2019 A N N UA L R EP O R T
STANDING
PROUD
Pride isn’t ego or entitlement. It’s feeling good about the work you do every day—even when
Pride isn’t ego or entitlement. It’s feeling good about the work you do every day—even when
no one is looking. It’s facing the future with confidence and humility. We’re proud of everything
no one is looking. It’s facing the future with confidence and humility. We’re proud of everything
we’ve done, and the way we’ve done it with integrity and care. We are committed to all aspects of
we’ve done, and the way we’ve done it with integrity and care. We are committed to all aspects of
our environmental, social and governance responsibilities and strive to be a leader in respecting
our environmental, social and governance responsibilities and strive to be a leader in respecting
and supporting people, communities and the environment. The eyes of the world are on us now
and supporting people, communities and the environment. The eyes of the world are on us now
more than ever—and we’re proud to show the world who we are and how we do things.
more than ever—and we’re proud to show the world who we are and how we do things.
2
| 2019 Annual Report TA B L E O F C O N T E N T S
02
03
04
06
08
10
12
13
17
18
28
32
38
96
103
128
130
130
131
137
138
Overview
Financial and Operational Highlights
Message to Shareholders
Executive Team
Management Team
History
2019 Accomplishments
2020 Key Objectives
Peace River Arch
Montney/Doig Resource Play
Environmental, Social & Governance
2019 Year-End Reserves
Management’s Discussion & Analysis
Financial Statements
Notes to the Financial Statements
Glossary
Non-GAAP Measures
Presentation of Oil and Gas Reserves
Advisories
Team Birchcliff
Corporate Information
This Annual Report contains forward-looking statements and information within the meaning of applicable securities laws. Such forward-looking statements and information are based upon
certain expectations and assumptions and actual results may differ materially from those expressed or implied by such forward-looking statements and information. For further information
regarding the forward-looking statements and information contained herein, see “Advisories – Forward-Looking Statements” in this Annual Report. In addition, this Annual Report contains
references to “adjusted funds flow”, “adjusted funds flow per basic common share”, “free funds flow”, “transportation and other expense”, “operating netback”, “adjusted funds flow netback”
and “total debt”, which do not have standardized meanings prescribed by GAAP and therefore may not be comparable to similar measures presented by other companies where similar
terminology is used. For further information, see “Non-GAAP Measures” in this Annual Report and in the management’s discussion and analysis for the year ended December 31, 2019
(the “MD&A”). Boe amounts in this Annual Report have been calculated by using the conversion ratio of 6 Mcf of natural gas to 1 bbl of oil. With respect to the disclosure of Birchcliff’s
production in this Annual Report, see “Advisories – Production”.
O V E R V I E W
Birchcliff Energy Ltd. is an intermediate oil and
gas company based in Calgary, Alberta, with
operations concentrated within one core area,
the Peace River Arch of Alberta.
In 2019, Birchcliff generated approximately $335 million of
adjusted funds flow and averaged 77,977 boe/d of production.
At December 31, 2019, 425 (417.4 net) Montney/Doig
horizontal wells have been successfully drilled and cased
on Birchcliff’s lands. The majority of Birchcliff’s natural gas is
processed through our 100% owned and operated natural
gas plant located in the Pouce Coupe area of Alberta
(the “Pouce Coupe Gas Plant”). The Pouce Coupe Gas
Plant has a processing capacity of 340 MMcf/d and is the
cornerstone of our strategy to develop our Montney/Doig
Resource Play, to control and expand our production in the
play and to further reduce our operating costs per boe.
Our Montney/Doig Resource Play provides us with
an extensive inventory of repeatable, low-cost drilling
opportunities targeting natural gas, light oil, condensate
and NGLs. Birchcliff has the ability to grow when commodity
prices warrant doing so, while also having the ability to
maintain production in a low commodity price environment.
We continue to operate essentially all of our high
working interest production, which is surrounded by
large contiguous blocks of high working interest lands
where we own control and/or have long-term access to
the infrastructure. Our operatorship, land position and
infrastructure ownership gives us a competitive advantage
in our areas of operation and supports our low F&D
costs and low operating cost structure, which helps us to
maximize our funds flow.
Our common shares are listed on the TSX under the symbol
BIR. Our Series A and Series C Preferred Shares are listed
for trading on the TSX under the symbols BIR.PR.A and
BIR.PR.C, respectively.
B Y T H E N U M B E R S
99%
Operated
production
99%
New drilling
initiated and
controlled
425
(417.4)
NET
Horizontal wells
drilled and cased on
the Montney/Doig
Resource Play
As at December 31, 2019
87%
Average working
interest in
undeveloped land
4
| 2019 Annual Report FINANCIAL AND OPERATIONAL HIGHLIGHTS
Three months ended
December 31,
Twelve months ended
December 31,
2019
2018(5)
2019
2018(5)
OPERATING
Average production
Light oil – (bbls/d)
Condensate – (bbls/d)(1)
NGLs – (bbls/d)(1)
Natural gas – (Mcf/d)
Total – boe/d
Average realized sales price (CDN$)(2)
Light oil – (per bbl)
Condensate – (per bbl)(1)
NGLs – (per bbl)(1)
Natural gas – (Mcf)
Total – per boe
NETBACK AND COST ($/boe)
Petroleum and natural gas revenue(2)
Royalty expense
Operating expense
Transportation and other expense
Operating netback ($/boe)
G&A expense, net
Interest expense
Realized gain (loss) on financial instruments
Other income
Adjusted funds flow netback ($/boe)
Depletion and depreciation expense
Unrealized gain (loss) on financial instruments
Other expenses(3)
Dividends on preferred shares
Income tax recovery (expense)
Net income (loss) to common shareholders ($/boe)
FINANCIAL
Petroleum and natural gas revenue ($000s)(2)
Cash flow from operating activities ($000s)
Adjusted funds flow ($000s)
Per basic common share ($)
Net income (loss) to common shareholders ($000s)
Per basic common share ($)
End of period basic common shares (000s)
Weighted average basic common shares (000s)
Dividends on common shares ($000s)
Dividends on preferred shares ($000s)
Total capital expenditures ($000s)(4)
Long-term debt ($000s)
Total debt ($000s)
4,435
4,906
7,814
364,847
77,962
4,788
4,207
6,814
363,596
76,408
4,742
5,145
7,264
364,958
77,977
67.58
68.80
16.62
2.81
22.97
22.97
(1.15)
(3.06)
(4.51)
14.25
(1.26)
(0.82)
(0.92)
0.03
11.28
(7.49)
(6.50)
(0.28)
(0.27)
0.61
(2.65)
164,759
85,557
80,941
0.30
(18,984)
(0.07)
265,935
265,935
6,981
1,922
58,136
609,177
632,582
41.39
55.99
21.60
3.03
22.01
22.01
(0.96)
(3.51)
(4.07)
13.47
(1.08)
(1.06)
0.24
0.03
11.60
(7.29)
11.02
(1.21)
(0.26)
(3.77)
10.09
154,720
92,200
81,517
0.31
70,900
0.27
265,911
265,910
6,648
1,922
52,886
605,267
626,454
68.29
68.06
13.76
2.48
21.55
21.56
(0.96)
(3.09)
(4.44)
13.07
(0.94)
(0.88)
0.48
0.02
11.75
(7.50)
(6.77)
(0.51)
(0.27)
1.21
(2.09)
613,559
327,066
334,504
1.26
(59,579)
(0.22)
265,935
265,930
27,923
7,687
300,246
609,177
632,582
(1) Beginning in Q1 2019, Birchcliff began presenting condensate and NGLs separately. Prior period sales and volumes have been adjusted to conform to this current period presentation.
See “Advisories – Production”.
(2) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.
(3) Includes non-cash expenses such as compensation, accretion, amortization of deferred financing fees and other losses.
(4) Total capital expenditures for the year ended December 31, 2019 include the $39 million asset acquisition in Pouce Coupe complete by Birchcliff in Q1 2019 (the “Acquisition”).
See “Advisories – Capital Expenditures”.
(5) Birchcliff adopted IFRS 16: Leases effective January 1, 2019 using the modified retrospective approach; therefore 2018 comparative information has not been restated.
4,873
4,072
6,123
372,170
77,096
68.66
77.36
22.92
2.45
22.08
22.08
(1.36)
(3.52)
(3.68)
13.52
(0.87)
(0.99)
(0.56)
0.02
11.12
(7.42)
2.28
(0.79)
(0.27)
(1.44)
3.48
621,421
324,434
312,922
1.18
98,025
0.37
265,911
265,852
26,586
7,687
298,018
605,267
626,454
5
2019 Annual Report | M E S S A G E T O S H A R E H O L D E R S
Dear Fellow Shareholder,
2019 OVERVIEW
We successfully executed on our capital program and
delivered strong financial and operational results in 2019
in spite of the challenging commodity price environment
and difficult industry conditions. Our achievements in 2019
include the following:
•
•
We generated $334.5 million of adjusted funds flow and
$78.1 million of free funds flow in 2019, as compared to
$312.9 million and $13.3 million in 2018.
Our annual average production in 2019 increased by
1% from 2018 and our operating costs decreased by 12%
from 2018, reflecting the significant efforts by our team
to continue to sustainably grow our production while
bringing down per unit costs in order to remain one of
industry’s lowest-cost producers.
•
•
•
•
Our proved developed producing reserves grew to
approximately 206.9 MMboe at December 31, 2019,
a 2% increase from December 31, 2018, and we
successfully added profitable production with
positive recycle ratios in 2019.
In early January 2019, we completed a strategic land
acquisition where we acquired 18 gross (15.1 net)
contiguous sections of Montney lands located between
our existing Pouce Coupe and Gordondale areas, further
consolidating our land position in the area.
As at December 31, 2019, we had drawn $611.5 million of
our $1.0 billion credit facilities, which currently extend to
May 11, 2022 and contain no financial covenants.
We increased our quarterly common share dividend by
5% in 2019, paying a total of $27.9 million in dividends to
our common shareholders in 2019.
In 2019, Birchcliff
had a record year
for production,
adjusted funds flow,
and operating costs.
6
| 2019 Annual Report As noted above, we have significant liquidity under our
credit facilities which currently extend to May 11, 2022 and
contain no financial covenants. Having one of the lowest-
cost structures in the industry combined with our high
working interest, operatorship and ownership/control of
infrastructure positions us to be competitive and sustainable
in a low commodity price environment and gives us the
flexibility to react to challenging industry conditions. Our
Executive Team has been through a number of cycles and
we are up to the challenge.
I would like to thank our Board of Directors for their support
and guidance throughout 2019. I would also like to thank
all of our staff for their excellent work and for helping us
to deliver these strong results for 2019. Our staff are truly
dedicated to help Birchcliff succeed and I believe that
they are our best asset.
Lastly, I would like to thank all of our shareholders for their
continued support. We continue to strive to deliver long-term
value for all of you.
A. Jeffery Tonken
President & Chief Executive Officer
March 11, 2020
In summary, we strengthened Birchcliff in 2019 by growing
our production and reserves and reducing our per unit
operating costs, while continuing to maintain a strong
balance sheet and paying dividends to our shareholders.
COMMITMENT TO CORPORATE
RESPONSIBILITY
Here at Birchcliff, we recognize the importance of, and
our responsibility for, environmental stewardship and one
of our primary goals is to create and preserve a safe and
environmentally responsible organization. We strive to
maintain excellence in environmental reporting and to take
proactive steps to eliminate or reduce our environmental
impact. As an organization that strives for continuous
improvement, we continue to identify, develop and utilize
new technology, systems and processes that will help
reduce our environmental footprint and create a safer work
environment. Information regarding our ESG initiatives and
activities can be found later in this Annual Report under the
heading “Environmental, Social & Governance” and in our
2018 Corporate Responsibility Report which is available on
our website at www.birchcliffenergy.com.
OUTLOOK
We are focused on maintaining our strong balance sheet and
financial flexibility. On March 11, 2020, we announced the
deferral of approximately $65 million of capital expenditures
(approximately 19% of our previously announced capital
budget), bringing our anticipated 2020 capital expenditures
more in-line with our targeted annual adjusted funds flow.
Our F&D capital expenditures are now anticipated to be
$275 million to $295 million and we are targeting an annual
average production rate of 78,000 to 80,000 boe/d in 2020.
We will continue to closely monitor economic conditions and
commodity prices.
We have very low operating costs as a result of owning the
majority of our infrastructure, with low production declines,
estimated to be approximately 22%, which allows us to
withstand weakening and volatile commodity prices.
7
2019 Annual Report | E X E C U T I V E T E A M
Drawing on extensive backgrounds in the energy sector, our Executive Team brings a rich portfolio of
skills and experience to Birchcliff’s business operations.
MYLES BOSMAN
Vice-President, Exploration
& Chief Operating Officer
JEFF TONKEN
President &
Chief Executive Officer
8
| 2019 Annual Report Under the oversight of our Board of Directors, our Executive Team collectively drives our
day-to-day pursuit of operational excellence, while identifying and pursuing responsible growth
opportunities. Deeply invested in our success and unified by a genuine sense of camaraderie,
our Executive Team works together to provide effective leadership and strategic direction.
BRUNO GEREMIA
Vice-President &
Chief Financial Officer
CHRIS CARLSEN
Vice-President,
Engineering
DAVE HUMPHREYS
Vice-President,
Operations
9
2019 Annual Report | M A N A G E M E N T T E A M
Birchcliff’s management team is comprised of talented, high-performing individuals who are driven to
help Birchcliff succeed.
JEFF ROGERS
Facilities Manager
RANDY ROUSSON
Drilling & Completions Manager
RYAN SLOAN
Health, Safety &
Environment Manager
ROBYN BOURGEOIS
General Counsel & Corporate Secretary
BRUCE PALMER
Manager of Geology
GATES AURIGEMMA
Manager, General Accounting
VICTOR SANDHAWALIA
Manager of Finance
ANDREW FULFORD
Surface Land Manager
GEORGE FUKUSHIMA
Manager of Engineering
10
| 2019 Annual Report With guidance from our Executive Team, our management team is instrumental in executing our
business strategy and managing our day-to-day operations.
BRIAN RITCHIE
Asset Manager – Gordondale
THEO VAN DER WERKEN
Asset Manager – Pouce Coupe
MICHELLE RODGERSON
Manager, Human Resources
& Corporate Services
HUE TRAN
Business Development Manager
JESSE DOENZ
Controller & Investor Relations Manager
PAUL MESSER
Manager of Information Technology
TYLER MURRAY
Mineral Land Manager
DUANE THOMPSON
Production Manager
11
2019 Annual Report | H I S T O R Y
Birchcliff was incorporated as a private corporation on July 6, 2004. Since our inception, we have
invested approximately $4.4 billion of capital in Alberta, primarily in the Montney/Doig Resource Play.
These investments have generated $4.6 billion in revenue, paid $370 million in royalties to Albertans
and delivered $2.4 billion in adjusted funds flow.
The following describes the major events in our history:
JANUARY 19, 2005
Common shares commenced
trading on the TSX Venture
Exchange
FEBRUARY 6, 2005
Rig released first Montney/
Doig vertical exploration gas
well drilled by Birchcliff in the
Pouce Coupe area
SEPTEMBER 22, 2007
Rig released first Montney/
Doig horizontal natural gas
well drilled by Birchcliff
utilizing multi-stage fracture
stimulation technology in the
Pouce Coupe area
OCTOBER 2012
Phase III of the Pouce Coupe
Gas Plant commenced
operations with a combined
processing capacity of
150 MMcf/d
2005
MAY 31, 2005
Completed acquisition of
properties in the Peace River
Arch for $242.8 million, including
a significant undeveloped land
position on the Montney/Doig
Resource Play
JULY 21, 2005
Common shares commenced
trading on the TSX
MARCH 2010
Phase I of the Pouce Coupe Gas
Plant commenced operations
with a processing capacity of
30 MMcf/d
NOVEMBER 2010
Phase II of the Pouce Coupe Gas
Plant commenced operations with
a combined processing capacity
of 60 MMcf/d
12
| 2019 Annual Report JULY 13, 2016
Closed equity financings
for total gross proceeds
of $690.8 million
JULY 28, 2016
Completed acquisition of
assets in Gordondale for
approximately $613.5 million
APRIL 3, 2018
Announced a new long-term
processing arrangement at
Altagas’ deep-cut processing
facility in Gordondale
AUGUST 2018
Phase VI of the Pouce Coupe Gas
Plant commenced operations with
a combined processing capacity
of 340 MMcf/d
SEPTEMBER 2014
Phase IV of the Pouce Coupe
Gas Plant commenced operations
with a combined processing
capacity of 180 MMcf/d
2019
MARCH 31, 2017
Paid first quarterly dividend
to common shareholders
SEPTEMBER 2017
Phase V of the Pouce Coupe
Gas Plant commenced
operations with a combined
processing capacity of
260 MMcf/d
JANUARY 3, 2019
Acquired 18 gross (15.1 net)
contiguous sections of
Montney land between
Pouce Coupe and
Gordondale for $39 million
DECEMBER 31, 2019
425 (417.4 net) Montney/Doig
horizontal wells successfully
drilled and cased to date
13
2019 Annual Report | 2 0 1 9 A C C O M P L I S H M E N T S
Generated approximately $78 million of free funds flow, an increase from
approximately $13 million in 2018
Achieved record annual average production of 77,977 boe/d
(1% growth year-over-year)
Delivered reserves growth year-over-year
Continued to pay and increased our quarterly dividend
to common shareholders
Successfully executed the 2019 capital program, drilling a total of
30 (30.0 net) wells and bringing 33 (33.0 net) wells on production
14
| 2019 Annual Report 2 0 2 0 K E Y O B J E C T I V E S
Preserve and protect the balance sheet
Complete and commission Birchcliff’s 20,000 bbls/d (50% condensate,
50% water) inlet liquids-handling facility at the Pouce Coupe Gas Plant
(the “Inlet Liquids-Handling Facility”) to increase condensate production
capability to 10,000 bbls/d in Pouce Coupe
Successful execution of the 14-well pad in Pouce Coupe using multi-interval
cube-style development
Continued commitment to science and technology to drive operational
excellence and further our learnings on field development planning
Optionality on commodity type allows us to focus on Gordondale oil,
Pouce Coupe condensate-rich natural gas, or Pouce Coupe dry natural
gas wells depending on commodity prices in order to maximize our returns
Continue to focus on long-term full cycle profitability while paying a
sustainable quarterly dividend to common shareholders
15
2019 Annual Report | “ WE HAVE
OUR
BEST
ASSET IN
PLACE;
OUR
PEOPLE.”
- A. Jeffery Tonken
President &
Chief Executive Officer
16
| 2019 Annual Report 17
2019 Annual Report | O N E C O R E A R E A
P E A C E
R I V E R
A R C H
18
| 2019 Annual Report P E A C E R I V E R A R C H
Our operations are concentrated within our one core area, the Peace River Arch, which is centered
northwest of Grande Prairie, Alberta, adjacent to the Alberta/British Columbia border. The Peace
River Arch is considered by management to be one of the most desirable natural gas and light oil
drilling areas in North America.
Peace River Arch
The Peace River Arch is generally characterized by multiple horizons with a myriad of structural, stratigraphic and hydrodynamic
traps. The Peace River Arch is highlighted by the Deep Basin hydrocarbon trapping phenomena. The Deep Basin is a
hydrodynamic or permeability trap where the water in the updip position cannot travel through the fine grained reservoirs
with characteristics that include overpressured reservoirs, continuous hydrocarbon columns and low water production, with
low terminal declines. The Peace River Arch provides all-season access that allows the Corporation to drill, equip and tie-in
wells on an almost continuous basis. In addition, Birchcliff has excellent control of and/or long-term access to infrastructure
in the Peace River Arch, which helps us to control our costs and expand our production when market conditions recover.
19
2019 Annual Report | M O N T N E Y/ D O I G R E S O U R C E P L AY
We are focused on the Montney/
Doig Resource Play within the
Peace River Arch.
ATTRIBUTES OF THE MONTNEY/DOIG RESOURCE PLAY
Birchcliff characterizes its Montney/Doig Resource Play
as a regionally pervasive, continuous, low-permeability
hydrocarbon accumulation or system that typically
requires intensive stimulation to produce. The production
characteristics of this play generally include steep initial
declines that rapidly trend to much lower decline rates,
yielding long-life production. The play exhibits a statistical
distribution of estimated ultimate recoveries and therefore
provides a repeatable distribution of drilling opportunities.
Birchcliff’s Montney/Doig Resource Play is ideally suited
for the application of horizontal drilling and multi-stage
fracture stimulation technology. As more wells are drilled
into a resource play, there is a substantial decrease in both
the geological and technical risks. Over the past 15 years,
Birchcliff has worked to de-risk its Montney/Doig Resource
Play by drilling both vertical and horizontal exploration
wells in order to develop an in-depth understanding of
the oil and gas pools, rock properties and petrophysical
characteristics and reservoir parameters. The Corporation
designs, tests and evaluates its drilling, completion and
production technologies and practices to achieve continual
improvements in productivity and expected ultimate
recoveries in order to drive down capital and operating
costs. The Corporation’s pool delineation strategy de-risks
future development and helps to reduce future costs
as new well pads and infrastructure are designed and
built to support multiple horizontal well locations
and increased production.
20
Stratigraphic Column and Production Zones
0 m
500 m
1000 m
1500 m
2000 m
2500 m
3000 m
Surface
Doe Creek
Dunvegan
Paddy/Cadotte
Notikewin
Falher
Bluesky
Gething
Cadomin
Nikanassin
Nordegg
Baldonnel
Boundary Lake
Subcrop
Halfway
Doig
Montney
Kiskatinaw
Exshaw
Wabamun
Duvernay
Leduc
Beaverhill Lake/
Granite Wash
PreCambrian
Graben Complex
DRILLED AND CASED
425
417.4 NET
At December 31, 2019
MONTNEY/DOIG
HORIZONTAL
WELLS
| 2019 Annual Report BIRCHCLIFF OPERATIONS IN THE PEACE RIVER ARCH
The Montney/Doig Resource Play is managed by two technical teams at Birchcliff: the Pouce Coupe Team and the
Gordondale Team. These teams each have a full complement of highly skilled technical professionals, including engineers,
geoscientists and landmen.
Birchcliff Montney/Doig Resource Play in the Peace River Arch
BC
AB
L E G E ND
Birchcliff Pouce Coupe Non-Confidential Land
Birchcliff Gordondale Non-Confidential Land
Birchcliff Non-Core Non-Confidential Land
Montney/Doig Deep Basin Edge
Birchcliff Facility
Pouce Coupe Gas Plant
Gordandale Gas Plant
POUCE COUPE
TEAM
GORDONDALE
TEAM
MONTNEY/DOIG
RESOURCE PLAY
TREND
I
T
K
R
A
M
S
H
I
:
E
C
R
U
O
S
DISCLAIMER: The IHS Markit reports, data and information referenced herein (the “IHS Markit Materials”) are the copyrighted property of IHS Markit Ltd. and its subsidiaries (“IHS Markit”) and
represent data, research, opinions or viewpoints published by IHS Markit, and are not representations of fact. The IHS Markit Materials speak as of the original publication date thereof and not as of the
date of this document. The information and opinions expressed in the IHS Markit Materials are subject to change without notice and IHS Markit has no duty or responsibility to update the IHS Markit
Materials. Moreover, while the IHS Markit Materials reproduced herein are from sources considered reliable, the accuracy and completeness thereof are not warranted, nor are the opinions and analyses
which are based upon it. IHS Markit is a trademark of IHS Markit. Other trademarks appearing in the IHS Markit Materials are the property of IHS Markit or their respective owners.
21
2019 Annual Report |
Our Montney/Doig Resource Play is centred approximately 95 km northwest of Grande Prairie,
Alberta, Canada and, in the opinion of Birchcliff, is one of the most sought after resource plays in
North America. Within the Montney/Doig Resource Play, Birchcliff is focused on two key operating
areas: Pouce Coupe and Gordondale.
There are a number of attributes that the Montney/Doig Resource Play has that contribute to it being a world class resource play,
including resource density, large areal extent, excellent “fracability”, high fracture stability and high permeability, as discussed in
further detail on the next page.
Select Unconventional Plays in North America
Birchcliff Montney/Doig
Source: Source: Canadian Discovery, RBC Rundle
SOURCE: RBC RUNDLE
22
| 2019 Annual Report GEOLOGY
The Montney/Doig Resource Play in Birchcliff’s areas of
operations is approximately 300 metres (1,000 feet) thick.
The play has a large areal extent covering in excess of
50,000 square miles. The Montney/Doig is composed
of a high percentage of hard minerals and a very low
percentage of clay minerals resulting in excellent “fracability”.
This, combined with the current stress regime, results in
the rock shattering more like glass in a complex fracture
style versus a simple bi-wing style. The rock parameters
also yield excellent fracture stability; the fractures stay open
due to low proppant embedment. This is a key contributing
factor to the low terminal declines and large estimated
ultimate recoveries of the play. Unlike most shale plays that
are predominantly shale, the Montney/Doig is classified
by management as a hybrid resource play because it is
comprised of hydrocarbon-saturated rock with both tight
silt and sand reservoir rock interlayered with shale source
rock. This results in relatively high permeability and
productivity rates.
Hydrodynamics is another important attribute for resource
plays. A large portion of the Montney/Doig Resource Play
is over-pressured which reduces the potential for significant
water production. The Pouce Coupe and Gordondale
areas are predominantly over-pressured which also results
in higher hydrocarbons in-place. The Montney and a
majority of the Doig were deposited in a lower to middle
shore face environment that is regionally extensive and
results in a widespread style deposit that provides for
more repeatable results.
The Montney/Doig Resource Play exists in two geological
formations (the Montney and the Doig) and Birchcliff has
divided the geologic column in its areas of operations into six
drilling intervals from the youngest (top) to the oldest (bottom):
(i) the Basal Doig/Upper Montney; (ii) the Montney D4;
(iii) the Montney D3; (iv) the Montney D2; (v) the Montney D1;
and (vi) the Montney C. Part of Birchcliff’s long-term strategy
is to continue to explore and delineate the Montney/Doig
Resource Play, both geographically and stratigraphically.
Birchcliff Montney/Doig Resource Play Full Development Plan: Hexastack
300m
BASAL DOIG
MONTNEY D5
MONTNEY D4
M O N T N E Y D 3
M O N T N E Y D 2
M O N T N E Y D 1
M O N T N E Y C
60m
3 0 0 m
Drilling Interval
Basal Doig/Upper Montney
Mature Developed/Commercial
74 Wells
Montney D4
Mature Developed/Commercial
12 Wells
Montney D3
Exploration
0 Wells
Montney D2
Mature Developed/Commercial
33 Wells
Montney D1
Mature Developed/Commercial
291 Wells
Montney C
Mature Developed/Commercial
3 Wells
Mature Developed/Commercial
Future Potential
1600m
1600m
As of December 31, 2019
23
2019 Annual Report | OUR OPERATIONS
2019 ACQUISITIONS AND DISPOSITIONS
At December 31, 2019, Birchcliff has successfully drilled
and cased an aggregate of 425.0 (417.4 net) Montney/Doig
horizontal wells on the Montney/Doig Resource Play.
Of these wells, an aggregate of 413.0 (406.2 net) wells have
been completed and brought on production, consisting of
74 (72.2 net) wells in the Basal Doig/Upper Montney interval,
12 (12.0 net) wells in the Montney D4 interval, 33 (33.0 net)
wells in the Montney D2 interval, 291 (286.0 net) wells in the
Montney D1 interval and 3 (3.0 net) wells in the Montney C
interval. To date, Birchcliff has not drilled any wells in the
Montney D3 interval.
2019 DRILLING AND COMPLETIONS
During 2019, Birchcliff drilled 30 (30.0 net) horizontal wells,
7 (7.0 net) of which were drilled in Q4 2019 to help ensure
the efficient execution of the Corporation’s 2020 capital
program. Of these, 5 (5.0 net) were condensate-rich natural
gas wells in Pouce Coupe and 2 (2.0 net) were oil wells in
Gordondale. The Corporation brought on production
33 (33.0 net) wells during 2019, including 9 (9.0 net) wells
that were drilled in Q4 2018 and 1 of the 7 wells drilled in
Q4 2019, the remaining 6 of which are expected to be
brought on production in Q1 and Q2 2020. All wells drilled
in 2019 were drilled on multi-well pads, which allows Birchcliff
to reduce its per well costs and environmental footprint.
On January 3, 2019, Birchcliff completed the Acquisition
of 18 gross (15.1 net) contiguous sections of Montney land
located between its existing Pouce Coupe and Gordondale
properties. The Acquisition demonstrates the highly
functional integrated teams working together at Birchcliff.
The Acquisition was directly related to the learnings from
the offsetting 2018 science and technology pad, which
led to the evaluation and acquisition of these lands. That,
in turn, allowed Birchcliff’s operations team to quickly and
efficiently drill, complete and bring on production 6 wells on
the acquired lands in early 2019, targeting condensate-rich
natural gas. The wells were drilled in three different intervals
(4 in the Montney D1, 1 in the Montney D2 and 1 in the
Montney C) and have shown strong production results,
including high condensate-to-gas ratios. With the positive
results of the first 6 wells on the acquired lands, specifically
in the new Montney D2 and C drilling intervals, Birchcliff
returned to this pad in Q4 2019 to drill an additional
6 (6.0 net) wells, 3 Montney D2 and 3 Montney C wells,
2 of which were drilled by year-end 2019. These 6 wells
are expected to be brought on production in Q2 2020.
SIGNIFICANT FUTURE DRILLING OPPORTUNITIES
As at December 31, 2019, Birchcliff held 413.2 sections of
land that have potential for the Montney/Doig Resource Play.
Of these lands, 408.2 (378.3 net) sections have potential for
the Basal Doig/Upper Montney interval, 381.7 (368.9 net)
sections have potential for the Montney D4 interval,
24
| 2019 Annual Report 387.4 (373.5 net) sections have potential for the Montney
D2 interval, 385.9 (372.0 net) sections have potential for the
Montney D1 interval and 386.8 (372.8 net) sections have
potential for the Montney C interval. As at December 31, 2019,
Birchcliff’s total land holdings on these five intervals were
1,950.0 (1,865.5 net) sections. Assuming full development of
four horizontal wells per section per drilling interval, Birchcliff
has 7,462.0 net existing horizontal wells and potential net
future horizontal drilling locations in respect of the Basal
Doig/Upper Montney and the Montney D1, D2, D4 and
C intervals as at December 31, 2019. With 425 (417.4 net)
horizontal locations drilled at the end of 2019, there remains
7,044.6 (1) potential net future horizontal drilling locations
as at December 31, 2019, up from 6,365.8 at year-end 2018.
This increase is largely due to the acquisition of third party
and crown lands within Birchcliff’s key focus areas. Birchcliff’s
consolidated reserves report effective December 31, 2019
attributed proved reserves to 939.3 net existing wells and
potential net future horizontal drilling locations (of which
533.1 net wells are potential future drilling locations) and
proved plus probable reserves to 1,175.1 net existing wells
and potential net future horizontal drilling locations (of which
768.9 net wells are potential future drilling locations). The
remaining 6,286.9 potential net future horizontal drilling
locations have not yet had any proved or probable reserves
attributed to them by Birchcliff’s independent qualified
reserves evaluators.
CORPORATE OUTLOOK
Over time, Birchcliff will work towards filling our existing
infrastructure. This will allow us to continue to lower our
per unit costs and maximize cash flow. Birchcliff remains
focused on continuing to drive down costs and remaining a
low-cost operator with significant financial flexibility in order
to succeed in a low commodity price environment.
Birchcliff Montney/Doig Multi-Layer Opportunity
Elmworth
Sinclair
Glacier
Pouce Coupe
South
Pouce Coupe
North
Gordondale
Basal Doig
Montney D5
Montney D4
Montney D3
Montney D2
Montney D1
TSE
Montney C
Hydrocarbon Pore Volume
Bulk Volume Water
25
2019 Annual Report | P O U C E C O U P E T E A M
The Pouce Coupe key operating area is located west and northwest of Grande Prairie, Alberta and consists of the Corporation’s
properties in Pouce Coupe and Elmworth. At December 31, 2019, the Corporation held an aggregate of 407.7 (376.6 net)
sections of land in the area. Annual average production in 2019 was 50,616 boe/d (274,009 MMcf/d of natural gas,
986 bbls/d of NGLs (excluding condensate) and 3,963 bbls/d of condensate).
Pouce Coupe Team Highlight Map
R13W6
R12W6
R11W6
R10W6
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POUCE COUPE GAS PLANT
E
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T77
L E G E ND
Pouce Coupe Non-Confidential Land
Birchcliff Non-Confidential Land
N
N
Birchcliff Vertical Producers
Birchcliff Horizontal Producers
T76
2020 Capital Program
2019 Capital Program
SOURCE: IHS MARKIT
26
| 2019 Annual Report
of the Pouce Coupe Gas Plant. During 2010, we constructed
Phases I and II of our Pouce Coupe Gas Plant with 60 MMcf/d
of natural gas processing capacity. Processing capacity at
the Pouce Coupe Gas Plant was subsequently increased to
150 MMcf/d (Phase III) in 2012, to 180 MMcf/d (Phase IV) in
2014, to 260 MMcf/d (Phase V) in 2017 and to 340 MMcf/d
(Phase VI) in 2018. In Q4 2018, Birchcliff completed the
re-configuration of Phases V and VI to provide for shallow-cut
capability. This shallow-cut capability allows Birchcliff to
extract propane plus (C3+) from the natural gas stream, further
enhancing Birchcliff’s ability to maximize its liquids production.
POUCE COUPE DRILLING AND DEVELOPMENT
Key focus areas for Pouce Coupe in 2019 were the drilling of
condensate-rich natural gas wells and the further exploitation
and delineation of condensate-rich trends in the Montney D1, D2
and C intervals. Birchcliff drilled 16 (16.0 net) wells and brought
17 (17.0 net) wells on production in Pouce Coupe in 2019.
POUCE COUPE GAS PLANT
Our 100% owned and operated Pouce Coupe Gas Plant
located in the Pouce Coupe area of Alberta is strategically
situated in the heart of our Montney/Doig Resource Play,
enabling us to process natural gas at a lower cost than that
borne by others who rely on third-party processing. The
Pouce Coupe Gas Plant is the cornerstone of our strategy to
develop our Montney/Doig Resource Play, to control and
expand our production in the play and to further reduce
our operating costs on a per boe basis. In 2010, we began
executing on our “build & fill” strategy with the construction
27
2019 Annual Report | G O R D O N D A L E T E A M
The Gordondale key operating area is located northwest of Grande Prairie, Alberta and consists of the Corporation’s properties
in Gordondale and Progress. At December 31, 2019, the Corporation held an aggregate of 148.5 (93.4 net) sections of land in
the area. Annual average production in 2019 was 27,357 boe/d (90,947 MMcf/d of natural gas, 4,686 bbls/d of light oil,
6,278 bbls/d of NGLs (excluding condensate) and 1,235 bbls/d of condensate).
GORDONDALE DRILLING AND DEVELOPMENT
Key focus areas for Gordondale in 2019 were the drilling of crude oil wells and the further exploitation and delineation of oil in the
Montney D1 and D2 intervals, specifically in the southeastern part of the Gordondale field. Birchcliff drilled 14 (14.0 net) horizontal
wells and brought 16 (16.0 net) wells on production in Gordondale in 2019.
Gordondale Team Highlight Map
R13W6
R12W6
R11W6
R10W6
BC
AB
CF
M
O
N
T
N
E
F
L
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LG
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/
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LGG
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F
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T77
L E G E ND
Gordondale Non-Confidential Land
Birchcliff Non-Confidential Land
N
N
Birchcliff Vertical Producers
Birchcliff Horizontal Producers
T76
2020 Capital Program
2019 Capital Program
SOURCE: IHS MARKIT
28
| 2019 Annual Report
E N V I R O N M E N TA L , S O C I A L & G O V E R N A N C E
OUR
ROLE
29
2019 Annual Report | E N V I R O N M E N TA L , S O C I A L & G O V E R N A N C E
Birchcliff recognizes the importance of, and its responsibility for,
environmental stewardship and one of the Corporation’s primary
goals is to create and preserve a safe and environmentally responsible
organization. Birchcliff strives to maintain excellence in environmental
reporting and to take proactive steps to eliminate or reduce its
environmental impact. As an organization that strives for continuous
improvement, Birchcliff continues to identify, develop and utilize
new technology, systems and processes that will help reduce its
environmental footprint and create a safer work environment.
A copy of the Corporation’s 2018 Corporate Responsibility Report, which provides additional information regarding Birchcliff’s ESG
initiatives and activities, including emissions reductions, is available on the Corporation’s website at www.birchcliffenergy.com.
HEALTH, SAFETY AND ENVIRONMENTAL PROGRAMS
Birchcliff is committed to continually evolving and improving
its health and safety program (the “H&S Program”) and its
environmental management program (the “EM Program”)
and to conducting its activities in a manner that safeguards
its employees, contractors and representatives, the public
and the environment. Birchcliff’s executives, managers,
employees and others engaged on its behalf are responsible
for upholding the requirements of its H&S and EM Programs.
The objective of Birchcliff’s H&S Program is to provide a
framework to safeguard its employees, contractors and visitors
from personal injury and health and safety hazards. Birchcliff’s
EM Program focuses on minimizing the environmental impact
of its operations while meeting regulatory requirements
and corporate standards. The EM Program includes:
(i) a suspended well inspection program to support future
development or eventual abandonment; (ii) an abandonment
and decommissioning program for wells and facilities ready
for abandonment; (iii) a surface reclamation program;
(iv) a groundwater monitoring program; (v) a spill prevention,
response and clean-up program; (vi) a fugitive emission
survey and repair program; (vii) an environmental liability
assessment program; (viii) a waste management program;
(ix) a naturally occurring radioactive materials program;
(x) a storage management program; (xi) a facility land
vegetation management program; and (xii) a site planning
and construction program.
Training and Emergency Response Plans
Birchcliff maintains a safe work environment with policies,
processes, standards, training, equipment and emergency
response procedures that meet or exceed governmental
regulations and industry practices. Employees and
contractors on Birchcliff’s worksites are required to follow
all health, safety and environmental rules and procedures
outlined in the H&S Program and to participate in pertinent
health and safety training.
The Corporation has developed emergency response plans
in conjunction with local authorities, emergency services and
the communities in which it operates in order to be prepared
to effectively respond to an incident should one arise.
The Corporation conducts a rigorous emergency response
exercise for its staff on an annual basis, as compared to the
regulatory requirement of once every three years.
Alberta Certificate of Recognition (COR) Safety Program
Birchcliff participates in Alberta’s COR Safety Program and
has received and maintained a COR certification since 2011.
30
| 2019 Annual Report
A COR certification demonstrates that the employer’s
health and safety management system has been evaluated
by a certified auditor and meets provincial standards, as
established by Alberta Occupational Health and Safety.
Maintaining a COR certification requires a commitment to
continuous improvement in health, safety and environment
management practices, including sound planning
and implementation. Birchcliff’s H&S Program is audited
externally every 3 years by an independent auditor and
internally every year by a certified professional.
Asset Integrity
Birchcliff works diligently to maintain the safety and integrity
of its facility and pipeline infrastructure and maintains two
separate integrity programs: a pressure equipment integrity
program and a pipeline integrity program. The Corporation’s
asset integrity group manages its pressure equipment
integrity program in compliance with the Alberta Boilers
Safety Association requirements and its pipeline integrity
program in compliance with AER requirements. These
programs are audited internally on an annual basis by a
qualified professional and externally on a periodic basis by
an independent auditor to evaluate their effectiveness and
are updated based on the findings from such audits.
The Corporation’s Chief Inspector and asset integrity group
make use of databases and associated work tracking systems
to ensure that all integrity tasks (inspections, pigging, etc.) are
scheduled and completed according to the requirements set
forth in the Corporation’s programs.
Environmental Assessments and Audits
Environmental assessments are undertaken for new
projects or when acquiring new properties or facilities in
order to identify, assess and minimize environmental risks
and operational exposures. The Corporation conducts
audits of operations to confirm compliance with internal
standards and to stimulate improvement in practices where
needed. Documentation is maintained to support internal
accountability and measure operational performance against
recognized industry indicators to assist in achieving the
objectives of its policies and programs.
COMMUNITY AND STAKEHOLDER RELATIONS
Fostering a strong relationship with the community and its
stakeholders is as integral to the success of the Corporation’s
projects as obtaining the required regulatory approvals. The
Corporation believes cooperative, sincere and responsive
consultation efforts with stakeholders in the areas in which
Birchcliff operates creates a solid foundation for its business.
Birchcliff has an experienced team working with local
stakeholders to learn their values and priorities and to resolve
any issues or concerns that arise.
Birchcliff recognizes the role that communities play in its
success and looks for opportunities to give back. The
Corporation is a staunch supporter of the community and
the business and educational initiatives of the Indigenous
communities who live in the areas where Birchcliff operates.
Every year, the Corporation participates in a number of
community support endeavours in the areas surrounding
its field operations and in Calgary. In 2019, the Corporation
contributed to a number of local community initiatives that
help to elevate and enhance the quality of life at the local
level, including minor hockey and other amateur sports,
local schools, agricultural societies and fire departments.
To date, Birchcliff has helped to raise over $1,000,000 for
both STARS Air Ambulance in the Grande Prairie area and
the United Way of Calgary. Each year, the Corporation also
raises funds for the YWCA. Through Birchcliff’s support
of Momentum, Calgarians living in poverty learn how to
achieve a sustainable livelihood. The Corporation supports
the Canadian Cancer Society daffodil campaign and
volunteers with Feed the Hungry, providing healthy meals
in an atmosphere of dignity and respect. During the holiday
season, Birchcliff employees “adopt” a number of families in
need and donate gifts, food and decorations to help make
the holidays special. The Corporation also fills backpacks with
living essentials and gifts for the Mustard Seed and prepares
sandwiches for the homeless for the Calgary Drop-In Centre.
Through these activities and numerous others, Birchcliff
creates and maintains long-term, positive partnerships and
relationships, while promoting employee engagement in the
communities in which it operates.
2019 Annual Report | 31
and prohibitions on the spill, release or emission of various
substances produced in association with oil and natural gas
industry operations. In addition, such legislation sets out
the requirements with respect to oilfield waste handling and
storage, habitat protection and the satisfactory operation,
maintenance, abandonment and reclamation of well and
facility sites. Compliance with environmental legislation can
require significant expenditures and/or result in operational
restrictions. A breach of applicable environmental legislation
may result in the imposition of fines and penalties, some
of which may be material. In addition, a breach may result
in the suspension or revocation of necessary licences and
authorizations and/or the Corporation being subject to
interim compliance measures, all of which may restrict
the Corporation’s ability to conduct operations. Further,
the Corporation could be subject to civil liability for
pollution damage.
GOVERNANCE
The Board of Directors currently consists of five directors,
namely A. Jeffery Tonken, Dennis A. Dawson, Debra A. Gerlach,
Stacey E. McDonald and James W. Surbey. Mr. Tonken is
the Chairman of the Board of Directors and Mr. Dawson is
the independent lead director. The Board of Directors has
four committees: the Audit Committee, the Compensation
Committee, the Reserves Evaluation Committee and the
Nominating Committee. Additional information on the
Corporation’s corporate governance practices is contained
in the Corporation’s information circular for its most recent
annual meeting of the holders of common shares, which was
held on May 16, 2019.
With respect to ESG oversight, the Board of Directors
has overall responsibility for ESG matters. Each quarter,
the Board of Directors receives a detailed report from
management on things such as the Corporation’s safety
performance, total recordable incident frequency, asset
retirement and reclamation activities and the Corporation’s
liability management rating. In addition to the oversight
provided by the Board of Directors, Birchcliff has established
the following committees which are comprised of members
of management:
•
•
Greenhouse Gas Regulatory Compliance Committee:
The purpose of this committee to help ensure that
there is corporate-wide awareness and compliance
with the latest provincial and federal GHG legislation
requirements which impact Birchcliff’s operations.
ESG Committee: The purpose of this committee
is to drive continuous improvement of Birchcliff’s
ESG-related corporate metrics by: (i) establishing and
monitoring ESG-related key performance indicators;
(ii) developing and maintaining an effective strategy to
communicate ESG-related key performance indicators;
and (iii) identifying, prioritizing and directing initiatives
to improve ESG key performance indicators within
the Corporation.
ENVIRONMENTAL PROTECTION REGULATION & COSTS
General
All phases of the oil and natural gas business present
environmental risks and hazards and are subject to
environmental regulation pursuant to a variety of federal,
provincial and local laws and regulations. Environmental
legislation provides for, among other things, restrictions
32
| 2019 Annual Report The costs of complying with existing or future environmental
legislation or regulations, including those relating to climate
change and GHG emissions, may have a material adverse
effect on the Corporation’s financial condition or results of
operations. Future changes in environmental legislation
could occur and result in stricter standards and enforcement,
larger fines and liability and increased capital expenditures
and operating costs. At December 31, 2019, the Corporation
has not recorded any material costs and liabilities relating to
GHG or environmental protection legislation or any material
environmental incidents.
See “Advisories– Forward-Looking Statements”.
GHG Emissions
The Corporation’s exploration and production facilities
and other operations and activities emit GHGs which
requires the Corporation to comply with applicable
GHG emissions legislation.
With the exception of the Pouce Coupe Gas Plant, the
Corporation’s facilities were not subject to the CCIR in 2019
as they did not emit more than 100,000 tonnes of GHGs per
year. The Pouce Coupe Gas Plant exceeded the 100,000
tonnes of GHGs per year threshold in 2017, 2018 and 2019
and it will be automatically subject to TIER as it exceeds the
100,000 tonnes of GHGs per year threshold. In addition,
the Corporation’s other facilities have been accepted as
an aggregate facility for the purposes of TIER and the TIER
Regulation will apply to such facilities for the 2020 year and
going forward.
On February 25, 2020, the Corporation received 23,571
emission performance credits under the transitional
provisions of the CCIR for the 2018 financial year and it
anticipates that it will receive emission performance credits
for the 2019 financial year. As the Pouce Coupe Gas Plant
and the Corporation’s other facilities are currently subject to
TIER, such facilities are exempt from paying the federal fuel
charge under the GGPPA.
At the present time, the operational and financial impacts of
complying with applicable GHG legislation are not material
to the Corporation. The Corporation will continue to monitor
and evaluate any developments in the area in order to assess
the potential financial and operational implications on the
Corporation. Given the multitude of variables that could
cause outcomes to change, it is not currently possible to
predict the future incremental compliance costs with any
certainty. However, given the evolving nature of climate
change policy and the control of GHG and resulting
requirements, it is expected that current and future climate
change regulations will have the effect of increasing the
Corporation’s operating expenses and in the long-term,
potentially reducing the demand for oil and natural gas
resulting in a decrease in the Corporation’s profitability
and a reduction in the value of its assets.
Decommissioning Obligations
As a result of its net ownership interest in oil and natural
gas properties and equipment, including well sites,
processing facilities and gathering systems, the Corporation
incurs decommissioning obligations. The Corporation’s
decommissioning obligation at December 31, 2019 was
$128 million, calculated on a discounted fair value basis
using a nominal risk-free rate of 1.74% and an inflation rate
of 1.33%. Additional information on the Corporation’s
decommissioning obligations is available in the Corporation’s
audited annual financial statements for the year ended
December 31, 2019.
LEARN MORE
BIRCHCLIFF CORPORATE
RESPONSIBILITY REPORT
BirchcliffEnergy.com
33
2019 Annual Report | 2 0 1 9 Y E A R - E N D R E S E R V E S
Birchcliff retained two independent qualified reserves evaluators, Deloitte LLP (“Deloitte”) and McDaniel & Associates Consultants Ltd.
(“McDaniel”), to evaluate and prepare reports on 100% of Birchcliff’s light crude oil and medium crude oil, conventional natural gas,
shale gas and NGLs reserves. Deloitte evaluated all of Birchcliff’s properties other than the Corporation’s assets in Gordondale and
Progress, representing approximately 80% of the assigned total proved plus probable reserves, and McDaniel evaluated the
reserves attributable to the Corporation’s assets in Gordondale and Progress, representing approximately 20% of the assigned
total proved plus probable reserves.
The reserves data set forth below at December 31, 2019 is based upon the evaluations by Deloitte with an effective date of
December 31, 2019 as contained in the report of Deloitte dated February 12, 2020 (the “2019 Deloitte Reserves Report”)
and the evaluation by McDaniel with an effective date of December 31, 2019 as contained in the report of McDaniel dated
February 12, 2020 (the “2019 McDaniel Reserves Report”), which are contained in the consolidated report of Deloitte dated
February 12, 2020 with an effective date of December 31, 2019 (the “2019 Consolidated Reserves Report”). Deloitte prepared
the 2019 Consolidated Reserves Report by consolidating the properties evaluated by Deloitte in the 2019 Deloitte Reserves Report
with the properties evaluated by McDaniel in the 2019 McDaniel Reserves Report. The forecast commodity prices, inflation and
exchange rates utilized were computed using the average of forecasts from Deloitte, McDaniel, GLJ Petroleum Consultants Ltd.
and Sproule Associates Ltd. effective January 1, 2020 (the “2019 IQRE Price Forecast”). The 2019 IQRE Price Forecast is available
in the Corporation's press release dated February 12, 2020 and the Corporation's Annual Information Form for the year ended
December 31, 2019.
Deloitte also prepared an evaluation with an effective date of December 31, 2018 as contained in the report of Deloitte dated
February 13, 2019 (the “2018 Deloitte Reserves Report”) and McDaniel prepared an evaluation with an effective date of
December 31, 2018 as contained in the report of McDaniel dated February 13, 2019 (the “2018 McDaniel Reserves Report”),
which are contained in the consolidated report of Deloitte with an effective date of December 31, 2018 (the “2018 Consolidated
Reserves Report”). Deloitte prepared the 2018 Consolidated Reserves Report by consolidating the properties evaluated by
Deloitte in the 2018 Deloitte Reserves Report with the properties evaluated by McDaniel in the 2018 McDaniel Reserves Report,
in each case using Deloitte’s forecast price and cost assumptions effective December 31, 2018 (the “2018 Deloitte Price Forecast”).
All of the above-noted reserves reports were prepared in accordance with the standards contained in the Canadian Oil and Gas
Evaluation Handbook (the “COGE Handbook”) and National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities
(“NI 51-101”) in effect at the relevant time.
For additional information regarding the presentation of Birchcliff’s reserves disclosure contained herein, see “Presentation of Oil and
Gas Reserves” and “Advisories” in this Annual Report. The reserves data provided in this Annual Report presents only a portion of the
disclosure required under NI 51-101. The disclosure required under NI 51-101 is contained in Birchcliff’s Annual Information Form for
the year ended December 31, 2019, which was filed on the System for Electronic Document Analysis and Retrieval (www.sedar.com)
on March 11, 2020. In certain of the tables below, numbers may not add due to rounding.
