> > SUSTAINABLE LONG-TERM GROWTH < <
2009
Annual Report
Birchcliff Energy Ltd. is an intermediate oil and gas exploration, development and production company based in Calgary, Alberta. Birchcliff’s production in the
first quarter of 2010 is expected to average 10,350 boe/day, comprised of 69% natural gas and the balance light oil and natural gas liquids. Birchcliff has two large
resource plays and significant exploration opportunities all of which are located in the Peace River Arch area of Alberta. Birchcliff operates approximately 90% of its
production and has significant undeveloped land – 398,308 gross (353,150 net) acres in close proximity to its production.
Birchcliff has at least $3 billion of development drilling on its resource plays. The first is a very extensive Montney/Doig natural gas resource play with at least 700 or
more potential horizontal natural gas locations, in the Pouce Coupe and Pouce Coupe South areas of North West Alberta. The second resource play is the expansion,
exploitation, development and water flooding of the Worsley light oil pool located near Worsley, Alberta.
Birchcliff is now completing construction of Phase I of its Pouce Coupe South Gas Plant which will increase Birchcliff’s net production capability by approximately
3,500 boe/day. Birchcliff is proceeding with construction of a Phase II expansion to this plant in 2010 which will further increase Birchcliff’s production capability by
an additional 3,500 boe/day net to Birchcliff, increasing production to 17,000-19,000 boe/day by December 2010.
As of January 2010, Birchcliff had a proved plus probable reserve life index of approximately 30.8 years based on an assumed production rate of 14,000 boe/day.
Birchcliff’s strategy is to expand its natural gas and light oil focused asset base in the Peace River Arch area of Alberta. Its objective is to acquire and hold, large
working interests in several highly focused producing areas in the Peace River Arch where it can operate its assets and control the infrastructure necessary to facilitate
the exploitation, development and exploration potential of those areas.
Birchcliff’s shares are listed for trading on the Toronto Stock Exchange under the symbol BIR and are included
in the Standard and Poor’s S&P/TSX Composite Index.
As of March 17, 2010 Birchcliff had an enterprise value of approximately $1.4 billion.
1 FINANCIAL & OPERATIONAL HIGHLIGHTS
2 PERFORMANCE HISTORY
3 REPORT TO SHAREHOLDERS
7 OPERATIONS REVIEW
18 RESERVES EVALUATION
27 MANAGEMENT’S DISCUSSION AND ANALYSIS
62 MANAGEMENT’S REPORT
63 AUDITORS’ REPORT
64 FINANCIAL STATEMENTS
67 NOTES TO FINANCIAL STATEMENTS
IBC CORPORATE INFO
Birchcliff’s Annual Meeting is scheduled for Wednesday,
May 12, 2010 at 3:00 p.m. in the Devonian Room at the
Petroleum Club, 319 – 5th Ave. SW, Calgary, Alberta.
> FINANCIAL AND OPERATIONAL HIGHLIGHTS
OPERATING
Average daily production
Light oil – barrels
Natural gas – thousands of cubic feet
NGLs – barrels
Total – barrels of oil equivalent (6:1)
Average sales price ($ Canadian)
Light oil – per barrel
Natural gas – per thousand cubic feet
NGLs – per barrel
Total – barrels of oil equivalent (6:1)
Undeveloped land
Gross (acres)
Net (acres)
Three months
ended
Three months Twelve months Twelve months
ended
December 31, December 31, December 31, December 31,
2008
2009
2009
2008
ended
ended
3,045
43,170
274
10,515
75.01
4.81
67.94
43.23
3,244
47,687
332
11,524
59.10
7.14
59.27
47.88
2,934
47,805
314
11,216
64.35
4.28
55.52
36.65
2,989
40,746
368
10,148
96.68
8.63
93.97
66.53
398,308
353,150
396,451
348,249
398,308
353,150
396,451
348,249
NETBACK AND COST
($ per barrel of oil equivalent at 6:1)
Petroleum and natural gas revenue
Royalties
Operating expense
Transportation and marketing expense
Netback
General and administrative expense, net
Stock-based compensation expense
Realized gain (loss) on risk management contracts
Realized gain (loss) on foreign exchange
Interest expense
Cash Flow Netback
Depletion and depreciation expense
Accretion expense
Stock-based compensation expense
Amortization of deferred financing fees
Unrealized gain on risk management contracts
Unrealized gain (loss) on foreign exchange
Future income tax recovery (expense)
Net Earnings (Loss)
43.32
(5.35)
(7.64)
(2.47)
27.86
(3.54)
–
–
–
(2.72)
21.60
(15.80)
(0.60)
(1.84)
(0.51)
–
–
(1.18)
1.67
48.13
(8.38)
(10.66)
(2.43)
26.66
(2.49)
–
1.03
0.12
(2.17)
23.15
(22.17)
(0.38)
(0.93)
–
1.92
(0.12)
(1.87)
(0.40)
36.80
(3.75)
(8.89)
(2.39)
21.77
(2.77)
–
–
–
(2.52)
16.48
(20.40)
(0.43)
(2.40)
(0.29)
–
–
1.12
(5.92)
66.90
(11.16)
(10.41)
(2.68)
42.65
(1.75)
(0.01)
(2.65)
(0.06)
(2.78)
35.40
(23.75)
(0.39)
(1.34)
–
1.82
0.01
(3.69)
8.06
41,908
20,900
0.17
0.17
1,616
0.01
0.01
51,034
24,627
0.22
0.22
(355)
–
–
FINANCIAL
Petroleum and natural gas revenue ($000)
Cash flow from operations ($000)
Per share – basic ($)
Per share – diluted ($)
Net earnings (loss) ($000)
Per share – basic ($)
Per share – diluted ($)
Common shares outstanding
123,815,002 112,395,970 123,815,002 112,395,970
End of period – basic
134,464,987 121,659,923 134,464,987 121,659,923
End of period – diluted
Weighted average shares for period – basic
123,538,213 112,399,570 117,993,314 108,986,165
Weighted average shares for period – diluted 126,358,921 112,801,866 119,786,708 113,092,125
237,079
Capital expenditures ($000)
38,276
Working capital deficit ($000)
211,586
Revolving credit facilities ($000)
249,862
Total debt ($000)
150,669
67,476
0.57
0.56
(24,252)
(0.21)
(0.20)
248,441
131,453
1.21
1.16
29,898
0.27
0.26
101,690 (1)
20,291
201,230
221,521
44,368 (1)
20,291
201,230
221,521
58,916
38,276
211,586
249,862
(1) Included as a reduction of capital is an expected recovery of $2.9 million and $6.3 million in the three and twelve months ended December 31, 2009,
respectively, relating to the new Alberta Drilling Royalty Credit Program.
1
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
HISTORICAL PERFORMANCE
ANNUAL AVERAGE PRODUCTION GROWTH
(boe/day)
12,000
9,000
6,000
3,000
0
(boe/day/million shares)
100
90
80
70
60
2005
2006
2007
2008
2009
2005
2006
2007
2008
2009
RESERVES GROWTH
(millions of boe)
200
150
100
50
0
(boe/share)
2.0
1.5
1.0
0.5
0
2005
2006
2007
2008
2009
2005
2006
2007
2008
2009
CASH FLOW
($ millions)
$150
$120
$90
$60
$30
$0
($/share)
$1.25
$1.00
$0.75
$0.50
$0.25
$0.00
2005
2006
2007
2008
2009
2005
2006
2007
2008
2009
UNDEVELOPED LANDS
GROSS ACRES
400,000
300,000
200,000
100,000
0
NET ACRES
400,000
300,000
200,000
100,000
0
2005
2006
2007
2008
2009
2005
2006
2007
2008
2009
We see the opportunity to significantly
grow our company in the years to come.
2
A. Jeffery Tonken
President and Chief Executive Officer
> REPORT TO SHAREHOLDERS
On behalf of the directors, management and staff of Birchcliff, I am very pleased to report our 2009
results and to take the opportunity to provide you with our current outlook for 2010 and beyond.
Birchcliff had a very successful year, increasing its average annual production, reserves, recycle
ratios, reserve life index and undeveloped land base. Birchcliff also significantly increased its port-
folio of potential future drilling locations for both our Montney/Doig natural gas resource play
and our Worsley light oil resource play. At the same time, we significantly reduced our finding and
development costs to levels which make economic sense to develop our very large Montney/
Doig natural gas resource play. We expect to continue to expand Birchcliff’s footprint on the
Montney/Doig natural gas resource play and to convert reserves to production in 2010.
As a measure of last year’s success, I note in a year where our business environment was challeng-
ing, Birchcliff increased its proved and probable reserves by 60% and added those reserves for
approximately $1.61 per boe without future capital, and $5.37 per boe including future capital.
Birchcliff also increased its 2009 average production by 11% over 2008 while increasing its reserve
life index to more than 30.8 years (assuming 14,000 boe/day) as a result of the large proved and
probable reserve additions.
With our success in 2009, we have accomplished three important objectives:
n we have established a large reserve and production base at low finding and development
costs from which we can generate sustainable production growth for many years.
n we have successfully constructed our Pouce Coupe South Gas Plant that is now undergoing
startup operations which will process our natural gas at low cost.
n we have increased our technical knowledge base with respect to our two resource plays to
the point where the risks associated with the further expansion and development of these
resource plays are substantially reduced.
The pace of development of the reserves associated with our Montney/Doig natural gas resource
play is now primarily a function of the future expansion of gas processing capacity by Birchcliff and
others and the economics resulting from future natural gas prices.
We have identified an inventory of at least 700 net potential Montney/Doig natural gas horizontal
drilling locations. This inventory has the potential to significantly expand our reserves and produc-
tion in the coming years.
Our Worsley light oil resource play continues to expand with delineation drilling increasing the
size of the Worsley pool and in-fill drilling and expansion of the water flood slowing production
declines and adding reserves each year.
These two strong assets will allow Birchcliff to grow production and reserves with the drill bit, stay
focused on its map sheet and pay attention to its core business.
Our substantial Montney/Doig natural gas reserves are now a reality and Birchcliff is poised to
start converting those reserves into production growth. To date we have been constrained from
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
3
> REPORT TO SHAREHOLDERS
a production growth perspective by the lack of accessible processing capacity for our proposed
development wells. Our capital investment in infrastructure in the past year has helped to solve
this issue.
We now expect to commence processing natural gas through Phase I of our 100% owned, emis-
sions free Pouce Coupe South Gas Plant in April 2010. We have received regulatory approval for
Phase II of this plant and the major components have been ordered. We expect Phase II to be
ready to commence processing Montney/Doig natural gas in December 2010. These new
processing facilities should increase Birchcliff’s 2010 exit production rate to between 17,000 and
19,000 boe/day. To set up further future production growth, we are doing the initial planning for
a Phase III expansion of the Pouce Coupe South Gas Plant in 2011. In addition, we are considering
various other means to secure additional future processing capacity.
To continue growing production, we need to spend significant future capital in developing our
resource plays. It is therefore important to note that our year-end bank debt of $221 million
(including working capital deficiency) as against $305 million of available credit facilities puts
Birchcliff in a very solid financial position.
2010 CAPITAL BuDGET
In light of our success in 2009, we have increased our 2010 capital expenditure budget to
$182 million, a 78% increase from 2009.
Birchcliff’s robust 2010 capital budget of $182 million is described below, however the substantial
majority, $110 million, is focused on the continued development of its Montney/Doig natural gas
resource play. Birchcliff expects to drill 51 (42.9 net) wells in 2010. Highlights of the budget include:
n $67 million for the drilling of 16 (12.1 net) Montney/Doig horizontal natural gas wells and 2 (2.0
net) vertical exploration wells associated with the Montney/Doig natural gas resource play;
n $19 million for the completion of Phase I of the PCS Gas Plant and related infrastructure;
n $24 million for the Phase II expansion of the PCS Gas Plant;
n $33 million for the Worsley light oil resource play including the drilling of 8 (8.0 net) horizontal
wells and 10 (9.7 net) vertical wells and capital to support expansion of the water flood; and
n $39 million for other projects, sustaining capital and seed capital for new growth opportunities.
This capital expenditure program is expected to be funded out of cash flow and Birchcliff’s debt
facilities and is expected to result in a 2010 exit production rate between 17,000 and 19,000 boe/day.
4
In 2010 we are
determined to
convert reserves
to production.
2010 OuTLOOK
The outlook for 2010 is very positive. With the start-up of Phase I of the PCS Gas Plant we will begin
converting reserves to production on a large scale and we expect a second step up of production
near the end of 2010 with the start-up of Phase II of the PCS Gas Plant.
We intend to continue to expand our footprint on both of our resource plays by buying further
undeveloped land and building infrastructure which we expect will further increase the reserves
attributable to Birchcliff’s lands.
We expect 2010 to be a year of continued low cost reserve additions, operating cost reduc-
tions and significant production growth. The increased cash flow that results from our increased
production will provide the capital for future sustainable growth.
CONCLuSION
2009 was a very successful year for Birchcliff.
In the coming years we are determined to build out our processing capacity and convert reserves
to production. With the quality of our resource plays and the land holdings we have acquired,
we expect to continue to add significant long life reserves and corresponding net asset value in
the future at very low finding and development costs. Our massive drilling inventory will sustain
production growth for years to come.
It is important to recognize both our office staff who developed and planned each of the individ-
ual initiatives that have brought us this success and our field staff who have safely and efficiently
performed the field operations that turned good ideas into actual physical results. I gratefully
acknowledge that without the hard work and tireless dedication of our staff, Birchcliff could not
have achieved the success we now enjoy.
Thank you also to our Directors for their continued dedication, input and guidance.
A special thank you to our executive team who worked very long hours for the benefit of our
employees and shareholders.
Finally, we all thank Mr. Seymour Schulich for his support and advice which has played an integral
role in our success. During 2009 Mr. Schulich increased his share position to 30 million common
shares, which is approximately 24% of the outstanding shares of Birchcliff. To Mr. Schulich’s credit
he saw Birchcliff’s potential and was aggressively buying Birchcliff’s stock in 2009 as the financial
markets collapsed.
(signed) “A. Jeffery Tonken”
A. Jeffery Tonken
President and Chief Executive Officer
March 17, 2010
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
5
> OPERATIONS REVIEW
Birchcliff continues to mature as a full cycle exploration and production resource company.
Corporate focus continues to be on building its two key resource plays that are defined as having
repeatable and sustainable long term opportunities and as a result Birchcliff dedicates the majority
of its manpower and capital to this objective. During 2009, Birchcliff made significant advance-
ments in both of its resource plays. Most notable was the transition in 2009 of our Montney/Doig
natural gas resource play to a focused production growth phase, attributed to the construction of
our Pouce Coupe South Gas Plant (“PCS Gas Plant”). Our Montney/Doig natural gas resource play
results are well ahead of what we had planned at the beginning of 2009 for this exciting industry
leading play. Results for our Worsley light oil resource play that was acquired late in 2007, continue
to meet or exceed our original expectations.
Birchcliff’s operations are focused within the Peace River Arch area of Northern Alberta which is
one of the most prolific natural gas and oil producing areas of the Western Canadian Sedimentary
Basin. The Peace River Arch is generally characterized by having multiple horizons with a myriad
of structural, stratigraphic and hydrodynamic traps. Most significant is the abundance of prolific
resource plays, related in part to the proximity of the area to the Deep Basin, where generation
and trapping of hydrocarbons preferentially occurs. The Peace River Arch also provides a signifi-
cant amount of all-season access that allows Birchcliff to drill, equip and tie-in wells on an almost
continuous basis, excluding the spring breakup period.
Wells in the Peace River Arch have the potential to initially produce 500-10,000 mcf/day (83-1,666
boe/day) of natural gas or 30-500 boe/day of light oil. Drilling depths on a true vertical depth
basis can range from 300 meters on our shallower horizons to 2,700 meters on our deeper, higher
impact targets.
The Montney/Doig natural gas resource play wells are approximately 2,300-2,500 meters for a verti-
cal well and 4,000-5,000 meters measured depth for a horizontal well. Initial well productivity for the
vertical wells is 500-1,000 mcf/day, (83-166 boe/day) while the horizontals are 3,000-10,000 mcf/d
(500-1,666 boe/day). As we develop this play and increase our knowledge relating to horizontal well
drilling and multi-stage fracture stimulation techniques, our results continue to improve with higher
production rates, improved production profiles and correspondingly increased reserves in our more
recent wells. We continue to advance technologies that are applied to support both the Montney/
Doig natural gas resource play and the Worsley light oil resource play. In addition, the capital cost for
the horizontal wells has continued to decrease as efficiencies are realized with utilization of multi-
well pads and existing infrastructure and increased cost competitiveness in the service sector.
Typical wells for the Worsley light oil resource play are drilled to 1,400 meters for a vertical well
and 2,500–3,000 meters measured depth for the horizontal wells. Initial well productivity for the
Worsley vertical wells is 30-100 boe/day and for the horizontal wells is 60-400 boe/day.
HIGHLIGHTS FOR 2009 INCLuDED:
n Substantially increased proved and probable reserves by 60% to 157.3 million boe at December
31, 2009 from 98.5 million boe at December 31, 2008.
n 2009 Finding, Development and Acquisition costs on a proved and probable basis were $1.61 per
boe, excluding future development costs and $5.37 per boe, including future development costs.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
7
> OPERATIONS REVIEW
n Estimated net asset value at December 31, 2009 amounted to $15.79 per diluted share, an
increase of 34% over the $11.78 per diluted share at December 31, 2008, in each case deter-
mined using the present value of net future revenues from all reserves as estimated by AJM
Petroleum Consultants (discounted at a 10% discount rate) and deducting total debt, assum-
ing exercise of all options and warrants and excluding any additional value for Birchcliff’s
substantial high working interest, undeveloped land base.
n Birchcliff’s reserve life index on a proved and probable basis increased by 45% to 30.8 years
(assuming 14,000 boe/day of production) which is a substantial increase from 21.3 years in
2008 and 15.5 years in 2007.
n Excellent drilling results including exploration successes and expanded application of horizon-
tal drilling and multi-stage fracture stimulation technology in Birchcliff’s resource play areas.
n 2009 average production was 11,216 boe/day, which was an increase of 11% from 2008.
n As of December 31, 2009, AJM estimated reserves for the Worsley light oil pool to be 6.0
mmboe proved developed producing, 18.3 mmboe proved and 26.3 mmboe proved plus
probable, an increase from 24.6 mmboe proved plus probable reserves at December 31, 2008.
n Continued expansion of Birchcliff’s footprint on the Montney/Doig natural gas resource play
in the Pouce Coupe area of north west Alberta with the acquisition of high working interest,
contiguous blocks of land through private and Alberta land sale purchases. Birchcliff currently
controls in excess of 700 potential Montney/Doig natural gas horizontal drilling locations.
2009 PRODuCTION
The 2009 average production rate was 11,216 boe/day which represents an increase of approxi-
mately 11% over the 2008 average production rate of 10,148 boe/day. This production growth is
significant considering Birchcliff invested only $101.7 million of capital in 2009 as compared to
$237.1 million total capital in 2008 and almost half ($45.5 million) of the 2009 capital was spent on
well equipment and facilities infrastructure.
In the fourth quarter of 2009 production averaged 10,515 boe/day.
2009 DRILLING
Birchcliff’s 2009 drilling program, which offered a mixture of moderate to high impact develop-
ment and exploration prospects, focused on our two resource plays, the Montney/Doig natural
gas resource play and the Worsley light oil resource play. During 2009, Birchcliff drilled 18 (15.3
net) wells, all of which were cased except for 1 (1.0 net) dry hole. These wells included 11 (8.3 net)
gas wells, and 6 (6.0 net) oil wells.
Birchcliff drilled 3 (2.1 net) vertical exploration wells that were successful in finding new Montney/
Doig gas pools. As well as part of the Montney/Doig natural gas resource program, Birchcliff drilled
8 (6.2 net) Montney/Doig horizontal wells utilizing multi-stage fracture stimulation technology in
our Pouce Coupe area.
On our Worsley light oil resource play Birchcliff drilled 3 (3.0 net) vertical oil wells and 1 (1.0
net) horizontal oil well. In other areas Birchcliff also drilled 2 successful Montney/Doig oil wells,
comprised of 1 (1.0 net) vertical and 1 (1.0 net) horizontal.
8
STRATIGRAPHIC
COLuMN AND
PRODuCTION
ZONES
350m
400m
1300m
1350m
1400m
1550m
1650m
1700m
1950m
2100m
2500m
3000m
Oil Zones Natural Gas Zones
Surface
Doe Creek
Dunvegan
Paddy/
Cadotte
Notikewin
Falher
Bluesky
Gething
Cadomin
Baldonnel
Charlie Lake
Boundary Lake
Subcrop
Halfway
Doig
Montney
Belloy
Kiskatinaw
Wabamun
Leduc
Beaverhill Lake/
Granite Wash
PreCambrian
Graben Complex
2009 LAND
Birchcliff’s undeveloped land base at December 31, 2009 consisted of 398,308
gross (353,150 net) undeveloped acres. This is a 1.4% increase over its 2008 year
end land base of 348,249 net undeveloped acres. Further, this is essentially a
371% increase over the 75,000 net undeveloped acres it acquired in the signifi-
cant Peace River Arch area acquisition completed on May 31, 2005.
Birchcliff’s land base consists of large contiguous blocks of high working inter-
est acreage located near facilities owned and/or operated by Birchcliff or near
third party infrastructure. A significant amount of the land purchased is a direct
result of exploration and development success by Birchcliff in the Peace River
Arch. Much of the new land has been purchased without partners at 100%
working interest.
2009 SEISMIC
The Peace River Arch area of Alberta is very complex geologically, making it an
excellent environment for the utilization of geophysics to identify and support
drilling opportunities. Birchcliff has been very methodical in assembling a
diverse inventory of exploration, exploitation and development prospects. Our
geosciences team is very familiar with the exploration plays in all horizons of
the Peace River Arch. Birchcliff uses both two-dimensional and three-dimen-
sional seismic across its lands to assist in identifying drilling locations. Many of
our primary targets and other secondary potential productive horizons can be
mapped geophysically. Seismic has been very successful in defining complex
geological settings and assisting to identify new oil and natural gas pools and
extensions to existing oil and natural gas pools. Seismic has also been very
helpful in our resource play development with many horizontal locations
being supported by three-dimensional seismic. The geophysical data is used
to identify stratigraphic continuity and structural complications assisting in the
drilling of wells operationally as well as enhancing the production performance
of the wells.
In 2009 Birchcliff acquired 13 kilometers of two-dimensional trade data and
62 square kilometers of three-dimensional seismic data. A portion of the
recently acquired three-dimensional data was for the continued expansion
of the Montney/Doig natural gas resource play at Pouce Coupe. Birchcliff’s
geophysical database to the end of 2009 includes 2,365 kilometers of two-
dimensional trade data, 918 square kilometers of three-dimensional trade data,
56 kilometers of two-dimensional proprietary data, and 236 square kilometers
of three-dimensional proprietary data.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
9
T88
T87
T86
T85
T84
T83
T82
T81
T80
T79
T78
T77
H
A
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A
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A
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R12
R11
R10
R9
R8
R7
R6
R5
R4
R3
R2
R1W6
R25
R24
R23
R22
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F
15
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Peejay
Peejay
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Currant
Currant
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Clear Prairie
Clear Prairie
Osborn
Osborn
Charlie
Charlie
Buick
Buick
NORTH
Rigel
Rigel
Boundary
Boundary
Lake North
Lake North
Clear Hills
Clear Hills
Worsley
Worsley
Hines
Hines
Dixonville
Dixonville
Flatrock
Flatrock
Boundary
Boundary
Lake
Lake
Hill
Hill
Cecil
Cecil
Clayhurst
Clayhurst
Gerry
Gerry
Lake
Lake
Parkland
Parkland
Doe
Doe
WEST
Bear
Bear
Canyon
Canyon
Pouce Coupe
Pouce Coupe
Dawson
Creek
Sunrise
Sunrise
Dawson
Dawson
Pouce Coupe
Pouce Coupe
South
South
Balsam
Balsam
Mulligan
Mulligan
Hamelin
Hamelin
Creek
Creek
Dunvegan
Dunvegan
Whitelaw
Whitelaw
Bonanza
Bonanza
Gordondale
Gordondale
Mirage
Mirage
Progress
Progress
Doe
Doe
Progress
Progress
EAST
Rycroft
Rycroft
Belloy
Belloy
Peoria
Peoria
P
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D
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Pouce Coupe South
Gas Plant
C
B
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C
K
B
J
F
1
G
C
K
B
J
PEACE RIVER
PEACE RIVER
ARCH AREA
ARCH AREA
16
G
F
Grande Prairie
C
B
Glacier
Glacier
Valhalla
Valhalla
Kakut-Woking
Kakut-Woking
Sinclair
Sinclair
Knopcik
Knopcik
Saddle
Saddle
Hills
Hills
Grande
Grande
Prairie
Prairie
Grande
Prairie
Teepee
Teepee
Bezanson
Bezanson
Elmworth
Elmworth
Gold Creek
Gold Creek
H
A
I
H
A
I
H
A
I
H
A
D
C
B
A
D
1 0
Edmonton
Calgary
R13
R12
R11
R10
R9
R8
R7
R6
R5
R4
R3
R2
R1W6
R27
R26
R25
R24
R23W5
LEGEND
Birchcliff Non-Confidential Land
Birchcliff WI Facilities
BIRCHCLIFF WELLS
Bottom Hole Locations:
Location
Suspended
Phase 1 Pouce Coupe South Gas Plant
Service or Drain
Oil
Surface Locations:
Directional Well
Horizontal Well
Gas
Dry and Abandoned
Abandoned Oil
Suspended Gas
Abandoned Gas
Injection
T91
T90
T89
T88
T87
T86
T85
T84
T83
T82
T81
T80
T79
T78
T77
T76
T75
T74
T73
T72
T71
T70
T69
T68
T67
> OPERATIONS REVIEW
PRINCIPAL OPERATIONS
The following is a description of Birchcliff’s principal oil and gas operating districts.
