Birchcliff Energy Ltd. Announces Unaudited 2017 Year-End and Fourth Quarter Results, 2017 Reserves Highlights and 2018 Capital Program

CALGARY, Alberta, Feb. 14, 2018 — Birchcliff Energy Ltd. (“Birchcliff”) (TSX:BIR) is pleased to announce its unaudited 2017 year-end and fourth quarter financial and operational results, highlights from its independent reserves evaluations effective December 31, 2017 and its 2018 capital expenditure program. Birchcliff is also pleased to provide an operational overview and update.
Message to ShareholdersBirchcliff achieved record quarterly average production of 80,103 boe/d and funds flow from operations of $97.0 million in the fourth quarter of 2017 and record annual average production of 67,963 boe/d and funds flow from operations of $317.7 million in 2017. We sold high-cost producing properties and replaced the production with the drill bit, adding low-cost oil and natural gas production in Gordondale and Pouce Coupe. In addition, we brought our 80 MMcf/d Phase V expansion of our Pouce Coupe gas plant on-stream in the third quarter of 2017. As a result, our per boe operating costs in the fourth quarter of 2017 were 10% lower than the third quarter of 2017 and 17% lower than the second quarter of 2017. Our production per share was up 31% in the fourth quarter of 2017 as compared to the fourth quarter of 2016. We were successful at adding profitable production with positive recycle ratios. Our proved developed producing reserves at December 31, 2017 increased to 197,955.1 Mboe from 165,507.0 Mboe at December 31, 2016, reflecting our drilling success and production additions. Lastly, we began paying a quarterly dividend to our common shareholders in 2017 at an annual rate of $0.10 per share. We accomplished all of the foregoing while keeping our total debt flat at approximately $598 million.In light of current economic conditions and what we believe to be a disconnect between the value of our business and our stock price, we are dedicated to strict capital discipline and are in a position to generate free funds flow from operations in 2018 while also providing strong annual average production growth. Our board of directors has approved a capital expenditure budget of $255 million for 2018 which targets an annual average production rate of 76,000 boe/d to 78,000 boe/d in 2018 (approximately 20% oil and NGLs). We expect that our 2018 capital expenditures will be less than our funds flow from operations during 2018. Our 2018 capital program is designed to maintain a prudent pace of development, protect our balance sheet and provide for the payment of a sustainable quarterly dividend to our shareholders. Of the $255 million budgeted for 2018, approximately $149.9 million has been allocated for drilling and development and $66.9 million for facilities and infrastructure. Our drilling program will focus on drilling liquids-rich natural gas and oil wells and our low-decline, low-cost producing assets are expected to generate a profitable return at a low commodity price.We have executed on our business plan despite poor economic conditions. We are positioning Birchcliff for future growth while we protect our balance sheet. We thank all of our stakeholders and our staff for their support.
2017 Fourth Quarter HighlightsHighlights of the fourth quarter of 2017 include the following:Record quarterly average production of 80,103 boe/d, a 32% increase from 60,750 boe/d in the fourth quarter of 2016. Production consisted of approximately 80% natural gas, 7% light oil and 13% NGLs as compared to 79% natural gas, 8% light oil and 13% NGLs in the fourth quarter of 2016.
Quarterly funds flow from operations of $97.0 million, or $0.36 per basic common share, a 35% increase and a 33% increase, respectively, from $71.8 million and $0.27 per basic common share in the fourth quarter of 2016.
Birchcliff recorded net income to common shareholders of $24.8 million ($0.09 per basic common share), as compared to net income to common shareholders of $11.1 million ($0.04 per basic common share) in the fourth quarter of 2016.
Operating costs of $3.86/boe, a 15% decrease from $4.54/boe in the fourth quarter of 2016.
General and administrative expense of $1.28/boe, an 8% increase from $1.19/boe in the fourth quarter of 2016.
Interest expense of $0.97/boe, a 31% decrease from $1.40/boe in the fourth quarter of 2016.
Net capital expenditures of $18.7 million.
