2 0 2 0 A N N U A L R E P O R T
Although people will look back on 2020 as being memorable for its
challenges, at Birchcliff we will look back at our successes, building
out our infrastructure and driving down our costs.
We are building momentum for the future.
Table of Contents
02
03
04
06
08
10
12
13
16
27
32
38
99
108
133
135
135
136
143
144
Overview
Financial and Operational Highlights
Message to Shareholders
Executive Team
Management Team
History
2020 Accomplishments
2021 Key Objectives
Peace River Arch
Environmental, Social & Governance
2020 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 uses the terms “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, 2020 (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”.
1
ANNUAL REPORT 2020
Overview
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 2020, Birchcliff generated $184.5 million of adjusted funds
flow and averaged 76,401 boe/d of production.
At December 31, 2020, 453 (449.9 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-cost structure, which helps us to
maximize our returns to shareholders.
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.
By the Numbers
As at December 31, 2020
99%
Operated
production
99%
New drilling
initiated and
controlled
89%
Average working
interest in
undeveloped land
453
(449.9 NET)
Horizontal wells
drilled and cased on
the Montney/Doig
Resource Play
2
BIRCHCLIFF ENERGY FINANCIAL AND OPERATIONAL HIGHLIGHTS
OPERATING
Average production
Light oil (bbls/d)
Condensate (bbls/d)
NGLs (bbls/d)
Natural gas (Mcf/d)
Total (boe/d)
Average realized sales price (CDN$)(1)
Light oil (per bbl)
Condensate (per bbl)
NGLs (per bbl)
Natural gas (per Mcf)
Total (per boe)
NETBACK AND COST ($/boe)
Petroleum and natural gas revenue(1)
Royalty expense
Operating expense
Transportation and other expense
OPERATING NETBACK ($/boe)
G&A expense, net
Interest expense
Realized gain (loss) on financial instruments
Other income
ADJUSTED FUNDS FLOW NETBACK ($/boe)
Depletion and depreciation expense
Unrealized gain (loss) on financial instruments
Other expenses (income)(2)
Dividends on preferred shares
Income tax recovery (expense)
Net income (loss) to common shareholders ($/boe)
FINANCIAL
Petroleum and natural gas revenue ($000s)(1)
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)
F&D capital expenditures ($000s)(3)
Total capital expenditures ($000s)(4)
Long-term debt ($000s)
Total debt ($000s)
Three months ended
December 31,
Twelve months ended
December 31,
2020
2019
2020
2019
3,566
6,658
8,285
360,839
78,649
4,435
4,906
7,814
364,847
77,962
4,415
5,824
7,650
351,068
76,401
4,742
5,145
7,264
364,958
77,977
49.56
52.90
16.16
2.93
21.87
21.88
(0.90)
(3.03)
(4.94)
13.01
(1.11)
(1.20)
(1.63)
0.12
9.19
(7.49)
5.84
0.30
(0.26)
(2.00)
5.58
158,283
71,431
66,509
0.25
40,407
0.15
265,943
265,940
1,330
1,905
41,291
28,778
731,372
761,951
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
56,800
58,136
609,177
632,582
42.39
48.03
13.62
2.49
18.90
18.90
(0.65)
(2.95)
(4.93)
10.37
(0.88)
(0.93)
(2.13)
0.17
6.60
(7.60)
(1.27)
(0.16)
(0.27)
0.48
(2.22)
528,505
188,180
184,526
0.69
(62,008)
(0.23)
265,943
265,936
10,968
7,654
287,967
276,785
731,372
761,951
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
256,395
300,246
609,177
632,582
(1) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.
(2) Includes non-cash items such as compensation, accretion, amortization of deferred financing fees and other gains and losses.
(3) See “Advisories – Capital Expenditures”.
(4) Includes acquisitions, dispositions and administrative assets. See “Advisories – Capital Expenditures”.
3
ANNUAL REPORT 2020 Message To Shareholders
Dear Fellow Shareholders,
2020 was a challenging year for Birchcliff and for the industry
as a whole. The significant negative impact of the COVID-19
pandemic on economic conditions in Canada and the rest of
the world, compounded by production and pricing decisions
from OPEC, drove down the price of oil, with WTI moving into
negative territory. Needless to say, these events put significant
strain on Birchcliff, its employees, and its stakeholders.
2020 OVERVIEW AND ACHIEVEMENTS
We took decisive action in 2020 to strengthen our balance sheet
and ensure liquidity and financial flexibility, including reducing
our original capital budget by 19% and our common share
dividend by 81%. We also implemented a number of initiatives
to protect the safety and well-being of our employees and
contractors, while effectively executing our 2020 business
plan. These initiatives, which are ongoing, include remote
work-from-home arrangements, physical distancing measures,
enhanced cleaning and sanitization measures and conducting
meetings through virtual means. We also brought in industrial
camps for contractors, which significantly reduced interaction
with the communities surrounding our operations. We have
established a response team to coordinate and implement
initiatives relating to COVID-19 and we continue to closely
monitor the recommendations of applicable government
and health authorities.
While others in our industry struggled to maintain liquidity in
2020, Birchcliff reconfirmed its $1 billion credit facilities with our
syndicate of banks in early May 2020. This was notwithstanding
very weak commodity prices and the decimation of our economy
and is a testament to the strength and value of our assets.
These credit facilities do not contain any financial maintenance
covenants and mature on May 11, 2022.
Birchcliff moved forward with its previously planned
infrastructure build-out projects in 2020. These projects, which
are expected to last for decades, are highlighted by our new inlet
liquids-handling facility (the “Inlet Liquids-Handling Facility”)
at the Pouce Coupe Gas Plant and the completion of a significant
trunk line in the southwest of Gordondale. The addition of the
“We are full speed ahead and
enthusiastically looking forward
to executing our business plan.”
4
BIRCHCLIFF ENERGY
Inlet Liquids-Handling Facility, which was completed ahead of
schedule and under budget, increases the operational safety
of the Pouce Coupe Gas Plant. It also allows us to process
a significant amount of condensate, including from the very
successful 14-well pad that we brought on production in
Pouce Coupe in 2020. Making the decision to continue with
these infrastructure projects during the 2020 downturn required
us to outspend our adjusted funds flow in 2020. We believe this
has proven to be the correct decision, as these projects reduced
our operating costs, allow us to increase our cash flow and make
our operations safer.
Other achievements in 2020 include:
•
•
•
•
We achieved record low annual operating expense of
$2.95/boe, a 5% decrease from 2019, which speaks to
the significant efforts of our team to remain one of
industry’s lowest-cost producers.
Our annual average production was 76,401 boe/d.
Liquids accounted for approximately 23% of our total
production in 2020, with total liquids production
increasing by 4% from 2019.
We successfully executed our 2020 capital program, drilling
and bringing on production a total of 34 (34.0 net) wells.
We adapted rapidly to the unprecedented changes to our
operations as a result of the COVID-19 pandemic in order
to reduce the risks to our employees and contractors, the
communities in which we operate and our business.
COMMITMENT TO CORPORATE RESPONSIBILITY
At Birchcliff, we recognize the importance of, and our
responsibility for, environmental stewardship and are
committed to the responsible development of our assets.
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
are continually looking to identify, develop and utilize new
technology, systems and processes that will reduce our
environmental footprint and create a safer work environment.
2020 was not only challenging for businesses, but also for
individuals, families, and communities, and we have been
focused on showing compassion for our employees and
contractors and giving back to our community and those
less fortunate through our community and stakeholder
engagement program.
As I look back on 2020, I am proud of the way that Birchcliff
balanced its responsibilities to all of its stakeholders. Information
regarding our ESG initiatives and activities can be found later in
this Annual Report under the heading “Environmental, Social
& Governance” and in our ESG Report which is available on
our website at www.birchcliffenergy.com.
OUTLOOK
In our press release on January 20, 2021, we outlined our
guidance for the year. This includes the expectation that
Birchcliff will generate approximately $360 million of adjusted
funds flow with F&D capital expenditures of between
$210 million and $230 million, resulting in free funds flow of
$130 million to $150 million in 2021.
We are focused on strengthening our balance sheet and free
funds flow in 2021 will be used primarily for debt reduction.
After the collapse of the public energy markets in 2020, it is
clearer than ever that we must return value to our shareholders.
We believe that in order to do this we must first drive our debt
down in order to confidently move forward with sustainable
shareholder returns.
I want to sincerely thank our Board of Directors and the other
members of our Executive Team for their hard work, support
and determination to be successful, especially during the
extraordinary circumstances that arose in the spring of 2020,
when significant collaborative discussion about the risks of our
business took place frequently.
On behalf of our Executive Team, we want to thank all of our
managers and staff for trusting us with the new and often
changing processes which were required due to COVID-19.
During 2020, we had more than 30 staff meetings, including
virtual meetings weekly from mid-March to the end of June,
as we focused on maintaining excellent communication
despite our work-from-home arrangements, to ensure the
safety of our stakeholders and the successful execution of
our capital program.
As I write this message, we are on budget and ahead of
schedule on our capital program, our drilling results are very
encouraging and commodity prices look very strong for 2021.
With our best asset in place, our people, we are full speed
ahead and enthusiastically looking forward to executing our
business plan.
A. Jeffery Tonken
President & Chief Executive Officer
March 10, 2021
5
ANNUAL REPORT 2020 Executive Team
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
6
BIRCHCLIFF ENERGY 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
7
ANNUAL REPORT 2020 Management Team
Birchcliff’s Management Team is comprised of talented, high-performing individuals who are driven
to help Birchcliff succeed.
ROBYN BOURGEOIS
General Counsel & Corporate Secretary
RANDY ROUSSON
Drilling & Completions Manager
RYAN SLOAN
Health, Safety &
Environment Manager
JEFF ROGERS
Facilities Manager
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
8
BIRCHCLIFF ENERGY 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
9
ANNUAL REPORT 2020 History
Birchcliff was incorporated as a private corporation on July 6, 2004. Since
our inception, we have invested approximately $4.7 billion of capital in Alberta,
primarily in the Montney/Doig Resource Play. These investments have generated
$5.2 billion in revenue, paid $388 million in royalties to Albertans and delivered
$2.6 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
MARCH 2010
Phase I of the Pouce Coupe Gas
Plant commenced operations
with a processing capacity of
30 MMcf/d
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
NOVEMBER 2010
Phase II of the Pouce Coupe Gas
Plant commenced operations with
a combined processing capacity
of 60 MMcf/d
20
05
10
JULY 21, 2005
Common shares commenced
trading on the TSX
BIRCHCLIFF ENERGY JANUARY 3, 2019
Acquired 18 gross (15.1 net)
contiguous sections of
Montney land between
Pouce Coupe and
Gordondale for $39 million
MARCH 31, 2017
Paid first quarterly dividend
to common shareholders
SEPTEMBER 2014
Phase IV of the Pouce Coupe
Gas Plant commenced operations
with a combined processing
capacity of 180 MMcf/d
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
SEPTEMBER 2017
Phase V of the Pouce Coupe
Gas Plant commenced
operations with a combined
processing capacity of
260 MMcf/d
APRIL 3, 2018
Announced a new long-term
processing arrangement at
Altagas’ Gordondale Gas Plant
AUGUST 2018
Phase VI of the Pouce Coupe Gas
Plant commenced operations with
a combined processing capacity
of 340 MMcf/d
20
20
JULY 2020
Completed the Inlet Liquids-
Handling Facility at the
Pouce Coupe Gas Plant
DECEMBER 31, 2020
453 (449.9 net) Montney/Doig
horizontal wells successfully
drilled and cased to date
11
ANNUAL REPORT 2020 2020 Accomplishments
Achieved record low annual
operating expense of $2.95/boe
Achieved annual average
production of 76,401 boe/d
Completed and commissioned Birchcliff’s
20,000 bbls/d Inlet Liquids-Handling Facility
to increase condensate production capability
to 10,000 bbls/d in Pouce Coupe
Successfully executed the 2020
capital program, drilling and
bringing on production a total
of 34 (34.0 net) wells
12
BIRCHCLIFF ENERGY 2021 Key Objectives
Continue to focus on long-term full
cycle profitability while paying a
sustainable quarterly dividend to
common shareholders
Continued commitment to science
and technology to drive operational
excellence and further our learnings
on field development planning
Maximizing free funds flow and
strengthening our balance sheet
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
13
ANNUAL REPORT 2020 “We have
been focused
on showing
compassion for
our employees
and contractors
and giving back
to our community
and those less
fortunate.”
- A. Jeffery Tonken
President &
Chief Executive Officer
14
BIRCHCLIFF ENERGY 15
ANNUAL REPORT 2020 One Core Area
PEACE
RIVER
ARCH
16
BIRCHCLIFF ENERGY Peace River Arch
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.
17
ANNUAL REPORT 2020 Montney/Doig Resource Play
We are focused on the Montney/Doig Resource Play within
the Peace River Arch.
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
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 16 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 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.
453
MONTNEY/DOIG
HORIZONTAL WELLS
DRILLED AND CASED
(449.9 NET) At December 31, 2020
18
BIRCHCLIFF ENERGY 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
Birchcliff Facility
Pouce Coupe Gas Plant
Gordandale Gas Plant
M
O
N
T
N
E
POUCE COUPE
TEAM
GORDONDALE
TEAM
Y
/
D
O
I
G
D
E
E
P
B
A
S
I
N
E
D
G
E
MONTNEY/DOIG
RESOURCE PLAY
TREND
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”)
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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.
19
ANNUAL REPORT 2020
Our Montney/Doig Resource Play is centred approximately 95 km northwest of Grande Prairie,
Alberta, Canada and is considered by management of Birchcliff to be one of the premier 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: RBC RUNDLE
Source: Source: Canadian Discovery, RBC Rundle
20
BIRCHCLIFF ENERGY 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.
Birchcliff Montney/Doig Resource Play Full Development Plan: Hexastack
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.
Production Interval
Basal Doig/Upper Montney
73 Wells
Montney D4
12 Wells
Montney D3
Exploration
0 Wells
Montney D2
49 Wells
Montney D1
295 Wells
Montney C
11 Wells
440 Wells Total
Mature Developed/Commercial
Future Potential
21
ANNUAL REPORT 2020BIRCHCLIFF MONTNEY/DOIG NATURAL GAS RESOURCE PLAY FULL DEVELOPMENT PLAN: HEXASTACKBASAL DOIGMONTNEY D5MONTNEY D4MONTNEY D3MONTNEY D2MONTNEY D1MONTNEY CProduction IntervalAs of December 31, 2020Mature Developed/Commercial1600m60m300m1600m300mBasal Doig/Upper Montney 73 WellsMontney D4 12 WellsMontney D3 Exploration0 WellsMontney D2 49 WellsMontney D1 295 WellsMontney C 11 WellsFuture Potential440 Wells Total Drilling Interval
Basal Doig/Upper Montney
Montney D4
Montney D3
Montney D2
Montney D1
Montney C
Cube-Style
Development
OUR OPERATIONS
At December 31, 2020, Birchcliff has successfully drilled
and cased an aggregate of 453 (449.9 net) Montney/Doig
horizontal wells on the Montney/Doig Resource Play. Of
these wells, an aggregate of 440 (437.7 net) wells have
been completed and brought on production, consisting of
73 (71.9 net) wells in the Basal Doig/Upper Montney interval,
12 (12.0 net) wells in the Montney D4 interval, 49 (49.0 net)
wells in the Montney D2 interval, 295 (293.7 net) wells in the
Montney D1 interval and 11 (11.0 net) wells in the Montney C
interval. To date, Birchcliff has not drilled any wells in the
Montney D3 interval.
