.9 million, respectively, as compared to $0.3 million and $1.5 million in the Comparable Prior Periods.
Other Income and Expense
The following table sets forth the components of the Corporation's other cash income and expense sources for the periods indicated:
| Three months ended September 30, | Nine months ended September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |||||
| ($000s) | ($/boe)(1) | ($000s) | ($/boe)(1) | ($000s) | ($/boe)(1) | ($000s) | ($/boe)(1) | |
| Other income (expense) | 30 | - | (540) | (0.07) | (31) | - | 2,114 | 0.09 |
(1) Supplementary financial measure. See "Non-GAAP and Other Financial Measures" in this MD&A.
Birchcliff's other income in the nine month Comparable Prior Period primarily included the sale of Emissions Performance Credits ("EPCs") for $1.7 million (net of purchases) for the 2019 and 2020 emissions reporting period under Alberta's Technology Innovation and Emissions Reduction ("TIER") program. A facility regulated under TIER, such as the Corporation's 100% owned and operated natural gas processing plant in Pouce Coupe, must reduce emissions beyond its established facility benchmarks in order to generate EPCs.
Other Gains
The following table sets forth the components of the Corporation's other non-cash gains for the periods indicated:
| Three months ended September 30, | Nine months ended September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |||||
| ($000s) | ($/boe)(1) | ($000s) | ($/boe)(1) | ($000s) | ($/boe)(1) | ($000s) | ($/boe)(1) | |
| Other gains | 162 | 0.02 | 2,127 | 0.27 | 2,450 | 0.12 | 5,520 | 0.26 |
(1) Supplementary financial measure. See "Non-GAAP and Other Financial Measures" in this MD&A.
On August 31, 2017, Birchcliff acquired securities consisting of 4,500,000 common A units in a limited partnership (the "Common A Units") and 10,000,000 preferred units (the "Preferred Trust Units") in a trust (collectively, the "Securities") at a combined investment value of $10.0 million. The Securities are not publicly listed and do not constitute significant investments. As at September 30, 2022, the Corporation determined the Securities had a fair value of $9.8 million (December 31, 2021 – $8.2 million). Birchcliff recorded a gain on investment of $Nil and $1.8 million during the three and nine month Reporting Periods, as compared to $1.8 million and $5.1 million during the three and nine month Comparable Prior Periods.
During the three month Reporting Period, Birchcliff redeemed 185,444 of the Preferred Trust Units and 83,450 of the Common A Units for an aggregate amount of $185,527. As at September 30, 2022, Birchcliff held a total of 9,814,556 Preferred Trust Units and 4,416,550 Common A Units.
Income Tax Expense
The following table sets forth the components of the Corporation's income tax expense for the periods indicated:
| Three months ended September 30, | Nine months ended September 30, | |||
|---|---|---|---|---|
| ($000s) | 2022 | 2021 | 2022 | 2021 |
| Deferred tax expense | 73,734 | 41,141 | 175,961 | 60,386 |
| Dividend tax expense on preferred shares | 692 | 688 | 2,065 | 2,075 |
| Deferred income tax expense | 74,426 | 41,829 | 178,026 | 62,461 |
| Deferred income tax expense per boe(1) | $10.36 | $5.34 | $8.59 | $2.91 |
(1) Supplementary financial measure. See "Non-GAAP and Other Financial Measures" in this MD&A.
Birchcliff's deferred income tax expense on an aggregate basis increased by 78% and 185% from the three and nine month Comparable Prior Periods, respectively. The increases were due to higher before-tax net income recorded in the Reporting Periods.
BIRCHCLIFF ENERGY LTD
The Corporation's estimated income tax pools were $1.4 billion at September 30, 2022. Management expects that future taxable income will be available to utilize the accumulated tax pools. The components of the Corporation's estimated income tax pools are set forth in the table below:
| ($000s) | Tax pools as at September 30, 2022 |
|---|---|
| Canadian oil and gas property expense | 302,892 |
| Canadian development expense | 322,841 |
| Canadian exploration expense(1) | 310,780 |
| Undepreciated capital costs | 237,803 |
| Non-capital losses(1) | 211,335 |
| Scientific research and experimental development expenditures(1) | 20,844 |
| Investment tax credits(2) | 3,096 |
| Financing costs and other | 6,473 |
| Estimated income tax pools | 1,416,064 |
(1) Immediately available in full to reduce any taxable income in future periods.
(2) Immediately available in full to reduce any cash taxes owing in future periods.
CAPITAL EXPENDITURES
The following table sets forth a summary of the Corporation's capital expenditures for the periods indicated:
| Three months ended September 30, | Nine months ended September 30, | |||
|---|---|---|---|---|
| ($000s) | 2022 | 2021 | 2022 | 2021 |
| Land | 378 | 434 | 2,047 | 1,361 |
| Seismic | 168 | 151 | 463 | 602 |
| Workovers | 2,889 | 1,982 | 8,233 | 8,093 |
| Drilling and completions | 68,053 | 9,733 | 177,524 | 145,100 |
| Well equipment and facilities | 13,842 | 5,726 | 69,592 | 39,597 |
| F&D capital expenditures(1) | 85,330 | 18,026 | 257,859 | 194,753 |
| Acquisitions | 848 | 228 | 2,348 | 228 |
| Dispositions | - | - | (315) | - |
| FD&A capital expenditures(2) | 86,178 | 18,254 | 259,892 | 194,981 |
| Administrative assets | 307 | 368 | 867 | 1,426 |
| Total capital expenditures(2) | 86,485 | 18,622 | 260,759 | 196,407 |
(1) See "Advisories – F&D Capital Expenditures" in this MD&A.
(2) Non-GAAP financial measure. See "Non-GAAP and Other Financial Measures" in this MD&A.
During the three month Reporting Period, Birchcliff had F&D capital expenditures of $85.3 million, which primarily included $40.2 million (47%) for the drilling and completion of horizontal wells in Pouce Coupe, $23.8 million (28%) for the drilling of horizontal wells in Gordondale and $13.8 million (16%) on large gas gathering and pipeline infrastructure projects. During the three month Reporting Period, Birchcliff drilled 8 (8.0 net) wells and brought 19 (19.0 net) wells on production.
During the nine month Reporting Period, Birchcliff had F&D capital expenditures of $257.9 million, which primarily included $133.0 million (52%) for the drilling and completion of horizontal wells in Pouce Coupe, $32.6 million (13%) for the drilling of horizontal wells in Gordondale and $69.6 million (27%) on plant turnarounds and large gas gathering and pipeline infrastructure projects. During the nine month Reporting Period, Birchcliff drilled 31 (31.0 net) wells and brought 35 (35.0 net) wells on production.
The remaining capital during the Reporting Periods was primarily spent on land, seismic, workovers, well equipment and facilities, including minor gas gathering and optimization projects in the Montney/Doig Resource Play.
BIRCHCLIFF ENERGY LTD
CAPITAL RESOURCES AND LIQUIDITY
Working Capital
The Corporation’s adjusted working capital surplus(1) was $10.9 million at September 30, 2022 as compared to $1.5 million at December 31, 2021. Adjusted working capital consists of items from normal day-to-day operations which include cash, trade receivables and payables, accruals, deposits and prepaid expenses and excludes the current portion of the fair value of financial instruments and capital securities (if any). The increase in adjusted working capital surplus at September 30, 2022 was attributed to an increase in the accounts receivable balance associated with higher revenue from the sale of Birchcliff’s production in the Reporting Periods and a higher prepaid expense and deposits balance, partially offset by an increase in the accounts payable and accrued liabilities balance which was largely comprised of F&D capital expenditures incurred in the Reporting Periods.
At September 30, 2022, the major component of Birchcliff’s current assets was revenue to be received from its commodity marketers in respect of September 2022 production (90%), which was subsequently received in October 2022. Birchcliff continues to monitor the financial strength of its marketers. At this time, Birchcliff expects that such counterparties will be able to meet their financial obligations. Current liabilities at September 30, 2022 primarily consisted of trade payables and accrued capital and operating expenses.
The Corporation’s adjusted working capital varies from quarter to quarter primarily due to the timing and size of items included from its normal operations and total capital expenditures, as well as volatility in commodity prices and changes in revenue, among other things. Birchcliff manages its adjusted working capital using adjusted funds flow and advances under its Credit Facilities. The adjusted working capital position does not impact the borrowing base available under its Credit Facilities.