Birchcliff drilled a total of 2 (2.0 net) wells in the fourth quarter of 2017, both of which were Montney/Doig horizontal natural gas wells in the Pouce Coupe area.
In addition to Birchcliff’s oil drilling at Gordondale, Birchcliff recently drilled a four-well pad at Pouce Coupe which came on-stream in November 2017. This pad has shown strong production rates on an IP60 day basis. The four well average IP60 production rate was 1,280 boe/d (6.2 MMcf/d of raw natural gas, 239 bbls/d of 54° API condensate (condensate gas ratio of approximately 38 bbls/MMcf)) with an average flowing casing pressure on day 60 of 11.6 MPa.For further information, please see “2017 Unaudited Fourth Quarter Financial and Operational Results” in this press release.2017 Year-End HighlightsHighlights of the year ended December 31, 2017 include the following:Record annual average production 67,963 boe/d, a 38% increase from 49,236 boe/d in 2016. Production consisted of approximately 79% natural gas, 9% light oil and 12% NGLs as compared to 83% natural gas, 8% light oil and 9% NGLs in 2016.Funds flow from operations of $317.7 million, or $1.20 per basic common share, a 115% increase and a 62% increase, respectively, from $147.4 million and $0.74 per basic common share in 2016.Birchcliff recorded a net loss to common shareholders of $51.0 million ($0.19 per basic common share), as compared to the net loss to common shareholders of $28.3 million ($0.14 per basic common share) in 2016. Included in the net loss for 2017 is an after-tax book loss of $132.3 million resulting from the sale of Birchcliff’s Worsley Charlie Lake Light Oil Pool which closed on August 31, 2017.Operating costs of $4.45/boe, a 6% increase from $4.18/boe in 2016.General and administrative expense of $1.07/boe, a 10% decrease from $1.19/boe in 2016.Interest expense of $1.14/boe, a 32% decrease from $1.68/boe in 2016.Net capital expenditures of $276.1 million and total capital expenditures of $416.8 million in 2017.Total debt at December 31, 2017 was $598.2 million, as compared to $600.0 million at December 31, 2016.Birchcliff drilled a total of 54 (54.0 net) wells in 2017, consisting of 16 (16.0 net) Montney horizontal oil and natural gas wells in the Gordondale area, 37 (37.0 net) Montney/Doig horizontal natural gas wells in the Pouce Coupe area and 1 (1.0 net) Montney/Doig vertical science and technology well in the Pouce Coupe area. Birchcliff brought a total of 61 (61.0 net) wells on production during 2017.The 80 MMcf/d Phase V expansion of Birchcliff’s 100% owned and operated natural gas processing plant in Pouce Coupe (the “Pouce Coupe Gas Plant”) was successfully brought on-stream in the third quarter of 2017, increasing the total processing capacity of the plant to 260 MMcf/d from 180 MMcf/d.During 2017, Birchcliff completed asset sales for total proceeds of approximately $148 million (before adjustments), including the disposition of its Worsley Charlie Lake Light Oil Pool for total proceeds of approximately $100 million (before adjustments) ($90 million in cash; $10 million in securities) which closed in the third quarter of 2017.During 2017, Birchcliff reduced its exposure to pricing at AECO and diversified the natural gas markets it sells to. Birchcliff entered into agreements for the firm service transportation of an aggregate of 175,000 GJ/d (approximately 152 MMcf/d) of natural gas on TCPL’s Canadian Mainline for a 10-year term, whereby natural gas is transported to the Dawn trading hub located in Southern Ontario. The first tranche of this service (120,000 GJ/d) became available to Birchcliff on November 1, 2017, with additional tranches becoming available on November 1, 2018 (35,000 GJ/d) and November 1, 2019 (20,000 GJ/d).Birchcliff began paying a quarterly dividend to its common shareholders during 2017 in the amount of $0.10 per share per year ($0.025 per share per quarter).For further information, please see “2017 Unaudited Year-End Financial and Operational Results” in this press release.2018 Capital Expenditure Program and 2018 GuidanceBirchcliff’s board of directors has approved a capital expenditure budget for 2018 of $255 million. Approximately $149.9 million has been allocated for drilling and development, $66.9 million for facilities and infrastructure and $17.1 million for sustaining and optimization.Highlights of Birchcliff’s 2018 capital expenditure program (the “2018 Capital Program”) include the following: The program contemplates the drilling, completing, equipping and bringing on production of a total of 27 (27.0 net) wells during 2018 and targets an annual average production rate for 2018 in the range of 76,000 to 78,000 boe/d.The 2018 Capital Program is expected to be fully funded from Birchcliff’s 2018 funds flow from operations, based on the assumptions contained herein.A continued focus on oil and NGLs production and field delineation of the Montney D1 and D2 intervals in Gordondale and further exploration and delineation of liquids-rich trends in the Montney D1, D2 and C intervals in Pouce Coupe.A continued commitment to science and technology to drive operational excellence and further Birchcliff’s learnings on field development planning.Completion of the 80 MMcf/d Phase VI expansion of the Pouce Coupe Gas Plant and other strategic infrastructure projects to provide for future growth. Approximately $25.7 million has been allocated towards the completion of Phase VI which is expected to come on-stream in October 2018. In addition, Phases V and VI of the plant are being re-configured to allow for shallow-cut capability to remove propane plus (“C3+”) liquids from the natural gas stream.For further information, please see “2018 Capital Program” and “Outlook and Guidance”.2017 Year-End Reserves HighlightsThe following table summarizes the estimates of Birchcliff’s gross reserves at December 31, 2017 and December 31, 2016, as estimated by Birchcliff’s independent qualified reserves evaluators using the forecast price and cost assumptions in effect at the applicable reserves evaluation date:Birchcliff added 65,974.3 Mboe of proved developed producing reserves during 2017, a 40% increase from December 31, 2016, after excluding the effects of acquisitions and dispositions and adding back 2017 actual production of 24,806.3 Mboe.Birchcliff added 2.7 boe of proved developed producing reserves for each boe that was produced in 2017, after excluding the effects of acquisitions and dispositions and adding back 2017 actual production.The increases in the proved and proved plus probable reserves volumes is primarily attributable to: (i) the success of Birchcliff’s 2017 drilling program which resulted in more potential future drilling locations to which reserves were assigned; and (ii) positive technical revisions as a result of improved well performance. Birchcliff achieved increases in its proved and proved plus probable reserves at December 31, 2017, notwithstanding the various dispositions completed during 2017 and economic factors resulting from a lower commodity price forecast.The estimated net present value at December 31, 2017 (before taxes, discounted at 10%) was $1.9 billion for Birchcliff’s proved developed producing reserves ($1.9 billion at December 31, 2016) and $5.1 billion ($5.8 billion at December 31, 2016) for its proved plus probable reserves, notwithstanding a lower commodity price forecast and the various dispositions Birchcliff completed during 2017.Reserves life index of 7.0 years on a proved developed producing basis, 23.6 years on a proved basis and 34.6 years on a proved plus probable basis, based on a forecast production rate of 77,000 boe/d (which represents the mid-point of Birchcliff’s annual average production guidance range for 2018).
The following table sets forth Birchcliff’s reserves per common share:For further information, please see “2017 Year-End Reserves” in this press release.2017 F&D Costs, FD&A Costs and Recycle RatiosThe following table sets forth Birchcliff’s 2017 F&D and FD&A costs for proved developed producing, proved and proved plus probable reserves:(1) Please see “Advisories – Oil and Gas Metrics” for a description of the methodology used to calculate F&D and FD&A costs. 
(2) Includes the 2017 increase in FDC from 2016 of $732.9 million on a proved basis and $352.9 million on a proved plus probable basis.