WEST DISTRICT
n Production growth to 5,683 boe/day average in 2009 from 4,242 boe/day average in 2008.
n Significant expansion of the Montney/Doig natural gas resource play – drilling 3 (2.1 net) verti-
cal new pool discoveries and 8 (6.2 net) horizontal wells and increasing the undeveloped land
position. 4 (2.8 net) of these horizontal wells are standing awaiting the start-up of Phase I of the
PCS Gas Plant.
n The Montney/Doig natural gas resource play is predominantly in the West District and Birchcliff
has increased by 100% its proved and probable Montney/Doig reserves to 115.5 mmboe at
December 31, 2009 (of which 114.2 mmboe are attributed to horizontal wells) as compared
to approximately 57.7 mmboe at December 31, 2008 and approximately 19.3 mmboe at
December 31, 2007 as estimated by AJM.
n Montney/Doig horizontal well potential locations significantly increased to at least 700 net
locations.
n Continued technological improvements in the application of multi-stage fracture stimulation
in Birchcliff’s horizontal well program with improved initial production rates and expected
reserve capture in our more recent wells.
n Construction of Phase I of the PCS Gas Plant has been completed on schedule and on budget
and start-up operations are now underway. This facility is expected to increase Birchcliff’s
production to approximately 14,000 boe/day by the end of April, 2010.
The West District is centered approximately 95 kilometers northwest of the city of Grande Prairie
and adjacent to the Alberta/British Columbia border and is comprised of our Pouce Coupe, Pouce
Coupe South and Glacier regions. As of December 31, 2009 Birchcliff has interests in approxi-
mately 140,047 (117,542 net) acres of land, of which 93,426 (84,606 net) acres are undeveloped.
In addition to the PCS Gas Plant, Birchcliff operates one 100% owned sweet gas plant and has
ownership in two other sweet gas plants within the District, one at a 15% and one at 32.9% work-
ing interest. Currently sour gas production from the area is processed at a Progress gas plant in
which Birchcliff owns a small working interest or delivered to the Spectra gathering system and
processed under firm service contracts at either of the Fourth Creek plant or Gordondale East
plant which are operated by Spectra. Overall working interest production from the area averaged
5,683 boe/day in 2009.
The West District offers Birchcliff multiple, stacked targets down to depths of 2,700 meters. The
primary natural gas horizons in the area are the deeper Kiskatinaw, Montney, Doig, Halfway and
Charlie Lake formations, along with the medium depth Dunvegan, Bluesky, Gething and Nikanassin
formations. Birchcliff also holds interests in a large Boundary Lake oil pool. In 2009 Birchcliff drilled
11 (8.3 net) wells in the West District spending a total of $72.0 million. Birchcliff is planning to spend
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
1 1
> OPERATIONS REVIEW
$115.3 million in 2010 in the West District which includes 19 (14.8 net) wells. The program includes 2
(2.0 net) vertical exploration wells intended on expanding the Montney/Doig natural gas resource
play. The program also includes 16 (12.1 net) wells that are planned to be horizontal Montney/Doig
wells. The last well is a Boundary Lake development oil well that will be Birchcliff’s first attempt at
utilizing horizontal drilling technology in this zone. Almost one-half of the proposed wells will be
drilled on lands that currently do not have any reserves assigned to them.
2009 MONTNEy/DOIG NATuRAL GAS RESOuRCE PLAy uPDATE
The majority of our Montney/Doig natural gas resource play exists in the West District and to a
much lesser extent in the East District. Birchcliff’s full cycle exploration strategy for the Montney/
Doig natural gas resource play continued to be successful in 2009. The program included 3 (2.1
net) vertical exploration wells that were all successful in finding new pools. To maximize produc-
tion and reserves, Birchcliff continued to optimize horizontal natural gas drilling and multi-stage
fracture stimulation operations, drilling 8 (6.2 net) horizontal natural gas wells in 2009. Our team
has been successful in reducing the average costs of these wells. Recently Birchcliff drilled, cased,
completed, equipped and tied-in a Montney/Doig horizontal gas well off an existing pad for
under $4 million.
Most of our capital and efforts on the Montney/Doig natural gas resource play continue to be
focused on the Basal Doig/Upper Montney zones. In an effort to expand the stratigraphic poten-
tial of the play, of the 8 horizontal natural gas wells drilled in 2009, 3 (2.4 net) were drilled in the
Middle/Lower Montney stratigraphic zones. The success of these horizontal wells and the vertical
wells drilled in 2009 have significantly expanded the stratigraphic potential of the Montney/Doig
natural gas resource play on Birchcliff’s lands. Birchcliff and other industry competitors believe
the Middle/Lower Montney reservoir characteristics are similar to the Basal Doig/Upper Montney
reservoirs and our drilling results to date have met or exceeded our expectations.
Birchcliff’s strategy has been focused on exploration and delineation, acquiring land and drill-
ing vertical wells to obtain geological and reservoir information. Birchcliff then drills horizontal
wells that are completed using multi-stage fracture stimulation technology to optimize produc-
tion and reserves. In general we have been drilling only one well per section and building out
the infrastructure.
A critical criteria of this Montney/Doig natural gas resource play is well spacing. Industry competi-
tors typically have been drilling up to 4 wells per section per stratigraphic zone on 400 meter
inter-well distances (160 acre spacing). Recently, various industry competitors in the Peace River
Arch area are drilling up to 8 wells per section per stratigraphic zone or 200 meter inter-well
distances (80 acre spacing units).
AJM’s reserve assignments to Birchcliff’s lands on this play are currently based on 400 meter inter-
well distances (160 acre spacing). Birchcliff has done and will continue to do significant technical
work that supports reducing inter-well distances that Birchcliff expects will provide AJM sufficient
evidence so that AJM will ultimately assign future horizontal locations and reserves based on
reduced inter-well distances.
1 2
A significant development on the Montney/Doig natural gas resource play for Birchcliff in 2009
was proving the viability of short length horizontals which will help maximize reserve recovery.
Due to the preferred orientation Birchcliff uses to drill horizontal wells and the complications
of land holdings, there are corners of sections where a full length horizontal cannot be drilled.
Birchcliff completed a 700 meter interval on one of its full length horizontal wells, with 7 stages
of fracture stimulation, to demonstrate what a short horizontal well was capable of. With the very
favorable results from this well the AJM Evaluation assigned reserves to 53 (43.9 net) future short
length horizontal locations.
Birchcliff continues to put extensive capital and technical time and effort into tight gas and shale
gas technologies to better understand the reservoir characteristics, optimal completion tech-
niques and ultimate potential of these resource plays in general and the Montney/Doig natural
gas resource play specifically.
The rapid advancements in horizontal drilling and multi-stage fracture stimulation of these
horizontal wells has seen significant improvements in production and reserve capture for many
different plays throughout North America. Birchcliff believes that the Montney/Doig natural gas
resource play continues to experience some of the best results of the application of this tech-
nology due to its unique reservoir characteristics. Birchcliff classifies the Montney/Doig natural
gas resource play as a hybrid resource play which significantly benefits from having approxi-
mately 300 meters (1,000 feet) of gas saturated rock, that has both tight silt and sand reservoir
rock inter layered with shale gas source rock. The horizontal wells are designed to maximize the
contributions from this complex reservoir, and as our knowledge grows with respect to both the
operations and this reservoir, our results continue to improve.
NORTH DISTRICT
n Production in the North District averaged 3,216 boe/day for 2009.
n Drilling activities included 4 (4.0 net) wells, 3 vertical and 1 horizontal, all were successful infills
or delineation wells which expanded the Worsley light oil pool to the west.
n Expanded the water flood and observed positive response in the existing water flood area.
n Continued success in the application of horizontal drilling and multi-stage fracture stimulation
technology.
n Significantly increased the reserves of our Worsley Charlie Lake pool to 18.3 million boe proven
and 26.3 million boe proven plus probable at December 31, 2009 as compared to 17.5 million
boe proven and 24.6 million boe proven plus probable at December 31, 2008 and 15.0 million
boe proven and 21.2 million boe proven plus probable at December 31, 2007.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
1 3
> OPERATIONS REVIEW
WORSLEy LIGHT OIL RESOuRCE PLAy uPDATE
The principal asset in the North District is the Worsley Charlie Lake light oil pool. Birchcliff drilled
4 (4 net) light oil wells at Worsley during 2009. Of the wells drilled, 3 were vertical and 1 was horizon-
tal, all of which were cased. The total capital spent in the North District in 2009 was $17.7 million. In
addition to the infill drilling, our drilling program was very successful in delineating extensions to
the pool to the west, which increased Birchcliff’s estimate of original oil in place. In 2009, Birchcliff
drilled a horizontal light oil well and completed it using multi-stage fracture stimulation technol-
ogy. This new horizontal light oil well came on production at approximately 400 boe/day. With this
success, a sizeable number of follow up locations have been identified. Birchcliff also drilled 3 (3.0
net) vertical infill and delineation oil wells extending the pool to the west.
The Worsley pool continues to be an excellent asset. Strong production performance, successful
expansion of the pool, water flood performance, application of horizontal drilling and multi-stage
fracture stimulation technology, continued reserve growth as well as high netback production all
contribute to this high quality asset. Since its acquisition in late September, 2007, the Worsley prop-
erty has provided $112 million of cash flow and Birchcliff has re-invested $80 million in the property.
The North District includes strategic plant, facility and pipeline interests and 114,008 (100,130 net)
acres of land of which 91,608 (84,577 net) acres are undeveloped. Birchcliff owns and operates an
oil battery and oil storage facilities at Worsley with a 90.7% working interest and an associated gas
plant with a 98.8% working interest. It also owns a 29.7% working interest in another sweet gas
plant in this District.
Since purchasing the Worsley property in 2007 Birchcliff has significantly expanded the water
flood by drilling one for-purpose injection well, and converting seven other producers to injec-
tors. As a result of these activities, about a third of the Birchcliff owned portion of the Worsley light
oil pool is under water flood. To date the water flood response has exceeded expectations and
Birchcliff is committed to further expansion of the water flood.
Plans for 2010 include following up the successful horizontal wells drilled in the north end of the
pool with 3 (3.0 net) more horizontal wells utilizing multi-stage fracture stimulation technology to
increase productivity. The south east end of the pool will see 5 (5.0 net) multi lateral horizontals,
these wells take advantage of the current drilling credit royalty reduction program and horizontal
drilling technology. In the water flood area 5 (5.0 net) wells are planned. In addition 5 (4.7 net)
wells are planned for the south expansion of the water flood area. The total capital spending
program for 2010 is planned to be approximately $33.6 million.
1 4
EAST DISTRICT
n Production in the East District averaged 2,318 boe/day for 2009.
n Delineation of our Montney/Doig oil play with a successful vertical and a successful horizontal well.
n Significant technical work and a positive production response to the existing water flood at our
Progress Doe Creek pool has set up for further water flood expansion, infill drilling and delineation.
n Substantial technical work on our existing resource plays with a goal of expanding them into
the East District as well as the evaluation of new resource plays in the area.
n The geological complexity of the area, operated infrastructure and undeveloped land, repre-
sent an excellent opportunity for Birchcliff to control the area and provides long term growth.
To increase efficiencies and improve effective work flow we have recently merged our previously
named Central District into the East District. A primary focus of the East team is to extend our
existing resource plays into the East District as well as to research, evaluate and test new resource
plays in this District. Birchcliff has significant infrastructure, production and land within this District.
The East District is a multi-zone natural gas and oil property centered approximately 50 kilometers
northeast of Grande Prairie. As of December 31, 2009, Birchcliff has interests in approximately
307,890 (231,156 net) acres of land of which 213,272 (183,966 net) acres are undeveloped. Birchcliff
operates two gas plants in the East District, one sour gas plant with a 55.5% working interest, one
sweet plant with a 100% working interest and has ownership interests in five other gas plants
and two oil batteries within the District. Overall working interest production for the East District
averaged 2,318 boe/day in 2009.
In 2009, Birchcliff spent $7.6 million in the East District drilling 3 (3.0 net) wells. One well was a
successful Montney/Doig horizontal light oil well, the second well was a successful Montney/
Doig vertical light oil well, and the third well was an exploration well that resulted in a dry hole.
FACILITIES
In addition to the PCS Gas Plant, Birchcliff operates four natural gas plants within the Peace River
Arch and has an interest in seven other plants. These provide third party processing revenue and,
more importantly, allow control of production and operating flexibility in this highly competitive
and desired operating area. The company also has a working interest in 29 compressors and three
oil batteries, of which two oil batteries are operated by Birchcliff.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
1 5
> OPERATIONS REVIEW
POuCE COuPE SOuTH GAS PLANT
Birchcliff has recently completed construction of its 100% owned PCS Gas Plant and startup
operations are underway. This new facility is designed to be emissions free, has an initial design
processing capacity of approximately 30 mmcf/day and is connected by a sales pipeline to the
NOVA system. Construction of Phase I of the PCS Gas Plant cost approximately $50 million which
includes expenditures for the plant, the associated acid gas disposal well, related infrastructure
including natural gas gathering and sales pipelines and other associated costs.
Birchcliff expects the PCS Gas Plant will add approximately 3,500 boe/day net to Birchcliff, vaulting
its production to approximately 14,000 boe/day by the end of April, 2010.
The PCS Gas Plant is a significant milestone for Birchcliff as it will result in a step change in produc-
tion volumes and will provide the following additional benefits:
n
Increased production growth from the Pouce Coupe area where Birchcliff’s current and future
production growth is currently constrained by insufficient gathering and processing capacity;
n Reduced operating costs which will increase netbacks;
n
n
n
n
Increased third party revenues which will reduce Birchcliff’s operating costs and improve netbacks;
Increased control over production volumes and decreased exposure to production curtail-
ments caused by third party processing plants;
Increased run times from its natural gas wells in the Pouce Coupe area;
Increased ability to expand production in the area by expanding the processing capacity of
the PCS Gas Plant to correspond with the timing of its drilling plans in the area;
n
Increased strategic competitive advantage in Birchcliff’s core development area; and
n Reduced construction costs for the PCS Gas Plant because it was constructed at a time when
there was competitive pricing for plant components and a competitive environment for
services and materials necessary to complete construction.
The PCS Gas Plant is being constructed in the heart of Birchcliff’s Montney/Doig natural gas
resource play. Control of infrastructure is a key component to the successful development of any
natural gas play but it is magnified in these circumstances because of the intense competition for
infrastructure, gathering and processing capacity as the development of unconventional natural
gas in the Pouce Coupe area of Alberta continues to grow. Birchcliff has proven in the last several
years that it can find and develop natural gas in its focus area at low cost. The PCS Gas Plant will
allow Birchcliff to produce natural gas at lower operating costs than producers that rely on third
party processing. This will position Birchcliff to become a dominant low cost finder and producer
of natural gas in the Pouce Coupe area of Alberta.
1 6
The PCS Gas Plant
is a significant
milestone for
Birchcliff as it
will result in
a step change
in production
volumes.
POuCE COuPE SOuTH GAS PLANT – “PHASE II” ExPANSION
Birchcliff recently received regulatory approval for the Phase II expansion of its 100% owned PCS
Gas Plant, which will increase the processing capacity of the plant from approximately 30 to 60
mmcf/day. Birchcliff expects that Phase II of the PCS Gas Plant will commence operations in early
December, 2010 and will add approximately 3,500 boe/day of production net to Birchcliff.
Birchcliff estimates that the construction costs of Phase II of the plant will be approximately
$24 million which is approximately half of the cost of Phase I. This cost reduction is a result of the
peripheral infrastructure that has been put in place during Phase I construction in anticipation of
further expansion. For example, the acid gas disposal well and related facilities ($5.0 million), inlet
and sales gas lines ($8.2 million) and other gathering pipelines were installed as part of Phase I
and sized to accommodate Phase II. As part of its 2010 capital program, Birchcliff expects to drill
7 (4.9 net) Montney/Doig horizontal natural gas wells to initially fill Phase II of the PCS Gas Plant.
2010 CAPITAL BuDGET
Birchcliff has set a capital budget of $182 million for 2010, of which $110 million is focused on the
continued development of its Montney/Doig natural gas resource play. Birchcliff expects to drill
51 (42.9 net) wells in 2010. Highlights of the budget include:
n $67 million for the drilling of 16 (12.1 net) Montney/Doig horizontal natural gas wells and 2 (2.0
net) vertical exploration wells;
n $19 million for the completion of Phase I of the PCS Gas Plant and related infrastructure;
n $24 million for the Phase II expansion of the PCS Gas Plant;
n $33 million for the Worsley light oil resource play including the drilling of 8 (8.0 net) horizontal
wells and 10 (9.7 net) vertical wells and capital to support expansion of the water flood;
n $5 million for the development of our Montney/Doig light oil play in the Grande Prairie area of
Alberta; and
n $39 million for other projects, sustaining capital and seed capital for new growth opportunities.
Birchcliff’s 2010 capital expenditure program is expected to be funded out of cash flow and
Birchcliff’s debt facilities.
2010 PRODuCTION
Birchcliff expects to achieve a 2010 exit production rate between 17,000 and 19,000 boe/day. First
quarter 2010 production is expected to average 10,350 boe/day.
The 2010 production forecast assumes that Phase I of the PCS Gas Plant will reach full operat-
ing capacity in May, 2010, that Phase II of the PCS Gas Plant will reach full operating capacity in
December, 2010, that no unexpected curtailments occur in the infrastructure that Birchcliff relies on
to produce its wells and that existing and future wells continue to meet production expectations.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
1 7
> RESERVES EVALuATION
An independent evaluation of Birchcliff’s oil and gas reserves effective December 31, 2009 was
prepared by AJM Petroleum Consultants (“AJM”) and provided to Birchcliff in an Evaluation Report
dated February 16, 2010 (the “AJM Evaluation”). The oil and gas reserves and income projec-
tions provided were estimated by AJM in accordance with the Canadian Oil and Gas Evaluation
Handbook (COGEH) and National Instrument 51-101 (“NI 51-101”).
Additional Reserves data as required by National Instrument 51-101 are contained in Birchcliff’s
Statement of Reserves and Other Oil & Gas Information, which is filed on SEDAR at www.sedar.com.
The following table summarizes the Corporation’s total reserves and net present values of future
net revenues based on AJM’s December 31, 2009 forecast of commodity prices and costs.
1 8
RESERVES SuMMARy –
DECEMBER 31, 2009 FORECAST PRICES AND COSTS
LIGHT AND
MEDIuM OIL
Net
Gross
(mbbl)
(mbbl)
NATuRAL
GAS
Gross
(mmcf )
Net
(mmcf )
NATuRAL GAS
LIquIDS
Net
(mbbl)
Gross
(mbbl)
BOE
Gross
(mboe)
Net
(mboe)
RESERVES CATEGORy
PROVED
336 20,615 16,686
Developed Producing
3,116
4,469
65
Developed Non-Producing 2,091 1,204 13,692
10,546 8,297 314,337 242,448 2,018 1,280 64,953 49,985
Undeveloped
18,907 14,821 410,817 319,707 2,661 1,681 90,037 69,787
TOTAL PROVED
PROBABLE
8,854 5,745 337,519 266,836 2,122 1,342 67,229 51,560
PROVED PLuS PROBABLE 27,761 20,566 748,336 586,543 4,783 3,023 157,266 121,346
5,320 82,787 66,175
11,083
548
96
6,269
Note: Columns may not add due to rounding of individual items.
NET PRESENT VALuE OF FuTuRE NET REVENuE –
DECEMBER 31, 2009 FORECAST PRICES AND COSTS
PROVED
Developed Producing
Developed Non-Producing
Undeveloped
TOTAL PROVED
PROBABLE
PROVED PLuS PROBABLE
BEFORE INCOME TAxES
DISCOuNTED AT (% / yEAR)
0%
(MM$)
5%
(MM$)
8%
(MM$)
10%
(MM$)
15%
(MM$)
20%
(MM$)
789.5
201.7
2,210.7
3,201.9
2,803.0
6,004.8
606.9
130.7
1,317.2
2,054.7
1,441.3
3,496.0
534.0
108.1
1,008.4
1,650.5
1,034.0
2,684.5
494.9
97.1
854.1
1,446.0
845.2
2,291.2
419.6
77.7
580.1
1,077.5
537.8
365.7
65.0
404.7
835.4
361.3
1,615.2 1,196.7
Notes:
(1) Columns may not add due to rounding of individual items.
(2) National Instrument 51-101 requires the inclusion of the following statement: estimates of future net revenues whether discounted or
not do not represent fair market value.
RELEVANT PORTIONS OF AJM’S FORECAST OF COMMODITy PRICES AND
COSTS uSED IN THE AJM EVALuATION
AJM DECEMBER 31, 2009 PRICE FORECAST
NATuRAL
WTI CRuDE EDMONTON GAS AT
CITy GATE
AECO
($CDN/mcf )
($CDN/bbl)
5.80
77.55
6.70
84.45
7.05
88.90
7.45
93.45
7.55
101.05
7.75
108.85
7.90
116.95
8.25
119.30
8.55
121.70
8.85
124.10
9.15
126.60
9.35
129.15
9.50
131.70
9.70
134.35
9.90
137.05
10.10
139.80
10.30
142.55
10.50
145.40
10.70
148.35
10.95
151.30
2.0%
2.0%
OIL
($US/bbl)
75.00
81.60
85.85
90.20
97.40
104.90
112.60
114.85
117.15
119.50
121.90
124.35
126.80
129.35
131.95
134.60
137.30
140.00
142.80
145.70
2.0%
yEAR
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
thereafter
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
NATuRAL GAS LIquIDS
Edm
Butane
($CDN/bbl)
62.05
67.55
71.10
74.75
80.85
87.10
93.55
95.45
97.35
99.30
101.30
103.30
105.35
107.50
109.65
111.85
114.05
116.30
118.70
121.05
2.0%
Edm
Propane
($CDN/bbl)
42.65
46.45
48.90
51.40
55.60
59.85
64.30
65.60
66.95
68.25
69.65
71.05
72.45
73.90
75.40
76.90
78.40
79.95
81.60
83.20
2.0%
Edm C5+
($CDN/bbl)
81.45
88.65
93.35
98.15
106.10
114.30
122.80
125.25
127.80
130.30
132.95
135.60
138.30
141.05
143.90
146.80
149.70
152.65
155.75
158.85
2.0%
CuRRENCy
ExCHANGE
RATE
($US/$CDN)
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
INFLATION
RATE
(%)
0.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
1 9
> RESERVES EVALuATION
RESERVES RECONCILIATION
The following table sets forth the reconciliation of the Corporation’s reserves from January 1, 2009
to December 31, 2009.
2009 RECONCILATION OF BIRCHCLIFF GROSS RESERVES –
FORECAST PRICES AND COSTS
2009 RESERVES RECONCILIATION
Proved Reserves
Opening Balance January 1, 2009
Discoveries
Extensions
Improved Recovery
Recompletions
Technical Revisions
Acquisitions
Dispositions
Economic Factors
Working Interest Adjustment
Production
Closing Balance December 31, 2009
Probable Reserves
Opening Balance January 1, 2009
Discoveries
Extensions
Improved Recovery
Recompletions
Technical Revisions
Acquisitions
Dispositions
Economic Factors
Working Interest Adjustment
Production
Closing Balance December 31, 2009
Proved Plus Probable Reserves
Opening Balance January 1, 2009
Discoveries
Extensions
Improved Recovery
Recompletions
Technical Revisions
Acquisitions
Dispositions
Economic Factors
Working Interest Adjustment
Production
Closing Balance December 31, 2009
LIGHT AND MEDIuM
CRuDE OIL
(Mbbl)
NATuRAL
GAS
(Mmcf )
NGL’S
(mbbl)
OIL
EquIVALENT
(MBOE)
18,034
–
1,041
–
–
871
53
–
(21)
–
(1,071)
18,907
8,170
–
327
–
–
386
15
–
(45)
–
–
8,854
26,204
–
1,369
–
–
1,256
68
–
(66)
–
(1,071)
27,761
213,663
–
136,934
–
–
79,258
999
–
(2,590)
1
(17,448)
410,817
197,194
–
143,250
–
–
4,791
281
–
(1,347)
(6,648)
–
337,519
410,857
–
280,184
–
–
84,048
1,280
–
(3,937)
(6,647)
(17,448)
748,336
2,026
–
893
–
–
(111)
7
–
(39)
–
(115)
2,661
1,814
–
864
–
–
(495)
2
–
(13)
(51)
–
2,122
3,840
–
1,757
–
–
(606)
9
–
(52)
(51)
(115)
4,783
55,671
–
24,756
–
–
13,969
227
–
(492)
–
(4,094)
90,037
42,850
–
25,067
–
–
689
64
–
(282)
(1,159)
–
67,229
98,521
–
49,823
–
–
14,659
290
–
(774)
(1,159)
(4,094)
157,266
Note: Columns may not add precisely due to rounding of individual items.
2 0
RESERVE LIFE INDEx
Based on the reserves estimated by the AJM Evaluation and a production rate of 14,000 boe/day,
Birchcliff has a reserve life index of 17.6 years on a proved basis versus 12.0 years at the end of 2008
and 30.8 years on a proved plus probable basis versus 21.3 years at the end of 2008.
FINDING, DEVELOPMENT AND ACquISITION COSTS
During 2009, Birchcliff spent approximately $97.7 million on exploration and development activi-
ties and $3.3 million on net acquisitions. Birchcliff estimates its finding and development costs
as follows:
FD&A COSTS ExCLuDING FuTuRE DEVELOPMENT CAPITAL
($/BOE)
F&D – Exploration and Development – Proved
F&D – Exploration and Development
– Proved plus Probable
Acquisitions – Proved
Acquisitions – Proved plus Probable
FD&A – Total – Proved
FD&A – Total – Proved plus Probable
2009
$ 2.57
$ 1.57
$ 8.84
$ 6.32
$ 2.63
$ 1.61
2008
$ 9.09
$ 4.99
$ 37.11
$ 21.59
$ 9.40
$ 5.17
2007
$ 6.92
3 yR AVG.