Debt
At September 30, 2022, the Corporation’s Credit Facilities were comprised of an extendible revolving syndicated term credit facility (the “Syndicated Credit Facility”) of $750.0 million and an extendible revolving working capital facility (the “Working Capital Facility”) of $100.0 million. 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. The agreement governing the Credit Facilities also contains provisions that give the lenders the right to redetermine the borrowing base in certain circumstances. Effective May 3, 2022, the agreement governing the Credit Facilities was amended to extend the maturity dates of each of the Syndicated Credit Facility and Working Capital Facility from May 11, 2024 to May 11, 2025. In addition, the lenders confirmed the aggregate borrowing base limit under the Corporation’s Credit Facilities at $850.0 million. The Credit Facilities do not contain any financial maintenance covenants.
Total debt(1) at September 30, 2022 was $186.1 million, a decrease of 63% from $499.4 million at December 31, 2021. Total debt decreased primarily due to the significant free funds flow generated in the Reporting Periods, which was allocated to debt reduction. During the nine month Reporting Period, Birchcliff generated $736.6 million in adjusted funds flow and incurred $257.9 million in F&D capital expenditures, resulting in free funds flow of $478.7 million. Total debt in the nine month Reporting Period was also positively impacted by proceeds in the amount of $21.9 million received from the exercise of stock options and performance warrants and negatively impacted by the cost to repurchase common shares under Birchcliff’s NCIB of $54.4 million, the redemption of the Series A and Series C Preferred Shares of $88.3 million, the purchase of performance warrants of $14.5 million and the payment of dividends of $18.4 million. See “Discussion of Operations – Administrative Expense”, “Share Information – Normal Course Issuer Bid”, “Share Information – Series A Preferred Shares”, “Share Information – Series C Preferred Shares” and “Dividends” in this MD&A for details on the Corporation’s stock option and performance warrant exercises, the repurchases of common shares, the redemption of the Series A and Series C Preferred Shares, performance warrant purchases and dividend distributions.
(1) Capital management measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
43 | BIRCHCLIFF ENERGY LTD
The following table sets forth the Corporation's unused Credit Facilities for the periods indicated:
| As at, ($000s) | September 30, 2022 | December 31, 2021 |
|---|---|---|
| Maximum borrowing base limit: | ||
| Revolving term credit facilities | 850,000 | 850,000 |
| Principal amount utilized: | ||
| Revolving term credit facilities | (196,989) | (500,870) |
| Unamortized deferred financing fees | (3,967) | (3,718) |
| Outstanding letters of credit(1) | (185) | (4,185) |
| (201,141) | (508,773) | |
| Unused credit | 648,859 | 341,227 |
| % unused credit | 76% | 40% |
(1) Letters of credit are issued to various service providers. The letters of credit reduce the amount available under the Corporation's Working Capital Facility.
Liquidity and Capital Resources
The following table sets forth a summary of the Corporation's capital resources for the periods indicated:
| Three months ended September 30, | Nine months ended September 30, | |||
|---|---|---|---|---|
| ($000s) | 2022 | 2021 | 2022 | 2021 |
| Cash flow from operating activities | 272,965 | 155,606 | 700,828 | 319,227 |
| Issuance of common shares | 3,594 | 5,810 | 21,883 | 8,748 |
| Repurchase of common shares(1) | (4,967) | (17,367) | (54,414) | (17,367) |
| Redemption of capital securities(2) | (38,206) | - | (38,268) | (1,602) |
| Redemption of preferred shares(3) | (50,000) | - | (50,000) | - |
| Purchase of performance warrants | - | - | (14,506) | - |
| Financing fees paid | - | - | (1,275) | (3,454) |
| Lease payments | (614) | (615) | (1,843) | (1,830) |
| Dividend distributions | (7,047) | (3,047) | (18,447) | (9,181) |
| Net change in revolving term credit facilities | (79,466) | (72,832) | (303,633) | (80,320) |
| Investments | (844) | (155) | (1,628) | (155) |
| Changes in non-cash working capital from investing | (8,951) | (48,732) | 22,043 | (17,656) |
| Capital resources(4) | 86,464 | 18,668 | 260,740 | 196,410 |
(1) Represents common shares that have been purchased and cancelled pursuant to the NCIB. See "Share Information – Normal Course Issuer Bid" in this MD&A.
(2) Represents the Series C Preferred Shares that were redeemed by the Corporation on September 30, 2022. See "Share Information – Series C Preferred Shares" in this MD&A.
(3) Represents the Series A Preferred Shares that were redeemed by the Corporation on September 30, 2022. See "Share Information – Series A Preferred Shares" in this MD&A.
(4) Non-GAAP financial measure. See "Non-GAAP and Other Financial Measures" in this MD&A.
The capital-intensive nature of Birchcliff's operations requires it to maintain adequate sources of liquidity to fund its short-term and long-term financial obligations. Birchcliff's capital resources primarily consist of its adjusted funds flow and available Credit Facilities. The Corporation believes that its anticipated adjusted funds flow in 2022 will be sufficient to fund its working capital requirements, the remainder of its capital program and future dividend distributions in 2022. For further information, see "Outlook and Guidance", "Capital Resources and Liquidity – Debt", "Dividends" and "Advisories – Forward-Looking Statements" in this MD&A.
At September 30, 2022, Birchcliff had long-term debt under the Credit Facilities of $197.0 million as compared to $500.9 million at December 31, 2021 from available Credit Facilities of $850.0 million, leaving the Corporation with $648.9 million of unutilized credit capacity after adjusting for outstanding letters of credit and unamortized deferred financing fees. This unutilized credit capacity provides Birchcliff with significant financial flexibility and additional capital resources to fund its working capital requirements, capital expenditure programs and dividend payments if required in the future. See "Capital Resources and Liquidity – Debt" in this MD&A.
Birchcliff remains committed to maximizing free funds flow and achieving zero total debt in order to reduce the risks to its business and provide the Corporation with the optionality to increase shareholder returns and enhance long-term shareholder value, through sustainable increases to its common share dividend, common share buybacks and potential reinvestment.
BIRCHCLIFF ENERGY LTD
OFF-BALANCE SHEET TRANSACTIONS
The Corporation has certain arrangements that are excluded from its financial statements, all of which are reflected in the contractual obligations and commitments table below, which were entered into in the normal course of operations.
Contractual Obligations and Commitments
The Corporation enters into various contractual obligations and commitments in the normal course of operations. The following table lists Birchcliff's estimated material contractual obligations and commitments at September 30, 2022:
| ($000s) | 2022 | 2023 | 2024-2026 | Thereafter |
|---|---|---|---|---|
| Accounts payable and accrued liabilities | 139,789 | - | - | - |
| Drawn revolving term credit facilities | - | - | 200,956 | - |
| Firm transportation and fractionation(1) | 36,769 | 145,863 | 363,903 | 117,370 |
| Natural gas processing(2) | 4,871 | 19,327 | 57,850 | 103,024 |
| Operating commitments(3) | 508 | 2,033 | 6,099 | 2,202 |
| Capital commitments(4) | - | 8,243 | - | - |
| Lease payments | 1,330 | 3,293 | 8,007 | 3,273 |
| Estimated contractual obligations(5) | 183,267 | 178,759 | 636,815 | 225,869 |
(1) Includes firm transportation service arrangements and fractionation commitments with third parties.
(2) Includes natural gas processing commitments at third-party facilities.
(3) Includes variable operating components associated with Birchcliff's head office premises.
(4) Includes drilling commitments and purchasing obligations.
(5) Contractual obligations and commitments that are not material to Birchcliff are excluded from the above table. The Corporation's decommissioning obligations are excluded from the table as these obligations arose from a regulatory requirement rather than from a contractual arrangement. Birchcliff estimates the total undiscounted cash flow to settle its decommissioning obligations on its wells and facilities at September 30, 2022 to be approximately $240.3 million and are estimated to be incurred as follows: 2022 - $1.3 million, 2023 - $3.5 million and $235.5 million thereafter. The estimate for determining the undiscounted decommissioning obligations requires significant assumptions on both the abandonment cost and timing of the decommissioning and therefore the actual obligation may differ materially.
SHARE INFORMATION
At November 9, 2022, Birchcliff had common shares outstanding. Birchcliff's common shares are listed on the TSX under the symbol "BIR".