The following table sets forth Birchcliff’s 2017 operating netback and funds flow netback recycle ratios for proved developed producing, proved and proved plus probable reserves:(1) Birchcliff’s operating netback and funds flow netback for 2017 were $13.97/boe and $12.81/boe, respectively. Please see “Advisories – Oil and Gas Metrics” for a description of the methodology used to calculate F&D costs, FD&A costs and recycle ratios.This press release contains forward-looking information within the meaning of applicable securities laws. Such forward-looking information is based upon certain expectations and assumptions and actual results may differ materially from those expressed or implied by such forward-looking information. For further information regarding the forward-looking information contained herein, please see “Advisories – Forward-Looking Information”. In addition, this press release contains references to “funds flow from operations”, “funds flow per common share”, “free funds flow from operations”, “operating netback”, “estimated operating netback”, “funds flow netback”, “operating margin”, “total cash costs”, “adjusted working capital deficit” and “total debt”, which do not have standardized meanings prescribed by GAAP. For further information regarding these non-GAAP measures, including reconciliations to the most directly comparable GAAP measure where applicable, please see “Non-GAAP Measures”. All financial and operating information for the fourth quarter and year ended December 31, 2017 is unaudited. See “Advisories – Unaudited Information”.  
2017 UNAUDITED FINANCIAL AND OPERATIONAL HIGHLIGHTS(1)  Excludes the effects of hedges using financial instruments but includes the effects of fixed price physical delivery contracts.2017 UNAUDITED FOURTH QUARTER FINANCIAL AND OPERATIONAL RESULTS2017 Q4 ProductionWe achieved record quarterly average production of 80,103 boe/d, which is slightly above the high end of our previous guidance range of 79,000 to 80,000 boe/d. This quarterly average production represents a 23% increase from 65,276 boe/d in the third quarter of 2017 and a 32% increase from 60,750 boe/d in the fourth quarter of 2016. The increase in production is primarily attributable to the success of our 2017 capital program which resulted in incremental production from new horizontal oil wells being brought on production in Gordondale, as well as from new horizontal natural gas wells being brought on production in Pouce Coupe in connection with the start-up of Phase V of the Pouce Coupe Gas Plant.Production consisted of approximately 80% natural gas, 7% light oil and 13% NGLs in the fourth quarter of 2017, which is in line with our previous guidance of 80% natural gas and 20% oil and NGLs. This compares to 79% natural gas, 8% light oil and 13% NGLs in the fourth quarter of 2016.2017 Q4 Funds Flow From Operations and Net IncomeFunds flow from operations was $97.0 million, or $0.36 per basic common share, a 51% increase and a 50% increase, respectively, from $64.4 million and $0.24 per basic common share in the third quarter of 2017, and a 35% increase and a 33% increase, respectively, from $71.8 million and $0.27 per basic common share in the fourth quarter of 2016. The increase in funds flow from operations from the third quarter of 2017 was largely due to a higher average corporate realized commodity sales price and higher corporate production, partially offset by higher general and administrative expense and increased royalties, operating and transportation and marketing expenses resulting from higher production in the fourth quarter of 2017. The increase in funds flow from operations from the fourth quarter of 2016 was largely due to higher corporate production, a realized cash gain on financial commodity price risk management contracts and lower royalty expense, partially offset by a lower average corporate realized commodity sales price, higher general and administrative expense and increased operating and transportation and marketing expenses primarily resulting from higher production in the fourth quarter of 2017.We had net income of $25.8 million, as compared to the net loss of $120.7 million in the third quarter of 2017 and net income of $12.1 million in the fourth quarter of 2016. We recorded net income to common shareholders of $24.8 million ($0.09 per basic common share), as compared to the net loss to common shareholders of $121.7 million ($0.46 per basic common share) in the third quarter of 2017 and net income to common shareholders of $11.1 million ($0.04 per basic common share) in the fourth quarter of 2016. The change from the net loss in the third quarter of 2017 to net income in the fourth quarter of 2017 is primarily attributable to the after-tax book loss of $132.3 million on the sale of our Worsley Charlie Lake Light Oil Pool which was recorded in the third quarter