$ 5.41
$ 5.07
$ 24.12
$ 17.83
$ 15.46
$ 11.38
$ 3.27
$ 23.94
$ 17.57
$ 7.97
$ 4.93
FD&A COSTS INCLuDING FuTuRE DEVELOPMENT CAPITAL(1)
($/BOE)
F&D – Exploration and Development – Proved
F&D – Exploration and Development
– Proved plus Probable
Acquisitions – Proved
Acquisitions – Proved plus Probable
FD&A – Total – Proved
FD&A – Total – Proved plus Probable
2009
$ 7.12
$ 5.36
$ 8.84
$ 6.32
$ 7.13
$ 5.37
2008
$ 20.17
$ 13.98
$ 37.11
$ 21.59
$ 20.36
$ 14.06
2007
$ 17.04
3 yR AVG.
$ 13.00
$ 12.03
$ 26.44
$ 20.96
$ 21.71
$ 16.45
$ 9.36
$ 26.13
$ 20.50
$ 14.81
$ 10.66
(1) Includes the increase for 2009 of $236.5 million in future development capital from the 2008 amount.
Future development costs used in the AJM Evaluation were $668.5 million on a proved basis and
$953.7 million on a proved plus probable basis which includes approximately $100 million for the
expansion of the PCS Gas Plant to 120 mmcf/day of total capacity.
During 2009, the
average WTI price
of crude oil was
$US 61.80 per
barrel and the
average price of
natural gas at
AECO was Cdn
$3.96 per mcf.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
2 1
> RESERVES EVALuATION
RECyCLE RATIOS
During 2009, the average WTI price of crude oil was $US 61.80 per barrel and the average price of
natural gas at AECO was Cdn $3.96 per mcf. Based on Birchcliff’s estimated average 2009 operating
netback of $21.77 per boe, and including all capital spent in 2009 ($101.0 million) for exploration,
development and acquisition spending (FD&A), Birchcliff has a proved plus probable recycle ratio
of 13.5 excluding future capital and 4.1 including future capital. The recycle ratios are calculated
in each case by dividing the average operating netback of $21.77 per boe or cash flow netback of
$16.48 per boe, as the case may be, by each of F&D and FD&A costs per boe.
BIRCHCLIFF’S OPERATING AND CASH FLOW NETBACK RECyCLE RATIOS
OPERATING NETBACK
RECyCLE RATIO
CASH FLOW NETBACK
RECyCLE RATIO
2009
2008
2009
2008
Recycle Ratio Excluding Future
Development Capital
F&D – Exploration and Development
– Proved plus Probable
FD&A – Exploration, Development & Acquisition
– Proved plus Probable
Recycle Ratio Including Future
Development Capital
F&D – Exploration and Development
– Proved plus Probable
FD&A – Exploration, Development & Acquisition
– Proved plus Probable
13.9
13.5
4.1
4.1
8.5
8.3
3.1
3.0
10.5
10.3
3.1
3.1
7.1
6.9
2.5
2.5
MONTNEy/DOIG NATuRAL GAS
RESOuRCE PLAy RESERVE DETAILS
Birchcliff increased by 100% its proved and probable Montney/Doig reserves to 115.5 mmboe at
December 31, 2009 (of which 114.2 mmboe are attributed to horizontal wells) as compared to
approximately 57.7 mmboe at December 31, 2008 and approximately 19.3 mmboe at December
31, 2007 as estimated by AJM.
The following table sets forth reserves data attributable to Birchcliff’s horizontal wells on the
Montney/Doig natural gas resource play, the number of horizontal wells to which reserves were
attributed and the future capital associated with such reserves:
Natural Gas
(Bcf )
2009 2008
Natural Gas
Liquids
(mbbl)
Total
(mboe)
2009
2008
2009
2008
Existing Wells and Future
Locations
Gross
2009 2008
Net
2009 2008
Net Future
Capital(1)
($millions)
2009
2008
41
27
264
253
7,139 4,780
21
17
18
15
18
0
352 158 2,239 1,441 60,952 27,708 167 104 132
86 547 (1) 355
660 314 4,145 2,848 114,151 55,225 253 145 200 121 811 (1) 525
(1) Includes Future Plant Capital of approximately $100 million for the expansion of the PCS Gas Plant to 120 mmcf/day of total capacity.
Proved
Developed
Producing
Total
Proved
Proved &
Probable
2 2
Birchcliff believes that the ultimate recovery from its Montney/Doig horizontal natural gas wells
will continue to improve year over year as production declines continue to flatten. In addition,
as drilling and completion technologies continue to improve, we expect recovery factors and
production rates in this unconventional reservoir will also improve.
As at December 31, 2009, the Montney/Doig reserve bookings in the AJM Reserve Report include
78.4 sections of land (63.4 net) and 228 horizontal locations (178.5 net) up from 67.5 sections of
land (56.7 net) and 128 horizontal locations (105.7 net) in 2008 and up from 35 horizontal loca-
tions (26.4 net) in 2007. The AJM Evaluation attributes to each of these net future horizontal well
locations on average, 3.5 bcf of proved and probable natural gas reserves at an average capital
cost of $4 million per well as compared to an average 2.8 bcf of proved and probable natural gas
reserves at an average capital cost of $5 million per future well used in the reserves evaluation
prepared by AJM as at December 31, 2008.
AJM has assigned reserves to 253 (199.7 net) existing horizontal wells and future horizontal
locations on 78.4 (63.4 net) sections of land, for an average of 3.22 (3.15 net) horizontal wells and/
or future horizontal locations per section. For clarity, the 253 (199.7 net) existing wells and future
horizontal locations include 25 (21.2 net) existing horizontal wells and 228 (178.5 net) future
horizontal locations
Drilling success in a second stratigraphic zone, the Middle/Lower Montney, has resulted in signifi-
cant reserve assignments by AJM to 32 (24.9 net) sections of land. There are now 19 (14.2 net)
sections to which AJM has assigned reserves in respect of both the Basal Doig/Upper Montney
and the Middle/Lower Montney stratigraphic zones.
Birchcliff believes that at December 31, 2009 it had at least 700 net potential future horizontal loca-
tions on its lands. These potential locations are comprised of 178.5 net future horizontal locations
to which reserves have been assigned in the AJM Evaluation, 110.7 net potential future horizontal
locations on lands to which AJM has assigned reserves and 415.2 net potential future horizontal
locations on Birchcliff’s trend lands. These potential locations assume 4 horizontal wells per section.
Trend land is land which Birchcliff believes has a high likelihood of extending the Montney/Doig
natural gas resource play based on technical information including geological and geophysical data.
WORLSEy LIGHT OIL RESOuRCE PLAy RESERVE DETAILS
The Worsley light oil pool continues to prove itself as a top quality asset as both the original oil
in place and the estimated recoverable reserves for the pool continue to grow. As of December
31, 2009, AJM estimated reserves for the Worsley light oil pool to be 26.3 mmboe proved plus
probable. This continues the growth trend for the Worsley reserves since July 1, 2007 (being the
effective date of the acquisition), when recoverable reserves were estimated at 11.3 mmboe
proved, and 15.1 mmboe proved plus probable.
Birchcliff believes
that the ultimate
recovery from
its Montney/
Doig horizontal
natural gas wells
will continue to
improve year over
year as production
declines continue
to flatten.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
2 3
> RESERVES EVALuATION
HISTORy OF RESERVES ESTIMATED FOR WORSLEy OIL POOL(1)
Proved Reserves
Proved + Probable Reserves
JuLy 1,
2007
11.3
15.1
DEC. 31,
2007
15.0
21.2
DEC. 31,
2008
17.5
24.6
DEC. 31,
2009
18.3
26.3
(1) All reserves estimates taken from Birchcliff’s filings under National Instrument 51-101.
RESERVE REPLACEMENT
During 2009, excluding acquisitions, Birchcliff added 9.3 boe of proved reserves for each boe of
production and added 15.2 boe of proved plus probable reserves for each BOE of production.
PER SHARE GROWTH
The following table demonstrates Birchcliff’s growth on a per share basis using basic common
shares outstanding at December 31, 2007, December 31, 2008 and December 31, 2009 except
as otherwise noted. There were 94,554,269 common shares outstanding at December 31, 2007,
112,395,970 common shares outstanding at December 31, 2008 and 123,815,002 common shares
outstanding at December 31, 2009.
PER SHARE GROWTH
December 31,
Daily Average Annual Production(1)
(boe/day/million shares)
Proved Reserves (boe/1,000 shares)
Proved plus Probable Reserves (boe/1000 shares)
Net Undeveloped Land (acres/million shares)
(1) Based on weighted average shares outstanding for the year indicated.
2007
2008
2009
93.0
363
599
2,823
93.1
495
877
3,098
95.1
727
1,270
2,852
ADVISORy
Reserves Data: All estimates of reserves volumes and future net revenues disclosed herein for
2009 are derived from the reserves evaluation dated February 16, 2010 which was prepared
effective December 31, 2009 in accordance with National Instrument 51-101 by AJM Petroleum
Consultants, an independent reserves evaluator. Estimates of reserves for each of 2007 and 2008
are derived from the evaluation of Birchcliff’s reserves prepared by AJM Petroleum Consultants
effective December 31 of such year.
Finding and Development Costs: With respect to disclosure of finding and development costs
disclosed above:
a) The amounts of finding and development and/or acquisition costs herein are calculated by
dividing the total of the particular costs noted incurred during such year by the amounts of
additions to proved reserves and proved and probable reserves during such year that resulted
from the expenditure of such costs.
b) In calculating the amounts of finding and development and/or acquisition costs for a year,
the changes during the year in estimated future development costs and in estimated reserves
are based upon the evaluation of Birchcliff’s reserves prepared by AJM Petroleum Consultants
effective December 31 of such year.
c) National Instrument 51-101 requires the inclusion of the following warning statement:
2 4
The aggregate of the exploration and development costs incurred in the most recent financial
year and any change during that year in estimated future development costs generally will not
reflect total finding and development costs related to reserves additions for that year.
BOE Conversions: The term barrels of oil equivalent (“boe”) may be misleading, particularly if
used in isolation. Per boe amounts have been calculated using a conversion rate of six thousand
cubic feet of natural gas to one barrel of oil equivalent (“6:1”). A BOE conversion ratio of 6:1 is
based on an energy equivalency conversion method primarily applicable at the burner tip and
does not represent a value equivalency at the wellhead.
Reserves for Portion of Properties: With respect to the disclosure of reserves contained herein
relating to portions of Birchcliff’s properties, the estimates of reserves and future net revenue
for individual properties may not reflect the same confidence level as estimates of reserves and
future net revenues for all properties due to the effects of aggregation.
Forward Looking Statements: This Annual Report contains forward looking statements regard-
ing the assets, business and operations of Birchcliff Energy Ltd. and the economic and regulatory
environment in which it operates. The information, cautions, qualifications and disclosures made in
Management’s Discussion and Analysis under the heading “FORWARD LOOKING STATEMENTS” on
page 60 of this Annual Report apply to all such forward looking statements in this Annual Report.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
2 5
>
Birchcliff Management Team
(left to right): Bruno P. Geremia – Vice President and Chief Financial Officer, Dave Humphreys – Vice President, Operations, Karen Pagano – Vice President,
Engineering, A. Jeffery Tonken – President and Chief Executive Officer, Myles Bosman – Chief Operating Officer and Vice President, Exploration and
James W. Surbey – Vice President, Corporate Development.
> MANAGEMENT’S DISCuSSION & ANALySIS
This Management’s Discussion and Analysis (“MD&A”) in respect of the three and twelve month
periods ended December 31, 2009 (the “Reporting Periods”) as compared to the three and
twelve month periods ended December 31, 2008 (the “Comparable Prior Periods”) is dated
March 17, 2010.
The following discussion and analysis is management’s assessment of the historical, financial and
operating results of Birchcliff Energy Ltd. (the “Corporation” or “Birchcliff”) and should be read in
conjunction with the audited financial statements and the notes thereto as at and for the years
ended December 31, 2009 and 2008. The financial statements have been prepared in accordance
with Canadian Generally Accepted Accounting Principles (“GAAP”).
The Corporation is engaged in the exploration for and the development, production and acquisi-
tion of, petroleum and natural gas reserves in Western Canada. Additional information relating
to the Corporation, including the Annual Information Form and the Statement of Reserve Data
and Other Oil and Gas Information is available on SEDAR at www.sedar.com. Birchcliff’s common
shares are listed for trading on the Toronto Stock Exchange (“TSx”) under the symbol “BIR”.
Birchcliff’s common shares are included in the Standards and Poor’s S&P/TSX Composite Index.
All amounts are expressed in Canadian dollars unless otherwise stated.
SELECTED ANNuAL INFORMATION
year ended December 31,
($000’s, except for production and share information)
Average daily production (boe at 6 mcf:1 bbl)
Petroleum and natural gas revenue
Total revenue, net royalties
Cash flow from operations
Per share – basic ($)
Per share – diluted ($)
Net earnings (loss)
Per share – basic ($)
Per share – diluted ($)
Capital expenditures
Total assets
Working capital deficit
Non-revolving credit facility
Revolving credit facilities
Total debt
Shareholder’s equity
Common shares outstanding
End of period – basic
End of period – diluted
Weighted average shares for period – basic
Weighted average shares for period – diluted
2009
11,216
150,669
135,327
67,476
0.57
0.56
(24,252)
(0.21)
(0.20)
101,690 (1)
837,108
20,291
–
201,230
221,521
554,561
2008
10,148
248,441
206,992
131,453
1.21
1.16
29,898
0.27
0.26
237,079
814,823
38,276
–
211,586
249,862
507,371
2007
6,711
120,696
101,373
56,245
0.78
0.77
(14,244)
(0.20)
(0.20)
350,173
662,252
18,232
(2)
98,830
155,854
272,916
340,756
123,815,002 112,395,970
94,554,269
134,464,987 121,659,923 103,639,748
72,156,544
117,993,314 108,986,165
73,285,368
119,786,708 113,092,125
(1) Included as a reduction of capital is an expected recovery of $6.3 million relating to the new Alberta Drilling Royalty Credit Program.
(2) This amount excludes both the accrued liability for the unrealized loss of $6.8 million on oil price risk management contracts and the
related future income tax asset of $6.3 million.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
2 7
> MANAGEMENT’S DISCuSSION & ANALySIS
BOE CONVERSION
Barrel of oil equivalent (“boe”) amounts may be misleading, particularly if used in isolation. A boe
conversion ratio has been calculated using a conversion rate of six thousand cubic feet (6 mcf ) of
natural gas to one barrel (1 bbl) and is based on an energy equivalent conversion method primar-
ily applicable at the burner tip. It does not necessarily represent an economic value equivalency
at the wellhead. This conversion basis conforms to National Instrument 51-101 Standards for Oil
and Gas Activities of the Canadian Securities Administrators.
NON-GAAP MEASuRES
This MD&A and the Corporation’s Annual Report for 2009 make references to terms commonly
used in the petroleum and natural gas industry, such as cash flow or cash flow netback, cash flow
per share, operating netback and netback.
Cash flow, as discussed in this MD&A and in the Corporation’s Annual Report for 2009, appears
as a separate line on the Corporation’s Statements of Cash Flows above “changes in non-cash
working capital” and is reconciled to net income (loss) and comprehensive income (loss). In the
Corporation’s disclosure, netback and/or operating netback denotes petroleum and natural gas
revenue less royalties, less operating expenses and less transportation and marketing expenses.
Cash flow netback denotes net earnings plus non-cash items including future income tax
expense (less any recovery), depletion, depreciation and accretion expense, unrealized losses
from risk management contracts and foreign exchange (less unrealized gains), non-cash stock-
based compensation expense and amortization of deferred financing fees.
EBITDA, as discussed in this MD&A and in the Corporation’s Annual Report for 2009,denotes earn-
ings before interest, taxes, stock-based compensation, depletion, depreciation and amortization.
These terms are not defined by GAAP and consequently, they are referred to as non-GAAP
measures. The reader should be cautioned that these amounts may not be directly comparable
to measures for other companies where similar terminology is used.
2009 OVERALL PERFORMANCE
PRODuCTION
Production in 2009 averaged 11,216 boe/day. This is an 11% increase from the 10,148 boe/
day the Corporation averaged in 2008 and is essentially on target with management’s previ-
ously announced guidance of 11,300 per day. The increase from 2008 is virtually all due to the
Corporation’s drilling and operational success from the Montney/Doig natural gas resource play
and Worsley light oil resource play, notwithstanding normal production declines.
In 2009, the Corporation’s production consisted of approximately 71% natural gas and 29% crude
oil and natural gas liquids.
COMMODITy PRICES
Oil sales prices at the wellhead averaged $64.35 per boe in 2009, which is a 33% decrease from
$96.68 per boe in 2008. Natural gas prices at the wellhead averaged $4.28 per mcf in 2009, which
is a 50% decrease from $8.63 per mcf in 2008. These decreases are a direct result of the worldwide
2 8
economic downturn and the impact this downturn had on the level of supply and demand for
oil and natural gas.
Canadian Edmonton Par oil prices averaged $65.90 per barrel in 2009 as compared to $102.16
per barrel in 2008, which is a 35% decrease. The AECO daily natural gas spot price averaged $3.96
per mcf in 2009 as compared to $8.16 per mcf in 2008, which is a 51% decrease. Both of these
commodity price decreases translated into reduced cash flow available for reinvestment in 2009.
CASH FLOW AND EARNINGS
Cash flow decreased to $67.5 million ($0.57 per share) in 2009 as compared to $131.5 million ($1.21
per share) for 2008. Birchcliff had a loss of $24.3 million ($0.21 per share) for 2009 as compared
to earnings of $29.9 million ($0.27 per share) for 2008. The decrease in cash flow and the net loss
resulted from lower average commodity prices realized in 2009 as compared to 2008, notwith-
standing increased production volumes.
CAPITAL ExPENDITuRES
Total capital expenditures in 2009 were $101.7 million as compared to $237.1 million in 2008.
The decrease in capital expenditures is a direct result of the Corporation’s response to the drop in
commodity prices in the latter part of 2008 and throughout 2009. Birchcliff spent approximately
$34.2 million of capital in excess of cash flow in 2009 as compared to $105.6 million in 2008.
Of the total capital spent in 2009, approximately $41.7 million was directed to the construction of
Phase I of the Pouce Coupe South Natural Gas Plant (the “PCS Gas Plant”) and related Montney/
Doig horizontal wells that will be tied into this plant. Therefore, 41% of the total capital spent in
2009 has no associated production until the end of April 2010. The PCS Gas Plant will provide
Birchcliff with greater control over its future production growth and an opportunity to reduce its
operating costs.
TOTAL DEBT
The Corporation’s total debt (including working capital deficit) decreased by 11% to $221.5
million at December 31, 2009 from $249.9 million at December 31, 2008. This decrease is largely
due to net proceeds from the June 30, 2009 equity financing described below which were used to
reduce the Corporation’s outstanding credit facilities in 2009. The decrease in total debt was offset
by an increase in capital spending in excess of cash flow during 2009.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
2 9
> MANAGEMENT’S DISCuSSION & ANALySIS
MAJOR TRANSACTIONS
AFFECTING FINANCIAL RESuLTS
n On March 14, 2008, the Corporation completed a bought deal equity financing whereby it
issued 1,522,843 flow-through common shares at a price of $9.85 per flow-through share and
14,375,000 common shares at a price of $8.00 per common share for total gross proceeds of
$130 million and net proceeds of approximately $123 million. Proceeds of the offering were
used to retire the $100 million syndicated non-revolving credit facility used for the Worsley
Acquisition (the “Acquisition Facility”) and to reduce the amount outstanding under the
Corporation’s revolving credit facility.
n On May 21, 2009, the Corporation established a new $50 million non-revolving term credit
facility (the “Term Facility”) with a maturity date of May 21, 2010. The Corporation’s use of this
facility is subject to consent of the bank syndicate at the time of draw-down.
n On May 21, 2009, the Corporation amended its credit agreement with its bank syndicate which
increased its existing revolving credit facilities to an aggregate limit of $255 million from $240
million and extended the conversion date of those facilities until May 21, 2010. The revolving
credit facilities consist of an extendible revolving term credit facility with an authorized limit
of $235 million (the “Syndicated Credit Facility”) and an extendible revolving working capital
facility with an authorized limit of $20 million (the “Working Capital Facility”).
n On June 30, 2009, the Corporation completed an equity financing (the “Equity Financing”)
comprised of a bought deal equity offering (the “Bought Deal Offering”) whereby it issued
8,000,000 common shares at a price of $6.20 per share for gross proceeds of $49.6 million and a
private placement (the “Private Placement”) with its major shareholder whereby it issued
2,000,000 common shares at a price of $6.20 per share for gross proceeds of $12.4 million, for
total gross proceeds of $62 million. The net proceeds of the Equity Financing were $59.3 million.
n On January 15, 2010, the bank syndicate extended the maturity date of the $50 million Term
Facility from May 21, 2010 to May 21, 2011. Consent was also received from the bank syndicate
in January 2010 which allows the Corporation to draw the full amount of this facility.
LIquIDITy AND BANK DEBT
WORKING CAPITAL
The Corporation’s working capital deficit (current assets minus current liabilities) decreased to
$20.3 million at December 31, 2009 as compared to a $38.3 million working capital deficit at
December 31, 2008. The year over year decrease was a result of a reduced capital expenditure
program in the fourth quarter of 2009 as compared to 2008. The working capital deficit at the end
of 2009 is largely comprised of costs incurred for construction of Phase I of the PCS Gas Plant and
related infrastructure.
3 0
Birchcliff manages
its working capital
deficit using its
cash flow and
advances under
its credit facilities.
At December 31, 2009, the major component (48%) of Birchcliff’s current assets is cash to be
received from its marketers in respect of December 2009 production which was subsequently
received in January 2010. In contrast, current liabilities largely consisted of trade payables (50%)
and accrued capital and operating costs (38%).
Birchcliff manages its working capital deficit using its cash flow and advances under its credit
facilities. The Corporation’s working capital deficit does not reduce the amount available under
the Corporation’s credit facilities which have a combined limit of $305 million at December 31,
2009 (2008 – $240 million). The Corporation did not have any liquidity issues with respect to the
operation of its petroleum and natural gas business in 2009 and 2008.
BANK DEBT
The amount drawn under the Corporation’s credit facilities decreased to $206.4 million at
December 31, 2009, with an aggregate limit of $305 million as compared to $215.2 million drawn
at December 31, 2008, when the aggregate limit was $240 million. The drawn amount excludes
any amounts related to unamortized prepaid interest, deferred financing fees and letters of credit
that have not been drawn upon. The decrease in credit facilities from 2008 was a result of the net
proceeds from the Equity Financing used to repay the debt; and was mitigated by an increase in
capital expended during 2009 in excess of cash flow during that same period and from a reduc-
tion in the working capital deficit at December 31, 2009 as compared to 2008.
The following table shows the Corporation’s total available credit under its credit facilities at
December 31, 2009 and 2008:
($000’s)
Maximum borrowing base limit:
Working capital facility
Syndicated credit facility
Term credit facility (2)
Principal amount:
Working capital facility (1)
Syndicated credit facility
Term credit facility (2)
Total unused credit at December 31,
2009
2008
20,000
235,000
50,000
305,000
(17,125)
(192,000)
–
(209,125)
95,875
20,000
220,000
–
240,000
(15,970)
(201,000)
–
(216,970)
23,030
(1) Included in the Working Capital Facility at December 31, 2009 are outstanding letters of credit issued to various service providers in the
amount of $2.7 million (2008 – $1.8 million). At December 31, 2009, the letters of credit were undrawn.
(2) Birchcliff did not request a draw-down of the $50 million Term Facility in 2009 and as a result no amounts were outstanding on this
facility at December 31, 2009. This facility did not exist at December 31, 2008.
At December 31, 2009, the Corporation’s aggregate borrowing base limit on its credit facilities was
$305 million (2008 – $240 million) of which $95.9 million (2008 – $23.0 million) in total unused
credit was available at the end of the year to fund short term and long term obligations. The
Corporation’s credit facilities are subject to a semi-annual review of the borrowing base limit
which is directly impacted by the value of the oil and natural gas reserves.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
3 1
> MANAGEMENT’S DISCuSSION & ANALySIS
The following table lists the contractual maturities of the Corporation’s estimated financial liabili-
ties at December 31, 2009:
($000’s)
Accounts payable and accrued liabilities
Revolving credit facilities (1)
Office leases (2)
Transportation and processing
Total financial liabilities
< 1 yEAR
54,731
–
3,214
1,032
58,977
1 – 2 yEARS
–
–
3,214
6,802
10,016
3 – 5 yEARS
–
206,387
9,885
20,023
236,295
THEREAFTER
–
–
9,716
4,364
14,080
(1) The revolving credit facilities consist of $14.4 million drawn on the Working Capital Facility and $192 million drawn on the Syndicated
Credit Facility at December 31, 2009.
(2) The Corporation is committed under an operating lease relating to its office premises, beginning December 1, 2007 and expiring on
November 30, 2017. Birchcliff does not presently use all of the leased premises and has sublet approximately 40% of the excess space to
an arms’ length party on a basis that recovers all of the rental costs for the first five years. The Corporation is also committed to March
29, 2011 under an operating lease for another office premises that it does not use and has sublet to an arm’s length party on a basis that
recovers all of its rental costs.
The financial covenants applicable to the Corporation’s credit facilities include a review of earn-
ings before interest, taxes, stock-based compensation, depletion, depreciation and amortization
(“EBITDA”) to interest coverage ratio which is calculated quarterly. The following table shows the
EBITDA to interest coverage ratio at December 31, 2009 and 2008:
REquIRED
>3.5
2009
ACTuAL
7.6
REquIRED
>3.5
2008
ACTuAL
13.8
Annualized EBITDA to interest coverage (1)
(1) Annualized EBITDA is defined as earnings before interest, taxes, stock-based compensation, depletion, depreciation and amortization
and is calculated on a trailing twelve month basis.
The Corporation was compliant with all financial covenants under its credit facilities throughout
2009 and 2008 and continues to be compliant with such covenants at the date hereof.
CASH FLOW FROM OPERATIONS
Cash flow generated by the Corporation in 2009 was $67.5 million ($0.57 per basic share) as
compared to $131.5 million ($1.21 per basic share) in 2008. The 49% decrease in cash flow was
mainly due to lower average commodity prices realized in 2009. However, this decrease was
mitigated by higher average petroleum and natural gas production volumes as a result of the
continued drilling success on its two resource plays in 2009. Future cash flow will be dependent
mainly on production levels and commodity prices.