The following table sets forth the common shares issued by the Corporation for the periods indicated:
| Common Shares | |
|---|---|
| Balance at December 31, 2021 | 264,790,404 |
| Exercise of stock options and performance warrants | 7,127,068 |
| Repurchase of common shares(1) | (6,040,192) |
| Balance at September 30, 2022 | 265,877,280 |
| Exercise of stock options | 38,442 |
| Balance at November 9, 2022 | 265,915,722 |
(1) Represents common shares that have been purchased and cancelled pursuant to the NCIB.
At November 9, 2022, the Corporation had the following securities outstanding: 265,915,722 common shares; 15,094,472 stock options to purchase an equivalent number of common shares; and 404,967 performance warrants to purchase an equivalent number of common shares.
Normal Course Issuer Bid
On November 17, 2021, Birchcliff announced that the TSX had accepted the Corporation's notice of intention to make a normal course issuer bid. Pursuant to the NCIB, Birchcliff may purchase up to 13,267,554 of its outstanding common shares over a period of twelve months commencing on November 25, 2021. The NCIB will terminate no later than November 24, 2022. Under the 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 382,548 common shares. However, Birchcliff may make one block purchase per calendar week which exceeds the daily purchase restriction. All common shares purchased under the NCIB will be cancelled.
BIRCHCLIFF ENERGY LTD
During the nine month Reporting Period, the Corporation purchased 6,040,192 common shares under the NCIB at an average price of $9.00 for an aggregate cost of $54.4 million (before fees).
Series A Preferred Shares
On September 30, 2022, Birchcliff redeemed all of its 2,000,000 issued and outstanding Series A Preferred Shares for a redemption price equal to $25.00 per share. A final quarterly cash dividend of $0.527677 per Series A Preferred Share was paid on October 3, 2022 to the holders of record at the close of business on September 15, 2022. The aggregate redemption amount of the Series A Preferred Shares, including all accrued and unpaid dividends, totalled approximately $51.1 million.
Series C Preferred Shares
On September 30, 2022, Birchcliff redeemed all of its 1,528,219 issued and outstanding Series C Preferred Shares for a redemption price equal to $25.00 per share. A final quarterly cash dividend of $0.441096 per Series C Preferred Share was paid on October 3, 2022 to the holders of record at the close of business on September 15, 2022. The aggregate redemption amount of the Series C Preferred Shares, including all accrued and unpaid dividends, totalled approximately $38.9 million.
DIVIDENDS
The following table sets forth the dividend distributions by the Corporation for each class of shares for the periods indicated:
| Three months ended September 30, | Nine months ended September 30, | |||
|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |
| Common Shares: | ||||
| Dividend distribution ($000s) | 5,317 | 1,330 | 13,285 | 3,993 |
| Per common share ($) | 0.0200 | 0.0050 | 0.0500 | 0.0150 |
| Series A Preferred Shares: | ||||
| Series A dividend distribution ($000s) | 1,055 | 1,046 | 3,149 | 3,140 |
| Per Series A Preferred Share ($) | 0.5277 | 0.5234 | 1.5745 | 1.5702 |
| Series C Preferred Shares: | ||||
| Series C dividend distribution ($000s) | 675 | 671 | 2,013 | 2,048 |
| Per Series C Preferred Share ($) | 0.4411 | 0.4375 | 1.3161 | 1.3125 |
All dividends have been designated as "eligible dividends" for the purposes of the Income Tax Act (Canada).
The Corporation's quarterly common share dividend has increased by 300% since the three month Comparable Prior Period, from $0.005 per share for the quarter ended September 30, 2021 to $0.02 per share for the quarter ended September 30, 2022. On November 30, 2021, Birchcliff's board of directors declared a quarterly common share dividend of $0.01 per share for the quarter ended December 31, 2021, which represented a 100% increase over the prior quarterly common share dividend of $0.005 per share. On May 11, 2022, Birchcliff's board of directors declared a quarterly common share dividend of $0.02 per share for the quarter ended June 30, 2022, which represented a 100% increase over the prior quarterly common share dividend of $0.01 per share.
On October 13, 2022, Birchcliff's board or directors declared a special cash dividend of $0.20 per common share. The dividend was paid on October 28, 2022 to shareholders of record at the close of business on October 21, 2022.
BIRCHCLIFF ENERGY LTD
SUMMARY OF QUARTERLY RESULTS
The following table sets forth a summary of the Corporation's quarterly results for the eight most recently completed quarters:
| Quarter ending, | Sep. 30, 2022 | Jun. 30, 2022 | Mar. 31, 2022 | Dec. 31, 2021 | Sep. 30, 2021 | Jun. 30, 2021 | Mar. 31, 2021 | Dec. 31, 2020 |
|---|---|---|---|---|---|---|---|---|
| Average light oil production (bbls/d) | 2,254 | 1,855 | 2,369 | 2,604 | 2,878 | 2,766 | 3,355 | 3,566 |
| Average condensate production (bbls/d) | 4,601 | 4,500 | 4,796 | 5,330 | 5,990 | 6,070 | 5,467 | 6,658 |
| Average NGLs production (bbls/d) | 7,593 | 6,349 | 7,976 | 7,570 | 6,889 | 7,647 | 8,734 | 8,285 |
| Average natural gas production (Mcf/d) | 381,788 | 366,256 | 365,296 | 379,275 | 415,005 | 352,694 | 345,057 | 360,839 |
| Average production (boe/d) | 78,079 | 73,746 | 76,024 | 78,716 | 84,924 | 75,265 | 75,065 | 78,649 |
| Average realized light oil sales price ($/bbl) (1)(2) | 115.94 | 135.91 | 115.47 | 92.79 | 83.52 | 76.50 | 67.02 | 49.56 |
| Average realized condensate sales price ($/bbl) (1)(2) | 115.84 | 138.28 | 121.56 | 98.66 | 88.04 | 81.90 | 74.22 | 52.90 |
| Average realized NGLs sales price ($/bbl) (1)(2) | 38.18 | 48.26 | 43.56 | 38.24 | 35.13 | 25.27 | 24.69 | 16.16 |
| Average realized natural gas sales price ($/Mcf) (1)(2) | 6.83 | 8.61 | 5.40 | 5.52 | 4.46 | 3.48 | 3.52 | 2.93 |
| Average realized sales price ($/boe) (1)(2) | 47.26 | 58.75 | 41.79 | 40.02 | 33.70 | 28.27 | 27.47 | 21.87 |
| P&NG revenue ($000s) (3) | 339,531 | 394,315 | 285,976 | 289,806 | 263,348 | 193,643 | 185,609 | 158,283 |
| Operating expense ($/boe) (2) | 3.50 | 3.40 | 3.49 | 3.50 | 2.96 | 3.14 | 3.18 | 3.03 |
| F&D capital expenditures ($000s) (3) | 85,330 | 84,247 | 88,282 | 35,726 | 18,026 | 80,887 | 95,840 | 41,291 |
| Total capital expenditures ($000s) (4) | 86,485 | 86,150 | 88,124 | 36,075 | 18,622 | 81,160 | 96,625 | 28,778 |
| Cash flow from operating activities ($000s) | 272,965 | 273,711 | 154,152 | 196,142 | 155,606 | 81,013 | 82,608 | 71,431 |
| Adjusted funds flow ($000s) (4) | 267,350 | 285,535 | 183,699 | 193,649 | 168,076 | 90,188 | 87,820 | 66,509 |
| Per common share – basic ($) (5) | 1.01 | 1.08 | 0.69 | 0.73 | 0.63 | 0.34 | 0.33 | 0.25 |
| Per common share – diluted ($) (5) | 0.97 | 1.03 | 0.67 | 0.70 | 0.61 | 0.33 | 0.33 | 0.25 |
| Free funds flow ($000s) (4) | 182,020 | 201,288 | 95,417 | 157,923 | 150,050 | 9,301 | (8,020) | 25,218 |
| Net income ($000s) | 245,637 | 214,902 | 126,839 | 107,149 | 139,413 | 44,901 | 23,213 | 41,454 |
| Net income to common shareholders ($000s) | 244,582 | 213,855 | 125,792 | 106,102 | 138,367 | 43,854 | 22,166 | 40,407 |
| Per common share – basic ($) | 0.92 | 0.81 | 0.47 | 0.40 | 0.52 | 0.16 | 0.08 | 0.15 |
| Per common share – diluted ($) | 0.89 | 0.77 | 0.46 | 0.38 | 0.50 | 0.16 | 0.08 | 0.15 |
| Total assets ($ millions) | 3,188 | 3,066 | 3,006 | 2,960 | 2,993 | 2,996 | 2,941 | 2,902 |
| Long-term debt ($000s) | 196,989 | 276,030 | 397,752 | 500,870 | 648,327 | 720,920 | 701,735 | 731,372 |
| Total debt ($000s) (6) | 186,064 | 266,894 | 408,998 | 499,397 | 637,905 | 770,897 | 777,385 | 761,951 |
| Dividends on common shares ($000s) | 5,317 | 5,310 | 2,658 | 2,646 | 1,330 | 1,333 | 1,330 | 1,330 |
| Dividends on Series A Preferred Shares ($000s) | 1,055 | 1,047 | 1,047 | 1,047 | 1,046 | 1,047 | 1,047 | 1,047 |
| Dividends on Series C Preferred Shares ($000s) | 675 | 668 | 670 | 670 | 671 | 678 | 699 | 858 |
| Series A Preferred Shares outstanding (000s) | - | 2,000 | 2,000 | 2,000 | 2,000 | 2,000 | 2,000 | 2,000 |
| Series C Preferred Shares outstanding (000s) | - | 1,528 | 1,529 | 1,531 | 1,533 | 1,533 | 1,550 | 1,597 |
| End of period common shares outstanding (000s) | ||||||||
| Basic | 265,877 | 265,204 | 266,810 | 264,790 | 265,573 | 266,953 | 266,045 | 265,943 |
| Diluted | 281,397 | 281,940 | 287,829 | 290,847 | 287,518 | 289,806 | 292,757 | 295,017 |
| Weighted average common shares outstanding (000s) | ||||||||
| Basic | 265,298 | 265,440 | 265,530 | 265,197 | 266,547 | 266,231 | 265,989 | 265,940 |
| Diluted | 274,223 | 276,015 | 275,980 | 276,600 | 276,282 | 270,155 | 266,370 | 265,985 |
(1) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.