of 2017 (see “2017 Unaudited Year-End Financial Operational Results – Acquisitions and Dispositions”). The increase in net income as compared to the fourth quarter of 2016 is primarily due to an increase in funds flow from operations, an after-tax gain of $10.0 million on the sale of our Progress Charlie Lake assets (see “– Acquisitions and Dispositions”) and partially offset by higher depletion expense resulting from higher production in the fourth quarter of 2017.2017 Q4 Operating Costs, Transportation and Marketing Expense and General and Administrative ExpenseOperating costs were $3.86/boe, which is in line with our previous guidance of less than $4.00/boe. This represents a 10% decrease from $4.27/boe in the third quarter of 2017 and a 15% decrease from $4.54/boe in the fourth quarter of 2016. The decrease in operating costs per boe from the comparative quarters was largely due to an increased percentage of incremental production additions brought on production to Phase V of the Pouce Coupe Gas Plant, the sale of our higher-cost Worsley Charlie Lake Light Oil Pool and various cost reductions and infrastructure optimization initiatives implemented by Birchcliff throughout 2017.Transportation and marketing expense was $3.52/boe, a 33% increase from $2.65/boe in the third quarter of 2017 and a 45% increase from $2.42/boe in the fourth quarter of 2016. The increase from the comparative quarters was primarily due to firm service transportation tolls for natural gas transported to Dawn between November 1, 2017 and December 31, 2017. See “Update on Hedging and Market Diversification” for further information.General and administrative expense was $1.28/boe, a 56% increase from $0.82/boe in the third quarter of 2017 and an 8% increase from $1.19/boe in the fourth quarter of 2016. The increase from the comparative quarters was primarily due to the additional staff needed to manage the increases in production, reserves and land base associated with our assets in Pouce Coupe and Gordondale and higher general business expenditures.2017 Q4 Capital ExpendituresTotal F&D capital in the fourth quarter of 2017 (which excludes acquisitions, dispositions and administrative assets) was $49.3 million. Of these capital expenditures, approximately $35.5 million was spent on drilling and completions and $9.7 million on facilities and infrastructure.2017 Q4 DrillingDuring the fourth quarter of 2017, we drilled 2 (2.0 net) wells, both of which were Montney/Doig horizontal natural gas wells in the Pouce Coupe area. For further information regarding our drilling activities during 2017, please see “Operations Overview and Update” in this press release.2017 UNAUDITED YEAR-END FINANCIAL AND OPERATIONAL RESULTS2017 ProductionWe achieved record annual average production in 2017 of 67,963 boe/d, which is on the high end of our previous guidance range of 67,000 to 68,000 boe/d. This annual average production represents a 38% increase from our 2016 annual average production of 49,236 boe/d. The increase in production is primarily attributable to the success of our 2017 capital program which resulted in incremental production from new horizontal oil wells being brought on production in Gordondale, as well as from new horizontal natural gas wells being brought on production in Pouce Coupe in connection with the start-up of Phase V of the Pouce Coupe Gas Plant.Production consisted of approximately 79% natural gas, 9% light oil and 12% NGLs in 2017, which is in line with our previous guidance of 79% natural gas and 21% oil/NGLs. This compares to 83% natural gas, 8% light oil and 9% NGLs in 2016.2017 Market Diversification and Commodity PricesDuring 2017, we entered into agreements with TCPL for the firm service transportation of an aggregate of 175,000 GJ/d (approximately 152 MMcf/d) of natural gas on TCPL’s Canadian Mainline for a 10-year term, whereby natural gas is transported to the Dawn trading hub located in Southern Ontario. The first tranche of this service (120,000 GJ/d) became available to Birchcliff on November 1, 2017, with additional tranches becoming available later in 2018 and in 2019. In addition, we entered into additional arrangements during 2017 with third party marketers to sell and deliver natural gas into the Alliance pipeline system. See “Update on Hedging and Market Diversification”.During 2017, the average benchmark price for WTI oil was US$50.95/bbl, up 18% from US$43.32/bbl during 2016, and the average benchmark price for natural gas sold at AECO stayed flat at $2.16/MMBtu as compared to 2016. The average benchmark price for natural gas sold at Dawn from November 1, 2017 to December 31, 2017 was $3.82/MMBtu. Our average corporate realized commodity sales price during 2017 was $22.44/boe, a 20% increase from $18.73/boe during 2016. At December 31, 2017, approximately 29% of our natural gas production was