32
| 2019 Annual Report RESERVES SUMMARY
The following table summarizes the estimates of Birchcliff’s gross reserves at December 31, 2019 and December 31, 2018, estimated
using the forecast price and cost assumptions in effect as at the effective dates of the applicable reserves evaluations:
Summary of Gross Reserves
(Forecast Prices and Costs)
Reserves Category
Proved Developed Producing
Total Proved
Probable
Total Proved Plus Probable
Corporate
Corporate Reserves
Dec 31, 2019
(Mboe)
Dec 31, 2018
(Mboe)
Change from
Dec 31, 2018
206,922.4
709,061.2
323,133.5
203,631.0
689,674.1
312,396.0
1,032,194.7
1,002,070.1
)
e
o
b
M
M
(
s
e
v
r
e
s
e
R
)
e
o
b
M
M
(
s
e
v
r
e
s
e
R
1,200
1,000
800
600
400
200
0
2011
2012
2013
2014
2015
2016
2017
2018
2019
Montney
SINCE 2011:
1,200
PDP
1,000
23% COMPOUND
ANNUAL
GROWTH
800
PROVED
PROVED PLUS
PROBABLE
21% COMPOUND
ANNUAL
GROWTH
18% COMPOUND
ANNUAL
GROWTH
600
400
200
0
2011
2012
2013
2014
2015
2016
2017
2018
2019
2%
3%
3%
3%
PDP
TP
2P
PDP
TP
2P
33
2019 Annual Report |
The following table sets forth Birchcliff’s light crude oil and medium crude oil, conventional natural gas, shale gas and NGLs reserves at
December 31, 2019, estimated using the 2019 IQRE Price Forecast:
Summary of Reserves at December 31, 2019
(Forecast Prices and Costs)
Reserves
Category
Proved
Developed
Producing
Developed
Non-Producing
Light Crude Oil and
Medium Crude Oil
Conventional
Natural Gas
Shale Gas
NGLs(1)
Total Boe
Gross
(Mbbls)
Net
(Mbbls)
Gross
(MMcf)
Net
(MMcf)
Gross
(MMcf)
Net
(MMcf)
Gross
(Mbbls)
Net
(Mbbls)
Gross
(Mboe)
Net
(Mboe)
9,695.0
7,951.6
7,814.9
7,266.9
982,141.3
922,927.5 32,234.6
25,443.1
206,922.4 188,427.2
0.0
0.0
781.0
726.3
21,756.0
20,362.1
650.9
547.0
4,407.1
4,061.8
Undeveloped
11,358.3
9,801.8
2,870.5
2,624.0 2,576,268.7
2,414,085.0 56,516.9
46,590.6
497,731.7 459,177.2
Total Proved
Probable
Total Proved
Plus Probable
(1) NGLs includes condensate.
21,053.3
17,753.5
11,466.4
10,617.2
3,580,166.0
3,357,374.6 89,402.5
72,580.7
709,061.2
651,666.1
12,543.4
10,172.4
8,348.4
7,850.7
1,553,306.8
1,437,876.2 50,314.2
39,829.8
323,133.5 290,956.6
33,596.8
27,925.8
19,814.8
18,467.9
5,133,472.7 4,795,250.8 139,716.7
112,410.5
1,032,194.7 942,622.8
NET PRESENT VALUES OF FUTURE NET REVENUE
The following table sets forth the net present values of future net revenue attributable to Birchcliff’s reserves at December 31, 2019,
estimated using the 2019 IQRE Price Forecast, before deducting future income tax expenses and calculated at various discount rates:
Summary of Net Present Values of Future Net Revenue at December 31, 2019(1) (2)
(Forecast Prices and Costs)
Reserves Category
Proved
Developed Producing
Developed Non-Producing
Undeveloped
Total Proved
Probable
Total Proved Plus Probable
Before Income Taxes Discounted At (%/year)
0
(MM$)
5
(MM$)
10
(MM$)
15
(MM$)
20
(MM$)
Unit Value
Discounted
at 10%/yr
($/boe)(3)
3,258.4
2,462.2
1,938.5
1,594.6
1,357.2
10.29
79.2
7,044.1
10,381.7
5,890.7
16,272.4
39.8
3,759.9
6,261.9
2,481.5
8,743.3
19.5
2,148.9
4,106.9
1,207.6
5,314.5
7.7
1,271.7
2,874.0
654.3
0.3
755.5
2,113.1
383.8
3,528.3
2,496.9
4.80
4.68
6.30
4.15
5.64
(1) Estimates of future net revenue, whether calculated without discount or using a discount rate, do not represent fair market value.
(2) Includes abandonment, decommissioning and reclamation costs for all oil and natural gas assets, including all wells, gathering systems, pipelines, facilities and surface land development.
(3) Unit values are based on net reserves.
34
| 2019 Annual Report FUTURE DEVELOPMENT COSTS
FDC reflects the independent reserves evaluators’ best estimate of what it will cost to bring the proved and proved plus probable
reserves on production. Changes in forecast FDC occur annually as a result of development activities, acquisition and disposition
activities and capital cost estimates. The following table sets forth development costs deducted in the estimation of Birchcliff’s future
net revenue attributable to the reserves categories noted below:
Future Development Costs
(Forecast Prices and Costs)
2020
2021
2022
2023
2024
Thereafter
Total undiscounted
Proved
(MM$)
322.5
411.8
555.8
775.8
405.0
609.7
3,080.6
Proved Plus Probable
(MM$)
322.5
475.4
611.9
818.0
508.3
1,682.8
4,418.9
FDC for total proved reserves increased to $3.08 billion at December 31, 2019 from $2.96 billion at December 31, 2018. FDC for total
proved plus probable reserves increased to $4.42 billion at December 31, 2019 from $4.29 billion at December 31, 2018. The increases
in FDC for both proved and proved plus probable reserves were largely due to: (i) the addition of the Inlet Liquids-Handling Facility;
(ii) the additional compression and line looping scheduled in 2020 in Gordondale; (iii) and the FDC associated with a net increase
in Montney/Doig potential net future drilling locations added in each category of reserves as a result of Birchcliff’s successful
2019 drilling program.
The FDC for both proved and proved plus probable reserves are primarily the capital costs required to drill, complete, equip and
tie-in the net undeveloped locations. The estimates of FDC on a proved and proved plus probable basis also include approximately
$374 million (unescalated) for the continued expansion of the Pouce Coupe Gas Plant from the existing 340 MMcf/d to 660 MMcf/d
of total throughput. The FDC for the expansions of the Pouce Coupe Gas Plant also include the costs of the related gathering pipelines
and maintenance capital.
The following table sets forth the average cost to drill, complete, equip and tie-in a multi-stage fractured horizontal well as estimated by
Deloitte and McDaniel:
Average Well Cost, as Estimated by
Deloitte or McDaniel
December 31, 2019
(MM$)
December 31, 2018
(MM$)
Pouce Coupe(1)
Gordondale(2)
(1) Estimated by Deloitte.
(2) Estimated by McDaniel.
2019YE RESERVE HIGHLIGHTS:
4.7
5.4
4.7
5.4
$8.65
/boe
PDP F&D
COSTS
254% 2P RESERVES
REPLACEMENT
35
2019 Annual Report | 2019 FINDING AND DEVELOPMENT COSTS
During 2019, our F&D costs were $256.4 million and our FD&A costs were $297.8 million.
The following table sets forth our estimates of our F&D costs per boe and FD&A costs per boe for 2019, 2018 and 2017, excluding
and including FDC:
Excluding FDC ($/boe)(1)
F&D – Proved Developed Producing
F&D – Proved
F&D – Proved Plus Probable
FD&A – Proved Developed Producing
FD&A – Proved
FD&A – Proved Plus Probable
Including FDC ($/boe)(1)
F&D – Proved
F&D – Proved Plus Probable
FD&A – Proved
FD&A – Proved Plus Probable
2019
$8.65
$5.13
$3.55
$9.38
$6.22
$5.08
2019(2)
$7.84
$6.22
$8.71
$7.25
2018
$8.75
$5.56
$5.57
$8.75
$5.55
$5.13
2018(3)
$0.64
$1.27
$0.45
$1.47
2017
$6.29
$2.53
$2.54
$4.79
$1.95
$2.35
2017(4)
$8.14
$7.27
$7.16
$5.37
3-Year
Average
$7.48
$3.63
$3.36
$7.07
$3.59
$3.72
3-Year
Average
$6.57
$5.89
$5.98
$4.88
(1) See “Advisories – Oil and Gas Metrics” for a description of the methodology used to calculate F&D and FD&A costs.
(2) Reflects the 2019 increase in FDC from 2018 of $118.8 million on a proved basis and $127.0 million on a proved plus probable basis.
(3) Reflects the 2018 decrease in FDC from 2017 of $272.2 million on a proved basis and $211.2 million on a proved plus probable basis.
(4) Reflects the 2017 increase in FDC from 2016 of $732.9 million on a proved basis and $352.9 million on a proved plus probable basis.
2019 RECYCLE RATIOS
The following table sets forth our recycle ratios for operating and adjusted funds flow netbacks for 2019 and 2018, excluding
and including FDC:
Excluding FDC
F&D – Proved Developed Producing
FD&A – Proved Developed Producing
F&D – Proved
FD&A – Proved
F&D – Proved Plus Probable
FD&A – Proved Plus Probable
Including FDC(4)
F&D – Proved
FD&A – Proved
F&D – Proved Plus Probable
FD&A – Proved Plus Probable
Operating Netback
Recycle Ratio(1)(2)
Adjusted Funds Flow Netback
Recycle Ratio(1)(3)
2019
2018
2019
2018
1.5
1.4
2.5
2.1
3.7
2.6
1.7
1.5
2.1
1.8
1.5
1.5
2.4
2.4
2.4
2.6
21.2
30.3
10.7
9.2
1.4
1.3
2.3
1.9
3.3
2.3
1.5
1.3
1.9
1.6
1.3
1.3
2.0
2.0
2.0
2.2
17.4
24.9
8.8
7.6
(1) See “Advisories – Oil and Gas Metrics” for a description of the methodology used to calculate recycle ratios.
(2) Birchcliff’s operating netback was $13.07/boe in 2019, as compared to $13.52/boe in 2018.
(3) Birchcliff’s adjusted funds flow netback was $11.75/boe in 2019, as compared to $11.12/boe in 2018.
During 2019, the average benchmark price for WTI crude oil was US$57.03/bbl and the average benchmark price for natural gas sold
at AECO was CDN$1.67/GJ. The operating netback was $13.07/boe in 2019, as compared to $13.52/boe in 2018. Adjusted funds flow
netback was $11.75/boe in 2019, as compared to $11.12/boe in 2018.
36
| 2019 Annual Report 2019
FINANCIALS
37
2019 Annual Report | M A N AG E M E N T’S D I S C U S S I O N A N D A N A LYS I S
GENERAL
This Management’s Discussion and Analysis (“MD&A”) for Birchcliff Energy Ltd. (“Birchcliff” or the “Corporation”) dated March 11, 2020
is with respect to the three and twelve months ended December 31, 2019 (the “Reporting Periods”) as compared to the three and
twelve months ended December 31, 2018 (the “Comparable Prior Periods”). This MD&A has been prepared by management and
approved by the Corporation’s Audit Committee and Board of Directors and should be read in conjunction with the annual audited
financial statements of the Corporation and the related notes for the year ended December 31, 2019 which have been prepared
in accordance with IFRS. Birchcliff adopted IFRS 16: Leases (“IFRS 16”) effective January 1, 2019 using the modified retrospective
approach; therefore, comparative information has not been restated. For further information, see “Changes In Accounting Policies”
in this MD&A. All dollar amounts are expressed in Canadian currency, unless otherwise stated.
This MD&A uses “adjusted funds flow”, “adjusted funds flow per common share”, “free funds flow”, “transportation and other expense”,
“operating netback”, “adjusted funds flow netback”, “total cash costs”, “adjusted working capital deficit” and “total debt”, which do
not have standardized meanings prescribed by GAAP and therefore may not be comparable to similar measures presented by other
companies where similar terminology is used. For further information, including reconciliations to the most directly comparable
GAAP measure where applicable, see “Non-GAAP Measures” in this MD&A.
This MD&A contains forward-looking statements and information (collectively, “forward-looking statements”) within the meaning
of applicable Canadian securities laws. Such forward-looking statements are based upon certain expectations and assumptions
and actual results may differ materially from those expressed or implied by such forward-looking statements. For further information
regarding the forward-looking statements contained herein, see “Advisories – Forward-Looking Statements” in this MD&A.
All boe amounts have been calculated by using the conversion ratio of 6 Mcf of natural gas to 1 bbl of oil and all Mcfe amounts have
been calculated by using the conversion ratio of 1 bbl of oil to 6 Mcf of natural gas. For further information, see “Advisories – Boe and
Mcfe Conversions” in this MD&A.
With respect to the disclosure of Birchcliff’s production contained in this MD&A: (i) references to “light oil” mean “light crude oil and
medium crude oil” as such term is defined in National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities (“NI 51-101”);
(ii) except where otherwise stated, references to “liquids” mean “light crude oil and medium crude oil” and “natural gas liquids”
(including condensate) as such terms are defined in NI 51-101; and (iii) references to “natural gas” mean “shale gas”, which also includes
an immaterial amount of “conventional natural gas”, as such terms are defined in NI 51-101. In addition, NI 51-101 includes condensate
within the product type of natural gas liquids. Birchcliff has disclosed condensate separately from other natural gas liquids as the
price of condensate as compared to other natural gas liquids is currently significantly higher and Birchcliff believes presenting the two
commodities separately provides a more accurate description of its operations and results therefrom.
ABOUT BIRCHCLIFF
Birchcliff is a Calgary, Alberta based intermediate oil and natural gas company with operations concentrated within its one core area,
the Peace River Arch of Alberta. Birchcliff’s common shares and cumulative redeemable preferred shares, Series A and Series C,
are listed for trading on the Toronto Stock Exchange (the “TSX”) under the symbols “BIR”, “BIR.PR.A” and “BIR.PR.C”, respectively.
Additional information relating to the Corporation, including its Annual Information Form for the financial year ended December 31, 2019,
is available on the SEDAR website at www.sedar.com and on the Corporation’s website at www.birchcliffenergy.com.
HIGHLIGHTS
2019 Year-End Highlights
• Achieved record annual average production of 77,977 boe/d, a 1% increase from the twelve month Comparable Prior Period.
•
Liquids accounted for approximately 22% of Birchcliff’s total production as compared to approximately 20% in the twelve month
Comparable Prior Period, with total liquids production increasing by 14% from the twelve month Comparable Prior Period.
• Delivered $334.5 million of adjusted funds flow, or $1.26 per basic common share, each a 7% increase from the twelve month
Comparable Prior Period.
• Generated $78.1 million of free funds flow in the twelve month Reporting Period, an increase from $13.3 million in the twelve
month Comparable Prior Period.
38
| 2019 Annual Report •
Recorded a net loss to common shareholders of $59.6 million, or $0.22 per basic common share, as compared to net income
to common shareholders of $98.0 million and $0.37 per basic common share in the twelve month Comparable Prior Period.
• Achieved record low annual operating expense of $3.09/boe, a 12% decrease from the twelve month Comparable Prior Period.
•
•
•
Realized an operating netback of $13.07/boe, a 3% decrease from the twelve month Comparable Prior Period.
Successfully executed the Corporation’s 2019 capital program, drilling a total of 30 (30.0 net) wells and bringing 33 (33.0 net)
wells on production. F&D capital expenditures were $256.4 million in 2019.
Total capital expenditures were $300.2 million in the twelve month Reporting Period, which included the $39 million acquisition
of 18 gross (15.1 net) contiguous sections of Montney land located between Birchcliff’s existing Pouce Coupe and Gordondale
properties (the “Acquisition”). Birchcliff drilled 8 (8.0 net) wells and completed and brought on production 6 (6.0 net) successful
condensate-rich natural gas wells on the acquired lands in 2019.
• Distributed $27.9 million in common share dividends in the twelve month Reporting Period.
Fourth Quarter 2019 Highlights
• Achieved quarterly average production of 77,962 boe/d, a 2% increase from the three month Comparable Prior Period.
•
Liquids accounted for approximately 22% of Birchcliff’s total production as compared to approximately 21% in the three month
Comparable Prior Period, with total liquids production increasing by 9% from the three month Comparable Prior Period.
• Delivered $80.9 million of adjusted funds flow, or $0.30 per basic common share, a 1% decrease and a 3% decrease,
respectively, from the three month Comparable Prior Period.
• Generated $24.1 million of free funds flow in the three month Reporting Period, a decrease from $29.2 million in the three month
Comparable Prior Period.
•
Recorded a net loss to common shareholders of $19.0 million, or $0.07 per basic common share, as compared to net income
to common shareholders of $70.9 million and $0.27 per basic common share in the three month Comparable Prior Period.
• Achieved operating expense of $3.06/boe, a 13% decrease from the three month Comparable Prior Period.
•
•
Realized an operating netback of $14.25/boe, a 6% increase from the three month Comparable Prior Period.
Total capital expenditures of $58.1 million. During the three month Reporting Period, Birchcliff drilled 7 (7.0 net) wells.
See “Cash Flow from Operating Activities and Adjusted Funds Flow”, “Net Income (Loss) to Common Shareholders”, “Discussion of
Operations”, “Capital Expenditures” and “Capital Resources and Liquidity” in this MD&A for further information regarding the financial
and operational results for the Reporting Periods and Comparable Prior Periods.
2020 OUTLOOK
Birchcliff is focused on maintaining its strong balance sheet and financial flexibility. In response to the significant decline in commodity
prices since Birchcliff announced its 2020 capital program on January 22, 2020, Birchcliff’s Board of Directors has approved a reduced
capital budget of $275 million to $295 million for 2020, as compared to the previous budget of $340 million to $360 million. Birchcliff’s
revised capital program for 2020 (the “2020 Capital Program”) now contemplates the drilling of 28 (28.0 net) wells and bringing on
production of a total of 34 (34.0 net) wells during 2020.
The revised 2020 Capital Program now targets an annual average production rate of 78,000 to 80,000 boe/d which is expected
to generate approximately $252 million of adjusted funds flow, based on the mid-point of the Corporation’s revised annual average
production guidance and revised commodity price assumptions for 2020. Birchcliff’s objective remains to grow its high-value liquids
production in 2020 and drilling will target condensate-rich natural gas wells in Pouce Coupe and oil wells in Gordondale. Funds
will also be directed towards completing the 20,000 bbls/d inlet liquids-handling facility (the “Inlet Liquids-Handling Facility”) at
Birchcliff’s 100% owned and operated natural gas processing plant in Pouce Coupe (the “Pouce Coupe Gas Plant”) in order to handle
increased condensate volumes in the area. For further details regarding the revised 2020 Capital Program, see the Corporation’s press
release dated March 11, 2020.
39
2019 Annual Report | Birchcliff has revised its 2020 guidance and commodity price assumptions to reflect the revised 2020 Capital Program and current
economic conditions. The following table sets forth Birchcliff’s previous and revised guidance and commodity price assumptions for
2020, as well as its 2019 actual audited results and 2019 guidance for comparative purposes:
Production
Annual average production (boe/d)
78,000 – 80,000
80,000 – 82,000
77,977
77,000 – 79,000
New 2020
guidance and
assumptions(1)
Old 2020
guidance and
assumptions(2)
2019
actual results
2019
guidance
% Light oil
% Condensate
% NGLs
% Natural gas
Q4 average production (boe/d)
Average Expenses ($/boe)
Royalty
Operating
Transportation and other
Adjusted Funds Flow (MM$)
F&D Capital Expenditures (MM$)
Free Funds Flow (MM$)(6)
Total Debt at Year End (MM$)
Natural Gas Market Exposure
AECO exposure as a % of total natural gas production
Dawn exposure as a % of total natural gas production
NYMEX HH exposure as a % of total natural gas production
Alliance exposure as a % of total natural gas production
Commodity Prices
Average WTI spot price (US$/bbl)
Average WTI-MSW differential (CDN$/bbl)
Average AECO 5A spot price (CDN$/GJ)
Average Dawn spot price (US$/MMBtu)(9)
Average NYMEX HH spot price (US$/MMBtu)(9)
Exchange rate (CDN$ to US$1)
7%
8%
9%
76%
8%
8%
8%
76%
81,000 – 83,000
87,000 – 89,000
1.00 – 1.20
3.05 – 3.25
4.90 – 5.10(3)
252(4)
275 – 295(5)
(23) – (43)
1.40 – 1.60
3.10 – 3.30
4.90 – 5.10
370
340 – 360
10 – 30
700 – 720(7)
645 – 665
20%(8)
45%(8)
34%(8)
1%(8)
22%
44%
33%
1%
48.00
60.00
5.70
1.90
2.15
2.20
1.34
8.50
2.10
2.50
2.50
1.32
6%
7%
9%
78%
77,962
0.96
3.09
4.44
334.5
256.4
78.1
632.6
33%
38%
25%
4%
57.03
6.97
1.67
2.40
2.63
1.33
6%
7%
9%
78%
N/A
1.10 – 1.30
3.15 – 3.35
4.65 – 4.85
335
242
93
N/A
34%
38%
25%
3%
57.50
7.50
1.50
2.44
2.70
1.32
(1) See “Advisories – Forward-Looking Statements”. Birchcliff’s revised guidance for its commodity mix, adjusted funds flow and natural gas market exposure in 2020 is based on an annual average
production rate of 79,000 boe/d during 2020, which is the mid-point of Birchcliff’s revised annual average production guidance for 2020.
(2) As disclosed on January 22, 2020. Birchcliff’s previous guidance for its commodity mix, adjusted funds flow and natural gas market exposure in 2020 was based on an annual average production rate of
81,000 boe/d during 2020, which was the previous mid-point of Birchcliff’s annual average production guidance for 2020.
(3) Includes transportation tolls for 175,000 GJ/d of natural gas sold at the Dawn price and includes any unused firm transportation costs associated with Birchcliff’s commitments on the NGTL system.
(4) Birchcliff’s estimate of adjusted funds flow takes into account the effects of its commodity risk management contracts outstanding as at March 11, 2020.
(5) Birchcliff’s estimate of F&D capital expenditures excludes any net potential acquisitions and dispositions and corresponds to Birchcliff’s revised 2020 F&D capital budget. See “Advisories – Capital Expenditures”.
(6) Free funds flow is calculated as adjusted funds flow less F&D capital expenditures and is prior to acquisitions and dispositions, dividend payments, abandonment and reclamation obligations,
administrative assets, financing fees and capital lease obligations. See “Non-GAAP Measures”.
(7) The total debt amount set forth in the table above assumes the following: (i) that the timing and amount of common share and preferred share dividends paid by the Corporation remains consistent
with previous years, with the dividend rates remaining flat; (ii) that there are 2,000,000 series C preferred shares outstanding, with no series C preferred shares redeemed in 2020; (iii) that the 2020
Capital Program will be carried out as currently contemplated and the level of capital spending set forth herein will be achieved; and (iv) the targets for production, commodity mix, capital expenditures,
adjusted funds flow, free funds flow and natural gas market exposure and the commodity price and exchange rate assumptions set forth herein are met. The amount set forth in the table above does not
include annual cash incentive payments.
(8) Birchcliff’s guidance regarding its natural gas market exposure in 2020 assumes: (i) 175,000 GJ/d being sold at the Dawn index price; (ii) 5 MMcf/d being sold at Alliance’s Trading Pool daily index price
until October 31, 2020; and (iii) 132,500 MMBtu/d being hedged on a financial and physical basis at a fixed basis differential between the AECO 7A price and the NYMEX HH price.
(9) $1.00 per MMBtu equals $1.00 per Mcf based on a standard heat value of 37.4 MJ/m3 or a heat uplift of 1.055 when converting from $/GJ.
Birchcliff’s 2019 financial and operational results were generally in line with its guidance. Birchcliff’s 2019 production was 77,977 boe/d,
within its guidance range of 77,000 boe/d to 79,000 boe/d. Royalty expense on a per boe basis in 2019 was 13% lower than the low
end of Birchcliff’s guidance of $1.10/boe to $1.30/boe, primarily due to a lower average corporate realized sales price in the second of
half of 2019. Operating expense on a per boe basis was better than Birchcliff’s guidance of $3.15/boe to $3.35/boe, primarily due to
40
| 2019 Annual Report operational efficiencies. Birchcliff’s transportation and other expense on a per boe basis was 5% lower than the low end of Birchcliff’s
guidance of $4.65/boe to $4.85/boe, due to the mitigation of excess firm natural gas transportation service. Birchcliff generated
adjusted funds flow of $334.5 million in 2019, in line with its guidance of $335 million. Birchcliff’s F&D capital expenditures of
$256.4 million and total capital expenditures of $300.2 million were 6% higher than its guidance of $242 million and $283 million,
respectively, primarily due to the Corporation not realizing previously anticipated cost savings during the execution of its 2019 capital
program. Birchcliff generated free funds flow of $78.1 million in 2019 which was 16% lower than its guidance of $93 million, due to
higher than anticipated capital expenditures as discussed above. For further information regarding Birchcliff’s guidance for 2020,
see “Advisories – Forward-Looking Statements” in this MD&A.
SELECTED ANNUAL INFORMATION
2019
2018
2017
Average production
Light oil (bbls/d)
Condensate (bbls/d)(1)
NGLs (bbls/d)(1)
Natural gas (Mcf/d)
Total (boe/d)
Average sales price (CDN$)(2)
Light oil (per bbl)
Condensate (per bbl)(1)
NGLs (per bbl)(1)
Natural gas (per Mcf)
Total (per boe)
Cash flow from operating activities ($000s)
Adjusted funds flow ($000s)
Per common share – basic ($)
Net income (loss) ($000s)
Net income (loss) to common shareholders ($000s)
Per common share – basic ($)
Petroleum and natural gas revenue ($000s)(2)
Total capital expenditures ($000s)(3)
Operating expense ($ per boe)
Total assets ($000s)
Long-term debt ($000s)
Total debt ($000s)
End of period basic common shares (000s)
Weighted average basic common shares (000s)
Common shares dividend distribution ($000s)
Per common share ($)
Series A preferred shares outstanding – end of period (000s)
Series A preferred shares dividend distribution ($000s)
Per Series A preferred share ($)
Series C preferred shares outstanding – end of period (000s)
Series C preferred share dividend distribution ($000s)
Per Series C preferred share ($)
4,742
5,145
7,264
364,958
77,977
68.29
68.06
13.76
2.48
21.55
327,066
334,504
1.26
(55,392)
(59,579)
(0.22)
613,559
300,246
3.09
4,873
4,072
6,123
372,170
77,096
68.66
77.36
22.92
2.45
22.08
324,434
312,922
1.18
102,212
98,025
0.37
621,421
298,018
3.52
6,004
2,779
5,692
320,927
67,963
61.42
63.14
17.94
2.72
22.44
287,660
317,680
1.20
(46,980)
(51,027)
(0.19)
556,942
276,125
4.45
2,816,685
2,762,920
2,627,108
609,177
632,582
265,935
265,930
27,923
0.1050
2,000
4,187
2.0935
2,000
3,500
1.7500
605,267
626,454
265,911
265,852
26,586
0.1000
2,000
4,187
2.0935
2,000
3,500
1.7500
587,126
598,193
265,797
265,182
26,522
0.1000
2,000
4,047
2.0234
2,000
3,500
1.7500
(1) Beginning in Q1 2019, Birchcliff began presenting condensate and NGLs separately. Prior period sales and volumes have been adjusted to conform to this current period presentation.
See “Advisories – Production”.
(2) Excludes the effects of financial derivatives but includes the effects of physical delivery contracts.
(3) Birchcliff previously referred to total capital expenditures as “net capital expenditure” or “capital expenditures, net”. See “Advisories – Capital Expenditures”.
41
2019 Annual Report | Annual average production in 2019 was 77,977 boe/d, up 1% from 2018 and up 15% from 2017. The increase in annual average
production from 2017 was primarily due to incremental production additions from new horizontal oil and natural gas wells brought on
production in Pouce Coupe and Gordondale in connection with Birchcliff’s successful 2018 and 2019 capital programs, partially offset
by natural production declines.
Birchcliff generated higher adjusted funds flow in 2019 as compared to 2018 and 2017. The increase in adjusted funds flow from
2018 was primarily due to lower operating and royalty expenses and a realized gain on financial instruments in 2019 as compared to
a realized loss on financial instruments in 2018, partially offset by lower reported revenue and an increase in transportation and other
expense as a result of Birchcliff’s increased Dawn and AECO firm service. Adjusted funds flow in 2019 and 2018 was also negatively
impacted by lower oil production as a result of the disposition of the Corporation’s assets in the Worsley area (the “Worsley Assets”)
in August 2017 (the “Worsley Disposition”). The increase in adjusted funds flow from 2017 was primarily due to an increase in annual
average production volumes, partially offset by a lower average sales price received for Birchcliff’s production.
Birchcliff recorded net loss to common shareholders of $55.6 million ($0.22 per basic common share) in 2019, as compared to net
income to common shareholders of $98.0 million ($0.37 per basic common share) in 2018 and net loss to common shareholders of
$51.0 million ($0.19 per basic common share) in 2017. The change to a net loss position in 2019 from a net income position in 2018
was primarily due to a $192.8 million unrealized mark-to-market loss on financial instruments recorded in 2019 as compared to a
$64.2 million unrealized mark-to-market gain on financial instruments in 2018, partially offset by higher adjusted funds flow. The net
loss to common shareholders in 2017 included a $132.3 million after-tax loss in connection with the Worsley Disposition and lower
adjusted funds flow compared to 2019.
Total capital expenditures in 2019 were comparable to total capital expenditures in 2018 and increased 8% from 2017. Capital
expenditures in the last three years were largely directed towards the Montney/Doig Resource Play which included: (i) the drilling and
completion of new horizontal oil and natural gas wells brought on production in Pouce Coupe and Gordondale; and (ii) the Phase V and
Phase VI expansion of the Pouce Coupe Gas Plant (including related wells and infrastructure), which increased the licensed natural gas
processing capacity from 180 MMcf/d to a licensed processing capacity of 340 MMcf/d.
Operating expense on a per boe basis in 2019 was lower as compared to the prior two years primarily due to an incremental increase in
natural gas production processed at the Pouce Coupe Gas Plant and additional reduced processing fees at AltaGas’ deep-cut sour gas
processing facility located in Gordondale (the “Gordondale Gas Plant”), as well as the disposition of the higher-cost Worsley Assets in
August 2017. During 2018, Birchcliff entered into a new long-term natural gas processing arrangement effective January 1, 2018, which
significantly reduced its processing fees at the Gordondale Gas Plant.
CASH FLOW FROM OPERATING ACTIVITIES AND ADJUSTED FUNDS FLOW
The following table sets forth the Corporation’s cash flow from operating activities and adjusted funds flow for the periods indicated:
Cash flow from operating activities ($000s)
Adjusted funds flow ($000s)
Per common share – basic ($)
Per common share – diluted ($)
Adjusted funds flow netback ($/boe)
Three months ended
December 31,
Twelve months ended
December 31,
2019
85,557
80,941
0.30
0.30
11.28
2018
92,200
81,517
0.31
0.30
11.60
2019
327,066
334,504
1.26
1.26
11.75
2018
324,434
312,922
1.18
1.17
11.12
Adjusted funds flow decreased by 1% from the three month Comparable Prior Period. The decrease was primarily due to a realized
loss on financial instruments and an increase in transportation and other expense as a result of Birchcliff’s increased Dawn and AECO
firm service, partially offset by higher reported revenue and lower operating expense. Revenue received by the Corporation was
higher primarily due to an increase in total liquids production and a higher average realized liquids sales price, partially offset by a
lower average realized natural gas sales price. As a result of the adoption of IFRS 16 which became effective January 1, 2019, Birchcliff’s
adjusted funds flow increased by approximately $0.6 million in the three month Reporting Period.
42
| 2019 Annual Report Adjusted funds flow increased by 7% from the twelve month Comparable Prior Period. The increase was primarily due to lower
operating and royalty expenses and a realized gain on financial instruments as compared to a realized loss on financial instruments
in the twelve month Comparable Prior Period, partially offset by lower reported revenue and an increase in transportation and other
expense as a result of Birchcliff’s increased Dawn and AECO firm service. Revenue received by the Corporation was lower primarily
due to a lower average realized liquids sales price, partially offset by higher total liquids production. As a result of the adoption
of IFRS 16 which became effective January 1, 2019, Birchcliff’s adjusted funds flow increased by approximately $2.2 million in the
twelve month Reporting Period.
Cash flow from operating activities decreased by 7% and increased by 1% from the three and twelve month Comparable Prior Periods,
respectively. The reasons for the changes are consistent with the explanation for adjusted funds flow; however, cash flow from
operating activities was also impacted by changes in non-cash operating working capital and decommissioning expenditures.
The following table sets forth a breakdown of the Corporation’s total cash costs on a per unit basis for the periods indicated:
($/boe)
Royalty expense
Operating expense
Transportation and other expense
G&A expense, net
Interest expense
Total cash costs
2019
1.15
3.06
4.51
1.26
0.82
Three months ended
December 31,
2018 % Change
0.96
3.51
4.07
1.08
1.06
20%
(13%)
11%
17%
(23%)
1%
10.80
10.68
Twelve months ended
December 31,
2018 % Change
1.36
3.52
3.68
0.87
0.99
10.42
(29%)
(12%)
21%
8%
(11%)
(1%)
2019
0.96
3.09
4.44
0.94
0.88
10.31
See “Discussion of Operations” in this MD&A for further details regarding the period-over-period movement in revenue and total
cash cost inputs.
NET INCOME (LOSS) TO COMMON SHAREHOLDERS
The following table sets forth the Corporation’s net income (loss) and net income (loss) to common shareholders for the periods indicated:
Net income (loss) to common shareholders ($000s)
Per common share – basic ($)
Per common share – diluted ($)
Net income (loss) to common shareholders ($/boe)
Three months ended
December 31,
Twelve months ended
December 31,
2019
2018
2019
(18,984)
70,900
(59,579)
(0.07)
(0.07)
(2.65)
0.27
0.27
10.09
(0.22)
(0.22)
(2.09)
2018
98,025
0.37
0.37
3.48
The change to a net loss position in the three month Reporting Period was primarily due to a $46.6 million unrealized mark-to-market
loss on financial instruments recorded in the three month Reporting Period as compared to a $77.4 million unrealized mark-to-market
gain on financial instruments in the three month Comparable Prior Period, resulting in a period-over-period change of $124.0 million
(or $91.1 million on an after-tax basis). The adoption of IFRS 16 resulted in a $0.1 million decrease to reported net income to common
shareholders in the three month Reporting Period.
The change to a net loss position in the twelve month Reporting Period was primarily due to a $192.8 million unrealized mark-to-market
loss on financial instruments recorded in the twelve month Reporting Period as compared to a $64.2 million unrealized mark-to-market
gain on financial instruments in the twelve month Comparable Prior Period, resulting in a year-over-year change of $257.0 million
(or $188.9 million on an after-tax basis), partially offset by higher adjusted funds flow. The adoption of IFRS 16 resulted in a $0.5 million
decrease to reported net income to common shareholders in the twelve month Reporting Period.
See “Discussion of Operations – Risk Management” and “Discussion of Operations – Income Taxes” in this MD&A for further details
regarding the period-over-period movement in unrealized gains and losses on financial instruments and income taxes.
43
2019 Annual Report | POUCE COUPE GAS PLANT NETBACKS
During the twelve month Reporting Period, Birchcliff processed approximately 72% of its total corporate natural gas production
and 62% of its total corporate production through its Pouce Coupe Gas Plant as compared to 67% and 57%, respectively, during the
twelve month Comparable Prior Period. The following table sets forth Birchcliff’s average daily production and operating netback for
wells producing to the Pouce Coupe Gas Plant for the periods indicated:
Average production:
Condensate (bbls/d)
NGLs (bbls/d)
Natural gas (Mcf/d)
Total (boe/d)
Liquids-to-gas ratio(1) (bbls/MMcf)
Netback and cost:
Petroleum and natural gas revenue(2)
Royalty expense
Operating expense(3)
Transportation and other expense
Operating netback
Operating margin(4)
Twelve months ended
December 31, 2019
Twelve months ended
December 31, 2018
3,801
934
263,108
48,587
18.0
$/Mcfe
3.20
(0.07)
(0.34)
(0.76)
$2.03
63%
$/boe
$/Mcfe
19.17
(0.42)
(2.05)
(4.54)
$12.16
63%
3.02
(0.05)
(0.34)
(0.59)
$2.04
68%
2,430
179
250,011
44,278
10.4
$/boe
18.11
(0.29)
(2.02)
(3.56)
$12.24
68%
(1) Liquids consists of NGLs, including condensate.
(2) Excludes the effects of financial instruments but includes the effects of physical delivery contracts. See “Discussion of Operations – Risk Management” in this MD&A.
(3) Represents plant and field operating expense.
(4) Operating margin is calculated by dividing the operating netback for the period by the petroleum and natural gas revenue for the period.
The Corporation’s liquids-to-gas ratio increased by 73% as compared to the twelve month Comparable Prior Period primarily
due to: (i) specifically targeted condensate-rich natural gas wells that were brought on production in Pouce Coupe in 2019; and
(ii) the re-configuration of Phases V and VI of the Pouce Coupe Gas Plant in the fourth quarter of 2018 which provided for shallow-cut
capability, allowing Birchcliff to extract C3+ from the natural gas stream. The amount of condensate from Montney horizontal natural
gas wells being produced to the Pouce Coupe Gas Plant increased by 56% to 3,801 bbls/d in the twelve month Reporting Period
from 2,430 bbls/d in the twelve month Comparable Prior Period. The increase in the liquids-to-gas ratio improved Birchcliff’s
average realized sales price at the Pouce Coupe Gas Plant.
Operating expense per boe at the Pouce Coupe Gas Plant remained largely unchanged from the twelve month Comparable Prior
Period and was impacted by: (i) reduced take-or-pay processing commitments in Pouce Coupe beginning in November 2018 that
resulted in natural gas being redirected from higher cost third-party facilities to the Pouce Coupe Gas Plant; (ii) increased operating
efficiencies resulting from expanded liquids-handling capabilities in Pouce Coupe; and (iii) higher natural gas production processed
at the Pouce Coupe Gas Plant during the twelve month Reporting Period.
Transportation and other expense per boe at the Pouce Coupe Gas Plant increased by 28% from the twelve month Comparable Prior
Period mainly due to additional firm service transportation to AECO and Dawn sales trading hubs.
44
| 2019 Annual Report DISCUSSION OF OPERATIONS
Petroleum and Natural Gas Revenue
The following table sets forth Birchcliff’s P&NG revenue by product category for the Corporation’s Pouce Coupe operating assets
geologically situated in the dry gas and condensate-rich trends of the Montney/Doig Resource Play (the “Pouce Coupe assets”),
the Corporation’s Gordondale operating assets geologically situated in the oil-rich trend of the Montney/Doig Resource Play (the
“Gordondale assets”) and on a corporate basis for the periods indicated:
($000s)
Light oil
Condensate
NGLs
Natural gas
P&NG sales(2)
Royalty income
P&NG revenue
% of corporate P&NG revenue
($000s)
Light oil
Condensate
NGLs
Natural gas
P&NG sales(2)
Royalty income
P&NG revenue
Three months ended
December 31, 2019
Three months ended
December 31, 2018
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
23,936
2,083
70,427
96,446
2
96,448
59%
-
26,544
8,115
9,862
23,761
27,571
31,050
11,945
94,188
68,282
164,754
1
68,283
41%
5
164,759
Twelve months ended
December 31, 2019
-
15,438
1,864
75,020
92,322
4
92,326
60%
18,208
6,226
11,676
26,226
62,336
23
62,359
40%
18,233
21,671
13,539
101,249
154,692
28
154,720
Twelve months ended
December 31, 2018
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
-
96,915
6,974
250,543
354,432
14
116,803
32,201
29,513
80,428
258,945
81
118,182
127,816
36,488
330,973
613,459
100
-
74,708
2,936
247,793
325,437
18
121,622
40,519
48,278
84,630
295,049
107
122,118
114,973
51,221
332,979
621,291
130
354,446
259,026
613,559
325,455
295,156
621,421
% of corporate P&NG revenue
58%
42%
52%
47%
(1) Includes other minor oil and natural gas properties that were not individually significant during the respective periods.
(2) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.
On a corporate basis, P&NG revenue increased by 6% from the three month Comparable Prior Period and decreased by 1% from
the twelve month Comparable Prior Period. The increase from the three month Comparable Prior Period was largely due to a higher
average realized sales price received for Birchcliff’s production and an increase in liquids production. The decrease from the twelve
month Comparable Prior Period was largely due to a lower average realized sales price received for Birchcliff’s production, partially
offset by an increase in liquids production.
45
2019 Annual Report |
Production
The following table sets forth Birchcliff’s production by product category for the Pouce Coupe assets, the Gordondale assets and on a
corporate basis for the periods indicated:
Three months ended
December 31, 2019
Three months ended
December 31, 2018
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
-
3,820
1,168
269,314
49,873
18.5
64%
4,271
1,245
6,646
95,534
28,085
127.3
36%
4,435
4,906
7,814
364,847
77,962
47.0
-
2,892
599
266,774
47,953
13.1
63%
4,777
1,317
6,215
96,818
28,446
127.1
37%
4,788
4,207
6,814
363,596
76,408
43.5
Twelve months ended
December 31, 2019
Twelve months ended
December 31, 2018
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
-
3,963
986
274,009
50,616
18.1
65%
4,686
1,235
6,278
90,947
27,357
134.1
35%
4,742
5,145
7,264
364,958
77,977
47.0
-
2,723
219
276,004
48,943
10.7
63%
4,852
1,355
5,903
95,508
28,028
126.8
36%
4,873
4,072
6,123
372,170
77,096
40.5
Light oil (bbls/d)
Condensate (bbls/d)
NGLs (bbls/d)
Natural gas (Mcf/d)
Production (boe/d)
Liquids-to-gas ratio (bbls/MMcf)
% of corporate production
Light oil (bbls/d)
Condensate (bbls/d)
NGLs (bbls/d)
Natural gas (Mcf/d)
Production (boe/d)
Liquids-to-gas ratio (bbls/MMcf)
% of corporate production
(1) Includes other minor oil and natural gas properties that were not individually significant during the respective periods.
Birchcliff’s corporate production increased by 2% and 1% from three and twelve month Comparable Prior Periods, respectively, primarily
due to the success of Birchcliff’s 2019 capital program, which resulted in incremental production from new horizontal oil wells brought on
production in Gordondale and horizontal condensate-rich natural gas wells in Pouce Coupe, partially offset by natural production declines.
The following table sets forth Birchcliff’s production weighting by product category for its Pouce Coupe and Gordondale assets and on a
corporate basis for the periods indicated:
Three months ended
December 31, 2019
Three months ended
December 31, 2018
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
-
8%
2%
90%
15%
4%
24%
57%
6%
6%
10%
78%
-
6%
1%
93%
17%
5%
21%
57%
6%
6%
9%
79%
Twelve months ended
December 31, 2019
Twelve months ended
December 31, 2018
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
-
8%
2%
90%
17%
5%
23%
55%
6%
7%
9%
78%
-
6%
-
94%
17%
5%
21%
57%
6%
6%
8%
80%
% Light oil production
% Condensate production
% NGLs production
% Natural gas production
% Light oil production
% Condensate production
% NGLs production
% Natural gas production
(1) Includes other minor oil and natural gas properties that were not individually significant during the respective periods.
46
| 2019 Annual Report
Corporate liquids production increased by 9% and 14% from the three and twelve month Comparable Prior Periods, respectively,
and the corporate liquids-to-gas ratio (liquids yield) increased by 8% and 16% from the three and twelve month Comparable Prior
Periods, respectively. These increases were largely attributable to incremental production from new horizontal condensate-rich
natural gas wells that were brought on production in Pouce Coupe and an increase in C3+ extracted from the natural gas stream
at the Pouce Coupe Gas Plant.
Commodity Prices
The following table sets forth the average benchmark index prices and exchange rate for the periods indicated:
Light oil – WTI Cushing (US$/bbl)
Light oil – MSW (Mixed Sweet) (CDN$/bbl)
Natural gas – NYMEX HH (US$/MMBtu)(1)
Natural gas – AECO 5A Daily (CDN$/GJ)
Natural gas – AECO 7A Month Ahead (US$/MMBtu)(1)
Natural gas – Dawn Day Ahead (US$/MMBtu)(1)
Natural gas – ATP 5A Day Ahead (CDN$/GJ)
Exchange rate (CDN$ to US$1)
Exchange rate (US$ to CDN$1)
Three months ended
December 31,
Twelve months ended
December 31,
2019
56.96
67.66
2.50
2.35
1.77
2.23
1.92
1.3201
0.7575
2018
58.81
42.42
3.76
1.48
1.45
3.78
2.57
1.3215
0.7567
Change
(3%)
60%
(34%)
59%
22%
(41%)
(25%)
2019
57.03
68.72
2.63
1.67
1.22
2.40
1.66
-
-
1.3269
0.7536
2018
64.77
69.04
3.07
1.42
1.54
3.12
2.07
1.2961
0.7715
Change
(12%)
-
(14%)
18%
(21%)
(23%)
(20%)
2%
(2%)
(1) $1.00/MMBtu = $1.00/Mcf based on a standard heat value Mcf. See “Advisories – MMBtu Pricing Conversions” in this MD&A.
Birchcliff sells substantially all of its light oil based on the MSW benchmark price and substantially all of its natural gas production
based on the AECO and Dawn benchmark prices. Effective November 1, 2019, Birchcliff increased its firm service transportation to
Dawn by 25,000 GJ/d, bringing its total natural gas production receiving the Dawn benchmark price to 175,000 GJ/d (see “Discussion
of Operations – Petroleum and Natural Gas Revenue – Natural Gas Sales, Production and Average Realized Sales Price” in this MD&A).
Birchcliff has also financially diversified a portion of its AECO production to NYMEX HH based pricing beginning January 1, 2019
(see “Discussion of Operations – Risk Management” in this MD&A). The average realized sales prices the Corporation receives for
its light oil and natural gas production depend on a number of factors, including the average benchmark prices for crude oil and
natural gas, the US to Canadian dollar exchange rate, transportation costs, product quality differentials and the heat premium on
its natural gas production.
The benchmark prices for crude oil are impacted by global and regional events that dictate the level of supply and demand for
crude oil. The principal benchmark trading exchanges that Birchcliff compares its oil price to are the WTI price and the MSW price.
The differential between the WTI price and the MSW price can fluctuate due to a number of factors, including, but not limited to,
North American refinery utilization rates, domestic production growth levels, inventory levels in North America and pipeline
infrastructure capacity connecting key consuming oil markets.
Canadian natural gas prices are mainly influenced by North American supply and demand fundamentals which can be impacted by
a number of factors, including, but not limited to, production growth levels, weather-related conditions in key consuming natural gas
markets, changing demographics, economic growth, inventory levels, access to underground storage, net import and export markets,
pipeline supply takeaway capacity, maintenance on key natural gas infrastructure, cost of competing renewable and non-renewable
energy alternatives, drilling and completion rates and efficiencies in extracting natural gas from North American natural gas basins.
The following table sets forth Birchcliff’s average realized light oil, condensate, NGLs and natural gas sales prices for the periods indicated:
Light oil ($/bbl)
Condensate ($/bbl)
NGLs ($/bbl)
Natural gas ($/Mcf)
Average realized sales price ($/boe)(1)
Three months ended
December 31,
2018
Change
41.39
55.99
21.60
3.03
22.01
63%
23%
(23%)
(7%)
4%
Twelve months ended
December 31,
2018
68.66
77.36
22.92
2.45
22.08
Change
(1%)
(12%)
(40%)
1%
(2%)
2019
68.29
68.06
13.76
2.48
21.55
2019
67.58
68.80
16.62
2.81
22.97
(1) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.
47
2019 Annual Report | The average realized sales price increased by 4% and decreased by 2% from the three and twelve month Comparable Prior Periods,
respectively, primarily due to the changes in the average benchmark index prices which impacted the prices Birchcliff received for its
liquids. The average realized sales price for the twelve month Reporting Period also includes the effects of physical natural gas delivery
contracts at Dawn during the first quarter of 2019 for 50,000 MMBtu/d at an average contract price of US$5.05/MMBtu.
The average realized sales price for the Pouce Coupe assets was $21.02/boe in the three month Reporting Period, which remained
largely unchanged from the three month Comparable Prior Period. The average realized sales price for the Pouce Coupe assets was
$19.19/boe in the twelve month Reporting Period, a 5% increase from the twelve month Comparable Prior Period. The average realized
sales price for the Gordondale assets was $26.43/boe in the three month Reporting Period and $25.94/boe in the twelve month
Reporting Period, an 11% increase and 10% decrease, respectively, from the Comparable Prior Periods. The Gordondale assets received
a higher average realized sales price compared to the Pouce Coupe assets, largely as a result of the higher volume weighting of liquids
produced in the Gordondale area, which received a higher value on a per boe basis than Birchcliff’s natural gas sales. The higher
volume weighting of liquids in the total corporate production mix generally improves Birchcliff’s average realized sales price.
For further production and average realized pricing details for Birchcliff’s Pouce Coupe assets and Gordondale assets, see “Discussion
of Operations – Operating Netbacks” in this MD&A.
Natural Gas Sales, Production and Average Realized Sales Price
The following table sets forth Birchcliff’s sales, average daily production and average realized sales price by natural gas market for
the periods indicated:
Three months ended
December 31, 2019
Three months ended
December 31, 2018
Natural
gas sales
($000s)(1)
48,976
43,706
1,507
Natural gas
production
(Mcf/d)
204,461
152,115
8,271
(%)
52
46
2
(%)
56
42
2
94,189
100
364,847
100
Average
realized
sales
price
($/Mcf)(1)
2.60
3.12
1.98
2.81
Natural
gas sales
($000s)(1)
33,788
64,969
2,492
Natural gas
production
(Mcf/d)
223,261
127,211
13,124
(%)
61
35
4
(%)
33
64
3
101,249
100
363,596
100
Average
realized
sales
price
($/Mcf)(1)
1.67
5.55
2.06
3.03
Twelve months ended
December 31, 2019
Twelve months ended
December 31, 2018
Natural
gas sales
($000s)(1)
136,050
185,199
9,724
Natural gas
production
(Mcf/d)
210,545
140,803
13,610
(%)
41
56
3
(%)
58
39
3
330,973
100
364,958
100
Average
realized
sales
price
($/Mcf)(1)
1.77
3.60
1.96
2.48
Natural
gas sales
($000s)(1)
132,342
182,385
18,252
(%)
40
55
5
Natural gas
production
(Mcf/d)
229,225
114,110
28,835
(%)
61
31
8
332,979
100
372,170 100
Average
realized
sales
price
($/Mcf)(1)
1.59
4.38
1.73
2.45
AECO
Dawn(2)
Alliance(3)
Total
AECO
Dawn(2)
Alliance(3)
Total
(1) Excludes the effects of financial instruments but includes the effects of physical delivery contracts. A portion of AECO production received NYMEX HH pricing under Birchcliff’s long-term financial
NYMEX/AECO 7A basis swap contracts. Birchcliff sold financial AECO 7A basis swaps for 95,000 MMBtu/d at an average contract price of approximately NYMEX HH less US$1.28/MMBtu during
the Reporting Periods (see “Discussion of Operations – Risk Management” in this MD&A).