(2) Supplementary financial measure. See "Non-GAAP and Other Financial Measures" in this MD&A.
(3) See "Advisories - F&D Capital Expenditures" in this MD&A.
(4) Non-GAAP financial measure. See "Non-GAAP and Other Financial Measures" in this MD&A.
(5) Non-GAAP ratio. See "Non-GAAP and Other Financial Measures" in this MD&A.
(6) Capital management measure. See "Non-GAAP and Other Financial Measures" in this MD&A.
Quarterly average daily production volumes were primarily impacted by Birchcliff's successful drilling of liquids-rich natural gas and light oil horizontal wells in Pouce Coupe and Gordondale and the timing thereof, as well as natural production declines during those periods. Light oil and condensate production has generally trended lower over the last eight quarters primarily due to the Corporation specifically targeting horizontal natural gas wells in liquids-rich zones in the Pouce Coupe and Gordondale areas. Light oil production during the second quarter of 2022 was significantly lower compared to the other disclosed quarters due to a major scheduled turnaround in the second quarter of 2022 at the AltaGas Facility.
P&NG revenue and adjusted funds flow in the last eight quarters were largely impacted by the average realized sales price received for Birchcliff's production. Birchcliff's average realized sales prices have benefited from significant increases in benchmark oil and natural gas prices since the fourth quarter of 2020. Over the last eight quarters, Birchcliff's adjusted funds flow was primarily impacted by increasing P&NG revenue, realized gains and losses on the settlement of financial instruments due to market diversification initiatives and higher trending royalties.
BIRCHCLIFF ENERGY LTD
Birchcliff's net income in each of the last eight quarters was largely impacted by adjusted funds flow, unrealized mark-to-market gains and losses on financial instruments due to market diversification initiatives and certain other adjustments, including depletion and depreciation expense and deferred income tax expense and recoveries.
The Corporation's F&D capital expenditures fluctuate quarter to quarter based on the Corporation's outlook for commodity prices and market conditions, the level of drilling and completions operations and other capital projects and the timing thereof.
Quarterly fluctuations in long-term debt and total debt are primarily driven by available free funds flow which is impacted by changes in adjusted funds flow and the amount and timing of F&D capital expenditures. Long-term debt in the last five quarters has trended lower due to significant free funds flow generation, which was allocated towards debt reduction in line with management's commitment to significantly reduce indebtedness.
The Corporation pays dividends on its common shares when declared and approved by the board of directors. The Corporation's quarterly common share dividend has increased by 300% since the three month Comparable Prior Period, from $0.005 per share for the quarter ended September 30, 2021 to $0.02 per share for the quarter ended September 30, 2022. The increases in the quarterly common share dividend have resulted in significantly higher common share dividend payments. See "Dividends" in this MD&A.
POTENTIAL TRANSACTIONS
Within its focus area, the Corporation is continually reviewing potential asset acquisitions and dispositions and corporate mergers and acquisitions for the purpose of determining whether any such potential transaction is of interest to the Corporation, as well as the terms on which such a potential transaction would be available. As a result, the Corporation may from time to time be involved in discussions or negotiations with other parties or their agents in respect of potential asset acquisitions and dispositions and corporate merger and acquisition opportunities.
INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in the Corporation's internal control over financial reporting ("ICFR") that occurred during the period beginning on July 1, 2022 and ended on September 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Corporation's ICFR. Birchcliff's ICFR was not impacted by the COVID-19 pandemic during the Reporting Periods.
CRITICAL ACCOUNTING ESTIMATES
The timely preparation of the financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and reported amounts of assets and liabilities and income and expenses. Accordingly, actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. The Corporation's use of estimates, judgements and assumptions in preparing the interim condensed financial statements for the Reporting Periods and the Comparable Prior Periods is discussed in Note 3 of the annual audited financial statements for the year ended December 31, 2021.
Benchmark oil and natural gas prices have remained volatile during 2022 primarily due to supply and demand uncertainty that has resulted from the COVID-19 pandemic, the potential for a global economic slowdown attributed to rising inflation and interest rates, global tensions arising from the Russian invasion of Ukraine and global commodity supply constraints and labour shortages which have increased inflationary pressures. These events and economic conditions remain evolving situations that have had, and may continue to have, a significant impact on Birchcliff's business, results of operations, financial condition and the environment in which it operates.
Management cannot reasonably estimate the length or severity of these events and conditions, or the extent to which they will impact the Corporation's go-forward financial position, profit or loss and cash flows. The potential direct and indirect impacts of these events and conditions have been considered in management's estimates and assumptions at September 30, 2022 and have been reflected in the Corporation's results.
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RISK FACTORS
Birchcliff's financial and operational performance is potentially affected by a number of factors, including, but not limited to, financial risks, risks relating to economic conditions, business and operational risks, environmental and regulatory risks and other risks. A detailed discussion of the risk factors affecting the Corporation is presented under the heading "Risk Factors" in the AIF and management's discussion and analysis for the year ended December 31, 2021.
ABBREVIATIONS
| AECO | benchmark price for natural gas determined at the AECO 'C' hub in southeast Alberta |
|---|---|
| ATP | Alliance Trading Pool |
| bbl | barrel |
| bbls | barrels |
| bbls/d | barrels per day |
| boe | barrel of oil equivalent |
| boe/d | barrel of oil equivalent per day |
| condensate | pentanes plus (C5+) |
| F&D | finding and development |
| FD&A | finding, development and acquisition |
| G&A | general and administrative |
| GAAP | generally accepted accounting principles for Canadian public companies, which are currently IFRS |
| GJ | gigajoule |
| GJ/d | gigajoules per day |
| HH | Henry Hub |
| IFRS | International Financial Reporting Standards as issued by the International Accounting Standards Board |
| LIBOR | London Interbank Offered Rate |
| LNG | liquefied natural gas |
| Mcf | thousand cubic feet |
| Mcf/d | thousand cubic feet per day |
| MMBtu | million British thermal units |
| MMBtu/d | million British thermal units per day |
| MMcf | million cubic feet |
| MSW | price for mixed sweet crude oil at Edmonton, Alberta |
| NGLs | natural gas liquids consisting of ethane (C2), propane (C3) and butane (C4) and specifically excluding condensate |
| NYMEX | New York Mercantile Exchange |
| OPEC | Organization of the Petroleum Exporting Countries |
| P&NG | petroleum and natural gas |
| SOFR | Secured Overnight Financing Rate |
| TCPL | TransCanada PipeLines Limited |
| WTI | West Texas Intermediate, the reference price paid in U.S. dollars at Cushing, Oklahoma, for crude oil of standard grade |
| 000s | thousands |
| $000s | thousands of dollars |
NON-GAAP AND OTHER FINANCIAL MEASURES
This MD&A uses various "non-GAAP financial measures", "non-GAAP ratios", "supplementary financial measures" and "capital management measures" (as such terms are defined in NI 52-112), which are described in further detail below. These measures facilitate management's comparisons to the Corporation's historical operating results in assessing its results and strategic and operational decision-making and may be used by financial analysts and others in the oil and natural gas industry to evaluate the Corporation's performance.
