There’s a commonality running through the 2016 results of Canada’s exploration and production community as results from 2016: no matter how far the price of oil falls, a strong balance sheet is critical to weathering the trough.
Many companies still thriving learned this after the last collapse in 2008-09 and have been vigilant since in living within their means and their cash flow.
At the other end of the spectrum are the free-spenders: those who spent like drunken sailors when oil was north of $100 and are now paying the piper—or their bankers—with oil hovering around $50.
And somewhere in the middle are a host of companies—many of them large juniors or small intermediates—who were cautious coming out of the 2008 recession but still found themselves in need of a balance sheet brushing-up as prices stayed lower for longer.
Birchcliff Energy is one of those.
In the middle of the intermediate pack at around 50,000 boe/d of production last year, Birchcliff weathered 2016 by shutting down drilling early, as WTI tanked below US$35/bbl, and returned cautiously to the field in the summer, as crude struggled back to around US$50/bbl.
But it also kept its eyes open for worthy asset acquisitions, says Jeffery Tonken, president and chief executive officer, knowing that as times got tougher, bid-ask spreads would narrow and some gems might become available.
“Back in January and February of 2016, when the industry was in total collapse, we cut our capital budget, stayed focussed on just drilling Montney/Doig natural gas wells and took the opportunity to buy an asset from Encana,” he says matter-of-factly.
“Encana, like all the big oil and gas producers, saw its stock just cave, and suddenly they were carrying too much debt, so they had to sell some assets. They chose to sell the Gordondale asset, which happens to sit right between two of our major properties.”
The $625-million all-cash transaction, which Birchcliff characterized as “transformational,” was struck in June 2016 and brought with it 64 net sections of Montney rights in the heart of Birchcliff’s core Pouce Coupe/Gordondale area north of Grande Prairie, Alta.
“They are acquiring an excellent complementary Montney asset base within the company’s existing core area at very attractive metrics,” Darrell Bishop, head of research at Haywood Securities, told the Daily Oil Bulletin when the deal was announced.
“The synergies that exist between Birchcliff and the Encana Gordondale area are significant. They’re basically identical assets side by side. Identical in terms of geographic area but also in terms of some of the horizons that are being developed there.”
While Tonken recognized the excellent fit of the deal, he also recognized that Birchcliff itself was a bit over-extended on the debt side of its balance sheet, so it would have to structure the acquisition as a cash deal—meaning it had to raise new equity to support the bid.
A syndicate comprised of National Bank, GMP Securities, Scotia Capital and Cormark Securities led an equity issue that ended up raising $690 million, enough to pay for the acquisition with some left over to pay down existing debt.
“It took our production from roughly 40,000 to 63,000 bbls/d, but by raising that much equity, we totally de-levered our balance sheet because we added 23,000 bbls/d with no debt plus we raised an extra $65 million to reduce our debt,” Tonken says.
“When the smoke cleared, we had de-levered our balance sheet [and] increased the size of the company. And now the Gordondale property, which is an excellent property, gives us the ability to drill more Montney oil wells versus the Montney gas wells that we have at Pouce Coupe.”
With a lot of new running room at Gordondale—more than 5,700 new drilling locations as of the end of last year—Birchcliff has more than doubled its capital program this year, to $355 million from about $167.5 million in 2015, and plans to drill and tie in 46 new horizontal wells, mostly at Pouce Coupe and Gordondale, and complete, equip and tie in another 10 wells drilled last year.
Production is expected to average 80,000 boe/d in the fourth quarter this year, while current guidance suggests annual average production this year will be somewhere in the 70,000–74,000-boe/d range.
But none of it, Tonken says, would have been possible if Birchcliff hadn’t been mindful of living within its means and strengthening its balance sheet whenever possible.
“If you are a low, low, low–cost producer and you have no debt, then it is just a question of how much money you’re going to make when you have a repeatable business like the Montney/Doig natural gas play,” he says.
“Where everybody runs into trouble is they ramp up their production, way out-spend their cash flow, and then commodity prices tank or you get a new government or you get new taxes or some black swan event happens that you don’t see coming, and all of a sudden that debt becomes a problem. Our goal is to take that away so our shareholders don’t have that concern.”