(2) Birchcliff has agreements for the firm service transportation of an aggregate of 175,000 GJ/d of natural gas on TCPL’s Canadian Mainline, whereby natural gas is transported to the Dawn trading hub
in Southern Ontario. The first tranche of this service (120,000 GJ/d) became available on November 1, 2017, the second tranche (30,000 GJ/d) became available on November 1, 2018 and the third
tranche (25,000 GJ/d) became available on November 1, 2019. Each tranche has a 10-year term. During the first quarter of 2019, Birchcliff had in place physical natural gas delivery contracts at Dawn for
50,000 MMBtu/d at an average contract price of US$5.05/MMBtu for the period from December 1, 2018 to March 31, 2019. There were no physical delivery contracts in place at Dawn subsequent to
March 31, 2019.
(3) Birchcliff has sales agreements with a third party marketer to sell and deliver into the Alliance pipeline system. Alliance sales are recorded net of transportation tolls.
48
| 2019 Annual Report
Risk Management
Birchcliff engages in risk management activities by utilizing various financial instruments and physical delivery contracts to diversify
its sales points or fix commodity prices and market interest rates. Subject to compliance with the Corporation’s credit facilities,
the Board of Directors has authorized the Corporation to execute a risk management strategy whereby Birchcliff is authorized to enter
into agreements and financial or physical transactions with one or more counterparties from time to time that are intended to reduce
the risk to the Corporation from volatility in future commodity prices, foreign exchange rates and/or interest rates.
Financial Derivative Contracts
Birchcliff has not designated its financial derivative contracts as effective accounting hedges, even though the Corporation considers all
commodity price contracts to be effective economic hedges. As a result, all such financial instruments are recorded on the statements
of financial position on a mark-to-market fair value basis at December 31, 2019, with the changes in fair value being recognized as a
non-cash unrealized gain or loss in profit or loss and realized upon settlement. These contracts are not entered into for trading or
speculative purposes.
At December 31, 2019, Birchcliff had the following financial derivative contracts in place in order to manage commodity price risk:
Product
Type of Contract
Notional Quantity
Remaining Term(1)
Contract Price
Natural gas
AECO 7A basis swap(2)
30,000 MMBtu/d
Jan. 1, 2020 – Dec. 31, 2023
NYMEX HH less US$1.298/MMBtu
Natural gas
AECO 7A basis swap(2)
10,000 MMBtu/d
Jan. 1, 2020 – Dec. 31, 2023
NYMEX HH less US$1.32/MMBtu
Natural gas
AECO 7A basis swap(2)
30,000 MMBtu/d
Jan. 1, 2020 – Dec. 31, 2023
NYMEX HH less US$1.33/MMBtu
Natural gas
AECO 7A basis swap(2)
15,000 MMBtu/d
Jan. 1, 2020 – Dec. 31, 2024
NYMEX HH less US$1.185/MMBtu
Natural gas
AECO 7A basis swap(2)
5,000 MMBtu/d
Jan. 1, 2020 – Dec. 31, 2024
NYMEX HH less US$1.20/MMBtu
Natural gas
AECO 7A basis swap(2)
5,000 MMBtu/d
Jan. 1, 2020 – Dec. 31, 2024
NYMEX HH less US$1.20/MMBtu
Natural gas
AECO 7A basis swap(2)
12,500 MMBtu/d
Jan. 1, 2020 – Dec. 31, 2025
NYMEX HH less US$1.108/MMBtu
Natural gas
AECO 7A basis swap(2)
10,000 MMBtu/d
Jan. 1, 2020 – Dec. 31, 2025
NYMEX HH less US$1.115/MMBtu
Natural gas
AECO 7A basis swap(2)
10,000 MMBtu/d
Jan. 1, 2020 – Dec. 31, 2025
NYMEX HH less US$1.050/MMBtu
Natural gas
AECO 7A basis swap(2)
5,000 MMBtu/d
Jan. 1, 2021 – Dec. 31, 2025
NYMEX HH less US$1.178/MMBtu
Natural gas
AECO 7A basis swap(2)
10,000 MMBtu/d
Jan. 1, 2021 – Dec. 31, 2025
NYMEX HH less US$1.175/MMBtu
Natural gas
AECO 7A basis swap(2)
5,000 MMBtu/d
Jan. 1, 2021 – Dec. 31, 2025
NYMEX HH less US$1.190/MMBtu
Natural gas
AECO 7A basis swap(2)
30,000 MMBtu/d
Jan. 1, 2024 – Dec. 31, 2025
NYMEX HH less US$1.114/MMBtu
Natural gas
AECO 7A basis swap(2)
35,000 MMBtu/d
Jan. 1, 2024 – Dec. 31, 2025
NYMEX HH less US$1.081/MMBtu
Natural gas
AECO 7A basis swap(2)
5,000 MMBtu/d
Jan. 1, 2024 – Dec. 31, 2025
NYMEX HH less US$1.013/MMBtu
Natural gas
AECO 7A basis swap(2)
20,000 MMBtu/d
Jan. 1, 2025 – Dec. 31, 2025
NYMEX HH less US$1.005/MMBtu
Natural gas
AECO 7A basis swap(2)
5,000 MMBtu/d
Jan. 1, 2025 – Dec. 31, 2025
NYMEX HH less US$0.990/MMBtu
(1) Transactions with common terms and the same counterparty have been aggregated and presented at the weighted average price.
(2) Birchcliff sold AECO basis swap.
There were no financial derivative contracts entered into subsequent December 31, 2019.
Physical Delivery Contracts
Birchcliff also enters into physical delivery contracts to manage commodity price risk. These contracts are considered normal executory
sales contracts and are not recorded at fair value through profit or loss.
At December 31, 2019, the Corporation had the following physical delivery contract in place:
Product
Type of Contract
Quantity
Remaining Term
Contract Price
Natural gas
AECO 7A basis swap(2)
5,000 MMBtu/d
Jan. 1, 2020 – Dec. 31, 2023
NYMEX HH less US$1.205/MMBtu
(1) Birchcliff sold AECO basis swap.
There were no long-term physical delivery contracts entered into subsequent to December 31, 2019.
49
2019 Annual Report | Interest Rate Risk
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Corporation’s credit facilities
are exposed to interest rate risk. The remainder of Birchcliff’s financial assets and liabilities are not exposed directly to interest rate risk.
At December 31, 2019, Birchcliff had the following financial derivative contracts in place to manage interest rate risk:
Type of Contract
Index
Remaining Term(1)(2)
Notional value
Fixed Rate
Interest rate swap
One-month banker’s acceptance – CDOR(3)
Jan. 1 2020 – Mar. 1, 2024
$350,000,000
2.215%
(1) Transactions with common terms and the same counterparty have been aggregated and presented at the weighted average price.
(2) Contract terms commenced on March 1, 2019.
(3) Canadian Dollar Offered Rate (“CDOR”).
Realized and Unrealized Gains and Losses on Financial Instruments
The following table provides a summary of the realized and unrealized gains (losses) on financial instruments for the periods indicated:
Realized gain (loss)
Unrealized gain (loss)
Three months ended
December 31,
Twelve months ended
December 31,
2019
2018
2019
2018
($000s)
($/boe)
($000s)
($/boe)
($000s)
($/boe)
($000s)
($/boe)
(6,565)
(0.92)
1,658
0.24
13,673
0.48
(15,771)
(0.56)
(46,602)
(6.50)
77,443
11.02 (192,765)
(6.77)
64,222
2.28
Birchcliff realized a cash loss of $6.6 million and a cash gain of $13.7 million on financial instruments during the three and twelve
month Reporting Periods, respectively, due to the settlement of financial NYMEX HH/AECO basis swap contracts that were
outstanding in the periods.
Birchcliff recorded an unrealized non-cash loss on financial instruments of $46.6 million in the three month Reporting Period and
an unrealized non-cash loss on financial instruments of $192.8 million in the twelve month Reporting Period. The unrealized non-cash
losses on financial instruments recorded in the Reporting Periods were primarily due to the decrease in the fair value of the
Corporation’s financial instruments to a liability position of $132.6 million at December 31, 2019. The fair value of the liability is the
estimated discounted value to settle outstanding financial contracts at a point in time. The decrease in the fair value of Birchcliff’s
financial instruments during the Reporting Periods was primarily attributable to: (i) the decrease in the forward basis spread between
NYMEX HH and AECO 7A for contracts outstanding at December 31, 2019 as compared to the fair value previously assessed at
September 30, 2019 and December 31, 2018; and (ii) the settlement of financial NYMEX HH/AECO basis swap contracts in the
Reporting Periods.
The unrealized gains and losses on financial instruments can fluctuate materially from period-to-period due to movement in the forward
strip commodity prices and interest rates. Unrealized gains and losses on financial instruments do not impact adjusted funds flow and
may differ materially from the actual gains or losses realized on the eventual cash settlement of financial contracts in the period.
Royalties
The following table sets forth Birchcliff’s royalty expense for the periods indicated:
Royalty expense ($000s)(1)
Royalty expense ($/boe)
Effective royalty rate (%)(2)
Three months ended
December 31,
Twelve months ended
December 31,
2019
8,263
1.15
5%
2018
6,763
0.96
4%
2019
27,452
0.96
4%
2018
38,306
1.36
6%
(1) Royalties are paid primarily to the Government of Alberta.
(2) The effective royalty rate is calculated by dividing the aggregate royalties into P&NG sales for the period.
Birchcliff’s per unit royalties increased by 20% and decreased by 29% from the three and twelve month Comparable Prior Periods,
respectively, primarily due to the fluctuation in the average realized light oil, condensate and NGLs sales prices and the effect these
prices have on the sliding scale royalty calculation. See “Discussion of Operations – Operating Netbacks” in this MD&A for details on
royalties for the Corporation’s Pouce Coupe and Gordondale assets.
50
| 2019 Annual Report Operating Expense
The following table sets forth a breakdown of Birchcliff’s operating expense for the periods indicated:
($000s)
Field operating expense
Recoveries
Operating expense
Operating expense per boe
Three months ended
December 31,
Twelve months ended
December 31,
2019
22,903
(926)
21,977
$3.06
2018
25,705
(1,028)
24,677
$3.51
2019
91,679
(3,776)
87,903
$3.09
2018
102,099
(2,995)
99,104
$3.52
On a per unit basis, operating expense decreased by 13% and 12% from the three and twelve month Comparable Prior Periods,
respectively, primarily due to: (i) a step-down reduction in natural gas processing fees which became effective January 1, 2019 at the
Gordondale Gas Plant; (ii) reduced take-or-pay processing commitments in Pouce Coupe beginning in November 2018 which resulted
in natural gas being redirected from third-party facilities to the Pouce Coupe Gas Plant; and (iii) increased operating efficiencies
resulting from expanded liquids-handling capabilities in Pouce Coupe. See “Discussion of Operations – Operating Netbacks” in this
MD&A for details on operating expense for the Pouce Coupe assets and Gordondale assets.
Transportation and Other
The following table sets forth Birchcliff’s transportation and other expense for the periods indicated:
($000s)
Natural gas transportation
Liquids transportation
Fractionation
Other fees
Transportation
Transportation per boe
Marketing purchases(1)
Marketing revenue(1)
Marketing gain(1)
Marketing gain per boe
Transportation and other expense
Transportation and other expense per boe
Three months ended
December 31,
Twelve months ended
December 31,
2019
25,433
6,806
1,084
30
33,353
$4.65
7,196
(8,271)
(1,075)
($0.14)
32,278
$4.51
2018
21,801
6,213
521
32
28,567
$4.06
-
-
-
-
28,567
$4.07
2019
96,044
26,830
4,761
128
127,763
$4.49
18,503
(20,131)
(1,628)
($0.05)
126,135
$4.44
2018
78,878
21,011
3,533
125
103,547
$3.68
-
-
-
-
103,547
$3.68
(1) Marketing purchases and marketing revenue represent the volumes purchased and sold to third parties, which are recorded on a gross basis for financial statement presentation purposes. Birchcliff
enters into certain marketing purchase and sales arrangements to reduce its take-or-pay fractionation fees associated with third-party commitments. Any gains or losses from the purchase and sale of
third-party products relate to the commodity price differential.
On a per unit basis, transportation expense increased by 15% and 22% from the three and twelve month Comparable Prior Periods.
The increases were primarily due to: (i) an additional 30,000 GJ/d and 25,000 GJ/d of firm service transportation to Dawn that became
available on November 1, 2018 and November 1, 2019, respectively; (ii) additional firm service transportation associated with Birchcliff’s
commitments on the NGTL system to the AECO sales trading hub; and (iii) increased total liquids production in the Reporting Periods.
See “Discussion of Operations – Operating Netbacks” in this MD&A for details on transportation and other expense for the
Pouce Coupe assets and Gordondale assets.
Operating Netback
The following table sets forth Birchcliff’s average production and operating netback for the Corporation’s Pouce Coupe assets,
Gordondale assets and on a corporate basis for the periods indicated:
51
2019 Annual Report | Pouce Coupe assets:
Average production:
Condensate (bbls/d)
NGLs (bbls/d)
Natural gas (Mcf/d)
Total (boe/d)
% of corporate production
Liquids(1)-to-gas ratio (bbls/MMcf)
Netback and cost ($/boe):
Petroleum and natural gas revenue(2)
Royalty expense
Operating expense
Transportation and other expense
Operating netback
Gordondale assets:
Average production:
Light oil (bbls/d)
Condensate (bbls/d)
NGLs (bbls/d)
Natural gas (Mcf/d)
Total (boe/d)
% of corporate production
Liquids(1)-to-gas ratio (bbls/MMcf)
Netback and cost ($/boe):
Petroleum and natural gas revenue(2)
Royalty expense
Operating expense
Transportation and other expense
Operating netback
Total Corporate:
Average production:
Light oil (bbls/d)
Condensate (bbls/d)
NGLs (bbls/d)
Natural gas (Mcf/d)
Total (boe/d)(3)
Liquids(1)-to-gas ratio (bbls/MMcf)
Netback and cost ($/boe):
Petroleum and natural gas revenue(2)
Royalty expense
Operating expense
Transportation and other expense
Operating netback
(1) Liquids consists of NGLs, including condensate.
(2) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.
(3) Includes other minor oil and natural gas properties which were not individually significant.
52
Three months ended
December 31,
Twelve months ended
December 31,
2019
2018
2019
2018
3,820
1,168
269,314
49,873
64%
18.5
21.02
(0.78)
(2.22)
(4.71)
13.31
4,271
1,245
6,646
95,534
28,085
36%
127.3
26.43
(1.81)
(4.54)
(4.13)
15.95
4,435
4,906
7,814
364,847
77,962
47.0
22.97
(1.15)
(3.06)
(4.51)
14.25
2,892
599
266,774
47,953
63%
13.1
20.93
(0.33)
(2.29)
(4.16)
14.15
4,777
1,317
6,215
96,818
28,446
37%
127.1
23.83
(2.04)
(5.55)
(3.91)
12.33
4,788
4,207
6,814
363,596
76,408
43.5
22.01
(0.96)
(3.51)
(4.07)
13.47
3,963
986
2,723
219
274,009
276,004
50,616
48,943
65%
18.1
19.19
(0.47)
(2.07)
(4.58)
12.07
4,686
1,235
6,278
90,947
27,357
35%
134.1
25.94
(1.88)
(4.93)
(4.18)
14.95
4,742
5,145
7,264
364,958
77,977
47.0
21.56
(0.96)
(3.09)
(4.44)
13.07
63%
10.7
18.22
(0.29)
(2.28)
(3.59)
12.06
4,852
1,355
5,903
95,508
28,028
36%
126.8
28.85
(3.23)
(5.63)
(3.84)
16.15
4,873
4,072
6,123
372,170
77,096
40.5
22.08
(1.36)
(3.52)
(3.68)
13.52
| 2019 Annual Report Pouce Coupe Montney/Doig Resource Play
Birchcliff’s average production from its Pouce Coupe assets was 49,873 boe/d in the three month Reporting Period and 50,616 boe/d
in the twelve month Reporting Period, a 4% increase and 3% increase, respectively, from the Comparable Prior Periods. The increases
were primarily due to the incremental production from horizontal condensate-rich natural gas wells that were brought on production
in Pouce Coupe, partially offset by natural production declines.
Birchcliff’s liquids-to-gas ratio for the Pouce Coupe assets was 18.5 bbls/MMcf in the three month Reporting Period and 18.1 bbls/MMcf in
the twelve month Reporting Period, a 41% increase and 69% increase, respectively, from the Comparable Prior Periods. The increases were
primarily due to the specifically targeted condensate-rich natural gas wells in Pouce Coupe and the re-configuration of Phases V and VI of
the Pouce Coupe Gas Plant which provided for shallow-cut capability, allowing Birchcliff to extract C3+ from the natural gas stream.
Operating expense for the Pouce Coupe assets was $2.22/boe in the three month Reporting Period and $2.07/boe in the twelve month
Reporting Period, a 3% decrease and 9% decrease, respectively, from the Comparable Prior Periods. The decreases were primarily due to
reduced take-or-pay processing commitments in Pouce Coupe beginning in November 2018 that resulted in natural gas being redirected
from third-party facilities to the Pouce Coupe Gas Plant and increased operating efficiencies from improved liquids-handling capabilities
in the Pouce Coupe area.
Transportation and other expense for the Pouce Coupe assets was $4.71/boe in the three month Reporting Period and $4.58/boe in the
twelve month Reporting Period, a 13% increase and 28% increase, respectively, from the Comparable Prior Periods. The increases were
primarily due to additional firm service transportation to AECO and Dawn sales trading hubs.
Birchcliff’s operating netback for the Pouce Coupe assets was $13.31/boe in the three month Reporting Period, a 6% decrease from the
three month Comparable Prior Period. Birchcliff’s operating netback for the Pouce Coupe assets was $12.07/boe in the twelve month
Reporting Period and remained relatively unchanged from the twelve month Comparable Prior Period. The decrease in the three month
Reporting Period was primarily due to higher per boe royalty and transportation and other expenses, partially offset by lower per boe
operating expense. Operating netback in the twelve month Reporting Period was impacted by a higher average realized sales price
received for Birchcliff’s Pouce Coupe production and lower per boe operating expense, offset by higher per boe royalty and
transportation and other expenses.
Gordondale Montney/Doig Resource Play
Birchcliff’s average production from its Gordondale assets was 28,085 boe/d in the three month Reporting Period and 27,357 boe/d
in the twelve month Reporting Period, a 1% decrease and 2% decrease, respectively, from the Comparable Prior Periods. The decreases
were primarily due to natural production declines, partially offset by the incremental production from new horizontal oil wells that were
brought on production in Gordondale.
Birchcliff’s liquids-to-gas ratio for the Gordondale assets was 127.3 bbls/MMcf in the three month Reporting Period and remained
relatively unchanged from the three month Comparable Prior Period. Birchcliff’s liquids-to-gas ratio for the Gordondale assets
was 134.1 bbls/MMcf in the twelve month Reporting Period, a 6% increase from the twelve month Comparable Prior Period. The
liquids-to-gas ratio in the Reporting Periods was primarily impacted by the timing of bringing new production on-stream and the
successful drilling of horizontal oil wells in Gordondale.
Operating expense for the Gordondale assets was $4.54/boe in the three month Reporting Period and $4.93/boe in the twelve
month Reporting Period, an 18% decrease and 12% decrease, respectively, from the Comparable Prior Periods. The decreases were
primarily due to a step-down reduction in natural gas processing fees which became effective January 1, 2019 at the Gordondale Gas Plant.
Transportation and other expense for the Gordondale assets was $4.13/boe in the three month Reporting Period and $4.18/boe in the
twelve month Reporting Period, a 6% increase and 9% increase, respectively, from the Comparable Prior Periods. The increases were
primarily due to additional firm service transportation to AECO and Dawn sales trading hubs.
Birchcliff’s operating netback for the Gordondale assets was $15.95/boe in the three month Reporting Period and $14.95/boe in the
twelve month Reporting Period, a 29% increase and 7% decrease, respectively, from the Comparable Prior Periods. The increase in the
three month Reporting Period was primarily due to a higher average realized sales price received for Birchcliff’s Gordondale production
and lower per boe royalty and operating expenses, partially offset by higher transportation and other expense. The decrease in
the twelve month Reporting Period was primarily due to a lower average realized sales price received for Birchcliff’s Gordondale
production and higher transportation and other expense, partially offset by lower per boe royalty and operating expenses.
53
2019 Annual Report | Administrative Expense
The following table sets forth the components of Birchcliff’s net administrative expense for the periods indicated:
Cash:
Salaries and benefits(1)
Other(2)(3)
Operating overhead recoveries
Capitalized overhead(4)
G&A expense, net
G&A expense, net per boe
Non-cash:
Other compensation(5)
Capitalized compensation(4)
Other compensation, net
Other compensation, net per boe
Administrative expense, net
Administrative expense, net per boe
Three months ended
December 31,
Twelve months ended
December 31,
2019
(%)
81
19
100
(1)
(49)
50
100
(58)
42
($000s)
14,561
3,440
18,001
(40)
(8,926)
9,035
$1.26
1,886
(1,088)
798
$0.11
9,833
$1.37
2019
(%)
70
30
100
(1)
(41)
58
100
(51)
49
2018
(%)
75
25
100
(1)
($000s)
11,131
3,683
14,814
(33)
($000s)
32,335
14,057
46,392
(156)
(7,163)
(48)
(19,421)
7,618
$1.08
9,668
(4,175)
5,493
$0.78
13,111
$1.86
51
100
(43)
57
26,815
$0.94
8,684
(4,406)
4,278
$0.15
31,093
$1.09
($000s)
28,618
13,329
41,947
(150)
(17,195)
24,602
$0.87
14,758
(7,061)
7,697
$0.27
32,299
$1.14
2018
(%)
68
32
100
(1)
(40)
59
100
(48)
52
(1) Includes salaries and benefits paid to officers and employees of the Corporation and retainer fees, meeting fees and benefits paid to directors of the Corporation. The increase in salaries and benefits
were primarily due to additional corporate staff required to manage its core operating areas and additional employee costs.
(2) Includes costs such as rent, legal, tax, insurance, computer hardware and software and other business expenses incurred by the Corporation.
(3) Other G&A expense excludes lease payments in the Reporting Periods. As a result of Birchcliff’s adoption of IFRS 16 effective January 1, 2019, approximately $0.6 million in the three month Reporting
Period and $2.2 million in the twelve month Reporting Period of lease payments have been applied against the lease liability on the statements of financial position and the interest portion of lease
payment is included in finance expenses as accretion. Birchcliff applied IFRS 16 using the modified retrospective approach; therefore comparative information has not been restated.
(4) Includes a portion of gross G&A expenses and other compensation directly attributable to the exploration and development activities of the Corporation, which have been capitalized.
(5) Includes $1.7 million of additional stock-based compensation expense recorded in the twelve month Reporting Period related to the amendment of the Corporation’s outstanding performance warrants
and includes a post-employment benefit expense of $7.8 million recorded in the Comparable Priors Periods.
The following table sets forth the Corporation’s outstanding stock options for the Reporting Periods and the Comparable Prior Periods:
Three months ended
December 31,
Twelve months ended
December 31,
2019
Exercise
Price(2)
2018
Exercise
Price(2)
2019
Exercise
Price(2)
Number
Number
Number
Number
Balance, beginning
18,532,368
$4.85
16,000,070
$5.78
15,847,570
$5.74
14,158,107
2018
Exercise
Price(2)
$6.88
$3.23
5,152,000
$2.32
140,500
$4.59
10,107,200
$2.90
4,734,900
-
-
(26,000)
($3.35)
(23,867)
($3.08)
(114,664)
($3.35)
(27,334)
($3.74)
(10,000)
($5.03)
(229,736)
($4.22)
(483,405)
($5.59)
(173,666)
($7.39)
(257,000)
($7.46)
(2,217,799)
($8.47)
(2,447,368)
($7.57)
Granted(1)
Exercised
Forfeited
Expired
Balance, ending
23,483,368
$4.28
15,847,570
$5.74 23,483,368
$4.28
15,847,570
$5.74
(1) Each stock option granted entitles the holder to purchase one common share at the exercise price.
(2) Exercise price is calculated on a weighted average basis.
At December 31, 2019, there were also 2,939,732 performance warrants outstanding with an exercise price of $3.00. On June 7, 2019,
the Corporation’s outstanding performance warrants were amended to extend the expiry date from January 31, 2020 to January 31, 2025.
The Corporation recorded a non-cash stock-based compensation expense in the twelve month Reporting Period of approximately
$1.3 million (net, $0.4 million of capitalization) relating to the extension.
54
| 2019 Annual Report Depletion and Depreciation Expense
Depletion and depreciation (“D&D”) expense is a function of the estimated proved plus probable reserve additions, the F&D costs
attributable to those reserves, the associated future development costs required to recover those reserves and the actual production
in the relevant period. The Corporation determines its D&D expense on a field area basis. The following table sets forth Birchcliff’s D&D
expense for the periods indicated:
($000s)
Depletion and depreciation expense
Depletion and depreciation expense per boe
Three months ended
December 31,
2019
53,757
$7.49
2018
51,274
$7.29
Twelve months ended
December 31,
2019
2018
213,565
208,868
$7.50
$7.42
D&D expense on an aggregate basis for the Reporting Periods was higher than the Comparable Prior Periods mainly due to an increase
in production. Included in the depletion assessment at December 31, 2019 were 1,032.2 MMboe of proved plus probable reserves and
$4.4 billion of future development costs required to recover those reserves as estimated by the Corporation’s independent qualified
reserves evaluators.
Asset Impairment Assessment
The Corporation reviews its petroleum and natural gas assets for impairment in accordance with International Accounting Standards
(“IAS”) 36 under IFRS. Birchcliff’s assets are grouped into cash-generating units (“CGU”) for the purpose of determining impairment.
A CGU represents the smallest group of assets that generates cash inflows from continuing use that are largely independent of the
cash inflows of other assets or groups of assets. In determining the Corporation’s CGUs, the Corporation takes into consideration
all available information, including, but not limited to: geographical proximity; geological similarities (i.e. reservoir characteristics
and production profiles); degree of shared infrastructure; independent versus interdependent cash flows; operating structure; the
regulatory environment; management decision-making; and overall business strategy.
The Corporation’s CGUs are reviewed at each reporting date for both internal and external indicators of potential impairment. Potential
CGU impairment indicators include, but are not limited to: changes to Birchcliff’s business plan; deterioration in commodity prices;
negative changes in the technological, economic, legal, capital or operating environment; adverse changes to the physical condition
of a CGU; current expectations that a material CGU (or a significant component thereof) is more likely than not to be sold or otherwise
disposed of before the end of its previously estimated useful life; non-compliance with the agreements governing the Corporation’s
bank credit facilities; deterioration in the financial and operational performance of a CGU; net assets exceeding market capitalization;
and significant downward revisions of estimated proved plus probable reserves of a CGU. If impairment indicators exist, an impairment
test is performed by comparing a CGU’s carrying value to its recoverable amount.
Birchcliff performed an impairment assessment of its petroleum and natural gas assets on a CGU basis and determined that there
were impairment indicators present at December 31, 2019 and December 31, 2018. Birchcliff performed an impairment test on a CGU
basis and determined that the carrying value of its P&NG properties and equipment was recoverable. Birchcliff’s P&NG properties
and equipment were not impaired at December 31, 2019 or December 31, 2018. For further details on the methodology used in the
impairment test, see the notes to the annual audited financial statements of the Corporation for the Reporting Periods.
Management has determined that the calculation of the recoverable amount is most sensitive to key assumptions regarding discount
rates, commodity prices and estimated quantities of proved plus probable reserves and the future production profile of those reserves.
Each of these underlying key assumptions is reviewed by management and corroborated independently to assess for reasonableness.
The P&NG future prices are based on period-end commodity price forecast assumptions as included in the Corporation’s independent
reserves evaluation.
55
2019 Annual Report | Finance Expense
The following table sets forth the components of the Corporation’s finance expense for the periods indicated:
Cash:
Interest expense(1)
Interest expense per boe(1)
Non-cash:
Accretion(2)
Amortization of deferred financing fees
Other expenses
Other expenses per boe
Finance expense
Finance expense per boe
Three months ended
December 31,
Twelve months ended
December 31,
2019
2018
2019
2018
5,852
$0.82
963
386
1,349
$0.18
7,201
$1.00
7,437
$1.06
811
374
1,185
$0.17
8,622
$1.23
25,073
$0.88
3,517
1,528
5,045
$0.17
30,118
$1.05
27,969
$0.99
3,208
1,534
4,742
$0.16
32,711
$1.15
(1) Birchcliff’s extendible revolving credit facilities (the “Credit Facilities”) are comprised of an extendible revolving syndicated term credit facility (the “Syndicated Credit Facility”) of $900 million and an
extendible revolving working capital facility (the “Working Capital Facility”) of $100 million. Birchcliff may draw on its Syndicated Credit Facility using CDN dollar denominated bankers’ acceptances
and US dollar denominated LIBOR loans. The average effective interest rate under the Syndicated Credit Facility is determined based on: (i) the market interest rate of its drawn bankers’ acceptances and
LIBOR loans; and (ii) Birchcliff’s stamping fees. Birchcliff’s stamping fees are calculated using a pricing margin grid and will change as a result of the ratio of outstanding indebtedness to the trailing four
quarter EBITDA as calculated in accordance with the Corporation’s agreement governing the Credit Facilities. EBITDA is defined as earnings before interest and non-cash items, including (if any) income
taxes, other compensation, gains and losses on sale of assets, unrealized gains and losses on financial instruments and depletion, depreciation and amortization.
(2) Includes accretion on decommissioning obligations, lease obligations and post-employment benefit obligations.
Birchcliff’s aggregate interest expense in the three and twelve month Reporting Periods decreased by 21% and 10%, respectively,
from the Comparable Prior Periods. The decreases were primarily due to: (i) higher drawn US dollar denominated LIBOR loans in the
Reporting Periods, which had a lower average market interest rate component compared to higher drawn CDN dollar denominated
bankers’ acceptances in the Comparable Prior Periods; and (ii) lower stamping fees applicable to Birchcliff’s Syndicated Credit Facility
in the Reporting Periods.
The following table sets forth the Corporation’s effective interest rates under its Credit Facilities for the periods indicated:
Working Capital Facility
Syndicated Credit Facility
Three months ended
December 31,
Twelve months ended
December 31,
2019
4.7%
3.6%
2018
5.2%
4.7%
2019
4.7%
4.1%
2018
5.2%
4.7%
Birchcliff’s average outstanding total balance under its Credit Facilities was approximately $605.0 million and $613.0 million in the three
and twelve month Reporting Periods, respectively, as compared to $620.0 million and $605.0 million in the Comparable Prior Periods,
calculated as the simple average of the month-end amounts.
Other Losses
The following table sets forth the components of the Corporation’s other losses for the periods indicated:
Three months ended
December 31,
Twelve months ended
December 31,
2019
-
-
-
-
2018
-
1,831
1,831
$0.26
2019
5,549
-
5,549
$0.19
2018
-
10,192
10,192
$0.36
($000s)
Loss on investment
Loss on sale of assets
Other losses
Other losses per boe
56
| 2019 Annual Report Loss on Investment
On August 31, 2017, Birchcliff acquired securities consisting of 4,500,000 common A units in a limited partnership and 10,000,000
preferred units in a trust (collectively, the “Securities”) at a combined value of $10.0 million. The Securities are not publicly listed and do
not constitute significant investments. At December 31, 2019, the Corporation determined the Securities had a fair value of $4.4 million
resulting in a recorded loss on investment of $5.6 million during the twelve month Reporting Period.
Loss on Sale of Assets
During the twelve month Comparable Prior Period, Birchcliff completed the dispositions of certain non-core miscellaneous P&NG
properties and related assets and interests. The total cash consideration was $5.2 million, before customary closing adjustments.
As a result of the dispositions, Birchcliff recorded a loss on sale of assets of approximately $10.2 million in the twelve month Comparable
Prior Period. These dispositions were considered non-core as they represented less than 1% of both Birchcliff’s production during the
Reporting Periods and proved plus probable reserves at December 31, 2018 and therefore were not significant to the Corporation’s
financial results or operational performance.
Income Taxes
The following table sets forth the components of the Corporation’s income taxes for the periods indicated:
($000s)
Deferred tax recovery (expense)
Dividend tax expense on preferred shares
Income tax recovery (expense)
Income tax recovery (expense) per boe
Three months ended
December 31,
Twelve months ended
December 31,
2019
5,228
(769)
4,459
$0.61
2018
(25,585)
(769)
(26,354)
($3.77)
2019
37,881
(3,075)
34,806
$1.21
2018
(36,858)
(3,075)
(39,933)
($1.44)
Birchcliff’s income taxes are primarily impacted by the before-tax net income or losses recorded in the respective periods. During the
twelve month Reporting Period, Birchcliff recorded a $34.8 million deferred tax recovery that primarily resulted from a reduction in the
provincial corporate income tax rate from 12% to 8%.
On May 28, 2019, the Government of Alberta reduced the general corporate income tax rate to 8% (from 12%) over four years.
Starting July 1, 2019, the general corporate tax rate decreased to 11% (from 12%), with further 1% rate reductions every year on January 1
until the general corporate tax rate is 8% on January 1, 2022. The reduction in the provincial corporate income tax rate is considered
“substantively enacted” under IFRS as of May 28, 2019 and therefore the financial impact has been accounted for in Birchcliff’s financial
statements for the Reporting Periods.
The Corporation’s estimated income tax pools were $2.1 billion at December 31, 2019. Management expects that future taxable
income will be available to utilize the accumulated tax pools. The components of the Corporation’s estimated income tax pools are
set forth in the table below:
($000s)
Canadian oil and gas property expense
Canadian development expense
Canadian exploration expense
Undepreciated capital costs
Non-capital losses
SR&ED(1) & Investment tax credits
Financing costs and other
Estimated income tax pools(2)
(1) Scientific research and experimental development (“SR&ED”) tax pools.
(2) Excludes Veracel tax pools of $39.3 million which were reassessed by the Canada Revenue Agency (the “CRA”).
Tax pools as at
December 31, 2019
401,214
344,250
311,091
326,346
641,415
25,592
11,618
2,061,526
57
2019 Annual Report |
Veracel Tax Pools
Birchcliff’s 2006 income tax filings were reassessed by the CRA in 2011 (the “Reassessment”). The Reassessment was based on the
CRA’s position that the tax pools available to Veracel Inc. (“Veracel”), prior to its amalgamation with Birchcliff, ceased to be available
to Veracel after Birchcliff and Veracel amalgamated on May 31, 2005. The Veracel tax pools in dispute totalled $39.3 million. Birchcliff
appealed the Reassessment to the Tax Court of Canada (the “Trial Court”) and the trial of that appeal occurred in November 2013.
On October 1, 2015, the Trial Court issued its decision (the “Trial Decision”) and dismissed Birchcliff’s appeal on the basis of the
general anti‐avoidance rule contained in the Income Tax Act (Canada). The Trial Decision was rendered by a judge based on the written
record and not by the judge who conducted the trial. As a result of the Trial Decision, Birchcliff recorded a non-cash deferred income
tax expense in the amount of $10.2 million in the fourth quarter of 2015.
Birchcliff appealed the Trial Decision to the Federal Court of Appeal (the “FCA”), which appeal was heard in January 2017. In April 2017
the FCA issued its decision and allowed the appeal and set aside the Trial Decision, based on the lack of jurisdiction by the judge who
rendered the Trial Decision. In setting aside the Trial Decision, the FCA referred the matter back to the judge of the Trial Court who initially
conducted the trial in 2013 to render a judgment. The judge of the Trial Court rendered a decision in November 2017 and dismissed the
Corporation’s appeal. The Corporation appealed that decision to the FCA, which appeal was heard on December 10, 2018. The FCA
rendered a decision in May 2019 dismissing the Corporation’s appeal. The Corporation filed an application for leave to appeal to the
Supreme Court of Canada, which was denied on November 14, 2019 and as a result there was no further impact to the Corporation’s
financial statements.
CAPITAL EXPENDITURES
The following table sets forth a summary of the Corporation’s capital expenditures for the periods indicated:
($000s)
Land
Seismic
Workovers
Drilling and completions
Well equipment and facilities
Finding and development capital
Acquisitions
Dispositions
Finding, development and acquisition capital
Administrative assets
Total capital expenditures
Three months ended
December 31,
Twelve months ended
December 31,
2019
962
761
570
40,763
13,744
56,800
800
-
57,600
536
58,136
2018
390
332
1,804
37,888
11,907
52,321
-
(9)
52,312
574
52,886
2019
2,947
4,848
6,609
178,468
63,523
256,395
41,407
-
2018
2,226
1,310
6,281
200,782
89,055
299,654
1,524
(5,184)
297,802
295,994
2,444
2,024
300,246
298,018
During the three month Reporting Period, Birchcliff had total capital expenditures of $58.1 million which included approximately
$28.7 million (49%) on the drilling and completion of Montney horizontal wells in Pouce Coupe, $12.0 million (21%) on the drilling and
completion of Montney horizontal wells in Gordondale and $5.0 million (9%) on the Inlet Liquids-Handling Facility at the Pouce Coupe
Gas Plant.
During the twelve month Reporting Period, Birchcliff had total capital expenditures of $300.2 million which included approximately
$95.8 million (32%) on the drilling and completion of Montney horizontal wells in Pouce Coupe, $82.3 million (27%) on the drilling
and completion of Montney horizontal wells in Gordondale, $39.0 million (13%) on the Acquisition and $10.2 million (3%) on the
Inlet Liquids-Handling Facility.
The remaining capital during the Reporting Periods was primarily spent on land, seismic, infrastructure expansion, gas gathering and
optimization projects in the Montney/Doig Resource Play and other oil and gas development projects in the Peace River Arch.
During the three month Reporting Period, Birchcliff drilled a total of 7 (7.0 net) wells, consisting of 2 (2.0 net) Montney horizontal oil wells
in Gordondale and 5 (5.0 net) Montney horizontal natural gas wells in Pouce Coupe. During the twelve month Reporting Period, Birchcliff
drilled a total of 30 (30.0 net) wells, consisting of 14 (14.0 net) Montney horizontal oil wells in Gordondale and 16 (16.0 net) Montney
horizontal natural gas wells in Pouce Coupe.
58
| 2019 Annual Report CAPITAL RESOURCES AND LIQUIDITY
Liquidity and Capital Resources
The capital intensive nature of Birchcliff’s operations requires it to maintain adequate sources of liquidity to fund its short-term and
long-term financial obligations. Birchcliff’s capital resources primarily consist of adjusted funds flow and available Credit Facilities.
The Corporation believes that its internally generated adjusted funds flow and its existing undrawn Credit Facilities will provide sufficient
liquidity to fund its working capital requirements, capital expenditure programs and dividend payments for the foreseeable future.
In addition, the Corporation may from time to time seek additional capital in the form of debt and/or equity or dispose of non-core
properties to fund its ongoing capital expenditure programs and protect its statements of financial position. There is no certainty that
any of these additional sources of capital will be available if required. See “Advisories – Forward-Looking Statements” in this MD&A.
The following table sets forth a summary of the Corporation’s capital resources for the periods indicated:
($000s)
Adjusted funds flow
Changes in non-cash working capital from operations
Decommissioning expenditures
Exercise of stock options
Financing fees paid on credit facilities
Lease payments
Dividends paid
Deposit on acquisition
Net change in revolving term credit facilities
Changes in non-cash working capital from investing
Capital resources
Three months ended
December 31,
Twelve months ended
December 31,
2019
80,941
5,058
(442)
-
-
(561)
(8,903)
-
2018
81,517
10,838
(155)
87
-
-
(8,570)
(3,900)
(29,761)
(30,149)
11,804
58,136
3,218
52,886
2019
334,504
(5,153)
(2,285)
73
(990)
(2,172)
2018
312,922
12,591
(1,079)
384
(950)
-
(35,610)
(34,273)
-
3,683
4,313
296,363
(3,900)
17,868
(5,540)
298,023
Birchcliff’s adjusted funds flow depends on a number of factors, including, but not limited to, commodity prices and market
diversification initiatives, production and sales volumes, royalties, operating and transportation expenses and foreign exchange rates.
The Corporation closely monitors commodity prices and its capital spending and has taken proactive measures to ensure liquidity
and financial flexibility in the current environment. As discussed in further detail above under the heading “2020 Outlook”, Birchcliff’s
Board of Directors has approved a reduced capital budget for 2020 in the amount of $275 million to $295 million.
Birchcliff’s market diversification initiatives have increased its exposure to various natural gas sales trading hubs in North America.
Birchcliff has agreements for the firm service transportation of an aggregate of 175,000 GJ/d of natural gas on TCPL’s Canadian Mainline
whereby natural gas is transported to the Dawn sales trading hub in Southern Ontario. Birchcliff also has various financial and physical
risk management contracts in place to 2025 with exposure to NYMEX HH pricing. See “Discussion of Operations – Petroleum and
Natural Gas Revenue” and “Discussion of Operations – Risk Management” in this MD&A.
In addition to its adjusted funds flow, the Corporation’s other main source of liquidity is its Credit Facilities. At December 31, 2019,
the Corporation’s Credit Facilities limit was $1.0 billion with maturity dates of May 11, 2022. The aggregate principal amount drawn
under the Credit Facilities at December 31, 2019 was $615.7 million, leaving $384.3 million available to fund future obligations.
Working Capital
The Corporation’s adjusted working capital deficit increased to $23.4 million at December 31, 2019 from a $21.2 million deficit at
December 31, 2018. The deficit at December 31, 2019 was largely comprised of costs incurred from the drilling and completion of
new wells in Pouce Coupe and Gordondale.
At December 31, 2019, the major component of Birchcliff’s current assets was revenue to be received from its marketers in respect
of December 2019 production (87%), which was subsequently received in January 2020. Current liabilities largely consisted of trade
payables (50%) and accrued capital and operating expense (13%). Birchcliff monitors the financial strength of its marketers. At this
time, Birchcliff expects that such counterparties will be able to meet their financial obligations.
59
2019 Annual Report | Adjusted working capital includes items expected from normal operations, including trade receivables and payables, accruals,
deposits and prepaid expenses and excludes the current portion of the fair value of financial instruments and capital securities.
The Corporation’s adjusted working capital varies from quarter to quarter primarily due to the timing of such items, as well as the
size and timing of the Corporation’s capital expenditures, volatility in commodity prices and changes in revenue, among other
things. Birchcliff manages its adjusted working capital deficit using adjusted funds flow and advances under its Credit Facilities.
The adjusted working capital deficit position does not reduce the amount available under the Credit Facilities.
Bank Debt
Management of debt levels continues to be a priority for Birchcliff given the current volatility in the commodity price environment.
Total debt, including the adjusted working capital deficit, was $632.6 million at December 31, 2019 as compared to $626.5 million at
December 31, 2018. Total debt increased from December 31, 2018 primarily due to adjusted funds flow being less than the aggregate
of total capital expenditures and dividends paid in the twelve month Reporting Period.
The following table sets forth the Corporation’s unused Credit Facilities for the periods indicated:
As at, ($000s)
Maximum borrowing base limit(1):
Revolving term credit facilities
Principal amount utilized:
Drawn revolving term credit facilities
Outstanding letters of credit(2)
Unused credit
% unused credit
December 31,
2019
December 31,
2018
1,000,000
950,000
(611,483)
(4,185)
(615,668)
384,332
38%
(608,821)
(17,205)
(626,026)
323,974
34%
(1) Effective May 11, 2019, the borrowing base limit under the Credit Facilities was increased to $1.0 billion from $950.0 million. The Credit Facilities are subject to semi-annual reviews of the borrowing
base limit by Birchcliff’s syndicate of lenders, which limit is directly impacted by the value of Birchcliff’s oil and natural gas reserves. In addition, pursuant to the terms of the credit agreement governing
the Credit Facilities, the borrowing base of the Credit Facilities may be redetermined in certain other circumstances, including in the event that the Corporation’s liability management rating (“LMR”) is
less than 2.0. Birchcliff’s LMR as at December 31, 2019 was 18.7. The Credit Facilities do not contain any financial maintenance covenants. See “Risk Factors and Risk Management – Credit Facilities”.
(2) Letters of credit are issued to various service providers. The letters of credit reduce the amount available under the Working Capital Facility.
Contractual Obligations and Commitments
The Corporation enters into various contractual obligations and commitments in the normal course of operations. The following table
lists Birchcliff’s estimated material contractual obligations and commitments at December 31, 2019:
($000s)
Accounts payable and accrued liabilities
Drawn revolving term credit facilities
Firm transportation and fractionation(1)
Natural gas processing(2)
Operating commitments(3)
Capital commitments(4)
Lease payments
Capital securities(5)
Estimated contractual obligations(6)
127,079
135,252
2020
92,607
-
17,202
2,260
19,600
2,710
50,000
311,458
2021
2022-2024
Thereafter
-
-
17,155
2,260
-
3,008
-
-
611,483
363,954
51,512
6,780
-
7,791
-
-
-
294,124
137,334
6,968
-
8,821
-
157,675
1,041,520
447,247
(1) Includes firm transportation service arrangements and fractionation commitments with third parties.
(2) Includes natural gas processing commitments at third-party facilities.
(3) Includes variable operating components associated with Birchcliff’s head office premises.
(4) Primarily includes capital components associated with the construction of Birchcliff’s Inlet Liquids-Handling Facility.
(5) Birchcliff has 2,000,000 Series C Preferred Shares outstanding at December 31, 2019, which are redeemable by their holders at $25.00 per share. For further details, see the annual audited financial
statements of the Corporation and related notes for the Reporting Periods.
(6) Contractual obligations and commitments that are not material to Birchcliff are excluded from the above table. The Corporation’s decommissioning obligations are excluded from the table as these
obligations arose from a regulatory requirement rather than from a contractual arrangement. Birchcliff estimates the total undiscounted cash flow to settle its decommissioning obligations on its wells
and facilities at December 31, 2019 to be approximately $226.7 million and are estimated to be incurred as follows: 2020 - $3.0 million, 2021 – $3.0 million and $220.7 million thereafter. The estimate
for determining the undiscounted decommissioning obligations requires significant assumptions on both the abandonment cost and timing of the decommissioning and therefore the actual obligation
may differ materially.
60
| 2019 Annual Report OFF-BALANCE SHEET TRANSACTIONS
The Corporation has certain arrangements, all of which are reflected in the contractual obligations and commitments table above,
which were entered into in the normal course of operations.
OUTSTANDING SHARE INFORMATION
At March 11, 2020, Birchcliff had common shares, Series A Preferred Shares and Series C Preferred Shares that were outstanding.
Birchcliff’s common shares are listed on the TSX under the symbol “BIR”. Birchcliff’s Series A Preferred Shares and Series C Preferred Shares
are individually listed on the TSX under the symbols “BIR.PR.A” and “BIR.PR.C”, respectively.
The following table sets forth the common shares issued by the Corporation:
Balance at December 31, 2018
Exercise of options
Balance at December 31, 2019 and March 11, 2020
Common Shares
265,911,362
23,867
265,935,229
At March 11, 2020, the Corporation had the following securities outstanding: 265,935,229 common shares; 2,000,000 Series A Preferred
Shares; 2,000,000 Series C Preferred Shares; 21,177,001 stock options to purchase an equivalent number of common shares; and
2,939,732 performance warrants to purchase an equivalent number of common shares.
Dividends
The following table sets forth the dividend distributions by the Corporation for each class of shares for the periods indicated:
Common shares:
Dividend distribution ($000s)
Per common share ($)
Preferred shares - Series A:
Series A dividend distribution ($000s)
Per Series A preferred share ($)
Preferred shares - Series C:
Series C dividend distribution ($000s)
Per Series C preferred share ($)
Three months ended
December 31,
Twelve months ended
December 31,
2019
2018
2019
2018
6,981
0.0263
1,047
0.5234
875
0.4375
6,648
0.0250
1,047
0.5234
875
0.4375
27,923
0.1050
4,187
2.0935
3,500
1.7500
26,586
0.1000
4,187
2.0935
3,500
1.7500
All dividends have been designated as “eligible dividends” for the purposes of the Income Tax Act (Canada).
Normal Course Issuer Bid
On November 19, 2019, Birchcliff announced that the TSX had accepted the Corporation’s notice of intention to make a normal
course issuer bid (the “NCIB”). Pursuant to the NCIB, Birchcliff may purchase up to 13,296,761 of its outstanding common shares.
The total number of common shares that Birchcliff is permitted to purchase is subject to a daily purchase limit of 309,858 common
shares; provided, however, that the Corporation may make one block purchase per calendar week which exceeds the daily purchase
restriction. The NCIB commenced on November 25, 2019 and will terminate on November 24, 2020, or such earlier time as the
NCIB is completed or is terminated at the option of Birchcliff. Purchases under the NCIB will be effected through the facilities of the
TSX and/or Canadian alternative trading systems at the prevailing market price at the time of such transaction. All common shares
purchased under the NCIB will be cancelled. As at the date of this MD&A, Birchcliff has not purchased any common shares
pursuant to the NCIB.
A security holder of the Corporation may obtain, for no charge, a copy of the notice in respect of the NCIB filed with the TSX by
contacting the Corporation at 403-261-6401.