Non-GAAP Financial Measures
NI 52-112 defines a non-GAAP financial measure as a financial measure that: (i) depicts the historical or expected future financial performance, financial position or cash flow of an entity; (ii) with respect to its composition, excludes an amount that is included in, or includes an amount that is excluded from, the composition of the most directly comparable financial measure disclosed in the primary financial statements of the entity; (iii) is not disclosed in the financial statements of the entity; and (iv) is not a ratio, fraction, percentage or similar representation. The non-GAAP financial measures used in this MD&A are not standardized financial measures under GAAP and might not be comparable to similar measures presented by other companies where similar terminology is used. Investors are cautioned that non-GAAP financial measures should not be construed as alternatives to or more meaningful than the most directly comparable GAAP measures as indicators of Birchcliff's performance. Set forth below is a description of the non-GAAP financial measures used in this MD&A.
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Adjusted Funds Flow, Free Funds Flow and Excess Free Funds Flow
Birchcliff defines "adjusted funds flow" as cash flow from operating activities before the effects of decommissioning expenditures and changes in non-cash operating working capital. Birchcliff eliminates settlements of decommissioning expenditures from cash flow from operating activities as the amounts can be discretionary and may vary from period to period depending on its capital programs and the maturity of its operating areas. The settlement of decommissioning expenditures is managed with Birchcliff's capital budgeting process which considers available adjusted funds flow. Changes in non-cash operating working capital are eliminated in the determination of adjusted funds flow as the timing of collection and payment are variable and by excluding them from the calculation, the Corporation believes that it is able to provide a more meaningful measure of its operations and ability to generate cash on a continuing basis. Adjusted funds flow can also be derived from petroleum and natural gas revenue less royalty expense, operating expense, transportation and other expense, net G&A expense, interest expense and any realized losses (plus realized gains) on financial instruments and plus any other cash income and expense sources. Management believes that adjusted funds flow assists management and investors in assessing Birchcliff's financial performance after deducting all operating and corporate cash costs, as well as its ability to generate the cash necessary to fund sustaining and/or growth capital expenditures, repay debt, settle decommissioning obligations, buy back common shares and pay dividends.
Birchcliff defines "free funds flow" as adjusted funds flow less F&D capital expenditures. Management believes that free funds flow assists management and investors in assessing Birchcliff's ability to generate shareholder returns through a number of initiatives, including but not limited to, debt repayment, common share buybacks, the payment of dividends and acquisitions.
Birchcliff defines "excess free funds flow" as free funds flow less common share dividends paid. Management believes that excess free funds flow assists management and investors in assessing Birchcliff's ability to further enhance shareholder returns after the payment of common share dividends, which may include special dividends, increases to the Corporation's base dividend, common share buybacks, acquisitions and other opportunities that would complement or otherwise improve the Corporation's business and enhance long-term shareholder value.
The following table provides a reconciliation of cash flow from operating activities, as determined in accordance with GAAP, to adjusted funds flow, free funds flow and excess free funds flow for the periods indicated:
| Three months ended September 30, | Nine months ended September 30, | Twelve months ended December 31, | |||
|---|---|---|---|---|---|
| ($000s) | 2022 | 2021 | 2022 | 2021 | 2021 |
| Cash flow from operating activities | 272,965 | 155,606 | 700,828 | 319,227 | 515,369 |
| Change in non-cash operating working capital | (6,448) | 12,305 | 33,581 | 25,416 | 21,161 |
| Decommissioning expenditures | 833 | 165 | 2,175 | 1,441 | 3,203 |
| Adjusted funds flow | 267,350 | 168,076 | 736,584 | 346,084 | 539,733 |
| F&D capital expenditures | (85,330) | (18,026) | (257,859) | (194,753) | (230,479) |
| Free funds flow | 182,020 | 150,050 | 478,725 | 151,331 | 309,254 |
| Dividends on common shares | (5,317) | (1,330) | (13,285) | (3,993) | (6,639) |
| Excess free funds flow | 176,703 | 148,720 | 465,440 | 147,338 | 302,615 |
Birchcliff has disclosed full year 2022 guidance for adjusted funds flow, free funds flow and excess free funds flow, which are forward-looking non-GAAP financial measures (see "Outlook and Guidance" in this MD&A). The most directly comparable financial measure for these measures, as disclosed in the Corporation's financial statements, is cash flow from operating activities. The table above provides a reconciliation of the equivalent historical non-GAAP financial measures from cash flow from operating activities, as determined in accordance with GAAP, for the twelve months ended December 31, 2021. Birchcliff anticipates the forward-looking non-GAAP financial measures to exceed their respective historical amounts for the twelve months ended December 31, 2021, primarily due to higher anticipated benchmark oil and natural gas prices which are expected to increase the average realized sales prices the Corporation receives for its production. The commodity price assumptions on which the Corporation's 2022 guidance are based are set forth in the table under the heading "Outlook and Guidance".
Capital Resources
Birchcliff defines "capital resources" as cash flow from operating activities less the aggregate of issuance of common
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shares, repurchase of common shares, repurchase of capital securities, repurchase of preferred shares, purchase of performance warrants, financing fees paid, lease payments, dividend distributions, net change in revolving term credit facilities, investments and changes in non-cash working capital from investing. Management believes capital resources assists management and investors in assessing Birchcliff's ability to fund its short and long-term financial obligations. Please refer to "Capital Resources and Liquidity" in this MD&A for the reconciliation of cash flow from operating activities, as determined in accordance with GAAP, to capital resources.
FD&A and Total Capital Expenditures
Birchcliff defines "FD&A capital expenditures" as F&D capital expenditures (see "Advisories – F&D Capital Expenditures" in this MD&A) plus acquisitions and less dispositions. Birchcliff defines "total capital expenditures" as FD&A capital expenditures plus administrative assets. Management believes that FD&A capital expenditures and total capital expenditures assist management and investors in assessing Birchcliff's overall capital cost structure associated with its petroleum and natural gas activities. The following table provides a reconciliation of F&D capital expenditures, as determined in accordance with GAAP, to FD&A capital expenditures and total capital expenditures for the periods indicated:
| Three months ended September 30, | Nine months ended September 30, | |||
|---|---|---|---|---|
| ($000s) | 2022 | 2021 | 2022 | 2021 |
| F&D capital expenditures(1) | 85,330 | 18,026 | 257,859 | 194,753 |
| Acquisitions | 848 | 228 | 2,348 | 228 |
| Dispositions | - | - | (315) | - |
| FD&A capital expenditures | 86,178 | 18,254 | 259,892 | 194,981 |
| Administrative assets | 307 | 368 | 867 | 1,426 |
| Total capital expenditures | 86,485 | 18,622 | 260,759 | 196,407 |
(1) Disclosed as exploration and development expenditures in the financial statements.