The following table sets forth management’s estimates of the sensitivity of cash flow expected
in 2010 as a result of changes in petroleum and natural commodity prices, US – Canadian dollar
exchange rate, and interest prime rate:
SENSITIVITy (1)
WTI oil price
AECO daily natural gas spot price
CDN$ – US$ exchange rate
Canadian prime interest rate
VARIANCE IN
SENSITIVITy
US$1.00/bbl
CDN $0.10/mcf
CDN $0.01
1%
VARIANCE IN
ANNuAL CASH FLOW
CDN$ Millions
$1.3
$1.7
$1.9
$2.5
(1) These sensitivities assume that all other variables remain constant. Price sensitivities ignore the impact of the sliding scale royalty
calculation and the effect this has on the effective royalty rate.
3 2
OuTSTANDING SHARE DATA
The common shares of Birchcliff are the only class of shares outstanding and at March 12, 2010
there were 124,295,735 common shares outstanding. Birchcliff’s common shares began trading on
the TSX Exchange on July 21, 2005 under the symbol “BIR” and were at the same time de-listed from
the TSX Venture Exchange where they were trading under the same symbol prior to such time.
Birchcliff’s common shares are included in the Standards and Poor’s S&P/TSX Composite Index. The
following table summarizes the common shares issued during 2009 and 2008:
Balance at December 31, 2007
Issue of common shares (1)
Issue of common shares upon exercise of options
Issue of common shares upon exercise of warrants
Balance at December 31, 2008
Issue of common shares (2)
Issue of common shares upon exercise of options
Balance at December 31, 2009
COMMON SHARES
94,554,269
15,897,843
1,133,925
809,933
112,395,970
10,000,000
1,419,032
123,815,002
(1) Issued 1,522,843 flow-through shares and 14,375,000 common shares on March 14, 2008. Proceeds of the equity offering were used to
retire the $100 million Acquisition Facility used for the purchase of the Worsley properties.
(2) Issued under the Bought Deal Equity Offering of 8,000,000 common shares and the Private Placement of 2,000,000 common shares on
June 30, 2009.
RESuLTS OF OPERATIONS
PETROLEuM AND NATuRAL GAS REVENuE
Petroleum and natural gas (“P&NG”) revenues totaled $41.9 million ($43.32 per boe) for the three
month Reporting Period and $150.7 million ($36.80 per boe) for the twelve month Reporting
Period as compared to $51.0 million ($48.13 per boe) and $248.4 million ($66.90 per boe) for the
Comparable Prior Periods. The following table details Birchcliff’s petroleum and natural gas revenue
production and sales prices by category for the Reporting Periods and the Comparable Prior Periods:
THREE MONTHS ENDED
DECEMBER 31, 2009
THREE MONTHS ENDED
DECEMBER 31, 2008
Light oil (bbls)
Natural gas (mcf )
Natural gas liquids (bbls)
Total P&NG sales
Royalty revenue
Total P&NG revenue
21,015
19,092
1,716
41,823
85
41,908
TOTAL
REVENuE
AVERAGE
DAILy
($000’s) PRODuCTION
TOTAL
REVENuE
AVERAGE
DAILy
($000’s) PRODuCTION
AVERAGE
%
($/unit)
3,045 29 75.01
4.81
43,170 68
3 67.94
274
10,515 100 43.23
0.09
43.32
17,641
31,313
1,811
50,765
269
51,034
AVERAGE
%
($/unit)
3,244 28 59.10
47,687 69
7.14
3 59.27
332
11,524 100 47.88
0.25
48.13
TWELVE MONTHS ENDED
DECEMBER 31, 2009
TWELVE MONTHS ENDED
DECEMBER 31, 2008
Light oil (bbls)
Natural gas (mcf )
Natural gas liquids (bbls)
Total P&NG sales
Royalty revenue
Total P&NG revenue
68,916
74,754
6,369
150,039
630
150,669
TOTAL
REVENuE
AVERAGE
DAILy
($000’s) PRODuCTION
TOTAL
REVENuE
AVERAGE
DAILy
($000’s) PRODuCTION
AVERAGE
%
($/unit)
2,934 26 64.35
4.28
47,805 71
3 55.52
314
11,216 100 36.65
0.15
105,747
128,673
12,661
247,081
1,360
36.80 248,441
AVERAGE
%
($/unit)
2,989 29 96.68
40,746 67
8.63
4 93.97
368
10,148 100 66.53
0.37
66.90
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
3 3
> MANAGEMENT’S DISCuSSION & ANALySIS
Birchcliff receives
premium pricing
for its natural gas
due to its high
heat content.
The decrease in aggregate and per boe P&NG revenues in the three month Reporting Period as
compared to the same period in 2008 was largely due to lower average natural gas prices at the
wellhead and reduced production volumes in the fourth quarter of 2009, notwithstanding higher
average oil prices. The quarter over quarter decrease in production was mainly due to normal
production declines and an unexpected third party infrastructure curtailment.
The decrease in aggregate and per boe P&NG revenues in the twelve month Reporting Period as
compared to the same period in 2008 was due to significantly lower average commodity prices in
2009, notwithstanding higher average production volumes. The increase in average daily produc-
tion from 2008 is virtually all due to the Corporation’s drilling and operational success from its
resource play, notwithstanding normal production declines.
COMMODITy PRICES
Birchcliff sells all of its crude oil on a spot basis and virtually all of its natural gas production for
prices based on the AECO daily spot price. Birchcliff receives premium pricing for its natural gas
due to its high heat content. The following table details the average sales price and differential
received by Birchcliff for natural gas for the Reporting Periods and Comparable Prior Periods:
Average natural gas sales price ($/mcf )
Average AECO daily spot prices ($/mmbtu) (1)
Positive differential
THREE MONTHS ENDED
TWELVE MONTHS ENDED
DEC. 31, 2009 DEC. 31, 2008 DEC. 31, 2009 DEC. 31, 2008
8.63
8.16
0.47
4.28
3.96
0.32
4.81
4.49
0.32
7.14
6.70
0.44
(1) $1.00/mmbtu = $1.00/mcf based on a standard heat value mcf.
The price the Corporation receives for its production depends on a number of factors, including
AECO Canadian dollar spot market prices for natural gas, Canadian dollar Edmonton Par oil prices,
US dollar oil prices, the US – Canadian dollar exchange rate, and transportation and product qual-
ity differentials. Birchcliff regularly considers managing the risks associated with fluctuating spot
market prices for natural gas and US dollar oil prices and the US – Canadian dollar exchange rate.
Birchcliff currently has no fixed commodity price contracts or other hedge type contracts for its
natural gas and light oil production in 2009, but entered into the following risk management
contracts for its 2008 light oil production for the terms noted below:
TERM
January 1 – March 31, 2008 (1)
January 1 – March 31, 2008 (1)
January 1 – December 31, 2008
TyPE
Put
Call
Costless collar
quANTITy
1,000
1,000
1,000
WTI PRICE (uSD) (2)
$67.50
$81.40
$67.50 – $79.10
(1) Each contract was entered into separately on different dates but the two contracts essentially form a costless collar.
(2) Each contract is settled on the average of the daily NYMEX WTI US$ price.
All of the Corporation’s oil price risk management contracts outstanding in 2008 were settled at
December 31, 2008. As a result of the changes in the fair value of its oil price risk management
contracts during 2008, the Corporation recorded to income a realized oil price risk management
loss of $9.9 million and an unrealized oil price risk management gain of $6.8 million. Risk manage-
ment contracts are recorded at their fair values (mark-to-market) at each period end date, and
realized and unrealized gains or losses on risk management contracts are shown as a separate
category in net income.
3 4
The Corporation actively monitors the market to determine whether any additional commod-
ity price risk management contracts are warranted. At the date hereof, the Corporation has no
current intention to enter into further commodity price risk management contracts.
ROyALTIES
Birchcliff recorded a royalty expense of $5.2 million ($5.35 per boe) for the three month Reporting
Period and $15.3 million ($3.75 per boe) for the twelve month Reporting Period as compared to
$8.9 million ($8.38 per boe) and $41.5 million ($11.16 per boe) for the Comparable Prior Periods.
Royalties are paid to various government entities and other land and mineral rights owners. The
following table illustrates the Corporation’s royalty expense for Reporting Periods and Comparable
Prior Periods:
Oil & natural gas royalties ($000’s)
Oil & natural gas royalties ($/boe)
Effective royalty rate (%) (1)
(1) The effective royalty rate is calculated by dividing the total aggregate royalties into petroleum and natural gas revenues for the period.
TWELVE MONTHS ENDED
DEC. 31, 2009 DEC. 31, 2008 DEC. 31, 2009 DEC. 31, 2008
41,451
11.16
17%
15,342
3.75
10%
8,888
8.38
17%
5,172
5.35
12%
THREE MONTHS ENDED
The decrease in the effective royalty rate in the Reporting Periods was largely due to lower aver-
age commodity prices in 2009 as compared to 2008 and the effect these lower prices have on
the sliding scale royalty calculation. The effective royalty rate was also impacted by $3.7 million in
royalty credits received by the Corporation in 2009 relating to prior period gas cost allowance and
custom processing credits.
NEW ROyALTy AND DRILLING INCENTIVES
On July 9, 2009, the Government of Alberta approved an incentive royalty rate of 5% for the first
year of production from each new conventional oil or gas well brought on production after April
1, 2009 and before March 31, 2011 up to a maximum of 50,000 barrels of oil or 500 million cubic
feet of natural gas per well.
On September 15, 2009, the Government of Alberta approved a drilling royalty credit incentive
for new conventional oil and natural gas wells spud on or after April 1, 2009 and rig released
before April 1, 2011. Birchcliff is entitled to a royalty credit of $200 per meter drilled, up to a maxi-
mum of 50% of the aggregate royalties paid during that period. Included as a reduction of capital
at December 31, 2009 is an expected recovery of $6.3 million relating to this drilling incentive
program. At the date hereof, Birchcliff has received $4.3 million in drilling royalty credits from
the Crown with respect to its 2009 drilling program. The recovery of the drilling royalty credits is
dependent on future commodity prices and the effect these prices have on the aggregate royal-
ties paid by Birchcliff during the incentive period.
On March 11, 2010, the Alberta Government completed its Investment Competiveness Review.
As a result of the competitiveness review analysis, the existing Alberta Royalty Framework (“ARF”)
will be adjusted to better reflect current industry conditions. The adjusted ARF will be effective for
January 2011 production month. Some of the highlights include:
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
3 5
> MANAGEMENT’S DISCuSSION & ANALySIS
n The current 5% front-end royalty rate on natural gas and conventional oil will become a perma-
nent feature of the royalty system with the current time and volume limits as described above;
n The $200 per meter drilling royalty credit program will continue to remain in place as legislated
until March 31, 2011. Credits not used prior to January 1, 2011 and credits established by drill-
ing on or after that date until March 31, 2011 will be offset from net royalties calculated using
adjusted ARF rates;
n The maximum royalty rate for conventional and unconventional natural gas will be reduced
at higher price levels from 50% to 36%. For conventional oil, the maximum royalty will be
reduced from 50% to 40%;
n Continuation of the transitional royalty framework for oil and gas introduced in November,
2008 until December 31, 2013. Effective January 1, 2011, the government will not allow any
new wells to select the transitional royalty rates. But it will allow an operator of wells for which
transitional royalty rates have already been elected, an option to switch to the new rates effec-
tive January 1, 2011; and
n The royalty curves, an important element of the new regime, will be finalized and announced
by May 31, 2010.
Details of this adjustment have not been finalized by the Alberta Government. Birchcliff is currently
assessing the impact of the announced changes.
These incentives will provide material royalty relief with respect to Birchcliff’s operations. Birchcliff
intends to focus its capital spending program in large part on its Montney/Doig natural gas
resource play and Worsley light oil resource playsplay to maximize the incentives available from
these new Alberta royalty programs.
3 6
Recoveries
increased on
a per boe basis
in 2009 as
compared to
2008 mainly
due to higher
third party
compression
fees.
OPERATING COSTS
Operating costs were $7.4 million ($7.64 per boe) for the three month Reporting Period and
$36.4 million ($8.89 per boe) for the twelve month Reporting Period as compared to $11.3 million
($10.66 per boe) and $38.7 million ($10.41 per boe) for the Comparable Prior Periods. The follow-
ing table compares operating costs for the Reporting Periods and Comparable Prior Periods:
Field operating costs
Recoveries
Field operating costs, net of recoveries
Expensed workovers and other
Total operating costs
Field operating costs
Recoveries
Field operating costs, net of recoveries
Expensed workovers and other
Total operating costs
THREE MONTHS ENDED
DECEMBER 31, 2009
$/boe
8.13
(0.81)
7.32
0.32
7.64
Total ($000’s)
7,866
(789)
7,077
316
7,393
TWELVE MONTHS ENDED
DECEMBER 31, 2009
$/boe
9.63
(0.93)
8.70
0.19
8.89
Total ($000’s)
39,432
(3,830)
35,602
786
36,388
THREE MONTHS ENDED
DECEMBER 31, 2008
$/boe
10.72
(0.61)
10.11
0.55
10.66
Total ($000’s)
11,370
(647)
10,723
583
11,306
TWELVE MONTHS ENDED
DECEMBER 31, 2008
$/boe
10.53
(0.60)
9.93
0.48
10.41
Total ($000’s)
39,100
(2,213)
36,887
1,780
38,667
The $3.02 per boe decrease in total operating costs during the three month Reporting Period as
compared to the same period in 2008 was due to higher third party recoveries ($0.20 per boe),
lower costs of expensed workovers ($0.23 per boe), and reduced costs of supplies and services
($2.59 per boe).
The $1.52 per boe decrease in total operating costs during the twelve month Reporting Period
as compared to the same period in 2008 was due to higher third party recoveries ($0.33 per boe),
lower costs of expensed workovers ($0.29 per boe), and reduced costs of supplies and services
($0.90 per boe).
Recoveries increased on a per boe basis in 2009 as compared to 2008 mainly due to higher third
party compression fees. Supplies and service costs decreased in 2009 as compared to 2008 mainly
as a result of lower cost of power and fuel and reduced facility turnaround costs, notwithstanding
higher natural gas processing costs due to a proportionate increase in gas production.
TRANSPORTATION AND MARKETING ExPENSES
Transportation and marketing expenses were $2.4 million ($2.47 per boe) for the three month
Reporting Period and $9.8 million ($2.39 per boe) for the twelve month Reporting Period as
compared to $2.6 million ($2.43 per boe) and $9.9 million ($2.68 per boe) for the Comparable
Prior Periods. These costs consist primarily of transportation costs. The aggregate transporta-
tion and marketing cost in 2009 was lower than in 2008 due to a proportionate increase in gas
production, which has a much lower transportation cost than the trucking costs associated
with the Worsley light oil field.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
3 7
> MANAGEMENT’S DISCuSSION & ANALySIS
GENERAL AND ADMINISTRATIVE ExPENSE
Net General and Administrative (“G&A”) expenses for the three and twelve month Reporting
Periods were $3.4 million ($3.54 per boe) and $11.4 million ($2.77 per boe) as compared to $2.6
million ($2.49 per boe) and $6.5 million ($1.75 per boe) for the Comparable Prior Periods.
The components of G&A for the Reporting Periods and Comparable Prior Periods are as follows:
Salaries, benefits and consultants
Other
G&A expense, gross
Overhead recoveries
Capitalized overhead
G&A expense, net
G&A expense, net per boe
Salaries, benefits and consultants
Other
G&A expense, gross
Overhead recoveries
Capitalized overhead
G&A expense, net
G&A expense, net per boe
THREE MONTHS ENDED
DECEMBER 31, 2009
%
77
23
100
(29)
(13)
58
($000’s)
4,513
1,362
5,875
(1,701)
(752)
3,422
$3.54
TWELVE MONTHS ENDED
DECEMBER 31, 2009
%
67
33
100
(26)
(11)
63
($000’s)
11,849
5,945
17,794
(4,540)
(1,901)
11,353
$2.77
THREE MONTHS ENDED
DECEMBER 31, 2008
%
78
22
100
(40)
(14)
46
($000’s)
4,401
1,255
5,656
(2,239)
(778)
2,639
$2.49
TWELVE MONTHS ENDED
DECEMBER 31, 2008
%
64
36
100
(49)
(11)
40
($000’s)
10,414
5,850
16,264
(7,892)
(1,859)
6,513
$1.75
The aggregate and per boe net G&A increased in the Reporting Periods largely due to lower
overhead recoveries which resulted from a decrease in capital expended in 2009 as compared to
2008. Capital expenditures decreased by 25% and 57% in the three and twelve month Reporting
Periods, respectively, from $58.9 million and $237.1 million in the Comparable Prior Periods.
The capitalization of costs in the “overhead recoveries” category reflects an industry standard
charge per Authorization For Expenditure to capitalize engineering, land, accounting and opera-
tions time spent on capital projects, whereas the “capitalized overhead” category reflects a portion
of costs relating to Birchcliff’s exploration and geology department.
INTEREST ExPENSE
Interest expense was $2.6 million ($2.72 per boe) and $10.3 million ($2.52 per boe) for the three
and twelve month Reporting Periods as compared $2.3 million ($2.17 per boe) and $10.3 million
($2.78 per boe) for the Comparable Prior Periods. The aggregate interest expense in 2009 was
increased by higher pricing margins (that are used to determine Birchcliff’s effective interest
rate) that became applicable upon the establishment of the Corporation’s increased revolving
credit facilities on May 21, 2009 and was decreased by a reduction in the amounts drawn under
the Syndicated Credit Facility. In 2008, the Corporation’s interest expense included costs related
to the $98.8 million non-revolving Acquisition Facility used to purchase the Worsley properties
which was outstanding for most of the first quarter of 2008. The year over year decrease in interest
expense per boe was due to higher production volumes in 2009 as compared to 2008.
3 8
The year over
year decrease in
interest expense
per boe was due to
higher production
volumes in 2009 as
compared to 2008.
At December 31, 2009, the effective rate applicable to the Working Capital Facility was 4.8% as
compared to 4.7% at the end of 2008. The overall effective interest rate applicable to the bankers’
acceptances in the Syndicated Credit Facility was 4.2% and 4.0% in the three and twelve Reporting
Periods as compared to 3.5% and 3.2% in the Comparable Prior Periods.
The Corporation’s average bank debt was approximately $191.9 million and $208.3 million in
the three and twelve month Reporting Periods as compared to $197.3 and $186.8 million in the
Comparable Prior Periods, calculated as the simple average of the month end amounts. Included
in average bank debt in 2008 was the non-revolving Acquisition Facility which was outstanding
for most of the first quarter of 2008.
DEFERRED FINANCING FEES
On May 21, 2009, the Corporation paid $625,000 in financing fees to establish the one year
non-revolving $50 million Term Facility and $1.35 million to extend the conversion date of the
revolving facilities to May 21, 2010. The Corporation amortized to income deferred financing
expense of $0.5 million ($0.51 per boe) and $1.2 million ($0.29 per boe) for the three and twelve
month Reporting Periods as compared to $NIL and $NIL for the Comparable Prior Periods.
DEPLETION, DEPRECIATION AND ACCRETION ExPENSE
Depletion, Depreciation and Accretion (“DD&A”) expenses for the three and twelve month
Reporting Periods were $15.9 million ($16.40 per boe) and $85.3 million ($20.83 per boe) as
compared to $23.9 million ($22.55 per boe) and $89.7 million ($24.14 per boe) for the Comparable
Prior Periods. The DD&A on an aggregate and per boe basis was lower in the Reporting Periods
largely due to the reduced cost of adding significant proved reserves during 2009.
The components of DD&A for the Reporting Periods and Comparable Prior Periods are as follows:
Depletion & depreciation
Accretion on asset retirement obligations
Total DD&A
Depletion & depreciation
Accretion for asset retirement obligations
Total DD&A
THREE MONTHS ENDED
DECEMBER 31, 2009
$/boe
15.80
0.60
16.40
Total ($000’s)
15,289
584
15,873
THREE MONTHS ENDED
DECEMBER 31, 2008
$/boe
22.17
0.38
22.55
Total ($000’s)
23,505
405
23,910
TWELVE MONTHS ENDED
DECEMBER 31, 2009
$/boe
20.40
0.43
20.83
Total ($000’s)
83,495
1,758
85,253
TWELVE MONTHS ENDED
DECEMBER 31, 2008
$/boe
23.75
0.39
24.14
Total ($000’s)
88,201
1,466
89,667
Depletion and depreciation expense is a function of the estimated proved reserve additions,
the associated future development capital required to recover those proved reserves, and the
cost of petroleum and natural gas properties in the full cost pool attributable to those proved
reserves. At December 31, 2009, the Corporation excluded from its full cost pool $44.9 million
(2008 – $49.7 million) of costs for undeveloped land acquired by Birchcliff and for unproved prop-
erties acquired relating to opportunities in the probable reserve category and potential drilling,
recompletion and workover opportunities which have not yet been assigned any reserves.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
3 9
> MANAGEMENT’S DISCuSSION & ANALySIS
PETROLEuM AND NATuRAL GAS PROPERTIES IMPAIRMENT TEST
The Corporation follows the full cost method of accounting which requires periodic review of
capitalized costs to ensure that they do not exceed the recoverable value of the petroleum and
natural gas properties and the fair value of the Corporation’s assets.
Birchcliff performed an impairment test at December 31, 2009 on its petroleum and natural gas
assets. Birchcliff determined its petroleum and natural gas assets were not impaired at December
31, 2009 and 2008. The assumptions used in the impairment test are discussed in this MD&A in the
“Critical Accounting Estimates” section.
STOCK-BASED COMPENSATION
Birchcliff accounts for its stock-based compensation awards, which includes stock options and
performance warrants, using the fair value method. Under this method, the Corporation records
compensation expense related to stock awards in the income statement over the vesting period.
The Corporation recorded a total non-cash stock-based compensation expense relating to all
stock awards of $1.8 million ($1.84 per boe) and $9.8 million ($2.40 per boe) for the three and
twelve month Reporting Periods as compared to $1.0 million ($0.93 per boe) and $5.0 million
($1.34 per boe) for the Comparable Prior Periods. In the year ended December 31, 2009, $3.1
million of the expense related to the extension of the expiration date of outstanding performance
warrants, while in 2008 performance warrants had a $NIL impact on the expense.
For the year ended December 31, 2009, the Corporation recorded $6.7 million (2008 – $5.0
million) of non-cash stock-based compensation expense relating to stock options. A summary of
the Corporation’s outstanding stock options during the year ended December 31, 2009 and 2008
is presented below:
Outstanding, December 31, 2007
Granted (1)
Exercised
Forfeited
Cancelled (2)
Outstanding, December 31, 2008
Granted (1)
Exercised
Forfeited
Outstanding, December 31, 2009
NuMBER
5,335,814
2,330,000
(1,133,925)
(202,668)
(5,000)
6,324,221
3,959,900
(1,419,032)
(1,154,836)
7,710,253
WEIGHTED AVERAGE
ExERCISE PRICE ($)
4.00
8.23
(3.74)
(4.75)
(3.75)
5.58
5.53
(3.74)
(6.18)
5.81
(1) Of the options issued in 2009, there remained outstanding options to purchase 3,485,400 common shares (2008 – 1,985,200 options) at
the end of the year.
(2) The cancellation of 5,000 vested stock options resulted in a cash-paid stock-based compensation expense of $20,000 in 2008. The
Corporation no longer makes cash payments for the cancellation of vested stock options. The cash-paid expense was included in the total
stock-based compensation expense in 2008.
4 0
On January 22, 2010, the Corporation issued 2,311,300 options to directors, officers, and employees
of Birchcliff at an exercise price of $9.72 per common share as a result of its annual compensation
review. At March 12, 2010 there were options to purchase 9,939,086 common shares outstanding.
At March 12, 2010, there were 2,939,732 performance warrants outstanding. On May 28, 2009,
the expiration date of the Corporation’s outstanding performance warrants was extended from
January 31, 2010 to January 31, 2015 (the “Extension”). The Corporation recorded a non-cash
stock-based compensation expense of $3.1 million relating to the Extension of the performance
warrants in 2009. This amount represents the fair value of the Extension determined by the differ-
ence between the fair value of the outstanding performance warrants with the expiration date of
January 31, 2015 and the fair value of the outstanding performance warrants with the expiration
date of January 31, 2010. The fair value in each case was estimated as at May 28, 2009 using the
Black-Scholes option-pricing model that takes into account: exercise price, expected life, current
price, expected volatility, expected dividends, and risk-free interest rates.
TAxES
Birchcliff recorded a future income tax expense of $1.1 million ($1.18 per boe) for the three month
Reporting Period and a recovery of $4.6 million ($1.12 per boe) for the twelve month Reporting
Period as compared to an expense of $2.0 million ($1.87 per boe) and $13.7 million ($3.69 per boe)
for the Comparable Prior Periods. A future income tax expense was recorded in the three month
Reporting Period mainly due to recovering petroleum and natural gas prices and a significant reduc-
tion of DD&A expense in that period which resulted in net earnings. A future income tax recovery
was recorded in the twelve month Reporting Period mainly due to declining commodity prices
throughout 2009 which resulted in net losses for the year ended December 31, 2009. Birchcliff did
not incur Part XII.6 taxes in 2009 as compared to a Part XII.6 recovery of $6,455 during 2008.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
4 1
> MANAGEMENT’S DISCuSSION & ANALySIS
CAPITAL ExPENDITuRES AND CAPITAL RESOuRCES
Capital expenditures totaled $101.7 million in 2009 as compared to $237.1 million in 2008. The
decrease in capital spent was in response to declining average commodity prices in the latter
part of 2008 and throughout 2009. In periods of low commodity prices, the Corporation closely
monitors its capital spending and cash flow to maximize the value of its asset base with the capital
it is able to prudently deploy.