2020 DRILLING AND COMPLETIONS
During 2020, Birchcliff drilled 34 (34.0 net) horizontal
wells. Of these 34 wells, 26 (26.0 net) were condensate-rich
natural gas wells in Pouce Coupe and 8 (8.0 net) were oil
wells in Gordondale. The Corporation brought on production
34 (34.0 net) wells during 2020, including 6 (6.0 net) wells
that were drilled in Q4 2019 and 28 of the 34 wells drilled in
2020. The remaining wells that were drilled in Q4 2020 were
brought on production in Q1 2021. All wells drilled in 2020
were drilled on multi-well pads, which allows Birchcliff to
reduce its per well costs and environmental footprint.
MULTI-INTERVAL CUBE-STYLE DEVELOPMENT AND
CONTINUOUS PERFORMANCE IMPROVEMENT
The 14-well pad in Pouce Coupe, drilled in 2020, highlights
the progress Birchcliff has made with its DCCET best practices.
Through its many years of exploration and development,
Birchcliff has acquired significant proprietary knowledge
respecting all aspects of the Montney/Doig Resource Play in
its areas of focus. This competitive advantage has resulted from
Birchcliff’s commitment to science and technology and striving
for continuous performance improvement, as well as the
knowledge gained from the drilling, completing and bringing
on production of 440 (437.7 net) horizontal wells since its first
Montney/Doig horizontal well was drilled in 2007. Building off
of the success of its science and technology pad in 2018 that
targeted three different intervals (the Montney D1, D2 and C),
Birchcliff continues to refine its multi-interval cube-style DCCET
practices to improve resource recovery and cost efficiency.
This cube-style of development has various benefits, including:
(i) it reduces Birchcliff’s environmental footprint; (ii) it allows
Birchcliff to fracture stimulate (complete) a large number
of wells in several different intervals at once to leverage
the rock mechanics and achieve better resource recovery;
(iii) it helps to minimize frac-driven interaction with offsetting
wells; (iv) it reduces per well costs through common well
equipment and pipelines; and (v) it maximizes operational
scale and repeatability.
Birchcliff’s investment in science and technology is critical
to its continuous performance improvement. The 14-well
pad provided an excellent opportunity to utilize leading-
edge diagnostic technology to enhance the Corporation’s
learnings. The diagnostics on this pad include: (i) surface
microseismic; (ii) downhole whip array microseismic;
(iii) fibre distributed acoustic sensing, which was used for
microseismic and cross-strain measurements; (iv) sealed
wellbore pressure monitoring to monitor offsetting well
interactions; (v) full-cycle geochemistry sampling; and
(vi) accelerated and conventional diagnostic fracture
injection testing and interference testing.
22
BASAL DOIGMONTNEY D5MONTNEY D4MONTNEY D3MONTNEY D2MONTNEY D1MONTNEY C2,400m Drilling IntervalBasal Doig/Upper MontneyMontney D4 Montney D3 Montney D2 Montney D1 Montney C 1,600m300m300m300m60m60mCube-StyleDevelopment150mMulti-Interval Cube-Style Development2,400m1,600mBIRCHCLIFF ENERGYBASAL DOIGMONTNEY D5MONTNEY D4MONTNEY D3MONTNEY D2MONTNEY D1MONTNEY C2,400m Drilling IntervalBasal Doig/Upper MontneyMontney D4 Montney D3 Montney D2 Montney D1 Montney C 1,600m300m300m300m60m60mCube-StyleDevelopment150mMulti-Interval Cube-Style Development2,400m1,600m The utilization of these diagnostic technologies has provided
Birchcliff with significant insights into its DCCET best practices
at the stage, well and pad level, including:
•
•
•
At the stage level: optimal cluster design, including the
number of clusters per stage, stage length, tonnes per
metre of proppant and proppant concentrations.
At the well level: optimal number of stages per well,
well lengths and wellbore landing depths.
At the pad level: optimal frac order, flowback order and
well spacing, both laterally and vertically.
In 2020, Birchcliff continued to utilize innovative technologies
in its completions operations in order to achieve better well
results, including zipper fracturing, plug and perf technology
and fluid additives to enhance its condensate production
and recoveries.
Further, Birchcliff’s operations team is focused on maximizing
fracture pumping time through surface manifolds, which
allows for a quick change over from well to well on multi-well
pads and on utilizing new smart coil tubing units for wellbore
milling operations post fracture treatment.
With respect to drilling, Birchcliff has modified its drill bit,
drilling mud and downhole motor selection to reduce drill
times and has trialed the use of rotary steerable technology for
smoother well trajectories and faster drilling times.
In addition, Birchcliff will continue to utilize compressed
natural gas to displace diesel from its drilling and completions
operations in 2021, which helps to reduce costs and lessen
its environmental footprint. Birchcliff also continues to
implement various initiatives in order to optimize its netbacks
and capitalize on its large contiguous land base.
SIGNIFICANT FUTURE DRILLING OPPORTUNITIES
At December 31, 2020, Birchcliff held 227.7 (214.1 net) sections
of contiguous land that have potential for the Montney/Doig
Resource Play in Pouce Coupe and Gordondale. The 2020
Deloitte Reserves Report attributed proved plus probable
reserves to 769.0 potential net future horizontal drilling
locations in Pouce Coupe and Gordondale. Based on
Birchcliff’s five year plan (announced on January 20, 2021),
the Corporation is targeting drilling 158 wells in the next five
years to achieve average annual production of 91,000 boe/d
in 2025. In addition, at December 31, 2020, Birchcliff had
approximately 3,065 potential net future horizontal drilling
locations in Pouce Coupe and Gordondale that have not
had any proved or probable reserves attributed to them
by Deloitte.
Birchcliff also owns 169.5 (169.5 net) sections of land
in the Elmworth area of Alberta with potential for the
Montney/Doig Resource Play. At December 31, 2020,
the Corporation has approximately 3,300 potential net
future horizontal drilling locations in Elmworth that have
not had any proved or probable reserves attributed to
them by Deloitte. See “2020 Year-End Reserves” and
“Advisories – Drilling Locations”.
Birchcliff Montney/Doig
Multi-Layer Opportunity
23
Basal DoigMontney D5Montney D4Montney D3Montney D2Montney D1TSEMontney CElmworthPouce CoupeGordondaleHydrocarbon Pore Volume123456Producing IntervalsFuture Potential IntervalsLEGENDANNUAL REPORT 2020 Pouce Coupe Team
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, 2020, the Corporation held an aggregate of 415.4 (386.7 net)
sections of land in the area. Annual average production in 2020 was 47,149 boe/d (249 MMcf/d of natural gas, 1,226 bbls/d
of NGLs (excluding condensate), 4,401 bbls/d of condensate and 31 bbls/d of light oil).
Pouce Coupe Team Highlight Map
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24
BIRCHCLIFF ENERGY
POUCE COUPE DRILLING AND DEVELOPMENT
POUCE COUPE GAS PLANT
Key focus areas for Pouce Coupe in 2020 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 26 (26.0 net) wells and brought
24 (24.0 net) wells on production in Pouce Coupe in 2020.
A highlight for the Pouce Coupe Team in 2020 was the
discovery of an extension to the Gordondale light oil pool.
In Q3 2020, the Corporation brought the production on from
its 14-well pad (14-19-079-12W6) located in the northeastern
area of Pouce Coupe. The 14 wells were drilled in 3 different
intervals, with 5 wells drilled in the Montney D2, 4 wells
drilled in the Montney D1 and 5 in the Montney C. The results
from Birchcliff’s 14-well pad demonstrate the extension of the
Gordondale light oil pool into the northeastern area of
Pouce Coupe, which provides the Corporation with
significantly more potential condensate/light oil drilling
opportunities. The 14 wells are showing strong initial
condensate/light oil rates, similar to the light oil wells that
Birchcliff drilled in Gordondale over the past year, and are
delivering strong rates of return at current commodity prices.
The Inlet Liquids-Handling Facility, which was completed in
the Q3 2020, allows the Corporation to process and sell the
condensate/light oil from these wells in Pouce Coupe
to achieve a premium price.
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
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. In July 2020, the Inlet Liquids-Handling Facility
was brought on-stream. This facility was completed ahead
of schedule and under budget and it represents an important
milestone for Birchcliff as it increases the operational safety
of the Pouce Coupe Gas Plant and provides the ability to
optimize condensate and NGLs product streams and pricing,
as well as grow its condensate production in Pouce Coupe to
approximately 10,000 bbls/d.
25
ANNUAL REPORT 2020 Gordondale Team
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, 2020,
the Corporation held an aggregate of 126.5 (90.8 net) sections
of land in the area. Annual average production in 2020 was
29,250 boe/d (102 MMcf/d of natural gas, 4,382 bbls/d of
light oil, 6,424 bbls/d of NGLs (excluding condensate) and
1,424 bbls/d of condensate).
GORDONDALE DRILLING AND DEVELOPMENT
Key focus areas for Gordondale in 2020 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. In Gordondale, the
Corporation drilled 8 (8.0 net) wells and brought 10 (10.0 net)
wells on production. Birchcliff used multi-interval cube-style
development to drill the 10 wells, using two drilling rigs on two
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proximal pads targeting the Montney D1, D2 and D4 intervals.
Two wells were drilled in Q4 2019 and the remaining 8 wells
were drilled in Q1 2020. All of the wells were brought on
production in Q2 2020.
GORDONDALE INFRASTRUCTURE
In Gordondale in 2020, Birchcliff completed the addition
of natural gas compression at both of its 100% owned and
operated oil batteries and the construction of its significant
trunk line to transport oil, natural gas and water to these
batteries from the southeastern portion of the field. Both
projects were completed in Q2 2020. The addition of natural
gas compression at both batteries allows the existing wells to
produce against lower wellhead pressures, which in turn has
increased production rates. The addition of the new trunk line
allows the compression to become even more effective and
handle both the new and existing volumes in the area.
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F
F
E
D
G
G
E
G
G
E
LL
G
FCC
F
FCC
F
F
F
C
C
FCC
F
F
F
F
F
E
E
LL
A
T78
T77
GC
C
C
C
CF
L
GG
L E G E ND
F
KC
G
Gordondale Non-Confidential Land
Birchcliff Non-Confidential Land
Birchcliff Vertical Producers
Birchcliff Horizontal Producers
T76
N
N
2021 Capital Program
2020 Capital Program
F
F
F
F
F
F
F
F
26
BIRCHCLIFF ENERGY
Environmental, Social & Governance
OUR
ROLE
27
ANNUAL REPORT 2020 Environmental, Social & Governance
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 ESG Report, which provides additional information regarding Birchcliff’s ESG initiatives and activities,
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.
Birchcliff’s H&S Program provides a framework to safeguard
its employees, contractors, visitors and the people in the
communities where the Corporation operates from personal
injury and health and safety hazards. Pursuant to the H&S
Program, 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.
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.
Emergency Response Plans
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 typically 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. 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
28
BIRCHCLIFF ENERGY 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. Two of Birchcliff’s key
ongoing campaigns are the Corporation’s annual United Way
of Calgary campaign and its support of STARS Air Ambulance
in the Grande Prairie Area. To date, Birchcliff has helped
to raise over $1.4 million and over $1.5 million, for these
programs, respectively.
Other highlights in 2020 include:
•
•
•
Birchcliff sponsored a group of young adults, along with
chaperones and Elders, from the Horse Lake and Sturgeon
Lake First Nations for an educational visit to Calgary
in order to introduce them to post-secondary educational
opportunities and the career opportunities available to
them in Alberta’s energy industry and to provide them with
tools for professional success in an urban setting.
Birchcliff is a strong supporter of the Calgary Police
Foundation (the “CPF”), with a focus on helping vulnerable
and at-risk children and youth. In 2020, when schools
across Alberta were closed as a result of the COVID-19
pandemic, Birchcliff, through the CPF, donated new
laptop computers to students in need, who otherwise
would have had significant difficulty accessing online
classes and school resources.
Birchcliff sponsored the Calgary Cares Campaign
through the CPF as well as matching its employee
donations to the program. The aim of the Calgary Cares
Campaign was to support vulnerable children and at-risk
youth within the community, by providing them with
everything they needed to get through the summer
months, including food and activities.
In addition, the Corporation regularly contributes to a
number of local community initiatives that help to elevate
and enhance the quality of life at the local level, including
amateur sports, local schools, agricultural societies and fire
departments. 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. 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.
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.
29
ANNUAL REPORT 2020
GOVERNANCE
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 municipal laws and regulations. Environmental
legislation provides for, among other things, 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. 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.
The Board 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 and Mr. Dawson is the independent
lead director. The Board 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 14, 2020.
With respect to ESG oversight, the Board has overall
responsibility for ESG matters. Each quarter, the Board 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 LMR. In addition to the oversight provided by
the Board, 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.
30
BIRCHCLIFF ENERGY
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, 2020 was
$146.2 million, calculated on a discounted fair value basis
using a nominal risk-free rate of 1.26% and an inflation rate of
1.54%. See Note 8 – Decommissioning Obligations to the
Corporation’s audited annual financial statements for the
year ended December 31, 2020 for additional information
regarding the Corporation’s decommissioning obligations.
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, 2020, 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” and “Risk
Factors” in the MD&A.
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.
The Pouce Coupe Gas Plant exceeded the 100,000 tonnes
of GHGs per year threshold in the TIER Regulation in 2018,
2019 and 2020 and is therefore automatically subject to the
TIER Regulation. In addition, the Corporation’s other facilities
have been accepted as an aggregate facility for the purposes
of TIER and were therefore subject to the TIER Regulation in
2020 and going forward.
In 2020, the Corporation received 23,571 emission
performance credits under the transitional provisions of the
CCIR for the 2018 financial year. The Corporation anticipates
that it will receive 2019 emission performance credits during
the first half of 2021. Future emission performance credits will
be determined based on the Corporation’s future emission
reduction performance as determined by TIER. As the
Pouce Coupe Gas Plant and the Corporation’s other facilities
are currently subject to the TIER Regulation, such facilities are
exempt from paying the federal fuel charge under the GGPPA.
LEARN MORE
BIRCHCLIFF ESG REPORT
BirchcliffEnergy.com
31
ANNUAL REPORT 2020 2020 Year-End Reserves
Birchcliff retained Deloitte, independent qualified reserves evaluator,
to evaluate and prepare a report on 100% of Birchcliff’s light
crude oil and medium crude oil, conventional natural gas, shale
gas and NGLs reserves.
The reserves data set forth below at December 31, 2020 is based upon the evaluation by Deloitte with an effective date of
December 31, 2020 as contained in the report of Deloitte dated February 10, 2021 (the “2020 Deloitte Reserves Report”).
The forecast commodity prices, inflation and exchange rates utilized were computed using the average of forecasts from
Deloitte, McDaniel & Associates Consultants Ltd. (“McDaniel”), GLJ Petroleum Consultants Ltd. and Sproule Associates Ltd.
effective January 1, 2021 (the “2020 IQRE Price Forecast”). A copy of the 2020 IQRE Price Forecast is available in our press
release dated February 10, 2021.
The 2020 Deloitte Reserves Report has been 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”).
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, 2020, which was filed on the System for Electronic Document Analysis and
Retrieval (www.sedar.com) on March 10, 2021. In certain of the tables below, numbers may not add due to rounding.