Transportation and Other Expense and Marketing Gain
Birchcliff defines "transportation and other expense" as transportation expense plus "marketing gain", which denotes marketing purchases less marketing revenue. Birchcliff may enter into certain marketing purchase and sales arrangements with the objective of reducing any available transportation and/or fractionation fees associated with its take-or-pay commitments. Management believes that transportation and other expense assists management and investors in assessing Birchcliff's total cost structure related to transportation activities. Management believes that marketing gain assists management and investors in assessing the success of Birchcliff's marketing arrangements. The following table provides a reconciliation of transportation expense, as determined in accordance with GAAP, to marketing gain and transportation and other expense for the periods indicated:
| Three months ended September 30, | Nine months ended September 30, | |||
|---|---|---|---|---|
| ($000s) | 2022 | 2021 | 2022 | 2021 |
| Transportation expense | 39,379 | 37,960 | 117,071 | 113,809 |
| Marketing purchases | 2,124 | 8,840 | 8,337 | 12,621 |
| Marketing revenue | (2,613) | (9,861) | (9,890) | (14,553) |
| Marketing gain | (489) | (1,021) | (1,553) | (1,932) |
| Transportation and other expense | 38,890 | 36,939 | 115,518 | 111,877 |
Operating Netback
Birchcliff defines "operating netback" as petroleum and natural gas revenue less royalty expense, operating expense and transportation and other expense. Management believes that operating netback assists management and investors in assessing Birchcliff's operating profits after deducting the cash costs that are directly associated with the sale of its production, which can then be used to pay other corporate cash costs or satisfy other obligations. The following table provides a breakdown of Birchcliff's operating netback for the Pouce Coupe assets and Gordondale assets and on a corporate basis for the periods indicated:
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| Three months ended | Nine months ended | |||
|---|---|---|---|---|
| September 30, | September 30, | |||
| (5000s) | 2022 | 2021 | 2022 | 2021 |
| Petroleum and natural gas revenue | 221,623 | 163,207 | 665,440 | 390,353 |
| Royalty expense | (22,154) | (9,631) | (65,895) | (24,005) |
| Operating expense | (13,649) | (11,321) | (37,917) | (32,208) |
| Transportation and other expense | (26,395) | (25,013) | (76,916) | (75,149) |
| Operating netback – Pouce Coupe assets | 159,425 | 117,242 | 484,712 | 258,991 |
| Petroleum and natural gas revenue | 117,539 | 100,115 | 353,353 | 252,167 |
| Royalty expense | (21,204) | (9,869) | (59,589) | (23,814) |
| Operating expense | (11,328) | (11,833) | (33,389) | (33,793) |
| Transportation and other expense | (12,453) | (11,924) | (38,477) | (36,724) |
| Operating netback – Gordondale assets | 72,554 | 66,489 | 221,898 | 157,836 |
| Petroleum and natural gas revenue | 339,531 | 263,348 | 1,019,822 | 642,600 |
| Royalty expense | (43,379) | (19,500) | (125,547) | (47,819) |
| Operating expense | (25,155) | (23,164) | (71,798) | (66,200) |
| Transportation and other expense | (38,890) | (36,939) | (115,518) | (111,877) |
| Operating netback – Corporate | 232,107 | 183,745 | 706,959 | 416,704 |
Non-GAAP Ratios
NI 52-112 defines a non-GAAP ratio as a financial measure that: (i) is in the form of a ratio, fraction, percentage or similar representation; (ii) has a non-GAAP financial measure as one or more of its components; and (iii) is not disclosed in the financial statements of the entity. The non-GAAP ratios used in this MD&A are not standardized financial measures under GAAP and might not be comparable to similar measures presented by other companies where similar terminology is used. Set forth below is a description of the non-GAAP ratios used in this MD&A.
Adjusted Funds Flow Per Boe and Adjusted Funds Flow Per Basic and Diluted Common Share
Birchcliff calculates "adjusted funds flow per boe" as aggregate adjusted funds flow in the period divided by the production (boe) in the period. Management believes that adjusted funds flow per boe assists management and investors in assessing Birchcliff's financial profitability and sustainability on a cash basis by isolating the impact of production volumes to better analyze its performance against prior periods on a comparable basis. The Corporation previously referred to adjusted funds flow per boe as "adjusted funds flow netback".
Birchcliff calculates "adjusted funds flow per basic common share" and "adjusted funds flow per diluted common share" as aggregate adjusted funds flow in the period divided by the basic or diluted common shares outstanding, as the case may be, at the end of the period. Management believes that adjusted funds flow per basic common share and adjusted funds flow per diluted common share assist management and investors in assessing Birchcliff's financial strength on a per common share basis.
Free Funds Flow Per Basic Common Share
Birchcliff calculates "free funds flow per basic common share" as aggregate free funds flow in the period divided by the basic common shares outstanding at the end of the period. Management believes that free funds flow per basic common share assists management and investors in assessing Birchcliff's financial strength and its ability to generate shareholder returns on a per common share basis.
Transportation and Other Expense Per Boe
Birchcliff calculates "transportation and other expense per boe" as aggregate transportation and other expense in the period divided by the production (boe) in the period. Management believes that transportation and other expense per boe assists management and investors in assessing Birchcliff's cost structure as it relates to its transportation and marketing activities by isolating the impact of production volumes to better analyze its performance against prior periods on a comparable basis.
Marketing Gain Per Boe
Birchcliff calculates "marketing gain per boe" as aggregate marketing gain in the period divided by the production (boe) in the period. Management believes that marketing gain per boe assists management and investors in assessing the
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success of Birchcliff's marketing arrangements by isolating the impact of production volumes to better analyze its performance against prior periods on a comparable basis.
Operating Netback Per Boe
Birchcliff calculates "operating netback per boe" as aggregate operating netback in the period divided by the production (boe) in the period. Management believes that operating netback per boe assists management and investors in assessing Birchcliff's operating profitability and sustainability by isolating the impact of production volumes to better analyze its performance against prior periods on a comparable basis.
Supplementary Financial Measures
NI 52-112 defines a supplementary financial measure as a financial measure that: (i) is, or is intended to be, disclosed on a periodic basis to depict the historical or expected future financial performance, financial position or cash flow of an entity; (ii) is not disclosed in the financial statements of the entity; (iii) is not a non-GAAP financial measure; and (iv) is not a non-GAAP ratio. The supplementary financial measures used in this MD&A are either a per unit disclosure of a corresponding GAAP measure, or a component of a corresponding GAAP measure, presented in the financial statements. Supplementary financial measures that are disclosed on a per unit basis are calculated by dividing the aggregate GAAP measure (or component thereof) by the applicable unit for the period. Supplementary financial measures that are disclosed on a component basis of a corresponding GAAP measure are a granular representation of a financial statement line item and are determined in accordance with GAAP.
The supplementary financial measures used in this MD&A include: operating expense per boe; net income to common shareholders per boe; average realized sales price per bbl, Mcf and boe; realized gain (loss) on financial instruments per boe; unrealized gain per boe; royalty expense per boe; effective royalty rate; transportation expense per boe; petroleum and natural gas revenue per boe; G&A expense, net per boe; other compensation, net per boe; administrative expense, net per boe; depletion and depreciation expense per boe; interest expense per boe; other finance expenses per boe; finance expense per boe; other income (expense) per boe; other gains per boe; and deferred income tax expense per boe.
Capital Management Measures
NI 52-112 defines a capital management measure as a financial measure that: (i) is intended to enable an individual to evaluate an entity's objectives, policies and processes for managing the entity's capital; (ii) is not a component of a line item disclosed in the primary financial statements of the entity; (iii) is disclosed in the notes to the financial statements of the entity; and (iv) is not disclosed in the primary financial statements of the entity. Set forth below is a description of the capital management measures used in this MD&A.
Total Debt and Adjusted Working Capital Deficit (Surplus)
Birchcliff calculates "total debt" as the amount outstanding under the Corporation's Credit Facilities (if any) plus adjusted working capital deficit (less adjusted working capital surplus) at the end of the period. "Adjusted working capital deficit (surplus)" is calculated as working capital deficit (surplus) plus the fair value of the current asset portion of financial instruments less the fair value of the current liability portion of financial instruments and less capital securities (if any) at the end of the period. Management believes that total debt assists management and investors in assessing Birchcliff's overall liquidity and financial position at the end of the period. Management believes that adjusted working capital deficit (surplus) assists management and investors in assessing Birchcliff's short-term liquidity. The following table provides a reconciliation of the amount outstanding under the Credit Facilities and working capital deficit (surplus), as determined in accordance with GAAP, to total debt and adjusted working capital surplus, respectively, for the periods indicated:
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| As at, ($000s) | September 30, 2022 | June 30, 2022 | December 31, 2021 | September 30, 2021 |
|---|---|---|---|---|
| Revolving term credit facilities | 196,989 | 276,030 | 500,870 | 648,327 |
| Working capital deficit (surplus)(1) | (80,650) | 18,633 | 53,312 | 16,058 |
| Fair value of financial instruments – asset(2) | 69,725 | 13,099 | 69 | 17,565 |
| Fair value of financial instruments – liability(2) | - | (2,663) | (16,586) | (5,717) |
| Capital securities | - | (38,205) | (38,268) | (38,328) |
| Adjusted working capital surplus | (10,925) | (9,136) | (1,473) | (10,422) |
| Total debt(3) | 186,064 | 266,894 | 499,397 | 637,905 |
(1) Current liabilities less current assets
(2) Reflects the current portion only.
(3) Total debt can also be derived from the amounts outstanding under the Corporation's Credit Facilities plus accounts payable and less cash, accounts receivable and accrued liabilities and prepaid expenses and deposits at the end of the period.