CAPITAL ExPENDITuRES
The following table sets forth a summary of the Corporation’s capital expenditures incurred
during the Reporting Periods and Comparable Prior Periods:
Three months ended December 31, ($000’s)
Land
Seismic
Workovers and other
Drilling and completions (1)
Well equipment and facilities
Capitalized general and administrative expenses
Total finding and development costs (F&D)
Acquisitions, net
Total finding, development and acquisition costs (FD&A)
Administrative assets
Total capital expenditures
2009
2,768
796
2,732
16,043
20,902
752
43,993
285
44,278
90
44,368
2008
8,770
957
2,414
27,924
17,569
777
58,411
56
58,467
449
58,916
(1) Included in drilling and completions for the three months ended December 31, 2009 is an expected recovery of $2.9 million related to
the new Alberta Drilling Royalty Credit Program.
Twelve months ended December 31, ($000’s)
Land
Seismic
Workovers and other
Drilling and completions (1)
Well equipment and facilities
Capitalized general and administrative expenses
Total finding and development costs (F&D)
Acquisitions, net
Total finding, development and acquisition costs (FD&A)
Administrative assets
Total capital expenditures
2009
4,452
1,551
6,333
37,985
45,498
1,902
97,721
3,334
101,055
635
101,690
2008
25,616
4,503
9,096
125,719
58,467
1,858
225,259
10,369
235,628
1,451
237,079
(1) Included in drilling and completions for the twelve months ended December 31, 2009 is an expected recovery of $6.3 million related to
the new Alberta Drilling Royalty Credit Program.
4 2
CAPITAL RESOuRCES
The following table sets forth a summary of the Corporation’s capital resources for the Reporting
Periods and Comparable Prior Periods:
Three months ended December 31, ($000’s)
Cash generated by operations
Changes in working capital from operations
Asset retirement expenditures
Equity issues, net of issue costs
Increase (decrease) in revolving credit facilities
Changes in working capital from investing
Total capital resources
Twelve months ended December 31, ($000’s)
Cash generated by operations
Changes in working capital from operations
Asset retirement expenditures
Equity issues, net of issue costs
Decrease in non-revolving credit facility
Increase (decrease) in revolving credit facilities
Deferred financing fees paid
Changes in working capital from investing
Total capital resources
2009
20,900
(7,780)
(297)
1,929
18,303
11,313
44,368
2009
67,476
(10,051)
(606)
64,605
–
(9,826)
(1,975)
(7,858)
101,765
2008
24,627
4,747
(927)
–
30,590
(119)
58,918
2008
131,453
2,068
(1,082)
129,764
(98,830)
55,732
–
17,973
237,078
In periods of low commodity prices, the Corporation closely monitors
its capital spending and cash flow to maximize the value of its asset
base with the capital it is able to prudently deploy.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
4 3
> MANAGEMENT’S DISCuSSION & ANALySIS
SELECTED quARTERLy INFORMATION
quarters ended 2009
($000’s, except for production, share and per share amounts) DECEMBER 31, SEPTEMBER 30,
Petroleum and natural gas
production (boe/day)
Petroleum and natural gas commodity
price at wellhead ($ per boe)
Natural gas commodity price
at wellhead ($ per mcf )
Petroleum commodity price
at wellhead ($ per bbl)
10,515
43.23
75.01
10,552
33.32
70.00
4.81
3.20
JuNE 30,
MARCH 31,
11,313
12,513
33.79
36.48
3.75
5.27
63.84
49.33
34,917
2,118
–
37,035
5,485
(7,128)
(0.06)
(0.06)
20,026
0.18
0.18
41,398
(8,644)
–
32,754
18,395
(9,701)
(0.09)
(0.09)
14,354
0.13
0.13
41,908
(5,172)
–
36,736
44,368
1,616
0.01
0.01
20,900
0.17
0.17
32,446
(3,644)
–
28,802
33,442
(9,039)
(0.07)
(0.07)
12,196
0.10
0.10
837,108
201,230
221,521
554,561
796,338
182,589
199,346
549,239
819,142
219,361
179,649
535,917
800,959
228,867
253,544
496,276
123,815,002
134,464,987
123,267,436 122,807,637 112,542,635
134,049,987 134,732,322 124,618,156
123,538,213
126,358,921
122,914,069 112,887,812 112,457,321
124,523,458 113,817,095 112,457,321
Total petroleum and natural gas revenue
Total royalties
Total interest and other revenue
Total revenues, net
Total capital expenditures
Net income (loss)
Per share basic
Per share diluted
Cash generated by operations
Per share basic
Per share diluted
Book value of total assets
Revolving credit facilities
Total debt
Shareholders’ equity
Common shares outstanding
– end of period
Basic
Diluted
Weighted average common shares
outstanding
Basic
Diluted
4 4
quarters ended 2008
($000’s, except for production, share and per share amounts) DECEMBER 31, SEPTEMBER 30,
Petroleum and natural gas
production (boe/day)
Petroleum and natural gas commodity
price at wellhead ($ per boe)
Natural gas commodity price
at wellhead ($ per mcf )
Petroleum commodity price
at wellhead ($ per bbl)
11,524
47.88
59.10
10,000
115.95
73.44
7.14
8.47
JuNE 30,
MARCH 31,
9,583
83.58
10.93
9,470
64.83
8.35
121.39
94.72
73,273
(11,361)
–
61,912
37,487
9,776
0.09
0.08
41,676
0.37
0.36
719,292
148,922
163,378
488,579
56,192
(8,700)
2
47,494
51,518
3,828
0.04
0.04
27,264
0.28
0.27
699,567
133,035
169,614
475,453
51,034
(8,888)
–
42,146
58,916
(355)
–
–
24,627
0.22
0.22
814,823
211,586
249,862
507,371
67,942
(12,502)
–
55,440
89,158
16,649
0.15
0.14
37,886
0.34
0.33
774,794
180,995
214,642
506,742
112,395,970
121,659,923
112,395,970 112,375,970 111,863,089
121,451,823 121,270,357 121,175,691
112,395,970
112,801,866
98,852,346
112,386,829 112,234,676
116,859,500 117,074,630 102,589,422
Total petroleum and natural gas revenue
Total royalties
Total interest and other revenue
Total revenues, net
Total capital expenditures
Net income (loss)
Per share basic
Per share diluted
Cash generated by operations
Per share basic
Per share diluted
Book value of total assets
Revolving credit facilities
Total debt
Shareholders’ equity
Common shares outstanding
– end of period
Basic
Diluted
Weighted average common shares
outstanding
Basic
Diluted
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
4 5
> MANAGEMENT’S DISCuSSION & ANALySIS
DISCuSSION OF quARTERLy RESuLTS
Birchcliff’s average quarterly production in the fourth quarter of 2009 was 10,515 boe/day, which
is less than 1% decrease from 10,552 boe/day in the third quarter of 2009 and a 9% decrease from
11,524 boe/day in the fourth quarter of 2008. The decrease from the fourth quarter of 2008 was
due to normal production declines, facility downtime relating to scheduled plant turnarounds,
and an unexpected third party infrastructure curtailment.
Birchcliff spent $44.4 million on capital during the fourth quarter of 2009 as compared to $33.4
million in the third quarter of 2009 and $58.9 million during the fourth quarter of 2008. The
increase from the third quarter of 2009 was largely due to capital spent on processing facilities
and infrastructure. Of the $44.4 million in capital expended, approximately $23.4 million (53%)
was related to the construction of Phase I of the PCS Gas Plant project. The operating and produc-
tion benefits associated with the capital spent on Phase I of the PCS Gas Plant project will be
realized when the gas plant is operating at full capacity by the end of April 2010.
Cash flow generated by the Corporation in the fourth quarter of 2009 was $20.9 million, which
is a 71% increase from $12.2 million in the third quarter of 2009 and a 15% decrease from $24.6
million in the fourth quarter of 2008. The 71% increase in cash flow from the previous quarter was
largely due to higher average petroleum and natural gas wellhead prices realized by Birchcliff in
the fourth quarter of 2009. The 15% decrease in cash flow from the fourth quarter of 2008 was
largely attributed to lower average natural gas prices at the wellhead and decreased production
volumes in the fourth quarter of 2009, notwithstanding higher average oil prices.
Birchcliff recorded net income of $1.6 million in the fourth quarter of 2009 as compared to a net
loss of $9.0 million in the third quarter of 2009 and a net loss of $355,000 in the fourth quarter
of 2008. The increase in net earnings from the previous quarter was mainly a result of recovering
petroleum and natural gas prices and lower DD&A expense recorded in the fourth quarter of
2009. The DD&A expense decreased mainly due to the reduced cost of adding significant proved
reserves during 2009.
The weighted average basic common shares outstanding at the end of 2009 increased as
compared to 2008 mainly due to the issuance of 10 million common shares in the June 30, 2009
Equity Financing.
2010 OuTLOOK
CAPITAL ExPENDITuRES
The Board of Directors recently approved the Corporation’s 2010 capital spending program in
the amount of $182 million. Of the $182 million, approximately $67 million is budgeted for the
exploration and development of the Montney/Doig natural gas resource play which includes
related infrastructure and other projects; approximately $33 million is allocated to the Worsley
light oil resource play; approximately $19 million will be used to complete Phase I of the PCS Gas
Plant and related infrastructure; approximately $24 million is allocated for the Phase II expansion
of the PCS Gas Plant and related infrastructure; and approximately $39 million is planned for other
projects and sustaining capital and seed capital for new growth opportunities.
4 6
Birchcliff has
a very strong
asset base with
its two main
resource plays,
the Montney/
Doig natural gas
resource play and
the Worsley light
oil resource play.
PRODuCTION
Phase I of the PCS Gas Plant is expected to add 30 mmcf/day of processing capacity by the end of
April 2010, increasing production to approximately 14,000 boe/day.
Birchcliff’s 2010 exit production rate is expected to range between 17,000 and 19,000 boe/day,
assuming that the Phase II expansion of the PCS Gas Plant will reach full operating capacity in
December 2010. The Phase II expansion of the PCS Gas Plant is expected to increase processing
capacity from 30 to 60 mmcf/day in December 2010, adding 3,500 boe/day net to Birchcliff.
CASH FLOW AND BANK DEBT
The Corporation’s operating cash flow and available credit facilities will be used to fund the $182
million capital spending program in 2010. At December 31, 2009, the Corporation had $95.9
million in total unused credit facilities available to fund future capital expenditures. Birchcliff
expects that its aggregate credit facilities will increase or remain at $305 million given the large
increase in proved and probable reserves additions in 2009. The annual review of the Corporation’s
borrowing base limit will occur in the second quarter of 2010 and the borrowing base limit will
depend largely on the bank syndicate’s expectation of future commodity prices.
The Corporation intends to finance its oil and natural gas business primarily through cash gener-
ated from operations, its working capital, and available credit from its credit facilities. Should
commodity prices deteriorate in 2010, Birchcliff will adjust its capital spending to ensure that it
does not exceed its credit capacity. Management expects that in 2010 Birchcliff’s working capital
deficiency will be slightly higher than in 2009 as a result of increased capital spending. However,
the Corporation may also issue shares or renegotiate the terms of its credit facilities to fund its
capital spending program if management determines the assets it is acquiring or the projects it is
drilling are of high quality. Management expects to be able to continue to raise additional equity
and debt financing sufficient to meet both its short-term and long-term growth requirements
in the current environment. Birchcliff is now at such a size that it anticipates it will not require
additional equity except to fund a significant acquisition or to significantly increase its capital
spending beyond its cash flow.
The Corporation does not foresee any liquidity issues with respect to the operation of its petroleum
and natural gas business in 2010 and expects to meet its future obligations as they become due.
RESOuRCE PLAyS
Birchcliff has a very strong asset base with its two main resource plays, the Montney/Doig natural
gas resource play and the Worsley light oil resource play. These properties provide the Corporation
with a long term and operationally reliable cash flow base, the level of which is primarily depen-
dent on commodity prices. The construction of the 100% owned PCS Gas Plant is expected to
enhance the value of the Montney/Doig resource play by increasing production growth, reduc-
ing operating costs, and increasing strategic control over Birchcliff’s core area. The Corporation
anticipates that both Phases I and II will be brought online during 2010 for a total throughput
capacity of 60 mmcf/day. Birchcliff is currently considering the potential Phase III expansion of the
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
4 7
> MANAGEMENT’S DISCuSSION & ANALySIS
PCS Gas Plant which would result in an additional 60 mmcf/day for a total processing capacity
of 120 mmcf/day. The extensive portfolio of development opportunities on these properties will
not expire in the near term and provides low risk long life future production additions that are
readily available with the investment of additional capital. Commodity prices will affect cash flow
and thus will dictate the pace at which Birchcliff invests in its resource plays and the rate at which
its production will grow. Birchcliff has a long term view to the development of its resource plays
and therefore short term commodity prices will not affect the quality or the long term value of
the Corporation’s asset base.
MERGERS & ACquISITIONS
The Corporation continues to review potential property acquisitions and dispositions, joint
venture opportunities, and corporate mergers and acquisitions with the intention of completing
such a transaction if acceptable terms can be negotiated. As a result, Birchcliff may at any time be
involved in negotiations with other parties in respect of property acquisitions and dispositions,
joint venture opportunities, and corporate mergers and acquisition opportunities.
DISCLOSuRE CONTROLS AND PROCEDuRES
The Corporation has established and maintains disclosure controls and procedures that have
been designed by, or under the supervision of, the Corporation’s Chief Executive Officer and the
Chief Financial Officer (“Certifying Officers”) to provide reasonable assurance that information
required to be disclosed by the Corporation in its annual filings, interim filings or other reports
filed or submitted by it under securities legislation is recorded, processed, summarized and
reported within the time periods specified in the securities legislation and to ensure that informa-
tion required to be disclosed by an issuer in its annual filings, interim filings or other reports filed
or submitted under securities legislation is accumulated and communicated to the Corporation’s
management, including its certifying officers, as appropriate to allow timely decisions regarding
required disclosure. Such disclosure controls and procedures are referred to as the “Disclosure
Controls and Procedures”.
The Certifying Officers have evaluated, or caused to be evaluated under the supervision, the effec-
tiveness of the Corporation’s Disclosure Controls and Procedures as at December 31, 2009 and
have concluded that such Disclosure Controls and Procedures were effective as at that date to
provide reasonable assurance that information required to be disclosed by the Corporation in its
annual filings, interim filings or other reports filed or submitted by it under securities legislation is
recorded, processed, summarized, and reported within the time periods specified in the securities
legislation and that information required to be disclosed by the Corporation in its annual filings,
interim filings or other reports filed or submitted under securities legislation is accumulated and
communicated to the Corporation’s management, including the Certifying Officers, as appropri-
ate to allow timely decisions regarding required disclosure.
It should be noted that while the Certifying Officers believe that the Corporation’s Disclosure
Controls and Procedures are effective to provide a reasonable level of assurance, they do not
expect that the Disclosure Controls and Procedures will provide an absolute level of assurance
or prevent all errors and fraud. A control system, no matter how well conceived, maintained and
4 8
operated, can provide only reasonable, not absolute, assurance that the objectives of the control
system are achieved.
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Corporation has established and maintains internal controls over financial reporting that have
been designed by, or under the supervision of, the Corporation’s Certifying Officers to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of finan-
cial statements for external purposes in accordance with GAAP applicable to the Corporation and
reasonable assurance that all assets are safeguarded and transactions are appropriately authorized
and recorded to facilitate the preparation of relevant, reliable and timely information. Such internal
controls over financial reporting are herein referred to as “ICFR”. The Certifying Officers have evalu-
ated, or caused to be evaluated under their supervision, the effectiveness of the Corporation’s ICFR
as required by National Instrument 52-109, Certification of Disclosure in Issuers’ Annual and Interim
Filings. Based on that evaluation, the Certifying Officers concluded that the Corporation’s ICFR was
effective at December 31, 2009 for the purposes described above. It should be noted that a control
system, including the Corporation’s, no matter how well conceived, maintained and operated, can
provide only reasonable, but not absolute, assurance that the objectives of the control system will
be met and it should not be expected that the ICFR will prevent all errors and fraud.
CHANGE IN ACCOuNTING POLICIES
On January 1, 2009 the Corporation prospectively adopted the following Canadian Institute of
Chartered Accountant (“CICA”) Handbook Sections:
n Section 3064 Goodwill and Intangible Assets, which defines the criteria for the recognition
of intangible assets. The adoption of this Section had no impact on the Corporation’s
Financial Statements.
n EIC-173 Credit Risk and the Fair Value of Financial Assets and Financial Liabilities, which provides
guidance on how to take into account credit risk of an entity and counterparty when determin-
ing the fair value of financial assets and financial liabilities, including derivative instruments. The
application of this EIC did not have a material effect on the Corporation’s Financial Statements.
n Section 3855 Financial Instruments – Recognition and Measurement and Section 3025 Impaired
Loans which were amended to converge with international standards (IAS 39 Financial
Instruments – Recognition and Measurement) for impairment of debt instruments by changing
the categories into which debt instruments are required or permitted to be classified. The
adoption of these Sections did not have an impact on the Corporation’s Financial Statements.
n Section 3862 Financial Instruments – Disclosures which was amended in June 2009 to include
enhanced disclosures related to the fair value of financial instruments and the liquidity risk
associated with financial instruments. The amendments will be effective for annual financial
statements for fiscal years ending after December 31, 2009. The amendments are consistent with
recent amendments to financial instrument disclosure standards in IFRS. The Corporation has
included the applicable disclosures related to this Section in Note 9 of the Financial Statements.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
4 9
> MANAGEMENT’S DISCuSSION & ANALySIS
During 2009,
Birchcliff made
significant
progress on
its IFRS
transition
plan.
INTERNATIONAL FINANCIAL REPORTING STANDARDS
IFRS TRANSITION PLAN
In February 2008, the CICA’s Accounting Standards Board confirmed that IFRS will replace
Canadian GAAP in 2011 for profit-oriented Canadian publicly accountable enterprises. Birchcliff
will be required to report its results in accordance with IFRS beginning in 2011. The Corporation
has developed a transition plan to complete the transition to IFRS by January 1, 2011, including
the preparation of 2010 required comparative information.
Birchcliff’s transition plan includes training and development throughout the organization, and
three key phases:
n Scoping and diagnostic phase
This phase involves performing a high level impact analysis to identify areas that may be affected
by the transition to IFRS. The results of this analysis are priority ranked according to complexity
and the amount of time required to assess the impact of changes in transitioning to IFRS.
n Impact analysis and evaluation phase
During this phase, items identified in the diagnostic phase are addressed according to the
priority levels assigned to them. This phase involves analysis of policy choices allowed under
IFRS and their impact on the financial statements. In addition, certain potential differences are
further investigated to assess whether there may be a broader impact to Birchcliff’s debt agree-
ments, business processes or management reporting systems. The conclusion of the impact
analysis and evaluation phase will require the Audit Committee of the Board of Directors to
review and approve all accounting policy choices as proposed by management.
n Implementation phase
This phase involves implementation of all changes approved in the impact analysis phase and
will include changes to information systems, business processes, modification of agreements
and training of all staff who are impacted by the conversion.
During 2009, Birchcliff made significant progress on its transition plan. The Corporation conducted
preliminary analysis of accounting policy alternatives and preliminarily drafted several of its IFRS
accounting policies. Broader business process and systems impacts have been considered for
significant areas of impact, with internal control requirements taken into account. IFRS education
sessions have been held with internal stakeholders.
Process and system changes will be implemented in early 2010 to ensure IFRS comparative data is
captured. Birchcliff’s IFRS accounting policies are expected to be finalized mid-2010. Quantification
of IFRS impacts will then be determined utilizing previously captured data. Communication of
impacts to external stakeholders is expected to occur in the latter half of 2010.
Birchcliff will continue to update its IFRS transition plan to reflect new and amended accounting
standards issued by the International Accounting Standards Board (“IASB”).
5 0
IFRS ACCOuNTING POLICIES
Birchcliff has completed its analysis of accounting policy alternatives and determined the areas
that will be most significantly affected by the adoption of IFRS. The areas identified as being signifi-
cant have the greatest potential impact to the Corporation’s financial statements or the greatest
risk in terms of complexity to implement. The most significant areas continue to include:
n Property, Plant and Equipment (“PP&E”), including;
– Transition on date of adoption of IFRS
– Pre-exploration costs
– Exploration and Evaluation (“E&E”) costs
– Depletion, depreciation and amortization
n Impairment testing
n Decommissioning liabilities (known as “asset retirement obligations” under GAAP)
n Stock-based compensation
n Income taxes
Each of these significant impact areas is discussed in more detail below.
Property, Plant & Equipment
PP&E will be one of the most significant areas impacted by the adoption of IFRS. Under Canadian
GAAP, Birchcliff follows the CICA’s guideline on full cost accounting, while IFRS has no equivalent
guideline. In order to facilitate the transition to IFRS by full cost accounting companies, the IASB
released additional exemptions for first-time adopters of IFRS in July 2009. Included in the amend-
ments is an exemption which permits full cost accounting companies to allocate their existing
PP&E net book value (full cost pool) over reserves to the unit of account level upon transition to
IFRS. Birchcliff expects to adopt this exemption and is currently evaluating whether to allocate
based on reserve volumes or values. Without this exemption, the Corporation would have been
required to retrospectively determine the carrying amount of oil and gas assets at the date of
transition, or use the fair value or revaluation amount as the new deemed cost under IFRS. By
using the exemption, the net book value of Birchcliff’s PP&E at the date of transition to IFRS will
be the same as it was under Canadian GAAP, subject to any potential IFRS impairments that are
recognized at the date of transition.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
5 1
> MANAGEMENT’S DISCuSSION & ANALySIS
In moving to IFRS, Birchcliff will be required to adopt different accounting policies for pre-explo-
ration activities, exploration and evaluation costs, DD&A and the accounting for gains and losses
on divestitures of properties.
Pre-exploration costs are costs incurred before the Corporation obtains the legal right to explore
an area. Under Canadian GAAP, these costs are capitalized, while under IFRS, these costs must be
expensed. At this time, Birchcliff does not anticipate that this accounting policy difference will
have a significant impact on the financial statements.
During the exploration and evaluation phase, Birchcliff capitalizes costs incurred for these projects
under Canadian GAAP. Under IFRS, the Corporation has the alternative to either continue capital-
izing these costs until technical feasibility and commercial viability of the project is determined,
or to expense these costs as incurred. At this time, Birchcliff’s IFRS accounting policy in relation to
E&E activities has not been finalized.
Under Canadian GAAP, Birchcliff calculates its depletion, depreciation and amortization rate at the
country cost centre level. Under IFRS, this rate will be calculated at a lower unit of account level.
At this time, the Corporation has not finalized its policy in this regard, and therefore the impact of
this difference in accounting policy is not reasonably determinable.
Full cost accounting under Canadian GAAP requires that gains or losses on divestitures of proper-
ties are only recognized when the disposal would affect the DD&A rate by 20 percent or more.
Under IFRS, there is no such exemption, and therefore Birchcliff will be required to recognize all
gains and losses on property divestitures. At this time, the impact of this difference in accounting
policy is not reasonably determinable.
As a result of the additional exemption released by the IASB in July 2009, the Corporation antici-
pates that all changes to its PP&E accounting policies will be adopted prospectively.
Impairment Testing
For the first step of the impairment test under Canadian GAAP, future cash flows are not discounted.
Under IFRS, the future cash flows are discounted. In addition, for PP&E, impairment testing is
currently performed at the country cost centre level, while under IFRS, it will be performed at a
lower level, referred to as a cash-generating unit. The impairment calculations will be performed
using either total proved or proved plus probable reserves. Canadian GAAP prohibits reversal
of impairment losses. Under IFRS if the conditions giving rise to impairment have reversed,
impairment losses previously recorded would be partially or fully reversed to eliminate write-
downs recorded. Birchcliff expects to adopt these changes in accounting policy prospectively.
At this time, the impact of accounting policy differences related to impairment testing is not
reasonably determinable.
Asset Retirement Obligation
Under Canadian GAAP, the Corporation recognizes a liability for the estimated fair value of the
future retirement obligations associated with PP&E. The fair value is capitalized and amortized over
the same period as the underlying asset. Birchcliff estimates the liability based on the estimated
costs to abandon and reclaim its net ownership interest in wells and facilities, including an estimate
5 2
for the timing of the costs to be incurred in future periods. These cash outflows are discounted
using a credit-adjusted rate. Changes in the net present value of the future retirement obliga-
tion are expensed through accretion as part of DD&A. Under IFRS, these liabilities are known as
“decommissioning liabilities” and are included in the scope of IAS 37 Provisions, Contingent Liabilities
and Contingent Assets. Decommissioning liabilities are calculated at each reporting period using
estimate of risk-adjusted future cash outflows discounted using a risk-free rate. Changes in the
net present value of the future retirement obligation are expensed through accretion as part
of DD&A. Due to the change in the discount rate from a credit-adjusted rate to a risk-free rate,
Birchcliff expects there may be an increase in the value of the decommissioning liability under IFRS
as compared to Canadian GAAP. However the difference, if any, is not known at this time.
Stock-based Compensation
IFRS 2 Share-Based Payments requires the expense related to share-based payments to be recog-
nized as the options vest; that is, for options that vest over a period of time, each tranche must
be treated as a separate option grant which accelerates the expense recognition in comparison
to Canadian GAAP which allows the expense to be recognized on a straight-line basis over the
period the options vest. While the carrying value for each reporting period will be different under
IFRS, the cumulative expense recognized over the life of the instrument under both methods will
be the same. Birchcliff expects to adopt this change in accounting policy prospectively. At this
time, the impact of this difference has not been determined.
Income Tax
In transitioning to IFRS, the carrying amount of Birchcliff’s tax balances will be directly impacted by
the tax effects resulting from changes required by the above IFRS accounting policy differences. Due
to the recent withdrawal of the exposure draft on IAS 12 Income Taxes in November 2009, Birchcliff
is still determining the impact of the revised standard on its IFRS transition. Therefore, at this time the
income tax impacts of our differences are not reasonably determinable.