RESERVES SUMMARY
The following table summarizes the estimates of Birchcliff’s gross reserves at December 31, 2020 and December 31, 2019,
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
Total Probable
Total Proved Plus Probable
Dec 31, 2020
(Mboe)
Dec 31, 2019(1)
(Mboe)
Change from
Dec 31, 2019
206,605.6
699,066.8
341,410.1
206,922.4
709,061.2
323,133.5
1,040,476.9
1,032,194.7
-
(1)%
6%
1%
(1) Deloitte prepared an evaluation 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 McDaniel
prepared an evaluation 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 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, in each case 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”).
32
BIRCHCLIFF ENERGY Corporate Reserves
Corporate Reserves
)
e
o
b
M
M
(
s
e
v
r
e
s
e
R
1,200
1,000
800
600
400
200
0
PDP
TP
2P
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
SINCE 2011
PDP
PROVED
PROVED PLUS
PROBABLE
20% compound
annual
growth
18% compound
annual
growth
16% compound
annual
growth
33
ANNUAL REPORT 2020
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, 2020, estimated using the 2020 IQRE Price Forecast:
Summary of Reserves at December 31, 2020
(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)
9,290.7
8,056.8
5,095.3
4,729.1
958,123.9
903,152.6 36,778.3
30,248.4
206,605.6 189,618.8
54.3
51.6
988.8
931.2
21,037.6
19,841.1
345.2
280.3
4,070.6
3,793.9
Undeveloped
10,223.0
9,113.8
2,379.1
2,260.2 2,530,366.6
2,380,312.2 56,043.3
47,724.2
488,390.6 453,933.3
Total Proved
19,568.0
17,222.2
8,463.2
7,920.4 3,509,528.1
3,303,305.9 93,166.8
78,252.8
699,066.8 647,346.1
Total Probable
11,776.1
9,867.4
5,268.9
4,842.9
1,619,891.4
1,508,888.9 58,774.0
48,392.8
341,410.1 310,548.9
Total Proved
Plus Probable
(1) NGLs includes condensate.
31,344.1
27,089.6
13,732.1
12,763.3
5,129,419.6
4,812,194.8 151,940.8 126,645.7 1,040,476.9 957,895.0
NET PRESENT VALUES OF FUTURE NET REVENUE
The following tables set forth the net present values of future net revenue attributable to Birchcliff’s reserves at December 31, 2020, estimated
using the 2020 IQRE Price Forecast, before and after deducting future income tax expenses and calculated at various discount rates:
Summary of Net Present Values of Future Net Revenue at December 31, 2020(1)
(Forecast Prices and Costs)
Reserves Category
Proved
Developed Producing
Developed Non-Producing
Undeveloped
Total Proved
Total 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
($/boe)(2)
3,094.0
2,362.3
1,869.4
1,543.5
1,318.2
62.0
6,360.8
9,516.8
5,657.8
15,174.7
39.1
3,318.3
5,719.6
2,320.2
8,039.9
27.0
1,839.8
3,736.2
1,095.5
4,831.7
19.8
1,044.0
2,607.4
578.7
3,186.1
15.1
582.1
1,915.4
334.2
2,249.5
9.86
7.12
4.05
5.77
3.53
5.04
(1) Estimates of future net revenue, whether calculated without discount or using a discount rate, do not represent fair market value.
(2) Unit values are based on net reserves volumes.
34
BIRCHCLIFF ENERGY FUTURE DEVELOPMENT COSTS
FDC reflects Deloitte’s best estimate of what it will cost to bring the proved and proved plus probable reserves on production.
Changes in forecast FDC occur annually as a result of development activities, acquisition and disposition activities and capital cost
estimates. The following table sets forth development costs deducted in the estimation of Birchcliff’s future net revenue attributable
to the reserves categories noted below:
Future Development Costs
(Forecast Prices and Costs)
2021
2022
2023
2024
2025
Thereafter
Total undiscounted
Proved
(MM$)
143.0
552.3
496.3
691.3
424.0
616.6
2,923.5
Proved Plus Probable
(MM$)
190.3
552.9
496.3
726.7
484.6
1,926.2
4,377.0
FDC for total proved reserves decreased by $157.0 million to $2.92 billion at December 31, 2020 from $3.08 billion at December 31, 2019.
FDC for total proved plus probable reserves decreased by $41.8 million to $4.38 billion at December 31, 2020 from $4.42 billion
at December 31, 2019. The decreases in FDC for both proved and proved plus probable reserves were largely due to: (i) the completion of
the Inlet Liquids-Handling Facility and compressor installations and large trunk line in Gordondale; (ii) the removal of lower net present value
future drilling locations related to the proved reserves as a result of the COGE Handbook mandated development time frame of 5 to 7 years
within available plant capacity; and (iii) the removal of 2 gross (2 net) proved undeveloped future natural gas locations and 5 gross (5 net)
proved plus probable future natural gas locations in Elmworth that were uneconomic.
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 $256 million
(unescalated) for the continued expansion of the Pouce Coupe Gas Plant from the existing 340 MMcf/d to 660 MMcf/d of total throughput.
The FDC for the expansions of the Pouce Coupe Gas Plant also include the costs of the related gathering pipelines and maintenance capital.
The following table sets forth the average cost to drill, complete, equip and tie-in a multi-stage fractured horizontal well as estimated
by Deloitte:
Average Well Cost
Pouce Coupe
Gordondale
December 31, 2020
(MM$)
December 31, 2019
(MM$)
4.7
5.4
4.7
5.4
2020YE RESERVES HIGHLIGHTS:
$10.16 /boe
PDP F&D
COSTS
130%
2P RESERVES
REPLACEMENT
35
ANNUAL REPORT 2020 2020 FINDING AND DEVELOPMENT COSTS
During 2020, our F&D capital expenditures were $288.0 million, which included $74.8 million of facilities and infrastructure capital spent
in 2020 that did not result in the addition of proved developed producing reserves at year-end 2020. FD&A capital expenditures were
$275.1 million in 2020.
The following table sets forth Birchcliff’s F&D costs and FD&A costs per boe for its proved developed producing, total proved and total
proved plus probable reserves for 2020, 2019 and 2018, including FDC:
($/boe)(1)
F&D – Proved Developed Producing
FD&A – Proved Developed Producing
F&D – Proved
F&D – Proved Plus Probable
FD&A – Proved
FD&A – Proved Plus Probable
2020(2)
$10.16
$9.95
$7.08
$6.66
$6.57
$6.44
2019(3)
2018(4)
$8.65
$9.38
$7.84
$6.22
$8.71
$7.25
$8.75
$8.75
$0.64
$1.27
$0.45
$1.47
3-Year
Average
$9.15
$9.32
$4.58
$4.70
$4.69
$4.87
(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 2020 decrease in FDC from 2019 of $157.0 million on a proved basis and $41.8 million on a proved plus probable basis.
(3) 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.
(4) 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.
2020 RECYCLE RATIOS
The following table sets forth our recycle ratios, on an operating and adjusted funds flow netback basis, for our proved developed
producing, total proved and total proved plus probable reserves for 2020 and 2019, including 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
Operating Netback
Recycle Ratio(1)(2)
Adjusted Funds Flow Netback
Recycle Ratio(1)(3)
2020
2019
2020
2019
1.0
1.0
1.5
1.6
1.6
1.6
1.5
1.4
1.7
1.5
2.1
1.8
0.6
0.7
0.9
1.0
1.0
1.0
1.4
1.3
1.5
1.3
1.9
1.6
(1) See “Advisories – Oil and Gas Metrics” for a description of the methodology used to calculate recycle ratios.
(2) Birchcliff’s operating netback was $10.37/boe in 2020, as compared to $13.07/boe in 2019.
(3) Birchcliff’s adjusted funds flow netback was $6.60/boe in 2020, as compared to $11.75/boe in 2019.
Due to the unprecedented effects of the COVID-19 pandemic, the Corporation believes that its 2020 adjusted funds flow netback does
not properly reflect the future profitability of the proved developed producing reserves added in 2020. Birchcliff anticipates that as a result
of improved commodity prices, the Corporation’s netbacks and recycle ratios will improve in 2021 to be more comparable to its historical
recycle ratios prior to COVID-19.
36
BIRCHCLIFF ENERGY 2020
FINANCIALS
37
ANNUAL REPORT 2020 Management’s Discussion and Analysis
GENERAL
This Management’s Discussion and Analysis (“MD&A”) for Birchcliff Energy Ltd. (“Birchcliff” or the “Corporation”) dated March 10, 2021
is with respect to the three and twelve months ended December 31, 2020 (the “Reporting Periods”) as compared to the three and
twelve months ended December 31, 2019 (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, 2020 which have been prepared in
accordance with IFRS. All dollar amounts are expressed in Canadian currency, unless otherwise stated.
This MD&A uses the terms “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 measures 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) unless otherwise indicated, references to “liquids” mean “light crude oil and medium crude oil” and “natural gas
liquids” (including condensate) as such terms are defined in NI 51-101; and (iii) references to “natural gas” mean “shale gas”, which also
includes an immaterial amount of “conventional natural gas”, as such terms are defined in NI 51-101. In addition, NI 51-101 includes
condensate within the product type of natural gas liquids. Birchcliff has disclosed condensate separately from other natural gas liquids
as the price of condensate as compared to other natural gas liquids is currently significantly higher and Birchcliff believes presenting the
two commodities separately provides a more accurate description of its operations and results therefrom.
ABOUT BIRCHCLIFF
Birchcliff is a Calgary, Alberta based intermediate oil and natural gas company with operations concentrated within its one core
area, the Peace River Arch of Alberta. Birchcliff’s common shares, cumulative redeemable preferred shares, Series A (the “Series A
Preferred Shares”) and cumulative redeemable preferred shares, Series C (the “Series C Preferred Shares”) 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, 2020 (the “AIF”), is
available on the SEDAR website at www.sedar.com and on the Corporation’s website at www.birchcliffenergy.com.
CURRENT OPERATING ENVIRONMENT AND COVID-19
On January 30, 2020, the World Health Organization declared the novel Coronavirus disease (“COVID-19”) outbreak a public health
emergency of international concern and on March 11, 2020, declared it to be a pandemic. The outbreak of the COVID-19 pandemic has
had a significant negative impact on global economic conditions. This included a sharp decrease in crude oil demand which, combined
with other macro-economic conditions, resulted in significant volatility in oil and natural gas commodity prices, as well as economic
uncertainty. In response, Birchcliff took decisive action in 2020 to protect its balance sheet and ensure liquidity and financial flexibility,
including reducing its original 2020 capital budget and its common share dividend (see “Capital Resources and Liquidity”).
Benchmark oil prices began to recover in the second half of 2020 due renewed production curtailments by OPEC+, an increase in demand
for oil after governments began to ease COVID-19 related restrictions and market optimism generated by COVID-19 vaccine approvals and
global vaccine distribution beginning in the three month Reporting Period. This oil price recovery has continued into early 2021.
In response to the COVID-19 pandemic, Birchcliff implemented a number of initiatives to protect the well-being of its employees and
contractors. The Corporation has established a response team to coordinate and implement such initiatives and continues to closely
38
BIRCHCLIFF ENERGY monitor the recommendations of applicable government and health authorities. In addition, the Corporation has established remote
working capabilities and procedures to ensure business continuity and the reliability of its operations in the event of future COVID-19
related restrictions or lockdowns.
The COVID-19 pandemic remains an evolving situation that has had, and may continue to have, a significant impact on future demand for
the commodities Birchcliff produces and on the Corporation’s cash flow, access to capital, results of operations, financial condition and the
environment in which it operates, as well as on the Corporation’s suppliers and employees. Management cannot reasonably estimate the
length or severity of this pandemic, or the extent to which the disruption will impact the Corporation’s go-forward financial position, profit or
loss and cash flows. The potential direct and indirect impacts of the economic downturn have been considered in management’s estimates
and assumptions at December 31, 2020 and have been reflected in the Corporation’s results. See also “Risk Factors” in this MD&A.
HIGHLIGHTS
2020 Year-End Highlights
• Achieved annual average production of 76,401 boe/d, a 2% decrease from the twelve month Comparable Prior Period.
•
Liquids accounted for approximately 23% of Birchcliff’s total production in the twelve month Reporting Period, as compared
to approximately 22% in the twelve month Comparable Prior Period, with total liquids production increasing by 4% from the
twelve month Comparable Prior Period.
• Delivered $184.5 million of adjusted funds flow, or $0.69 per basic common share, each a 45% decrease from the twelve month
Comparable Prior Period. Cash flow from operating activities decreased by 42% from the twelve month Comparable Prior Period.
•
Recorded a net loss to common shareholders of $62.0 million, or $0.23 per basic common share, as compared to a net loss to
common shareholders of $59.6 million and $0.22 per basic common share in the twelve month Comparable Prior Period.
• Achieved record low annual operating expense of $2.95/boe, a 5% decrease from the twelve month Comparable Prior Period.
•
•
•
•
Realized an operating netback of $10.37/boe, a 21% decrease from the twelve month Comparable Prior Period.
Successfully executed the Corporation’s 2020 capital program (the “2020 Capital Program”), drilling and bringing on
production a total of 34 (34.0 net) wells. F&D capital expenditures were $288.0 million in the twelve month Reporting Period.
Redeemed 402,820 Series C Preferred Shares during 2020. At December 31, 2020, the Corporation had 1,597,180 Series C
Preferred Shares outstanding, with an aggregate redemption value of approximately $39.9 million.
Total debt at December 31, 2020 was $762.0 million, as compared to $632.6 million at December 31, 2019.
Fourth Quarter 2020 Highlights
• Achieved quarterly average production of 78,649 boe/d, a 1% increase from the three month Comparable Prior Period.
•
Liquids accounted for approximately 24% of Birchcliff’s total production in the three month Reporting Period, as compared to
approximately 22% in the three month Comparable Prior Period, with total liquids production increasing by 8% from the three
month Comparable Prior Period.
• Delivered $66.5 million of adjusted funds flow, or $0.25 per basic common share, an 18% decrease and a 17% decrease,
respectively, from the three month Comparable Prior Period. Cash flow from operating activities decreased by 17% from the three
month Comparable Prior Period.
• Generated $25.2 million of free funds flow in the three month Reporting Period, a 4% increase from $24.1 million in the three
month Comparable Prior Period.
•
Recorded net income to common shareholders of $40.4 million, or $0.15 per basic common share, as compared to a net loss to
common shareholders of $19.0 million and $0.07 per basic common share in the three month Comparable Prior Period.
• Achieved operating expense of $3.03/boe, a 1% decrease from the three month Comparable Prior Period.
•
•
•
Realized an operating netback of $13.01/boe, a 9% decrease from the three month Comparable Prior Period.
F&D capital expenditures of $41.3 million. During the three month Reporting Period, Birchcliff drilled 6 (6.0 net) wells to help
ensure the efficient execution of the Corporation’s 2021 capital program (the “2021 Capital Program”).
Redeemed 364,655 Series C Preferred Shares in the three month Reporting Period for an aggregate of $9.1 million.
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.
39
ANNUAL REPORT 2020 2021 OUTLOOK AND GUIDANCE
Birchcliff is focused on maximizing free funds flow and strengthening its balance sheet. On January 20, 2021, the Corporation
announced that its Board of Directors had approved an F&D capital budget of $210 million to $230 million for 2021, which targets
an annual average production rate of 78,000 to 80,000 boe/d in 2021. Birchcliff’s 2021 Capital Program contemplates the drilling
of 27 (27.0 net) wells and bringing on production of a total of 33 (33.0 net) wells during 2021. For further details regarding the
Corporation’s 2021 Capital Program, see its press release dated January 20, 2021.