61
2019 Annual Report | SUMMARY OF QUARTERLY RESULTS
The following table sets forth a summary of the Corporation’s quarterly results for the eight most recently completed quarters:
Quarter ending,
Dec. 31,
2019
Sep. 30,
2019
Jun. 30,
2019
Mar. 31,
2019
Dec. 31,
2018
Sep. 30,
2018
Jun. 30,
2018
Mar. 31,
2018
Average production (boe/d)
77,962
80,548
78,453
74,884
76,408
79,331
76,296
76,323
Average realized light oil sales price ($/bbl)(1)
Average realized condensate sales price ($/bbl)(1)
Average realized NGLs sales price ($/bbl)(1)
Average realized natural gas sales price ($/Mcf)(1)
Average realized sales price ($/boe)
P&NG revenue ($000s)(1)
Operating expense ($/boe)
67.58
68.80
16.62
2.81
22.97
67.15
65.94
9.75
1.71
17.62
72.25
71.69
11.13
1.95
66.08
65.45
17.71
3.55
19.59
26.45
41.39
55.99
21.60
3.03
22.01
80.16
84.10
23.39
2.06
21.45
79.55
87.52
21.94
2.01
21.68
71.92
83.00
25.12
2.72
23.22
164,759
130,588
139,857
178,355
154,720
156,609
150,561
159,531
3.06
2.75
3.17
3.40
3.51
3.45
3.36
3.78
F&D capital expenditures ($000s)
57,600
40,192
67,937
91,466
52,321
44,984
69,826
132,602
Total capital expenditures ($000s)
58,136
41,621
68,532
131,958
52,886
45,524
66,464
133,144
Cash flow from operating activities ($000s)
85,557
48,908
97,857
94,744
92,200
68,556
71,825
91,853
Adjusted funds flow ($000s)
80,941
62,958
73,957
116,648
81,517
75,378
72,369
83,658
Per common share – basic ($)
Per common share – diluted ($)
Free funds flow ($000s)
Net income (loss) ($000s)
Net income (loss) to common shareholders
($000s)(2)
Per common share – basic ($)
Per common share – diluted ($)
Total assets ($ million)
0.30
0.30
0.24
0.24
0.28
0.28
0.44
0.44
0.31
0.30
0.28
0.28
0.27
0.27
0.31
0.31
24,141
22,766
6,020
25,182
29,196
30,394
2,543
(48,944)
(17,937)
(45,843)
(8,458)
16,846
71,947
7,703
7,437
15,125
(18,984)
(46,889)
(9,505)
15,799
70,900
6,657
6,390
14,078
(0.07)
(0.07)
2,817
(0.18)
(0.18)
2,822
(0.04)
(0.04)
2,840
0.06
0.06
0.27
0.27
0.03
0.02
2,860
2,763
2,707
0.02
0.02
2,715
0.05
0.05
2,697
Long-term bank debt ($000s)
609,177
638,631
622,282
611,911
605,267
635,120
617,291
573,935
Total debt ($000s)
632,582
644,407
654,709
626,454
641,484
661,409
657,732
598,193
Dividends on common shares ($000s)
Dividends on pref. shares – Series A ($000s)
Dividends on pref. shares – Series C ($000s)
Pref. shares outstanding – Series A (000s)
Pref. shares outstanding – Series C (000s)
Common shares outstanding (000s)
6,981
1,047
875
2,000
2,000
6,981
1,046
875
2,000
2,000
6,981
1,047
875
2,000
2,000
6,980
1,047
875
2,000
2,000
6,648
1,047
875
2,000
2,000
6,647
1,046
875
2,000
2,000
6,646
1,047
875
2,000
2,000
6,645
1,047
875
2,000
2,000
Basic
Diluted
265,935
265,935
265,935
265,924
265,911
265,885
265,845
265,805
292,358
287,407
287,381
287,480
284,699
285,825
285,253
285,692
Wtd. avg. common shares outstanding (000s)
Basic
Diluted
265,935
265,935
265,933
265,914
265,910
265,877
265,820
265,797
265,935
265,935
265,933
266,382
267,288
268,605
267,773
266,179
(1) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.
(2) Reduced for the Series A Preferred Share dividends paid in the period.
62
| 2019 Annual Report Average daily production volumes for the 2018 and 2019 quarters were impacted primarily by Birchcliff’s successful drilling of new
horizontal wells brought on production in Pouce Coupe and Gordondale, production curtailments due to temporary restrictions in
pipeline and compressor station capacity on the NGTL system and natural production declines during those periods.
Quarterly variances in revenue, adjusted funds flow and net income (loss) are primarily due to fluctuations in commodity prices and
production volumes. Oil and gas revenue and adjusted funds flow in the last eight quarters were largely impacted by quarterly
production and the average realized sales price received for Birchcliff’s production. Over the last eight quarters, Birchcliff’s adjusted
funds flow was also impacted by realized gains and losses on the settlement of financial instruments and lower trending operating
expenses primarily due to reduced third-party processing fees, the addition of Phase VI of the Pouce Coupe Gas Plant and higher
trending transportation and other expense primarily due to added market diversification initiatives.
Birchcliff’s net income in the fourth quarter of 2018 included an unrealized mark-to-market gain on financial instruments of $77.4 million.
Birchcliff’s net income (loss) in the four quarters of 2019 was primarily impacted by unrealized mark-to-market before-tax losses on
financial instruments of $38.9 million in Q1 2019, $46.4 million in Q2 2019, $60.9 million in Q3 2019 and $46.6 million in Q4 2019.
Net income or loss in the last eight quarters was also impacted by adjusted funds flow and certain non-cash adjustments, including
depletion expense and gains and losses on the sale of non-core assets recognized in those periods.
The Corporation’s F&D and total capital expenditures fluctuate quarter-to-quarter based on the outlook in commodity prices and
market conditions, the timing of drilling and completions operations and the timing of acquisitions and dispositions. Quarterly
variances in long-term debt and total debt are primarily due to fluctuations in adjusted funds flow and the amount and timing of capital
expenditures (including acquisitions and dispositions) and dividends paid.
Quarterly variances in free funds flow are primarily due to fluctuations in adjusted funds flow and F&D capital expenditures.
POTENTIAL TRANSACTIONS
Within its focus area, the Corporation is continually reviewing potential asset acquisitions and dispositions and corporate mergers and
acquisitions for the purpose of determining whether any such potential transaction is of interest to the Corporation, as well as the terms
on which such a potential transaction would be available. As a result, the Corporation may from time to time be involved in discussions
or negotiations with other parties or their agents in respect of potential asset acquisitions and dispositions and corporate merger and
acquisition opportunities.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Disclosure Controls and Procedures
The Corporation’s Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”) have designed, or caused to be
designed under their supervision, disclosure controls and procedures (“DC&P”), as defined in National Instrument 52-109 – Certification
of Disclosure in Issuer’s Annual and Interim Filings (“NI 52-109”), to provide reasonable assurance that: (i) material information relating
to the Corporation is made known to the Certifying Officers by others, particularly during the period in which the annual filings are
being prepared; and (ii) information required to be disclosed by the Corporation in its annual filings, interim filings or other reports filed
or submitted by the Corporation under securities legislation is recorded, processed, summarized and reported within the time periods
specified in securities legislation. The Certifying Officers have evaluated, or caused to be evaluated under their supervision, the
effectiveness of the Corporation’s DC&P at December 31, 2019 and have concluded that the Corporation’s DC&P were effective
at December 31, 2019.
While the Certifying Officers believe that the Corporation’s DC&P provide a reasonable level of assurance and are effective, they do
not expect that the DC&P will prevent all errors and fraud. A control system, 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.
Internal Control over Financial Reporting
The Certifying Officers have designed, or caused to be designed under their supervision, internal control over financial reporting
(“ICFR”), as defined in NI 52-109, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with the generally accepted accounting principles applicable to the
Corporation. The control framework the Certifying Officers used to design the Corporation’s ICFR is Internal Control – Integrated
Framework (2013) published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Certifying Officers
have evaluated, or caused to be evaluated under their supervision, the effectiveness of the Corporation’s ICFR at December 31, 2019
and have concluded that the Corporation’s ICFR was effective at December 31, 2019. There were no changes in the Corporation’s ICFR
that occurred during the period beginning on October 1, 2019 and ended on December 31, 2019 that have materially affected, or are
reasonably likely to materially affect, the Corporation’s ICFR.
63
2019 Annual Report | While the Certifying Officers believe that the Corporation’s ICFR provides a reasonable level of assurance and is effective, they do not
expect that the ICFR will prevent all errors and fraud. A control system, 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.
CRITICAL ACCOUNTING ESTIMATES
The timely preparation of the financial statements requires management to make judgments, estimates and assumptions that affect the
application of accounting policies and reported amounts of assets and liabilities and income and expenses. Accordingly, actual results
may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting
estimates are recognized in the period in which the estimates are revised and in any future periods affected.
Critical Judgments in Applying Accounting Policies
The following are the critical judgments that management has made in the process of applying the Corporation’s accounting policies
and that have the most significant effect on the amounts recognized in these financial statements:
Identification of Cash-Generating Units
Birchcliff’s assets are required to be aggregated into CGUs for the purpose of calculating impairment based on their ability to
generate largely independent cash inflows. CGUs have been determined based on similar geological structure, shared infrastructure,
geographical proximity, operating structure, commodity type and similar exposures to market risks. By their nature, these assumptions
are subject to management’s judgment and may impact the carrying value of the Corporation’s assets in future periods.
Identification of Impairment Indicators
IFRS requires Birchcliff to assess, at each reporting date, whether there are any indicators that its petroleum and natural gas assets may
be impaired. Birchcliff is required to consider information from both external sources (such as negative downturn in commodity prices,
significant adverse changes in the technological, market, economic or legal environment in which the entity operates) and internal
sources (such as downward revisions in reserves, significant adverse effect on the financial and operational performance of a CGU,
evidence of obsolescence or physical damage to the asset). By their nature, these assumptions are subject to management’s judgment.
Tax Uncertainties
IFRS requires Birchcliff, at each reporting date, to make certain judgments on uncertain tax positions by relevant tax authorities.
Judgments include determining whether the Corporation will “more likely than not” be successful in defending its tax positions
by considering information from relevant tax interpretations and tax laws in Canada. As such, this recognition threshold is subject
to management’s judgment and may impact the carrying value of the Corporation’s deferred tax assets and liabilities at the end
of the reporting period.
Lease Obligation
IFRS requires Birchcliff to make certain judgements in reviewing each of its contractual arrangements to determine whether the
arrangement contains a lease. Leases that are recognized are subject to further management judgment and estimation in various areas
specific to the arrangement. In determining the lease term to be recognized, management considers all facts and circumstances that
create an economic incentive to exercise an extension option, or not to exercise a termination option.
Key Sources of Estimation Uncertainty
The following are the key assumptions concerning the sources of estimation uncertainty at the end of the reporting period, that have
a significant risk of causing adjustments to the carrying amounts of assets and liabilities within the next financial year:
Reserves
Reported recoverable quantities of proved and probable reserves requires estimation regarding production profile, commodity prices,
exchange rates, remediation costs, timing and amount of future development costs, and production, transportation and other costs
for future cash flows. It also requires interpretation of geological and geophysical models in order to make an assessment of the size,
shape, depth and quality of reservoirs, and their anticipated recoveries. The economical, geological and technical factors used to
estimate reserves may change from period to period. Changes in reported reserves can impact the carrying values of the Corporation’s
petroleum and natural gas properties and equipment, the calculation of depletion and depreciation, the provision for decommissioning
obligations, and the recognition of deferred tax assets due to changes in expected future cash flows. The recoverable quantities
of reserves and estimated cash flows from Birchcliff’s petroleum and natural gas interests are independently evaluated by reserve
engineers at least annually.
64
| 2019 Annual Report The Corporation’s petroleum and natural gas reserves represent the estimated quantities of petroleum, natural gas and NGLs which
geological, geophysical and engineering data demonstrate with a specified degree of certainty to be economically recoverable in
future years from known reservoirs and which are considered commercially producible. Such reserves may be considered commercially
producible if management has the intention of developing and producing them and such intention is based upon (i) a reasonable
assessment of the future economics of such production; (ii) a reasonable expectation that there is a market for all or substantially all the
expected petroleum and natural gas production; and (iii) evidence that the necessary production, transmission and transportation
facilities are available or can be made available. Reserves may only be considered proved and probable if producibility is supported
by either production or conclusive formation tests. Birchcliff’s oil and gas reserves are determined in accordance with the standards
contained in NI 51-101 and the Canadian Oil and Gas Evaluation Handbook (the “COGE Handbook”).
Share-Based Payments
All equity-settled, share-based awards issued by the Corporation are fair valued using the Black-Scholes option-pricing model.
In assessing the fair value of equity-based compensation, estimates have to be made regarding the expected volatility in share price,
option life, dividend yield, risk-free rate and estimated forfeitures at the initial grant date.
Decommissioning Obligations
The Corporation estimates future remediation costs of production facilities, wells and pipelines at different stages of development
and construction of assets or facilities. In most instances, removal of assets occurs many years into the future. This requires an estimate
regarding abandonment date, future environmental and regulatory legislation, the extent of reclamation activities, the engineering
methodology for estimating cost, future removal technologies in determining the removal cost and liability-specific discount rates
to determine the present value of these risk-free cash flows.
Post-Employment Benefit Obligation
The Corporation estimates the post-employment benefit obligation at the end of each reporting period. In most instances, the
obligation occurs many years into the future. The Corporation uses estimates related to the initial measurement of the obligation for
eligible employees including expected age of employee retirement, employee turnover, probability of early retirement, discount
rate and inflation rate on salary and benefits. From time to time, these estimates may change causing the obligation recorded by the
Corporation to change.
Lease Obligation
Lease obligations are estimated using the rate implicit in the lease, unless this rate is not readily determinable, in which case a
discount rate equal to the Corporation’s incremental borrowing rate is used. This rate represents the rate that the Corporation
would incur to obtain the funds necessary to purchase an asset of a similar value, with similar payment terms and security in a
similar economic environment.
Impairment of Non-Financial Assets
For the purposes of determining the extent of any impairment or its reversal, estimates must be made regarding future cash flows
taking into account key assumptions including future petroleum and natural gas prices, expected forecasted production volumes
and anticipated recoverable quantities of proved and probable reserves. These assumptions are subject to change as new information
becomes available. Changes in economic conditions can also affect the rate used to discount future cash flow estimates. Changes in
the aforementioned assumptions could affect the carrying amount of the Corporation’s assets, and impairment charges and reversal
will affect profit or loss.
Income Taxes
Birchcliff files corporate income tax, goods and services tax and other tax returns with various provincial and federal taxation authorities
in Canada. There can be differing interpretations of applicable tax laws and regulations. The resolution of these tax positions through
negotiations or litigation with tax authorities can take several years to complete. The Corporation does not anticipate that there will be
any material impact upon the results of its operations, financial position or liquidity.
Tax provisions are based on enacted or substantively enacted laws. Changes in those laws could affect amounts recognized in profit
or loss both in the period of change, which would include any impact on cumulative provisions, and in future periods.
Deferred tax assets (if any) are recognized only to the extent it is considered probable that those assets will be recoverable. This involves
an assessment of when those deferred tax assets are likely to reverse and a judgment as to whether or not there will be sufficient taxable
profits available to offset the tax assets when they do reverse. This requires assumptions regarding future profitability and is therefore
inherently uncertain. Estimates of future taxable income are based on forecasted cash flows from operations. To the extent that any
interpretation of tax law is challenged by the tax authorities or future cash flows and taxable income differ significantly from estimates,
the ability of Birchcliff to realize the deferred tax assets recorded at the statement of financial position date could be impacted.
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2019 Annual Report | CHANGES IN ACCOUNTING POLICIES
Accounting Pronouncements Adopted
On January 1, 2019, Birchcliff adopted IFRS 16 to replace IAS 17: Leases and IFRIC 4: Determining whether an Arrangement contains
a Lease. IFRS 16 requires the recognition of a right-of-use asset and lease liability on the statements of financial position for all leases,
where Birchcliff is acting as a lessee. For lessees applying IFRS 16, the dual classification model of leases as either operating leases
or finance leases no longer exists, effectively treating all leases as finance leases. IFRS 16 allows lessors to continue with the dual
classification model for recognized leases as either a finance or an operating lease. Birchcliff is the lessee in all of its lease arrangements
effective January 1, 2019. The Corporation adopted IFRS 16 using the modified retrospective approach, which does not require the
restatement of prior period financial information and applies the standard prospectively.
The impact of applying IFRS 16 on the financial statements in the period was affected by multiple factors and conditions, including,
but not limited to, the Corporation’s incremental borrowing rate at January 1, 2019, the composition of the Corporation’s lease portfolio
at that date, the Corporation’s latest assessment of whether it will exercise any lease renewal options, and the extent to which the
Corporation chose to use practical expedients and recognition exemptions.
On initial adoption, Birchcliff had the following optional practical expedients available under IFRS 16:
• Certain short-term leases and leases of low value assets that have been identified as a lease under IFRS 16 at January 1, 2019 have
been excluded from recognition on the statements of financial position. Birchcliff has excluded certain low value leases such as
information technology, office equipment and other minor operating and capital assets used in its operations. Short-term and low
value leases are expensed in profit or loss in the period incurred.
• Certain classes of lease arrangements that transfer a separate good or service under the same contract that have been identified
for recognition at January 1, 2019 can be recognized as a single lease component rather than separating between their lease and
non-lease components. Birchcliff did not apply this practical expedient on initial adoption of IFRS 16. Non-lease components such
as operating costs and payment for services were separated from their lease component under the same contract and expensed
in profit or loss in the period incurred.
•
For leases having similar characteristics, a portfolio approach can be used by applying a single discount rate. Birchcliff has applied
this practical expedient for leases having similar characteristic on recognition.
The following table details the impact of the initial adoption of IFRS 16 on the Corporation’s balance sheet effective January 1, 2019:
($000s)
Lease assets
Lease obligations
Balance sheet impact
January 1, 2019
Increase
Increase
17,311
(17,311)
RISK FACTORS AND RISK MANAGEMENT
Investors should carefully consider the risk factors set out below and consider all other information contained herein and in the
Corporation’s other public filings before making an investment decision. The risks set out below are not an exhaustive list and
should not be taken as a complete summary or description of all the risks associated with the Corporation’s business and the oil
and natural gas business generally. If any of the risks set out below materialize, the Corporation’s business, financial condition,
results of operations, prospects, cash flow and reputation may be adversely affected, which may, in turn, reduce or restrict the
Corporation’s ability to pay dividends and may materially affect the market price of the Corporation’s securities.
Prices, Markets and Marketing
Various factors may adversely impact the prices and marketability of oil, natural gas and NGLs, affecting the Corporation’s
revenue, production volumes, development and exploration activities, value of its reserves, cash flow and ability to access capital
The Corporation’s revenue, operating results and financial condition depend substantially on prevailing prices for oil and natural gas
and the Corporation’s ability to successfully market its oil and natural gas production from its properties. Numerous factors beyond
the Corporation’s control do, and will continue to, affect the marketability and price of oil and natural gas acquired, produced or
discovered by the Corporation.
The Corporation’s ability to market its oil and natural gas may depend upon its ability to acquire capacity on pipelines that deliver
natural gas, crude oil and NGLs to commercial markets or contract for the delivery of crude oil by rail (see “Risk Factors and Risk
Management – Weakness and Volatility in the Oil and Natural Gas Industry” and “Risk Factors and Risk Management – Gathering and
66
| 2019 Annual Report Processing Facilities, Pipeline Systems and Rail”). Deliverability uncertainties include the distance the Corporation’s reserves are from
pipelines, railway lines, processing and storage facilities and operational problems affecting pipelines, railway lines and facilities.
Prices for oil and natural gas are subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil
and natural gas, market uncertainty and a variety of additional factors that are beyond the Corporation’s control. These factors include,
but are not limited to, the following:
• global energy supply and demand;
•
the actions taken by the Organization of Petroleum Exporting Countries (“OPEC”) and other oil and gas exporting nations;
• political conditions, instability and hostilities;
• domestic and foreign supplies of crude oil, NGLs and natural gas;
•
•
•
•
the level of consumer demand, including demand for different qualities and types of crude oil and NGLs;
the production and storage levels of North American natural gas and crude oil and the supply and price of imported oil;
the ability to export oil, LNG and NGLs from North America;
the availability, proximity and capacity of gathering, transportation, processing and/or refining facilities in regional or localized
areas that may affect the realized prices for oil and natural gas;
• weather conditions;
• government regulations, including existing and proposed changes to such regulations;
•
•
the effect of world-wide environmental regulations and energy conservation and GHG reduction measures;
the price and availability of alternative energy supplies; and
• global and domestic economic conditions, including currency fluctuations.
Oil and natural gas prices are expected to remain volatile for the near future because of market uncertainties over the supply and
demand of these commodities. Market events and conditions, including global excess oil and natural gas supply, actions taken by
OPEC, sanctions against Iran and Venezuela, conflict between the United States and Iran, slowing growth in China and emerging
economies, weakening global relationships, isolationist and punitive trade policies, increased shale production in the United States,
sovereign debt levels, the outbreak of the novel coronavirus and political upheavals in various countries (including growing anti-fossil
fuel sentiment) have caused significant volatility in commodity prices. Prices for crude oil and natural gas are also impacted by the
availability of foreign markets and the ability to access such markets.
Any substantial and prolonged decline in the price of oil and natural gas would have an adverse effect on the carrying value of the
Corporation’s assets, borrowing capacity, revenue, profitability and cash flow from operations and may have a material adverse effect
on the Corporation’s business, financial condition, results of operations, prospects, its ability to pay dividends and ultimately on the
market prices of the Corporation’s securities.
A material decline in oil and natural gas prices could result in a reduction in the Corporation’s net production revenue. The economics
of producing from some wells may change because of lower prices, which could result in reduced production of oil or natural gas.
The Corporation might also elect not to produce from certain wells at lower prices. In addition, any prolonged period of low crude oil
or natural gas prices could result in a decision by the Corporation to suspend or slow exploration and development activities or the
construction or expansion of new or existing facilities or reduce its production levels.
Volatile oil and natural gas prices make it difficult to estimate the value of producing properties for acquisitions and often cause
disruption in the market for oil and natural gas producing properties, as buyers and sellers have difficulty agreeing on the value or terms
of such arrangements. Price volatility also makes it difficult to budget for and project the return on potential acquisitions, divestitures or
exploitation projects.
Lower commodity prices may also affect the volume and value of the Corporation’s reserves, rendering certain reserves uneconomic
for development. The Corporation’s reserves at December 31, 2019 are estimated using forecast prices and costs. If oil and natural
gas prices stay at current levels or decrease, the Corporation’s reserves may be substantially reduced as economic limits of developed
reserves are reached earlier and undeveloped reserves become uneconomic at such prices. Even if some reserves remain economic
at lower price levels, sustained low prices may compel the Corporation to re-evaluate its development plans and reduce or eliminate
various projects with marginal economics. Any decrease in the value of the Corporation’s reserves may reduce the borrowing base
under the Credit Facilities, which, depending on the level of the Corporation’s indebtedness, could result in the Corporation having
to repay a portion of its indebtedness. See “Risk Factors and Risk Management – Credit Facilities”.
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2019 Annual Report | In addition, lower commodity prices restrict the Corporation’s cash flow resulting in less funds from operations being available to fund
the Corporation’s capital expenditure programs. The Corporation’s capital expenditure plans are impacted by the Corporation’s cash
flow. Consequently, the Corporation may not be able to replace its production with additional reserves and both the Corporation’s
production and reserves could be reduced on a year-over-year basis.
In addition to possibly resulting in a decrease in the value of the Corporation’s economically recoverable reserves, lower commodity
prices may also result in a decrease in the value of the Corporation’s infrastructure and facilities, all of which could also have the effect
of requiring a write-down of the carrying value of its oil and natural gas assets on its balance sheet and the recognition of an impairment
charge on its income statement.
Weakness and Volatility in the Oil and Natural Gas Industry
Declining general economic, business or industry conditions may have a material adverse effect on the Corporation’s results
of operations, liquidity and financial condition
Concerns over global economic conditions, fluctuations in interest rates and foreign exchange rates, stock market volatility,
energy costs, geopolitical issues, OPEC actions, inflation, the availability and cost of credit, the deceleration of economic growth
in the People’s Republic of China, trade disputes between the United States and the People’s Republic of China, civil unrest in
Venezuela and Iran and the outbreak of COVID-19 have contributed to increased economic uncertainty and diminished expectations
for the global economy over the past few years. In addition, continued hostilities in the Middle East and the occurrence or threat
of terrorist attacks, including attacks on oil infrastructure in oil producing nations, in the United States or other countries could
adversely affect the economies of Canada, the United States and other countries.
Concerns about global economic growth have had a significant adverse impact on global financial markets and commodity prices.
If the economic climate in Canada, the United States or abroad deteriorates, worldwide demand for petroleum products could
diminish, which could impact the price at which the Corporation can sell its oil, NGLs and natural gas, affect the ability of the
Corporation’s vendors, suppliers and customers to continue operations and ultimately adversely impact the Corporation’s results
of operations, liquidity and financial condition.
These events and conditions have caused a significant reduction in the valuation of oil and natural gas companies and a decrease in
the confidence in the oil and natural gas industry. These difficulties have been exacerbated in Canada by political and other actions
resulting in uncertainty surrounding regulatory, tax, royalty changes and environmental regulation. In addition, difficulties encountered
by midstream proponents to obtain the necessary approvals on a timely basis to build pipelines, LNG plants and other facilities to
provide better access to markets for the oil and natural gas industry in Western Canada has led to additional downward price pressure
on oil and natural gas produced in Western Canada. The resulting price differential between Western Canadian Select crude oil,
Brent and WTI crude oil has created uncertainty and reduced confidence in the oil and natural gas industry in Western Canada.
Exploration, Development and Production Risks
The Corporation's business, operations and financial condition may be affected by the financial, operational, environmental and
safety risks associated with the exploration, development and production of oil and natural gas
Oil and natural gas operations involve many risks that even a combination of experience, knowledge and careful evaluation may
not be able to overcome. The long-term commercial success of the Corporation depends on its ability to find, acquire, develop
and commercially produce oil and natural gas reserves. Without the continual addition of new reserves, any existing reserves the
Corporation may have at a particular point in time and the production therefrom, will decline over time as such existing reserves are
produced. A future increase in the Corporation’s reserves will depend on both the ability of the Corporation to explore and develop
its existing properties and its ability to select and acquire suitable producing properties or prospects. There is no assurance that
the Corporation will be able to continue to find satisfactory properties to acquire or participate in the development. Moreover,
management of the Corporation may determine that current markets, terms of acquisition, participation or pricing conditions make
potential acquisitions or participation uneconomic. There is also no assurance that the Corporation will discover or acquire further
commercial quantities of oil and natural gas. The success of the Corporation’s business is highly dependent on its ability to acquire
or discover new reserves in a cost efficient manner as substantially all of the Corporation’s cash flow is derived from the sale of the
petroleum and natural gas reserves that 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.
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| 2019 Annual Report Future oil and natural gas exploration may involve unprofitable efforts from dry wells or wells that are productive but do not produce
sufficient petroleum substances to return a profit after drilling, completing (including hydraulic fracturing), operating and other costs.
Completion of a well does not ensure a profit on the investment or recovery of drilling, completion and operating costs.
Drilling hazards, environmental damage and various field operating conditions could greatly increase the cost of operations and
adversely affect the production from successful wells. Field operating conditions include, but are not limited to, delays in obtaining
governmental approvals or consents, the shutting-in of wells resulting from extreme weather conditions, insufficient storage or
transportation capacity or geological and mechanical conditions. While diligent well supervision, effective maintenance operations
and the development and utilization of enhanced recovery technologies can contribute to maximizing production rates over time,
it is not possible to eliminate production delays and declines from normal field operating conditions, which can negatively affect
revenue and cash flow levels to varying degrees.
Oil and natural gas exploration, development and production operations are subject to all the risks and hazards typically associated
with such operations, including, but not limited to, fire, explosion, blowouts, cratering, sour gas releases, spills and other
environmental hazards. These typical risks and hazards could result in substantial damage to oil and natural gas wells, production
facilities, other property or the environment and cause personal injury or threaten wildlife. Particularly, the Corporation may explore
for and produce sour natural gas in certain areas. An unintentional leak of sour natural gas could result in personal injury, loss of life
or damage to property and may necessitate an evacuation of populated areas, all of which could result in liability to the Corporation.
Oil and natural gas production operations are also subject to geological and seismic risks, including encountering unexpected
formations or pressures, premature decline of reservoirs and the invasion of water into producing formations. Losses resulting from
the occurrence of any of these risks may have a material adverse effect on the Corporation’s business, financial condition, results
of operations and prospects.
As is standard industry practice, the Corporation is not fully insured against all risks, nor are all risks insurable. Although the
Corporation maintains liability and business interruption insurance in amounts that it considers consistent with industry practice,
liabilities associated with certain risks could exceed policy limits or not be covered. In either event, the Corporation could incur
significant costs. See “Risk Factors and Risk Management – Insurance”.
Project Risks
The success of the Corporation’s operations may be negatively impacted by factors outside of its control resulting in operational
delays and cost overruns
The Corporation manages a variety of small and large projects in the conduct of its business. Project delays and interruptions may
delay expected revenue from operations. Significant project cost overruns could make a project uneconomic. The Corporation’s
ability to execute projects and successfully market its oil and natural gas depends upon numerous factors beyond the Corporation’s
control, including:
•
•
•
•
•
•
•
•
•
•
•
the availability and proximity of processing and pipeline capacity;
the availability of storage capacity;
the availability of, and the ability to acquire, water supplies needed for drilling and hydraulic fracturing and the Corporation’s ability
to dispose of water used or removed from strata at a reasonable cost and in accordance with applicable environmental regulations;
the effects of inclement and severe weather events, including fire, drought and flooding;
the availability of drilling and related equipment;
unexpected cost increases;
accidental events;
currency fluctuations;
regulatory changes;
the availability and productivity of skilled labour; and
the regulation of the oil and natural gas industry by various levels of government and governmental agencies.
Because of these factors, the Corporation could be unable to execute projects on time, on budget, or at all, and may be unable to
effectively market the oil and natural gas that it produces.
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2019 Annual Report | Gathering and Processing Facilities, Pipeline Systems and Rail
Lack of capacity and/or regulatory constraints on gathering and processing facilities, pipeline systems and railway lines may
have a negative impact on the Corporation's ability to produce and sell its oil and natural gas
The Corporation delivers its products through gathering and processing facilities, pipeline systems and, in certain circumstances,
by rail. The amount of oil and natural gas produced and sold by the Corporation is subject to the accessibility, availability, proximity
and capacity of these gathering and processing facilities, pipeline systems and railway lines. The lack of firm pipeline capacity,
production limits and limits on availability of capacity in gathering and processing facilities continues to affect the oil and natural
gas industry and limits the ability to transport produced oil and natural gas to market. However, in early 2020, the Supreme Court
of Canada and the Federal Court of Appeal both dismissed the challenges to the approval of the cabinet (“Cabinet”) of the federal
government of Canada (the “Federal Government”) of the Trans Mountain Pipeline expansion, and construction on the pipeline
expansion is underway. In addition, the pro-rationing of capacity on inter-provincial pipeline systems continues to affect the ability
of oil and natural gas companies to export oil and natural gas and could result in the inability of the Corporation to realize the full
economic potential of the produced oil or natural gas or a reduction of the price offered for the production from its properties.
Unexpected shutdowns or curtailment of capacity of pipelines for maintenance or integrity work or because of actions taken by
regulators could also affect the Corporation’s production and operations which may have a material adverse effect on its business
and financial condition. As a result, producers have considered rail lines as an alternative means of transportation. Announcements
and actions taken by the Federal Government and the provincial governments of British Columbia, Alberta and Québec relating
to approval of infrastructure projects may continue to intensify, leading to increased challenges to interprovincial and international
infrastructure projects moving forward. On August 28, 2019, with the passing of Bill C-69, the Canadian Energy Regulator Act (Canada)
and the Impact Assessment Act (Canada) came into force and the National Energy Board Act (Canada) and the Canadian Environmental
Assessment Act, 2012 (Canada) were repealed. In addition, the Impact Assessment Agency of Canada replaced the Canadian
Environmental Assessment Agency. The impact of the new federal regulatory scheme on the oil and natural gas industry and
the timing for receipt of approvals of major projects is unclear.
The Corporation’s production passes through Birchcliff owned or third-party infrastructure prior to it being ready for sale. There
is a risk that should this infrastructure fail and cause a significant portion of the Corporation’s production to be shut-in and unable
to be sold, this could have a material adverse effect on the Corporation’s available cash flow. With respect to facilities owned by
third parties and over which the Corporation has no control, these facilities may discontinue or decrease operations, either as a
result of normal servicing requirements or as a result of unexpected events. A discontinuation or decrease of operations could
have a material adverse effect on the Corporation’s ability to process its production and deliver the same to market. Midstream
and pipeline companies may take actions to maximize their return on investment which may in turn adversely affect producers and
shippers, especially when combined with a regulatory framework that may not always align with the interests of particular shippers.
Further, the Corporation has certain long-term take-or-pay commitments to deliver products through third-party owned
infrastructure which creates a financial liability and there can be no assurance that future volume commitments will be met which
may adversely affect the Corporation’s financial condition and cash flow from operations.
Uncertainty of Reserves and Resource Estimates
The Corporation’s estimated reserves and resources are based on numerous factors and assumptions which may prove incorrect
and which may affect the Corporation
There are numerous uncertainties inherent in estimating oil, natural gas and NGLs reserves and the future net revenue attributed to
such reserves. The reserves and associated future net revenue information are estimates only. In general, estimates of economically
recoverable oil, natural gas and NGLs reserves and the future net revenue therefrom are based upon a number of variable factors and
assumptions, such as historical production from the properties, production rates, ultimate reserves recovery, the timing and amount
of capital expenditures, marketability of oil, natural gas and NGLs, royalty rates, the assumed effects of regulation by governmental
agencies and future operating costs, all of which may vary materially from actual results. For these reasons, estimates of the economically
recoverable oil, natural gas and NGLs reserves attributable to any particular group of properties, the classification of such reserves
based on risk of recovery and estimates of future net revenue associated with reserves prepared by different engineers, or by the
same engineer at different times, may vary. The Corporation’s actual production, revenue, taxes and development and operating
expenditures with respect to its reserves will vary from estimates thereof and such variations could be material.
The estimation of proved reserves that may be developed and produced in the future is often based upon volumetric calculations and
upon analogy to similar types of reserves rather than actual production history. Recovery factors and drainage areas are often estimated
by experience and analogy to similar producing pools. Estimates based on these methods are generally less reliable than those based
on actual production history. Subsequent evaluation of the same reserves based upon production history and production practices will
result in variations in the estimated reserves and such variations could be material.
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| 2019 Annual Report In accordance with applicable securities laws in Canada, the Corporation’s independent qualified reserves evaluators have used
forecast prices and costs in estimating the reserves and future net revenue as summarized herein. Actual future net revenue will be
affected by other factors such as actual production levels, supply and demand for oil and natural gas, curtailments or increases in
consumption by oil and natural gas purchasers, changes in governmental regulations or taxation and the impact of inflation on costs.
Actual production and cash flow derived from the Corporation’s reserves will vary from the estimates contained in the Corporation’s
independent reserves evaluations and such variations could be material. The independent reserves evaluations are based in part on
the assumed success of activities the Corporation intends to take in future years. The reserves and estimated future net revenue to be
derived therefrom and contained in the Corporation’s independent reserves evaluations will be reduced to the extent that such
activities do not achieve the level of success assumed in the evaluations.
Substantial Capital and Additional Funding Requirements
The Corporation may require additional financing from time to time to fund the acquisition, exploration and development
of properties and its ability to obtain such financing in a timely fashion and on acceptable terms may be negatively impacted
by the current economic and global market volatility
The Corporation anticipates that it will make substantial capital expenditures for the acquisition, exploration, development and
production of oil and natural gas reserves and resources in the future. As future capital expenditures are expected to be financed out
of cash generated from operations, borrowings and possible future equity sales, the Corporation’s ability to do so is dependent on,
among other factors:
•
•
•
•
•
•
•
the overall state of the capital markets;
the Corporation’s credit rating (if applicable);
commodity prices;
interest rates;
royalty rates;
tax burden due to current and future tax laws; and
investor appetite for investments in the energy industry and the Corporation’s securities in particular.
The Corporation’s cash flow from its properties may not be sufficient to fund its ongoing activities at all times and from time to time the
Corporation may require additional financing. The inability of the Corporation to access sufficient capital for its operations and activities
could have a material adverse effect on the Corporation’s financial condition, results of operations and prospects.
Due to the conditions in the oil and natural gas industry, global economic and political conditions and the domestic landscape,
the Corporation may from time to time have restricted access to capital and increased borrowing costs. The conditions in or affecting
the oil and natural gas industry have negatively impacted the ability of oil and natural gas companies to access additional financing.
Failure to obtain financing on a timely basis could cause the Corporation to forfeit its interest in certain properties, miss certain
acquisition opportunities and reduce its operations.
There can be no assurance that debt or equity financing or cash generated by operations will be available or sufficient to meet the
Corporation’s requirements or, if debt or equity financing is available, that it will be on terms acceptable to the Corporation. To the
extent that external sources of capital become limited, unavailable or available on onerous terms, the Corporation’s ability to make
capital investments and maintain existing assets may be impaired, and its assets, liabilities, business, financial condition and results of
operations may be affected materially and adversely as a result. In addition, the Corporation may be required to seek additional equity
financing on terms that are highly dilutive to existing shareholders. Moreover, future activities may require the Corporation to alter its
capitalization significantly.
Political Uncertainty
The Corporation’s business may be adversely affected by recent political and social events and decisions made in Canada,
the United States, Europe and elsewhere
In the last several years, the United States and certain European countries have experienced significant political events that have cast
uncertainty on global financial and economic markets. Since the 2016 U.S. presidential election, the U.S. administration has withdrawn
the United States from the Trans-Pacific Partnership and the United States Congress has passed sweeping tax reforms, which, among
other things, significantly reduces U.S. corporate tax rates. This has affected the competitiveness of other jurisdictions, including
Canada. In addition, the North American Free Trade between the Governments of Canada, the United States and Mexico (“NAFTA”)
has been renegotiated and on November 30, 2018, Canada, the U.S. and Mexico signed the United States-Mexico-Canada Agreement
(the “USMCA”) which will replace NAFTA once ratified by the three signatory countries. The USMCA was ratified by
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2019 Annual Report | Mexico’s Senate in June 2019 and by the United States’ Senate in January 2020. In late January 2020, the Canadian Parliament tabled
Bill C-4, which once proclaimed into force, will ratify the USMCA. The USMCA is expected to fully replace NAFTA two months after
Bill C-4 comes into force. The U.S. administration has also taken action with respect to reduction of regulation which may also affect
relative competitiveness of other jurisdictions. It is unclear exactly what other actions the U.S. administration will implement, and if
implemented, how these actions may impact Canada and in particular the oil and natural gas industry. Any actions taken by the
current U.S. administration may have a negative impact on the Canadian economy and on the businesses, financial condition,
results of operations, prospects and the valuation of Canadian oil and natural gas companies, including the Corporation.
In addition to the political disruption in the United States, the impact of the United Kingdom’s exit from the European Union remains
to be determined. Some European countries have also experienced the rise of anti-establishment political parties and public protests held
against open-door immigration policies, trade and globalization. Conflict and political uncertainty also continues in the Middle East.
To the extent that certain political actions taken in North America, Europe and elsewhere in the world result in a marked decrease in free
trade, access to personnel and freedom of movement could have an adverse effect on the Corporation’s ability to market its products
internationally, increase costs for goods and services required for the Corporation’s business, reduce access to skilled labour and
negatively impact the Corporation’s business, financial condition, results of operations, prospects and the market value of its securities.
A change in federal, provincial or municipal governments in Canada may have an impact on the directions taken by such governments
on matters that may impact the oil and natural gas industry, including the balance between economic development and environmental
policy. Alberta elected a new government in 2019 that is supportive of the Trans Mountain Pipeline expansion project. Although the
Supreme Court of Canada unanimously rejected the Government of British Columbia’s proposed regulation of the transport of heavy
oil products into and through British Columbia in January 2020, tensions remain high between provincial and federal governments.
Continued uncertainty and delays have led to decreased investor confidence, increased capital costs and operational delays for
producers and service providers operating in the jurisdictions where the Corporation’s properties are located.
The Federal Government was re-elected in 2019, but in a minority position. The ability of the minority Federal Government to pass
legislation will be subject to whether it is able to come to agreement with, and garner the support of, the other elected parties,
most of whom are opposed to the development of the oil and natural gas industry. The minority Federal Government will also be
required to rely on the support of the other elected parties to remain in power, which provides less stability and may lead to an earlier
subsequent federal election. Lack of political consensus, at both the federal and provincial government level, continues to create
regulatory uncertainty, the effects of which become apparent on an ongoing basis, particularly with respect to carbon pricing regimes,
curtailment of crude oil production and transportation and export capacity, and may affect the business of participants in the oil and
natural gas industry.
Climate Change
Climate change may pose varied and far ranging risks to the business and operations of the Corporation, both known and
unknown, which may adversely affect its business, operations and financial condition
The Corporation has grouped its risks related to climate change into two main categories: physical risks and transition risks.
Physical risks have been further sub-divided into acute physical risks (those that are event-driven, including increased severity of
extreme weather events) and chronic physical risks (those that relate to longer-term shifts in climate patterns). Transition risks have been
further sub-divided into reputational, market, regulatory and policy, legal and technology risks.
Physical Risks – Acute
Climate change has been linked to extreme weather conditions. Extreme hot and cold weather, heavy snowfall, heavy rainfall and
wildfires may restrict or interfere with the Corporation’s operations, increasing its costs and negatively impacting its production.
Moreover, extreme weather conditions may lead to disruptions in the Corporation’s ability to transport produced oil and natural
gas, as well as goods and services in their supply chains. Certain of the Corporation’s properties are located in locations that are
proximate to forests and rivers and a wildfire or flood, respectively, may lead to significant downtime and/or damage to such assets
which may affect production. At this time, the Corporation is unable to determine the extent to which climate change may lead to
increased storm or weather hazards affecting its operations.
Physical Risks – Chronic
Climate change has been linked to long-term shifts in climate patterns, including sustained higher temperatures. As the level
of activity in the Canadian oil and natural gas industry is influenced by seasonal weather patterns, long-term shifts in climate
patterns pose the risk of exacerbating operational delays and other risks posed by seasonal weather patterns. See also
“Risk Factors and Risk Management– Seasonality”.
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| 2019 Annual Report In addition, long-term shifts in weather patterns such as water scarcity, increased frequency of storms and fires and prolonged heat
waves may, among other things, require the Corporation to incur greater expenditures (time and capital) to deal with the challenges
posed by such changes to its premises, operations, supply chain, transport needs, and employee safety, which may in turn have a
material adverse effect on the Corporation’s business, operations and financial condition. In the event of water shortages or sourcing
issues, the Corporation may not be able to, or will incur greater costs to, carry out hydraulic fracturing. See also “Risk Factors and
Risk Management – Hydraulic Fracturing”.
Transition Risks – Reputational
The Corporation’s business, financial condition, operations or prospects may be negatively impacted as a result of any negative
public opinion towards the Corporation or as a result of any negative sentiment towards, or in respect of, the Corporation’s
reputation with stakeholders, special interest groups, political leadership, the media or other entities. Public opinion may be
influenced by certain media and special interest groups’ negative portrayal of the industry in which the Corporation operates,
as well as their opposition to certain oil and natural gas projects. Concerns about climate change have resulted in a number of
environmental activists and members of the public opposing the continued exploitation and development of fossil fuels which
influenced investors’ willingness to invest in the oil and natural gas industry. Historically, political and legal opposition to the fossil
fuel industry focused on public opinion and the regulatory process. More recently, however, there has been a movement to
more directly hold governments and oil and natural gas companies responsible for climate change through climate litigation.
In November 2018, ENvironment JEUnesse, a Québec advocacy group, applied to the Québec Superior Court to certify all
Quebecois under 35 as a class in a proposed class action lawsuit against the Government of Canada for climate related matters.
While the application was denied, the group has stated it plans to appeal. In January 2019, the City of Victoria became the first
municipality in Canada to endorse a class action lawsuit against oil and natural gas producers for alleged climate-related harms.
The Union of British Columbia Municipalities defeated the City of Victoria’s motion to initiate a class action lawsuit to recover costs
it claims are related to climate change. See also “Risk Factors and Risk Management – Changing Investor Sentiment”, “Risk Factors
and Risk Management – Public Opinion and Reputational Risk” and “Risk Factors and Risk Management – Public Opposition and
Non-Governmental Organizations”.
Transition Risks – Market
Concerns over climate change, fossil fuels, GHG emissions and water and land-use could lead to reduced demand for the oil,
natural gas and NGLs that the Corporation produces, which would have a material adverse effect on the Corporation’s business,
financial condition, results of operations and prospects. See also “Risk Factors and Risk Management – Alternatives to and Changing
Demand for Petroleum Products”.
Transition Risks – Regulatory and Policy
Climate change policy is evolving at regional, national and international levels and political and economic events may significantly
affect the scope and timing of climate change measures that are ultimately put in place to prevent climate change or mitigate its
effects. Existing and future laws and regulations may impose significant liabilities for a failure to comply with their requirements.
Concerns over climate change, fossil fuels, GHG emissions and water and land-use could lead to the enactment of more stringent
laws and regulations applicable to the Corporation. Any new laws and regulations (or additional requirements to existing laws and
regulations) could have a material impact on the Corporation’s business, financial condition, results of operations and prospects.
Adverse impacts to the Corporation’s business as a result of GHG legislation may include, but are not limited to, increased
compliance costs, permitting delays, increased operating costs and capital expenditures. Given the evolving nature of climate
change policy and the control of GHG and resulting requirements, it is expected that current and future climate change regulations
will have the effect of increasing the Corporation’s operating expenses and in the long-term, potentially reducing the demand for
oil and natural gas resulting in a decrease in the Corporation’s profitability and a reduction in the value of its assets or requiring
impairments for financial statement purposes.
The Corporation’s exploration and production facilities and other operations and activities emit GHGs which requires the
Corporation to comply with applicable GHG emissions legislation. The Corporation is subject to Alberta’s Technology Innovation
and Emissions Reduction Regulation and the Corporation may become subject to future regional, provincial and/or federal climate
change regulations to manage GHG emissions.
See also “Risk Factors and Risk Management – Regulatory”, “Risk Factors and Risk Management – Environmental”, “Risk Factors and Risk
Management – Evolving Corporate Governance and Reporting Framework” and “Risk Factors and Risk Management – Carbon Pricing Risk”.
Transition Risks – Legal
The Corporation may become involved in, be named as a party to or be the subject of, various legal proceedings related to
climate-change. See also “Risk Factors and Risk Management – Litigation”.
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2019 Annual Report | Transition Risks – Technology
The adoption of new technologies by the Corporation to deal with climate change could require a significant capital investment.
See also “Risk Factors and Risk Management – Cost of New Technologies”.
Changing Investor Sentiment
Changing investor sentiment towards the oil and natural gas industry may impact the Corporation’s access to, and cost of, capital
A number of factors, including the effects of the use of fossil fuels on climate change, the impact of oil and natural gas operations on
the environment, environmental damage relating to spills of petroleum products during production and transportation and Indigenous
rights, have affected certain investors’ sentiments towards investing in the oil and natural gas industry. As a result of these concerns,
some institutional, retail and governmental investors have announced that they no longer are willing to fund or invest in oil and natural
gas properties or companies or are reducing the amount of their investments of such entities over time. In addition, certain institutional
investors are requesting that issuers develop and implement more robust social, environmental and governance policies and practices.
Developing and implementing such policies and practices can involve significant costs and require a significant time commitment
from the Corporation’s Board of Directors, management and employees. Failing to implement the policies and practices as requested
by institutional investors may result in such investors reducing their investment in the Corporation or not investing in the Corporation
at all. Any reduction in the investor base interested or willing to invest in the oil and natural gas industry and more specifically, in the
Corporation, may result in limiting Birchcliff’s access to capital, increasing the cost of capital and decreasing the price and liquidity
of the Corporation’s securities, even if the Corporation’s operating results, underlying asset value or prospects have not changed.
Additionally, these factors, as well as other related factors, may cause a decrease in the value of the Corporation’s assets which may
result in an impairment charge.
Public Opinion and Reputational Risk
The Corporation relies on its reputation to continue its operations and to attract and retain investors and employees
The Corporation’s business, financial condition, operations and prospects may be negatively impacted as a result of any negative
public opinion towards the Corporation or as a result of any negative sentiment towards, or in respect of, the Corporation’s reputation
with stakeholders, special interest groups, political leadership, the media or other entities. Public opinion may be influenced by certain
media and special interest groups’ negative portrayal of the industry in which the Corporation operates, as well as their opposition
to certain oil and natural gas projects. Potential impacts of negative public opinion or reputational issues may include delays or
interruptions in operations, legal or regulatory actions or challenges, blockades, increased regulatory oversight, reduced support for,
delays in, challenges to, or the revocation of regulatory approvals, permits and/or licences and increased costs and/or cost overruns.
See also “Risk Factors and Risk Management – Public Opposition and Non-Governmental Organizations”.
Any environmental damage, loss of life, injury or damage to property caused by the Corporation’s operations could damage its
reputation. Negative sentiment towards the Corporation could result in a lack of willingness of governmental authorities to grant the
necessary licences or permits for the Corporation to operate its business. In addition, negative sentiment towards the Corporation
could result in the residents of the areas where the Corporation is doing business opposing further operations in the area by the
Corporation. If the Corporation develops a reputation of having an unsafe workplace, this may impact its ability to attract and retain
the necessary skilled employees and consultants to operate its business. Further, the Corporation’s reputation could be affected by
actions and activities of other corporations operating in the oil and natural gas industry, particularly other producers, over which the
Corporation has no control. Further, opposition from special interest groups opposed to oil and natural gas development and the
possibility of climate related litigation against governments and fossil fuel companies may harm the Corporation’s reputation.
See “Risk Factors and Risk Management – Climate Change”.
Reputational risk cannot be managed in isolation from other forms of risk. Credit, market, operational, insurance, regulatory and
legal risks, among others, must all be managed effectively to safeguard the Corporation’s reputation. Damage to the Corporation’s
reputation could result in negative investor sentiment towards the Corporation, which may result in limiting the Corporation’s access
to capital, increasing the cost of capital and decreasing the price and liquidity of the Corporation’s securities.
Public Opposition and Non-Governmental Organizations
The oil and natural gas industry and the Corporation may be subject to public opposition and other actions by
non-governmental organizations
The oil and natural gas industry may, at times, be subject to public opposition. The oil and natural gas industry has become an
increasingly politically polarizing topic in Canada, which has resulted in a rise in civil disobedience surrounding oil and natural gas
development, particularly with respect to infrastructure projects. Such public opposition could expose the Corporation to the risk of
higher costs, operational delays and disruptions or even project cancellations due to increased pressure on governments and
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| 2019 Annual Report regulators by special interest groups, which may include Indigenous groups, landowners, environmental interest groups (including
those opposed to oil and gas production operations) and other non-governmental organizations. Potential impacts of such pressure
and opposition include blockades, legal or regulatory actions or challenges, increased regulatory oversight, reduced support of
the federal, provincial or municipal governments, and delays in, challenges to, or the revocation of regulatory approvals, permits
and/or licences, as well as direct legal challenges, including the possibility of climate-related litigation. There is no guarantee that the
Corporation will be able to satisfy the concerns of the special interest groups and non-governmental organizations and attempting to
address such concerns may require significant and unanticipated capital and operating expenditures which may negatively impact the
Corporation’s business, financial condition, results of operations and prospects.
In addition, the Corporation’s oil and natural gas properties, wells and facilities or the third-party facilities and pipelines utilized by the
Corporation could be the subject of a terrorist attack. If any of such properties, wells or facilities are the subject of terrorist attack, it may
have a material adverse effect on the Corporation’s business, financial condition, results of operations and prospects.
Alternatives to and Changing Demand for Petroleum Products
Changes to the demand for oil and natural gas products and the rise of petroleum alternatives may negatively affect the
Corporation’s business, financial condition, results of operations and cash flow
Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas and
technological advances in fuel economy and renewable energy generation systems could reduce the demand for oil, natural gas and
liquid hydrocarbons. Recently, certain jurisdictions have implemented policies or incentives to decrease the use of fossil fuels and
encourage the use of renewable fuel alternatives, which may lessen the demand for petroleum products and put downward pressure
on commodity prices. Advancements in energy efficient products have a similar effect on the demand for oil and natural gas products.