CHANGES TO IFRS ACCOuNTING STANDARDS
Birchcliff’s analysis of accounting policy differences specifically considers the current IFRS stan-
dards that are in effect. The Corporation will continue to monitor any new or amended accounting
standards that are issued by the IASB, including assessing any impact of the new joint ventures
standard that the IASB expects to publish in the first quarter of 2010.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
Birchcliff does not anticipate that the transition to IFRS will have a significant impact on either
its internal controls over financial reporting, or its disclosure controls and procedures. As the
review of Birchcliff’s accounting policies is completed, an assessment will be made to determine
changes necessary for internal controls over financial reporting. For example, additional controls
and review will be implemented as necessary for the IFRS 1 changes such as the allocation of
Birchcliff’s PP&E as well as the process for reclassifying E&E expenditures from PP&E on transition.
This will be an ongoing process throughout 2010 to ensure that all changes in accounting policies
include the appropriate additional controls and procedures for future IFRS reporting requirements.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
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> MANAGEMENT’S DISCuSSION & ANALySIS
Throughout the transition, Birchcliff will assess stakeholders’ information requirements and will
ensure that adequate and timely information is provided so that all stakeholders remain apprised.
EDuCATION AND TRAINING
All of the individuals that are involved in financial reporting under Canadian GAAP have been
engaged and involved in the IFRS transition project since 2008, and will continue to be involved
in the IFRS transition throughout 2010 and 2011. Other individuals affected by the change from
Canadian GAAP to IFRS will be educated and trained during 2010 as Birchcliff identifies and calcu-
lates the specific dollar value of differences arising from the changes to our accounting policies.
IMPACTS TO OuR BuSINESS
Birchcliff does not expect that the adoption of IFRS in 2011 will have a significant impact or
influence on its business activities, operations or strategies.
CRITICAL ACCOuNTING ESTIMATES
Management is required to make judgments, assumptions and estimates in the application of
GAAP that may have a significant impact on the financial results of the Corporation. The following
summarizes the accounting estimates that are critical to determining Birchcliff’s financial results.
ESTIMATES OF P&NG RESERVES, DEPLETION
AND DEPRECIATION AND IMPAIRMENT TEST
The Corporation, at least annually, engages a qualified independent reserves evaluator to provide
an estimate of the Corporation’s year-end reserve volumes and associated future net revenues.
These estimates are herein referred to as the “Reserve Estimates”. To facilitate this process, the
Corporation provides relevant production, financial and technical data to the reserves evalua-
tor. The Corporation considers the Reserve Estimates to be critical estimates for the reasons
discussed below. For further details on the methodology and assumptions relating to the Reserve
Estimates, please see the Statement of Reserves Data and Other Oil and Gas Information filed by
the Corporation on SEDAR at www.sedar.com in accordance with National Instrument 51-101.
The Reserves Estimates relating to the volume of reserves are utilized in the calculation of deple-
tion and depreciation expense in the financial statements. The reserve volumes together with
the production volumes for the relevant period is utilized in calculating a depletion rate for the
Corporation. This depletion rate is used in conjunction with other accounting information to
determine the depletion and depreciation for that period.
The Reserve Estimates relating to future net revenues of reserves are utilized in a impairment test
calculation to determine if the costs capitalized under the full cost method of accounting have been
impaired and thus should be written down. This potential impairment is based on a determina-
tion of whether the carrying value of petroleum and natural gas properties exceeds the estimated
undiscounted future net cash flows from the proved reserves attributable to such properties.
Should the Reserve Estimates relating to the volume of reserves be materially incorrect, it could
have a material impact on the Corporation’s recorded amount of depletion and depreciation
5 4
Birchcliff does
not expect that
the adoption
of IFRS in 2011
will have a
significant
impact or
influence on
its business
activities,
operations
or strategies.
expense. Should the Reserves Estimates relating to the future net revenues of reserves be materially
incorrect it may have a material impact on the determination of whether or not the Corporation is
required to write down its petroleum and natural gas assets as a result of the impairment test. The
Reserve Estimates will from time to time change based on changes in the many factors underlying
the Reserve Estimates, which include but are not limited to: production performance, commod-
ity prices, amount and timing of projected capital expenditures, revised technical interpretations
based on activity and new information and the impact of additional activities not contemplated
in the preparation of the Reserve Estimates.
The Reserve Estimates are also relied upon by the Corporation’s lending syndicate in determining
the amounts available to the Corporation under its credit facilities. The lending syndicate relies on
all components of the Reserve Estimates and the underlying assumptions, except for the price
forecast. The lending syndicate in most instances utilizes its own price forecast. The availability of
these credit facilities is important to the Corporation because it relies on this source of capital to
fund its capital budget in excess of its internally generated funds. Should the Reserves Estimates
change materially and negatively, it may have a material adverse affect on the amount of capital
available to the Corporation under the credit facilities, which may impair the Corporation’s ability
to pursue its business plans.
ASSET RETIREMENT OBLIGATIONS
Birchcliff records a liability for the fair value of legal obligations associated with the retirement of
long-lived assets in the period in which they are incurred, normally when the asset is purchased
or developed. In the oil and gas industry, this retirement obligation is normally associated with
abandonment and reclamation costs relating to wells and facilities. On recognition of the asset
retirement obligation there is a corresponding increase in the carrying amount of the related
asset (an increase to petroleum and natural gas properties and equipment) which is recorded as
the asset retirement cost. The total future asset retirement obligation is an estimate at a point in
time based on the Corporation’s net ownership interest in all wells (producing, shut-in, suspended
and others) and facilities, the estimated cost to abandon and reclaim these wells and facilities, and
the estimated timing of the costs to be incurred in future periods. The total undiscounted amount
of the estimated cash flows required to settle the asset retirement obligation is the Corporation’s
best estimate at any given point in time that is subject to measurement uncertainty and any
change may potentially impact the liability materially.
Birchcliff attempts to mitigate this risk by reviewing all of its wells and facilities included in the
calculation and by utilizing the expertise of its reserve evaluation consultants in order to provide
the best estimates possible at the time.
CuRRENT INCOME TAxES
The Corporation is required to file a corporate income tax return annually and is required to pay any
income tax liability in a timely manner. As a result of this requirement, Birchcliff must estimate at
the end of each financial reporting period its potential current income tax liability for the particular
fiscal year in question. In order to determine its income tax liability for the fiscal year, the Corporation
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
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> MANAGEMENT’S DISCuSSION & ANALySIS
must estimate revenue, royalties other income, operating expenses, general and administrative
expenses, interest expense, capital expenditures and other relevant items. The Corporation makes
these estimates using its budget approved by the Board of Directors and adjusts it for any actual
history up to the time the estimate is made. The critical estimates in this process are production
rates, commodity prices, capital expenditures and the tax category of these capital expenditures
for the entire fiscal period. The risk of materially misstating the amount of current taxes payable is
highest in respect of the first quarter and reduces for each quarter thereafter as more actual data is
used and the estimated amounts apply to a shorter period.
To the extent that the estimate of current taxes payable varies materially from the actual amount
of taxes payable, the Corporation may be required to pay an unexpected material amount of taxes
which may adversely affect the Corporation’s financial condition. The most critical part of this esti-
mate is the estimate of the amount and tax category of capital expenditures that will be incurred
during the relevant year as those expenditures form the basis of any new tax pools that Birchcliff
can use as deductions in respect of that year. To the extent that a material amount of capital
allocated to exploration drilling which is 100% deductible in the fiscal year, is ultimately allocated
to development drilling which is only 30% deductible in the fiscal year, the Corporation’s current
taxes payable can change materially. There is a risk that wells that are drilled in an effort to encoun-
ter a new oil or natural gas accumulation can encounter an already discovered accumulation, thus
changing the tax category from exploration expenditure to development expenditure. This risk
is significant because many wells drilled by the Corporation are drilled in proximity to other wells
and the tax category of the expenditures is not finally determined until drilling is completed. To
mitigate this risk, the Corporation allocates its entire budget to tax categories based on discus-
sions with its operations group and reviews the continuing validity of these categorizations at the
end of each reporting period.
The determination of the Corporation’s income and other tax liabilities requires interpretation of
complex laws and regulations. All tax filings are subject to audit and potential reassessment after
the lapse of considerable time. Accordingly, the actual income tax liability may differ from that
estimated and recorded by Management.
RISK FACTORS & RISK MANAGEMENT
COMMODITy PRICE RISK
Birchcliff’s liquidity and cash flow are largely impacted by petroleum and natural gas commodity
prices. Currently, Birchcliff has not hedged any of its oil and natural gas production at the date
hereof and although it does monitor the hedge market, its strategy is to continue and to sell its
oil and natural gas production at the spot market rate. Management remains bullish about future
commodity prices and believes Birchcliff is well positioned to take advantage of a rising oil and
natural gas price environment. If there is a significant deterioration in the price it receives for oil
and natural gas, Birchcliff will consider reducing its capital spending or access alternate sources
of capital.
5 6
FOREIGN CuRRENCy ExCHANGE RISK
The Corporation is exposed to foreign currency fluctuations because its Canadian revenues are
strongly linked to United States dollar denominated benchmark prices.
PRODuCTION RISK
Birchcliff believes it has a stable production base from a large number of producing wells and
that an adverse event affecting production at any single well would not cause a liquidity issue.
Nonetheless, Birchcliff remains subject to the risk that production rates of its most significant wells
may decrease in an unpredictable and uncontrollable manner, which could result in a material
decrease in the Corporation’s overall production and associated cash flows.
The majority of Birchcliff’s production passes through owned or third party infrastructure prior
to it being ready for transfer at designated commodity sales points. There is a risk that should
this infrastructure fail and cause a significant portion of Birchcliff’s production to be shut-in and
unable to be sold, this could have a material adverse effect on Birchcliff’s available cash flow.
The Corporation mitigates this risk by purchasing business interruption insurance policies for its
significant owned infrastructure and contingent business interruption insurance policies for its
significant third party infrastructure.
RESERVE REPLACEMENT RISK
Oil and natural gas reserves naturally deplete as they are produced over time. The success of the
Corporation’s business is highly dependent on its ability to acquire and/or discover new reserves
in a cost efficient manner. Substantially all of the Corporation’s cash flow is derived from the sale of
the petroleum and natural gas reserves it accumulates and develops. In order to remain financially
viable, the Corporation must be able to replace reserves over time at a lesser cost on a per unit
basis than its cash flow on a per unit basis. The reserves and costs used in this determination
are estimated each year based on numerous assumptions and these estimates and costs may
vary materially from the actual reserves produced or from the costs required to produce those
reserves. In order to mitigate this risk, the Corporation employs a competent and experienced
team of petroleum and natural gas professionals and closely monitors the capital expenditures
made for the purposes of increasing its petroleum and natural gas reserves.
HEALTH, SAFETy & ENVIRONMENTAL RISK
Health, safety and environment risks influence the workforce, operating costs and the establish-
ment of regulatory standards. Birchcliff provides staff with the training and resources need to
complete work safely and effectively; incorporates hazard assessment and risk management as
an integral part of everyday operations; monitors performance to ensure its operations comply
with legal obligations and internal standards; and identifies and manages environmental liabili-
ties associated with its existing asset base. The Corporation has a site inspections program and
a corrosion risk management program designed to ensure compliance with environmental laws
and regulations. Birchcliff carries insurance to cover a portion of property losses, liability to others
and business interruption resulting from unusual events.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
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> MANAGEMENT’S DISCuSSION & ANALySIS
Continued access
to capital is
dependent on
Birchcliff’s ability
to continue to
perform at a level
that meets market
expectations.
Birchcliff is subject to the risk that the unexpected failure of its equipment used in drilling, completing
or producing wells or in transporting production could result in releases of fluids substances that
pollute or contaminate lands at or near its facilities which could result in significant liability to the
Corporation for costs of clean up, remediation and reclamation of contaminated lands. Birchcliff’s
policy with regards to the environment is to conduct all operations with due regard for the potential
impact on the environment. This policy is implemented by hiring skilled personnel and reminding
staff involved with operations of their responsibilities in this regard and by retaining expert environ-
ment advice and assistance to deal with environmental releases and remediation and reclamation
work where such expertise is needed.
REGuLATORy RISK
Government royalties, income tax laws, environmental laws and regulatory requirements can
have a significant financial and operational impact on the Corporation. As an oil and natural gas
producer, Birchcliff is subject to a broad range of regulatory requirements. Birchcliff does its best
to remain knowledgeable regarding changes to the regulatory regime under which it operates.
All of Birchcliff’s properties are currently located within the province of Alberta. There is a risk that
although the Corporation believes it is making an economic investment at the time all of the
upfront capital is invested in facilities or drilling, completing and equipping an oil or natural gas
well, the Government may at any point in the economic life of that project, expropriate without
compensation a portion of the expected profit under a new royalty/tax regulation or regime with
no grandfathering provisions. Without grandfathering provisions this may cause that particular
project to become uneconomic once the new royalties or taxes take effect. This type of possible
future government action is unpredictable and cannot be forecast by the Corporation.
COuNTERPARTy RISK
Birchcliff assumes customer credit risk associated with oil and gas sales and joint venture partici-
pants. To mitigate this risk, the Corporation performs regular reviews of receivables to minimize
default or non-payment and takes the majority of its production in kind. The Corporation also
puts in place security arrangements with respect to amounts owed to it by others when reviews
indicate it is appropriate to do so.
ACCESS TO CREDIT MARKETS
Due to the nature of the Corporation’s business it is necessary from time to time for the Corporation
to access other sources of capital beyond its internally generated cash flow in order to fund the
development and acquisition of its long term asset base. As part of this strategy the Corporation
obtains some of this necessary capital by incurring debt and therefore the Corporation is depen-
dent to a certain extent on continued availability of the credit markets.
The continued availability of the credit markets for Birchcliff is primarily dependent on the state
of the economies and the health of the banking industry in Canada and United States. There is
risk that should these economies and banking industry see unexpected and/or prolonged dete-
rioration, then Birchcliff’s access to credit markets may contract or disappear all together. The
5 8
Corporation tries to mitigate this risk by dealing with reputable lenders and tries to structure its
lending agreements to give it the most flexibility possible should these situations arise. However,
the situations that may give rise to credit markets tightening or disappearing are ultimately
uncontrollable by Birchcliff.
Birchcliff is also dependent to a certain extent on continued access to equity capital markets. The
Corporation is listed on the Toronto Stock Exchange and maintains an active investor relations
program. Continued access to capital is dependent on Birchcliff’s ability to continue to perform at
a level that meets market expectations.
CLIMATE CHANGE RISKS
North American climate change policy is evolving at both regional and national levels and recent
political and economic events may significantly affect the scope and timing of new climate
change measures that are ultimately put in place. Although it is not the case today, the Corporation
expects that some of its significant facilities may ultimately be subject to future regional, provin-
cial and/or federal climate change regulations to manage greenhouse gas (“GHG”) emissions.
The Specified Gas Emitters Regulation, which came into effect in Alberta in 2007, requires large
industrial facility emitters of GHG to reduce GHG emissions intensities by 12 per cent. Each of
Birchcliff’s facilities is below the 100,000 tonnes per year threshold that this regulation applies to.
The Government of Alberta released its climate change strategy which sets a target to reduce
GHG emissions in Alberta by 50% by 2050. Implementing carbon capture and storage technol-
ogy across industrial sectors is a large component of the strategy, along with energy-efficiency
measures, clean energy technologies, and expanding the use of renewable sources of energy. In
July 2008, the Alberta government announced that it will commit to $2 billion in capital invest-
ments to fund the carbon capture and storage technology.
The Canadian government has expressed interest in pursuing the development of a North
American cap and trade system for GHG emissions. In April 2007, the Government of Canada
released the Regulatory Framework for Air Emissions (“Framework”). The Framework outlines
short, medium and long-term objectives for managing both GHG emissions and air pollutants in
Canada. It is uncertain how the Framework will fit within a North American cap and trade system
and what the specific requirements for industrial emitters such as Birchcliff will be. Proposed regu-
lations have not yet been released and therefore it is uncertain whether the impacts from such
future regulations will be material to the Corporation.
In addition there are a number of regional initiatives being pursued by various provinces and US
states such as the Western Climate Initiative which involves seven western US states and Alberta
and three other Canadian provinces which are focused on the implementation of a cap and trade
program. The Corporation anticipates a number of its facilities may be affected by these initiatives,
however, the level of impact is uncertain as key details remain unknown.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
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> MANAGEMENT’S DISCuSSION & ANALySIS
FORWARD LOOKING STATEMENTS
This MD&A contains certain forward-looking statements and forward-looking information (hereinafter
collectively referred to as “forward-looking statements”) within the meaning of applicable Canadian
securities laws. These statements relate to future events or our future performance and are based upon
the Corporation’s current internal expectations, estimates, projections, assumptions and beliefs. All
statements other than statements of historical fact are forward-looking statements. In some cases,
words such as “plan”, “expect”, “project”, “intend”, “believe”, “anticipate”, “estimate”, “may”, “will”, “would”,
“potential”, “proposed” and other similar words, or statements that certain events or conditions “may” or
“will” occur, are intended to identify forward-looking statements.
Undue reliance should not be placed on these forward-looking statements, as there can be no assur-
ance that the plans, intentions or expectations upon which they are based will occur. By their nature,
forward-looking statements involve numerous assumptions and known and unknown risks and uncer-
tainties that the predictions, forecasts, projections and other forward-looking statements will not occur.
Although the Corporation 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. The Corporation
cannot guarantee future results, levels of activity, performance or achievements. Consequently, there is
no representation by the Corporation that actual results achieved will be the same in whole or in part as
those set out in the forward-looking statements. Such forward-looking statements in this MD&A speak
only as of the date of this MD&A.
In particular, this MD&A contains forward-looking statements pertaining to the following: drilling
inventory, drilling plans and timing of drilling, completion, re-completion and tie-in of wells; plans
for facilities construction and completion of construction and the timing and method of funding
thereof; productive capacity of wells, anticipated or expected production rates and anticipated dates
of commencement of production; drilling, completion and facilities costs; results of projects of the
Corporation; ability to lower costs borne by the Corporation; production growth expectations; timing
of development of undeveloped reserves; the tax horizon of the Corporation; the future performance
and characteristics of the Corporation’s oil and natural gas properties; oil and natural gas produc-
tion levels; the quantity of oil and natural gas reserves; planned capital expenditure programs; supply
and demand for oil and natural gas; commodity prices; the future impact of Canadian federal and
provincial governmental regulation on the Corporation; weighting of production between different
commodities; expected levels of royalty rates and incentives, operating costs, general administrative
costs, costs of services and other costs and expenses; expectations regarding the Corporation’s ability to
raise capital and to add to reserves through acquisitions, exploration and development; and treatment
under tax laws. With respect to such forward-looking statements, the key assumptions on which the
Corporation relies are: that future prices for crude oil and natural gas, future currency exchange rates
and interest rates and future availability of debt and equity financing will be at levels and costs that
allow the Corporation to manage, operate and finance its business and develop its properties and meet
its future obligations; that the regulatory framework in respect of royalties, taxes and environmental
matters applicable to the Corporation will not become so onerous as to preclude the Corporation from
viably managing, operating and financing its business and the development of its properties; and that
6 0
the Corporation will continue to be able to identify, attract and employ qualified staff and obtain the
outside expertise and specialized and other equipment and services it requires to manage, operate and
finance its business and develop its properties.
All such forward-looking statements necessarily involve risks associated with oil and gas exploration,
production and marketing which may cause actual results to differ materially from those anticipated
in the forward-looking statements. Some of those risks include: general economic conditions in Canada,
the United States and globally; industry conditions, including fluctuations in the price of oil and natural
gas; changes in governmental regulation of the oil and gas industry, including environmental regula-
tion; fluctuations in foreign exchange rates or interest rates; geological, technical, drilling and processing
problems and other difficulties in producing reserves; unanticipated operating events which can damage
facilities or reduce production or cause production to be shut in or delayed; failure to obtain regulatory
approvals in a timely manner; adverse conditions in the debt and equity markets; competition from
others for scarce resources; and other factors disclosed under “Risk Factors” in this MD&A.
Readers are cautioned that the foregoing list of factors is not exhaustive. The forward-looking state-
ments contained in this MD&A are expressly qualified by this cautionary statement. The Corporation
is not under any duty to update any of the forward-looking statements after the date of this MD&A to
conform such statements to actual results or to changes in the Corporation’s plans or expectations,
except as otherwise required by applicable securities laws.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
6 1
> MANAGEMENT’S REPORT
To the Shareholders of Birchcliff Energy Ltd.
The financial statements of Birchcliff Energy Ltd. were prepared by management within the
acceptable limits of materiality and are in accordance with accounting principles generally accepted
in Canada. Management is responsible for ensuring that the financial and operating information
presented in this annual report is consistent with that shown in the financial statements.
The financial statements have been prepared by management in accordance with the accounting
policies as described in the notes to the financial statements. Timely release of financial information
sometimes necessitates the use of estimates when transactions affecting the current accounting
period cannot be finalized until future periods. When necessary, such estimates are based on
informed judgments made by management.
Management has designed and maintains an appropriate system of internal controls to provide
reasonable assurance that all assets are safeguarded and financial records properly maintained to
facilitate the preparation of financial statements for reporting purposes.
Deloitte & Touche LLP, an independent firm of Chartered Accountants appointed by shareholders,
have conducted an examination of the corporate and accounting records in order to express their
opinion on the financial statements.
The Audit Committee, consisting of non-management directors, has met with representatives
of Deloitte & Touche LLP and management in order to determine if management has fulfilled its
responsibilities in the preparation of the financial statements. The Board of Directors has approved
the financial statements on the recommendation of the Audit Committee.
(signed) “A. Jeffery Tonken”
(signed) “Bruno P. Geremia”
A. Jeffery Tonken
President and Chief Executive Officer
Bruno P. Geremia
Vice President and Chief Financial Officer
March 12, 2010
6 2
Financial Statements
> AUDITORS’ REPORT
To the Shareholders of Birchcliff Energy Ltd.
We have audited the balance sheets of Birchcliff Energy Ltd. as at December 31, 2009 and 2008
and the statements of net income (loss), comprehensive income (loss) and retained earnings
(deficit) and cash flows for the years then ended. These financial statements are the responsibility
of the Corporation’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable assurance
whether the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly in all material respects, the financial
position of the Corporation as at December 31, 2009 and 2008 and the results of its operations
and its cash flows for the years then ended in accordance with Canadian generally accepted
accounting principles.
Deloitte & Touche LLP
Chartered Accountants
Calgary, Alberta
March 12, 2010
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
6 3
> BALANCE SHEETS
As at December 31, (000’s)
2009
2008
ASSETS
CURRENT
Cash
Accounts receivable (Note 9)
Prepaid and other
Deferred financing fees (Note 6)
Petroleum and natural gas
properties and equipment (Note 4)
LIABILITIES
CURRENT
Accounts payable and accrued liabilities
Revolving credit facilities (Note 7)
Asset retirement obligations (Note 11)
Future income taxes (Note 10)
Commitments (Note 15)
SHAREHOLDERS’ EQUITY
Share capital (Note 12)
Contributed surplus (Note 13)
Retained earnings (deficit)
140
29,665
4,635
34,440
245
802,423
837,108
54,731
54,731
201,230
24,713
1,873
541,593
20,315
(7,347)
554,561
837,108
65
29,836
3,031
32,932
–
781,891
814,823
71,208
71,208
211,586
21,223
3,435
477,482
12,984
16,905
507,371
814,823
See accompanying notes to the financial statements.
APPROVED BY THE BOARD
(signed) “Larry A. Shaw”
Larry A. Shaw
Director
(signed) “A. Jeffery Tonken”
A. Jeffery Tonken
Director
6 4
6 4
Financial Statements
> REPORT TO SHAREHOLDERS
>
STATEMENTS OF NET INCOME (LOSS),
COMPREHENSIVE INCOME (LOSS)
AND RETAINED EARNINGS (DEFICIT)
For the years ended December 31, (000’s)
2009
2008
REVENUE
Petroleum and natural gas
Royalties
Interest and other
Gain (loss) on risk management contracts (Note 9)
Realized
Unrealized
EXPENSES
Production
Transportation and marketing
General and administrative, net (Note 4)
Stock-based compensation (Note 13)
Depletion, depreciation and accretion (Notes 4 and 11)
Realized foreign exchange loss (Note 9)
Unrealized foreign exchange gain (Note 9)
Amortization of deferred financing fees (Notes 6 and 7)
Interest (Note 7)
150,669
(15,342)
–
135,327
–
–
135,327
36,388
9,799
11,353
9,844
85,253
–
–
1,200
10,311
164,148
INCOME (LOSS) BEFORE TAXES
(28,821)
TAXES
Other taxes (recovery)
Future income tax expense (recovery) (Note 10)
NET INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS)
RETAINED EARNINGS (DEFICIT),
BEGINNING OF PERIOD
RETAINED EARNINGS (DEFICIT),
END OF PERIOD
Net income (loss) per common share (Note 14)
Basic
Diluted
Weighted average common shares (Note 14)
Basic
Diluted
See accompanying notes to the financial statements.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
–
(4,569)
(4,569)
(24,252)
16,905
(7,347)
$(0.21)
$(0.21)
117,993,314
117,993,314
108,986,165
113,092,125
6 5
248,441
(41,451)
2
206,992
(9,859)
6,769
203,902
38,667
9,941
6,513
5,004
89,667
226
(24)
–
10,320
160,314
43,588
(7)
13,697
13,690
29,898
(12,993)
16,905
$0.27
$0.26
> STATEMENTS OF CASH FLOWS
For the years ended December 31, (000’s)
2009
2008
OPERATING
Net income (loss)
Adjustments for items not affecting cash:
Depletion, depreciation and accretion
Stock-based compensation
Unrealized risk management contracts gain
Unrealized foreign exchange gain
Amortization of deferred financing fees
Future income taxes expense (recovery)
Changes in non-cash working capital (Note 16)
Asset retirement expenditures (Note 11)
FINANCING
Decrease in non-revolving credit facility (Note 5)
Deferred financing fees paid
Increase (decrease) in revolving credit facilities
Issuance of common shares (Notes 12)
Share issue costs (Note 12)
INVESTING
Purchase of petroleum and natural gas
properties and equipment
Development of petroleum and natural gas
properties and equipment
Changes in non-cash investing working
capital (Note 16)
NET INCREASE (DECREASE) IN CASH
CASH, BEGINNING OF PERIOD
CASH, END OF PERIOD
Cash interest paid
Cash taxes paid
See accompanying notes to the financial statements.