The following table sets forth Birchcliff’s guidance and commodity price assumptions for 2021, as well as its 2020 actual audited results
and 2020 guidance for comparative purposes:
Production
Annual average production (boe/d)
78,000 – 80,000
76,401
76,000 – 77,000
2021 guidance and
assumptions(1)
2020 actual
results
2020 revised guidance
and assumptions(2)
% Light oil
% Condensate
% NGLs
% Natural gas
Q4 average production (boe/d)
Average Expenses ($/boe)
Royalty
Operating
Transportation and other
Adjusted Funds Flow (MM$)
F&D Capital Expenditures (MM$)
Free Funds Flow (MM$)
Total Debt at Year End (MM$)
Natural Gas Market Exposure(7)
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 price (US$/bbl)
Average WTI-MSW differential (CDN$/bbl)
Average AECO 5A price (CDN$/GJ)
Average Dawn price (US$/MMBtu)(9)
Average NYMEX HH price (US$/MMBtu)(9)
Exchange rate (CDN$ to US$1)
5%
9%
10%
76%
83,000 – 85,000
1.15 – 1.35
2.90 – 3.10
5.00 – 5.20
360(3)
210 – 230(4)
130 – 150(5)
635 – 655(6)
12%(8)
44%
38%(8)
6%
50.00
6.00
2.50
2.75
2.80
1.27
6%
8%
9%
77%
78,649
0.65
2.95
4.93
184.5
288.0
(103.4)
762.0
17%
45%
34%
4%
38.91
8.34
2.11
1.88
2.08
1.3413
6%
8%
9%
77%
78,000 – 79,000
0.60 – 0.80
2.85 – 3.05
4.90 – 5.10
195
285
(90)
740 – 760
16%
46%
34%
4%
37.50
8.10
2.20
1.95
2.10
1.35
(1) Birchcliff’s guidance for its production commodity mix, adjusted funds flow and natural gas market exposure is based on an annual average production rate of 79,000 boe/d during 2021, which is the
mid-point of Birchcliff’s annual average production guidance range.
(2) As revised on November 12, 2020.
(3) Birchcliff’s estimate of adjusted funds flow takes into account the effects of its commodity risk management contracts outstanding as at January 20, 2021.
(4) Birchcliff’s estimate of F&D capital expenditures excludes any net potential acquisitions and dispositions and corresponds to Birchcliff’s 2021 F&D capital budget. See “Advisories – Capital Expenditures” in this MD&A.
(5) 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” in this MD&A.
(6) 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 and applicable taxes remaining unchanged; (ii) that there are 266 million common, 2,000,000 Series A and 1,550,129 Series C Preferred Shares outstanding,
with no further redemptions of Series C Preferred Shares or buybacks of common shares occurring during 2021; (iii) that there is no repayment of debt using the proceeds from asset dispositions or debt
or equity issuances; (iv) that the 2021 Capital Program will be carried out as currently contemplated and the level of capital spending set forth herein will be achieved; and (v) the targets for production,
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.
(7) Birchcliff’s guidance regarding its natural gas market exposure in 2021 assumes: (i) 175,000 GJ/d being sold at the Dawn index price; (ii) 25,400 MMcf/d being sold at Alliance’s Trading Pool daily index
price; and (iii) 152,500 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.
(8) Updated to correctly reflect natural gas market exposure to NYMEX HH and AECO. Was previously reported as 17% at AECO and 33% at NYMEX HH in Birchcliff’s press release dated January 20, 2021.
(9) See “Advisories – MMBtu Pricing Conversions” in this MD&A.
40
BIRCHCLIFF ENERGY Adjusted Funds Flow Sensitivity
The following table illustrates the expected impact of changes in commodity prices and the CDN/US exchange rate on the
Corporation’s estimate of adjusted funds flow for 2021 of $360 million, after taking into account the effects of its commodity risk
management contracts outstanding as at January 20, 2021:
Estimated change to 2021 adjusted funds flow (MM$)(1)(2)
Change in WTI US$1.00/bbl
Change in NYMEX HH US$0.10/MMBtu
Change in Dawn US$0.10/MMBtu
Change in AECO CDN$0.10/GJ
Change in CDN/US exchange rate CDN$0.01
5.9
6.6
8.0
3.0
3.3
(1) See the guidance table above.
(2) The calculated impact on adjusted funds flow is only applicable within the limited range of change indicated. Calculations are performed independently and may not be indicative of actual results.
Actual results may vary materially when multiple variables change at the same time.
Changes in assumed commodity prices and variances in production estimates may impact the Corporation’s estimates of adjusted
funds flow and free funds flow and the Corporation’s other guidance, which impact may be material. For further information, see
“Advisories – Forward-Looking Statements” in this MD&A.
Comparison of 2020 Results to Guidance
Birchcliff’s 2020 financial and operational results were generally in line with its guidance. Birchcliff’s adjusted funds flow of
$184.5 million in the twelve month Reporting Period was 5% lower than its guidance of $195 million, primarily due to a lower than
anticipated average realized natural gas sales price in the three month Reporting Period. Birchcliff’s F&D capital expenditures of
$288.0 million in the twelve month Reporting Period were slightly above its guidance of $285 million. Birchcliff’s negative free funds
flow of $103.4 million in 2020 was 15% below its guidance of $90 million, primarily due to lower than anticipated adjusted funds flow
and higher than anticipated F&D capital expenditures. Birchcliff’s total debt at December 31, 2020 of $762.0 million was slightly above
its guidance of $740 to $760 million, primarily due to the redemption of $9.1 million of Series C Preferred Shares in December 2020
and a lower than anticipated average realized natural gas sales price in the three month Reporting Period.
41
ANNUAL REPORT 2020 SELECTED ANNUAL INFORMATION
2020
2019
2018
Average production
Light oil (bbls/d)
Condensate (bbls/d)(1)
NGLs (bbls/d)(1)
Natural gas (Mcf/d)
Total (boe/d)
Average realized sales price (CDN$)(2)
Light oil (per bbl)
Condensate (per bbl)(1)
NGLs (per bbl)(1)
Natural gas (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)
F&D capital expenditures ($000s)(3)
Total capital expenditures ($000s)(4)
Operating expense ($ per boe)
Total assets ($000s)
Long-term bank debt ($000s)
Total debt ($000s)
End of period basic common shares (000s)
Weighted average basic common shares (000s)
Common share dividend distribution ($000s)
Per common share ($)
Series A Preferred Shares outstanding – end of period (000s)
Series A Preferred Share dividend distribution ($000s)
Per Series A Preferred Share ($)
Series C Preferred Shares outstanding – end of period (000s)
Series C Preferred Share dividend distribution ($000s)
Per Series C Preferred Share ($)
4,415
5,824
7,650
351,068
76,401
42.39
48.03
13.62
2.49
18.90
188,180
184,526
0.69
(57,821)
(62,008)
(0.23)
528,505
287,967
276,785
2.95
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
256,395
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
299,654
298,018
3.52
2,902,043
2,816,685
2,762,920
731,372
761,951
265,943
265,936
10,968
0.0413
2,000
4,187
2.0935
1,597
3,467
1.7500
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
(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) See “Advisories – Capital Expenditures”.
(4) Includes acquisitions, dispositions and administrative assets. See “Advisories – Capital Expenditures”.
Annual average production in 2020 decreased by 2% from 2019 and by 1% from 2018. The decreases were primarily due to natural
production declines and the impacts of frac-driven interaction in the second half of 2020, partially offset by horizontal light oil and
condensate rich natural gas wells brought on production which improved total corporate liquids weighting in 2020. Additionally, in
order to manage the higher condensate and frac water flowback volumes associated with the 14-well pad brought on production in
Pouce Coupe in the third quarter of 2020, Birchcliff proactively and temporarily restricted production of existing wells in Pouce Coupe
during the third quarter of 2020, which negatively impacted production in 2020.
42
BIRCHCLIFF ENERGY Adjusted funds flow in 2020 decreased by 45% from 2019 and by 41% from 2018. The decreases were primarily due to lower reported
revenue and a realized loss on financial instruments recorded in 2020. Revenue decreased largely due to decreases in the average
realized light oil and condensate sales prices in 2020. Birchcliff’s light oil and condensate sales revenue in 2020 was negatively
impacted by the significant weakness and volatility in benchmark oil prices as a result of the COVID-19 pandemic and ensuing global
demand destruction. Birchcliff recorded a realized loss on financial instruments of $59.7 million in 2020, as compared to a realized
gain on financial instruments of $13.7 million in 2019 and a realized loss on financial instruments of $15.8 million in 2018. Adjusted funds
flow in 2020 was also negatively impacted by higher interest and transportation and other expenses, and positively impacted by lower
royalty, operating and G&A expenses as compared to 2019 and 2018.
Cash flow from operating activities in 2020 decreased by 42% from 2019 and 2018. The reason for the decreases is 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.
Birchcliff recorded a net loss to common shareholders of $62.0 million ($0.23 per basic common share) in 2020, as compared to net
loss to common shareholders of $59.6 million ($0.22 per basic common share) in 2019 and net income to common shareholders of
$98.0 million ($0.37 per basic common share) in 2018. The increase in net loss from 2019 was primarily due to lower adjusted funds
flow as described above, partially offset by lower unrealized after-tax mark-to-market losses on financial instruments. The change to
a net loss position in 2020 as compared to net income in 2018 was primarily due to lower adjusted funds flow as described above
and an unrealized mark-to-market loss on financial instruments in 2020 as compared to an unrealized mark-to-market gain on financial
instruments in 2018. Birchcliff recorded an unrealized after-tax mark-to-market loss on financial instruments of approximately
$26.5 million in 2020 as compared to an unrealized after-tax mark-to-market loss of approximately $148.4 million in 2019 and an
unrealized after-tax mark-to-market gain of approximately $64.2 million in 2018.
Total capital expenditures in 2020 decreased by 8% from 2019 and decreased by 7% from 2018. The Corporation’s capital expenditures
fluctuate each year based on: (i) the Corporation’s outlook for commodity prices and market conditions; (ii) the level of drilling and
completions operations and other capital projects and the timing thereof; and (iii) the level of acquisition and disposition activities
and the timing thereof. Capital expenditures in the last three years were largely directed towards the Montney/Doig Resource Play,
including: (i) the drilling and completion of horizontal light oil and natural gas wells in Pouce Coupe and Gordondale; (ii) the Phase VI
expansion of Birchcliff’s 100% owned and operated natural gas processing plant in Pouce Coupe (the “Pouce Coupe Gas Plant”)
which was completed in the third quarter of 2019 and increased the licensed natural gas processing capacity to 340 MMcf/d; and
(iii) the addition of the inlet-liquids handling facility at the Pouce Coupe Gas Plant (the “Inlet Liquids-Handling Facility”) which was
completed in the third quarter of 2020. Total capital expenditures in 2020 included the $12.7 million disposition of various lands
and assets in Gordondale. Total capital expenditures in 2019 included the $39.0 million acquisition of 18 gross (15.1 net) contiguous
sections of Montney land located between Birchcliff’s existing Pouce Coupe and Gordondale properties.
Operating expense on a per boe basis in 2020 decreased by 5% from 2019 and by 16% from 2018. The decreases were primarily
due to various field optimization and cost saving initiatives in Pouce Coupe and Gordondale, which included the addition of the
Inlet Liquids-Handling Facility in Pouce Coupe in 2020.
Total debt in 2020 increased by 20% from 2019 and by 22% from 2018. The increases were primarily due to adjusted funds flow being
less than the aggregate of total capital expenditures, dividends paid on preferred shares and common shares and the redemption of
Series C Preferred Shares in 2020.
Total common share dividends in 2020 decreased by 61% from 2019 and 59% from 2018. The decreases were due to the Corporation
reducing the amount of its quarterly common share dividend in the second quarter of 2020 from $0.02625 per share (or $0.105 per
share annually) to $0.005 per share (or $0.02 per share annually) in order to preserve cash in 2020.
Birchcliff’s Series C Preferred Shares outstanding at the end of 2020 decreased by 20% from 2019 and 2018. During 2020, the
Corporation received Notices of Redemption (as such term is defined herein) for 402,820 Series C Preferred Shares. The Corporation
elected to settle in cash the redemption of 365,655 Series C Preferred Shares at $25.00 per share for a total of $9.1 million. The
Corporation elected to convert the remaining 37,165 Series C Preferred Shares into common shares and accordingly issued a total
of 464,562 common shares. See “Outstanding Share Information – Capital Securities”.
43
ANNUAL REPORT 2020 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,
2020
71,431
66,509
0.25
0.25
9.19
2019
85,557
80,941
0.30
0.30
11.28
2020
188,180
184,526
0.69
0.69
6.60
2019
327,066
334,504
1.26
1.26
11.75
Adjusted funds flow in the three and twelve month Reporting Periods decreased by 18% and 45%, respectively, from the Comparable
Prior Periods. The decreases were primarily due to lower reported revenue and a realized loss on financial instruments recorded in the
Reporting Periods. Revenue decreased primarily due to a 24% and 33% decrease in the average realized light oil and condensate sales
price (combined) from the three and twelve month Comparable Prior Periods, respectively. Birchcliff’s light oil and condensate sales
revenue in the Reporting Periods was negatively impacted by the significant weakness and volatility in benchmark oil prices as a result
of the COVID-19 pandemic and ensuing global demand destruction. Birchcliff recorded a realized loss on financial instruments of
$11.8 million and $59.7 million in the three and twelve month Reporting Periods, respectively, as compared to a realized loss on
financial instruments of $6.6 million in the three month Comparable Prior Period and a realized gain on financial instruments of
$13.7 million in the twelve month Comparable Prior Period. Birchcliff’s realized gains and losses on financial instruments were primarily
due to the settlement of its market diversification NYMEX HH/AECO basis swap contracts in the periods indicated. Adjusted funds
flow in the Reporting Periods was also negatively impacted by higher interest and transportation and other expenses, and positively
impacted by lower royalty, operating and G&A expenses.
Cash flow from operating activities for the three and twelve month Reporting Periods decreased by 17% and 42%, respectively, from
the Comparable Prior Periods. The reason for the decreases is consistent with the explanation for adjusted funds flow; however, cash flow
from operating activities was also impacted by changes in non-cash operating working capital and decommissioning expenditures.
The following table sets forth a breakdown of the Corporation’s total cash costs on a per unit basis for the periods indicated:
($/boe)
Royalty expense
Operating expense
Transportation and other expense
G&A expense, net
Interest expense
Total cash costs
Three months ended
December 31,
2020
2019 % Change
0.90
3.03
4.94
1.11
1.20
11.18
1.15
3.06
4.51
1.26
0.82
10.80
(22)
(1)
10
(12)
46
4
Twelve months ended
December 31,
2019 % Change
0.96
3.09
4.44
0.94
0.88
10.31
(32)
(5)
11
(6)
6
-
2020
0.65
2.95
4.93
0.88
0.93
10.34
See “Discussion of Operations” in this MD&A for further details regarding the period-over-period movement in revenue, realized gains
and losses on financial instruments and total cash cost inputs.
44
BIRCHCLIFF ENERGY NET INCOME (LOSS) TO COMMON SHAREHOLDERS
The following table sets forth the Corporation’s net income (loss) to common shareholders for the periods indicated:
Three months ended
December 31,
Twelve months ended
December 31,
2020
2019
2020
2019
Net income (loss) to common shareholders ($000s)
40,407
(18,984)
(62,008)
(59,579)
Per common share – basic ($)
Per common share – diluted ($)
Net income (loss) to common shareholders ($/boe)
0.15
0.15
5.58
(0.07)
(0.07)
(2.65)
(0.23)
(0.23)
(2.22)
(0.22)
(0.22)
(2.09)
The change to a net income position from the three month Comparable Prior Period was primarily due to an unrealized after-tax
mark-to-market gain on financial instruments of $32.5 million in the three month Reporting Period as compared to an unrealized after-tax
mark-to-market loss of $35.9 million in the three month Comparable Prior Period, partially offset by lower adjusted funds flow in the
three month Reporting Period.