The Corporation cannot predict the impact of the changing demand for oil and natural gas products and any major changes may have
a material adverse effect on the Corporation’s business, financial condition, results of operations and cash flow by decreasing the
Corporation’s profitability, increasing its costs, limiting its access to capital or decreasing the value of its assets.
Regulatory
Modification to current, or implementation of additional, regulations may reduce the demand for oil and natural gas,
increase the Corporation’s costs and/or delay planned operations
The implementation of new regulations or the modification to existing regulations affecting the oil and natural gas industry could reduce
the demand for crude oil and natural gas, increase the Corporation’s costs or make certain projects uneconomic, any of which may have
a material adverse effect on the Corporation’s business, financial condition, results of operations and prospects. Further, the ongoing
third-party challenges to regulatory decisions and orders has reduced the efficiency of the regulatory regime, as the implementation of
the decisions and orders has been delayed resulting in uncertainty and interruption to the business of the oil and natural gas industry.
In order to conduct oil and natural gas operations, the Corporation requires regulatory permits, licences, registrations, approvals and
authorizations from various governmental authorities. There can be no assurance that the Corporation will be able to obtain all of the
permits, licences, registrations, approvals and authorizations that may be required to conduct operations that it may wish to undertake.
In addition, the Corporation may have to comply with the requirements of certain federal legislation such as the Competition Act (Canada)
and the Investment Canada Act (Canada), which may adversely affect its business and financial condition and the market value of its
securities or assets, particularly when undertaking, or attempting to undertake, an acquisition or disposition.
Environmental
Compliance with environmental regulations requires the dedication of a portion of the Corporation’s financial and
operational resources
All phases of the oil and natural gas business present environmental risks and hazards and are subject to environmental regulation
pursuant to a variety of federal, provincial and municipal laws and regulations. Environmental legislation provides for, among other
things, the initiation and approval of new oil and natural gas projects and restrictions and prohibitions on the spill, release or emission
of various substances produced in association with oil and natural gas industry operations. In addition, such legislation sets out the
requirements with respect to oilfield waste handling and storage, habitat protection and the satisfactory operation, maintenance,
abandonment and reclamation of well and facility sites. New environmental legislation at the federal and provincial levels may increase
uncertainty among oil and natural gas industry participants as the new laws are implemented, and the effects of the new rules and
standards are felt in the oil and natural gas industry.
Compliance with environmental legislation can require significant expenditures and a breach of applicable environmental legislation
may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner
expected to result in stricter standards and enforcement, larger fines and liability and potentially increased capital expenditures and
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2019 Annual Report | operating costs. The discharge of oil, natural gas or other pollutants into the air, soil or water may give rise to liabilities to governments
and third parties and may require the Corporation to incur costs to remedy such discharge. Although the Corporation believes that it
is in material compliance with current applicable environmental legislation, no assurance can be given that environmental compliance
requirements will not result in a curtailment of production or a material increase in the costs of production, development or
exploration activities or otherwise have a material adverse effect on the Corporation’s business, financial condition, results of
operations and prospects.
In addition, political and economic events may significantly affect the scope and timing of climate change measures that are put in
place. The implementation of new environmental regulations or the modification of existing environmental regulations affecting the
oil and natural gas industry generally could reduce demand for oil and natural gas and increase costs. See “Risk Factors and Risk
Management – Climate Change”.
Carbon Pricing Risk
Taxes on carbon emissions affect the demand for oil and natural gas and the Corporation’s operating expenses and may impair
the Corporation’s ability to compete
The majority of countries across the globe have agreed to reduce their carbon emissions in accordance with the Paris Agreement.
In Canada, the Federal Government has implemented legislation aimed at incentivizing the use of alternative fuels and in turn reducing
carbon emissions. The federal system currently applies in provinces and territories without their own system that meets federal
standards. The federal regime is subject to a number of court challenges.
Any taxes placed on carbon emissions may have the effect of decreasing the demand for oil and natural gas products and at the
same time, increasing the Corporation’s operating expenses, each of which may have a material adverse effect on the Corporation’s
profitability and financial condition. Further, the imposition of carbon taxes puts companies at an economic disadvantage with their
counterparts who operate in jurisdictions where there are less costly carbon regulations. See also “Risk Factors and Risk Management –
Climate Change” and “Risk Factors and Risk Management – Environmental”.
Credit Facilities
The Corporation’s borrowing base under the Credit Facilities could be redetermined and the Corporation could fail to
comply with covenants under the Credit Facilities, resulting in restricted access to capital or a requirement to repay all
amounts owing thereunder
The amount authorized under the Credit Facilities is dependent on the borrowing base determined by the Corporation’s lenders.
The Credit Facilities are subject to semi-annual reviews of the borrowing base limit by Birchcliff’s syndicate of lenders, which limit is
directly impacted by the value of Birchcliff’s oil and natural gas reserves. The Corporation’s lenders use the Corporation’s reserves,
commodity prices and other factors to determine the Corporation’s borrowing base. Commodity prices continue to be depressed
and have fallen dramatically since 2014. Continued depressed commodity prices or further declines in commodity prices could result
in a reduction in the Corporation’s borrowing base, thereby reducing the funds available to the Corporation under the Credit Facilities.
As the borrowing base is determined based on the lender’s interpretation of the Corporation’s reserves and future commodity prices,
there can be no assurance as to the amount of the borrowing base determined at each review.
In addition to the semi-annual reviews of the borrowing limit, the lenders have the right to redetermine the borrowing base limit in
certain other circumstances. In the event that: (i) the Corporation, any material subsidiary of the Corporation or any of its borrowing
base properties become subject to an abandonment/reclamation order by an energy regulator where the aggregate estimated current
cost to the Corporation and its material subsidiaries to comply with all outstanding orders exceeds 10% of the borrowing base; or (ii) the
liability management rating (as such term is defined in the agreement governing the Credit Facilities) of the Corporation or any material
subsidiary is less than 2.0, then, unless agreed to by all of the lenders, a redetermination of the borrowing base shall be completed
within 45 days of receipt by the Corporation or the applicable material subsidiary of such order or demand in the case of (i) above, and
of receipt by the agent of notice that the liability management rating is less than 2.0 in the case of (ii) above. Further, a majority of lenders
have the right once per year to redetermine the borrowing base in between scheduled redeterminations and the borrowing base may
also be reduced in connection with asset dispositions.
If, at the time of a borrowing base redetermination, the outstanding borrowings under the Credit Facilities were to exceed the
borrowing base as a result of any such redetermination, the Corporation would be required to make principal repayments or otherwise
eliminate the borrowing base shortfall. If the Corporation is forced to repay a portion of its indebtedness under the Credit Facilities,
it may not have sufficient funds to make such repayments. If it does not have sufficient funds and is otherwise unable to negotiate
renewals of its borrowings or arrange new financing, it may have to sell significant assets. Any such sale could have a material adverse
effect on the Corporation’s business and financial results.
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| 2019 Annual Report The maturity date of the Credit Facilities is currently May 11, 2022. The Corporation may each year, at its option, request an extension
to the maturity date of the Syndicated Credit Facility and the Working Capital Facility, or either of them, for an additional period of
up to three years from May 11 of the year in which the extension request is made. In the event that either of the Credit Facilities is not
extended before the maturity date, all outstanding indebtedness under such Credit Facility will be repayable at the maturity date. There
is also a risk that the Credit Facilities will not be renewed for the same principal amount or on the same terms. Any of these events could
adversely affect the Corporation’s ability to fund its ongoing operations and to pay dividends.
The Corporation is required to comply with covenants under the Credit Facilities. In the event that the Corporation does not comply
with these covenants, the Corporation’s access to capital could be restricted or repayment could be required. Events beyond
the Corporation’s control may contribute to the failure of the Corporation to comply with such covenants. A failure to comply with
covenants could result in an event of default under the Credit Facilities, which could result in the Corporation being required to
repay amounts owing thereunder and may prevent the payment of dividends to shareholders. The acceleration of the Corporation’s
indebtedness under one agreement may permit acceleration of indebtedness under other agreements that contain cross-default or
cross-acceleration provisions. In addition, the Credit Facilities impose certain restrictions on the Corporation, including, but not limited
to, restrictions on the payment of dividends, incurring of additional indebtedness, dispositions of properties and the entering into
of amalgamations, mergers, plans of arrangements, reorganizations or consolidations with any person. The Credit Facilities do not
currently contain any financial maintenance covenants; however, there is no assurance that the Corporation’s lenders will not impose
any such covenants on the Corporation in the future. Any such covenants may either affect the availability or price of additional funding.
If the Corporation’s lenders require repayment of all or portion of the amounts outstanding under the Credit Facilities for any reason,
including for a default of a covenant, there is no certainty that the Corporation would be in a position to make such repayment. Even if
the Corporation is able to obtain new financing in order to make any required repayment under the Credit Facilities, it may not be on
commercially reasonable terms or terms that are acceptable to the Corporation. If the Corporation is unable to repay amounts owing
under the Credit Facilities, the lenders under the Credit Facilities could proceed to foreclose or otherwise realize upon the collateral
granted to them to secure the indebtedness.
Issuance of Debt
Increased debt levels may impair the Corporation’s ability to borrow additional capital on a timely basis to fund opportunities
as they arise
From time to time, the Corporation may finance its activities (including asset acquisitions) in whole or in part with debt, which
may increase the Corporation’s debt levels above industry standards for peers of similar size. Depending on future exploration and
development plans, the Corporation may require additional debt financing that may not be available or, if available, may not be
available on favourable terms. Neither the Corporation’s articles nor its by-laws limit the amount of indebtedness that the Corporation
may incur. The level of the Corporation’s indebtedness from time to time could impair the Corporation’s ability to obtain additional
financing on a timely basis to take advantage of business opportunities that may arise.
Hedging
Hedging activities expose the Corporation to the risk of financial loss and counter-party risk
From time to time, the Corporation may enter into agreements to receive fixed prices on its oil and natural gas production to offset the
risk of revenue losses if commodity prices decline. Similarly, the Corporation may enter into agreements to fix the differential or discount
pricing gap which exists and may fluctuate between different grades of oil, NGLs and natural gas and the various market prices received
for such products. However, to the extent that the Corporation engages in price risk management activities to protect itself from
commodity price declines, it may also be prevented from realizing the full benefits of price increases above the levels of the derivative
instruments used to manage price risk. In addition, the Corporation’s hedging arrangements expose it to the risk of financial loss in
certain circumstances, including instances in which:
• production falls short of the hedged volumes or prices fall significantly lower than projected;
•
•
•
there is a widening of price-basis differentials between delivery points for production and the delivery point assumed in the
hedge arrangement;
the counterparties to the hedging arrangements or other price risk management contracts fail to perform under those
arrangements; and/or
a sudden unexpected material event impacts crude oil and natural gas prices.
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2019 Annual Report | Similarly, the Corporation may enter into agreements to fix the exchange rate of Canadian dollars to United States dollars or other
currencies in order to offset the risk of revenue losses if the Canadian dollar increases in value compared to the other currencies.
However, if the Canadian dollar declines in value compared to such fixed currencies, the Corporation will not benefit from the
fluctuating exchange rate.
Further, the Corporation may enter into hedging arrangements to fix interest rates applicable to the Corporation’s debt. However,
if interest rates decrease as compared to the interest rate fixed by the Corporation, the Corporation will not benefit from the lower
interest rate.
Market Prices of the Corporation’s Securities
The trading price of the Corporation’s securities may be volatile and adversely affected by factors related and unrelated
to the oil and natural gas industry and cannot be accurately predicted
The market price of the Corporation’s securities may be volatile, which may affect the ability of holders to sell such securities at an
advantageous price. The trading price of the securities of oil and natural gas issuers, including the Corporation, is subject to substantial
volatility often based on factors related and unrelated to the financial performance or prospects of the issuers involved. Factors
unrelated to the Corporation’s performance could include macroeconomic developments nationally, within North America or globally,
domestic and global commodity prices and/or current perceptions of the oil and natural gas market. This includes, but is not limited
to, changing (and in some cases negative) investor sentiment towards energy-related businesses. In recent years, the volatility of
commodities has increased due to, in part, the implementation of computerized trading and the decrease of discretionary commodity
trading. In addition, the volatility, trading volume and share price of issuers have been impacted by increasing investment levels in
passive funds that track major indices, as such funds only purchase securities included in such indices. Further, in certain jurisdictions,
institutions, including government-sponsored entities, have determined to decrease their ownership in oil and natural gas entities,
which may impact the liquidity of certain securities and may put downward pressure on the trading price of those securities.
Similarly, the market prices of the Corporation’s securities could be subject to significant fluctuations in response to variations in the
Corporation’s operating results, financial condition, liquidity and other internal factors. In addition, market price fluctuations in the
Corporation’s securities may also be due to the Corporation’s results failing to meet the expectations of securities analysts or investors
in any quarter, downward revisions in securities analysts’ estimates and material public announcements by the Corporation, along
with a variety of additional factors, including, without limitation, those set forth under “Advisories – Forward-Looking Statements”.
Accordingly, the prices at which the Corporation’s securities will trade cannot be accurately predicted.
Hydraulic Fracturing
Implementation of new regulations on hydraulic fracturing may lead to operational delays, increased costs and/or decreased
production volumes, adversely affecting the Corporation’s business and financial position
Hydraulic fracturing involves the injection of water, sand and small amounts of additives under pressure into rock formations to stimulate
the production of oil and natural gas. Specifically, hydraulic fracturing enables the production of commercial quantities of oil and
natural gas from reservoirs that were previously unproductive. While hydraulic fracturing has been in use for many years, there has been
increased focus on the environmental aspects of hydraulic fracturing practices in recent years. Increased regulation and attention given
to the hydraulic fracturing process could lead to greater opposition (including litigation) to oil and natural gas production activities
using hydraulic fracturing techniques. Any new laws, regulations or permitting requirements regarding hydraulic fracturing could lead
to operational delays, increased operating costs, third-party or governmental claims and could increase the Corporation’s costs of
compliance and doing business, as well as delay the development of oil and natural gas resources from certain formations which are
not commercial without the use of hydraulic fracturing. Restrictions on hydraulic fracturing could also reduce the amount of oil and
natural gas that the Corporation is ultimately able to produce from its reserves and, therefore, could adversely affect the Corporation’s
business, financial condition, results of operations and prospects.
Minor earthquakes are common in certain parts of Alberta, and are generally clustered around the municipalities of Cardston,
Fox Creek and Rocky Mountain House. Due to notable seismic activity reported around Fox Creek, the Alberta Energy Regulator
(the “AER”) introduced seismic monitoring and reporting requirements for hydraulic fracturing operators in the Duvernay formation in
the Fox Creek area in February 2015. These requirements include, among others, an assessment of the potential for seismicity prior to
conducting operations, the implementation of a response plan to address potential seismic events, and the suspension of operations
if a seismic event above a particular threshold occurs. These requirements remain in effect as long as the AER deems them necessary.
Further, the AER continues to monitor seismic activity around the province and may extend these requirements to other areas of the
province if necessary.
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| 2019 Annual Report Competition
The Corporation competes with other oil and natural gas companies, some of which have greater financial and
operational resources
The oil and natural gas industry is highly competitive in all of its phases. The Corporation competes with numerous other entities in
the exploration, development, production and marketing of oil and natural gas, including land, acquisitions of reserves, access to
drilling and service rigs and other equipment, access to transportation and access to skilled technical and operating personnel.
The Corporation’s competitors include oil and natural gas companies that have substantially greater financial resources, staff and
facilities than those of the Corporation. Some of these companies not only explore for, develop and produce oil and natural gas,
but also carry on refining operations and market oil and natural gas on an international basis. As a result of these complementary
activities, some of these competitors may have greater and more diverse competitive resources to draw on than the Corporation.
The Corporation’s ability to increase its reserves in the future will depend not only on its ability to explore and develop its present
properties, but also on its ability to select and acquire other suitable producing properties or prospects for exploratory drilling.
Variations in Foreign Exchange Rates and Interest Rates
Variations in foreign exchange rates and interest rates could adversely affect the Corporation’s financial condition
World oil and natural gas prices are quoted in United States dollars. The Canadian/United States dollar exchange rate, which fluctuates
over time, consequently affects the price received by Canadian producers of oil and natural gas. Material increases in the value of the
Canadian dollar relative to the United States dollar may negatively affect the Corporation’s production revenue. Accordingly,
Canadian/United States exchange rates could impact the future value of the Corporation’s reserves as determined by independent
evaluators. Although a low value of the Canadian dollar relative to the United States dollar may positively affect the price the
Corporation receives for its oil and natural gas production, it could also result in an increase in the price for certain goods used
for the Corporation’s operations, which may have a negative impact on the Corporation’s financial results.
To the extent that the Corporation engages in risk management activities related to foreign exchange and interest rates, there is credit risk
associated with the counterparties with whom the Corporation may contract. See also “Risk Factors and Risk Management – Hedging”.
An increase in interest rates could result in a significant increase in the amount the Corporation pays to service debt, resulting in a
reduced amount available to fund its exploration and development activities and the cash available for dividends and could negatively
impact the market prices of the Corporation’s securities.
Availability and Cost of Equipment, Materials and Services
Restrictions on the availability and cost of equipment, materials and services may impede the Corporation's exploration,
development and operating activities
Oil and natural gas exploration, development and operating activities are dependent on the availability and cost of specialized
equipment and other materials (typically leased from third parties) and skilled personnel trained to use such equipment in the areas where
such activities will be conducted. The availability of such equipment, materials and personnel is limited. An increase in demand or cost,
or a decrease in the availability of, such equipment, materials or personnel may impede the Corporation’s exploration, development and
operating activities, which, in turn, could materially adversely affect the Corporation’s business and financial condition.
Potential Future Drilling Locations
The Corporation’s identified potential future drilling locations are susceptible to uncertainties that could materially alter the
occurrence or timing of their drilling
The Corporation’s identified potential future drilling locations represent a significant part of the Corporation’s future growth.
The Corporation’s ability to drill and develop these locations and the drilling locations on which the Corporation actually drills wells
depends on a number of uncertainties and factors, including, but not limited to, the availability of capital, equipment and personnel,
oil and natural gas prices, costs, inclement weather, seasonal restrictions, drilling results, additional geological, geophysical and
reservoir information that is obtained, production rate recovery, gathering system and transportation constraints, the net price received
for commodities produced, regulatory approvals and regulatory changes. As a result of these uncertainties, there can be no assurance
that the potential future drilling locations that Birchcliff has identified will ever be drilled and, if drilled, that such locations will result in
additional oil, NGLs or natural gas production and, in the case of unbooked locations, additional reserves. As such, the Corporation’s
actual drilling activities may differ materially from those presently identified, which could adversely affect the Corporation’s business.
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2019 Annual Report | Seasonality
Oil and natural gas operations are subject to seasonal conditions and the Corporation may experience significant operational
delays as a result
The level of activity in the Canadian oil and natural gas industry is influenced by seasonal weather patterns. Wet weather and spring thaw
may make the ground unstable. Consequently, municipalities and provincial transportation departments may enforce road bans that
restrict the movement of rigs and other heavy equipment, thereby reducing activity levels. Road bans and other restrictions generally
result in a reduction of drilling and exploratory activities and may also result in the shut-in of some of the Corporation’s production if not
otherwise tied-in. In addition, certain oil and natural gas producing properties are located in areas that are inaccessible other than during
the winter months because the ground surrounding the sites in these areas consists of swampy terrain. Further, extreme cold weather,
heavy snowfall and heavy rainfall may restrict the Corporation’s ability to access its properties and cause operational difficulties including
damage to machinery or contribute to personnel injury because of dangerous working conditions. Seasonal factors and unexpected
weather patterns may lead to declines in exploration and production activity and also to volatility in commodity prices as the demand
for natural gas typically fluctuates during cold winter months and hot summer months.
All Assets in One Area
All of the Corporation’s properties are located in the Peace River Arch area of Alberta, making the Corporation vulnerable to
risks associated with having its production concentrated in one area
All of the Corporation’s producing properties are geographically concentrated in the Peace River Arch area of Alberta. As a result of
this concentration, the Corporation may be disproportionately exposed to the impact of delays or interruptions of production from
that area caused by transportation capacity constraints, curtailment of production, natural disasters, availability of equipment, facilities
or services, adverse weather conditions or other events which impact that area. Due to the concentrated nature of the Corporation’s
portfolio of properties, a number of the Corporation’s properties could experience any of the same conditions at the same time,
resulting in a relatively greater impact on the Corporation’s results of operations than they might have on other companies that have a
more diversified portfolio of properties. Such delays or interruptions could have a material adverse effect on the Corporation’s financial
condition and results of operations.
Cost of New Technologies
The Corporation’s ability to successfully implement new technologies into its operations in a timely and efficient manner will
affect its ability to compete
The oil and natural gas industry is characterized by rapid and significant technological advancements and introductions of new products
and services utilizing new technologies. Other oil and natural gas companies may have greater financial, technical and personnel
resources that allow them to implement and benefit from new technologies before the Corporation. There can be no assurance that
the Corporation will be able to respond to such competitive pressures and implement such technologies on a timely basis or at an
acceptable cost. If the Corporation implements such technologies, there is no assurance that the Corporation will do so successfully.
One or more of the technologies currently utilized by the Corporation or implemented in the future may become obsolete. In such
case, the Corporation’s business, financial condition, results of operations and prospects could be affected adversely and materially.
If the Corporation is unable to utilize the most advanced commercially available technology or is unsuccessful in implementing certain
technologies, its business, financial condition, results of operations and prospects could also be adversely affected in a material way.
Dividends
The payment of dividends could vary
The declaration and payment of future dividends (and the amount thereof) is subject to the discretion of the Board of Directors
and may vary depending on a variety of factors and conditions existing from time to time, including fluctuations in commodity
prices, the financial condition of Birchcliff, production levels, results of operations, capital expenditure requirements, working capital
requirements, debt service requirements, operating costs, royalty burdens, foreign exchange rates, interest rates, contractual
restrictions, Birchcliff’s hedging activities or programs, available investment opportunities, Birchcliff’s business plan, strategies and
objectives, the satisfaction of the solvency and liquidity tests imposed by the Business Corporations Act (Alberta) (the “ABCA”) for
the declaration and payment of dividends and other factors that the Board of Directors may deem relevant. Depending on these and
various other factors, many of which are beyond the control of Birchcliff, the dividend policy of the Corporation may vary from time
to time and, as a result, future cash dividends could be reduced or suspended entirely.
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| 2019 Annual Report Pursuant to the ABCA, the Corporation may not declare or pay a dividend if there are reasonable grounds for believing that: (i) the
Corporation is, or would after the payment be, unable to pay its liabilities as they become due; or (ii) the realizable value of its assets
would thereby be less than the aggregate of its liabilities and stated capital of its outstanding shares. Additionally, pursuant to the
agreement governing the Credit Facilities, the Corporation is not permitted to make any distribution (which includes dividends) at any
time when an event of default exists or would reasonably be expected to exist upon making such distribution, unless such event of
default arose subsequent to the ordinary course declaration of the applicable distribution.
Dividends may be reduced or suspended during periods of lower cash flow from operations. The timing and amount of Birchcliff’s
capital expenditures, and the ability of the Corporation to repay or refinance existing debt as it becomes due, directly affects the
amount of cash dividends that may be declared by the Board of Directors. Future acquisitions, expansions of Birchcliff’s assets, and
other capital expenditures and the repayment or refinancing of existing debt as it becomes due may be financed from sources such
as cash flow from operations, the issuance of additional shares or other securities of Birchcliff, and borrowings. Dividends may be
reduced, or even eliminated, at times when significant capital or other expenditures are made. There can be no assurance that sufficient
capital will be available on terms acceptable to Birchcliff, or at all, to make additional investments, fund future expansions or make
other required capital expenditures. To the extent that external sources of capital, including the issuance of additional shares or other
securities or the availability of additional credit facilities, become limited or unavailable on favourable terms or at all due to credit market
conditions or otherwise, the ability of the Corporation to make the necessary capital investments to maintain or expand its operations,
to repay outstanding debt and to invest in assets, as the case may be, may be impaired. To the extent Birchcliff is required to use cash
flow from operations to finance capital expenditures or acquisitions or to repay existing debt as it becomes due, the cash available for
dividends may be reduced and the level of dividends declared may be reduced or suspended entirely.
Over time, the Corporation’s capital and other cash needs may change significantly from its current needs, which could affect whether
the Corporation pays dividends and the amount of dividends, if any, it may pay in the future. If the Corporation continues to pay
dividends at the current levels, it may not retain a sufficient amount of cash to finance external growth opportunities, meet any large
unanticipated liquidity requirements or fund its activities in the event of a significant business downturn.
The market value of the Corporation’s securities may deteriorate if dividends are reduced or suspended. Furthermore, the future
treatment of dividends for tax purposes will be subject to the nature and composition of dividends paid by Birchcliff and potential
legislative and regulatory changes.
Reliance on a Skilled Workforce and Key Personnel
An inability to recruit and retain a skilled workforce and key personnel would negatively impact the Corporation
The operations and management of the Corporation require the recruitment and retention of a skilled workforce, including engineers,
technical personnel and other professionals. The loss of key members of such workforce, or a substantial portion of the workforce as
a whole, could result in the failure to implement the Corporation’s business plans, which could have a material adverse effect on the
Corporation’s business, financial condition, results of operations and prospects.
Competition for qualified personnel in the oil and natural gas industry is intense and there can be no assurance that the Corporation
will be able to continue to attract and retain all personnel necessary for the development and operation of its business. Contributions
of the existing management team to the immediate and near-term operations of the Corporation are likely to be of central importance.
In addition, certain of the Corporation’s current employees are senior and have significant institutional knowledge that must be
transferred to other employees prior to their departure from the workforce. If the Corporation is unable to: (i) retain current employees;
(ii) successfully complete effective knowledge transfers; and/or (iii) recruit new employees with the requisite knowledge and
experience, the Corporation could be negatively impacted. In addition, the Corporation could experience increased costs to retain
and recruit these professionals.
Earnings Volatility
Earnings of the Corporation may fluctuate in each reporting period
The Corporation’s accounting policies conform to IFRS which constitutes generally accepted accounting principles in Canada.
Accounting under IFRS may result in non-cash charges and/or write-downs of net assets in the financial statements on a quarterly
basis. Similarly, non-cash gains and reversals of asset write-downs may also be recorded from time to time. Income statement volatility
resulting from such non-cash gains and losses under IFRS may be viewed unfavourably by the market and could result in an inability to
borrow funds and/or could result in a decline in the price of the Corporation’s securities.
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2019 Annual Report | Management of Growth and Integration
The Corporation may not be able to effectively manage the growth of its business
The Corporation may be subject to both integration and growth-related risks, including capacity constraints and pressure on its internal
systems and controls. The ability of the Corporation to effectively manage growth and the integration of additional assets will require it
to continue to implement and improve its operational and financial systems and to expand, train and manage its employee base.
The inability of the Corporation to effectively deal with this integration and growth could have a material adverse impact on its business,
financial condition, results of operations and prospects.
Information Technology Systems and Cyber-Security
A disruption of information technology services or a cyber-security breach may adversely affect the Corporation
The Corporation has become increasingly dependent upon the availability, capacity, reliability and security of its information technology
infrastructure and its ability to expand and continually update this infrastructure to conduct daily operations. The Corporation depends
on various information technology systems to estimate reserves, process and record financial data, manage its financial resources and
land base, analyze seismic information, administer its contracts with its operators and lessees and communicate with employees and
third-party partners.
In the event the Corporation is unable to regularly deploy software and hardware, effectively upgrade systems and network
infrastructure and take other steps to maintain or improve the efficiency and efficacy of its information technology systems,
the operation of such systems could be interrupted or result in the loss, corruption or release of data. Further, the Corporation is
subject to a variety of information technology and system risks as a part of its normal course operations, including potential breakdown,
invasion, virus, cyber-attack, cyber-fraud, security breach, and destruction or interruption of the Corporation’s information technology
systems by third parties or insiders. Unauthorized access to these systems by employees or third parties could lead to corruption or
exposure of confidential, fiduciary or proprietary information, interruption to communications or operations or disruption to its business
activities or its competitive position. In addition, cyber-phishing attempts, in which a malicious party attempts to obtain sensitive
information such as usernames, passwords, and credit card details (and money) by disguising as a trustworthy entity in an electronic
communication, have become more widespread and sophisticated in recent years. If the Corporation becomes a victim to a
cyber-phishing attack it could result in a loss or theft of the Corporation’s financial resources or critical data and information or could
result in a loss of control of the Corporation’s technological infrastructure or financial resources. The Corporation’s employees are often
the targets of such cyber-phishing attacks, as they are and will continue to be targeted by parties using fraudulent “spoof” emails to
misappropriate information or to introduce viruses or other malware through “trojan horse” programs to the Corporation’s computers.
These emails appear to be legitimate emails, but direct recipients to fake websites operated by the sender of the email or request
recipients to send a password or other confidential information through email or to download malware.
In addition to the oversight provided by the Corporation’s Information Technology Committee, there is further reporting on
the Corporation’s information technology and cyber-security risks to the Board of Directors. Further, the Corporation maintains policies
and procedures that address and implement employee protocols with respect to electronic communications and electronic devices
and the Corporation periodically conducts cyber-security risk assessments. The Corporation also employs encryption protection for
some of its confidential information. Despite the Corporation’s efforts to mitigate such cyber-phishing attacks through education and
training, phishing activities remain a serious problem that may damage its information technology infrastructure. The Corporation
applies technical and process controls in line with industry-accepted standards to protect its information assets and systems, including
a written incident response plan for responding to a cyber-security incident. However, these controls may not adequately prevent
cyber-security breaches. Disruption of critical information technology services, or breaches of information security, could have a
negative effect on the Corporation’s performance, earnings and its reputation and any damages sustained may not be adequately
covered by the Corporation’s current insurance coverage, or at all. The significance of any such event is difficult to quantify, but may
in certain circumstances be material and could have a material adverse effect on the Corporation’s business, financial condition,
results of operations and prospects.
To date, the Corporation has not been subject to a cyber-security attack or other breach that has had a material impact on its business
or operations or resulted in material losses to the Corporation; however, there is no assurance that the measures the Corporation takes
to protect its business systems and operational control systems will be effective in protecting against a breach in the future and that the
Corporation will not incur such losses in the future.
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| 2019 Annual Report Insurance
Not all risks are insurable and the occurrence of an uninsurable event may have a material adverse effect on the Corporation
Although the Corporation maintains insurance in accordance with industry standards to address certain risks, such insurance has
limitations on liability and may not be sufficient to cover the full extent of liabilities. In addition, certain risks are not, in all circumstances,
insurable or, in certain circumstances, the Corporation may elect not to obtain insurance to deal with specific risks due to the high
premiums associated with such insurance or for other reasons. The payment of any uninsured liabilities would reduce the funds available
to the Corporation. The occurrence of a significant event that the Corporation is not fully insured against, or the insolvency of the insurer
of such event, could have a material adverse effect on the Corporation’s business, financial condition, results of operations and prospects.
Ligation
The Corporation may be involved in litigation in the course of its normal operations and the outcome of the litigation may
adversely affect the Corporation and its reputation
In the normal course of the Corporation’s operations, it may become involved in, be named as a party to or be the subject of, various
legal proceedings, including regulatory proceedings, tax proceedings and legal actions. Such proceedings may develop in relation to
personal injury (including claims resulting from exposure to hazardous substances), property damage, property taxes, land and access
rights, royalty rights, the environment (including claims relating to contamination) and lease and contractual disputes. The outcome of
outstanding, pending or future proceedings cannot be predicted with certainty and may be determined adversely to the Corporation
and, as a result, could have a material adverse effect on the Corporation’s business, financial condition and results of operations. Even
if the Corporation prevails in any such legal proceedings, the proceedings could be costly and time-consuming and may divert the
attention of management and key personnel from the Corporation’s business operations, which may adversely affect the Corporation.
Due to the rapid development of oil and natural gas technology, the Corporation may become involved in, be named as a party to or
be the subject of, various legal proceedings in which it is alleged that the Corporation has infringed the intellectual property rights
of others or conversely, the Corporation may commence lawsuits against others who the Corporation believes are infringing upon
its intellectual property rights. The Corporation’s involvement in intellectual property litigation could result in significant expense,
adversely affecting the development of its assets or intellectual property or diverting the efforts of its technical and management
personnel, whether or not such litigation is resolved in the Corporation’s favour. In the event of an adverse outcome as a defendant in
any such litigation, the Corporation may, among other things, be required to: (i) pay substantial damages; (ii) cease the use of infringing
intellectual property; (iii) expend significant resources to develop or acquire non-infringing intellectual property; (iv) discontinue
processes incorporating infringing technology; or (v) obtain licences to the infringing intellectual property. However, the Corporation
may not be successful in such development or acquisition or such licences may not be available on reasonable terms. Any such
development, acquisition or licence could require the expenditure of substantial time and other resources and could have a material
adverse effect on the Corporation’s business and financial results.
Indigenous Claims
Indigenous claims may affect the Corporation
Indigenous peoples have claimed Indigenous rights and title in portions of Western Canada. The Corporation is not aware that any
claims have been made in respect of its properties or assets; however, the legal basis of an Indigenous land claim and Indigenous rights
are matters of considerable legal complexity and the impact of the assertion of such a claim, or the possible effect of a settlement of
such claim, upon the Corporation cannot be predicted with any degree of certainty. In addition, no assurance can be given that any
recognition of Indigenous rights or claims whether by way of a negotiated settlement or by judicial pronouncement (or through the
grant of an injunction prohibiting exploration or development activities pending resolution of any such claim) would not delay or even
prevent the Corporation’s exploration and development activities. If a claim arose and was successful, such claim may have a material
adverse effect on the Corporation’s business, financial condition, results of operations and prospects. In addition, the process of
addressing such claims, regardless of the outcome, is expensive and time consuming and could result in delays which could have
a material adverse effect on the Corporation’s business, financial condition, results of operations and prospects.
In addition, claims and protests of Indigenous peoples may disrupt or delay third-party operations or new development on the
Corporation’s properties.
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2019 Annual Report | Credit Risk
The Corporation is exposed to credit risk through its contractual arrangements and its third-party operators or partners
of properties in which it has an interest
The Corporation may be exposed to third-party credit risk through its contractual arrangements with joint venture partners, marketers
of its oil and natural gas production and other parties. In addition, the Corporation may be exposed to third-party credit risk from
operators of properties in which the Corporation has a working or royalty interest. In the event such entities fail to meet their contractual
obligations to the Corporation, such failures may have a material adverse effect on the Corporation’s business, financial condition,
results of operations and prospects. In addition, poor credit conditions in the industry generally and of joint venture partners may affect
a joint venture partner’s willingness to participate in the Corporation’s ongoing capital program, potentially delaying the program and
the results of such program until the Corporation finds a suitable alternative partner. To the extent that any of such third parties
go bankrupt, become insolvent or make a proposal or institute any proceedings relating to bankruptcy or insolvency, it could result
in the Corporation being unable to collect all or a portion of any money owing from such parties. Any of these factors could materially
adversely affect the Corporation’s financial and operational results.
Conversely, the Corporation’s counterparties may deem the Corporation to be at risk of defaulting on its contractual obligations.
These counterparties may require that the Corporation provide additional credit assurance by prepaying anticipated expenses or
posting letters of credit, which would decrease the Corporation’s available liquidity.
Internal Controls
Material weaknesses in the Corporation’s internal controls may negatively affect the Corporation and the market price of the
Corporation’s securities
Effective internal controls are necessary for the Corporation to provide reliable financial reports and to help prevent fraud. Although
the Corporation undertakes a number of procedures in order to help ensure the reliability of its financial reports, including those
imposed on it under Canadian securities laws, the Corporation cannot be certain that such measures will ensure that the Corporation
will maintain adequate control over financial processes and reporting. Failure to implement required new or improved controls,
or difficulties encountered in their implementation, could harm the Corporation’s results of operations or cause it to fail to meet its
reporting obligations. If the Corporation or its independent auditors discover a material weakness, the disclosure of that fact, even if
quickly remedied, could reduce the market’s confidence in the Corporation’s financial statements and negatively impact the trading
prices of the Corporation’s securities.
Liability Management Programs
Liability management programs enacted by regulators may prevent or interfere with the Corporation’s ability to acquire
properties or require a substantial cash deposit with the regulator
Alberta has developed a liability management rating program (the “AB LMR Program”) which is designed to prevent taxpayers from
incurring costs associated with the suspension, abandonment, remediation and reclamation of wells, facilities and pipelines in the event
that a licensee or permit holder is unable to satisfy its regulatory obligations. Changes to the AB LMR Program administered by the AER
or other changes to the requirements of the AB LMR Program may result in the requirement for security to be posted in the future and
may result in significant increases to the Corporation’s compliance obligations.
The impact and consequences of the Supreme Court of Canada’s decision in the Redwater Energy Corporation (Re) case on the AER’s
rules and policies, lending practices in the oil and natural gas industry and on the nature and determination of secured lenders to take
enforcement proceedings are expected to evolve as the consequences of the decision are evaluated and considered by regulators,
lenders and receivers/trustees. In addition, the AB LMR Program may prevent or interfere with the Corporation’s ability to acquire or
dispose of assets as both the vendor and the purchaser of oil and natural gas assets must be in compliance with the AB LMR Program
(both before and after the transfer of the assets) for the applicable regulatory agency to allow for the transfer of such assets.
Title to and Right to Produce from Assets
Defects in the Corporation’s title or rights to produce from its properties may result in a financial loss
The Corporation’s actual title to and interest in its properties, and its right to produce and sell the oil and natural gas therefrom,
may vary from the Corporation’s records. In addition, there may be valid legal challenges or legislative changes that affect the
Corporation’s title to and right to produce from its oil and natural gas properties, which could impair the Corporation’s activities
on them and result in a reduction of the revenue received by the Corporation.
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| 2019 Annual Report If a defect exists in the chain of title or in the Corporation’s right to produce, or a legal challenge or legislative change arises, it is possible
that the Corporation may lose all or a portion of the properties to which the title defect relates and/or its right to produce from such
properties. This may have a material adverse effect on the Corporation’s business, financial condition, results of operations and prospects.
Expiration of Licences and Leases
The Corporation, or its working interest partners, may fail to meet the requirements of a licence or lease, causing its
termination or expiry
The Corporation’s properties are held in the form of licences and leases and working interests in licences and leases held by others.
If the Corporation or the holder of the licence or lease fails to meet the specific requirements of a licence or lease, the licence or lease
may terminate or expire. There can be no assurance that any of the obligations required to maintain each licence or lease will be met.
The termination or expiration of the Corporation’s licences or leases or the working interests relating to a licence or lease may have a
material adverse effect on the business, financial condition, results of operations and prospects of the Corporation.
Disposal of Fluids Used in Operations
Regulations regarding the disposal of fluids used in operations may increase costs of compliance or subject the Corporation to
regulatory penalties or litigation
The safe disposal of the hydraulic fracturing fluids (including the additives) and water recovered from oil and natural gas wells is subject
to ongoing regulatory review by the federal and provincial governments, including its effect on fresh water supplies and the ability of
such water to be recycled, amongst other things. While it is difficult to predict the impact of any regulations that may be enacted in
response to such review, the implementation of stricter regulations may increase the Corporation’s costs of compliance which may
impact the economics of certain projects and, in turn, impact activity levels and new capital spending on the Corporation’s oil and
natural gas properties.
Breaches of Confidentiality
Breach of confidentiality by a third party could impact the Corporation’s competitive advantage or put it at risk of litigation
While discussing potential business relationships or other transactions with third parties, the Corporation may disclose confidential
information relating to its business, operations or affairs. Although confidentiality agreements are generally signed by third parties
prior to the disclosure of any confidential information, a breach could put the Corporation at competitive risk and may cause significant
damage to its business. The harm to the Corporation’s business from a breach of confidentiality cannot presently be quantified,
but may be material and may not be compensable in damages. There is no assurance that, in the event of a breach of confidentiality,
the Corporation will be able to obtain equitable remedies, such as injunctive relief, from a court of competent jurisdiction in a timely
manner, if at all, in order to prevent or mitigate any damage to its business that such a breach of confidentiality may cause.
Operational Dependence
The Corporation is subject to risk as it pertains to other parties operating assets it has an interest in
Other companies operate some of the assets in which the Corporation has an interest. The Corporation has limited ability to
exercise influence over the operation of those assets or their associated costs, which could adversely affect the Corporation’s
business, financial condition, results of operations and prospects. The Corporation’s return on assets operated by others depends
upon a number of factors that may be outside of the Corporation’s control, including, but not limited to, the timing and amount of
capital expenditures, the operator’s expertise and financial resources, the approval of other participants, the selection of technology
and risk management practices.
In addition, due to the current low and volatile commodity price environment, many companies, including companies that may operate
some of the assets in which the Corporation has an interest, may be in financial difficulty, which could impact their ability to fund and
pursue capital expenditures, carry out their operations in a safe and effective manner and satisfy regulatory requirements with respect
to abandonment and reclamation obligations. If companies that operate some of the assets in which the Corporation has an interest
fail to satisfy regulatory requirements with respect to abandonment and reclamation obligations, the Corporation may be required to
satisfy such obligations and to seek recourse from such companies. To the extent that any of such companies go bankrupt, become
insolvent or make a proposal or institute any proceedings relating to bankruptcy or insolvency, it could result in such assets being
shut-in, the Corporation potentially becoming subject to additional liabilities relating to such assets and the Corporation having
difficulty collecting revenue due to it from such operators or recovering amounts owing to the Corporation from such operators
for their share of abandonment and reclamation obligations. Any of these factors could have a material adverse effect on the
Corporation’s financial and operational results.
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2019 Annual Report | Risks Associated with Acquisitions and Dispositions
The anticipated benefits of acquisitions may not be achieved and the Corporation may dispose of certain assets for less than their
carrying value on the financial statements as a result of weak market conditions
The Corporation considers acquisitions and dispositions of assets in the ordinary course of business. Typically, once an acquisition
opportunity is identified, a review of available information relating to the assets is conducted. There is a risk that even a detailed review
of records and assets may not necessarily reveal every existing or potential problem, nor will it permit the Corporation to become
sufficiently familiar with the assets to fully assess their deficiencies and potential. There is no guarantee that defects in the chain of title
will not arise to defeat the Corporation’s title to certain assets or that environmental defects, liabilities or deficiencies do not exist or
are greater than anticipated. Inspections may not always be performed on every well, and environmental problems, such as ground
water contamination, are not necessarily observable even when an inspection is undertaken. Even when problems are identified, the
Corporation may assume certain environmental and other risk liabilities in connection with acquired assets.
In addition, acquisitions of oil and natural gas properties or companies are based in large part on engineering, environmental and
economic assessments. These assessments include a series of assumptions regarding such factors as recoverability and marketability
of oil and natural gas, environmental restrictions and prohibitions regarding releases and emissions of various substances, future
prices of oil and natural gas, future operating costs, future capital expenditures and royalties and other government levies which will
be imposed over the producing life of the reserves. Many of these factors are subject to change and are beyond the control of the
Corporation. All such assessments involve a measure of geological, engineering, environmental and regulatory uncertainty that could
result in lower production and reserves or higher operating or capital expenditures than anticipated.
Achieving the benefits of acquisitions depends on successfully consolidating functions and integrating operations and procedures
in a timely and efficient manner and the Corporation’s ability to realize the anticipated growth opportunities and synergies from
combining the acquired businesses and operations with those of the Corporation. The integration of acquired businesses and assets
may require substantial management effort, time and resources, diverting management’s focus away from other strategic opportunities
and operational matters.
Management continually assesses the value and contribution of the various assets within its portfolio. In this regard, certain assets
may be periodically disposed of so the Corporation can focus its efforts and resources more efficiently. Depending on market
conditions for such assets, there is a risk that certain assets of the Corporation could realize less than their carrying value on the
Corporation’s financial statements.
Royalty Regimes
Changes to royalty regimes may negatively impact the Corporation's cash flow
There can be no assurance that the Government of Alberta will not adopt a new royalty regime or modify the existing royalty regime,
which may have an impact on the economics of the Corporation’s projects. An increase in royalties would reduce the Corporation’s
earnings and could make future capital investments, or the Corporation’s operations, less economic or uneconomic.
Negative Impact of Additional Sales or Issuances of Securities
The Corporation may issue additional securities, diluting current shareholders
The Corporation may issue an unlimited number of Common Shares without any vote or action by the shareholders, subject to the rules
of any stock exchange on which the Corporation’s securities may be listed. The Corporation may make future acquisitions or enter into
financings or other transactions involving the issuance of securities of the Corporation. If the Corporation issues additional securities, the
percentage ownership of existing shareholders will be reduced and diluted and the price of the Corporation’s securities could decrease.
Conflicts of Interest
Conflicts of interest may arise for the Corporation’s directors and officers
Certain directors or officers of the Corporation may also be directors or officers of other oil and natural gas companies and as such
may, in certain circumstances, have a conflict of interest. Conflicts of interest, if any, will be subject to and governed by procedures
prescribed by the ABCA which require a director or officer of a Corporation who is a party to, or is a director or an officer of, or has
a material interest in any person who is a party to, a material contract or proposed material contract with the Corporation to disclose
his or her interest and, in the case of directors, to refrain from voting on any matter in respect of such contract unless otherwise
permitted under the ABCA.
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| 2019 Annual Report Income Taxes
Taxation authorities may reassess the Corporation’s tax returns
The Corporation files all required income tax returns and believes that it is in full compliance with the provisions of the
Income Tax Act (Canada) and all other applicable provincial tax legislation. However, such returns are subject to reassessment
by the applicable taxation authority. In the event of a successful reassessment of the Corporation, such reassessment may have
an impact on current and future taxes payable.
Income tax laws relating to the oil and natural gas industry, such as the treatment of resource taxation or dividends, may in the future
be changed or interpreted in a manner that adversely affects the Corporation. Furthermore, tax authorities having jurisdiction over the
Corporation may disagree with how the Corporation calculates its income for tax purposes or could change administrative practices
to the Corporation’s detriment.
Additional Taxation Applicable to Non-Residents
Non-resident shareholders are required to pay additional taxes on their dividends
Tax legislation in Canada may impose withholding or other taxes on the cash dividends, stock dividends or other property
transferred by the Corporation to non-resident shareholders. These taxes may be reduced pursuant to tax treaties between Canada
and the non-resident shareholder’s jurisdiction of residence. Evidence of eligibility for a reduced withholding rate must be filed by
the non-resident shareholder in prescribed form with their broker (or in the case of registered shareholders, with the transfer agent).
In addition, the country in which the non-resident shareholder is resident may impose additional taxes on such dividends. Any of these
taxes may change from time to time.
Foreign Exchange Risk for Non-Resident Shareholders
Variations in foreign exchange rates may affect the amount of cash dividends received by shareholders who receive dividends in
currencies other than Canadian dollars
The Corporation’s cash dividends are declared in Canadian dollars and may be converted in certain instances to foreign denominated
currencies at the spot exchange rate at the time of payment. As a consequence, non-resident shareholders and shareholders who
calculate their return in currencies other than the Canadian dollar are subject to foreign exchange risk. To the extent that the Canadian
dollar strengthens with respect to their currency, the amount of any dividend will be reduced when converted to their home currency.
Evolving Corporate Governance and Reporting Framework
Evolving corporate governance and reporting framework may increase both compliance costs and the risk of non-compliance
that may have an adverse effect on the Corporation
The Corporation’s business is subject to evolving corporate governance and public disclosure regulations that have increased both
compliance costs and the risk of non-compliance, which could have an adverse effect on the Corporation’s costs of doing business.
The Corporation is subject to changing rules and regulations promulgated by a number of governmental and self-regulated
organizations, including the Canadian Securities Administrators, the TSX and the Financial Accounting Standards Board. These rules
and regulations continue to evolve in scope and complexity, making compliance more difficult and uncertain. Further, the Corporation’s
efforts to comply with these and other new and existing rules and regulations have resulted in, and are likely to continue to result in,
increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities
to compliance activities.
Social Media
The Corporation faces compliance and supervisory challenges in respect of the use of social media as a means of communicating
Increasingly, social media is used as a vehicle to carry out cyber-phishing attacks. Information posted on social media sites, for business
or personal purposes, may be used by attackers to gain entry into the Corporation’s systems and obtain confidential information.
As social media continues to grow in influence and access to social media platforms becomes increasingly prevalent, there are
significant risks that the Corporation may not be able to properly regulate social media use and preserve adequate records of business
activities and client communications conducted through the use of social media platforms.
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2019 Annual Report | Expansion into New Activities
Expanding the Corporation’s business may expose it to new risks and uncertainties
The operations and expertise of the Corporation’s management are currently focused primarily on oil and natural gas production,
exploration and development in the Peace River Arch area of Alberta. In the future, the Corporation may acquire or move into new
industry-related activities or new geographical areas or may acquire different energy-related assets, and as a result, the Corporation
may face unexpected risks or alternatively, the Corporation’s exposure to one or more existing risk factors may be significantly
increased, which may in turn result in the Corporation’s future operational and financial condition being adversely affected.
Public Health Crises
Public health crises, including the COVID-19, could adversely affect the Corporation’s business
The Corporation’s business, operations and financial condition could be materially adversely affected by the outbreak of epidemics or
pandemics or other health crises. In December 2019, COVID-19 was reported to have surfaced in Wuhan, China and on January 30, 2020,
the World Health Organization declared the outbreak a global health emergency. In China, reactions to the spread of COVID-19 have
led to, among other things, significant restrictions on travel within China, temporary business closures, quarantines and a general reduction
in consumer activity. The outbreak has spread throughout Europe and the Middle East and there have been cases of COVID-19 in Canada
and the United States, causing companies and various international jurisdictions to impose restrictions such as quarantines, business
closures and travel restrictions. While these effects are expected to be temporary, the duration of the business disruptions internationally
and related financial impact cannot be reasonably estimated at this time. Similarly, the Corporation cannot estimate whether or to what
extent this outbreak and the potential financial impact may extend to countries outside of those currently impacted.
Such public health crises can result in volatility and disruptions in the supply and demand for oil and natural gas, global supply chains
and financial markets, as well as declining trade and market sentiment and reduced mobility of people, all of which could affect
commodity prices, interest rates, credit ratings, credit risk and inflation. In particular, oil prices have significantly weakened in response
to the outbreak of COVID-19. See “Risk Factors and Risk Management – Prices, Markets and Marketing” and “Risk Factors and Risk
Management – Weakness and Volatility in the Oil and Natural Gas Industry”. The risks to the Corporation of such public health crises
also include risks to employee health and safety and a slowdown or temporary suspension of operations in geographic locations
impacted by an outbreak. At this point, the extent to which COVID-19 may impact the Corporation is uncertain; however, it is possible
that COVID-19 may have a material adverse effect on the Corporation’s business, results of operations and financial condition.
Forward-Looking Information
Forward-looking information may prove inaccurate
Shareholders and prospective investors are cautioned not to place undue reliance on the Corporation’s forward-looking statements.