6 6
(24,252)
85,253
9,844
–
–
1,200
(4,569)
67,476
(10,051)
(606)
56,819
–
(1,975)
(9,826)
67,300
(2,695)
52,804
(3,334)
(98,356)
(7,858)
(109,548)
75
65
140
29,898
89,667
4,984
(6,769)
(24)
–
13,697
131,453
2,068
(1,082)
132,439
(98,830)
–
55,732
136,676
(6,912)
86,666
(10,369)
(226,710)
17,973
(219,106)
(1)
66
65
10,311
–
10,320
254
Notes to the Financial Statements
Notes to the Financial Statements
For the years ended December 31, 2009 and 2008
For the years ended December 31, 2009 and 2008
1. NATURE OF OPERATIONS
Birchcliff Energy Ltd. (“Birchcliff” or the “Corporation”) was a private company, incorporated
under the Business Corporations Act (Alberta) on July 6, 2004 as 1116463 Alberta Ltd. The
name was changed from 1116463 Alberta Ltd. to Birchcliff Energy Ltd. on September 10,
2004. The address of the Corporation’s registered office is 500, 630 – 4th Avenue, S.W., Calgary,
Alberta, Canada T2P 0J9.
The Corporation is engaged in the exploration for and the development, production and
acquisition of, petroleum and natural gas reserves in Western Canada. Birchcliff trades on the
Toronto Stock Exchange under the symbol “BIR”. Birchcliff’s financial year end is December 31.
2. SIGNIFICANT ACCOUNTING POLICIES
The annual audited Financial Statements have been prepared by management in accordance
with Canadian Generally Accepted Accounting Principles (“GAAP”), within an acceptable
level of materiality, utilizing the framework of the accounting policies below. The Financial
Statements are expressed in Canadian (“CDN”) dollars.
a) Basis of accounting
The Corporation’s Financial Statements include the accounts of Birchcliff. There are no
subsidiary companies.
b) Revenue recognition
Revenue associated with sales of petroleum and natural gas are recorded when
the commodities are delivered and title passes to the purchaser. Revenue associated
with sales of petroleum and natural gas are recorded gross of transportation and market-
ing charges.
c) Joint venture activities
Substantially all of the Corporation’s exploration and production activities are conducted
jointly with others and, accordingly, the accounts reflect only the Corporation’s propor-
tionate interest in such activities.
d) Measurement uncertainty
The preparation of timely Financial Statements necessitates the use of estimates when
transactions affecting the current accounting period cannot be finalized until future peri-
ods. These estimates will affect assets, liabilities and the disclosure of contingent assets and
liabilities at the date of the Financial Statements, as well as revenues and expenses during
the reporting periods. Such estimates are based on informed judgments made by manage-
ment. Actual results could differ materially from those estimated.
Amounts recorded for depletion, depreciation and, asset retirement and amounts used
for impairment test calculations are based on estimates of petroleum and natural gas
reserves which include estimates of future commodity prices, future costs and other rele-
vant assumptions. The Corporation’s reserves are estimated and evaluated, at a minimum,
annually by an independent engineering firm. The provision for income taxes is based on
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
6 7
6 7
judgments in applying income tax law and estimates on the timing, likelihood and reversal
of temporary differences between the accounting and tax bases of assets and liabilities. By
their nature, these estimates are subject to measurement uncertainty and the impact of
changes in such estimates on the Financial Statements of future periods could be material.
e) Cash and cash equivalents
Cash and cash equivalents includes cash and highly liquid short-term investments having
a maturity date of not more than ninety days at the time of purchase.
f) Property, plant and equipment
Capitalized costs
The Corporation follows the full cost method of accounting whereby all costs relating
to the exploration, acquisition and development of petroleum and natural gas reserves
are capitalized. Such costs include land acquisition costs, geological and geophysical
expenses, production equipment, carrying charges of non-producing properties, costs of
drilling both productive and non-productive wells and corporate charges directly related
to acquisition, exploration and development activities. Proceeds from the sale of proper-
ties are applied against capitalized costs, with no gain or loss recognized, unless such a sale
would alter the rate of depletion and depreciation by 20% or more.
Depletion and depreciation
Depletion and depreciation of petroleum and natural gas properties and equipment,
together with the estimated future costs to be incurred in developing proved reserves,
are depleted or depreciated using the unit-of-production method based on the proved
reserves before royalties as estimated by independent engineers. Petroleum and natural
gas reserves and production are converted into equivalent units based upon estimated
relative energy content of six thousand cubic feet of natural gas to one barrel of oil.
The costs of undeveloped properties are excluded from the costs subject to depletion
and depreciation until it is determined whether proved reserves are attributable to
the properties.
Impairment
Petroleum and natural gas properties are evaluated each reporting period through an
impairment test to determine the recoverability of capitalized costs. The carrying amount
is assessed as recoverable when the sum of the undiscounted cash flows expected
from proved reserves plus the cost of unproved interests, net of impairments, exceeds
the carrying amount. When the carrying amount is assessed not to be recoverable, an
impairment loss is recognized to the extent that the carrying amount exceeds the sum of
the discounted cash flows from proved and probable reserves plus the cost of unproved
interests, net of impairments. Reserves are determined pursuant to National Instrument
51-101, Standards of Disclosures for Oil and Gas Activities. Unproved properties are assessed
at least annually to determine whether impairment has occurred.
6 8
Notes to the Financial Statements
For the years ended December 31, 2009 and 2008
Administrative assets
The Corporation records depreciation on its office furniture and equipment, which includes
computer equipment, on a straight-line basis using an expected useful life of four years.
g) Asset retirement obligations
The Corporation recognizes the estimated liability associated with future site reclamation
costs in the Financial Statements when a well or related asset is drilled, constructed or
acquired including facilities. Costs are estimated by management in consultation with
the Corporation’s engineers based on current costs and technology in accordance with
current legislation and industry practices. The obligation is initially measured at fair value,
and subsequently adjusted for the accretion of discount and any changes to the under-
lying cash flows. The asset retirement cost is capitalized to petroleum and natural gas
properties and equipment and amortized into earnings in depletion expense on a basis
consistent with depletion and depreciation. Actual site restoration and abandonment
expenditures are applied directly against the asset retirement obligation. The Corporation
reviews the obligation regularly such that revisions to the estimated timing of cash flows,
discount rates and estimated costs will result in an increase or decrease to the asset retire-
ment obligation.
h) Future income taxes
The Corporation accounts for its income taxes using the liability method. Under this method,
future income tax assets and liabilities are determined based on the differences between
the accounting and tax bases of assets and liabilities using substantively enacted tax rates
anticipated to apply in relevant future periods. The effect of a change in income tax rates on
future income tax assets and liabilities is recognized in the period of substantive enactment.
i) Stock-based compensation
The Corporation accounts for its stock-based compensation plans using the fair value
method to value stock options and performance warrants granted to officers, directors,
employees and consultants. Under this method, compensation cost attributed to stock
options and performance warrants (“stock awards”) granted is measured at fair value at
the grant date and expensed over the vesting period with a corresponding increase to
contributed surplus. Upon the exercise of stock awards, consideration paid together with
the amount previously recognized in contributed surplus is recorded as an increase to share
capital. The Corporation does not incorporate an estimated forfeiture rate for stock awards
that will not vest, but instead accounts for forfeitures as a change in estimate in the period
in which they occur. In the event that vested stock awards expire without being exercised,
previously recognized compensation costs associated with such awards are not reversed.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
6 9
j) Flow-through shares
The resource expenditure deductions for income tax purposes related to exploratory and
development activities funded by flow-through share arrangements are renounced to
investors in accordance with tax legislation. The Corporation records the carrying value
of the expenditures in property, plant and equipment as incurred and records the future
income taxes associated with the renunciation of expenditures with a corresponding
reduction to share capital.
k) Financial instruments
All financial instruments are initially recognized at fair value on the balance sheet. The
Corporation has classified each financial instrument into the following categories: “held for
trading” financial assets and financial liabilities; “loans or receivables”; and “other financial
liabilities”. Subsequent measurement of the financial instruments is based on their clas-
sification. The Corporation has made the following classifications:
n Cash and cash equivalents are classified as financial assets held for trading and are
measured at fair value. Gains and losses from revaluation are recognized in net income.
n Accounts receivable are classified as loans and receivables and are initially measured at
fair value.
n Revolving credit facilities, accounts payable and accrued liabilities are classified as
other liabilities and are initially measured at fair value.
l) Derivative financial instruments
Derivative financial instruments are used by the Corporation to manage economic
exposure to market risks relating to commodity prices. Birchcliff’s policy is not to utilize
derivative financial instruments for speculative purposes.
Derivative financial instruments that do not qualify as hedges, or are not designated as
hedges, are classified as held-for-trading and are recorded using the mark-to-market
method of accounting whereby instruments are recorded in the Balance Sheet as either
an asset or liability with changes in fair value recognized in net income.
m) Per share information
Per share information is computed using the weighted average number of common shares
outstanding during the period. Diluted per share information is calculated using the trea-
sury stock method, which assumes that any proceeds from the exercise of “in-the-money”
stock options or performance warrants plus the unamortized stock based compensation
expense amounts would be used to purchase common shares at the average market price
during the period. No adjustment to diluted income per share is made if the result of these
calculations is anti-dilutive.
n) Foreign currency translations
Monetary assets and liabilities of the Corporation that are denominated in foreign curren-
cies are translated into its reporting currency at the rates of exchange in effect at the
period end date. Any gains or losses are recorded in net income.
7 0
Notes to the Financial Statements
For the years ended December 31, 2009 and 2008
3. CHANGES IN ACCOUNTING POLICIES
On January 1, 2009 the Corporation adopted the following Canadian Institute of Chartered
Accountant (“CICA”) Handbook Sections:
n Section 3064 Goodwill and Intangible Assets, replacing Section 3062, Goodwill and Other
Intangible Assets and Section 3450, Research and Development Costs. Various changes have
been made to other sections of the CICA Handbook for consistency purposes. This Section
establishes standards for the recognition, measurement, presentation and disclosure of
goodwill subsequent to its initial recognition and of intangible assets by profit-oriented
enterprises. Standards concerning goodwill are unchanged from the standards included
in the previous Section 3062. The adoption of this Section did not have an impact on the
Corporation’s Financial Statements.
n EIC-173 Credit Risk and the Fair Value of Financial Assets and Financial Liabilities. In January
2009, the CICA issued EIC-173 which provides guidance on how to take into account credit
risk of an entity and counterparty when determining the fair value of financial assets and
financial liabilities, including derivative instruments. The application of this EIC did not
have a material effect on the Corporation’s Financial Statements.
n Section 3855 Financial Instruments – Recognition and Measurement and Section 3025,
Impaired Loans. In August 2009, the Accounting Standards Board (“AcSB”) amended
these Sections to converge with international standards (IAS 39, Financial Instruments
– Recognition and Measurement) for impairment of debt instruments by changing the
categories into which debt instruments are required or permitted to be classified. These
amendments are effective for annual financial statements relating to fiscal years beginning
on or after November 1, 2008. The adoption of these Sections did not have an impact on
the Corporation’s Financial Statements.
n Section 3862 Financial Instruments – Disclosures. In June 2009, the CICA amended this
Section to include enhanced disclosures related to the fair value of financial instruments
and the liquidity risk associated with financial instruments. The amendments are effective
for annual financial statements relating to fiscal years ending after September 30, 2009. The
amendments are consistent with recent changes to financial instrument disclosure under
International Financial Reporting Standards. The Corporation has included the applicable
disclosures related to this Section in Note 9 of the Financial Statements.
Future Accounting Policy Changes
n Section 1582 Business Combinations. In January 2009, the CICA issued Handbook Section
1582, Business Combinations that replaces the Section 1581 of the same name. Under the
new standard, the purchase price used in a business combination is based on the fair value
of shares exchanged at the market price at acquisition date. Under the current standard,
the purchase price used is based on the market price of shares for a reasonable period
before and after the date the acquisition is agreed upon and announced. In addition, the
new standard generally requires all acquisition costs to be expensed while current stan-
dards allow for the capitalization of these costs as part of the purchase price. This new
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
7 1
standard also addresses contingent liabilities, which will be required to be recognized
at fair value on acquisition, and subsequently remeasured at each reporting period until
settled. Current standards require only contingent liabilities that are due to be recognized.
The new standard requires any negative goodwill to be recognized as a charge to earnings
rather than the current standard which reduces the fair value of non-current assets in the
purchase price allocation. The new standard applies prospectively to business combina-
tions on or after January 1, 2011 with earlier application permitted. The Corporation does
not intend to early adopt the new standard.
Convergence of Canadian GAAP with International
Financial Reporting Standards (“IFRS”)
In 2006, the AcSB ratified a strategic plan to converge Canadian GAAP with IFRS by 2011 for
public reporting entities. On February 13, 2008 the AcSB confirmed that IFRS will replace
Canadian GAAP for public companies beginning January 1, 2011. The adoption date of
January 1, 2011 will require the restatement, for comparative purposes, of amounts reported
by Birchcliff for the year ended December 31, 2010, including the opening balance sheet as
at January 1, 2010.
4. PETROLEUM AND NATURAL GAS PROPERTIES AND EQUIPMENT
($000’s)
Petroleum and natural gas assets
Office furniture and equipment
$000’s)
Petroleum and natural gas assets
Office furniture and equipment
ACCUMULATED
DEPLETION AND
DEPRECIATION
(298,560)
(1,852)
(300,412)
ACCUMULATED
DEPLETION AND
DEPRECIATION
(215,719)
(1,198)
(216,917)
2009
NET BOOk VALUE
800,860
1,563
802,423
2008
NET BOOk VALUE
780,309
1,582
781,891
COST
1,099,420
3,415
1,102,835
COST
996,028
2,780
998,808
At December 31, 2009, the cost of petroleum and natural gas properties includes $44.9 million
(2008 – $49.7 million) relating to unproved properties which have been excluded from costs
subject to depletion and depreciation.
Birchcliff capitalized general and administrative costs directly related to exploration and devel-
opment activities of approximately $1.9 million in the year ended December 31, 2009 (2008
– $1.9 million).
On September 15, 2009, the Government of Alberta approved a drilling royalty incentive for
conventional oil and natural gas wells drilled on or after April 1, 2009, but before April 1, 2011.
Included as a reduction of petroleum and natural gas properties and equipment at December
31, 2009 is an expected recovery of $6.3 million related to the new Alberta drilling royalty
credit program.
7 2
Notes to the Financial Statements
For the years ended December 31, 2009 and 2008
The Corporation performed an impairment test at December 31, 2009 to ensure the carrying
value of its petroleum and natural gas properties and equipment is recoverable and does
not exceed fair value. The petroleum and natural gas future prices are based on December
31, 2009 commodity price forecasts of the Corporation’s independent reserve evaluators. The
following table summarizes the actual prices used in the impairment test calculation:
YEAR
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2029+
WTI OIL (1)
($US/bbl)
75.00
81.60
85.85
90.20
97.40
104.90
112.60
114.85
117.15
119.50
121.90
124.35
126.80
129.35
131.95
134.60
137.30
140.00
142.80
145.70
2%
FOREIGN
EXCHANGE
RATE
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
0.950
2%
EDMONTON
LIGHT CRUDE
OIL (1)
($CDN/bbl)
77.55
84.45
88.90
93.45
101.05
108.85
116.95
119.30
121.70
124.10
126.60
129.15
131.70
134.35
137.05
139.80
142.55
145.40
148.35
151.30
2%
AECO GAS (1)
($CDN/mcf )
5.80
6.70
7.05
7.45
7.55
7.75
7.90
8.25
8.55
8.85
9.15
9.35
9.50
9.70
9.90
10.10
10.30
10.50
10.70
10.95
2%
(1) Actual prices used in the impairment test were adjusted for crude oil and natural gas differentials, and transportation and
marketing costs specific to the Corporation’s operations
Based on the impairment test, Birchcliff concluded that its petroleum and natural gas proper-
ties and equipment were not impaired at December 31, 2009 and 2008.
5. NON-REVOLVING ACQUISITION FACILITY
Birchcliff entered into an Acquisition Credit Agreement (the “Acquisition Facility”) with a
syndicate of banks on September 4, 2007. The agreement allowed for Birchcliff to make a
one-time draw of up to $100 million on a non-revolving credit facility for the purpose of clos-
ing the Worsley Acquisition. On September 27, 2007, the Corporation gave notice to draw the
entire amount of the credit facility in bankers’ acceptances. The drawn amount at December
31, 2007 was $98.8 million with the $1.2 million difference being the discounted value from
the $100 million credit facility limit based on the market interest rate at that time for bankers’
acceptances. On March 14, 2008 the facility was repaid in full and cancelled, following the
completion of the equity financing described in Note 12(d).
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
7 3
6. NON-REVOLVING TERM FACILITY
On May 21, 2009, the Corporation entered into a $50 million supplemental non-revolving one
year term credit facility (the “Term Facility”). The Term Facility is provided by a syndicate of four
banks (the “Syndicate”). No amounts were drawn on the Term Facility at December 31, 2009.
The Corporation paid $625,000 in financing fees to the Syndicate to establish the Term Facility.
These fees have been deferred as a non current asset and are being amortized to income
equally over the one year term beginning May 21, 2009. During the year ended December 31,
2009, the Corporation amortized to income approximately $380,000 in deferred financing fees
applicable to the Term Facility. At December 31, 2009, the unamortized portion of the deferred
financing fees related to this facility was approximately $245,000.
In January 2010, the Corporation paid $250,000 in financing fees to extend the maturity date
of the Term facility from May 21, 2010 to May 21, 2011. Consent was also received from the
Syndicate in January 2010 to allow the Corporation to draw the full amount of this facility.
The Term Facility allows for prime rate loans, US base rate loans, bankers’ acceptances, letters of
credit and LIBOR loans. The interest rates applicable to this facility are based on a pricing grid
and will increase as a result of the increased ratio of outstanding indebtedness to earnings
before interest, taxes, depreciation and amortization. The Term Facility is secured by a fixed and
floating charge debenture, an instrument of pledge, and a general security agreement encom-
passing all of the Corporation’s assets for a consideration equal to the draw-down amount.
7. REVOLVING CREDIT FACILITIES
($000’s)
Syndicated credit facility
Working capital facility
Outstanding revolving credit facilities
Unamortized prepaid interest on bankers’ acceptances
Unamortized deferred financing fees
Revolving credit facilities, net
2009
192,000
14,387
206,387
(4,627)
(530)
201,230
2008
201,000
14,176
215,176
(3,590)
–
211,586
On May 21, 2009, Birchcliff amended its agreement with its bank syndicate which increased
the Corporation’s existing revolving credit facilities from $240 million to an aggregate limit of
$255 million. The revolving credit facilities consist of an extendible revolving term credit facility
with an authorized limit of $235 million (the “Syndicated Credit Facility”) and an extendible
revolving working capital facility with an authorized limit of $20 million (the “Working Capital
Facility”). Included as a reduction in the available Working Capital Facility are letters of credit
issued to various service providers in the amount of $2.7 million at December 31, 2009 (2008 –
$1.8 million). At December 31, 2009, the effective rate applicable to the Working Capital Facility
was 4.8% (2008 – 4.7%). The overall effective interest rate applicable to the bankers’ acceptances
in the Syndicated Credit Facility was 4.0% for the year December 31, 2009 (2008 – 3.2%).
The Corporation paid $1.35 million in financing fees to the Syndicate to extend the conver-
sion date of the revolving credit facilities to May 21, 2010. These fees have been deferred and
netted against the revolving facilities and are being amortized to income over the one year
extension period. During the year ended December 31, 2009, the Corporation amortized to
income approximately $820,000 in deferred financing fees applicable to the revolving facili-
7 4
Notes to the Financial Statements
For the years ended December 31, 2009 and 2008
ties. At December 31, 2009, the unamortized portion of the deferred financing fees related to
this facility was approximately $530,000 (2008 – $NIL).
The revolving credit facilities allow for prime rate loans, US base rate loans, bankers’ accep-
tances, letters of credit and LIBOR loans. The interest rates applicable to the drawn loans are
based on a pricing grid and will increase as a result of the increased ratio of outstanding
indebtedness to earnings before interest, taxes, depreciation and amortization.
The revolving credit facilities are subject to the Syndicate’s redetermination of the borrow-
ing base twice each year as of November 15 and the conversion date. Upon any change in
or redetermination of the borrowing base limit which results in a borrowing base shortfall,
Birchcliff must eliminate the borrowing base shortfall amount. The revolving credit facilities
are secured by a fixed and floating charge debenture, an instrument of pledge, and a general
security agreement encompassing all of the Corporation’s assets.
Syndicated Credit Facility
The Syndicated Credit Facility has a conversion date of May 21, 2010 and a maturity date which
is two years after the conversion date. Birchcliff may request an extension of the conversion date
with such an extension not exceeding 364 days, in order to maintain the revolving Syndicated
Credit Facility. If the Syndicate does not grant an extension of the conversion date, then upon
the expiry of the conversion date, the revolving Syndicated Credit Facility will convert to a term
loan whereby all principal and interest will be required to be repaid at the maturity date.
Working Capital Facility
The Working Capital Facility has a conversion date of May 21, 2010 and a maturity date which is
two years after the conversion date. Birchcliff may request an extension of the conversion date
with such an extension not exceeding 364 days, in order to maintain the revolving Working
Capital Facility. If the Syndicate does not grant an extension of the conversion date, then upon
four months after the expiry of the conversion date, the revolving Working Capital Facility will
convert to a term loan whereby all principal and interest will be required to be repaid at the
maturity date.
8. CAPITAL MANAGEMENT
The Corporation’s general policy is to maintain a sufficient capital base in order to manage its
business in the most effective manner with the goal of increasing the value of its assets and
thus its underlying share value. The Corporation’s objectives when managing capital are to
maintain financial flexibility in order to preserve its ability to meet financial obligations, includ-
ing potential obligations arising from additional acquisitions; to maintain a capital structure
that allows Birchcliff to favour the financing of its growth strategy using primarily internally-
generated cash flow and its available debt capacity; and to optimize the use of its capital to
provide an appropriate investment return to its shareholders.
There were no changes in the Corporation’s approach to capital management during the
2009. The following table shows the Corporation’s total available credit under its credit facili-
ties at December 31, 2009 and 2008:
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
7 5
($000’s)
Maximum borrowing base limit:
Working capital facility
Syndicated credit facility
Term credit facility (2)
Principal amount:
Working capital facility (1)
Syndicated credit facility
Term credit facility (2)
Total unused credit at December 31
2009
2008
20,000
235,000
50,000
305,000
(17,125)
(192,000)
–
(209,125)
95,875
20,000
220,000
–
240,000
(15,970)
(201,000)
–
(216,970)
23,030
(1) Included in the Working Capital Facility at December 31, 2009 are outstanding letters of credit issued to various service providers in
the amount of $2.7 million (2008 – $1.8 million).
(2) Birchcliff did not request a draw-down of the $50 million Term Facility in 2009 and as a result no amounts were outstanding on this
facility at December 31, 2009. This facility did not exist at December 31, 2008.
At December 31, 2009, the Corporation’s aggregate borrowing base limit on its credit facilities
was $305 million (2008 – $240 million) of which $95.9 million (2008 – $23.0 million) in total
unused credit was available at the end of the year to fund short term and long term obliga-
tions. The Corporation’s credit facilities are subject to a semi-annual review of the borrowing
base limit which is directly impacted by the value of the oil and natural gas reserves.
The financial covenants applicable to the Corporation’s credit facilities include a review of
earnings before interest, taxes, stock-based compensation, depletion, depreciation and amor-
tization (“EBITDA”) to interest coverage ratio which is calculated quarterly. The following table
shows the EBITDA to interest coverage ratio at December 31, 2009 and 2008:
REQUIRED
>3.5
2009
ACTUAL
7.6
REQUIRED
>3.5
2008
ACTUAL
13.8
Annualized EBITDA to interest coverage (1)
(1) Annualized EBITDA is defined as earnings before interest, taxes, stock-based compensation, depletion, depreciation and
amortization and is calculated on a trailing twelve month basis.
The Corporation was compliant with all financial covenants under its credit facilities through-
out 2009 and 2008.
Birchcliff strives to properly exploit its current asset base and to acquire top quality assets.
To that end, the Corporation is not averse to maintaining a high ratio of debt to total capital
if management determines the assets it is acquiring or the projects it is drilling are of high
quality. In order to maintain or adjust the capital structure, the Corporation may issue new
shares or debt, increase the aggregate credit facility limits, obtain or adjust its capital spending
to manage current and projected debt levels. Management expects to be able to continue
to raise additional equity and debt financing sufficient to meet both its short-term and long-
term growth requirements in the current environment. Birchcliff is now at such a size that it
anticipates it will not require additional equity except to fund a significant acquisition or to
significantly increase its capital spending beyond its cash flow.
7 6
Notes to the Financial Statements
For the years ended December 31, 2009 and 2008
The capital structure of the Corporation is as follows:
($000’s)
Total shareholders’ equity (1)
Total shareholders’ equity as a % of total capital
Working capital deficit (2)
Revolving credit facilities (3)
Total debt
Total debt as a % of total capital
2009
554,561
71%
20,291
206,387
226,678
29%
2008
507,371
67%
38,276
215,176
253,452
33%
CHANGE %
9%
(11%)
Total capital
781,239
760,823
3%
(1) Shareholders’ equity is defined as share capital plus contributed surplus plus retained earnings, less any deficit.
(2) Working capital deficit is defined as current assets less current liabilities.
(3) The revolving credit facilities include $14.4 million drawn on the Working Capital Facility and $192 million drawn on the Syndicated
Credit Facility as described in Note 7.
During the year ended December 31, 2009, total shareholders’ equity increased mainly due to
the issuance of common shares (Note 12 (f )); exercise of options (Note 12); and offset by an
increase in reported net loss during the year.