ADVISORIES
Unaudited Information
All financial and operational information contained in this MD&A for the Reporting Periods and the Comparable Prior Periods is unaudited.
Currency
Unless otherwise indicated, all dollar amounts are expressed in Canadian dollars and all references to “$” and “CDN$” are to Canadian dollars and all references to “US$” are to United States dollars.
Boe Conversions
Boe amounts have been calculated by using the conversion ratio of 6 Mcf of natural gas to 1 bbl of oil. Boe amounts may be misleading, particularly if used in isolation. A boe conversion ratio of 6 Mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.
MMBtu Pricing Conversions
$1.00 per MMBtu equals $1.00 per Mcf based on a standard heat value Mcf.
Oil and Gas Metrics
This MD&A contains metrics commonly used in the oil and natural gas industry, including netbacks. These oil and gas metrics do not have any standardized meanings or standard methods of calculation and therefore may not be comparable to similar measures presented by other companies where similar terminology is used. As such, they should not be used to make comparisons. Management uses these oil and gas metrics for its own performance measurements and to provide investors with measures to compare Birchcliff's performance over time; however, such measures are not reliable indicators of Birchcliff's future performance, which may not compare to Birchcliff's performance in previous periods, and therefore should not be unduly relied upon. For additional information regarding netbacks, see "Non-GAAP and Other Financial Measures" in this MD&A.
F&D Capital Expenditures
Unless otherwise stated, references in this MD&A to "F&D capital expenditures" denotes exploration and development expenditures determined in accordance with GAAP. Management believes that F&D capital expenditures assists management and investors in assessing Birchcliff capital cost outlay associated with its exploration and development activities for the purposes of finding and developing its reserves.
Forward-Looking Statements
Certain statements contained in this MD&A constitute forward-looking statements and forward-looking information (collectively referred to as "forward-looking statements") within the meaning of applicable Canadian securities laws. The forward-looking statements contained in this MD&A relate to future events or Birchcliff's future plans, strategy,
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operations, performance or financial position and are based on Birchcliff's current expectations, estimates, projections, beliefs and assumptions. Such forward-looking statements have been made by Birchcliff in light of the information available to it at the time the statements were made and reflect its experience and perception of historical trends. All statements and information other than historical fact may be forward-looking statements. Such forward-looking statements are often, but not always, identified by the use of words such as "seek", "plan", "focus", "future", "outlook", "position", "expect", "project", "intend", "believe", "anticipate", "estimate", "forecast", "guidance", "potential", "proposed", "predict", "budget", "continue", "targeting", "may", "will", "could", "might", "should", "would", "on track", "maintain", "deliver" and other similar words and expressions.
By their nature, forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. Accordingly, readers are cautioned not to place undue reliance on such forward-looking statements. Although Birchcliff believes that the expectations reflected in the forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct and Birchcliff makes no representation that actual results achieved will be the same in whole or in part as those set out in the forward-looking statements.
In particular, this MD&A contains forward-looking statements relating to the following:
- Birchcliff's plans and other aspects of its anticipated future financial performance, results, operations, focus, objectives, strategies, opportunities, priorities and goals;
- the information set forth under the heading "Outlook and Guidance" and elsewhere in this MD&A as it relates to Birchcliff's outlook and guidance for 2022, including: estimates of annual and Q4 average production, production commodity mix, average expenses, adjusted funds flow, F&D capital expenditures, free funds flow, common share dividends, excess free funds flow, total debt at year end and natural gas market exposure and the expected impact of changes in commodity prices and the CDN/US exchange rate on Birchcliff's estimate of free funds flow; that the estimate of total debt at December 31, 2022 is expected to be comprised of any amounts outstanding under the Credit Facilities and adjusted working capital, which is expected to be largely comprised of cash, accounts receivable and accounts payable and accrued liabilities at the end of the year; that the Corporation is on track to achieve its 2022 annual average production guidance of 78,000 boe/d, which is expected to generate approximately $1.02 billion of adjusted funds flow and $655 million to $665 million of free funds flow, based on the assumptions set forth herein; and that the Corporation anticipates F&D capital expenditures to be between $355 million and $365 million, which includes $80 million being spent to prepare for the efficient execution of the Corporation's 2023 capital program;
- Birchcliff's market diversification and risk management activities and any anticipated benefits to be derived therefrom;
- the Corporation's estimated income tax pools and management's expectation that future taxable income will be available to utilize the accumulated tax pools;
- the information set forth under the heading "Capital Resources and Liquidity" and elsewhere in this MD&A as it relates to the Corporation's liquidity and capital resources, including: the Corporation's expectation that counterparties will be able to meet their financial obligations; that the capital-intensive nature of Birchcliff's operations requires it to maintain adequate sources of liquidity to fund its short-term and long-term financial obligations; that Birchcliff's capital resources primarily consist of its adjusted funds flow and available Credit Facilities; that the Corporation believes that its anticipated adjusted funds flow in 2022 will be sufficient to fund its working capital requirements, the remainder of its capital program and future dividend distributions in 2022; that the unutilized credit capacity under the Corporation's Credit Facilities provides it with significant financial flexibility and additional capital resources to fund its working capital requirements, capital expenditure programs and dividend payments if required in the future; and that Birchcliff remains committed to maximizing free funds flow and achieving zero total debt in order to reduce the risks to its business and provide the Corporation with the optionality to increase shareholder returns and enhance long-term shareholder value, through sustainable increases to its common share dividend, common share buybacks and potential reinvestment;
- estimates of Birchcliff's material contractual obligations and commitments and decommissioning obligations;
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- statements relating to the NCIB, including: potential purchases under the NCIB; and the cancellation of common shares under the NCIB; and
- statements regarding potential transactions.
With respect to the forward-looking statements contained in this MD&A, assumptions have been made regarding, among other things: the degree to which the Corporation's results of operations and financial condition will be disrupted by circumstances attributable to the COVID-19 pandemic; prevailing and future commodity prices and differentials, exchange rates, interest rates, inflation rates, royalty rates and tax rates; the state of the economy, financial markets and the exploration, development and production business; the political environment in which Birchcliff operates; the regulatory framework regarding royalties, taxes, environmental, climate change and other laws; the Corporation's ability to comply with existing and future environmental, climate change and other laws; future cash flow, debt and dividend levels; future operating, transportation, G&A and other expenses; Birchcliff's ability to access capital and obtain financing on acceptable terms; the timing and amount of capital expenditures and the sources of funding for capital expenditures and other activities; the sufficiency of budgeted capital expenditures to carry out planned operations; the successful and timely implementation of capital projects and the timing, location and extent of future drilling and other operations; results of operations; Birchcliff's ability to continue to develop its assets and obtain the anticipated benefits therefrom; the performance of existing and future wells; reserves volumes and Birchcliff's ability to replace and expand reserves through acquisition, development or exploration; the impact of competition on Birchcliff; the availability of, demand for and cost of labour, services and materials; the approval of the board of directors of future dividends; the ability to obtain any necessary regulatory or other approvals in a timely manner; the satisfaction by third parties of their obligations to Birchcliff; the ability of Birchcliff to secure adequate processing and transportation for its products; Birchcliff's ability to successfully market natural gas and liquids; the results of the Corporation's risk management and market diversification activities; and Birchcliff's natural gas market exposure. In addition to the foregoing assumptions, Birchcliff has made the following assumptions with respect to certain forward-looking statements contained in this MD&A:
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With respect to Birchcliff's 2022 guidance (as updated on October 13, 2022):
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The following commodity prices and exchange rate are assumed: an average WTI price of US$95.00/bbl; an average WTI-MSW differential of CDN$2.50/bbl; an average AECO price of CDN$5.25/GJ; an average Dawn price of US$6.35/MMBtu; an average NYMEX HH price of US$6.85/MMBtu; and an exchange rate (CDN$ to US$1) of 1.30. These commodity price and exchange rate assumptions are based on anticipated full-year averages, which include settled benchmark commodity prices and exchange rate for the period from January 1, 2022 to September 30, 2022 and forward strip benchmark commodity prices and CDN/US exchange rate as of October 5, 2022 for the period from October 1, 2022 to December 31, 2022.
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Birchcliff's production guidance for 2022 assumes that: the 2022 capital program will be carried out as currently contemplated; no unexpected outages occur in the infrastructure that Birchcliff relies on to produce its wells and that any transportation service curtailments or unplanned outages that occur will be short in duration or otherwise insignificant; the construction of new infrastructure meets timing and operational expectations; existing wells continue to meet production expectations; and future wells scheduled to come on production meet timing, production and capital expenditure expectations.