By their nature, forward-looking statements involve numerous assumptions and known and unknown risks and uncertainties, of both
a general and specific nature, that could cause actual results to differ materially from those suggested by the forward-looking
statements or contribute to the possibility that predictions, forecasts or projections will prove to be materially inaccurate. Additional
information on the risks, assumptions and uncertainties relating to forward-looking statements is found under the heading “Advisories –
Forward-Looking Statements”.
88
| 2019 Annual Report ABBREVIATIONS
AECO
ATP
bbl
bbls
bbls/d
boe
boe/d
C3+
benchmark price for natural gas determined at the AECO ‘C’ hub in southeast Alberta
Alliance Trading Pool
barrel
barrels
barrels per day
barrel of oil equivalent
barrel of oil equivalent per day
propane plus
condensate
pentanes plus (C5+)
F&D
G&A
GAAP
GHG
GJ
GJ/d
HH
IFRS
LNG
m3
MMboe
Mcf
Mcf/d
Mcfe
MJ
MM$
MMBtu
MMBtu/d
MMcf
MMcf/d
MSW
NGLs
NGTL
NYMEX
P&NG
TCPL
WTI
000s
$000s
finding and development
general and administrative
generally accepted accounting principles for Canadian public companies which are currently IFRS
greenhouse gas
gigajoule
gigajoules per day
Henry Hub
International Financial Reporting Standards as issued by the International Accounting Standards Board
liquefied natural gas
cubic metres
million barrels of oil equivalent
thousand cubic feet
thousand cubic feet per day
thousand cubic feet of gas equivalent
megajoule
millions of dollars
million British thermal units
million British thermal units per day
million cubic feet
million cubic feet per day
price for mixed sweet crude oil at Edmonton, Alberta
natural gas liquids consisting of ethane (C2), propane (C3) and butane (C4) and specifically
excluding condensate
NOVA Gas Transmission Ltd.
New York Mercantile Exchange
petroleum and natural gas
TransCanada PipeLines Limited
West Texas Intermediate, the reference price paid in U.S. dollars at Cushing, Oklahoma, for crude oil of
standard grade
thousands
thousands of dollars
89
2019 Annual Report | NON-GAAP MEASURES
This MD&A uses “adjusted funds flow”, “adjusted funds flow per common share”, “free funds flow”, “transportation and other
expense”, “operating netback”, “adjusted funds flow netback”, “total cash costs”, “adjusted working capital deficit” and “total debt”.
These measures do not have standardized meanings prescribed by GAAP and therefore may not be comparable to similar measures
presented by other companies where similar terminology is used. Management believes that these non-GAAP measures assist
management and investors in assessing Birchcliff’s profitability, efficiency, liquidity and overall performance. Each of these measures
is discussed in further detail below.
“Adjusted funds flow” denotes cash flow from operating activities before the effects of decommissioning expenditures and changes in
non-cash operating working capital and “adjusted funds flow per common share” denotes adjusted funds flow divided by the basic or
diluted weighted average number of common shares outstanding for the period. Birchcliff eliminates settlements of decommissioning
expenditures from cash flow from operating activities as the amounts can be discretionary and may vary from period-to-period
depending on its capital programs and the maturity of its operating areas. The settlement of decommissioning expenditures is
managed with Birchcliff’s capital budgeting process which considers available adjusted funds flow. Changes in non-cash operating
working capital are eliminated in the determination of adjusted funds flow as the timing of collection and payment are variable and by
excluding them from the calculation, the Corporation believes that it is able to provide a more meaningful measure of its operations and
ability to generate cash on a continuing basis. Management believes that adjusted funds flow and adjusted funds flow per common
share assist management and investors in assessing Birchcliff’s operating performance, as well as its ability to generate cash necessary
to fund sustaining and/or growth capital expenditures, repay debt, settle decommissioning obligations and pay common share and
preferred share dividends. Investors are cautioned that adjusted funds flow should not be construed as an alternative to or more
meaningful than cash flow from operating activities or net income or loss as determined in accordance with GAAP as an indicator of
Birchcliff’s performance. “Free funds flow” denotes adjusted funds flow less F&D capital expenditures. Management believes that
free funds flow assists management and investors in assessing Birchcliff’s ability to further generate shareholder returns through a
number of initiatives, including but not limited to, potential debt repayment, common share repurchases, future dividend increases
and acquisitions. The following table provides a reconciliation of cash flow from operating activities, as determined in accordance
with GAAP, to adjusted funds flow and free funds flow for the periods indicated:
($000s)
Cash flow from operating activities
Change in non-cash operating working capital
Decommissioning expenditures
Adjusted funds flow
F&D capital expenditures
Free funds flow
Three months ended
December 31,
Twelve months ended
December 31,
2019
85,557
(5,058)
442
80,941
2018
92,200
(10,838)
155
2019
327,066
5,153
2,285
2018
324,434
(12,591)
1,079
81,517
334,504
312,922
(56,800)
(52,321)
(256,395)
(299,654)
24,141
29,196
78,109
13,268
“Transportation and other expense” denotes transportation expense plus marketing purchases minus marketing revenue. Birchcliff
may enter into certain marketing purchase and sales arrangements with the objective of reducing any available transportation and/or
fractionation fees associated with its take-or-pay commitments. Management believes that transportation and other expense assists
management and investors in assessing Birchcliff’s total cost structure related to transportation activities.“Operating netback” denotes
petroleum and natural gas revenue less royalty expense, less operating expense and less transportation and other expense. “Adjusted
funds flow netback” denotes petroleum and natural gas revenue less royalty expense, less operating expense, less transportation and
other expense, less net G&A expense, less interest expense and less any realized losses (plus realized gains) on financial instruments
and plus any other cash income sources. All netbacks are calculated on a per unit basis, unless otherwise indicated. Management
believes that operating netback and adjusted funds flow netback assist management and investors in assessing Birchcliff’s operating
results by isolating the impact of production volumes to better analyze its performance against prior periods on a comparable basis.
The following table provides a breakdown of Birchcliff’s operating netback and adjusted funds flow netback for the periods indicated:
90
| 2019 Annual Report Three months ended
December 31,
Twelve months ended
December 31,
2019
2018
2019
2018
($000s)
($/boe)
($000s)
($/boe)
($000s)
($/boe)
($000s)
($/boe)
Petroleum and natural gas revenue
164,759
22.97
154,720
22.01
613,559
21.56
621,421
Royalty expense
Operating expense
(8,263)
(1.15)
(6,763)
(0.96)
(27,452)
(0.96)
(38,306)
(21,977)
(3.06)
(24,677)
(3.51)
(87,903)
(3.09)
(99,104)
(3.52)
22.08
(1.36)
Transportation and other expense
(32,278)
(4.51)
(28,567)
(4.07)
(126,135)
(4.44)
(103,547)
(3.68)
Operating netback
G&A, net
Interest expense
102,241
(9,035)
14.25
(1.26)
94,713
13.47
372,069
13.07
380,464
13.52
(7,618)
(1.08)
(26,815)
(0.94)
(24,602)
(0.87)
(5,852)
(0.82)
(7,437)
(1.06)
(25,073)
(0.88)
(27,969)
(0.99)
Realized gain (loss) on financial instruments
(6,565)
(0.92)
Other income
Adjusted funds flow netback
152
80,941
0.03
11.28
1,658
201
0.24
0.03
13,673
650
0.48
0.02
81,517
11.60
334,504
11.75
312,922
(15,771)
(0.56)
800
0.02
11.12
(1) All per boe amounts are calculated by dividing each aggregate financial amount by the production (boe) in the respective period.
The breakdown for the operating netback from the Pouce Coupe Gas Plant is provided under the heading “Pouce Coupe Gas
Plant Netbacks” in this MD&A.
“Total cash costs” are comprised of royalty, operating, transportation and other, G&A and interest expenses. Total cash costs are
calculated on a per unit basis. Management believes that total cash costs assists management and investors in assessing Birchcliff’s
efficiency and overall cash cost structure.
“Adjusted working capital deficit” is calculated as current assets minus current liabilities excluding the effects of any current portion of
financial instruments and capital securities. In 2018, Birchcliff’s capital securities were long-term in nature and therefore no adjustment
for capital securities was made to adjusted working capital deficit for that period. Management believes that adjusted working capital
deficit assists management and investors in assessing Birchcliff’s short-term liquidity. The following table reconciles working capital
deficit (current assets minus current liabilities), as determined in accordance with GAAP, to adjusted working capital deficit:
As at, ($000s)
Working capital deficit (surplus)
Financial instrument – current asset
Financial instrument – current liability
Capital securities – current liability
Adjusted working capital deficit
December 31,
2019
December 31,
2018
100,199
-
(26,949)
(49,845)
23,405
(15,611)
36,798
-
-
21,187
“Total debt” is calculated as the revolving term credit facilities plus adjusted working capital deficit. Management believes that total
debt assists management and investors in assessing Birchcliff’s liquidity. The following table provides a reconciliation of the revolving
term credit facilities, as determined in accordance with GAAP, to total debt:
As at, ($000s)
Revolving term credit facilities
Adjusted working capital deficit
Total debt
December 31,
2019
December 31,
2018
609,177
23,405
632,582
605,267
21,187
626,454
91
2019 Annual Report | ADVISORIES
Currency
Unless otherwise indicated, all dollar amounts are expressed in Canadian dollars and all references to “$” and “CDN$” are to Canadian
dollars and all references to “US$” are to United States dollars.
MMBtu Pricing Conversions
$1.00 per MMBtu equals $1.00 per Mcf based on a standard heat value Mcf.
Boe and Mcfe Conversions
Boe amounts have been calculated by using the conversion ratio of 6 Mcf of natural gas to 1 bbl of oil and Mcfe amounts have been
calculated by using the conversion ratio of 1 bbl of oil to 6 Mcf of natural gas. Boe and Mcfe amounts may be misleading, particularly
if used in isolation. A boe conversion ratio of 6 Mcf: 1 bbl and an Mcfe conversion ratio of 1 bbl: 6 Mcf is based on an energy
equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
Given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy
equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.
Oil and Gas Metrics
This MD&A contains metrics commonly used in the oil and natural gas industry, including netbacks. These oil and gas metrics do
not have any standardized meanings or standard methods of calculation and therefore may not be comparable to similar measures
presented by other companies where similar terminology is used. As such, they should not be used to make comparisons.
Management uses these oil and gas metrics for its own performance measurements and to provide investors with measures to
compare Birchcliff’s performance over time; however, such measures are not reliable indicators of Birchcliff’s future performance,
which may not compare to Birchcliff’s performance in previous periods, and therefore should not be unduly relied upon.
For additional information regarding netbacks, see “Non-GAAP Measures” in this MD&A.
Capital Expenditures
Unless otherwise stated, references in this MD&A to: (i) “F&D capital” denotes capital for land, seismic, workovers, drilling and
completions and well equipment and facilities; and (ii) “total capital expenditures” denotes F&D capital plus acquisitions, less any
dispositions, plus administrative assets.
Reserves
Birchcliff retained two independent qualified reserves evaluators, Deloitte LLP and McDaniel & Associates Consultants Ltd., to evaluate
and prepare reports on 100% of Birchcliff’s light crude oil and medium crude oil (combined), conventional natural gas, shale gas and
NGLs reserves effective December 31, 2019. Such evaluations were prepared in accordance with the standards contained in the
COGE Handbook and NI 51-101. Further information regarding the Corporation’s reserves can be found in the Corporation’s Annual
Information Form for the financial year ended December 31, 2019.
Certain terms used herein are defined in NI 51-101 or the COGE Handbook and, unless the context otherwise requires, shall have the
same meanings in this MD&A as in NI 51-101 or the COGE Handbook, as the case may be.
Forward-Looking Statements
Certain statements contained in this MD&A constitute forward-looking statements and forward-looking information (collectively
referred to as “forward-looking statements”) within the meaning of applicable Canadian securities laws. The forward-looking
statements contained in this MD&A relate to future events or Birchcliff’s future plans, operations or performance and are based on
Birchcliff’s current expectations, estimates, projections, beliefs and assumptions. Such forward-looking statements have been made
by Birchcliff in light of the information available to it at the time the statements were made and reflect its experience and perception of
historical trends. All statements and information other than historical fact may be forward-looking statements. Such forward-looking
statements are often, but not always, identified by the use of words such as “seek”, “plan”, “focus”, “future”, “outlook”, “position”,
“expect”, “project”, “intend”, “believe”, “anticipate”, “estimate”, “forecast”, “guidance”, “potential”, “proposed”, “predict”, “budget”,
“continue”, “targeting”, “may”, “will”, “could”, “might”, “should”, “would”, “on track” and other similar words and expressions.
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| 2019 Annual Report By their nature, forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual
results or events to differ materially from those anticipated in such forward-looking statements. Accordingly, readers are cautioned
not to place undue reliance on such forward-looking statements. Although Birchcliff believes that the expectations reflected in the
forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct and Birchcliff
makes no representation that actual results achieved will be the same in whole or in part as those set out in the forward-looking statements.
In particular, this MD&A contains forward-looking statements relating to the following: Birchcliff’s plans and other aspects of its
anticipated future financial performance, results, operations, focus, objectives, strategies, opportunities, priorities and goals;
the information set forth under the heading “2020 Outlook” and elsewhere in this MD&A as it relates to Birchcliff’s revised
2020 Capital Program and guidance for 2020 (including: statements that Birchcliff is focused on maintaining its strong balance
sheet and financial flexibility; the focus of, the objectives of, the anticipated results from and expected benefits of the 2020 Capital
Program; statements regarding the number of wells expected to be drilled and brought on production; statements regarding the
Inlet Liquids-Handling Facility; and estimates of annual and Q4 average production, annual commodity mix, average expenses,
adjusted funds flow, F&D capital expenditures, free funds flow, total debt and natural gas market exposure); Birchcliff’s market
diversification and risk management activities and any anticipated benefits to be derived therefrom; statements related to reserves
and future development costs; future income tax rates; the Corporation’s estimated income tax pools and management’s expectation
that future taxable income will be available to utilize the accumulated tax pools; the Corporation’s liquidity (including: the Corporation’s
financial flexibility; statements that Birchcliff’s capital resources primarily consist of adjusted funds flow and available Credit Facilities;
the Corporation’s belief that its internally generated adjusted funds flow and its existing undrawn Credit Facilities will provide sufficient
liquidity to fund its working capital requirements, capital expenditure programs and dividend payments for the foreseeable future;
statements that the Corporation may from time to time seek additional capital in the form of debt and/or equity or dispose of non-core
properties to fund its ongoing capital expenditure programs and protect its statements of financial position; the Corporation’s
expectation that counterparties will be able to meet their financial obligations; and statements that management of debt levels
continues to be a priority for Birchcliff); estimates of Birchcliff’s material contractual obligations and commitments and decommissioning
obligations; statements relating to the Corporation’s NCIB (including potential purchases under the bid and the cancellation of
common shares under the bid); and statements regarding potential transactions. Statements relating to reserves are forward-looking
as they involve the implied assessment, based on certain estimates and assumptions, that the reserves exist in the quantities predicted
or estimated and that the reserves can be profitably produced in the future.
With respect to the forward-looking statements contained in this MD&A, assumptions have been made regarding, among other
things: prevailing and future commodity prices and differentials, currency exchange rates, interest rates, inflation rates, royalty rates
and tax rates; the state of the economy, financial markets and the exploration, development and production business; the political
environment in which Birchcliff operates; the regulatory framework regarding royalties, taxes, environmental, climate change and other
laws; the Corporation’s ability to comply with existing and future environmental, climate change and other laws; future cash flow, debt
and dividend levels; future operating, transportation, marketing, general and administrative and other expenses; Birchcliff’s ability to
access capital and obtain financing on acceptable terms; the timing and amount of capital expenditures and the sources of funding
for capital expenditures and other activities; the sufficiency of budgeted capital expenditures to carry out planned operations; the
successful and timely implementation of capital projects and the timing, location and extent of future drilling and other operations;
results of operations; Birchcliff’s ability to continue to develop its assets and obtain the anticipated benefits therefrom; the performance
of existing and future wells; the success of new wells drilled; reserves and resource volumes and Birchcliff’s ability to replace and
expand reserves through acquisition, development or exploration; the impact of competition on Birchcliff; the availability of, demand
for and cost of labour, services and materials; the ability to obtain any necessary regulatory or other approvals in a timely manner; the
satisfaction by third parties of their obligations to Birchcliff; the ability of Birchcliff to secure adequate processing and transportation for
its products; Birchcliff’s ability to successfully market natural gas and liquids; the availability of hedges on terms acceptable to Birchcliff;
and Birchcliff’s natural gas market exposure. In addition to the foregoing assumptions, Birchcliff has made the following assumptions
with respect to certain forward-looking statements contained in this MD&A:
•
Birchcliff’s 2020 guidance (as updated March 11, 2020) assumes the following commodity prices and exchange rate: an average
WTI spot price of US$48.00/bbl; an average WTI-MSW differential of CDN$5.70/bbl; an average AECO 5A spot price of
CDN$1.90/GJ; an average Dawn spot price of US$2.15/MMBtu; an average NYMEX HH spot price of US$2.20/MMBtu; and
an exchange rate (CDN$ to US$1) of 1.34.
• With respect to estimates of 2020 capital expenditures and Birchcliff’s spending plans for 2020, such estimates and plans
assume that the revised 2020 Capital Program will be carried out as currently contemplated. Birchcliff makes acquisitions
and dispositions in the ordinary course of business. Any acquisitions and dispositions completed could have an impact on
Birchcliff’s capital expenditures, production, adjusted funds flow, free funds flow, costs and total debt, which impact could be
material. The amount and allocation of capital expenditures for exploration and development activities by area and the number
93
2019 Annual Report | and types of wells to be drilled and brought on production is dependent upon results achieved and is subject to review and
modification by management on an ongoing basis throughout the year. Actual spending may vary due to a variety of factors,
including commodity prices, economic conditions, results of operations and costs of labour, services and materials.
• With respect to Birchcliff’s estimates of adjusted and free funds flow for 2020, such estimates assume that: the revised 2020
Capital Program will be carried out as currently contemplated and the level of capital spending for 2020 set forth herein will
be achieved; and the targets for production, commodity mix and natural gas market exposure and the commodity price and
exchange rate assumptions set forth herein are met.
• With respect to Birchcliff’s production guidance, such guidance assumes that: the revised 2020 Capital Program will be carried
out as currently contemplated; no unexpected outages occur in the infrastructure that Birchcliff relies on to produce its wells and
that any transportation service curtailments or unplanned outages that occur will be short in duration or otherwise insignificant;
the construction of new infrastructure meets timing and operational expectations; existing wells continue to meet production
expectations; and future wells scheduled to come on production meet timing, production and capital expenditure expectations.
Birchcliff’s production guidance may be affected by acquisition and disposition activity.
• With respect to statements of future wells to be drilled and brought on production, the key assumptions are: the continuing
validity of the geological and other technical interpretations performed by Birchcliff’s technical staff, which indicate that
commercially economic volumes can be recovered from Birchcliff’s lands as a result of drilling future wells; and that commodity
prices and general economic conditions will warrant proceeding with the drilling of such wells.
• With respect to estimates of reserves, the key assumption is the validity of the data used by Deloitte and McDaniel in their
independent reserves evaluations.
Birchcliff’s actual results, performance or achievements could differ materially from those anticipated in the forward-looking statements
as a result of both known and unknown risks and uncertainties including, but not limited to: general economic, market and business
conditions which will, among other things, impact the demand for and market prices of Birchcliff’s products and Birchcliff’s access to
capital; volatility of crude oil and natural gas prices; fluctuations in currency exchange and interest rates; stock market volatility; the
risks posed by pandemics and epidemics and their impacts on supply and demand and commodity prices; loss of market demand; an
inability to access sufficient capital from internal and external sources on terms acceptable to the Corporation; fluctuations in the costs
of borrowing; operational risks and liabilities inherent in oil and natural gas operations; the occurrence of unexpected events such as
fires, severe weather, explosions, blow-outs, equipment failures, transportation incidents and other similar events affecting Birchcliff
or other parties whose operations or assets directly or indirectly affect Birchcliff; an inability to access sufficient water or other fluids
needed for operations; uncertainty that development activities in connection with Birchcliff’s assets will be economic; an inability to
access or implement some or all of the technology necessary to efficiently and effectively operate its assets and achieve expected future
results; uncertainties associated with estimating oil and natural gas reserves and resources; the accuracy of estimates of reserves, future
net revenue and production levels; geological, technical, drilling, construction and processing problems; uncertainty of geological
and technical data; horizontal drilling and completions techniques and the failure of drilling results to meet expectations for reserves or
production; uncertainties related to Birchcliff’s future potential drilling locations; delays or changes in plans with respect to exploration
or development projects or capital expenditures, including delays in the completion of gas plants and other facilities; the accuracy
of cost estimates and variances in Birchcliff’s actual costs and economic returns from those anticipated; incorrect assessments of
the value of acquisitions and exploration and development programs; changes to the regulatory framework in the locations where
the Corporation operates, including changes to tax laws, Crown royalty rates, environmental laws, climate change laws, carbon
tax regimes, incentive programs and other regulations that affect the oil and natural gas industry and other actions by government
authorities; an inability of the Corporation to comply with existing and future environmental, climate change and other laws; the cost
of compliance with current and future environmental laws; political uncertainty and uncertainty associated with government policy
changes; dependence on facilities, gathering lines and pipelines, some of which the Corporation does not control; uncertainties and
risks associated with pipeline restrictions and outages to third-party infrastructure that could cause disruptions to production; the lack of
available pipeline capacity and an inability to secure adequate and cost effective processing and transportation for Birchcliff’s products;
an inability to satisfy obligations under Birchcliff’s firm marketing and transportation arrangements; a failure to comply with covenants
under Birchcliff’s credit facilities; shortages in equipment and skilled personnel; the absence or loss of key employees; competition for,
among other things, capital, acquisitions of reserves, undeveloped lands, equipment and skilled personnel; management of Birchcliff’s
growth; environmental and climate change risks, claims and liabilities; potential litigation; default under or breach of agreements by
counterparties and potential enforceability issues in contracts; claims by Indigenous peoples; the reassessment by taxing or regulatory
authorities of the Corporation’s prior transactions and filings; unforeseen title defects; third-party claims regarding the Corporation’s
right to use technology and equipment; uncertainties associated with the outcome of litigation or other proceedings involving Birchcliff;
uncertainties associated with credit facilities and counterparty credit risk; risks associated with Birchcliff’s risk management activities and
the risk that hedges on terms acceptable to Birchcliff may not be available; risks associated with the declaration and payment of
94
| 2019 Annual Report future dividends, including the discretion of Birchcliff’s Board of Directors to declare dividends and change the Corporation’s dividend
policy; the failure to obtain any required approvals in a timely manner or at all; the failure to complete or realize the anticipated benefits
of acquisitions and dispositions and the risk of unforeseen difficulties in integrating acquired assets into Birchcliff’s operations; negative
public perception of the oil and natural gas industry and fossil fuels, including transportation and hydraulic fracturing involving fossil
fuels; the Corporation’s reliance on hydraulic fracturing; market competition, including from alternative energy sources; changing
demand for petroleum products; the availability of insurance and the risk that certain losses may not be insured; breaches or failure of
information systems and security (including risks associated with cyber-attacks); risks associated with the ownership of the Corporation’s
securities; the accuracy of the Corporation’s accounting estimates and judgments; and potential requirements under applicable
accounting standards for the impairment or reversal of estimated recoverable amounts of the Corporation’s assets from time to time.
Readers are cautioned that the foregoing lists of factors are not exhaustive. Additional information on these and other risk factors that
could affect results of operations, financial performance or financial results are included in Birchcliff’s most recent Annual Information
Form and in other reports filed with Canadian securities regulatory authorities.
This MD&A contains information that may constitute future-orientated financial information or financial outlook information
(collectively, “FOFI”) about Birchcliff’s prospective results of operations including, without limitation, adjusted funds flow, free funds
flow and total debt, all of which are subject to the same assumptions, risk factors, limitations and qualifications as set forth above.
Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time
of preparation, may prove to be imprecise or inaccurate and, as such, undue reliance should not be placed on FOFI. Birchcliff’s actual
results, performance and achievements could differ materially from those expressed in, or implied by, FOFI. Birchcliff has included FOFI
in order to provide readers with a more complete perspective on Birchcliff’s future operations and management’s current expectations
relating to Birchcliff’s future performance. Readers are cautioned that such information may not be appropriate for other purposes.
FOFI contained herein was made as of the date of this MD&A. Unless required by applicable laws, Birchcliff does not undertake any
obligation to publicly update or revise any FOFI statements, whether as a result of new information, future events or otherwise.
Management has included the above summary of assumptions and risks related to forward-looking statements provided in this MD&A
in order to provide readers with a more complete perspective on Birchcliff’s future operations and management’s current expectations
relating to Birchcliff’s future performance. Readers are cautioned that this information may not be appropriate for other purposes.
The forward-looking statements contained in this MD&A are expressly qualified by the foregoing cautionary statements. The
forward-looking statements contained herein are made as of the date of this MD&A. Unless required by applicable laws, Birchcliff
does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
95
2019 Annual Report | M A N AG E M E N T’S R E P O R T
To the Shareholders of Birchcliff Energy Ltd.
The annual financial statements of Birchcliff Energy Ltd. for the year ended December 31, 2019 were prepared by management
within the acceptable limits of materiality and are in accordance with International Financial Reporting Standards. Management is
responsible for ensuring that the financial and operating information presented in the 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.
KPMG LLP, an independent firm of Chartered Professional 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 KPMG 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.
Respectfully,
(signed) “Bruno P. Geremia”
Bruno P. Geremia
Vice-President and Chief Financial Officer
(signed) “A. Jeffery Tonken”
A. Jeffery Tonken
President and Chief Executive Officer
Calgary, Canada
March 11, 2020
96
| 2019 Annual Report I N D E P E N D E N T AU D I TO R S’ R E P O R T
To the Shareholders of Birchcliff Energy Ltd.
Opinion
We have audited the financial statements of Birchcliff Energy Ltd. (the “Company”), which comprise:
•
•
•
•
•
the statements of financial position as at December 31, 2019 and December 31, 2018
the statements of net income (loss) and comprehensive income (loss) for the years then ended
the statements of changes in shareholders’ equity for the years then ended
the statements of cash flows for the years then ended
and notes to the financial statements, including a summary of significant accounting policies
(Hereinafter referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as
at December 31, 2019 and December 31, 2018, and its financial performance and its cash flows for the years then ended in accordance
with International Financial Reporting Standards (“IFRS”).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards
are further described in the “Auditors’ Responsibilities for the Audit of the Financial Statements” section of our auditors’ report.
We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial
statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Other Information
Management is responsible for the other information. Other information comprises:
•
•
the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions.
the information, other than the financial statements and the auditors’ report thereon, included in a document entitled
“2019 Annual Report”.
Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance
conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing
so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the
audit and remain alert for indications that the other information appears to be materially misstated.
We obtained the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities
Commissions and the information, other than the financial statements and the auditors’ report thereon, included in a document
entitled “2019 Annual Report” as at the date of this auditors’ report. If, based on the work we have performed on this other information,
we conclude that there is a material misstatement of this other information, we are required to report that fact in the auditors’ report.
We have nothing to report in this regard.
The information, other than the financial statements and the auditors’ report thereon, included in a document likely to be entitled
“2019 Annual Report” is expected to be made available to us after the date of this auditors’ report. If, based on the work we will perform
on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact
to those charged with governance.
Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such
internal control as management determines is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
97
2019 Annual Report | In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern,
disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either
intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian
generally accepted auditing standards will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of the financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and
maintain professional skepticism throughout the audit.
We also:
•
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and
perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide
a basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may
involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.
•
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures
made by management.
• Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit
evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the
Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw
attention in our auditors’ report to the related disclosures in the financial statements or, if such disclosures are inadequate, to
modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However,
future events or conditions may cause the Company to cease to continue as a going concern.
•
Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the
financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
• Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit
and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
•
Provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding
independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this auditors’ report is Timothy Arthur Richards.
(signed) “KPMG LLP”
Chartered Professional Accountants
Calgary, Canada
March 11, 2020
98
| 2019 Annual Report B I R C H C L I F F E N E R GY LT D.
S TAT E M E N T S O F F I N A N C I A L P O S I T I O N
(Expressed in thousands of Canadian dollars)
As at December 31,
ASSETS
Current assets:
Cash
Accounts receivable
Prepaid expenses and deposits
Financial instruments (Note 18)
Non-current assets:
Deposit on acquisition
Investment in securities (Note 6)
Financial instruments (Note 18)
Petroleum and natural gas properties and equipment (Note 5)
Total assets
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities
Financial instruments (Note 18)
Capital securities (Note 10)
Non-current liabilities:
Revolving term credit facilities (Note 7)
Decommissioning obligations (Note 8)
Deferred income taxes (Note 9)
Capital securities (Note 10)
Other liabilities (Note 14)
Financial instruments (Note 18)
Total liabilities
SHAREHOLDERS’ EQUITY
Share capital (Note 10)
Common shares
Preferred shares (perpetual)
Contributed surplus
Retained earnings
Total shareholders’ equity and liabilities
Commitments (Note 19)
The accompanying notes are an integral part of these financial statements.
Approved by the Board
(signed) “Dennis A. Dawson”
Dennis A. Dawson
Lead Independent Director
(signed) “A. Jeffery Tonken”
A. Jeffery Tonken
Director
2019
2018
70
64,747
4,385
-
69,202
-
4,405
-
2,743,078
2,747,483
2,816,685
92,607
26,949
49,845
169,401
609,177
128,128
81,672
-
27,046
105,640
951,663
1,121,064
53
51,941
3,386
36,798
92,178
3,900
10,005
23,377
2,633,460
2,670,742
2,762,920
76,567
-
-
76,567
605,267
129,264
119,553
49,535
7,844
-
911,463
988,030
1,478,356
1,478,260
41,434
84,884
90,947
1,695,621
2,816,685
41,434
76,747
178,449
1,774,890
2,762,920
99
2019 Annual Report |
B I R C H C L I F F E N E R GY LT D.
S TAT E M E N T S O F N E T I N C O M E (LO S S) A N D
C O M P R E H E N S I V E I N C O M E (LO S S)
(Expressed in thousands of Canadian dollars, except per share information)
Years Ended December 31,
REVENUE
Petroleum and natural gas revenue (Note 11)
Marketing revenue (Note 11)
Royalties
Realized gain (loss) on financial instruments (Note 18)
Unrealized gain (loss) on financial instruments (Note 18)
Other income (Note 6)
EXPENSES
Operating (Note 12)
Transportation
Marketing purchases (Note 11)
Administrative, net (Note 13)
Depletion and depreciation (Note 5)
Finance (Note 15)
Dividends on capital securities (Note 10)
Other losses (Notes 5 & 6)
Net income (loss) before taxes
Income tax recovery (expense) (Note 9)
NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
Net income (loss) per common share (Note 10)
Basic
Diluted
The accompanying notes are an integral part of these financial statements.
2019
2018
613,559
20,131
(27,452)
13,673
(192,765)
650
427,796
87,903
127,763
18,503
31,093
213,565
30,118
3,500
5,549
517,994
(90,198)
34,806
(55,392)
$(0.22)
$(0.22)
621,421
-
(38,306)
(15,771)
64,222
800
632,366
99,104
103,547
-
32,299
208,868
32,711
3,500
10,192
490,221
142,145
(39,933)
102,212
$0.37
$0.37
100
| 2019 Annual Report B I R C H C L I F F E N E R GY LT D.
S TAT E M E N T S O F C H A N G E S
I N S H A R E H O L D E R S’ E Q U I T Y
(Expressed in thousands of Canadian dollars)
Share Capital
Common
Shares
Preferred
Shares
Contributed
Surplus
Retained
Earnings
As at December 31, 2017
1,477,750
41,434
69,959
Dividends on common shares (Note 10)
Dividends on perpetual preferred shares (Note 10)
Exercise of stock options (Note 16)
Stock-based compensation (Note 16)
Net income
As at December 31, 2018
Dividends on common shares (Note 10)
Dividends on perpetual preferred shares (Note 10)
Exercise of stock options (Note 16)
Stock-based compensation (Note 16)
Net loss
-
-
510
-
-
-
-
-
-
-
-
-
(126)
6,914
-
1,478,260
41,434
76,747
-
-
96
-
-
-
-
-
-
-
-
-
(23)
8,160
Total
1,696,153
(26,586)
(4,187)
384
6,914
102,212
1,774,890
(27,923)
(4,187)
73
8,160
107,010
(26,586)
(4,187)
-
-
102,212
178,449
(27,923)
(4,187)
-
-
-
(55,392)
(55,392)
As at December 31, 2019
1,478,356
41,434
84,884
90,947
1,695,621
The accompanying notes are an integral part of these financial statements.
101
2019 Annual Report |
B I R C H C L I F F E N E R GY LT D.
S TAT E M E N T S O F C A S H F LOW S
(Expressed in thousands of Canadian dollars)
Years ended December 31,
Cash provided by (used in):
OPERATING
Net income (loss)
Adjustments for items not affecting operating cash:
Unrealized (gain) loss on financial instruments (Note 18)
Depletion and depreciation (Note 5)
Other compensation (Note 13)
Finance (Note 15)
Other losses (Notes 5 & 6)
Income tax (recovery) expense
Interest paid (Note 15)
Dividends on capital securities (Note 10)
Decommissioning expenditures (Note 8)
Changes in non-cash working capital (Note 20)
FINANCING
Exercise of stock options (Note 16)
Lease payments (Note 14)
Financing fees paid on credit facilities
Dividends on common shares (Note 10)
Dividends on perpetual preferred shares (Note 10)
Dividends on capital securities (Note 10)
Net change in revolving term credit facilities (Note 7)
INVESTING
Exploration and development of petroleum and natural assets (Note 5)
Acquisition of petroleum and natural gas assets (Note 5)
Sale of petroleum and natural gas assets (Note 5)
Deposit on acquisition
Changes in non-cash working capital (Note 20)
Net change in cash
Cash, beginning of year
CASH, END OF YEAR
The accompanying notes are an integral part of these financial statements
102
2019
2018
(55,392)
102,212
192,765
213,565
4,278
30,118
5,549
(34,806)
(25,073)
3,500
(2,285)
(5,153)
327,066
73
(2,172)
(990)
(27,923)
(4,187)
(3,500)
3,683
(35,016)
(258,839)
(37,507)
-
-
4,313
(64,222)
208,868
7,697
32,711
10,192
39,933
(27,969)
3,500
(1,079)
12,591
324,434
384
-
(950)
(26,586)
(4,187)
(3,500)
17,868
(16,971)
(301,763)
(1,524)
5,269
(3,900)
(5,540)
(292,033)
(307,458)
17
53
70
5
48
53
| 2019 Annual Report B I R C H C L I F F E N E R GY LT D.
N OT E S TO T H E F I N A N C I A L S TAT E M E N T S
F O R T H E Y E A R S E N D E D D E C E M B E R 31, 2 019 A N D 2 018
(Expressed In thousands Of Canadian Dollars, Unless Otherwise Stated)
1. NATURE OF OPERATIONS
Birchcliff Energy Ltd. (“Birchcliff” or the “Corporation”) is domiciled and incorporated in Alberta, Canada. Birchcliff is
engaged in the exploration for and the development, production and acquisition of petroleum and natural gas reserves in
Western Canada. The Corporation’s financial year end is December 31. The address of the Corporation’s registered office is
Suite 1000, 600 – 3rd Avenue S.W., Calgary, Alberta, Canada T2P 0G5. Birchcliff’s common shares, Series A Preferred Shares
and Series C Preferred Shares are listed for trading on the Toronto Stock Exchange under the symbols “BIR”, “BIR.PR.A” and
“BIR.PR.C”, respectively.
These financial statements were approved and authorized for issuance by the Board of Directors on March 11, 2020.
2. BASIS OF PREPARATION
These financial statements present Birchcliff’s financial results of operations and financial position under International Financial
Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) as at and for the years ended
December 31, 2019 and December 31, 2018. The financial statements have been prepared in accordance with IFRS accounting
policies and methods of computation as set forth in Note 3.
Operating and transportation and other expenses in profit or loss are presented as a combination of function and nature
in conformity with industry practices. Depletion and depreciation, finance, dividends on capital securities and other losses
in profit or loss are presented in a separate line by their nature, while net administrative expense are presented on a functional
basis. Significant expenses such as salaries and benefits and other compensation are presented by their nature in the notes
to the financial statements.
Birchcliff’s financial statements are prepared on a historical cost basis, except for certain financial and non-financial assets and
liabilities which have been measured at fair value. The Corporation’s financial statements include the accounts of Birchcliff only
and are expressed in Canadian dollars, unless otherwise stated. Birchcliff does not have any subsidiaries.
3. SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue Recognition
Revenue from the sale of crude oil, natural gas and natural gas liquids (“NGLs”) is measured based on the consideration specified
in contracts with marketers and other third parties. Birchcliff recognizes revenue when it transfers control of the product to the
contract customer. In making this evaluation, management considers if Birchcliff has the ability to direct the use of, and obtain
substantially all of the remaining benefits from the delivery of the product.
Birchcliff evaluates its arrangements with marketers and other third parties to determine if the Corporation acts as the principal or
as an agent. In making this evaluation, the Corporation considers if it obtains control of the product delivered or services provided,
which is indicated by the Corporation having the primary responsibility for the delivery of the product or rendering of the service,
having the ability to establish prices or having inventory risk. If the Corporation acts in the capacity of an agent rather than as a
principal in a transaction, then the revenue is recognized on a net-basis, only reflecting the fee, if any, realized by the Corporation
from the transaction.
(b) Cash and Cash Equivalents
Cash may consist of cash on hand, deposits and term investments held with a financial institution, with an original maturity
of three months or less. Restricted cash is not considered part of cash and cash equivalents.
103
2019 Annual Report | (c) Jointly Owned Assets
Certain activities of the Corporation are conducted jointly with others where the participants have a direct ownership interest in
the related assets. Accordingly, the accounts of Birchcliff reflect only its working interest share of revenues, expenses and capital
expenditures related to these jointly owned assets. The relationship with jointly owned asset partners have been referred to as joint
venture in the remainder of the financial statements as this is common terminology in the Canadian oil and natural gas industry.
(d) Exploration and Evaluation Assets
Costs incurred prior to obtaining the right to explore a mineral resource are recognized as an expense in the period incurred.
Intangible exploration and evaluation expenditures are initially capitalized and may include mineral license acquisitions, geological
and geophysical evaluations, technical studies, exploration drilling and testing and other directly attributable administrative costs.
Tangible assets acquired which are consumed in developing an intangible exploration asset are recorded as part of the cost of
the exploration asset. These costs are accumulated in cost centres by exploration area pending the determination of technical
feasibility and commercial viability.
The technical feasibility and commercial viability of extracting a mineral resource in an exploration area is considered to be
determinable when economic quantities of proved reserves are determined to exist. A review of each exploration project by area
is carried out at each reporting date to ascertain whether such reserves have been discovered. Upon determination of commercial
proved reserves, associated exploration costs are transferred from exploration and evaluation to developed and producing
petroleum and natural gas asset category. Exploration and evaluation assets are reviewed for impairment prior to any such
transfer. Assets classified as exploration and evaluation are not subject to depletion and depreciation until they are reclassified
to developed and producing petroleum and natural gas assets.
(e) Petroleum and Natural Gas Properties and Equipment
(i) Recognition and measurement
Developed and producing petroleum and natural gas assets are measured at cost less accumulated depletion and
depreciation and accumulated impairment losses, if any. Such assets consists of the purchase price and costs directly
attributable to bringing the asset to the location and condition necessary for its intended use. Developed and producing
petroleum and natural gas asset interests include mineral lease acquisitions, geological and geophysical costs, facility and
production equipment and associated turnarounds, other directly attributable administrative costs and the initial estimate
of the costs of dismantling and removing an asset and restoring the site on which it was located.
(ii) Subsequent costs
Costs incurred subsequent to the determination of technical feasibility and commercial viability are recognized as
developed and producing petroleum and natural gas interests when they increase the future economic benefits
embodied in the specific asset to which they relate. Such capitalized developed and producing petroleum and natural gas
interests generally represent costs incurred in developed proved and/or probable reserves and bringing in or enhancing
production from such reserves, and are accumulated on an area basis. The cost of day-to-day servicing of an item of
petroleum and natural gas properties and equipment is expensed in profit or loss as incurred.
Petroleum and natural gas properties and equipment are de-recognized upon disposal or when no future economic benefits
are expected to arise from the continued use of the asset. Any gain or loss arising from the disposal of an asset, determined as
the difference between the net disposal proceeds and the carrying amount of the asset, is recognized in profit or loss.
(iii) Asset exchanges
For exchanges or parts of exchanges that involve only exploration and evaluation assets, the exchange is accounted for at
carrying value. Exchanges of development and production assets are measured at fair value, unless the exchange transaction
lacks commercial substance or the fair value of the assets given up or the assets received cannot be reliably estimated.
The cost of the acquired asset is measured at the fair value of the asset given up, unless the fair value of the asset received
is more reliable. Where fair value is not used, the cost of the acquired asset is measured at the carrying amount of the asset
given up. Any gain or loss on the de-recognition of the asset given up is recognized in profit and loss.
(iv) Depletion and depreciation
The net carrying value of developed and producing petroleum and natural gas assets, net of estimated residual value,
is depleted on an area basis using the unit of production method. This depletion calculation includes actual production
in the period and total estimated proved plus probable reserves attributable to the assets being depreciated, taking into
account total capitalized costs plus estimated future development costs necessary to bring those reserves into production.
104
| 2019 Annual Report Relative volumes of reserves and production (before royalties) are converted at the energy equivalent conversion ratio of
six thousand cubic feet of natural gas to one barrel of oil. These estimates are reviewed by the Corporation’s independent
reserves evaluator at least annually.
Capitalized plant turnaround costs are depreciated on a straight-line basis over the estimated time until the next turnaround
is completed. Corporate assets, which include office furniture and equipment, software, computer equipment and leasehold
improvements, are depreciated on a straight-line basis over the estimated useful lives of the assets, which are estimated
to be four years.
When significant parts of property and equipment, including petroleum and natural gas interests, have different useful lives,
they are accounted for as separate items (major components). Depreciation methods, useful lives and residual values for
petroleum and natural gas properties and equipment are reviewed at each reporting date.
(f) Provisions
Provisions are recognized when the Corporation has a present obligation (legal or constructive), as a result of a past event,
if it is probable that the Corporation will be required to settle the obligation and a reliable estimate can be made of the amount
of the obligation.
The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at
the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision
is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those
cash flows (where the effect of the time value of money is significant).
When some or all of the economic benefits required to settle a provision are expected to be recovered from a third-party,
a receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable
can be measured reliably.
Provisions are not recognized for future operating losses.
(g) Decommissioning Obligations
The Corporation’s activities give rise to dismantling, restoration and site disturbance remediation activities. Costs related to
abandonment activities are estimated by management in consultation with the Corporation’s independent reserves evaluators
based on risk-adjusted current costs which take into consideration current technology in accordance with existing legislation
and industry practices.
Decommissioning obligations are measured at the present value of the best estimate of expenditures required to settle the
future obligations at the reporting date. When the best estimate of the liability is initially measured, the estimated risk-adjusted
cost, discounted using a pre-tax risk-free discount rate, is capitalized by increasing the carrying amount of the related petroleum
and natural gas properties and equipment. The increase in the provision due to the passage of time, which is referred to as
accretion, is recognized as a finance expense. Actual costs incurred upon settlement of the liability are charged against the
obligation to the extent that the obligation was previously established. The carrying amount capitalized in petroleum and
natural gas properties and equipment is depleted in accordance with the Corporation’s depletion and depreciation policy.
The Corporation reviews the obligation at each reporting date and revisions to the estimated timing of cash flows, discount
rates and estimated costs result in an increase or decrease to the obligations and the related petroleum and natural gas
properties and equipment. Any difference between the actual costs incurred upon settlement of the obligation and the
recorded liability is recognized as a gain or loss in profit or loss.
(h) Share-Based Payments
Equity-settled share-based awards granted by the Corporation include stock options and performance warrants granted to officers
and employees. The fair value determined at the grant date of an award is expensed on a graded basis over the vesting period of
each respective tranche of an award with a corresponding increase to contributed surplus. In calculating the expense of share-based
awards, the Corporation revises its estimate of the number of equity instruments expected to vest by applying an estimated
forfeiture rate for each vesting tranche and subsequently revising this estimate throughout the vesting period, as necessary, with
a final adjustment to reflect the actual number of awards that vest. Upon the exercise of share-based awards, consideration paid
together with the amount previously recognized in contributed surplus is recorded as an increase to share capital. In the event
that vested share-based awards expire without being exercised, previously recognized compensation costs associated with such
awards are not reversed. The expense related to share-based awards is included within administrative expenses in profit or loss.
105
2019 Annual Report | The fair value of equity-settled share-based awards is measured using the Black-Scholes option-pricing model taking into account
the terms and conditions upon which the awards were granted. Measurement inputs as at the grant date include: share price,
exercise price, expected volatility (based on weighted average historical traded daily volatility), weighted average expected life
of the instruments (based on historical experience and general option holder behaviour), expected dividends and the risk-free
interest rate (based on government bonds) applicable to the term of the award.
A portion of share-based compensation expense directly attributable to the exploration and development of the Corporation’s
assets are capitalized.
(i) Finance Income and Expenses
Finance expenses include interest expense on borrowings, accretion of the discount on decommissioning, capital lease and
post-employment benefit obligations, amortization of deferred charges and impairment losses (if any) recognized on financial assets.
Interest and dividend income is recognized as it is earned and is presented as “other income” in profit and loss.
(j) Borrowing Costs
Borrowing costs incurred for the acquisition, construction or production of qualifying assets are capitalized during the period of
time that is required to complete and prepare the asset for its intended use or sale. Assets are considered to be qualifying assets
when this period of time is substantial. The capitalization rate, used to determine the amount of borrowing costs to be capitalized,
is the weighted average interest rate applicable to the Corporation’s outstanding borrowings during the period. All other borrowing
costs are charged to profit or loss using the effective interest method.
(k) Financial Instruments
(i) Non-derivative financial instruments
Non-derivative financial instruments are comprised of cash, accounts receivable, deposits, investment in securities,
accounts payable and accrued liabilities, revolving term credit facilities and capital securities. Non-derivative financial
instruments are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial
recognition, non-derivative financial instruments are measured based on their classification. The Corporation has made
the following classifications:
• Cash, accounts receivable, and deposits are classified as loans and receivables and are measured at amortized cost
using the effective interest method. Typically, the fair value of these balances approximates their carrying value due to
their short-term to maturity.
•
Investment in securities have been categorized as fair value through profit and loss which requires the securities to
be fair valued at the end of each reporting period with any gains or losses recognized in profit and loss. Distributions
declared are recorded to profit or loss and presented as an operating activity on the statement of cash flow.
• Accounts payable and accrued liabilities and revolving term credit facilities are classified as other financial liabilities
and are measured at amortized cost using the effective interest method. Due to the short-term nature of accounts
payable and accrued liabilities, their carrying values approximate their fair values. The Corporation’s revolving term
credit facilities bear interest at a floating rate and accordingly the fair market value approximates the carrying value
before the carrying value is reduced for any remaining unamortized costs. Any interest costs and financing fees
associated with the Corporation’s credit facilities have been deferred and netted against the amounts drawn, and
are being amortized to profit or loss using the effective interest method over the applicable term.
•
The proceeds from the issuance of Series C Preferred Shares, which are presented as “capital securities” on the
statement of financial position, are classified as “other financial liabilities” under IFRS. The incremental costs directly
attributable to the issuance of Series C Preferred Shares are initially recognized as a reduction to capital securities and
subsequently amortized to profit and loss, using the effective interest rate method, as a finance expense. Dividend
distributions on capital securities are recorded as an expense directly to profit and loss and presented as a financing
activity on the statements of cash flows.
(ii) Derivative financial instruments
Derivatives may be used by the Corporation to manage economic exposure to market risk relating to commodity prices,
interest rates and foreign exchange. Birchcliff’s policy is not to utilize derivative financial instruments for speculative
purposes. The Corporation does not designate its financial derivative contracts as hedges, and as such does not apply
hedge accounting. As a result, financial derivatives are classified at fair value through profit or loss and are recorded on
the statements of financial position at fair value.
106
| 2019 Annual Report The fair value of commodity price risk management contracts is determined by discounting the difference between the
contracted prices/rates and published forward price/rate curves as at the statement of financial position date. The fair value
of options and costless collars, if any, is based on option models that use published information with respect to volatility,
prices and interest rates.
The Corporation accounts for any forward physical delivery sales contracts, which were entered into and continue to be
held for the purpose of receipt or delivery of non-financial items, in accordance with its expected purchase, sale or usage
requirements as executory contracts. As such, these contracts are not considered to be derivative financial instruments
and have not been recorded at fair value on the statements of financial position. Settlements on physical commodity sales
contracts are recognized in petroleum and natural gas revenue in profit and loss.
(iii) Share capital
Common shares and perpetual preferred shares are classified as equity. Incremental costs directly attributable to the
issuance of shares are recognized as a reduction in share capital, net of any tax effects.
(l)
Impairment
Impairment of financial assets
(i)
Impairment of financial assets is determined by measuring the assets' expected credit loss ("ECL"). Birchcliff’s financial
assets are not considered to have a significant financing component and a lifetime ECL is measured at the date of initial
recognition of the financial asset. ECL allowances have not been recognized for cash and cash equivalents due to the virtual
certainty associated with their collection. The ECL pertaining to accounts receivable is assessed at initial recognition and
this provision is re-assessed at each reporting date. ECLs are a probability-weighted estimate of all possible default events
related to the financial asset (over the lifetime or within 12 months after the reporting period, as applicable) and are measured
as the difference between the present value of the cash flows due to Birchcliff and the cash flows the Corporation expects
to receive, including cash flows expected from collateral and other credit enhancements that are a part of contractual
terms. In making an assessment as to whether financial assets are credit-impaired, the Corporation considers historically
realized bad debts, evidence of a debtor’s present financial condition and whether a debtor has breached certain contracts,
the probability that a debtor will enter bankruptcy or other financial reorganization, changes in economic conditions that
correlate to increased levels of default, the number of days a debtor is past due in making a contractual payment, and the term
to maturity of the specified receivable. The carrying amounts of financial assets are reduced by the amount of the ECL through
an allowance account and losses are recognized within general and administrative expense in profit and loss.
Based on contractual terms and conditions, the Corporation considers its financial assets to be in default when the
counterparty fails to make contractual payments as required. Once the Corporation has pursued collection activities and it
has been determined that the incremental cost of pursuing collection outweighs the benefits, Birchcliff derecognizes the
gross carrying amount of the financial asset and the associated allowance from the statement of financial position.
Impairment of non-financial assets
(ii)
The Corporation’s petroleum and natural gas properties and equipment are grouped into Cash Generating Units (“CGUs”)
for the purpose of assessing impairment. A CGU represents the smallest group of assets that generates cash inflows from
continuing use that are largely independent of the cash inflows of other assets or groups of assets.