Total debt decreased during the year ended December 31, 2009 largely due to equity proceeds
of $59.3 million on June 30, 2009 (Note 12 (f )) which were used to pay down the Corporation’s
revolving credit facilities. Also during the year, total debt increased by $34.2 million as a result
of capital spent in excess of cash flow.
9. FINANCIAL INSTRUMENTS & RISk MANAGEMENT CONTRACTS
Birchcliff is exposed to credit risk, liquidity risk and market risk as part of its normal course of
business. The Board of Directors has overall responsibility for the establishment and oversight
of the Corporation’s financial risk management framework and periodically reviews the results
of all risk management activities and all outstanding positions. Management has implemented
and monitors compliance with risk management policies. The Corporation’s risk management
policies are established to identify and analyze the risks faced by the Corporation, to set appro-
priate risk limits and controls, and to monitor risks and adherence to market conditions and
the Corporation’s activities.
Credit Risk
Cash is comprised of bank balances. Historically, the Corporation has not carried short term
investments. Should this change in the future, counterparties will be selected based on credit
ratings and management will monitor all investments to ensure a stable return, and complex
investment vehicles with higher risk will be avoided. The Corporation’s exposure to cash credit
risk at the balance sheet date is very low.
A substantial portion of the Corporation’s accounts receivable are with customers in the oil
and natural gas industry and are subject to normal industry credit risks. The carrying amount
of accounts receivable reflects management’s assessment of the credit risk associated with
these customers.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
7 7
The following table illustrates the Corporation’s maximum exposure for receivables:
($000’s)
Marketers
Joint venture partners
Other
Total receivables
2009
16,607
12,984
74
29,665
2008
15,265
14,500
71
29,836
Of the Corporation’s significant individual accounts receivable due from marketers at
December 31, 2009, approximately 18% was due from one marketer (2008 – 21%, one
marketer). For the year ended December 31, 2009, the Corporation generated 39%, 10%, 11%
and 23% of its revenue, respectively, from four core customers. The Corporation generated the
majority of its revenue for the year ended December 31, 2008 from four customers, who indi-
vidually accounted for 23%, 16%, 11% and 18%, respectively. Typically, Birchcliff’s maximum
credit exposure to customers is revenue from two months of commodity sales. Receivables
from marketers are normally collected on the 25th day of the month following production.
Birchcliff’s policy to mitigate credit risk associated with these balances is to establish marketing
relationships with credit worthy purchasers, to obtain guarantees from their ultimate parent
companies and to obtain letters of credit as appropriate. The Corporation historically has not
experienced any material collection issues with its marketers.
At December 31, 2009 approximately $358,000 or 1% of Birchcliff’s total accounts receiv-
able are aged over 120 days and considered past due. The majority of these accounts are
due from various joint venture partners. Birchcliff attempts to mitigate the risk from joint
venture receivables by obtaining pre-approval of significant capital expenditures. However,
the receivables are from participants in the oil and natural gas sector, and collection of the
outstanding balances is dependent on industry factors such as commodity price fluctuations,
escalating costs and the risk of unsuccessful drilling. In addition, further risk exists with joint
venturers’ as disagreements occasionally arise that increase the potential for non-collection.
The Corporation does not typically obtain collateral from oil and natural gas marketers or joint
venturers’, however, the Corporation does have the ability to withhold production from joint
venturers’ in the event of non-payment.
Should Birchcliff determine that the ultimate collection of a receivable is in doubt, it will provide
the necessary provision in its allowance for doubtful accounts with a corresponding charge to
earnings. If the Corporation subsequently determines an account is uncollectible the account
is written off with a corresponding charge to the allowance account. At December 31, 2009,
Birchcliff’s allowance for doubtful accounts balance was $NIL (2008 – $99,000).
Liquidity Risk
Liquidity risk is the risk that the Corporation will not be able to meet its obligations associated
with financial liabilities that are settled by cash as they become due. Birchcliff’s approach to
managing liquidity is to ensure, as much as possible, that it will have sufficient liquidity to meet
its short term and long term financial obligations when due, under both normal and unusual
conditions without incurring unacceptable losses or risking harm to the Corporation’s reputation.
7 8
Notes to the Financial Statements
For the years ended December 31, 2009 and 2008
All of Corporation’s contractual financial liabilities are to be settled in cash at December 31,
2009 and 2008. Typically, the Corporation ensures that it has sufficient cash on demand to
meet expected operational expenses, including the servicing of financial obligations. To
achieve this objective, the Corporation prepares annual capital expenditure budgets, which
are approved by the Board of Directors and are regularly reviewed and updated as consid-
ered necessary. Petroleum and natural gas production is monitored weekly and is used to
provide monthly current cash flow estimates. Further, the Corporation utilizes authorizations
for expenditures on both operated and non operated projects to further manage capital
expenditure. The Corporation also attempts to match its payment cycle with collection of oil
and natural gas revenue on the 25th of each month.
To facilitate the capital expenditure program, the Corporation has reserve-based credit
facilities, as outlined in Note 7, which are reviewed semi-annually by the lender. The principal
amount utilized under the Corporation’s credit facilities at December 31, 2009 was $209.1
million (2008 – $217.0 million) and $95.9 million (2008 – $23.0 million) in unused credit was
available at the end of the year to fund future obligations.
The following table lists the contractual maturities of the Corporation’s financial liabilities at
December 31, 2009:
($000’s)
Accounts payable and accrued liabilities
Revolving credit facilities (1)
Total financial liabilities
< 1 YEAR
54,731
–
54,731
1 – 2 YEARS
–
–
–
3 – 5 YEARS
–
206,387
206,387
THEREAFTER
–
–
–
(1) The revolving credit facilities bear interest at a floating rate and include $14.4 million drawn on the Working Capital Facility and
$192 million drawn on the Syndicated Credit Facility as described in Note 7.
Market Risk
Market risk is the risk that changes in market conditions; such as commodity prices, exchange
rates and interest rates; will affect the Corporation’s net earnings or the value of its financial
instruments. The objective of market risk management is to manage and control exposures
within acceptable limits, while maximizing returns. These risks are consistent with prior years.
All risk management transactions are conducted within risk management tolerances that are
reviewed by the Board of Directors.
Commodity Price Risk
Commodity price risk is the risk that the fair value of future cash flows will fluctuate as a result
of changes in commodity prices. Significant changes in commodity prices can materially
impact the Corporation’s borrowing base under its credit facility. Lower commodity prices
can also reduce the Corporation’s ability to raise capital. Commodity prices for crude oil and
natural gas are not only impacted by the CDN and United States (“US”) dollar, but also by world
economic events that dictate the levels of supply and demand.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
7 9
The Corporation may attempt to mitigate commodity price risk through the use of financial
derivatives such as commodity price risk management contracts. Birchcliff had no risk manage-
ment contracts in place as at or during the year ended December 31, 2009. For the year ended
December 31, 2008, the total loss related to oil price risk management contracts was $3.1
million. Included in the total loss was a net cash outlay of approximately $9.9 million relating
to the actual monthly settlements incurred during the period. An unrealized gain of approxi-
mately $6.8 million for the year ended December 31, 2008 was also included within the total
loss identified as “unrealized risk management contracts gain” on the Statements of Cash Flows.
The Corporation had no risk management contracts in place as at or during the years ended
December 31, 2009. The Corporation actively monitors the market to determine whether any
additional commodity price risk management contracts are warranted.
Foreign Currency Risk
Foreign currency risk is the risk that future cash flows will fluctuate as a result of changes in
foreign currency exchange rates. Prices for oil are determined in global markets and generally
denominated in US dollars. Natural gas prices obtained by the Corporation are influenced by
both US and CDN demand and the corresponding North American supply. The exchange rate
effect cannot be quantified but generally an increase in the value of the $CDN as compared
to the $US will reduce the prices received by Birchcliff for its petroleum and natural gas sales.
The average exchange rate during 2009 was one US dollar equals $1.14 CDN (2008 – one $US
equals $1.07 CDN) and the exchange rate at December 31, 2009 was one $US equals $1.05
CDN dollar (2008 – one $US equals $1.22 CDN).
The Corporation had no forward exchange rate contracts in place as at or during the years
ended December 31, 2009 and 2008.
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 is exposed to interest rate cash flow risk on floating interest rate
bank debt due to fluctuations in market interest rates. The remainder of Birchcliff’s financial
assets and liabilities are not exposed to interest rate risk.
A 1% change in the CDN prime interest rate in 2009 would have increased (decreased) net
income (loss) and comprehensive income (loss) by $2.1 million (2008 – $1.8 million), assuming
that all other variables remain constant. A sensitivity of 1% is considered reasonable given
the current level of the bank prime rate and market expectations for future movements. The
Corporation considers this risk to be limited and thus does not hedge its interest rate risk.
The Corporation had no interest rate swap contracts in place as at or during the years ended
December 31, 2009 and 2008.
8 0
Notes to the Financial Statements
For the years ended December 31, 2009 and 2008
Fair Value of Financial Instruments
Birchcliff’s financial instruments include cash, accounts receivable, accounts payable and
accrued liabilities and revolving credit facilities. All of Birchcliff’s financial instruments are trans-
acted in active markets. Birchcliff classifies the fair value of these transactions according to the
following hierarchy based on the amount of observable inputs used to value the instrument.
n Level 1 – Quoted prices are available in active markets for identical assets or liabilities as
of the reporting date. Active markets are those in which transactions occur in sufficient
frequency and volume to provide pricing information on an ongoing basis.
n Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1.
Prices in Level 2 are either directly or indirectly observable as of the reporting date. Level 2
valuations are based on inputs, including quoted forward prices for commodities, time
value and volatility factors, which can be substantially observed or corroborated in
the marketplace.
n Level 3 – Valuations in this level are those with inputs for the asset or liability that are not
based on observable market data.
Assessment of the significance of a particular input to the fair value measurement requires
judgment and may affect the placement within the fair value hierarchy level. Birchcliff’s finan-
cial instruments have been assessed on the fair value hierarchy described above.
The carrying value and fair value of financial instruments at December 31, 2009 is disclosed
below by financial instrument category, as well as any related loss or interest expense for
the period:
($000’s)
Assets Held for Trading
Cash (1)
Loans and Receivables
Trade and other receivables (2)
CARRYING VALUE
FAIR VALUE
LOSS
140
140
29,665
29,665
–
–
INTEREST
EXPENSE
–
–
Other Liabilities
Accounts payable and accrued liabilities (2)
Revolving credit facilities (3)
(1) Cash is reported at fair value, based on a Level 1 designation.
(2) Trade and other receivables and trade and other payables are reported at amortized cost. Due to the short term nature trade and other
receivables and accounts payable and accrued liabilities, their carrying values approximate their fair values at December 31, 2009.
(3) The revolving credit facilities bear interest at a floating rate and accordingly the fair market value approximates the carrying value
54,731
206,387
54,731
206,387
–
10,311
–
–
before the carrying value is reduced for the remaining unamortized costs as described in Note 7.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
8 1
10. FUTURE INCOME TAX
The provision for income taxes differs from the result that would be obtained by applying
the combined current year Canadian federal and provincial income tax rates in 2009 of 29%
(2008 – 29.5%). The difference results from the following items:
($000’s)
Net income (loss) before taxes
Computed expected income tax expense (recovery)
Increase (decrease) in taxes resulting from:
Non-deductible stock-based compensation
Non-deductible expenses
Changes in tax rate and other
Future income tax expense (recovery)
2009
(28,821)
(8,358)
2,855
50
884
(4,569)
2008
43,588
12,858
1,639
72
(872)
13,697
The components of the future income tax assets and liabilities at December 31 are as follows:
($000’s)
Future tax liabilities:
Property, plant and equipment
Deferred financing fees
Future tax assets:
Asset retirement obligations
Share issue costs
NCL’s, SR&ED’s & ITC’s (1)
Net future tax liability
2009
2008
(42,198)
(217)
(21,338)
–
6,237
2,357
31,948
(1,873)
5,393
3,189
9,321
(3,435)
(1) “NCL” = Non Capital Losses; “SR&ED” = Scientific Research & Experimental Development; “ITC” = Investment Tax Credits
At December 31, 2009, the Corporation’s estimated non-capital losses for income tax purposes
is approximately $109.1 million (2008 – $18.6 million) available to shelter future taxable income.
Management expects that future taxable income will be available to utilize non-capital losses.
The following table shows a breakdown of the Corporation’s non-capital losses by year of expiry:
YEAR OF EXPIRY
2015
2026
2028
2029
2030
Total non-capital losses
$000’s
71
388
18,098
28,463
62,047
109,067
11. ASSET RETIREMENT OBLIGATIONS
The Corporation’s asset retirement obligations result from net ownership interests in petro-
leum and natural gas properties and equipment including well sites, gathering systems
and processing facilities. Birchcliff estimates the total undiscounted amount of cash flows
required to settle its asset retirement obligations at December 31, 2009 to be approximately
$70.1 million (2008 – $68.1 million) which will be incurred between 2010 and 2061. A credit-
adjusted risk-free interest rate of 8% and an inflation rate of 2% were used to calculate the fair
value of the asset retirement obligation.
8 2
Notes to the Financial Statements
For the years ended December 31, 2009 and 2008
A reconciliation of the asset retirement obligations is provided below:
($000’s)
Balance, January 1
Obligations incurred
Obligations acquired
Changes in estimate
Accretion expense
Actual expenditures incurred
Balance, December 31
12. SHARE CAPITAL
a) Authorized:
2009
21,223
475
17
1,846
1,758
(606)
24,713
2008
18,806
1,778
89
166
1,466
(1,082)
21,223
Unlimited number of voting common shares
Unlimited number of non-voting preferred shares
The preferred shares may be issued in one or more series and the directors are authorized
to fix the number of shares in each series and to determine the designation, rights, privi-
leges, restrictions and conditions attached to the shares of each series.
b)
Issued:
Balance, December 31, 2007
Issued upon exercise of stock options
Issued upon exercise of warrants (Note (c))
Issued, net of costs (Note (d))
Tax effect of share issue costs (Note (e))
Balance, December 31, 2008
Issued upon exercise of stock options
Tax effect of flow through shares (Note (d))
Issued, net of costs (Note (f ))
Tax effect of share issue costs (Note (g))
Balance, December 31, 2009
NUMBER OF
COMMON SHARES
94,554,269
1,133,925
809,933
15,897,843
–
112,395,970
1,419,032
–
10,000,000
–
123,815,002
AMOUNT $
342,818,621
6,009,537
3,596,103
123,088,169
1,970,000
477,482,430
7,813,442
(3,750,000)
59,304,600
743,000
541,593,472
c)
In January 2008, 809,933 common shares were issued to a former officer in exchange for
809,933 performance warrants with an exercise price of $3.00 for gross proceeds to the
Corporation of $2,429,799. In addition, $1,166,304 of non-cash costs attributable to these
warrants, which was previously recorded to contributed surplus, was reclassified from
contributed surplus to share capital.
d) On March 14, 2008, Birchcliff issued 1,522,843 flow-through shares at a price of $9.85
per share and 14,375,000 common shares at a price of $8.00 per share for total net proceeds
of $123,088,169. As at December 31, 2008, the commitment to spend and renounce
$15 million of qualified 100% deductible tax pools with respect to the flow-through shares
was fulfilled.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
8 3
e) Birchcliff recognized a future income tax benefit of $1,970,000 in respect of share issue costs
of $6,911,832 incurred with respect to the issuance of 15,897,843 shares on March 14, 2008.
f) On June 30, 2009, Birchcliff issued 10,000,000 common shares at a price of $6.20 per share
for total net proceeds of $59,304,600.
g) Birchcliff recognized a future income tax benefit of $743,000 in respect of share issue costs
of $2,695,400 incurred with respect to the issuance of 10,000,000 common shares on
June 30, 2009.
13. STOCk-BASED COMPENSATION
The Corporation has established a stock-based compensation plan whereby officers, employ-
ees, directors and consultants may be granted options to purchase common shares at a fixed
price not less than the fair market value of the stock at the time of grant, subject to certain
conditions being met. Stock options granted under this plan vest over a three year period
at the rate of one-third on each anniversary date of the stock option grant. All stock options
granted are for a five year term. The Corporation is authorized to issue stock options for a
maximum of 10% of the issued and outstanding common shares pursuant to the Amended
and Restated Stock Option Plan.
In order to calculate the compensation expense, the fair value of the stock options or perfor-
mance warrants is estimated using the Black-Scholes option-pricing model that takes into
account, as of the grant date: exercise price, expected life, current price, expected volatility,
expected dividends, and risk-free interest rates.
For the year ended December 31, 2009, the Corporation recorded a total non-cash stock-
based compensation expense of $9.8 million (2008 – $5.0 million) related to the issuance of
stock options and extension of performance warrants.
Stock Options
For the year ended December 31, 2009, the Corporation recorded $6.7 million (2008 – $5.0
million) of non-cash stock-based compensation expense and a corresponding increase to
contributed surplus related to the issuance of stock options. During the year ended December
31, 2009, the Corporation also recorded a cash stock-based compensation expense of $NIL
(2008 – $20,000) related to cash paid to cancel vested stock options during the period.
At December 31, 2009, the Corporation’s Amended and Restated Stock Option Plan permit-
ted the grant of options in respect of 12,381,500 common shares (2008 – 11,239,597). At
December 31, 2009, there remained available for issuance options in respect of 4,671,247
common shares (2008 – 4,915,376).
8 4
Notes to the Financial Statements
For the years ended December 31, 2009 and 2008
A summary of the Corporation’s outstanding stock options during the year ended December
31, 2009 and 2008 is presented below:
Outstanding, December 31, 2007
Granted
Exercised
Forfeited
Cancelled
Outstanding, December 31, 2008
Granted
Exercised
Forfeited
Outstanding, December 31, 2009
NUMBER
5,335,814
2,330,000
(1,133,925)
(202,668)
(5,000)
6,324,221
3,959,900
(1,419,032)
(1,154,836)
7,710,253
WEIGHTED AVERAGE
EXERCISE PRICE ($)
4.00
8.23
(3.74)
(4.75)
(3.75)
5.58
5.53
(3.74)
(6.18)
5.81
The fair value of each option was determined on the date of the grant using the Black-Scholes
option-pricing model. The weighted average assumptions used in calculating the fair values
are set forth below:
Risk-free interest rate
Expected maturity (years)
Expected volatility
Dividend yield
Fair value per option
2009
3.9%
5.0
63.5%
–
$3.02
2008
3.1%
5.0
52.0%
–
$3.98
A summary of the stock options outstanding and exercisable under the plan at December 31,
2009 is presented below:
EXERCISE PRICE
AWARDS OUTSTANDING
WEIGHTED
2009
AWARDS EXERCISABLE
WEIGHTED
LOW
$3.00
$6.01
$9.01
$12.01
HIGH
$6.00
$9.00
$12.00
$14.25
REMAINING
CONTRACTUAL
LIFE
3.08
3.53
3.59
3.53
3.23
AVERAGE WEIGHTED
AVERAGE
EXERCISE
PRICE
$4.63
$7.52
$10.68
$13.07
$5.81
QUANTITy
5,109,986
2,254,367
158,100
187,800
7,710,253
REMAINING
CONTRACTUAL
LIFE
1.66
2.82
3.59
3.53
2.04
AVERAGE WEIGHTED
AVERAGE
EXERCISE
PRICE
$4.05
$7.38
$10.68
$13.07
$5.25
QUANTITy
1,635,992
556,233
52,699
62,600
2,307,524
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
8 5
Performance Warrants
On January 14, 2005, as part of the Corporation’s initial restructuring to become a public entity,
the Corporation issued performance warrants with an exercise price of $3.00 and an expira-
tion date of January 31, 2010 to members of its executive team. Each performance warrant
entitles the holder to purchase one common share at the exercise price. Because the perfor-
mance conditions were fulfilled in 2005, resulting in the performance warrants vesting, the full
amount related compensation expense was recorded in net income in that year.
No performance warrants were issued in the periods ended December 31, 2009 and 2008.
A summary of the performance warrants outstanding and exercisable during the year ended
December 31, 2009 and 2008 is presented below:
Outstanding, December 31, 2007
Exercised
Outstanding, December 31, 2008
Exercised
Outstanding, December 31, 2009
NUMBER
3,749,665
(806,933)
2,939,732
–
2,939,732
WEIGHTED AVERAGE
EXERCISE PRICE ($)
3.00
(3.00)
3.00
–
3.00
On May 28, 2009, the Corporation’s outstanding performance warrants were amended to
extend the expiration date from January 31, 2010 to January 31, 2015 (the “Extension”). The
Corporation recorded a non-cash stock-based compensation expense of $3.1 million relating
to the Extension of the performance warrants for the year ended December 31, 2009. This
amount represents the fair value of the Extension determined by the difference between the
fair value of the outstanding performance warrants with the expiration date of January 31, 2015
(the “extended term”) and the fair value of the outstanding performance warrants with the expi-
ration date of January 31, 2010 (the “original term”). The fair value in each case was estimated as
at May 28, 2009 using the Black-Scholes option-pricing model. The fair value of each extended
term and original term performance warrant was $4.27 and $3.23, respectively.
The assumptions used in calculating the fair value of the extended and original term perfor-
mance warrants at May 28, 2009 are set forth below:
Risk-free interest rate
Expected maturity (years)
Expected volatility
Dividend yield
EXTENDED TERM
PERFORMANCE WARRANTS
2.1%
5.0
63.0%
–
ORIGINAL TERM
PERFORMANCE WARRANTS
2.1%
0.72
63.0%
–
8 6
Notes to the Financial Statements
For the years ended December 31, 2009 and 2008
Contributed Surplus Continuity
Balance, December 31, 2007
Stock-based compensation expense – stock options (1)
Exercise of stock options
Cancellation of stock options (2)
Balance, December 31, 2008
Stock-based compensation expense – stock options (1)
Stock-based compensation expense – performance warrants
Exercise of stock options
Balance, December 31, 2009
$000’s
10,930
5,004
(2,930)
(20)
12,984
6,784
3,060
(2,513)
20,315
(1) Included in the stock-based compensation expense is the non-cash impact of forfeitures during the period.
(2) Included in the cancellation of stock options is cash paid to cancel 5,000 vested stock options during 2008.
14. PER SHARE INFORMATION
Basic
Diluted
Net income (loss) per share
Weighted average shares outstanding
Net income (loss) per share
Weighted average shares outstanding
2009
$(0.21)
117,993,314
$(0.21)
117,993,314
2008
$0.27
108,986,165
$0.26
113,092,125
Because the Corporation reported a loss for the year ended December 31, 2009, the basic and
diluted weighted average shares outstanding are the same for that period.
The weighted average diluted shares outstanding for 2008 includes 108,986,165 weighted
average number of shares outstanding, plus the following: 2,031,061 shares related to the
dilutive effect of the performance and retention warrants and 2,074,899 shares related to
the dilutive effect of stock options. The average market value of the Corporation’s shares for
purposes of calculating the dilutive effect of share options was based on quoted market prices
for the period that the options were outstanding.
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
8 7
15. COMMITMENTS
The Corporation is committed under an operating lease relating to its office premises beginning
December 1, 2007 which expires on November 30, 2017. Birchcliff does not use all of the leased
space and has sublet approximately 40% of the excess space to an arms’ length party on a basis
that recovers all of the rental costs for the first five years. The Corporation is committed to
the following aggregate minimum lease payments (not reduced by rents receivable by
the Corporation):
YEAR
2010
2011
2012
2013
2014
Thereafter
$000’s
3,214
3,214
3,223
3,331
3,331
9,716
The Corporation is also committed to March 29, 2011 under an operating lease for another
office premises that it does not use and has sublet to an arm’s length party on a basis that
recovers all of its rental costs.
16. SUPPLEMENTARY CASH FLOW INFORMATION
The following table details the components of non-cash working capital:
($000’s)
Provided by (used in)
Accounts receivable
Prepaid and other
Accounts payable and accrued liabilities
Provided by (used in)
Operating
Investing
2009
2008
172
(1,604)
(16,477)
(17,909)
(9,800)
(152)
29,993
20,041
(10,051)
(7,858)
(17,909)
2,068
17,973
20,041
8 8
> CORPORATE INFORMATION
OFFICERS
A. Jeffery Tonken, B. Com, LLB
President & Chief Executive Officer
Myles R. Bosman, P. Geol.
Vice President, Exploration & Chief Operating Officer
karen A. Pagano, P. Eng.
Vice President, Engineering
Bruno P. Geremia, C.A.
Vice President & Chief Financial Officer
David M. Humphreys, R.E.T
Vice President, Operations
James W. Surbey, B. Eng., LLB
Vice President, Corporate Development
DIRECTORS
Larry A. Shaw
Chairman of the Board
Calgary, Alberta
Gordon W. Cameron
Independent Businessman
Calgary, Alberta
Werner A. Siemens
Independent Businessman
Calgary, Alberta
A. Jeffery Tonken
President & Chief Executive Officer
Birchcliff Energy Ltd.
Calgary, Alberta
SOLICITORS
Borden Ladner Gervais LLP
Calgary, Alberta
AUDITORS
Deloitte & Touche LLP
Chartered Accountants
Calgary, Alberta
RESERVE EVALUATORS
AJM Petroleum Consultants
Calgary, Alberta
BANkERS
Scotia Bank
HSBC Bank Canada
Alberta Treasury Branch
Union Bank of California
(Canada Branch)
TRANSFER AGENT
Olympia Trust Company
Calgary, Alberta
STOCk EXCHANGE LISTING
TSX Exchange
Symbol: BIR
WEBSITE
www.birchcliffenergy.com
EMAIL
info@birchcliffenergy.com
HEAD OFFICE
500, 630 – 4th Avenue S.W.
Calgary, Alberta T2P 0J9
Phone: 403.261.6401
403.261.6424
Fax:
SPIRIT RIVER OFFICE
Box 580
Spirit River, Alberta T0H 0G0
Phone: 780.864.4624
Fax:
780.864.4628
2 0 0 9 A n n u a l R e p o r t B i r c h c l i f f E n e r g y L t d .
500, 630 – 4th Avenue S.W., Calgary, Alberta T2P 0J9
Phone: 403.261.6401 Fax: 403.261.6424
www.birchcliffenergy.com