The increase in the net loss to common shareholders from the twelve month Comparable Prior Period was primarily due to lower
adjusted funds flow, partially offset by a lower unrealized after-tax mark-to-market loss on financial instruments. Birchcliff recorded an
unrealized after-tax mark-to-market loss on financial instruments of $26.5 million in the twelve month Reporting Period as compared to
an unrealized after-tax mark-to-market loss of $148.4 million in the twelve month Comparable Prior Period.
Birchcliff’s unrealized gains and losses on financial instruments for the periods indicated were primarily due to changes in the fair value
of its market diversification NYMEX HH/AECO basis swap contracts. See “Discussion of Operations – Risk Management” in this MD&A
for further details regarding the period-over-period movement in unrealized gains and losses on financial instruments.
POUCE COUPE GAS PLANT NETBACKS
During the twelve month Reporting Period, Birchcliff processed approximately 68% of its total corporate natural gas production and
59% of its total corporate production through the Pouce Coupe Gas Plant as compared to 72% and 62%, 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, 2020
Twelve months ended
December 31, 2019
4,284
1,156
239,419
45,343
22.7
$/boe
18.29
(0.37)
(2.14)
(5.27)
$10.51
57%
$/Mcfe
3.20
(0.07)
(0.34)
(0.76)
$2.03
63%
3,801
934
263,108
48,587
18.0
$/boe
19.17
(0.42)
(2.05)
(4.54)
$12.16
63%
$/Mcfe
3.05
(0.06)
(0.36)
(0.88)
$1.75
57%
(1) Liquids consists of condensate and other NGLs.
(2) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.
(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.
Production decreased from the twelve month Comparable Prior Period primarily due to natural production declines and the impacts of
frac-driven interaction in the second half of 2020, partially offset by condensate-rich natural gas wells brought on production in 2020,
including from the 14-well pad brought on production in Pouce Coupe in the third quarter of 2020. Birchcliff proactively and temporarily
restricted production of existing wells flowing to the Pouce Coupe Gas Plant during the third quarter of 2020 in order to manage the
higher condensate and frac water flowback volumes associated with the 14-well pad.
45
ANNUAL REPORT 2020 The Corporation’s liquids-to-gas ratio increased by 26% to 22.7 bbls/MMcf in the twelve month Reporting Period as compared to
18.0 bbls/MMcf in the twelve month Comparable Prior Period primarily due to: (i) the completion of Inlet Liquids-Handling Facility in
the third quarter of 2020; and (ii) the addition of the condensate-rich 14-well pad brought on production in Pouce Coupe in the third
quarter of 2020.
Operating netback per boe decreased by 14% from the twelve month Comparable Prior Period primarily due to lower per boe
petroleum and natural gas revenue and higher per boe operating and transportation and other expenses, partially offset by lower per
boe royalty expense. Petroleum and natural gas revenue and royalty expense decreased primarily due to lower average realized sales
prices for condensate and NGLs in 2020. Operating expense was higher primarily due to a decrease in production volumes processed
at the Pouce Coupe Gas Plant in 2020. Transportation and other expense increased mainly due to additional firm service transportation
to AECO and Dawn sales trading hubs in 2020.
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 light 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, 2020
Three months ended
December 31, 2019
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
54
23,495
2,607
69,026
95,182
1
95,183
60%
16,190
8,910
9,713
28,268
63,081
1
63,082
40%
16,261
32,406
12,320
97,293
158,280
3
158,283
Twelve months ended
December 31, 2020
1,001
22,935
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
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
473
76,736
8,579
229,636
315,424
4
68,000
25,661
29,544
89,838
213,043
4
68,498
102,397
38,123
319,473
528,491
14
1,301
95,614
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
315,428
213,047
528,505
354,446
259,026
613,559
% of corporate P&NG revenue
60%
40%
58%
42%
(1) Includes adjustments for 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 decreased by 4% and 14% from the three and twelve month Comparable Prior Periods,
respectively. Petroleum and natural gas revenue decreased primarily due to lower average realized light oil and condensate sales prices
and a decrease in light oil production, partially offset by higher condensate production in the Reporting Periods. Actions taken around
the world to mitigate the spread of COVID-19 resulted in significant weakness and volatility in benchmark oil prices which negatively
impacted Birchcliff’s realized light oil and condensate sales prices in the Reporting Periods.
46
BIRCHCLIFF ENERGY 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:
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
Three months ended
December 31, 2020
Three months ended
December 31, 2019
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
11
4,877
1,499
251,500
48,305
25.4
61%
3,551
1,780
6,786
109,345
30,342
110.8
39%
3,566
6,658
8,285
360,839
78,649
51.3
159
3,661
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
Twelve months ended
December 31, 2020
Twelve months ended
December 31, 2019
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
31
4,401
1,226
248,951
47,149
22.7
62%
4,382
1,424
6,424
102,119
29,250
119.8
38%
4,415
5,824
7,650
351,068
76,401
51.0
52
3,911
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
(1) Includes adjustments for other minor oil and natural gas properties that were not individually significant during the respective periods.
Birchcliff’s corporate production increased by 1% from the three month Comparable Prior Period and decreased by 2% from the twelve
month Comparable Prior Period. Production in the Reporting Periods was positively impacted by horizontal light oil and condensate-rich
natural gas wells brought on production in 2020, including from the 14-well pad brought on production in Pouce Coupe in the third quarter
of 2020, and negatively impacted by natural production declines and the impacts of frac-driven interaction in the second half of 2020.
Additionally, in order to manage the higher condensate and frac water flowback volumes associated with the 14-well pad, Birchcliff
proactively and temporarily restricted production of existing wells in Pouce Coupe during the third quarter of 2020, which negatively
impacted production.
Corporate liquids production increased by 8% and 4% from the three and twelve month Comparable Prior Periods, respectively. The
corporate liquids-to-gas ratio (liquids yield) increased by 9% from both the three and twelve month Comparable Prior Periods. The
change in the commodity production mix was primarily due to production from horizontal light oil and condensate-rich natural gas
wells brought on production in Gordondale and Pouce Coupe in the Reporting Periods.
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, 2020
Three months ended
December 31, 2019
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
-
10%
3%
87%
12%
6%
22%
60%
5%
8%
11%
76%
-
8%
2%
90%
15%
4%
24%
57%
6%
6%
10%
78%
% Light oil production
% Condensate production
% NGLs production
% Natural gas production
47
ANNUAL REPORT 2020 Twelve months ended
December 31, 2020
Twelve months ended
December 31, 2019
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
-
9%
3%
88%
15%
5%
22%
58%
6%
8%
9%
77%
-
8%
2%
90%
17%
5%
23%
55%
6%
7%
9%
78%
% 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.
Birchcliff’s corporate liquids accounted for approximately 24% and 23% of total production in the three and twelve month Reporting
Periods, respectively, as compared to approximately 22% in the Comparable Prior Periods.
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)
(1) See “Advisories – MMBtu Pricing Conversions” in this MD&A.
Three months ended
December 31,
2019
% Change
56.96
67.66
2.50
2.35
1.77
2.23
1.92
1.3201
0.7575
(25)
(27)
6
6
19
3
45
(1)
1
Twelve months ended
December 31,
2019
% Change
57.03
68.72
2.63
1.67
1.22
2.40
1.66
1.3269
0.7536
(32)
(37)
(21)
26
38
(22)
23
1
(1)
2020
38.91
43.52
2.08
2.11
1.68
1.88
2.05
1.3413
0.7455
2020
42.57
49.57
2.66
2.50
2.10
2.30
2.78
1.3035
0.7672
Birchcliff physically sells substantially all of its light oil based on the MSW benchmark price and substantially all of its physical natural
gas production based on the AECO 5A 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 diversified a portion of its AECO production to NYMEX HH-based pricing, predominantly on a financial
basis, beginning January 1, 2019. Total natural gas production receiving NYMEX HH-based pricing was 100,000 MMbtu/d in 2019 and
132,500 MMbtu/d in 2020. 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, domestic oil supply and demand balance, North American refinery
utilization rates and inventory levels and pipeline infrastructure capacity connecting key consuming oil markets.
The WTI benchmark oil index price decreased by 25% and 32% from the three and twelve month Comparable Prior Periods, respectively.
In late February 2020, benchmark oil index prices started a significant drop predominately due to the COVID-19 pandemic, resulting in
oil demand destruction. Benchmark oil prices began to recover in the second half of 2020 due to renewed production curtailments by
OPEC+, an increase in demand for oil after governments began to ease COVID-19 related restrictions, market optimism generated by
COVID-19 vaccine approvals and global vaccine distribution beginning in the three month Reporting Period.
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,
48
BIRCHCLIFF ENERGY 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 AECO 5A benchmark natural gas index price increased by 6% and 26% from the three and twelve month Comparable Prior
Periods, respectively, largely due to an improved supply and demand balance in Western Canada. The Dawn benchmark natural gas
index price increased by 3% from the three month Comparable Prior Period and decreased by 22% from the twelve month Comparable
Prior Period. The Dawn benchmark price was influenced by supply and demand fluctuations throughout 2020 primarily due to seasonal
temperature variations.
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)(2)
Three months ended
December 31,
2019 % Change
67.58
68.80
16.62
2.81
22.97
(27)
(23)
(3)
4
(5)
Twelve months ended
December 31,
2019 % Change
68.29
68.06
13.76
2.48
21.55
(38)
(29)
(1)
-
(12)
2020
42.39
48.03
13.62
2.49
18.90
2020
49.56
52.90
16.16
2.93
21.87
(1) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.
(2) The average realized sales price for the twelve month Comparable Prior Period also includes the effects of physical natural gas delivery contracts at Dawn for 50,000 MMBtu/d at an average contract
price of US$5.05/MMBtu, which settled in the first quarter of 2019 and improved Birchcliff’s average realized sales price in that period.
The average realized sales price decreased from the Comparable Prior Periods primarily due to lower average benchmark oil index
prices which negatively impacted the prices Birchcliff received for its light oil and condensate. See “Discussion of Operations –
Operating Netbacks” in this MD&A for details on production and average realized pricing for the Corporation’s Pouce Coupe and
Gordondale assets.
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, 2020
Three months ended
December 31, 2019
Natural
gas sales
($000s)(1)
44,556
44,785
7,952
Natural gas
production
(Mcf/d)
172,817
159,071
28,951
(%)
46
46
8
(%)
48
44
8
97,293
100
360,839
100
Average
realized
sales price
($/Mcf)(1)
2.80
3.06
2.99
2.93
Natural
gas sales
($000s)(1)
48,976
43,706
1,506
(%)
52
46
2
Natural gas
production
(Mcf/d)
204,461
152,115
8,271
(%)
56
42
2
94,188
100
364,847
100
Average
realized
sales price
($/Mcf)(1)
2.60
3.12
1.98
2.81
Twelve months ended
December 31, 2020
Twelve months ended
December 31, 2019
Natural
gas sales
($000s)(1)
153,007
152,728
13,738
Natural gas
production
(Mcf/d)
176,827
159,002
15,239
(%)
48
48
4
(%)
51
45
4
319,473
100
351,068
100
Average
realized
sales price
($/Mcf)(1)
2.37
2.62
2.46
2.49
Natural
gas sales
($000s)(1)
136,050
185,199
9,724
(%)
41
56
3
Natural gas
production
(Mcf/d)
210,545
140,803
13,610
(%)
58
39
3
330,973
100
364,958
100
Average
realized
sales price
($/Mcf)(1)
1.77
3.60
1.96
2.48
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.
(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 twelve month Comparable Prior Period, 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, which settled in the first quarter of 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.
49
ANNUAL REPORT 2020 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 agreement governing the Corporation’s
extendible revolving credit facilities (the “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, 2020, 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, 2020, 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, 2021 – Dec. 31, 2023
NYMEX HH less US$1.298/MMBtu
Natural gas
AECO 7A basis swap(2)
10,000 MMBtu/d
Jan. 1, 2021 – Dec. 31, 2023
NYMEX HH less US$1.320/MMBtu
Natural gas
AECO 7A basis swap(2)
30,000 MMBtu/d
Jan. 1, 2021 – Dec. 31, 2023
NYMEX HH less US$1.330/MMBtu
Natural gas
AECO 7A basis swap(2)
15,000 MMBtu/d
Jan. 1, 2021 – Dec. 31, 2024
NYMEX HH less US$1.185/MMBtu
Natural gas
AECO 7A basis swap(2)
5,000 MMBtu/d
Jan. 1, 2021 – Dec. 31, 2024
NYMEX HH less US$1.200/MMBtu
Natural gas
AECO 7A basis swap(2)
5,000 MMBtu/d
Jan. 1, 2021 – Dec. 31, 2024
NYMEX HH less US$1.200/MMBtu
Natural gas
AECO 7A basis swap(2)
12,500 MMBtu/d
Jan. 1, 2021 – Dec. 31, 2025
NYMEX HH less US$1.108/MMBtu
Natural gas
AECO 7A basis swap(2)
10,000 MMBtu/d
Jan. 1, 2021 – Dec. 31, 2025
NYMEX HH less US$1.115/MMBtu
Natural gas
AECO 7A basis swap(2)
10,000 MMBtu/d
Jan. 1, 2021 – 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 to December 31, 2020.
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, 2020, the Corporation had the following physical delivery contract in place:
Product
Type of Contract
Quantity
Remaining Term
Contract Price
Natural gas
AECO 7A basis swap(1)
5,000 MMBtu/d
Jan. 1, 2021 – Dec. 31, 2023
NYMEX HH less US$1.205/MMBtu
(1) Birchcliff sold AECO basis swap.
There were no physical delivery contracts entered into subsequent to December 31, 2020.
50
BIRCHCLIFF ENERGY Interest Rate Risk
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Corporation’s Credit
Facilities are exposed to interest rate risk. The remainder of Birchcliff’s financial assets and liabilities are not directly exposed to
interest rate risk.
At December 31, 2020, Birchcliff had the following financial derivative contracts in place to manage interest rate risk:
Type of Contract
Index
Remaining Term(1)
Notional value
Fixed Rate
Interest rate swap
One-month banker’s acceptance – CDOR(2)
Jan. 1 2021 – Mar. 1, 2024
$350 million
2.215%
(1) Transactions with common terms and the same counterparty have been aggregated and presented at the weighted average price.
(2) Canadian Dollar Offered Rate (“CDOR”).
Realized and Unrealized Gains and Losses on Financial Instruments
The following table provides a summary of the realized and unrealized gains and losses on financial instruments for the periods indicated:
Realized gain (loss)
Unrealized gain (loss)
Three months ended
December 31,
Twelve months ended
December 31,
2020
2019
2020
2019
($000s)
($/boe)
($000s)
($/boe)
($000s)
($/boe)
($000s)
($/boe)
(11,819)
(1.63)
(6,565)
(0.92)
(59,665)
(2.13)
13,673
0.48
42,237
5.84
(46,602)
(6.50)
(35,446)
(1.27)
(192,765)
(6.77)
Birchcliff realized a cash loss of $11.8 million and $59.7 million during the three and twelve month Reporting Periods, respectively,
primarily due to the settlement of financial NYMEX HH/AECO basis swap contracts in those periods.