CGUs are reviewed at each reporting date for indicators of potential impairment. Such indicators may include, but are not
limited to, changes in the Corporation’s business plan, deterioration in commodity prices or a significant downward revision
of estimated recoverable reserves. If indicators of asset impairment exist, an impairment test is performed by comparing a
CGU’s carrying value to its recoverable amount. A CGU’s recoverable amount is the greater of its fair value less cost to sell
and its current value in use. The calculation of the recoverable amount is sensitive to the assumptions regarding production
volumes, discount rates and commodity prices. Any excess of carrying value over recoverable amount is recognized as
impairment loss in profit or loss.
In assessing the value in use, the estimated future cash flows from proved and probable reserves are discounted to their
present value using a pre-tax discount rate that reflects current market assessment of the time value of money. Fair value
is determined as the amount that would be obtained from the sale of the asset in an arm’s length transaction between
knowledgeable and willing parties. The petroleum and natural gas future prices used in the impairment test are based on
period-end commodity price forecasts estimated by the Corporation’s independent reserves evaluator and are adjusted
for petroleum and natural gas differentials and transportation and other costs specific to the Corporation.
107
2019 Annual Report | Where circumstances change such that an impairment no longer exists or is less than the amount previously recognized,
the carrying amount of the CGU is increased to the revised estimate of its recoverable amount as long as the revised
estimate does not exceed the carrying amount that would have been determined, net of depletion and depreciation,
had no impairment loss been recognized for the CGU in prior periods. A reversal of an impairment loss is recognized
immediately through profit or loss.
Exploration and evaluation assets are assessed for impairment if: (i) sufficient data exists to determine technical feasibility
and commercial viability of an exploration area, or (ii) facts and circumstances suggest that the carrying amount exceeds
the recoverable amount. For purposes of impairment testing, exploration and evaluation assets are allocated to the
respective CGUs.
(m) Income Taxes
Birchcliff is a corporation as defined under the Income Tax Act (Canada) and is subject to Canadian Federal and provincial taxes.
Birchcliff is subject to provincial taxes in Alberta as the Corporation operates in this jurisdiction. The Corporation’s income tax
expenses include current and/or deferred tax. Income tax expense is recognized through profit or loss except to the extent that
it relates to items recognized directly in equity, in which case the related income taxes are also recognized in equity.
Current tax is the expected tax payable on taxable income and Part VI.I dividend tax payable on taxable preferred shares for
the period, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect
of previous years.
Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the financial statements
and the corresponding tax bases used in the computation of taxable income. Deferred tax liabilities are generally recognized for all
taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences to the extent
that it is probable that taxable income will be available against which those deductible temporary differences can be utilized.
The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is
no longer probable that sufficient taxable income will be available to allow all or part of the asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is
expected to be settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by
the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would
follow from the manner in which Birchcliff expects, at the end of the reporting period, to recover or settle the carrying amount of
its assets and liabilities.
(n) Per Common Share
The Corporation calculates per common share amounts using net income available to Birchcliff’s shareholders, reduced for
perpetual preferred share dividends and divided by the weighted average number of common shares outstanding. Basic per
share information is computed using the weighted average number of basic common shares outstanding during the period.
Diluted per share information is calculated using the treasury stock method, which assumes that any proceeds from the exercise
of “in-the-money” stock options and 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 earnings per
share is made if the result of these calculations is anti-dilutive. The average market value of the Corporation’s shares for the purpose
of calculating the dilutive effect is based on average quoted market prices for the time that the stock options and performance
warrants were outstanding during the period.
(o) Business Combinations
The purchase method of accounting is used to account for acquisitions of businesses and assets that meet the definition of
a business under IFRS. The cost of an acquisition is measured as the fair value of the assets given and liabilities incurred or
assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business
combination are measured initially at their fair values at the acquisition date. If the consideration given up is less than the fair
value of the net assets received, the difference is recognized immediately in the income statement. If the consideration is greater
than the fair value of the net assets received, the difference is recognized as goodwill on the statement of financial position.
Acquisition costs incurred are expensed.
108
| 2019 Annual Report (p) Post-Employment Benefit Obligation
Birchcliff’s post-employment benefits are defined benefit obligations under IFRS. The cost of the post-employment benefit
obligation is determined using the projected unit credit method. The obligation is determined by discounting the estimated future
cash outflows using interest rates of high-quality corporate bonds that have terms to maturity approximating the terms of the related
liability. Post-employment benefit obligation is presented on the statements of financial position as other liabilities. Past service
cost is the change in the present value of the obligation and can arise from the introduction, amendment or curtailment of a plan.
Current service cost is the increase in the present value of the obligation resulting from the service provided by an employee in
the current period. Current and past service costs are recognized as post-employment benefit expenses of the Corporation when
incurred and presented in profit and loss as an administrative expense. The unwinding of the present value of the post-employment
benefit obligation is recorded as accretion (interest) expense and is presented in profit and loss as a finance expense.
Remeasurements of the post-employment benefit obligation will result in gains and losses and will be included in other
comprehensive income. Remeasurements result from increases or decreases in the present value of the obligation as a result
of changes in assumptions including unexpectedly high or low rates of employee turnover, early retirement, change in expected
future salaries and benefits and revision to the discount rate. Settlements will be recorded as a reduction to the obligation in the
period incurred. Any difference between the actual costs incurred upon settlement of the obligation and the recorded liability
is recognized as a gain or loss in profit or loss.
(q) Lease Obligation
When Birchcliff is a party to a lease arrangement as the lessee, a lease liability, herein referred to as a “lease obligation”, and
corresponding right-of-use asset, herein referred to as a “lease asset”, for each identified lease is recognized under IFRS. The lease
obligation is determined by discounting the remaining lease term payments using the interest rate implicit in the lease, if available,
or the Corporation’s incremental borrowing rate. The lease obligation is reduced by actual cash lease payments made during the
period. Lease obligations are presented as other liabilities on the statements of financial position. The lease assets are included in
petroleum and natural gas properties and equipment on the statements of financial position. Lease assets are depreciated over the
remaining term of the lease and included in depletion and depreciation expense in profit and loss. The unwinding of the present
value of the lease obligation is recorded as accretion (interest) and included in finance expense in profit and loss. Cash lease
payments are classified as a financing activity and accretion expense classified as an operating activity in the statements of cash flows.
Remeasurements of the lease obligation will result in gains and losses and will be included in other comprehensive income.
Remeasurements result from increases or decreases in the present value of the obligation as a result of changes in assumptions
including lease term, payment or discount rate.
(r) Critical Accounting Judgments and Key Sources of Estimation Uncertainty
The timely preparation of the financial statements requires management to make judgments, estimates and assumptions that affect
the application of accounting policies and reported amounts of assets and liabilities and income and expenses. Accordingly, actual
results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to
accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
Critical judgments in applying accounting policies:
The following are the critical judgments that management has made in the process of applying the Corporation’s accounting
policies and that have the most significant effect on the amounts recognized in these financial statements:
Identification of cash-generating units
(i)
Birchcliff’s assets are required to be aggregated into CGUs for the purpose of calculating impairment based on their ability
to generate largely independent cash inflows. CGUs have been determined based on similar geological structure, shared
infrastructure, geographical proximity, operating structure, commodity type and similar exposures to market risks. By their
nature, these assumptions are subject to management’s judgment and may impact the carrying value of the Corporation’s
assets in future periods.
Identification of impairment indicators
(ii)
IFRS requires Birchcliff to assess, at each reporting date, whether there are any indicators that its petroleum and natural gas
assets may be impaired. Birchcliff is required to consider information from both external sources (such as negative downturn
in commodity prices, significant adverse changes in the technological, market, economic or legal environment in which
the entity operates) and internal sources (such as downward revisions in reserves, significant adverse effect on the financial
and operational performance of a CGU, evidence of obsolescence or physical damage to the asset). By their nature, these
assumptions are subject to management’s judgment.
109
2019 Annual Report | (iii) Tax uncertainties
IFRS requires Birchcliff, at each reporting date, to make certain judgments on uncertain tax positions by relevant tax
authorities. Judgments include determining whether the Corporation will “more likely than not” be successful in defending
its tax positions by considering information from relevant tax interpretations and tax laws in Canada. As such, this recognition
threshold is subject to management’s judgment and may impact the carrying value of the Corporation’s deferred tax assets
and liabilities at the end of the reporting period.
(iv) Lease obligation
IFRS requires Birchcliff to make certain judgments in reviewing each of its contractual arrangements to determine whether
the arrangement contains a lease. Leases that are recognized are subject to further management judgment and estimation in
various areas specific to the arrangement. In determining the lease term to be recognized, management considers all facts
and circumstances that create an economic incentive to exercise an extension option, or not to exercise a termination option.
Key sources of estimation uncertainty:
The following are the key assumptions concerning the sources of estimation uncertainty at the end of the reporting period, that have a
significant risk of causing adjustments to the carrying amounts of assets and liabilities within the next financial year:
(i) Reserves
Reported recoverable quantities of proved and probable reserves requires estimation regarding production profile,
commodity prices, exchange rates, remediation costs, timing and amount of future development costs, and production,
transportation and other costs for future cash flows. It also requires interpretation of geological and geophysical models
in order to make an assessment of the size, shape, depth and quality of reservoirs, and their anticipated recoveries.
The economical, geological and technical factors used to estimate reserves may change from period to period. Changes in
reported reserves can impact the carrying values of the Corporation’s petroleum and natural gas properties and equipment,
the calculation of depletion and depreciation, the provision for decommissioning obligations, and the recognition of deferred
tax assets due to changes in expected future cash flows. The recoverable quantities of reserves and estimated cash flows from
Birchcliff’s petroleum and natural gas interests are independently evaluated by reserve engineers at least annually.
The Corporation’s petroleum and natural gas reserves represent the estimated quantities of petroleum, natural gas and
NGLs which geological, geophysical and engineering data demonstrate with a specified degree of certainty to be
economically recoverable in future years from known reservoirs and which are considered commercially producible. Such
reserves may be considered commercially producible if management has the intention of developing and producing them
and such intention is based upon (i) a reasonable assessment of the future economics of such production; (ii) a reasonable
expectation that there is a market for all or substantially all the expected petroleum and natural gas production; and (iii)
evidence that the necessary production, transmission and transportation facilities are available or can be made available.
Reserves may only be considered proved and probable if producibility is supported by either production or conclusive
formation tests. Birchcliff’s oil and gas reserves are determined in accordance with the standards contained in National
Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities and the Canadian Oil and Gas Evaluation Handbook.
(ii) Share-based payments
All equity-settled, share-based awards issued by the Corporation are fair valued using the Black-Scholes option-pricing
model. In assessing the fair value of equity-based compensation, estimates have to be made regarding the expected volatility
in share price, option life, dividend yield, risk-free rate and estimated forfeitures at the initial grant date.
(iii) Decommissioning obligations
The Corporation estimates future remediation costs of production facilities, wells and pipelines at different stages of
development and construction of assets or facilities. In most instances, removal of assets occurs many years into the future.
This requires an estimate regarding abandonment date, future environmental and regulatory legislation, the extent of
reclamation activities, the engineering methodology for estimating cost, future removal technologies in determining the
removal cost and liability-specific discount rates to determine the present value of these risk-free cash flows.
(iv) Post-employment benefit obligation
The Corporation estimates the post-employment benefit obligation at the end of each reporting period. In most instances,
the obligation occurs many years into the future. The Corporation uses estimates related to the initial measurement of the
obligation for eligible employees including expected age of employee retirement, employee turnover, probability of early
retirement, discount rate and inflation rate on salary and benefits. From time to time, these estimates may change causing
the obligation recorded by the Corporation to change.
110
| 2019 Annual Report (v) Lease obligation
Lease obligations are estimated using the rate implicit in the lease, unless this rate is not readily determinable, in which case a
discount rate equal to the Corporation’s incremental borrowing rate is used. This rate represents the rate that the Corporation
would incur to obtain the funds necessary to purchase an asset of a similar value, with similar payment terms and security in a
similar economic environment.
(vi) Impairment of non-financial assets
For the purposes of determining the extent of any impairment or its reversal, estimates must be made regarding future cash
flows taking into account key assumptions including future petroleum and natural gas prices, expected forecasted production
volumes and anticipated recoverable quantities of proved and probable reserves. These assumptions are subject to change
as new information becomes available. Changes in economic conditions can also affect the rate used to discount future cash
flow estimates. Changes in the aforementioned assumptions could affect the carrying amount of the Corporation’s assets,
and impairment charges and reversal will affect profit or loss.
(vii) Income taxes
Birchcliff files corporate income tax, goods and services tax and other tax returns with various provincial and federal taxation
authorities in Canada. There can be differing interpretations of applicable tax laws and regulations. The resolution of these tax
positions through negotiations or litigation with tax authorities can take several years to complete. The Corporation does not
anticipate that there will be any material impact upon the results of its operations, financial position or liquidity.
Tax provisions are based on enacted or substantively enacted laws. Changes in those laws could affect amounts recognized
in profit or loss both in the period of change, which would include any impact on cumulative provisions, and in future periods.
Deferred tax assets (if any) are recognized only to the extent it is considered probable that those assets will be recoverable.
This involves an assessment of when those deferred tax assets are likely to reverse and a judgment as to whether or not there
will be sufficient taxable profits available to offset the tax assets when they do reverse. This requires assumptions regarding
future profitability and is therefore inherently uncertain. Estimates of future taxable income are based on forecasted cash
flows from operations. To the extent that any interpretation of tax law is challenged by the tax authorities or future cash flows
and taxable income differ significantly from estimates, the ability of Birchcliff to realize the deferred tax assets recorded at the
statement of financial position date could be impacted.
4. CHANGES IN ACCOUNTING POLICIES
Accounting Pronouncements Adopted
On January 1, 2019, Birchcliff adopted IFRS 16: Leases (“IFRS 16”) to replace IAS 17: Leases and IFRIC 4: Determining whether
an Arrangement contains a Lease. IFRS 16 requires the recognition of a right-of-use asset and lease liability on the statements of
financial position for all leases, where Birchcliff is acting as a lessee. For lessees applying IFRS 16, the dual classification model of
leases as either operating leases or finance leases no longer exists, effectively treating all leases as finance leases. IFRS 16 allows
lessors to continue with the dual classification model for recognized leases as either a finance or an operating lease. Birchcliff is the
lessee in all of its lease arrangements effective January 1, 2019. The Corporation adopted IFRS 16 using the modified retrospective
approach, which does not require the restatement of prior period financial information and applies the standard prospectively.
The impact of applying IFRS 16 on the financial statements in the period was affected by multiple factors and conditions, including,
but not limited to, the Corporation’s incremental borrowing rate at January 1, 2019, the composition of the Corporation’s lease
portfolio at that date, the Corporation’s latest assessment of whether it will exercise any lease renewal options, and the extent
to which the Corporation chose to use practical expedients and recognition exemptions.
On initial adoption, Birchcliff had the following optional practical expedients available under IFRS 16:
• Certain short-term leases and leases of low value assets that have been identified as a lease under IFRS 16 at January 1, 2019
have been excluded from recognition on the statements of financial position. Birchcliff has excluded certain low value
leases such as information technology, office equipment and other minor operating and capital assets used in its
operations. Short-term and low value leases are expensed in profit or loss in the period incurred.
• Certain classes of lease arrangements that transfer a separate good or service under the same contract that have been
identified for recognition at January 1, 2019 can be recognized as a single lease component rather than separating
between their lease and non-lease components. Birchcliff did not apply this practical expedient on initial adoption
of IFRS 16. Non-lease components such as operating costs and payment for services were separated from their lease
component under the same contract and expensed in profit or loss in the period incurred.
111
2019 Annual Report | •
For leases having similar characteristics, a portfolio approach can be used by applying a single discount rate. Birchcliff
has applied this practical expedient for leases having similar characteristic on recognition.
The following table details the impact of the initial adoption of IFRS 16 on the Corporation’s balance sheet effective January 1, 2019:
($000s)
Lease assets
Lease obligations
Balance sheet impact
January 1, 2019
Increase
Increase
17,311
(17,311)
See Notes 3 and 14 to these financial statements for further details on the accounting policy choices and financial effects of
IFRS 16 for the year ended December 31, 2019.
5. PETROLEUM AND NATURAL GAS PROPERTIES AND EQUIPMENT
The continuity for petroleum and natural gas (“P&NG”) properties and equipment are as follows:
($000s)
Cost:
As at December 31, 2017
Additions
Acquisitions
Dispositions(1)
As at December 31, 2018
Additions
Acquisitions(3)
Exploration
& Evaluation
Assets(5)
Developed
& Producing
Assets
Lease
Assets
Corporate
Assets
Total
81
31
-
-
112
209
3,291,102
311,887
2,173
(55,636)
3,549,526
253,060
-
47,503
-
-
-
-
-
19,931
-
15,724
3,306,907
2,013
-
-
17,737
2,480
-
313,931
2,173
(55,636)
3,567,375
275,680
47,503
As at December 31, 2019(2)
321
3,850,089
19,931
20,217
3,890,558
Accumulated depletion and depreciation:
As at December 31, 2017
Depletion and depreciation expense(4)
Dispositions(1)
As at December 31, 2018
Depletion and depreciation expense(4)
As at December 31, 2019
Net book value:
As at December 31, 2018
As at December 31, 2019
-
-
-
-
-
-
112
321
(750,760)
(206,892)
36,729
(920,923)
(209,315)
(1,130,238)
-
-
-
-
(1,925)
(1,925)
(11,016)
(761,776)
(1,976)
(208,868)
-
36,729
(12,992)
(933,915)
(2,325)
(213,565)
(15,317)
(1,147,480)
2,628,603
-
4,745
2,633,460
2,719,851
18,006
4,900
2,743,078
(1) Consists mainly of two asset dispositions with a combined net book value of $18.9 million for total consideration of $5.3 million.
(2) The Corporation’s P&NG properties and equipment were pledged as security for its credit facilities. Although the Corporation believes that it has title to its P&NG properties, it cannot control or
completely protect itself against the risk of title disputes and challenges. There were no borrowing costs capitalized to P&NG properties and equipment.
(3) Birchcliff completed the acquisition of various Montney lands and assets on January 3, 2019 for total cash consideration of $39.4 million, with a deposit of $3.9 million paid in 2018, and assumed
decommissioning obligations totalling $6.1 million (see Note 8).
(4) Future development costs required to develop and produce proved plus probable reserves totalled $4.4 billion at December 31, 2019 (December 31, 2018 – $4.3 billion) and are included in the
depletion expense calculation.
(5) E&E assets consist of the Corporation’s exploration activities which are pending the determination of economic quantities of commercially producible proved reserves. Additions represent the
Corporation’s net share of costs incurred on E&E activities during the period. A review of each exploration project by area is carried out at each reporting date to ascertain whether economical
quantities of proved reserves have been discovered and whether such costs should be transferred to depletable petroleum and natural gas components. There were no exploration costs
reclassified from the E&E category to petroleum and natural gas properties and equipment category during 2019 and 2018.
112
| 2019 Annual Report
Impairment Assessment
Birchcliff determined there were impairment indicators present at December 31, 2019 due to the decline in the current and
forward commodity price for natural gas and reduction in market capitalization since December 31, 2018. An impairment is
recognized if the carrying value of a CGU exceeds the recoverable amount for that CGU. At December 31, 2019, the Corporation
used value-in-use derived from production of proved and probable reserves estimated by the Corporation’s independent
third-party reserve evaluators and the estimated future cash flows discounted at pre-tax rates between 8% and 15% depending
on the risk profile of the reserve category. Birchcliff’s P&NG properties and equipment were not impaired at December 31, 2019
and December 31, 2018.
The following forward commodity price and foreign exchange rate estimates were used in determining whether an impairment to
the carrying value of the P&NG properties and equipment existed at December 31, 2019:
WTI Oil
(US$/bbl)(1)
AECO
Natural Gas
(CDN$/mcf)(1)
NYMEX
Henry Hub Gas
(US$/mcf)(1)
Dawn Gas
(US$/mcf)(1)
Foreign
Exchange Rate
(CDN$/US$)(1)
Year
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
60.25
63.11
66.02
67.64
69.16
70.69
72.25
73.77
75.25
76.76
2.05
2.32
2.60
2.74
2.82
2.91
2.97
3.03
3.10
3.16
2.57
2.79
2.99
3.15
3.22
3.29
3.35
3.43
3.49
3.56
2.49
2.78
2.96
3.11
3.19
3.27
3.34
3.40
3.47
3.53
0.760
0.768
0.779
0.789
0.786
0.789
0.789
0.789
0.789
0.789
0.789
Thereafter
+2.0%/year
+2.0%/year
+2.0%/year
+2.0%/year
(1) The forecast commodity prices, inflation and exchange rates were determined using the average of forecasts from Deloitte, McDaniel, GLJ Petroleum Consultants Ltd. and Sproule Associates Ltd.
effective January 1, 2020.
6. INVESTMENT IN SECURITIES
The Corporation received on August 31, 2017 (the “Issuance Date”) securities consisting of 4,500,000 common A units
(the “Common A LP Units”) in a limited partnership (the “Limited Partnership”) affiliated with the purchaser and 10,000,000
preferred units (the “Preferred Trust Units”) in a trust (the “Trust”) affiliated with the purchaser (collectively, the “Securities”)
at a combined value of $10 million. The Securities acquired are not publicly listed and do not constitute significant investments
of the entities.
The Securities have limited voting rights, certain participation rights in the event of the liquidation, dissolution or wind-up of the
Limited Partnership or the Trust, as the case may be, and, in the case of the Common A LP Units, no redemption rights. Holders
of the Securities are entitled to, if, as and when declared, quarterly distributions for each three month period ending March 31,
June 30, September 30 and December 31.
The Preferred Trust Units are redeemable on demand by Birchcliff. For each Preferred Trust Unit redeemed by Birchcliff, the
redemption price will be equal to the redemption proceeds received by the Trust from the Limited Partnership with respect to
a redemption by the Trust of a corresponding unit of the Limited Partnership that was acquired by the Trust with the proceeds
the Trust received from the issuance of such Preferred Trust Unit. Payment of the redemption price by the Trust is limited to an
aggregate maximum amount of $10,000 in cash in respect of all redemptions per calendar month, unless the trustees of the
Trust determine a greater amount. Any portion of the redemption price in excess of such cash amount (the “Balance”) will be
repaid through the Trust’s issuance of redemption notes (“Redemption Note”) and/or distribution, in specie, of Trust property.
Redemption Notes shall be due and payable on or prior to the fifth anniversary of the date of issuance.
At December 31, 2019, the Corporation determined the Securities had a fair value of $4.4 million (December 31, 2018 – $10.0 million).
During 2019, Birchcliff recorded a loss on investment of $5.6 million (2018 – $nil) and $0.6 million (2018 - $0.8 million) in dividend
distributions in respect of the Securities that are included in other income.
113
2019 Annual Report | 7. REVOLVING TERM CREDIT FACILITIES
The components of the Corporation’s revolving credit facilities include:
As at, ($000s)
Syndicated credit facility
Working capital facility
Drawn revolving term credit facilities
Unamortized prepaid interest
Unamortized deferred financing fees
Revolving term credit facilities
December 31,
2019
December 31,
2018
593,557
586,000
17,926
611,483
-
(2,306)
609,177
22,821
608,821
(1,021)
(2,533)
605,267
At December 31, 2019, the Corporation’s credit facilities consisted of extendible revolving credit facilities (the “Credit Facilities”)
in the aggregate principal amount of $1.0 billion with maturity dates of May 11, 2022 which were comprised of: (i) an extendible
revolving syndicated term credit facility (the “Syndicated Credit Facility”) of $900 million; and (ii) an extendible revolving working
capital facility (the “Working Capital Facility”) of $100 million. Birchcliff has outstanding $4.2 million in letters of credit
at December 31, 2019 (see Note 17). The letters of credit reduces the amount available under the Working Capital Facility from
$100 million to approximately $95.8 million.
The Credit Facilities allow for prime rate loans, LIBOR loans, U.S. base rate loans, bankers’ acceptances and, in the case of the
Working Capital Facility only, letters of credit. The interest rates applicable to the drawn loans are based on a pricing margin grid
and will change as a result of the ratio of outstanding indebtedness to EBITDA as calculated in accordance with the agreement
governing the Credit Facilities. EBITDA is defined as earnings before interest and non-cash items including (if any) income taxes,
other compensation, gains and losses on sale of assets, unrealized gains and losses on financial instruments and depletion,
depreciation and amortization.
The Credit Facilities are subject to semi-annual reviews of the borrowing base limit by Birchcliff’s syndicate of lenders, which limit is
directly impacted by the value of Birchcliff’s oil and natural gas reserves. In addition, pursuant to the terms of the credit agreement
governing the Credit Facilities, the borrowing base of the Credit Facilities may be adjusted in certain other circumstances. 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. Birchcliff may each year, at its option, request an extension to the maturity date of the
Syndicated Credit Facility and the Working Capital Facility, or either of them, for an additional period of up to three years from
May 11 of the year in which the extension request is made. Effective May 11, 2019 the Corporation and the lenders agreed to
increase the borrowing base to $1.0 billion. In addition, Birchcliff and its lenders agreed to include a provision giving the lenders
the right to redetermine the borrowing base if the Corporation’s liability management rating (“LMR”) is less than 2.0. Birchcliff’s
LMR as at December 31, 2019 was 18.7.
The Credit Facilities are secured by a fixed and floating charge debenture and pledge charging substantially all of the Corporation’s
assets. No fixed charges have been granted pursuant to such debenture. The Credit Facilities do not contain any financial
maintenance covenants.
114
| 2019 Annual Report 8. DECOMMISSIONING OBLIGATIONS
The Corporation’s decommissioning obligations result from its net ownership interests in petroleum and natural gas assets,
including well sites, gathering systems and processing facilities. The Corporation estimates the total undiscounted (inflated)
amount of cash flow required to settle its decommissioning obligations is approximately $226.7 million at December 31, 2019
(December 31, 2018 – $272.1 million) and is expected to be incurred up until 2073. A reconciliation of the decommissioning
obligations is set forth below:
As at, ($000s)
Balance, beginning
Obligations incurred
Obligations acquired(1)
Obligations divested
Changes in estimated future cash flows(2)
Accretion
Decommissioning expenditures
Balance, ending(3)
December 31,
2019
December 31,
2018
129,264
124,825
5,236
6,096
(51)
(12,724)
2,592
(2,285)
128,128
3,930
649
(3,446)
1,177
3,208
(1,079)
129,264
(1) Includes decommissioning obligations acquired from the acquisition of various Montney lands and assets on January 3, 2019.
(2) Primarily relates to changes in the nominal risk-free rate, inflation rate and cost estimates of future obligations used to calculate the present value of the decommissioning obligation.
(3) Birchcliff applied a nominal risk-free rate of 1.74% and an inflation rate of 1.33% to calculate the present value of the decommissioning obligation at December 31, 2019 and a nominal risk-free rate
of 2.36% and an inflation rate of 2.00% at December 31, 2018.
9. INCOME TAXES
Included in income tax expense is a deferred income tax recovery of $37.9 million in 2019 and deferred income tax expense
of $36.9 million in 2018. Part VI.I dividend tax totalling $3.1 million in 2019 (2018 – $3.1 million) resulted from preferred share
dividends paid during the period. For the purposes of determining the current and deferred income tax, the Corporation
applied a combined Canadian federal and provincial income tax rate of 26.5% in 2019 (2018 – 27%). On May 28, 2019,
the Government of Alberta reduced the general corporate income tax rate to 8% (from 12%) over four years. Starting July 1, 2019,
the general corporate tax rate decreased to 11% (from 12%), with further 1% rate reductions every year on January 1 until the general
corporate tax rate is 8% on January 1, 2022, which results in a combined Canadian federal and provincial income tax rate of 23%.
The components of income tax expense (recovery) are set forth below:
Years ended December 31, ($000s)
Net income (loss) before taxes
Computed expected income tax expense (recovery)
Decrease (increase) in taxes resulting from:
Non-deductible stock-based compensation
Non-deductible dividends on capital securities
Non-deductible expenses and other
Non-capital losses and investment tax credits
Change in tax rate
Change in deferred tax assets not recognized
Balance, ending
2019
(90,198)
(23,916)
1,393
928
470
-
(14,969)
1,288
2018
142,145
38,379
2,315
945
155
(1,861)
-
-
(34,806)
39,933
115
2019 Annual Report | The components of net deferred income tax liabilities are set forth below:
As at, ($000s)
Deferred income tax liabilities:
December 31,
2019
December 31,
2018
P&NG properties and equipment and E&E assets
303,058
322,526
Deferred financing fees
Capital securities
Risk management contracts
Deferred income tax assets:
Decommissioning obligations
Other obligations
Risk management contracts
Bank financing and share issue costs
Non-capital losses and other
Deferred income tax liabilities
A continuity of the net deferred income tax liabilities is set forth below:
($000s)
P&NG and E&E assets
Deferred financing fees
Decommissioning obligations
Other obligations
Risk management contracts
Bank financing and share issue costs
Non-capital losses and other
($000s)
P&NG and E&E assets
Deferred financing fees
Decommissioning obligations
Risk management contracts
Bank financing and share issue costs
Non-capital losses and other
530
35
-
(29,470)
(4,267)
(30,496)
(2,672)
684
125
16,247
(34,901)
-
-
(3,599)
(155,046)
(181,529)
81,672
119,553
Balance
Jan. 1, 2019
Recognized in
Profit or Loss
Balance
Dec. 31, 2019
322,526
684
(34,901)
-
16,247
(3,599)
(181,404)
119,553
(19,468)
(154)
5,431
(4,267)
(46,743)
927
26,393
(37,881)
303,058
530
(29,470)
(4,267)
(30,496)
(2,672)
(155,011)
81,672
Balance
Jan. 1, 2018
Recognized in
Profit or Loss
Balance
Dec. 31, 2018
286,604
758
(33,703)
(1,092)
(5,133)
(164,740)
82,694
35,922
(74)
(1,198)
17,339
1,534
(16,664)
36,859
322,526
684
(34,901)
16,247
(3,599)
(181,404)
119,553
As at December 31, 2019, the Corporation had approximately $2.1 billion (2018 – $2.1 billion) in tax pools available for deduction
against future taxable income. Included in this tax basis are estimated non-capital loss carry forwards of approximately $641 million
that expire between 2028 and 2039 and unrecognized temporary differences on marketable securities of $5.6 million. Discretionary
tax deductions, including Canadian Development Expenses, Canadian Oil and Gas Property Expense and Capital Cost Allowance,
were maximized in the respective tax years in order to reduce Birchcliff’s accounting profits into a loss position for tax purposes.
116
| 2019 Annual Report
10. CAPITAL STOCK
Share Capital
(a) Authorized:
Unlimited number of voting common shares, with no par value.
Unlimited number of preferred shares, with no par value.
The preferred shares may be issued in one or more series and the directors are authorized to fix the number of shares in each series
and to determine the designation, rights, privileges, restrictions and conditions attached to the shares of each series.
(b) Number of common shares and perpetual preferred shares issued:
The following table sets forth the number of common shares and perpetual preferred shares issued:
As at, (000s)
Common Shares:
Outstanding at beginning of year
Exercise of stock options
Outstanding at end of year(1)
Series A Preferred Shares (perpetual)(2):
Outstanding at beginning of year
Outstanding at end of year
December 31,
2019
December 31,
2018
265,911
265,797
24
114
265,935
265,911
2,000
2,000
2,000
2,000
(1) On November 19, 2019, Birchcliff announced that the TSX had accepted the Corporation’s notice of intention to make a normal course issuer bid (the “NCIB”). Pursuant to the NCIB, Birchcliff may
purchase up to 13,296,761 of its outstanding common shares. The total number of common shares that Birchcliff is permitted to purchase is subject to a daily purchase limit of 309,858 common
shares; provided, however, that the Corporation may make one block purchase per calendar week which exceeds the daily purchase restriction. The NCIB commenced on November 25, 2019
and will terminate on November 24, 2020, or such earlier time as the NCIB is completed or is terminated at the option of Birchcliff. Purchases under the NCIB will be effected through the facilities
of the TSX and/or Canadian alternative trading systems at the prevailing market price at the time of such transaction. All common shares purchased under the NCIB will be cancelled. Birchcliff has
not purchased any common shares pursuant to the NCIB.
(2) In August 2012, Birchcliff completed a bought deal equity financing for gross proceeds of $50 million. The Corporation issued 2,000,000 preferred units at a price of $25.00 per preferred unit for
gross proceeds of $50 million. Each preferred unit was comprised of one cumulative redeemable five year rate reset Series A Preferred Share of Birchcliff, to yield initially 8% per annum.
The Series A Preferred Shares paid cumulative dividends of $2.00 per Series A Preferred Share per annum for the initial five year period ending September 30, 2017. On September 30, 2017,
the Series A Preferred Shares dividend was reset to $2.09 per Series A Preferred Share per annum, payable quarterly if, as and when declared by Birchcliff’s Board of Directors. Thereafter, the
dividend rate will be reset every five years at a rate equal to the then current five year Government of Canada bond yield plus 6.83%. The Series A Preferred Shares were redeemable at $25.00 per
preferred share at the option of the Corporation on September 30, 2017. The Corporation did not exercise the option to redeem any Series A Preferred Shares on September 30, 2017. The next
opportunity for the Corporation to redeem the Series A Preferred Shares at $25.00 per preferred share is September 30, 2022 and on September 30 in every fifth year thereafter. Holders of the
Series A Preferred Shares had the right, at their option, to convert their Series A Preferred Shares into cumulative redeemable floating rate Series B Preferred Shares, subject to certain conditions,
on September 30, 2017. None of Birchcliff’s outstanding Series A Preferred Shares were converted into Series B Preferred Shares on September 30, 2017 as only 165,960 Series A Preferred
Shares were tendered for conversion, which was less than the 250,000 shares required to give effect to conversions into Series B Preferred Shares. The next opportunity for holders of the Series A
Preferred Shares to convert their Series A Preferred Shares into Series B Preferred Shares, subject to certain conditions, is September 30, 2022 and on September 30 in every fifth year thereafter.
The holders of the Series B Preferred Shares will be entitled to receive quarterly floating rate cumulative preferential cash dividends, if declared by Birchcliff’s Board of Directors, at a rate equal to the
sum of the then current 90 day Government of Canada Treasury Bill rate plus 6.83%. In the event of liquidation, dissolution or winding-up of Birchcliff, the holders of the Series A Preferred Shares
and Series B Preferred Shares will be entitled to receive $25.00 per share as well as all accrued unpaid dividends before any amounts will be paid or any assets will be distributed to the holders of
any other shares ranking junior to the Series A Preferred Shares and the Series B Preferred Shares. The holders of the Series A Preferred Shares and the Series B Preferred Shares will not be entitled
to share in any further distribution of the assets of the Corporation.
Capital Securities
On and after June 30, 2019, the Corporation may, at its option, redeem for cash, all or any number of the outstanding
Series C Preferred Shares at $25.50 per share if redeemed before June 30, 2020 and at $25.00 per share if redeemed on or
after June 30, 2020, in each case together with all accrued and unpaid dividends to but excluding the date fixed for redemption.
The Corporation may also elect to convert such Series C Preferred Shares into common shares of the Corporation.
The Series C Preferred Shares are not redeemable by the holders of the preferred shares prior to June 30, 2020. On and after
June 30, 2020, a holder of Series C Preferred Shares may, at its option, redeem for cash, all or any number of Series C Preferred
Shares held by such holder on the last day of each financial quarter at $25.00 per share, together with all accrued and unpaid
dividends to but excluding the date fixed for redemption. Upon receipt of the notice of redemption, the Corporation may,
at its option, elect to convert such Series C Preferred Shares into common shares of the Corporation.
At December 31, 2019, Birchcliff has not redeemed for cash any of its outstanding Series C Preferred Shares or converted
any number of the outstanding Series C Preferred Shares into common shares. The Corporation has outstanding 2,000,000
Series C Preferred Shares at December 31, 2019 (December 31, 2018 – 2,000,000).
117
2019 Annual Report | Dividends
The following table sets forth the dividend distributions by the Corporation for each class of shares:
Years ended December 31,
Common Shares:
Dividend distribution ($000s)
Per common share ($)
Preferred Shares - Series A:
Series A dividend distribution ($000s)
Per Series A preferred share ($)
Preferred Shares - Series C:
Series C dividend distribution ($000s)
Per Series C preferred share ($)
2019
2018
27,923
0.1050
26,586
0.1000
4,187
4,187
2.0935
2.0935
3,500
1.7500
3,500
1.7500
All dividends have been designated as “eligible dividends” for the purposes of the Income Tax Act (Canada).
Per Common Share
The following table sets forth the computation of net income (loss) per common share:
Years ended December 31, ($000s, except for per share information)
Net income (loss)
Dividends on Series A preferred shares
Net income (loss) to common shareholders
Weighted average common shares:
Weighted average basic common shares outstanding
Effects of dilutive securities
Weighted average diluted common shares outstanding(1)
Net income (loss) per common share
Basic
Diluted
2019
(55,392)
(4,187)
(59,579)
2018
102,212
(4,187)
98,025
265,930
265,852
-
1,471
265,930
267,323
$(0.22)
$(0.22)
$0.37
$0.37
(1) The weighted average diluted common shares outstanding as of December 31, 2018 excludes 9,512,201 common shares issuable pursuant to outstanding stock options that were anti-dilutive.
As the Corporation reported a loss in 2019, the basic and diluted weighted average shares outstanding are the same for the periods and all stock options and performance warrants were anti-dilutive.
11. REVENUE
The following table sets forth Birchcliff’s revenue by source:
Years ended December 31, ($000s)
Light oil sales
Condensate(1)
NGLs sales(2)
Natural gas sales
P&NG sales(3)(4)
Royalty income
P&NG revenue
Marketing revenue(5)
Revenue from contracts with customers
2019
118,182
127,816
36,488
2018
122,118
114,973
51,221
330,973
332,979
613,459
621,291
100
130
613,559
621,421
20,131
-
633,690
621,421
(1) Includes pentanes plus.
(2) Includes ethane, propane and butane.
(3) Excludes the effects of financial instruments but includes the effects of any physical delivery contracts outstanding during the year.
(4) Included in accounts receivable at December 31, 2019 was $60.0 million (December 31, 2018 - $49.1 million) in P&NG sales to be received from its marketers in respect of December 2019
production, which was subsequently received in January 2020.
(5) Marketing revenue represents the sale of commodities purchased from third parties less applicable fees. Birchcliff enters into certain marketing purchase and sales arrangements to reduce its
take-or-pay fractionation fees associated with third-party commitments. For the year ended December 31, 2019 the Corporation had marketing purchases from third parties of $18.5 million.
118
| 2019 Annual Report 12. OPERATING EXPENSE
The Corporation’s operating expenses include all costs with respect to day-to-day production operations. The components of
operating expenses are set forth below:
Years ended December 31, ($000s)
Field operating costs
Recoveries
Operating expense
13. ADMINISTRATIVE EXPENSE
The components of administrative expenses are set forth below:
Years ended December 31, ($000s)
Cash:
Salaries and benefits(1)
Other(2)
General and administrative, gross
Operating overhead recoveries
Capitalized overhead(3)
General and administrative, net
Non-cash:
Other compensation(4)
Capitalized compensation(3)
Other compensation, net
Administrative expense, net
2019
91,679
(3,776)
87,903
2018
102,099
(2,995)
99,104
2019
2018
32,335
14,057
46,392
(156)
(19,421)
26,815
8,684
(4,406)
4,278
31,093
28,618
13,329
41,947
(150)
(17,195)
24,602
14,758
(7,061)
7,697
32,299
(1) Includes salaries, benefits and bonuses paid to officers and employees of the Corporation and retainer fees, meeting fees and benefits paid to directors of the Corporation.
(2) Includes costs such as rent, legal, tax, insurance, minor computer hardware and software and other business expenses incurred by the Corporation.
(3) Includes a portion of gross general and administrative expenses and other compensation directly attributable to the exploration and development activities of the Corporation, which have
been capitalized.
(4) Includes stock-based compensation expense of $8.2 million and post-employment benefit expense of $0.5 million in 2019 (2018 - $6.9 million and $7.8 million, respectively) (Notes 14 & 16).
Gross compensation for the Corporation’s executive officers and directors are comprised of the following:
Years ended December 31, ($000s)
Salaries and benefits(1)
Stock-based compensation(2)
Post-employment benefit expense(3)
Executive officers and directors compensation
2019
6,710
3,171
524
10,405
2018
6,312
1,770
7,844
15,926
(1) Includes salaries, benefits and bonuses paid to officers of the Corporation and directors’ fees and benefits paid to the directors of the Corporation.
(2) Represents stock-based compensation expense associated with options and performance warrants granted to the executive officers.
(3) Represents service costs associated with post-employment benefits of the Corporation’s executive officers (Note 14).
14. OTHER LIABILITIES
Post-Employment Benefit Obligation
The Corporation has established a post-employment benefit plan for eligible participants, which provides for post-employment
benefits based upon the age at retirement and their period of service with Birchcliff (the “Plan”). The Plan is not funded and as such
no plan assets exist. The post-employment benefit obligation arising from the Plan is determined by discounting the estimated future
cash outflows using interest rates of high-quality corporate bonds that have terms to maturity approximating the terms of the related
liability. The expenses associated with the Plan are comprised of current and past service costs and the interest (accretion) on the
unwinding of the present value of the post-employment benefit obligation.
119
2019 Annual Report | The Corporation estimates the total undiscounted (inflated) amount of cash flow required to settle its obligations for all participants
meeting the eligibility requirements under the post-employment benefit plan is approximately $14.8 million at December 31, 2019
(December 31, 2018 – $14.8 million). A reconciliation of the discounted post-employment benefit obligation is set forth below:
As at, ($000s)
Balance, beginning
Obligations incurred(1)
Accretion
Balance, ending(2)
Current portion
Long-term portion
December 31,
2019
December 31,
2018
7,844
524
126
8,494
-
8,494
-
7,844
-
7,844
-
7,844
(1) Represents the service costs associated with post-employment benefits.
(2) Birchcliff applied a discount rate of 2.8% and an inflation rate of 3.0% to calculate the present value of the post-employment benefit obligation at December 31, 2019 and December 31, 2018.
Lease Obligation
Effective January 1, 2019, Birchcliff recognized a discounted lease obligation of $17.3 million on initial adoption of IFRS 16.
The Corporation’s total undiscounted (inflated) amount of cash flow required to settle its lease obligations is approximately
$22.3 million at December 31, 2019 and is expected to be substantially settled by 2029. A reconciliation of the discounted
lease obligation is set forth below:
As at, ($000s)
As at January 1, 2019 (Note 4)(1)(2)
Obligations incurred
Lease payments
Accretion
Balance, ending(2)
Current portion
Long-term portion
December 31, 2019
17,311
2,620
(2,172)
793
18,552
1,522
17,030
(1) Birchcliff recognized a lease obligation primarily related to its head office premises on initial adoption of IFRS.
(2) Birchcliff applied a discount rate of 4.7% to calculate the discounted value of the lease obligation on initial adoption of IFRS 16 and at December 31, 2019.
The total payments made for short-term and low value leases were approximately $0.2 million for the year ended
December 31, 2019 which are not included in the lease obligation.
15. FINANCE EXPENSE
The components of finance expenses are set forth below:
Years ended December 31, ($000s)
Cash:
Interest on credit facilities
Non-cash:
Accretion(1)
Amortization of deferred financing fees
Finance expense
(1) Includes accretion on decommissioning obligations, lease obligations and post-employment benefits.
2019
2018
25,073
27,969
3,517
1,528
30,118
3,208
1,534
32,711
120
| 2019 Annual Report 16. SHARE-BASED PAYMENT
Stock Option
At December 31, 2019, the Corporation’s stock option plan (the “Option Plan”) permitted the grant of options in respect of a
maximum of 26,593,523 (December 31, 2018 – 26,591,136) common shares. At December 31, 2019, there remained available for
issuance options in respect of 3,110,155 (December 31, 2018 – 10,743,566) common shares. For stock options exercised during 2019,
the weighted average common share trading price on the Toronto Stock Exchange was $2.69 (2018 – $4.03) per common share.
A summary of the outstanding stock options is set forth below:
Outstanding, December 31, 2017
Granted(2)
Exercised
Forfeited
Expired
Outstanding, December 31, 2018
Granted(2)
Exercised
Forfeited
Expired
Outstanding, December 31, 2019
(1) Calculated on a weighted average basis.
(2) Each stock option granted entitles the holder to purchase one common share at the exercise price.
Number
14,158,107
4,734,900
(114,664)
(483,405)
(2,447,368)
15,847,570
10,107,200
(23,867)
(229,736)
(2,217,799)
23,483,368
Price ($)(1)
6.88
3.23
(3.35)
(5.59)
(7.57)
5.74
2.90
(3.08)
(4.22)
(8.47)
4.28
The weighted average fair value per option granted during 2019 was $0.93 (2018 – $1.03). In determining the stock-based
compensation expense for options issued during 2019, the Corporation applied a weighted average estimated forfeiture rate
of 10% (2018 – 11%). The weighted average assumptions used in calculating the Black-Scholes fair values are set forth below:
Years ended December 31,
Risk-free interest rate
Expected life (years)
Expected volatility
Dividend yield
2019
1.7%
4.1
50.8%
3.7%
2018
2.0%
4.0
49.7%
3.2%
A summary of the stock options outstanding and exercisable under the Option Plan at December 31, 2019 is set forth below:
Exercise Price ($)
Awards Outstanding
Awards Exercisable
Weighted
Average
Remaining
Contractual
Life (years)
4.94
3.14
1.36
3.05
Weighted
Average
Exercise
Price ($)
2.32
3.42
7.36
4.28
Weighted
Average
Remaining
Contractual
Life (years)
-
1.91
1.17
1.48
Weighted
Average
Exercise
Price ($)
-
3.40
7.26
5.63
Quantity
-
3,867,194
5,290,975
9,158,169
Low
1.77
3.01
6.01
High
3.00
6.00
9.43
Quantity
5,292,000
11,584,168
6,607,200
23,483,368
Performance Warrants
On January 18, 2005, Birchcliff issued 4,049,665 performance warrants as part of its initial restructuring to become a public entity.
There are 2,939,732 performance warrants outstanding and exercisable at December 31, 2019 (December 31, 2018 – 2,939,732).
Each performance warrant is exercisable at a price of $3.00 to purchase one common share of Birchcliff.
On June 7, 2019, the Corporation’s outstanding performance warrants were amended to extend the expiry date from
January 31, 2020 to January 31, 2025 (the “Extension”). The Corporation recorded a non-cash stock-based compensation expense
in 2019 of approximately $1.3 million (net, $0.4 million of capitalization) relating to the Extension. This amount represents
the fair value of the Extension determined as the difference between the fair value of the outstanding performance warrants
121
2019 Annual Report |
with the expiration date of January 31, 2025 (the “extended term”) and the fair value of the outstanding performance warrants
with the expiration date of January 31, 2020 (the “original term”). The fair value in each case was estimated as at June 7, 2019 using
the Black-Scholes option-pricing model that takes into account: exercise price, expected life, current price, expected volatility,
expected dividend yield and risk-free interest rates. The assumptions used in calculating the fair value of the extended and original
term performance warrants at June 7, 2019 are set forth below:
Risk-free interest rate
Expected life (years)
Expected volatility
Dividend yield
Extended
Term
Original
Term
1.5%
5.7
50.0%
3.0%
1.5%
0.7
50.7%
2.9%
Using the Black-Scholes option-pricing model, the fair value of each extended term and original term performance warrant was
$1.32 and $0.74, respectively.
17. CAPITAL MANAGEMENT
The Corporation’s general policy is to maintain a sufficient capital base in order to manage its business in the most effective manner
with the goal of increasing the value of its assets and thus its underlying share value. The Corporation’s objectives when managing
capital are to maintain financial flexibility in order to preserve its ability to meet financial obligations, to maintain a capital structure
that allows Birchcliff to finance its business strategy using primarily 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 2019 and 2018.
The following table sets forth the Corporation’s total available credit:
As at, ($000s)
Maximum borrowing base limit(1):
Revolving term credit facilities
Principal amount utilized:
Drawn revolving term credit facilities
Outstanding letters of credit(2)
Unused credit
December 31,
2019
December 31,
2018
1,000,000
950,000
(611,483)
(608,821)
(4,185)
(17,205)
(615,668)
(626,026)
384,332
323,974
(1) The Credit Facilities are subject to a semi-annual review of the borrowing base limit, which is directly impacted by the value of Birchcliff’s petroleum and natural gas reserves. Effective May 10, 2019,
the borrowing base limit under the Credit Facilities was increased to $1.0 billion from $950 million.
(2) Letters of credit are issued to various service providers. The letters of credit reduced the amount available under the Working Capital Facility.
The capital structure of the Corporation is as follows:
As at, ($000s)
Shareholders’ equity(1)
Capital securities
December 31,
2019
December 31,
2018
% Change
1,695,621
1,774,890
49,845
49,535
Shareholders’ equity & capital securities
1,745,466
1,824,425
(4%)
Shareholders’ equity & capital securities as a % of total capital(2)
Working capital deficit(3)
Drawn revolving term credit facilities
Drawn debt
Drawn debt as a % of total capital
Total capital
73%
23,405
611,483
634,888
27%
74%
21,187
608,821
630,008
26%
1%
2,380,354
2,454,433
(3%)
(1) Shareholders’ equity is defined as share capital plus contributed surplus plus retained earnings, less any deficit.
(2) Of the 73%, approximately 95% relates to common capital stock and 5% relates to preferred capital stock.
(3) Working capital is defined as current assets less current liabilities (excluding fair value of financial instruments and capital securities).
122
| 2019 Annual Report
18. RISK MANAGEMENT
Birchcliff is exposed to credit risk, liquidity risk and market risk as part of its normal course of business. The Board of Directors
has overall responsibility for the establishment and oversight of the Corporation’s financial risk management framework and
periodically reviews the results of all risk management activities and all outstanding positions.
Credit Risk
Credit risk is the risk of financial loss to the Corporation if a customer or counterparty to a financial asset fails to meet its contractual
obligation, and arises principally from Birchcliff’s receivables from its oil and natural gas marketers. 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, 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 statement of financial position date is low.
The carrying amount of accounts receivable reflects management’s assessment of the credit risk associated with these customers.
The following table illustrates the Corporation’s maximum exposure for accounts receivable:
As at, ($000s)
Marketers(1)
Joint venture
Other
Accounts receivable
December 31,
2019
December 31,
2018
59,963
3,488
1,296
64,747
49,070
2,342
529
51,941
(1) At December 31, 2019, approximately 28% was due from one marketer (2018 – 33%, one marketer). During 2019, the Corporation received 29%, 13% and 15% of its revenue, respectively,
from three marketers (2018 – 23%, 11% and 10% of its revenue, respectively, from three marketers).