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Birchcliff's estimate of capital expenditures for 2022 assumes that the 2022 capital program will be carried out as currently contemplated. The amount and allocation of capital expenditures for exploration and development activities by area and the number and types of wells to be drilled and brought on production is dependent upon results achieved and is subject to review and modification by management on an ongoing basis throughout the year. Actual spending may vary due to a variety of factors, including commodity prices, economic conditions, results of operations and costs of labour, services and materials.
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Birchcliff's estimates of adjusted funds flow, free funds flow and excess free funds flow for 2022 assume that: the 2022 capital program will be carried out as currently contemplated and the level of capital spending for 2022 set forth herein will be achieved; and the targets for production, production commodity mix, expenses and natural gas market exposure and the commodity price and exchange rate assumptions set forth herein are met. Birchcliff's estimate of adjusted funds flow takes into account the effects of its physical and financial basis
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swap contracts outstanding as at October 13, 2022 and excludes annual cash incentive payments that have not been approved by Birchcliff's board of directors.
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Birchcliff's estimate of total debt at December 31, 2022 assumes that: (i) any free funds flow remaining after the payment of dividends, asset retirement obligations and other amounts for administrative assets, financing fees and capital lease obligations is allocated towards debt reduction in 2022; (ii) there are 266 million common shares outstanding, with no further buybacks of common shares occurring during 2022; (iii) a dividend of $0.02 per common share is paid for the quarter ending December 31, 2022, with no further special dividends paid during 2022; (iv) no significant acquisitions or dispositions are completed by the Corporation and there is no repayment of debt using the proceeds from equity issuances during 2022; (v) there are no further proceeds received from the exercise of stock options or performance warrants during 2022; (vi) the 2022 capital program will be carried out as currently contemplated with F&D capital expenditures of $355 million to $365 million; and (vii) the targets for production, production commodity mix, adjusted funds flow, free funds flow and natural gas market exposure and the commodity price and exchange rate assumptions set forth herein are met. Birchcliff's estimate of total debt at December 31, 2022 excludes annual cash incentive payments that have not been approved by Birchcliff's board of directors.
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Birchcliff's guidance regarding its natural gas market exposure for 2022 assumes: (i) 175,000 GJ/d being sold on a physical basis at the Dawn price; (ii) 22,040 GJ/d being sold at Alliance on a physical basis at the AECO 5A price plus a premium; and (iii) 152,500 MMBtu/d being contracted on a financial and physical basis at an average fixed basis differential price between AECO 7A and NYMEX HH of approximately US$1.23/MMBtu.
Birchcliff's actual results, performance or achievements could differ materially from those anticipated in the forward-looking statements as a result of both known and unknown risks and uncertainties including, but not limited to: the risks posed by pandemics (including COVID-19), epidemics and global conflict (including the Russian invasion of Ukraine) and their impacts on supply and demand and commodity prices; actions taken by OPEC and other major producers of crude oil and the impact such actions may have on supply and demand and commodity prices; the uncertainty of estimates and projections relating to production, revenue, costs, expenses and reserves; the risk that any of the Corporation's material assumptions prove to be materially inaccurate (including the Corporation's commodity price and exchange rate assumptions for 2022); general economic, market and business conditions which will, among other things, impact the demand for and market prices of Birchcliff's products and Birchcliff's access to capital; volatility of crude oil and natural gas prices; risks associated with increasing costs, whether due to high inflation rates, supply chain disruptions or other factors; fluctuations in exchange and interest rates; stock market volatility; loss of market demand; an inability to access sufficient capital from internal and external sources on terms acceptable to the Corporation; risks associated with Birchcliff's Credit Facilities, including a failure to comply with covenants under the agreement governing the Credit Facilities and the risk that the borrowing base limit may be redetermined; fluctuations in the costs of borrowing; operational risks and liabilities inherent in oil and natural gas operations; the occurrence of unexpected events such as fires, severe weather, explosions, blow-outs, equipment failures, transportation incidents and other similar events; an inability to access sufficient water or other fluids needed for operations; uncertainty that development activities in connection with Birchcliff's assets will be economic; an inability to access or implement some or all of the technology necessary to operate its assets and achieve expected future results; the accuracy of estimates of reserves, future net revenue and production levels; geological, technical, drilling, construction and processing problems; uncertainty of geological and technical data; horizontal drilling and completions techniques and the failure of drilling results to meet expectations for reserves or production; uncertainties related to Birchcliff's future potential drilling locations; delays or changes in plans with respect to exploration or development projects or capital expenditures; the accuracy of cost estimates and variances in Birchcliff's actual costs and economic returns from those anticipated; incorrect assessments of the value of acquisitions and exploration and development programs; changes to the regulatory framework in the locations where the Corporation operates, including changes to tax laws, Crown royalty rates, environmental laws, climate change laws, carbon tax regimes, incentive programs and other regulations that affect the oil and natural gas industry; actions by government authorities, including those with respect to the COVID-19 pandemic; an inability of the Corporation to comply with existing and future environmental, climate change and other laws; the cost of compliance with current and future environmental laws; political uncertainty and uncertainty associated with government policy changes; dependence on facilities, gathering lines and pipelines; uncertainties and risks associated with pipeline restrictions and outages to third-party infrastructure that could cause disruptions to production; the lack of available
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pipeline capacity and an inability to secure adequate and cost-effective processing and transportation for Birchcliff's products; an inability to satisfy obligations under Birchcliff's firm marketing and transportation arrangements; shortages in equipment and skilled personnel; the absence or loss of key employees; competition for, among other things, capital, acquisitions of reserves, undeveloped lands, equipment and skilled personnel; management of Birchcliff's growth; environmental and climate change risks, claims and liabilities; potential litigation; default under or breach of agreements by counterparties and potential enforceability issues in contracts; claims by Indigenous peoples; the reassessment by taxing or regulatory authorities of the Corporation's prior transactions and filings; unforeseen title defects; third-party claims regarding the Corporation's right to use technology and equipment; uncertainties associated with the outcome of litigation or other proceedings involving Birchcliff; uncertainties associated with counterparty credit risk; risks associated with Birchcliff's risk management and market diversification activities; risks associated with the declaration and payment of future dividends, including the discretion of Birchcliff's board of directors to declare dividends and change the Corporation's dividend policy; the failure to obtain any required approvals in a timely manner or at all; the failure to complete or realize the anticipated benefits of acquisitions and dispositions and the risk of unforeseen difficulties in integrating acquired assets into Birchcliff's operations; negative public perception of the oil and natural gas industry and fossil fuels; the Corporation's reliance on hydraulic fracturing; market competition, including from alternative energy sources; changing demand for petroleum products; the availability of insurance and the risk that certain losses may not be insured; breaches or failure of information systems and security (including risks associated with cyber-attacks); risks associated with the ownership of the Corporation's securities; and the accuracy of the Corporation's accounting estimates and judgments.
Readers are cautioned that the foregoing lists of factors are not exhaustive. Additional information on these and other risk factors that could affect results of operations, financial performance or financial results are included in Birchcliff's most recent Annual Information Form under the heading "Risk Factors" and in other reports filed with Canadian securities regulatory authorities.
This MD&A contains information that may constitute future-orientated financial information or financial outlook information (collectively, "FOFI") about Birchcliff's prospective financial performance, financial position or cash flows, all of which is subject to the same assumptions, risk factors, limitations and qualifications as set forth above. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise or inaccurate and, as such, undue reliance should not be placed on FOFI. Birchcliff's actual results, performance and achievements could differ materially from those expressed in, or implied by, FOFI. Birchcliff has included FOFI in order to provide readers with a more complete perspective on Birchcliff's future operations and management's current expectations relating to Birchcliff's future performance. Readers are cautioned that such information may not be appropriate for other purposes. FOFI contained herein was made as of the date of this MD&A. Unless required by applicable laws, Birchcliff does not undertake any obligation to publicly update or revise any FOFI statements, whether as a result of new information, future events or otherwise.
Management has included the above summary of assumptions and risks related to forward-looking statements provided in this MD&A in order to provide readers with a more complete perspective on Birchcliff's future operations and management's current expectations relating to Birchcliff's future performance. Readers are cautioned that this information may not be appropriate for other purposes.
The forward-looking statements contained in this MD&A are expressly qualified by the foregoing cautionary statements. The forward-looking statements contained herein are made as of the date of this MD&A. Unless required by applicable laws, Birchcliff does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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