Birchcliff recorded an unrealized non-cash gain on financial instruments of $42.2 million in the three month Reporting Period and
an unrealized non-cash loss of $35.4 million in the twelve month Reporting Period. The unrealized gains and losses for the periods
indicated were due to changes in the fair value of the Corporation’s financial instruments. The changes in the fair value of financial
instruments were primarily due to: (i) fluctuations in the forward basis spread between NYMEX HH and AECO 7A contracts outstanding
at December 31, 2020, as compared to the fair value previously assessed at September 30, 2020 and December 31, 2019; and (ii) the
settlement of financial NYMEX HH/AECO basis swap contracts in the 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,
2020
6,522
0.90
4%
2019
8,263
1.15
5%
2020
18,204
0.65
3%
2019
27,452
0.96
4%
(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 decreased by 22% and 32% from the three and twelve month Comparable Prior Periods, respectively,
primarily due to the decline in the average realized light oil and condensate sales prices in the Reporting Periods and the effect these
prices had on the sliding scale royalty calculation.
51
ANNUAL REPORT 2020 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,
2020
22,990
(1,048)
21,942
$3.03
2019
22,903
(926)
21,977
$3.06
2020
87,120
(4,763)
82,357
$2.95
2019
91,679
(3,776)
87,903
$3.09
On a per unit basis, operating expense decreased by 1% and 5% from the three and twelve month Comparable Prior Periods,
respectively. The decreases were primarily due to various field optimization and cost-saving initiatives in Pouce Coupe and Gordondale,
which included the addition of the Inlet Liquids-Handling Facility in Pouce Coupe. Birchcliff’s operating cost structure remained largely
unaffected by the COVID-19 pandemic in the Reporting Periods.
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 expense
Transportation expense 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,
2020
26,904
7,431
2,059
33
36,427
$5.03
1,152
(1,889)
(737)
$(0.09)
35,690
$4.94
2019
25,433
6,806
1,084
30
33,353
$4.65
7,196
(8,271)
(1,075)
($0.14)
32,278
$4.51
2020
106,409
28,732
5,305
128
140,574
$5.03
11,127
(13,687)
(2,560)
$(0.10)
138,014
$4.93
2019
96,044
26,830
4,761
128
127,763
$4.49
18,503
(20,131)
(1,628)
($0.05)
126,135
$4.44
(1) Marketing purchases and marketing revenue mainly represent the volumes purchased and sold to third parties, which are recorded on a gross basis for financial statement presentation purposes.
Birchcliff enters into certain marketing purchase and sales arrangements to reduce its take-or-pay fractionation fees associated with third-party commitments. Any gains or losses from the purchase and
sale of third-party products relate to the commodity price differential.
On a per unit basis, transportation expense increased by 8% and 12% from the three and twelve month Comparable Prior Periods,
respectively. The increases were primarily due to: (i) an additional 25,000 GJ/d of firm service transportation to Dawn that became
available on November 1, 2019; (ii) additional AECO firm service transportation associated with Birchcliff’s commitments on the
NGTL system; and (iii) increased total liquids production in the Reporting Periods.
52
BIRCHCLIFF ENERGY Operating Netback
The following table sets forth Birchcliff’s average production and operating netback for the Corporation’s Pouce Coupe assets,
Gordondale assets and on a corporate basis for the periods indicated:
Three months ended December 31,
Twelve months ended December 31,
2020
2019
2020
2019
Pouce Coupe assets:
Average production:
Light oil (bbls/d)
Condensate (bbls/d)
NGLs (bbls/d)
Natural gas (Mcf/d)
Total (boe/d)
% of corporate production
Liquids-to-gas ratio (bbls/MMcf)
Netback and cost ($/boe):
Petroleum and natural gas revenue(1)
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-to-gas ratio (bbls/MMcf)
Netback and cost ($/boe):
Petroleum and natural gas revenue(1)
Royalty expense
Operating expense
Transportation and other expense
Operating netback
Total Corporate:
Average production:
Light oil (bbls/d)
Condensate (bbls/d)
NGLs (bbls/d)
Natural gas (Mcf/d)
Total (boe/d)(2)
Liquids-to-gas ratio (bbls/MMcf)
Netback and cost ($/boe):
Petroleum and natural gas revenue(1)
Royalty expense
Operating expense
Transportation and other expense
Operating netback
11
4,877
1,499
251,500
48,305
61%
25.4
21.42
(0.64)
(2.35)
(5.20)
13.23
3,551
1,780
6,786
109,345
30,342
39%
110.8
22.60
(1.31)
(4.12)
(4.51)
12.66
3,566
6,658
8,285
360,839
78,649
51.3
21.88
(0.90)
(3.03)
(4.94)
13.01
159
3,661
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
31
4,401
1,226
248,951
47,149
62%
22.7
18.28
(0.41)
(2.18)
(5.25)
10.44
4,382
1,424
6,424
102,119
29,250
38%
119.8
19.90
(1.03)
(4.17)
(4.42)
10.28
4,415
5,824
7,650
351,068
76,401
51.0
18.90
(0.65)
(2.95)
(4.93)
10.37
52
3,911
986
274,009
50,616
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
(1) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.
(2) Includes adjustments for other minor oil and natural gas properties which were not individually significant.
53
ANNUAL REPORT 2020 Pouce Coupe Montney/Doig Resource Play
Birchcliff’s average production from its Pouce Coupe assets decreased by 3% and 7% from the three and twelve month Comparable
Prior Periods, respectively. The decreases were primarily due to natural production declines and the impacts of frac-driven interaction
in the second half of 2020, partially offset by horizontal condensate-rich natural gas wells that were brought on production in
Pouce Coupe, including from the 14-well pad brought on production in the third quarter of 2020. Additionally, in order to manage
the higher condensate and frac water flowback volumes associated with the 14-well pad, Birchcliff proactively and temporarily
restricted production of existing wells in Pouce Coupe during the third quarter of 2020, which negatively impacted production.
Birchcliff’s liquids-to-gas ratio for the Pouce Coupe assets increased by 37% and 25% from the three and twelve month Comparable
Prior Periods, respectively. The increases were primarily due to higher condensate recoveries and lower natural gas production rates
from the 14-well pad brought on production in the third quarter of 2020.
Royalty expense for the Pouce Coupe assets decreased by 18% and 13% from the three and twelve month Comparable Prior Periods,
respectively. The decreases were primarily due to the decline in the average realized condensate sales price.
Operating expense for the Pouce Coupe assets increased by 6% and 5% from the three and twelve month Comparable Prior Periods,
respectively. The increases were primarily due to increased costs associated with higher total liquids production in Pouce Coupe as
compared with the Comparable Prior Periods.
Transportation and other expense for the Pouce Coupe assets increased by 10% and 15% from the three and twelve month Comparable
Prior Periods, respectively. The increases were primarily due to additional firm service transportation to the AECO and Dawn sales
trading hubs and increased total liquids production in Pouce Coupe.
Gordondale Montney/Doig Resource Play
Birchcliff’s average production from its Gordondale assets increased by 8% and 7% from the three and twelve month Comparable Prior
Periods, respectively. The increases were primarily due to horizontal light oil wells that were brought on production in Gordondale in
the Reporting Periods, partially offset by natural production declines.
Birchcliff’s liquids-to-gas ratio for the Gordondale assets decreased by 13% and 11% from the three and twelve month Comparable Prior
Periods, respectively. The decreases were primarily due to higher natural gas production rates on the incremental production from the
horizontal light oil wells that were brought on production in Gordondale in the twelve month Reporting Period.
Royalty expense for the Gordondale assets decreased by 28% and 45% from the three and twelve month Comparable Prior Periods,
respectively. The decreases were primarily due to the decline in the average realized light oil and condensate sales prices.
Operating expense for the Gordondale assets decreased by 9% and 15% from the three and twelve month Comparable Prior Periods,
respectively. The decreases were primarily due to various field optimization initiatives which increased operating efficiencies in the
Gordondale area.
Transportation and other expense for the Gordondale assets increased by 9% and 6% from the three and twelve month Comparable Prior
Periods, respectively. The increases were primarily due to additional firm service transportation to the AECO and Dawn sales trading hubs.
54
BIRCHCLIFF ENERGY 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)
G&A expense, gross
Operating overhead recoveries
Capitalized overhead(3)
G&A expense, net
G&A expense, net per boe
Non-cash:
Other compensation
Capitalized compensation(3)
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,
2020
2019
2020
($000s)
(%)
($000s)
(%)
($000s)
(%)
($000s)
14,939
2,399
17,338
(33)
(9,277)
8,028
$1.11
1,302
(740)
562
$0.08
8,590
$1.19
86
14
100
(1)
(53)
46
100
(57)
43
14,561
3,440
18,001
(40)
81
19
100
(1)
33,404
11,633
45,037
(133)
74
26
100
(1)
32,335
14,057
46,392
(156)
(8,926)
(49)
(20,289)
(44)
(19,421)
9,035
$1.26
1,886
(1,088)
798
$0.11
9,833
$1.37
50
100
(58)
42
24,615
$0.88
5,527
(3,098)
2,429
$0.09
27,044
$0.97
55
100
(56)
44
26,815
$0.94
8,684
(4,406)
4,278
$0.15
31,093
$1.09
2019
(%)
70
30
100
(1)
(41)
58
100
(51)
49
(1) Includes salaries, benefits and other incentives paid to officers and employees of the Corporation and retainer fees, meeting fees and benefits paid to directors of the Corporation.
(2) Includes costs such as rent, legal, tax, insurance, computer hardware and software and other business expenses incurred by the Corporation.
(3) Includes a portion of gross G&A expenses and other compensation directly attributable to the exploration and development activities of the Corporation, which have been capitalized.
Net G&A expense decreased by 11% and 8% from the three and twelve month Comparable Prior Periods, respectively, primarily due
to COVID-19 and its impacts on reduced corporate expenses in the Reporting Periods. Net other compensation expense decreased
by 29% and 43% from the three and twelve month Comparable Prior Periods, respectively, primarily due to a decrease in stock-based
compensation expense resulting from lower fair value stock option grants outstanding during the Reporting Periods.
The following table sets forth the Corporation’s outstanding stock options for the periods indicated:
Three months ended
December 31,
Twelve months ended
December 31,
2020
2019
2020
2019
Number Price ($)(1)
Number Price ($)(1)
Number Price ($)(1)
Number Price ($)(1)
Outstanding, beginning
21,035,501
3.99
18,532,368
4.85
23,483,368
4.28
15,847,570
Granted(2)
Exercised
Forfeited
Expired
5,225,700
1.81
5,152,000
2.32
5,403,200
1.79
10,107,200
(7,500)
(1.91)
-
-
(7,500)
(1.91)
(23,867)
(3.08)
(69,000)
(2.77)
(27,334)
(3.74)
(194,067)
(2.92)
(229,736)
(50,500)
(4.74)
(173,666)
(7.39)
(2,550,800)
(6.52)
(2,217,799)
Outstanding, ending
26,134,201
3.56 23,483,368
4.28
26,134,201
3.56 23,483,368
(1) Calculated on a weighted average basis.
(2) Each stock option granted entitles the holder to purchase one common share at the exercise price.
5.74
2.90
(4.22)
(8.47)
4.28
At December 31, 2020, there were also 2,939,732 performance warrants outstanding with an exercise price of $3.00 and an expiry
date of January 31, 2025.
55
ANNUAL REPORT 2020 Depletion and Depreciation Expense
Depletion and depreciation (“D&D”) expense is a function of the estimated proved and probable reserves additions, the F&D costs
attributable to those reserves, the associated future development 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,
2020
54,199
$7.49
2019
53,757
$7.49
Twelve months ended
December 31,
2020
2019
212,404
213,565
$7.60
$7.50
D&D expense on an aggregate basis for the Reporting Periods was consistent with the Comparable Prior Periods. Included in the
depletion assessment at December 31, 2020 were 1,040.5 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 evaluator.
Asset Impairment Assessment
In accordance with IFRS, an impairment test is performed if Birchcliff identifies an indicator of impairment at the end of the reporting
period. At December 31, 2020, Birchcliff determined there were no impairment indicators present and therefore an impairment test
was not required.
Birchcliff determined there were indicators of impairment at March 31, 2020 due to the decline in forecasted oil and gas commodity
prices and reduction in market capitalization since its previously completed impairment assessment at December 31, 2019. An
impairment is recognized if the carrying value of a Cash Generating Unit (“CGU”) exceeds the estimated recoverable amount for that
CGU. A CGU’s estimated recoverable amount is the greater of its fair value less cost to sell and its current value in use. The estimated
recoverable amount involves significant estimates including the estimate of proved and probable oil and gas reserves and the related
cash flows and the discount rate. The estimate of proved and probable oil and gas reserves and the related cash flows is sensitive to
the significant forecasted assumptions regarding oil and gas commodity prices, production, operating costs, royalty costs and future
development costs.
At March 31, 2020, the Corporation used value in use derived from the estimate of its proved and probable oil and gas reserves and
the related cash flows estimated by the Corporation’s independent third-party reserves evaluators at December 31, 2019, which were
internally updated to forecasted period-end oil and gas commodity prices, future development costs and production. The estimated
future cash flows are discounted at pre-tax rates between 8% and 17.5% depending on the risk profile of the reserves category.
Birchcliff’s P&NG properties and equipment were not impaired at March 31, 2020 and December 31, 2019.
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.
56
BIRCHCLIFF ENERGY Finance Expense
The following table sets forth the components of the Corporation’s finance expense for the periods indicated:
($000s)
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,
2020
2019
2020
2019
8,652
$1.20
629
248
877
$0.12
9,529
$1.34
5,852
$0.82
963
386
1,349
$0.18
7,201
$1.00
26,067
$0.93
2,815
1,229
4,044
$0.14
30,111
$1.05
25,073
$0.88
3,517
1,528
5,045
$0.17
30,118
$1.05
(1) The Credit Facilities are comprised of an extendible revolving syndicated term credit facility (the “Syndicated Credit Facility”) of $900.0 million and an extendible revolving working capital facility
(the “Working Capital Facility”) of $100.0 million. Birchcliff can draw on its Syndicated Credit Facility using CDN dollar denominated bankers’ acceptances and US dollar denominated LIBOR loans.
(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 increased by 48% and 4%, respectively, from
the Comparable Prior Periods. The increases were primarily due to a higher average outstanding Syndicated Credit Facility balance
as compared to the Comparable Prior Periods and higher stamping fees applicable to the Syndicated Credit Facility, partially offset by
lower average market interest rates on drawn loans.
The following table sets forth the Corporation’s average effective interest rates under its Credit Facilities for the periods indicated:
Working Capital Facility
Syndicated Credit Facility(1)
Three months ended
December 31,
Twelve months ended
December 31,
2020
5.5%
4.3%
2019
4.7%
3.6%
2020
5.5%
3.5%
2019
4.7%
4.1%
(1) The average effective interest rate under the Syndicated Credit Facility is determined primarily based on: (i) the market interest rate of its drawn bankers’ acceptances and/or LIBOR loans; and
(ii) 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, gains and losses on securities, depletion, depreciation and amortization and impairment charges.
Birchcliff’s average outstanding total Credit Facilities balance was approximately $754 million and $702 million in the three and twelve
month Reporting Periods, respectively, as compared to $605 million and $613 million in the Comparable Prior Periods, calculated as
the simple average of the month-end amounts.