Typically, Birchcliff’s maximum credit exposure from its marketers is revenue from its commodity sales. Receivables from marketers
are normally collected on the 25th day of the month following production. Birchcliff mitigates the credit risk associated with these
receivables by establishing marketing relationships with credit worthy purchasers, obtaining guarantees from their ultimate parent
companies and obtaining letters of credit, if and as appropriate. The Corporation historically has not experienced any material
collection issues with its marketers.
Birchcliff’s accounts receivables are aged as follows:
As at, ($000s)
Current (less than 30 days)
30 to 60 days
61 to 90 days
91 to 120 days
Over 120 days
Accounts receivable
December 31,
2019
December 31,
2018
58,676
3,208
1,926
-
937
48,052
2,006
1,099
160
624
64,747
51,941
At December 31, 2019, approximately $0.9 million or 1.4% (2018 – $0.6 million or 1.2%) of Birchcliff’s total accounts receivable are
aged over 120 days. The majority of these accounts are due from various joint venture partners. Birchcliff attempts to mitigate the
credit 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
venture partners as disagreements occasionally arise that increases the potential for non-collection. The Corporation does not
typically obtain collateral from petroleum and natural gas marketers or joint venture partners; however, the Corporation does have
the ability to withhold production or proceeds from eventual sale of assets from joint venture partners in the event of non-payment.
The carrying amount of Birchcliff’s accounts receivable and investment in securities represents its maximum credit exposure.
Birchcliff determined that the ultimate collection of these financial assets were not in doubt and therefore no allowance or charge
to profit or loss was recorded in 2019 and 2018.
123
2019 Annual Report | 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. Birchcliff actively manages its liquidity using cash and
debt management programs. Strategies include monitoring forecast and actual cash flows from operating, financing, and investing
activities and managing available credit and working capital under its Credit Facilities.
All of the Corporation’s contractual financial liabilities can be settled in cash. 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 considered necessary. Petroleum and natural gas production is monitored daily and is used to provide
monthly cash flow estimates. Further, the Corporation utilizes authorizations for expenditures on both operated and non-operated
projects to manage capital expenditure. The Corporation also attempts to match its payment cycle with collection of petroleum
and natural gas revenue on the 25th of each month. Should commodity prices deteriorate materially, Birchcliff may adjust its capital
spending accordingly to ensure that it is able to service its short-term financial obligations.
To facilitate the capital expenditure program, the Corporation has an aggregate $1.0 billion reserve-based bank credit facilities
at the end of 2019 (2018 – $950 million) which are reviewed semi-annually by its lenders. The principal amount drawn under the
Corporation’s total credit facilities including letters of credit at December 31, 2019 was $615.7 million (2018 – $626.0 million) and
$384.3 million in unused credit was available at the end of 2019 (2018 – $324.0 million) to fund future obligations.
The following table details the undiscounted cash flows of the Corporation’s significant contractual financial liabilities at
December 31, 2019 in the period they are due:
($000s)
Accounts payable and accrued liabilities
Drawn revolving credit facilities
Capital securities(1)
Lease payments
Financial liabilities
2020
92,607
-
50,000
2,710
145,317
2021
2022-2024
Thereafter
-
-
-
3,008
3,008
-
611,483
-
7,791
619,274
-
-
-
8,821
8,821
(1) Birchcliff has 2,000,000 Series C Preferred Shares outstanding at December 31, 2019, which are redeemable by their holders at $25.00 per share.
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 income or the value of its financial instruments, if any. 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 cash flows and the Corporation’s borrowing base limit. Lower
commodity prices can also reduce the Corporation’s ability to raise capital. Commodity prices for petroleum and natural gas are
not only influenced by Canadian (“CDN”) and United States (“US”) demand, but also by world events that dictate the levels of
supply and demand.
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| 2019 Annual Report Financial Derivative Contracts
(i)
At December 31, 2019, Birchcliff had certain financial derivative contracts outstanding in order to manage commodity price risk.
These instruments are not used for trading or speculative purposes. Birchcliff has not designated its financial instruments as effective
accounting hedges, even though the Corporation considers all commodity contracts to be effective economic hedges. As a result,
all such financial instruments are recorded on the statements of financial position at fair value, with the changes in fair value being
recognized as an unrealized gain or loss in profit or loss and realized upon settlement.
At December 31, 2019, Birchcliff had the following financial derivative contracts in place in order to manage commodity price risk:
Product
Type of Contract
Notional
Quantity
Remaining Term(1)
Contract Price
Natural gas
AECO 7A basis swap(2)
30,000 MMBtu/d
Jan. 1, 2020 – Dec. 31, 2023 NYMEX HH less US$1.298/MMBtu
Natural gas
AECO 7A basis swap(2)
10,000 MMBtu/d
Jan. 1, 2020 – Dec. 31, 2023 NYMEX HH less US$1.32/MMBtu
Natural gas
AECO 7A basis swap(2)
30,000 MMBtu/d
Jan. 1, 2020 – Dec. 31, 2023 NYMEX HH less US$1.33/MMBtu
Natural gas
AECO 7A basis swap(2)
15,000 MMBtu/d
Jan. 1, 2020 – Dec. 31, 2024 NYMEX HH less US$1.185/MMBtu
Natural gas
AECO 7A basis swap(2)
5,000 MMBtu/d
Jan. 1, 2020 – Dec. 31, 2024 NYMEX HH less US$1.20/MMBtu
Natural gas
AECO 7A basis swap(2)
5,000 MMBtu/d
Jan. 1, 2020 – Dec. 31, 2024 NYMEX HH less US$1.20/MMBtu
Natural gas
AECO 7A basis swap(2)
12,500 MMBtu/d
Jan. 1, 2020 – Dec. 31, 2025 NYMEX HH less US$1.108/MMBtu
Natural gas
AECO 7A basis swap(2)
10,000 MMBtu/d
Jan. 1, 2020 – Dec. 31, 2025 NYMEX HH less US$1.115/MMBtu
Natural gas
AECO 7A basis swap(2)
10,000 MMBtu/d
Jan. 1, 2020 – Dec. 31, 2025 NYMEX HH less US$1.050/MMBtu
Natural gas
AECO 7A basis swap(2)
5,000 MMBtu/d
Jan. 1, 2021 – Dec. 31, 2025 NYMEX HH less US$1.178/MMBtu
Natural gas
AECO 7A basis swap(2)
10,000 MMBtu/d
Jan. 1, 2021 – Dec. 31, 2025 NYMEX HH less US$1.175/MMBtu
Natural gas
AECO 7A basis swap(2)
5,000 MMBtu/d
Jan. 1, 2021 – Dec. 31, 2025 NYMEX HH less US$1.190/MMBtu
Natural gas
AECO 7A basis swap(2)
30,000 MMBtu/d
Jan. 1, 2024 – Dec. 31, 2025 NYMEX HH less US$1.114/MMBtu
Natural gas
AECO 7A basis swap(2)
35,000 MMBtu/d
Jan. 1, 2024 – Dec. 31, 2025 NYMEX HH less US$1.081/MMBtu
Natural gas
AECO 7A basis swap(2)
5,000 MMBtu/d
Jan. 1, 2024 – Dec. 31, 2025 NYMEX HH less US$1.013/MMBtu
Natural gas
AECO 7A basis swap(2)
20,000 MMBtu/d
Jan. 1, 2025 – Dec. 31, 2025 NYMEX HH less US$1.005/MMBtu
Natural gas
AECO 7A basis swap(2)
5,000 MMBtu/d
Jan. 1, 2025 – Dec. 31, 2025 NYMEX HH less US$0.990/MMBtu
Fair Value
Liability
($000s)
23,651
8,293
25,330
11,272
3,839
3,823
8,574
7,069
5,279
3,486
6,889
3,632
7,696
7,788
833
1,767
383
129,604
(1) Transactions with common terms and the same counterparty have been aggregated and presented at the weighted average price.
(2) Birchcliff sold AECO basis swap.
There were no financial derivative contracts entered into subsequent December 31, 2019.
At December 31, 2019, if the future AECO/NYMEX basis was US$0.10/MMBtu higher, with all other variables held constant, after tax
net loss in 2019 would have increased by $28.8 million.
(ii) Physical Delivery Contracts
Birchcliff also enters into physical delivery contracts to manage commodity price risk. These contracts are considered normal
executory sales contracts and are not recorded at fair value through profit or loss. At December 31, 2019, the Corporation had
the following physical delivery commodity sales contract in place:
Product
Type of Contract
Quantity
Remaining Term
Contract Price
Natural gas
AECO 7A basis swap(1)
5,000 MMBtu/d
Jan. 1, 2020 – Dec. 31, 2023
NYMEX HH less US$1.205/MMBtu
(1) Birchcliff sold AECO basis swap.
There were no long-term physical delivery commodity sales contracts entered into subsequent to December 31, 2019.
Interest Rate Risk
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Corporation’s credit
facilities are exposed to interest rate risk. The remainder of Birchcliff’s financial assets and liabilities are not exposed directly to
interest rate risk.
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2019 Annual Report | At December 31, 2019, Birchcliff had the following financial derivative contracts in place in order to manage interest rate risk:
Type of Contract
Index
Remaining Term(1) (2)
Notional
Amount
($million)
Fixed Rate
(%)
Fair Value
Liability
($000s)
Interest rate swap One-month banker’s acceptance – CDOR(3)
Jan. 1, 2020 – Mar. 1, 2024
350
2.215
2,985
(1) Transactions with common terms and the same counterparty have been aggregated and presented at the weighted average price.
(2) Contract terms commenced on March 1, 2019.
(3) Canadian Dollar Offered Rate (“CDOR”).
At December 31, 2019, if the one-month banker’s acceptance CDOR index was 0.10% higher, with all other variables held constant,
after-tax net loss in 2019 would have decreased by $1.1 million.
The following table provides a summary of the realized and unrealized gains (losses) on financial instruments:
Years ended December 31, ($000s)
Realized gain (loss)
Unrealized gain (loss)
2019
13,673
(192,765)
2018
(15,771)
64,222
The fair value liability of the Corporation’s financial derivative contracts at December 31, 2019 was $132.6 million (2018 – asset of
$60.2 million).
Foreign Currency Risk
Foreign currency risk is the risk that future cash flows will fluctuate as a result of changes in foreign currency exchange rates.
The exchange rate effect cannot be quantified but generally an increase in the value of the CDN dollar as compared to the US dollar
will reduce the CDN dollar prices received by Birchcliff for its petroleum and natural gas sales. The Corporation had no long-term
forward exchange rate contracts in place as at or during the years ended December 31, 2019 and 2018.
Fair Value of Financial Instruments
Birchcliff’s financial instruments include cash, accounts receivable, deposits, investment in securities, accounts payable and
accrued liabilities, financial derivative contracts, outstanding credit facilities and capital securities. Substantially all of Birchcliff’s
financial instruments are transacted in active markets. Financial instruments carried at fair value are assessed using the following
hierarchy based on the amount of observable inputs used to value the instrument:
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.
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.
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.
The carrying value and fair value of the Corporation’s financial assets and liabilities at December 31, 2019 are set forth below:
Loans and receivables:
Cash
Accounts receivable
Deposits
Investment in securities(1)
Other liabilities:
Accounts payable and accrued liabilities
Capital Securities
Drawn revolving term credit facilities
Fair value of financial derivatives(2)
(1) Investment in securities are fair valued based on level 3.
(2) Financial derivative contracts are fair valued based on level 2.
126
Carrying Value
Fair Value
70
64,747
3,529
4,405
92,607
49,845
611,483
132,589
70
64,747
3,529
4,405
92,607
50,400
611,483
132,589
| 2019 Annual Report 19. COMMITMENTS
The Corporation enters into contracts and commitments in the normal course of operations. The following table lists Birchcliff’s
commitments at December 31, 2019:
($000s)
Capital commitments(1)
Operating commitments(2)
Firm transportation and fractionation(3)
Natural gas processing(4)
Commitments
2020
19,600
2,260
127,079
17,202
166,141
2021
2022 - 2024
Thereafter
-
2,260
135,252
17,155
154,667
-
6,780
363,954
51,512
422,246
-
6,968
294,124
137,334
438,426
(1) Primarily includes capital components associated with the construction of Birchcliff’s inlet liquids-handling facility.
(2) Includes variable operating components associated with Birchcliff’s head office premises.
(3) Includes firm transportation service arrangements and fractionation commitments with third parties.
(4) Includes natural gas processing commitments at third-party facilities.
20. SUPPLEMENTARY CASH FLOW INFORMATION
Years ended December 31, ($000s)
Provided by (used in):
Accounts receivable
Prepaid expenses and deposits
Accounts payable and accrued liabilities
Dividend tax
Provided by (used in):
Operating
Investing
21. CONTINGENT LIABILITY
2019
2018
(12,806)
(999)
16,040
(3,075)
(840)
(5,153)
4,313
(840)
17,361
(764)
(6,472)
(3,074)
7,051
12,591
(5,540)
7,051
Birchcliff’s 2006 income tax filings were reassessed by the CRA in 2011 (the “Reassessment”). The Reassessment was based
on the CRA’s position that the tax pools available to Veracel Inc. (“Veracel”), prior to its amalgamation with Birchcliff, ceased
to be available to Veracel after Birchcliff and Veracel amalgamated on May 31, 2005. The Veracel tax pools in dispute totalled
$39.3 million. Birchcliff appealed the Reassessment to the Tax Court of Canada (the “Trial Court”) and the trial of that appeal
occurred in November 2013. On October 1, 2015, the Trial Court issued its decision (the “Trial Decision”) and dismissed Birchcliff’s
appeal on the basis of the general anti-avoidance rule contained in the Income Tax Act (Canada). The Trial Decision was rendered
by a judge based on the written record and not by the judge who conducted the trial. As a result of the Trial Decision, Birchcliff
recorded a non-cash deferred income tax expense in the amount of $10.2 million in the fourth quarter of 2015.
Birchcliff appealed the Trial Decision to the Federal Court of Appeal (the “FCA”), which appeal was heard in January 2017.
In April 2017 the FCA issued its decision and allowed the appeal and set aside the Trial Decision, based on the lack of jurisdiction
by the judge who rendered the Trial Decision. In setting aside the Trial Decision, the FCA referred the matter back to the judge of
the Trial Court who initially conducted the trial in 2013 to render a judgment. The judge of the Trial Court rendered a decision in
November 2017 and dismissed the Corporation’s appeal. The Corporation appealed that decision to the FCA, which appeal was
heard on December 10, 2018. The FCA rendered a decision in May 2019 dismissing the Corporation’s appeal. The Corporation
filed an application for leave to appeal to the Supreme Court of Canada, which was denied on November 14, 2019 and as a result
there was no further impact to the Corporation’s financial statements.
127
2019 Annual Report | G LO S S A RY
DEFINITIONS
The following terms not otherwise defined in this Annual Report shall have the following meanings:
“Birchcliff”, “its”, “our” “us” or “we” means Birchcliff Energy Ltd.
“CCIR”
means the Carbon Competitiveness Incentive Regulation (Alberta).
“condensate”
means pentanes plus (C5+).
“CSA Staff Notice 51-324”
means CSA Staff Notice 51-324 – Revised Glossary to NI 51-101 Standards of Disclosure for
Oil and Gas Activities.
“ESG”
“GAAP”
“GGPPA”
“IFRS”
means environmental, social and governance.
means generally accepted accounting principles for Canadian public companies which
are currently IFRS.
means the Greenhouse Gas Pollution Pricing Act (Canada).
means International Financial Reporting Standards as issued by the International Accounting
Standards Board.
“Montney/Doig Resource Play”
means Birchcliff’s Montney and Doig formations resource play located northwest of
Grande Prairie, Alberta.
“TIER”
“TSX”
means the Technology Innovation and Emissions Reduction Regulation.
means the Toronto Stock Exchange.
128
| 2019 Annual Report ABBREVIATIONS
2P
AECO
bbl
bbls/d
boe
boe/d
F&D
FD&A
FDC
G&A
GJ
GHG
HH
km
Mbbls
Mboe
Mcf
Mcf/d
MM$
MMBoe
MMBtu
MMcf
MMcf/d
MSW
NGLs
NYMEX
PDP
TP
WTI
000s
$000s
proved plus probable reserves
benchmark price for natural gas determined at the AECO ‘C’ hub in southeast Alberta
barrel
barrels per day
barrel of oil equivalent
barrel of oil equivalent per day
finding and development
finding, development and acquisition
future development costs
general and administrative
gigajoule
greenhouse gas
Henry Hub
kilometres
thousand barrels
thousand barrels of oil equivalent
thousand cubic feet
thousand cubic feet per day
millions of dollars
million barrels of oil equivalent
million British thermal units
million cubic feet
million cubic feet per day
price for mixed sweet crude oil at Edmonton, Alberta
natural gas liquids excluding condensate
New York Mercantile Exchange
proved developed producing reserves
proved reserves
West Texas Intermediate, the reference price paid in U.S. dollars at Cushing, Oklahoma, for crude oil
of standard grade
thousands
thousands of dollars
129
2019 Annual Report | CONVENTIONS
Certain terms used herein are defined in NI 51-101, CSA Staff Notice 51-324 or the COGE Handbook and, unless the context otherwise
requires, shall have the same meanings in this Annual Report as in NI 51-101, CSA Staff Notice 51-324 or the COGE Handbook,
as the case may be. Unless otherwise indicated, all information contained herein is given at or for the year ended December 31, 2019.
Unless otherwise indicated, all dollar amounts are expressed in Canadian dollars and all references to “$”, “CDN$” or “dollars” are to
Canadian dollars and all references to “US$” are to United States dollars. Unless otherwise indicated, all financial information contained
in this Annual Report has been presented in accordance with GAAP. Words importing the singular number only include the plural, and
vice versa, and words importing any gender include all genders.
N O N - G A A P M E A S U R E S
This Annual Report uses “adjusted funds flow”, “adjusted funds flow per basic common share”, “free funds flow”, “transportation
and other expense”, “operating netback”, “adjusted funds flow netback” and “total debt”. These measures do not have standardized
meanings prescribed by GAAP and therefore may not be comparable to similar measures presented by other companies where
similar terminology is used. Management believes that these non-GAAP measures assist management and investors in assessing
Birchcliff’s profitability, efficiency, liquidity and overall performance. “Adjusted funds flow” denotes cash flow from operating activities
before the effects of decommissioning expenditures and changes in non-cash operating working capital and “adjusted funds flow per
basic common share” denotes adjusted funds flow divided by the basic weighted average number of common shares outstanding
for the period. “Free funds flow” denotes adjusted funds flow less F&D capital expenditures. “Transportation and other expense”
denotes transportation expense plus marketing purchases minus marketing revenue. “Operating netback” denotes petroleum and
natural gas revenue less royalty expense, less operating expense and less transportation and other expense. “Adjusted funds flow
netback” denotes petroleum and natural gas revenue less royalty expense, less operating expense, less transportation and other
expense, less net G&A expense, less interest expense and less any realized losses (plus realized gains) on financial instruments and
plus any other cash income sources. “Total debt” is calculated as the revolving term credit facilities plus adjusted working capital
deficit (calculated as current assets minus current liabilities excluding the effects of any current portion of financial instruments
and capital securities). For further information regarding these non-GAAP measures, including reconciliations to the most directly
comparable GAAP measures, please see “Non-GAAP Measures” in the MD&A.
P R E S E N TAT I O N O F O I L A N D G A S R E S E R V E S
Deloitte prepared the 2019 Consolidated Reserves Report, the 2018 Consolidated Reserves Report, the 2019 Deloitte Reserves Report
and the 2018 Deloitte Reserves Report. McDaniel prepared the 2019 McDaniel Reserves Report and the 2018 McDaniel Reserves Report.
In addition, Deloitte and/or McDaniel prepared reserves evaluations in respect of Birchcliff’s oil and natural gas properties effective
December 31, 2017 through to 2011. Such evaluations were prepared in accordance with the standards contained in NI 51-101 and the
COGE Handbook that were in effect at the relevant time. Reserves estimates stated herein are extracted from the relevant evaluation.
There are numerous uncertainties inherent in estimating quantities of oil, natural gas and NGLs reserves and the future net revenue
attributed to such reserves, including many factors beyond the control of Birchcliff. The reserves and associated future net revenue
information set forth in this Annual Report are estimates only. In general, estimates of economically recoverable oil, natural gas and
NGLs reserves and the future net revenue therefrom are based upon a number of variable factors and assumptions, such as historical
production from the properties, production rates, ultimate reserves recovery, the timing and amount of capital expenditures,
marketability of oil, natural gas and NGLs, royalty rates, the assumed effects of regulation by governmental agencies and future
operating costs, all of which may vary materially from actual results. For these reasons, estimates of the economically recoverable oil,
natural gas and NGLs reserves attributable to any particular group of properties, the classification of such reserves based on risk of
recovery and estimates of future net revenue associated with reserves prepared by different engineers, or by the same engineer at
different times, may vary. Birchcliff’s actual production, revenue, taxes and development and operating expenditures with respect
to its reserves will vary from estimates thereof and such variations could be material.
130
| 2019 Annual Report It should not be assumed that the undiscounted or discounted net present value of future net revenue attributable to the Corporation’s
reserves estimated by the Corporation’s independent qualified reserves evaluators represent the fair market value of those reserves.
There is no assurance that the forecast prices and costs assumptions will be attained and variances could be material. Actual oil, natural
gas and NGLs reserves may be greater than or less than the estimates provided herein and variances could be material.
In this Annual Report, unless otherwise stated all references to “reserves” are to Birchcliff’s gross company reserves (Birchcliff’s working
interest (operating or non-operating) share before deduction of royalties and without including any royalty interests of Birchcliff).
The information set forth in this Annual Report relating to the reserves, future net revenue and future development costs of Birchcliff
constitutes forward-looking statements and is subject to certain risks and uncertainties. See “Advisories – Forward-Looking Statements”.
A DV I S O R I E S
BOE CONVERSIONS
Boe amounts have been calculated by using the conversion ratio of 6 Mcf of natural gas to 1 bbl of oil. Boe amounts may be misleading,
particularly if used in isolation. A boe conversion ratio of 6 Mcf: 1 bbl is based on an energy equivalency conversion method primarily
applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio based on the current
price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion on a
6:1 basis may be misleading as an indication of value.
MMBTU PRICING CONVERSIONS
$1.00 per MMBtu equals $1.00 per Mcf based on a standard heat value Mcf.
OIL AND GAS METRICS
This Annual Report contains metrics commonly used in the oil and natural gas industry, including netbacks, recycle ratio, reserves
replacement, F&D costs and FD&A costs, which have been determined by Birchcliff as set out below. These oil and gas metrics do
not have any standardized meanings or standard methods of calculation and therefore may not be comparable to similar measures
presented by other companies where similar terminology is used. As such, they should not be used to make comparisons.
Management uses these oil and gas metrics for its own performance measurements and to provide shareholders with measures to
compare Birchcliff’s performance over time; however, such measures are not reliable indicators of Birchcliff’s future performance, which
may not compare to Birchcliff’s performance in previous periods, and therefore should not be unduly relied upon.
•
•
Recycle ratios are calculated by dividing the average operating netback per boe or adjusted funds flow netback per boe, as the case
may be, by F&D costs and FD&A costs, as the case may be. Recycle ratios may be used as a measure of a company’s profitability.
Reserves replacement is calculated by dividing proved developed producing reserves, proved reserves or proved plus probable
reserves additions, as the case may be, before production by total production in the applicable period. Reserves replacement
ratios have been presented both including and excluding the effects of acquisitions and dispositions. Reserves replacement may
be used as a measure of a company’s sustainability and its ability to replace its proved developed producing reserves, proved
reserves or proved plus probable reserves, as the case may be.
• With respect to F&D and FD&A costs disclosed in this Annual Report:
o F&D costs both including and excluding FDC have been presented herein. F&D costs for each reserves category in a
particular period are calculated by taking the sum of: (i) exploration and development costs (F&D capital expenditures)
incurred in the period; and (ii) where FDC has been included, the change during the period in FDC for the reserves category;
divided by the additions to the reserves category before production during the period. F&D costs exclude the effects
of acquisitions and dispositions. FD&A costs are calculated in the same manner as F&D costs but include the effects of
acquisitions and dispositions.
131
2019 Annual Report | o
In calculating the amounts of F&D and FD&A costs for a year, the changes during the year in estimated reserves and estimated
FDC are based upon the evaluations of Birchcliff’s reserves prepared by its independent qualified reserves evaluators,
effective December 31 of such year.
o The aggregate of the exploration and development costs incurred in the most recent financial year and any change during
that year in estimated FDC generally will not reflect total F&D costs related to reserves additions for that year.
o F&D and FD&A costs may be used as a measure of a company’s efficiency with respect to finding and developing its reserves.
•
For information regarding netbacks, please see “Non-GAAP Measures”.
DRILLING LOCATIONS
This Annual Report discloses net existing horizontal wells and potential net future horizontal drilling locations in four categories:
(i) proved locations; (ii) proved plus probable locations; (iii) unbooked locations; and (iv) an aggregate total of (ii) and (iii). Of the
7,462.0 net existing horizontal wells and potential net future horizontal drilling locations identified herein, 939.3 are proved locations,
1,175.1 are proved plus probable locations and 6,286.9 are unbooked locations.
Proved locations and probable locations consist of proposed drilling locations identified in the 2019 Consolidated Reserves Report
that have proved and/or probable reserves, as applicable, attributed to them in the 2019 Consolidated Reserves Report. Unbooked
locations are internal estimates based on Birchcliff’s prospective acreage and an assumption as to the number of wells that can
be drilled per section based on industry practice and internal technical analysis review. Unbooked locations have been identified
by management as an estimate of Birchcliff’s multi-year drilling activities based on evaluation of applicable geologic, seismic,
engineering, production and reserves information. Unbooked locations do not have proved or probable reserves attributed
to them in the 2019 Consolidated Reserves Report.
Birchcliff’s ability to drill and develop these locations and the drilling locations on which Birchcliff actually drills wells depends on a
number of uncertainties and factors, including, but not limited to, the availability of capital, equipment and personnel, oil and natural
gas prices, costs, inclement weather, seasonal restrictions, drilling results, additional geological, geophysical and reservoir information
that is obtained, production rate recovery, gathering system and transportation constraints, the net price received for commodities
produced, regulatory approvals and regulatory changes. As a result of these uncertainties, there can be no assurance that the potential
future drilling locations that Birchcliff has identified will ever be drilled and, if drilled, that such locations will result in additional oil,
NGLs or natural gas production and, in the case of unbooked locations, additional reserves. As such, Birchcliff’s actual drilling activities
may differ materially from those presently identified, which could adversely affect Birchcliff’s business. While certain of the unbooked
drilling locations have been de-risked by drilling existing wells in relatively close proximity to such unbooked drilling locations, some
of the other unbooked drilling locations are farther away from existing wells, where management has less information about the
characteristics of the reservoir and there is therefore more uncertainty whether wells will be drilled in such locations and, if drilled,
there is more uncertainty that such wells will result in additional proved or probable reserves, resources or production.
PRODUCTION
With respect to the disclosure of Birchcliff’s production contained in this Annual Report: (i) references to “light oil” mean “light crude oil
and medium crude oil” as such term is defined in NI 51-101; (ii) except where otherwise stated, references to “liquids” mean “light crude
oil and medium crude oil” and “natural gas liquids” (including condensate) as such terms are defined in NI 51-101; and (iii) references
to “natural gas” mean “shale gas”, which also includes an immaterial amount of “conventional natural gas”, as such terms are defined in
NI 51-101. In addition, NI 51-101 includes condensate within the product type of natural gas liquids. Birchcliff has disclosed condensate
separately from other natural gas liquids as the price of condensate as compared to other natural gas liquids is currently significantly
higher and Birchcliff believes presenting the two commodities separately provides a more accurate description of its operations
and results therefrom.
CAPITAL EXPENDITURES
Unless otherwise stated, references in this Annual Report to: (i) “F&D capital” denotes capital for land, seismic, workovers, drilling
and completions and well equipment and facilities; and (ii) “total capital expenditures” denotes F&D capital plus acquisitions, less any
dispositions, plus administrative assets.
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| 2019 Annual Report FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report constitute forward-looking statements and forward-looking information (collectively
referred to as “forward-looking statements”) within the meaning of applicable Canadian securities laws. The forward-looking
statements contained in this Annual Report relate to future events or Birchcliff’s future plans, operations or performance and are based
on Birchcliff’s current expectations, estimates, projections, beliefs and assumptions. Such forward-looking statements have been made
by Birchcliff in light of the information available to it at the time the statements were made and reflect its experience and perception of
historical trends. All statements and information other than historical fact may be forward-looking statements. Such forward-looking
statements are often, but not always, identified by the use of words such as “seek”, “plan”, “focus”, “future”, “outlook”, “position”,
“expect”, “project”, “intend”, “believe”, “anticipate”, “estimate”, “forecast”, “guidance”, “potential”, “proposed”, “predict”, “budget”,
“continue”, “targeting”, “may”, “will”, “could”, “might”, “should”, “would”, “on track” and other similar words and expressions.
By their nature, forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual
results or events to differ materially from those anticipated in such forward-looking statements. Accordingly, readers are cautioned
not to place undue reliance on such forward-looking statements. Although Birchcliff believes that the expectations reflected in the
forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct and Birchcliff makes
no representation that actual results achieved will be the same in whole or in part as those set out in the forward-looking statements.
In particular, this Annual Report contains forward-looking statements relating to the following: Birchcliff’s plans and other aspects
of its anticipated future financial performance, results, operations, focus, objectives, strategies, opportunities, priorities and goals
(including that Birchcliff’s strategy is to develop its Montney/Doig Resource Play, to control and expand its production in the play and
to further reduce its operating costs per boe); the performance and other characteristics of Birchcliff’s oil and natural gas properties
and expected results from, and benefits of, its assets (including: statements that its Montney/Doig Resource Play provides the
Corporation with an extensive inventory of repeatable, low-cost drilling opportunities targeting natural gas, light oil, condensate
and NGLs; statements regarding the potential or prospectivity of Birchcliff’s properties; and statements that Birchcliff’s control of,
and/or long-term access to, infrastructure in the Peace River Arch helps it to control its costs and expand its production when market
conditions recover); statements that Birchcliff has the ability to grow when commodity prices warrant doing so, while also having the
ability to maintain production in a low commodity price environment; statements regarding the Corporation’s competitive position
(including that its operatorship, land position and infrastructure ownership gives the Corporation a competitive advantage in its
areas of operation and supports its low F&D costs and low operating cost structure, which helps it to maximize its funds flow);
the information set forth under the heading “Message to Shareholders – Outlook” (including: that Birchcliff is focused on maintaining
its strong balance sheet and financial flexibility; that Birchcliff is bringing its anticipated 2020 capital expenditures more in-line
with its targeted annual adjusted funds flow; statements that its F&D capital expenditures are now expected to be $275 million to
$295 million and that it is targeting an annual average production rate of 78,000 to 80,000 boe/d in 2020; that Birchcliff’s production
declines are estimated to be approximately 22%; statements that Birchcliff has the ability to withstand weakening and volatile
commodity prices; statements that Birchcliff has significant liquidity; and statements that having one of the lowest-cost structures
in the industry combined with its high working interest, operatorship and ownership/control of infrastructure positions Birchcliff
to be competitive and sustainable in a low commodity price environment and gives it the flexibility to react to challenging industry
conditions); statements regarding Birchcliff’s 2020 capital program and its exploration and development activities and the timing
thereof; the information set forth under the heading “2020 Key Objectives”; statements regarding the Inlet Liquids-Handling Facility
(including: the capacity of the facility; and that the facility will increase Birchcliff’s condensate production capability to 10,000 bbls/d
in Pouce Coupe); statements regarding dividends (including: the sustainability of dividends; and the timing of payment of dividends);
estimates of potential future drilling locations and opportunities; the information set forth under the heading “Montney/Doig Resource
Play – Corporate Outlook” (including: statements that over time, Birchcliff will work towards filling its existing infrastructure which
will allow it to continue to lower its per unit costs and maximize its cash flow; and that Birchcliff remains focused on continuing to
drive down costs and remaining a low-cost operator with significant financial flexibility in order to succeed in a low commodity
price environment); the treatment under and the impact of climate change and GHG legislation (including: statements that Birchcliff
anticipates receiving emission performance credits for the 2019 financial year; statements that at the present time, the operational
and financial impacts of complying with applicable GHG legislation are not material to the Corporation; statements that it is expected
that current and future climate change regulations will have the effect of increasing the Corporation’s operating expenses and
in the long-term, potentially reducing the demand for oil and natural gas resulting in a decrease in the Corporation’s profitability
and a reduction in the value of its assets); estimates of decommissioning obligations; the information set forth under the heading
“2019 Year-End Reserves” and elsewhere in this Annual Report as it relates to Birchcliff’s reserves (including: estimates of reserves and
the net present values of future net revenue associated with Birchcliff’s reserves; price forecasts; FDC; forecast facility expansions;
and average estimated well costs). Information relating to reserves is forward-looking as it involves the implied assessment, based on
certain estimates and assumptions, that the reserves exist in the quantities predicted or estimated and that the reserves can profitably
be produced in the future. See “Presentation of Oil and Gas Reserves”. In addition, forward-looking statements in this Annual Report
include the forward-looking statements identified in the MD&A under the heading “Advisories – Forward-Looking Statements”.
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2019 Annual Report | With respect to the forward-looking statements contained in this Annual Report, assumptions have been made regarding, among
other things: prevailing and future commodity prices and differentials, currency exchange rates, interest rates, inflation rates, royalty
rates and tax rates; the state of the economy, financial markets and the exploration, development and production business; the political
environment in which Birchcliff operates; the regulatory framework regarding royalties, taxes, environmental, climate change and other
laws; the Corporation’s ability to comply with existing and future environmental, climate change and other laws; future cash flow, debt
and dividend levels; future operating, transportation, marketing, general and administrative and other expenses; Birchcliff’s ability to
access capital and obtain financing on acceptable terms; the timing and amount of capital expenditures and the sources of funding
for capital expenditures and other activities; the sufficiency of budgeted capital expenditures to carry out planned operations; the
successful and timely implementation of capital projects and the timing, location and extent of future drilling and other operations;
results of operations; Birchcliff’s ability to continue to develop its assets and obtain the anticipated benefits therefrom; the performance
of existing and future wells; the success of new wells drilled; reserves and resource volumes and Birchcliff’s ability to replace and
expand reserves through acquisition, development or exploration; the impact of competition on Birchcliff; the availability of, demand
for and cost of labour, services and materials; the ability to obtain any necessary regulatory or other approvals in a timely manner;
the satisfaction by third parties of their obligations to Birchcliff; the ability of Birchcliff to secure adequate processing and
transportation for its products; Birchcliff’s ability to successfully market natural gas and liquids; the availability of hedges on terms
acceptable to Birchcliff; and Birchcliff’s natural gas market exposure. In addition to the foregoing assumptions, Birchcliff has made
the following assumptions with respect to certain forward-looking statements contained in this Annual Report:
•
Birchcliff’s 2020 guidance (as updated March 11, 2020) assumes the following commodity prices and exchange rate:
an average WTI spot price of US$48.00/bbl; an average WTI-MSW differential of CDN$5.70/bbl; an average AECO 5A
spot price of CDN$1.90/GJ; an average Dawn spot price of US$2.15/MMBtu; an average NYMEX HH spot price of
US$2.20/MMBtu; and an exchange rate (CDN$ to US$1) of 1.34.
• With respect to estimates of 2020 capital expenditures and Birchcliff’s spending plans for 2020, such estimates and plans
assume that the 2020 capital program will be carried out as currently contemplated. Birchcliff makes acquisitions and
dispositions in the ordinary course of business. Any acquisitions and dispositions completed could have an impact on
Birchcliff’s capital expenditures, production, adjusted funds flow, free funds flow, costs and total debt, which impact could
be material. The amount and allocation of capital expenditures for exploration and development activities by area and the
number and types of wells to be drilled and brought on production is dependent upon results achieved and is subject to
review and modification by management on an ongoing basis throughout the year. Actual spending may vary due to a variety
of factors, including commodity prices, economic conditions, results of operations and costs of labour, services and materials.
• With respect to Birchcliff’s production guidance, such guidance assumes that: the 2020 capital program will be carried out
as currently contemplated; no unexpected outages occur in the infrastructure that Birchcliff relies on to produce its wells
and that any transportation service curtailments or unplanned outages that occur will be short in duration or otherwise
insignificant; the construction of new infrastructure meets timing and operational expectations; existing wells continue to
meet production expectations; and future wells scheduled to come on production meet timing, production and capital
expenditure expectations. Birchcliff’s production guidance may be affected by acquisition and disposition activity.
• With respect to statements of future wells to be drilled and brought on production and estimates of potential future
drilling locations and opportunities, the key assumptions are: the continuing validity of the geological and other technical
interpretations performed by Birchcliff’s technical staff, which indicate that commercially economic volumes can be
recovered from Birchcliff’s lands as a result of drilling future wells; and that commodity prices and general economic
conditions will warrant proceeding with the drilling of such wells.
• With respect to statements regarding the future potential and prospectivity of properties and assets, such statements assume:
the continuing validity of the geological and other technical interpretations determined by Birchcliff’s technical staff with
respect to such properties; and that, over the long-term, commodity prices and general economic conditions will warrant
proceeding with the exploration and development of such properties.
• With respect to estimates of reserves volumes and the net present values of future net revenue associated with Birchcliff’s
reserves, the key assumption is the validity of the data used by Deloitte and McDaniel in their independent reserves evaluations.
Birchcliff’s actual results, performance or achievements could differ materially from those anticipated in the forward-looking
statements as a result of both known and unknown risks and uncertainties including, but not limited to: general economic,
market and business conditions which will, among other things, impact the demand for and market prices of Birchcliff’s
products and Birchcliff’s access to capital; volatility of crude oil and natural gas prices; fluctuations in currency exchange and
interest rates; stock market volatility; the risks posed by pandemics and epidemics and their impacts on supply and demand
and commodity prices; loss of market demand; an inability to access sufficient capital from internal and external sources
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| 2019 Annual Report on terms acceptable to the Corporation; fluctuations in the costs of borrowing; operational risks and liabilities inherent in
oil and natural gas operations; the occurrence of unexpected events such as fires, severe weather, explosions, blow-outs,
equipment failures, transportation incidents and other similar events affecting Birchcliff or other parties whose operations
or assets directly or indirectly affect Birchcliff; an inability to access sufficient water or other fluids needed for operations;
uncertainty that development activities in connection with Birchcliff’s assets will be economic; an inability to access or
implement some or all of the technology necessary to efficiently and effectively operate its assets and achieve expected
future results; uncertainties associated with estimating oil and natural gas reserves and resources; the accuracy of estimates
of reserves, future net revenue and production levels; geological, technical, drilling, construction and processing problems;
uncertainty of geological and technical data; horizontal drilling and completions techniques and the failure of drilling
results to meet expectations for reserves or production; uncertainties related to Birchcliff’s future potential drilling locations;
delays or changes in plans with respect to exploration or development projects or capital expenditures, including delays
in the completion of gas plants and other facilities; the accuracy of cost estimates and variances in Birchcliff’s actual costs and
economic returns from those anticipated; incorrect assessments of the value of acquisitions and exploration and development
programs; changes to the regulatory framework in the locations where the Corporation operates, including changes to tax laws,
Crown royalty rates, environmental laws, climate change laws, carbon tax regimes, incentive programs and other regulations that
affect the oil and natural gas industry and other actions by government authorities; an inability of the Corporation to comply with
existing and future environmental, climate change and other laws; the cost of compliance with current and future environmental
laws; political uncertainty and uncertainty associated with government policy changes; dependence on facilities, gathering
lines and pipelines, some of which the Corporation does not control; uncertainties and risks associated with pipeline restrictions
and outages to third-party infrastructure that could cause disruptions to production; the lack of available pipeline capacity
and an inability to secure adequate and cost effective processing and transportation for Birchcliff’s products; an inability to
satisfy obligations under Birchcliff’s firm marketing and transportation arrangements; a failure to comply with covenants under
Birchcliff’s credit facilities; shortages in equipment and skilled personnel; the absence or loss of key employees; competition for,
among other things, capital, acquisitions of reserves, undeveloped lands, equipment and skilled personnel; management of
Birchcliff’s growth; environmental and climate change risks, claims and liabilities; potential litigation; default under or breach of
agreements by counterparties and potential enforceability issues in contracts; claims by Indigenous peoples; the reassessment
by taxing or regulatory authorities of the Corporation’s prior transactions and filings; unforeseen title defects; third-party claims
regarding the Corporation’s right to use technology and equipment; uncertainties associated with the outcome of litigation or
other proceedings involving Birchcliff; uncertainties associated with credit facilities and counterparty credit risk; risks associated
with Birchcliff’s risk management activities and the risk that hedges on terms acceptable to Birchcliff may not be available; risks
associated with the declaration and payment of future dividends, including the discretion of Birchcliff’s Board of Directors to
declare dividends and change the Corporation’s dividend policy; the failure to obtain any required approvals in a timely manner
or at all; the failure to complete or realize the anticipated benefits of acquisitions and dispositions and the risk of unforeseen
difficulties in integrating acquired assets into Birchcliff’s operations; negative public perception of the oil and natural gas industry
and fossil fuels, including transportation and hydraulic fracturing involving fossil fuels; the Corporation’s reliance on hydraulic
fracturing; market competition, including from alternative energy sources; changing demand for petroleum products; the
availability of insurance and the risk that certain losses may not be insured; breaches or failure of information systems and security
(including risks associated with cyber-attacks); risks associated with the ownership of the Corporation’s securities; the accuracy
of the Corporation’s accounting estimates and judgments; and potential requirements under applicable accounting standards
for the impairment or reversal of estimated recoverable amounts of the Corporation’s assets from time to time.
Readers are cautioned that the foregoing lists of factors are not exhaustive. Additional information on these and other risk
factors that could affect results of operations, financial performance or financial results are included in Birchcliff’s most recent
Annual Information Form and in other reports filed with Canadian securities regulatory authorities.
This Annual Report contains information that may constitute future-orientated financial information or financial outlook
information (collectively, “FOFI”) about Birchcliff’s prospective results of operations, all of which is subject to the same
assumptions, risk factors, limitations and qualifications as set forth above. Readers are cautioned that the assumptions used in
the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise or
inaccurate and, as such, undue reliance should not be placed on FOFI. Birchcliff’s actual results, performance and achievements
could differ materially from those expressed in, or implied by, FOFI. Birchcliff has included FOFI in order to provide readers with
a more complete perspective on Birchcliff’s future operations and management’s current expectations relating to Birchcliff’s
future performance. Readers are cautioned that such information may not be appropriate for other purposes. FOFI contained
herein was made as of the date of this Annual Report. Unless required by applicable laws, Birchcliff does not undertake any
obligation to publicly update or revise any FOFI statements, whether as a result of new information, future events or otherwise.
135
2019 Annual Report | Management has included the above summary of assumptions and risks related to forward-looking statements provided in this
Annual Report in order to provide readers with a more complete perspective on Birchcliff’s future operations and management’s
current expectations relating to Birchcliff’s future performance. Readers are cautioned that this information may not be
appropriate for other purposes.
The forward-looking statements contained in this Annual Report are expressly qualified by the foregoing cautionary statements.
The forward-looking statements contained herein are made as of the date of this Annual Report. Unless required by applicable
laws, Birchcliff does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.
136
| 2019 Annual Report T H A N K Y O U T E A M B I R C H C L I F F
Jeffrey Akeroyd, Bradley Alexander, Karen Allen, Diana Almeida, Tracy Anderson, Camille Ashton, Gaetano Aurigemma, Angela Belbeck,
Tyrus Bender, Riley Berge, Daniel Blattler, Calvin Bohdan, Angela Boire, Darryl Bolch, Deborah Borthwick, Myles Bosman, Jeff Boswell,
Robyn Bourgeois, David Boyle, Anthony (Tony) Bozzi, Jordan Calderwood, Matthew Campbell, Dave Campbell, Chris Carlsen,
Caitlin Carrigy, Ann Ceccanese, Scott Cedergren, Benjamin Christenson, Ian Clarke, Wendy Clay, Dallas Cline, Jacob Cloutier,
Kalen Conrad, Laura Conroy, Michael Cordingley, Kaleigh Cuthbertson, Loren Damer, Lara De Paula, Elle Devost, Mark Dilworth,
Tommy Doenz, Kellen Doenz, Joe Doenz, Jesse Doenz, Kelly Dolen, Terrance Dyck, Darryl Easter, John (Cliff) Ennis, Tim Etcheverry,
Lindsay Fast, Laura Ferguson, Mikaela Fero, Grant Friesen, Marshall Fritz, Colin Fry, George Fukushima, Andy Fulford, Carrie Fyfe,
Melina Geremia, Bruno Geremia, Kathryne (Katie) Giesbrecht, Chad Goddard, David Graham, Lee Grant, Hannah Grigore,
Ryan Gugyelka, Rylan Gulka, Tania Haberlack-Dolan, Mike Hale, Samuel Hampton, Trevor Harley, Wanda Hiebert, Lorna Hildebrand,
Warren Hingley, Paul Hirsekorn, Jasen Holmstrom, Lory-Ann Hoppe, Daryl Hudak, Dave Humphreys, Derek Jamieson, Lorn Johnson,
David Johnson, Anna Johnson, Dustin Kelm, Phyllis Kinzner, Diane Knoblauch, Jesiah (Jesse) Kurjata, Danny Kutrowski, Chase Lajeunesse,
Christina (Anji) Lawrence, Katherine Lazaruk, Calvin Leithead, Kirby Lenart, Kristen Lewicki, Ehsan Liaqat, Ryan Linsley, Thomas Lundquist,
Scott Lundquist, Joseph Lyste, John Macgillivray, Mason Mackay, Dallas Maclean, Darcy Macleod, Mary Macneill, Curtis Mah,
Maggie Malapad, Kevin Matiasz, Drystan Mazur, Angie Mcgonigal, Tyler Mcinnis, Ryan Mcintosh, Marc Mcintosh, Jerilyn Mcpherson,
Richard Melling, Paul Messer, Derek Michetti, Alfred Michetti, Emelyia Moghaddami, Thomas Moult, Steve Mueller, Mckenzie Murdoch,
Tyler Murray, Kody Naka, Sarah Nance, Kevin Nelson, Michael Ng, Tam Nguyen, Matteo Niccoli, Matthew O’Connell,
Matteo Olivier-Lintner, Christopher Olson, Tammy Page, Philomena Paisley, Bruce Palmer, Dean Paterson, Chase Peirce, Jess Peterson,
Paul Picco, Allan Pickel, Landon Poffenroth, Erin Poffenroth, Thomas Power, Terrence Power, Glenn Power, Austin Power, Adam Preston,
Shoni Proctor, Evan Pugh, Kathryn (Kate) Ramage, Brian Ritchie, Michelle Rodgerson, Blaine Rogers, Jeff Rogers, Sherri Rosia,
Jared Rousson, Randy Rousson, Brandon Rowley, Todd Sajtovich, Lee Sallenbach, Victor Sandhawalia, Aaron Sandnes, Wade Schultz,
Mohammad (Sadeq) Shahamat, Dan Sharp, Ryan Sloan, Colin Smith, Vamsikiran (Kiran) Somanchi, Tanner St.julian, Hilary Steinbach,
Brent Sterling, Darby Stolk, Lindsay Sturrock, Tracey Suchlandt, Tyson Suderman, Jim Surbey, Theresa Sutton (Hannouche),
Ryan Swanson, John (Conal) Tackney, Mathew Thiessen, Duane Thompson, Gerald Thornton, Leah (Janet) Tkachuk, Jeff Tonken,
Gillian Topping, Terry Tracey, Hue Tran, Kevin Urness, Joshua Cromwell Uy, Joshua Van Der Raadt, Theo Van Der Werken, Kara Vance,
Kris Veach, Greg Vreim, Blair Walsh, Linda Wang, Michael Warrick, Shelby Watson, Matthew Weiss, David Wetta, Blake Wilson,
Philip Wu, John Yeo, Kent Zahara, Michael (Mike) Zimmerman
2019 Annual Report | 137
C O R P O R AT E I N F O R M AT I O N
OFFICERS
MANAGEMENT CONT’D
A. Jeffery Tonken
President, Chief Executive Officer &
Chairman of the Board
Myles R. Bosman
Vice-President, Exploration &
Chief Operating Officer
Chris A. Carlsen
Vice-President, Engineering
Bruno P. Geremia
Vice-President &
Chief Financial Officer
David M. Humphreys
Vice-President, Operations
DIRECTORS
A. Jeffery Tonken (Chairman)
President & Chief Executive Officer
Calgary, Alberta
Dennis A. Dawson
Lead Independent Director
Calgary, Alberta
Debra A. Gerlach
Independent Director
Calgary, Alberta
Stacey E. McDonald
Independent Director
Calgary, Alberta
James W. Surbey
Non-Independent Director
Calgary, Alberta
MANAGEMENT
Gates Aurigemma
Manager, General Accounting
Robyn Bourgeois
General Counsel &
Corporate Secretary
Jesse Doenz
Controller &
Investor Relations Manager
birchcliffenergy.com
George Fukushima
Manager of Engineering
Andrew Fulford
Surface Land Manager
Paul Messer
Manager of IT
Tyler Murray
Mineral Land Manager
Bruce Palmer
Manager of Geology
Brian Ritchie
Asset Manager – Gordondale
Michelle Rodgerson
Manager of Human Resources &
Corporate Services
Jeff Rogers
Facilities Manager
Randy Rousson
Drilling & Completions Manager
Vic Sandhawalia
Manager of Finance
Ryan Sloan
Health, Safety & Environment Manager
Duane Thompson
Production Manager
Hue Tran
Business Development Manager
Theo van der Werken
Asset Manager – Pouce Coupe
AUDITORS
KPMG LLP,
Chartered Professional Accountants
Calgary, Alberta
RESERVES EVALUATORS
Deloitte LLP
Calgary, Alberta
McDaniel & Associates Consultants Ltd.
Calgary, Alberta
BANKERS
The Bank of Nova Scotia
Alberta Treasury Branches
Bank of Montreal
Business Development Bank of Canada
Canadian Branch
Canadian Imperial Bank of Commerce
HSBC Bank Canada
ICICI Bank Canada
National Bank of Canada
The Toronto-Dominion Bank
United Overseas Bank Limited
Wells Fargo Bank, N.A.,
Canadian Branch
HEAD OFFICE
Suite 1000, 600 – 3rd Avenue S.W.
Calgary, Alberta T2P 0G5
Phone: 403-261-6401
403-261-6424
Fax:
SPIRIT RIVER OFFICE
5604 – 49th Avenue
Spirit River, Alberta T0H 3G0
Phone: 780-864-4624
Fax:
780-864-4628
Email: info@birchcliffenergy.com
TRANSFER AGENT
Computershare Trust Company
of Canada
Calgary, Alberta and
Toronto, Ontario
TSX: BIR, BIR.PR.A, BIR.PR.C
2019 Annual Report | 138
2 0 1 9 A N N U A L R E P O R T
BIRCHCLIFF ENERGY LTD.
Suite 1000, 600 3rd Avenue S.W.
Calgary, Alberta T2P 0G5
Phone: 403-261-6401
birchcliffenergy.com