being sold at the Dawn price, 13% was being sold into the Alliance pipeline system and 58% of was being sold at AECO. After taking into account our oil and NGLs production, approximately 47% of our total corporate production at December 31, 2017 was exposed to AECO pricing, with the remaining 53% of corporate production not exposed to AECO pricing.2017 Funds Flow From Operations and Net LossFunds flow from operations in 2017 was $317.7 million, or $1.20 per basic common share, a 115% increase and a 62% increase, respectively, from $147.4 million and $0.74 per basic common share in 2016. The increase from 2016 was largely due to a higher average corporate realized commodity sales price, higher corporate production, a realized cash gain on financial commodity price risk management contracts and lower interest costs, partially offset by higher royalties, operating and transportation and marketing expenses primarily resulting from higher production during 2017.We had a net loss of $47.0 million in 2017, as compared to the net loss of $24.3 million in 2016. We recorded a net loss to common shareholders of $51.0 million ($0.19 per basic common share) in 2017, as compared to the net loss to common shareholders of $28.3 million ($0.14 per basic common share) in 2016. The increases in the net losses from 2016 were mainly attributable to an after-tax book loss of $132.3 million resulting from the sale of our Worsley Charlie Lake Light Oil Pool, higher depletion and stock-based compensation costs and an unrealized mark-to-market loss on financial commodity price risk management contracts, partially offset by higher funds flow from operations in 2017.2017 Operating Costs, Transportation and Marketing Expense and General and Administrative ExpenseOperating costs in 2017 were $4.45/boe, a 6% increase from $4.18/boe in 2016. The increase in operating costs per boe from 2016 was largely due to higher operating, processing and service costs associated with our assets in Gordondale (the “Gordondale Assets”) which were initially acquired on July 28, 2016, partially offset by incremental production additions brought on production to Phase V of the Pouce Coupe Gas Plant, the sale of our higher-cost Worsley Charlie Lake Light Oil Pool and various cost reductions and infrastructure optimization initiatives implemented by Birchcliff throughout 2017. Our Gordondale Assets have a higher cost structure primarily resulting from increased oil and NGLs production weighting and additional fees incurred to process natural gas from the Gordondale area at AltaGas’ owned and operated natural gas processing facility located in Gordondale.Transportation and marketing expense was $2.87/boe, a 21% increase from $2.38/boe in 2016. The increase was primarily due to firm service transportation tolls for natural gas transported from Empress to Dawn between November 1, 2017 and December 31, 2017. See “Update on Hedging and Market Diversification” for further information.General and administrative expense in 2017 was $1.07/boe, a 10% decrease from $1.19/boe in 2016. The decrease on a per unit basis is primarily due to an increase in corporate production, partially offset by additional staff needed to manage the increases in production, reserves and land base associated with our assets and higher general business expenditures.2017 Interest ExpenseInterest expense was $1.14/boe, a 32% decrease from $1.68/boe in 2016. The decrease is primarily due to a combination of higher production and a lower average outstanding bank debt drawn in 2017 as compared to 2016.2017 Pouce Coupe Gas Plant NetbacksApproximately 60% of our total corporate natural gas production and 49% of our total corporate production was processed at the Pouce Coupe Gas Plant during 2017 as compared to 68% and 59%, respectively, during 2016. These decreases are primarily due to the increased weighting of liquids-rich production from our Gordondale Assets as a percentage of corporate production. The average plant and field operating cost for production processed through the Pouce Coupe Gas Plant for 2017 was $0.34/Mcfe ($2.07/boe) and the estimated operating netback at the Pouce Coupe Gas Plant was $2.19/Mcfe ($13.12/boe), resulting in an operating margin of 72%.The following table details our average daily production and estimated operating netback for wells producing to the Pouce Coupe Gas Plant:

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About the Author: Sarah Tulowitzki

Sarah Tulowitzki is a financial reporter, focusing on technology, national security, and policing. Before joining Canadian Business Tribune she worked as a staff writer at Fast Company and spent two years as a foreign correspondent in Turkey. Her work has been published in Al Jazeera America, The Nation, Vice News, Motherboard, and many other outlets.

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