Other Income
The following table sets forth the components of the Corporation’s other cash income for the periods indicated:
Three months ended
December 31,
Twelve months ended
December 31,
2020
2019
2020
2019
($000s)
($/boe)
($000s)
($/boe)
($000s)
($/boe)
($000s)
($/boe)
Other income
879
0.12
152
0.03
4,943
0.17
650
0.02
Birchcliff’s other cash income in the Reporting Periods primarily consisted of wage subsidies under the Federal Government’s Canada
Emergency Wage Subsidy Program.
57
ANNUAL REPORT 2020 Other Gains and Losses
The following table sets forth the components of the Corporation’s other non-cash gains and losses for the periods indicated:
Three months ended
December 31,
Twelve months ended
December 31,
2020
2019
2020
2019
($000s)
($/boe)
($000s)
($/boe)
($000s)
($/boe)
($000s)
($/boe)
Other (gains) and losses(1)
(3,589)
(0.50)
-
-
(2,026)
(0.07)
5,549
0.19
(1) Primarily comprised of non-cash long-term investments gains and losses.
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 investment value of $10 million. The Securities are not publicly listed
and do not constitute significant investments. Birchcliff recorded a loss on investment of $0.6 million and $2.6 million during the three and
twelve month Reporting Periods, respectively.
Gain on Sale of Assets
During the three month Reporting Period, Birchcliff completed the disposition of various Gordondale lands and assets with a net book
value totaling $14.3 million, relinquished $5.9 million related to decommissioning obligations and received cash consideration of
$12.7 million, before customary closing adjustments. As a result of the disposition, Birchcliff recognized a gain on sale of $4.2 million.
This disposition was considered non-core as it represented less than 1% of both Birchcliff’s production during the Reporting Periods
and proved and probable reserves at December 31, 2020 and therefore was 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,
2020
(13,623)
(762)
(14,385)
($2.00)
2019
5,228
(769)
4,459
$0.61
2020
16,479
(3,062)
13,417
$0.48
2019
37,881
(3,075)
34,806
$1.21
Birchcliff’s income taxes are primarily impacted by the before-tax net income or loss recorded in the respective periods. During the
twelve month Comparable Prior Period, Birchcliff recorded a deferred tax recovery of $37.9 million of which $18.9 million related to the
reduction in the general corporate income tax rate from 12% to 8% as set forth by the Government of Alberta.
The Corporation’s estimated income tax pools were $2.2 billion at December 31, 2020. 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
(1) Scientific research and experimental development (“SR&ED”) tax pools.
58
Tax pools as at
December 31, 2020
345,589
258,300
274,468
291,006
968,796
23,941
5,858
2,167,958
BIRCHCLIFF ENERGY 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
F&D capital
Acquisitions
Dispositions
FD&A capital
Administrative assets
Total capital expenditures
Three months ended
December 31,
Twelve months ended
December 31,
2020
1,466
158
1,917
29,042
8,708
41,291
10
(12,902)
28,399
379
28,778
2019
962
761
570
40,763
13,744
56,800
800
-
57,600
536
58,136
2020
2,785
840
11,135
174,304
98,903
287,967
10
(12,887)
275,090
1,695
2019
2,947
4,848
6,609
178,468
63,523
256,395
41,407
-
297,802
2,444
276,785
300,246
During the three month Reporting Period, Birchcliff had FD&A capital expenditures of $28.4 million which included the $12.7 million
disposition of Gordondale lands and assets completed during the three month Reporting Period. F&D capital expenditures were
$41.3 million in the three month Reporting Period which included approximately $23.7 million (57%) on the drilling and completion
of Montney horizontal wells in Pouce Coupe and $5.4 million (13%) on the drilling and completion of Montney horizontal wells
in Gordondale.
During the twelve month Reporting Period, Birchcliff had FD&A capital expenditures of $275.1 million which included $12.9 million of
dispositions during the period. F&D capital expenditures were $288.0 million in the twelve month Reporting Period which included
approximately $122.1 million (42%) on the drilling and completion of Montney horizontal wells in Pouce Coupe, $52.2 million (18%)
on the drilling and completion of Montney horizontal wells in Gordondale, $23.9 million (8%) on pipeline twinning and battery
compression projects in Gordondale and $35.5 million (12%) on the Inlet Liquids-Handling Facility.
During the three month Reporting Period, Birchcliff drilled a total of 6 (6.0 net) wells, consisting of 6 (6.0 net) Montney horizontal
natural gas wells in Pouce Coupe. During the twelve month Reporting Period, Birchcliff drilled a total of 34 (34.0 net) wells, consisting
of 8 (8.0 net) Montney horizontal light oil wells in Gordondale and 26 (26.0 net) Montney horizontal natural gas wells in Pouce Coupe.
The remaining capital during the Reporting Periods was primarily spent on land, seismic, well equipment, 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.
59
ANNUAL REPORT 2020 CAPITAL RESOURCES AND LIQUIDITY
Liquidity and Capital Resources
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
Issue (repurchase) of common shares
Repurchase of capital securities
Financing fees paid on revolving term credit facilities
Lease payments
Dividends paid
Net change in revolving term credit facilities
Deposit on acquisition
Changes in non-cash working capital from investing
Capital resources
Three months ended
December 31,
Twelve months ended
December 31,
2020
66,509
6,269
(1,347)
14
(9,116)
-
(573)
(3,235)
(40,583)
-
10,867
28,805
2019
80,941
5,058
(442)
-
-
-
(561)
(8,903)
(29,761)
-
11,804
58,136
2020
184,526
5,977
(2,323)
(596)
(9,141)
-
(2,292)
(18,622)
121,120
-
(1,874)
276,775
2019
334,504
(5,153)
(2,285)
73
-
(990)
(2,172)
(35,610)
3,683
3,900
4,313
300,263
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, which
the Corporation believes are sufficient to fund its working capital requirements, capital expenditure programs and dividend payments
for the foreseeable future.
The COVID-19 pandemic had a significant negative impact on oil prices and global capital markets in 2020. In response, Birchcliff took
a number of initiatives in 2020 to protect its balance sheet and maintain adequate sources of liquidity and financial flexibility, including:
•
•
•
•
a 19% ($65 million) reduction of the Corporation’s original 2020 capital budget;
an 81% reduction in the Corporation’s quarterly common share dividend, which resulted in the preservation of approximately
$17.0 million in 2020. See “Outstanding Share information – Dividends” in this MD&A;
continued field optimization and cost-saving capital initiatives in Pouce Coupe and Gordondale, which resulted in a 5% decrease
in operating costs per boe in 2020;
increased its monitoring of receivables due from petroleum and natural gas marketers and from joint asset partners to manage
credit risk. Birchcliff historically has not experienced any significant collection issues with petroleum and natural gas marketers
as a significant portion of these receivables are with creditworthy purchasers; and
• maintained a borrowing base limit under the Credit Facilities of $1.0 billion at the end of 2020. The Credit Facilities do not
mature until May 11, 2022 and do not contain any financial maintenance covenants. At December 31, 2020, the Corporation
had $263.2 million in unused credit capacity available under its Credit Facilities. See “Bank Debt” in this section.
Birchcliff continues to proactively look for strategic risk management and market diversification opportunities. Birchcliff’s existing
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.
Birchcliff’s priority is to strengthen its balance sheet in the current operating environment. The Corporation believes that its anticipated
adjusted funds flow of $360 million in 2021 will provide sufficient liquidity to fund its 2021 Capital Program, dividend distributions and
working capital requirements and also decrease the Corporation’s outstanding debt. Birchcliff’s anticipated adjusted funds flow in 2021
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. For further information, see “2021 Outlook
and Guidance” and “Advisories – Forward-Looking Statements” in this MD&A.
The disruption and volatility that has resulted from the COVID-19 pandemic may continue and could impact future oil demand recovery
and increase future costs of capital. See “Risk Factors – Public Health Crises”.
60
BIRCHCLIFF ENERGY Working Capital
The Corporation’s adjusted working capital deficit increased to $30.6 million at December 31, 2020 from $23.4 million at December 31, 2019.
The deficit at December 31, 2020 was primarily comprised of costs incurred for the drilling of wells in Pouce Coupe.
At December 31, 2020, the major component of Birchcliff’s current assets was revenue to be received from its marketers in respect
of December 2020 production (87%), which was subsequently received in January 2021. Birchcliff continues to monitor the financial
strength of its marketers. At this time, Birchcliff expects that such counterparties will be able to meet their financial obligations. Current
liabilities at December 31, 2020 primarily consisted of trade payables and accrued capital and operating expenses.
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 Birchcliff’s 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 $762.0 million at December 31, 2020 compared to $632.6 million at
December 31, 2019. Total debt increased from December 31, 2019 primarily due to adjusted funds flow being less than the aggregate
of total capital expenditures and dividends paid in the Reporting Periods. Birchcliff spent $276.8 million in capital expenditures in the
twelve month Reporting Period primarily on the drilling and completions of horizontal light oil and condensate-rich natural gas wells in
Pouce Coupe and Gordondale and infrastructure costs related to the Inlet Liquids-Handling Facility.
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, 2020
December 31, 2019
1,000,000
1,000,000
(732,603)
(4,185)
(736,788)
263,212
26%
(611,483)
(4,185)
(615,668)
384,332
38%
(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 oil and gas reserves. In connection with the semi-annual review
of the borrowing base limit under the Credit Facilities which was completed by the Corporation’s syndicate of lenders in December 2020, the borrowing base limit was confirmed at $1.0 billion.
Birchcliff’s Credit Facilities 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
at December 31, 2020 was 18.0. The Credit Facilities do not mature until May 11, 2022 and do not contain any financial maintenance covenants. See “Risk Factors – 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.
61
ANNUAL REPORT 2020 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, 2020:
($000s)
Accounts payable and accrued liabilities
Drawn revolving term credit facilities
Firm transportation and fractionation(1)
Natural gas processing(2)
Operating commitments(3)
Lease payments
Capital securities(4)
Estimated contractual obligations(5)
2021
97,507
-
136,813
17,155
1,996
3,008
39,930
296,409
2022
2023-2025
Thereafter
-
732,603
130,858
17,155
1,996
3,174
-
-
-
307,912
51,512
5,989
7,795
-
-
-
183,269
120,179
4,159
6,061
-
885,786
373,208
313,668
(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) Birchcliff has 1,597,180 Series C Preferred Shares outstanding at December 31, 2020, which are redeemable by their holders at $25.00 per share. For further details, see “Outstanding Share Information
– Capital Securities” in this MD&A and the annual audited financial statements of the Corporation and related notes for the Reporting Periods.
(5) Contractual obligations and commitments that are not material to Birchcliff are excluded from the above table. The Corporation’s decommissioning obligations are excluded from the table as these obligations
arose from a regulatory requirement rather than from a contractual arrangement. Birchcliff estimates the total undiscounted cash flow to settle its decommissioning obligations on its wells and facilities at
December 31, 2020 to be approximately $221.3 million and are estimated to be incurred as follows: 2021 – $2.2 million, 2022 – $2.2 million and $216.9 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.
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 9, 2021, 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:
(000s)
Balance at December 31, 2019
Conversion of Series C Preferred Shares(1)
Repurchase of common shares(2)
Exercise of options
Balance at December 31, 2020
Exercise of options
Balance at March 9, 2021
Common Shares
265,935,229
464,562
(464,562)
7,500
265,942,729
99,497
266,042,226
(1) See "Capital Securities" below.
(2) Birchcliff purchased for cancellation 464,562 common shares pursuant to its normal course issuer bid.
At March 9, 2021, the Corporation had the following securities outstanding: 266,042,226 common shares; 2,000,000 Series A
Preferred Shares; 1,597,180 Series C Preferred Shares; 23,805,902 stock options to purchase an equivalent number of common shares;
and 2,939,732 performance warrants to purchase an equivalent number of common shares.
62
BIRCHCLIFF ENERGY Capital Securities
Subject to the provisions of the Business Corporations Act (Alberta) (the “ABCA”) and the provisions governing the Series C Preferred
Shares (the “Provisions”), a holder of Series C Preferred Shares may, at its option, upon giving notice in accordance with the Provisions
(the “Notice of Redemption”), redeem for cash, all or any number of Series C Preferred Shares held by such holder on the last day of a
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 (subject, if required, to stock exchange approval), upon
not less than 20 days’ prior written notice, elect to convert all such Series C Preferred Shares into common shares. The number of
common shares into which each Series C Preferred Share may be so converted will be determined by dividing the amount of $25.00,
together with all accrued and unpaid dividends to but excluding the date fixed for conversion, by the greater of $2.00 and 95% of the
“Current Market Price” (as determined in accordance with the Provisions) of the common shares.
The Corporation received Notices of Redemption for 402,820 Series C Preferred Shares in the twelve month Reporting Period. The
Corporation elected to settle in cash the redemption of 365,655 Series C Preferred Shares at $25.00 per share for a total of $9.1 million.
The Corporation elected to convert the remaining 37,165 Series C Preferred Shares into common shares and accordingly issued a total
of 464,562 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 ($000s)
Per common share ($)
Series A Preferred Shares:
Series A dividend distribution ($000s)
Per Series A Preferred Share ($)
Series C Preferred Shares:
Series C dividend distribution ($000s)
Per Series C Preferred Share ($)
Three months ended
December 31,
Twelve months ended
December 31,
2020
2019
2020
2019
1,330
0.0050
1,047
0.5234
858
0.4375
6,981
0.0263
1,047
0.5234
875
0.4375
10,968
0.0413
4,187
2.0935
3,467
1.7500
27,923
0.1050
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).
In the second quarter of 2020, the Corporation reduced the amount of its quarterly common share dividend from $0.02625 per share
(or $0.105 per share annually) to $0.005 per share (or $0.02 per share annually).
Normal Course Issuer Bid
On November 18, 2020, Birchcliff announced that the TSX had accepted the Corporation’s notice of intention to make a normal
course issuer bid (the “2021 NCIB”). Pursuant to the 2021 NCIB, Birchcliff may purchase up to 13,296,936 of its outstanding
common shares over a period of twelve months commencing on November 25, 2020. The 2021 NCIB will terminate no later than
November 24, 2021. Under the 2021 NCIB, common shares may be purchased in open market transactions on the TSX and/or
alternative Canadian trading systems at the prevailing market price at the time of such transaction. Pursuant to the rules of the TSX,
the total number of common shares that Birchcliff is permitted to purchase is subject to a daily purchase limit of 286,843 common
shares. However, Birchcliff may make one block purchase per calendar week which exceeds the daily purchase restriction. All
common shares purchased under the 2021 NCIB will be cancelled. The 2021 NCIB effectively renewed the Corporation’s previous
normal course issuer bid under which the Corporation was permitted to purchase up to 13,296,761 common shares over the
period from November 25, 2019 to November 24, 2020 (the “2020 NCIB”). During the twelve month Reporting Period, Birchcliff
purchased 464,562 common shares pursuant to the 2020 NCIB for an aggregate value of approximately $610,000, before fees.
All such common shares were cancelled.
A security holder or the Corporation may obtain, for no charge, a copy of the notice in respect of the 2021 NCIB filed with the TSX by
contacting the Corporation at 403-261-6401.
63
ANNUAL REPORT 2020 SUMMARY OF QUARTERLY RESULTS
The following table sets forth a summary of the Corporation’s quarterly results for the eight most recently completed quarters:
Quarter ending,
Dec. 31,
2020
Sep. 30,
2020
Jun. 30,
2020
Mar. 31,
2020
Dec. 31,
2019
Sep. 30,
2019
Jun. 30,
2019
Mar. 31,
2019
Average light oil production (bbls/d)
Average condensate production (bbls/d)
Average NGLs production (bbls/d)
3,566
6,658
8,285
4,405
7,266
6,898
5,744
4,825
7,455
3,954
4,524
7,962
4,435
4,906
7,814
4,882
5,744
7,559
4,853
5,505
6,923
4,800
4,416
6,743
Average natural gas production (Mcf/d)
360,839
358,851
341,558
342,831
364,847
374,180
367,033
353,548
Average production (boe/d)
78,649
78,376
74,950
73,580
77,962
80,548
78,453
74,884
Average realized light oil sales price ($/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)
F&D capital expenditures ($000s)
Total capital expenditures ($000s)
49.56
52.90
16.16
2.93
21.87
48.50
48.27
14.05
2.48
19.80
25.72
31.09
12.05
2.22
15.27
53.18
58.48
12.02
2.29
18.41
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
158,283
142,779
104,180
123,263
164,759
130,588
139,857
178,355
3.03
2.73
2.89
3.14
3.06
2.75
3.17
3.40
41,291
30,842
83,473
132,361
56,800
40,192
67,937
91,466
28,778
31,193
83,974
132,840
58,136
41,621
68,532
131,958
Cash flow from operating activities ($000s)
71,431
52,977
13,221
50,551
85,557
48,908
97,857
94,744
Adjusted funds flow ($000s)
66,509
59,377
21,746
36,894
80,941
62,958
73,957
116,648
Per common share – basic ($)
Per common share – diluted ($)
Free funds flow ($000s)
Net income (loss) ($000s)
0.25
0.25
0.22
0.22
0.08
0.08
0.14
0.14
0.30
0.30
0.24
0.24
0.28
0.28
0.44
0.44
25,218
28,535
(61,727)
(95,467)
24,141
22,766
6,020
25,182
41,454
(16,646)
(38,475)
(44,154)
(17,937)
(45,843)
(8,458)
16,846
Net income (loss) to common shareholders ($000s)(2)
40,407
(17,692)
(39,522)
(45,201)
(18,984)
(46,889)
(9,505)
15,799
Per common share – basic ($)
Per common share – diluted ($)
Total assets ($ million)
Long-term bank debt ($000s)
Total debt ($000s)
0.15
0.15
(0.07)
(0.07)
2,902
2,912
(0.15)
(0.15)
2,929
(0.17)
(0.17)
2,871
(0.07)
(0.07)
2,817
(0.18)
(0.18)
2,822
(0.04)
(0.04)
0.06
0.06
2,840
2,860
731,372
771,706
753,092
619,055
609,177
638,631
622,282
611,911
761,951
784,414
807,573
739,631
632,582
644,407
654,709
626,454
Dividends on common shares ($000s)
Dividends on Series A Preferred Shares ($000s)
Dividends on Series C Preferred Shares ($000s)
1,330
1,047
858
1,330
1,046
859
1,327
1,047
875
Series A Preferred Shares outstanding (000s)
2,000
2,000
2,000
Series C Preferred Shares outstanding (000s)
1,597
1,962
1,963
6,981
1,047
875
2,000
2,000
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
Common shares outstanding (000s)
Basic
Diluted
Weighted average common shares outstanding (000s)
265,943
265,935
265,935
265,935
265,935
265,935
265,935
265,924
295,017
290,009
290,014
290,037
292,358
287,407
287,381
287,480
Basic
Diluted
265,940
265,935
265,935
265,935
265,935
265,935
265,933
265,914
265,985
265,935
265,935
265,935
265,935
265,935
265,933
266,382
(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.
64
BIRCHCLIFF ENERGY Quarterly average daily production volumes were impacted primarily by Birchcliff’s successful drilling of horizontal wells brought on
production in Pouce Coupe and Gordondale and natural production declines during those periods.
P&NG 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 lower
trending operating expenses, realized gains and losses on the settlement of financial instruments due to added market diversification
initiatives and higher trending transportation and other expense primarily as a result of additional AECO and Dawn firm service.
Birchcliff’s net income and loss in each of the last eight quarters was largely impacted by adjusted funds flow and certain non-cash
adjustments, including depletion expense and unrealized mark-to-market gains and losses on financial instruments due to added
market diversification initiatives.
The Corporation’s capital expenditures fluctuate quarter-to-quarter based on: (i) the Corporation’s outlook for commodity prices and
market conditions; (ii) the level of drilling and completions operations and other capital projects and the timing thereof; and (iii) the level
of acquisition and disposition activities and the timing thereof.
Quarterly variances in free funds flow are primarily due to fluctuations in adjusted funds flow and F&D capital expenditures.
Long-term bank debt and total debt fluctuate quarter-to-quarter primarily based on changes in adjusted funds flow, capital
expenditures and dividends paid. Long-term bank debt in the last eight quarters has trended higher due to adjusted funds flow being
less than the aggregate of total capital expenditures, dividends paid on preferred shares and common shares and the redemptions of
Series C Preferred Shares in 2020.
The Corporation pays dividends on its common shares, Series A Preferred Shares and Series C Preferred Shares when declared and
approved by the Board of Directors. On June 2, 2020, the Corporation reduced the amount of its quarterly common share dividend
from $0.02625 per share to $0.005 per share with the first reduced payment taking effect for the quarter ended June 30, 2020. As a
result of this reduction, the dividends paid on the common shares over the last three quarters of 2020 were significantly lower than the
previous five quarters. Birchcliff’s Series C Preferred Shares outstanding in the last three quarters of 2020 decreased from the previous
five quarters. During 2020, the Corporation received Notices of Redemptions for 402,820 Series C Preferred Shares at $25.00 per
share for an aggregate of $10.1 million.
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, 2020 and have concluded that the
Corporation’s DC&P were effective at December 31, 2020.
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.
65
ANNUAL REPORT 2020 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 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, 2020 and
have concluded that the Corporation’s ICFR was effective at December 31, 2020. There were no changes in the Corporation’s ICFR
that occurred during the period beginning on October 1, 2020 and ended on December 31, 2020 that have materially affected, or are
reasonably likely to materially affect, the Corporation’s ICFR. Birchcliff’s ICFR was not impacted by the COVID-19 pandemic during the
Reporting Periods.
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 its 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 internal or external indicators that its petroleum and
natural gas properties and equipment within a CGU may be impaired. Birchcliff is required to consider information from both external
sources (such as negative downturn in forecasted oil and gas 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 proved and probable oil
and gas reserves and the related cash flows, 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.
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BIRCHCLIFF ENERGY 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 oil and gas reserves and the related cash flows requires estimation and are
subject to assumptions regarding forecasted production profile, forecasted oil and gas commodity prices, forecasted operating costs,
forecasted royalty costs and forecasted future development costs. 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 proved and probable oil and gas reserves may change from period to period.
Changes in reported proved and probable oil and gas 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 estimated recoverable quantities of
proved and probable oil and gas reserves and the related cash flows from Birchcliff’s petroleum and natural gas interests are evaluated
by independent third party reserve evaluators at least annually.
The Corporation’s proved and probable oil and 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 proved and probable oil and gas
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 proved and probable 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.
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ANNUAL REPORT 2020 Impairment of Non-Financial Assets
For the purposes of determining the extent of any impairment or its reversal, estimates must be made regarding proved and probable
oil and gas reserves and the related cash flows considering significant assumptions including forecasted oil and gas commodity
prices, forecasted production, forecasted operating costs, forecasted royalty costs and forecasted future development costs. These
significant assumptions are subject to change as new information becomes available. Changes in economic conditions can also affect
the discount rate estimate used to discount the cash flow estimates related to proved and probable oil and gas reserves. 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.
CHANGES IN ACCOUNTING POLICIES
Accounting Pronouncements Adopted
Business Combinations
On January 1, 2020, Birchcliff adopted the amendment as issued on October 22, 2018 to IFRS 3: Business Combinations (“IFRS 3”).
IFRS 3 sets out the principles in accounting for the acquisition of a business.
The amendments to this standard include a change in the definition of a business and the addition of an optional concentration test to
determine if the acquisition is a business for any acquisition occurring on or after January 1, 2020. The amended definition of a business
under IFRS 3 is that a business consists of inputs and processes applied to those inputs that have the ability to contribute to the creation
of outputs. The three elements of a business are defined as follows:
•
•
Input: any economic resource that creates outputs, or has the ability to contribute to the creation of outputs, when one or more
processes are applied to it.
Process: any system, standard, protocol, convention or rule that, when applied to an input or inputs, creates outputs or has the
ability to contribute to the creation of outputs.
• Output: the result of inputs and processes applied to those inputs that provide goods or services to customers, generate
investment income or generate other income from ordinary activities.
The optional concentration test permits a simplified assessment of whether an acquired set of activities and assets is in fact a business.
An entity may elect to apply, or not apply, the test. An entity may make such an election separately for each transaction or other event.
If the concentration test is met, the set of activities and assets is determined not to be a business and no further assessment is needed.
The adoption had no impact.
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BIRCHCLIFF ENERGY RISK FACTORS
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 – Weakness
and Volatility in the Oil and Natural Gas Industry” and “Risk Factors – Gathering and 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 OPEC and other oil and natural gas exporting nations;
• political conditions, instability and hostilities;
• domestic and foreign supplies of crude oil, NGLs and natural gas;
•
•
•
•
the level of consumer demand for different qualities and types of crude oil and NGLs, including the level of demand destruction
resulting from, and the pace of recovery following the COVID-19 pandemic;
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 crude 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 the current state of the world economy, OPEC actions, sanctions imposed
on certain oil producing nations by other countries, ongoing credit and liquidity concerns, the impact of protectionist measures on foreign
trade and public sentiment regarding fossil fuels have caused significant volatility in commodity prices. For instance, in 2020, oil prices
deteriorated due to softening global demand caused by the COVID-19 pandemic. In March 2020, OPEC and Russia were unable to reach
an agreement to further manage oil production volumes to support global oil prices. Saudi Arabia responded by reducing its pricing and
promising to increase production to over 10 million bbls/d. These actions led to the deepest drop in crude oil prices that global markets
have seen since 1991. With the rapid spread of COVID-19 and additional oil supply, oil prices and global equity markets deteriorated
significantly and remain under pressure. Prices for crude oil and natural gas are also impacted by the availability of foreign markets and
the ability to access such markets.
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ANNUAL REPORT 2020 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, 2020 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 – Credit Facilities”.
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 volatility of major stock exchanges in the
People’s Republic of China, 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 COVID-19 pandemic 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.
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BIRCHCLIFF ENERGY 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.
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 – Insurance”.
Public Health Crises
Public health crises, including 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. On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic,
prompting governments and regulatory authorities around the world to implement measures designed to contain the COVID-19
pandemic, including widespread business closures, social distancing protocols, travel restrictions, quarantines, curfews and
restrictions on gatherings and events. While a number of containment measures have been and continue to be gradually eased or lifted
across some regions, additional safety precautions and operating protocols aimed at containing the spread of COVID-19 have been
and continue to be instituted in line with guidance from public health authorities. In addition, the emergence of a second wave of the
COVID-19 pandemic, together with the emergence of variant COVID-19 strains, has led to the imposition of containment measures
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ANNUAL REPORT 2020 in many regions within Canada and globally. The COVID-19 pandemic has had a significant negative impact on global economic
conditions, including a sharp decrease in crude oil demand which, combined with other macro-economic conditions, has resulted in
significant volatility in oil and natural gas commodity prices, as well as increased economic uncertainty.
There is significant ongoing uncertainty surrounding COVID-19 and the extent and duration of the impacts that Birchcliff may
experience. While the duration and full impact of the COVID-19 pandemic is not yet known, the effect of low commodity prices as
a result of reduced demand associated with the impact of COVID-19 has had, and may continue to have a negative impact on the
Corporation’s business, results of operations, financial condition and the environment in which it operates. Low prices for crude oil and
natural gas will reduce Birchcliff’s cash flow, impact its level of capital investment and may result in the reduction of production at certain
producing properties. Further declines in commodity prices could lead to future impairments on the Corporation’s properties and
assets. Furthermore, the Corporation may from time to time have restricted access to capital and increased borrowing costs. In addition
to the economic impacts associated with falling commodity prices, the effects of COVID-19 may also include disruptions to production
operations, challenges accessing materials and services, increased employee absenteeism from illness and temporary closures
of the Corporation’s facilities. COVID-19 may also increase the Corporation’s third-party credit risk and the risk that counterparties
default on their contractual obligations to the Corporation or declare force majeure. All of the foregoing may adversely and materially
affect Birchcliff’s business, results of operations, financial condition, prospects and its ability to pay dividends. The ultimate impacts
will depend on future developments that are highly uncertain and cannot be predicted, including the scope, severity, duration and
additional subsequent waves of the COVID-19 pandemic, as well as the effectiveness of actions and measures taken by the various
levels of government. Despite recent positive vaccine developments, the ongoing evolution of the development and distribution of
effective vaccines also continues to raise uncertainty.
Additionally, the COVID-19 pandemic and its effect on local and global economic conditions could aggravate the other risk factors
identified in this MD&A, the extent of which is not yet known.
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.
72
BIRCHCLIFF ENERGY 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. 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. The Federal Government and various provincial governments have been active in recent years in their support for
and opposition to major infrastructure projects in Canada, leading to increased awareness of and challenges to, interprovincial and
international infrastructure projects. 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. 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.
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.
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ANNUAL REPORT 2020 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.
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.
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 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:
•
•
•
•
•
•
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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
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BIRCHCLIFF ENERGY 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.
Uncertainty of Reserves Estimates
The Corporation’s estimated reserves are based on numerous factors and assumptions which may prove incorrect and which may
affect the Corporation
There are numerous uncertainties inherent in estimating quantities of 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, commodity
prices, 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.
In accordance with applicable securities laws in Canada, the Corporation’s independent qualified reserves evaluator has 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 evaluation and such variations could be material. The independent reserves evaluation is 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 evaluation will be reduced to the extent that such activities
do not achieve the level of success assumed in the evaluation.
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. During its tenure, the former U.S. administration withdrew the United States from
the Trans-Pacific Partnership and the United States Congress passed sweeping tax reforms, which, among other things, significantly
reduced U.S. corporate tax rates. This has affected the competitiveness of other jurisdictions, including Canada.
In addition, the United States-Mexico-Canada Agreement (the “USMCA”), which replaced NAFTA, was ratified on July 1, 2020 and
may impact the Corporation’s business. The newly-inaugurated Biden administration in the U.S. has indicated that it will roll-back
certain policies of the former administration and has revoked the presidential permit for TC Energy’s Keystone XL Pipeline. While it is
unclear which other legislation or policies of the former U.S. administration will be rolled-back and if such roll-backs will be a priority
of the new administration in light of the ongoing COVID-19 pandemic, any future actions taken by the new U.S. administration could
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.
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ANNUAL REPORT 2020 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 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
Public support for climate change action has grown in recent years, as has the impetus to pursue new technologies to mitigate
the effects of climate change. Governments in Canada and around the world have responded by adopting ambitious emissions
reduction targets and supporting legislation, including measures relating to carbon pricing, clean energy and fuel standards, and
alternative energy incentives and mandates.
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 its production, as well as goods
and services in its 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 – Seasonality”.
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 – Hydraulic Fracturing”.
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BIRCHCLIFF ENERGY 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 has 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 appealed. 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 – Changing Investor Sentiment”,
“Risk Factors – Public Opinion and Reputational Risk” and “Risk Factors – 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 – 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 may become subject to future regional, provincial and/or federal climate change regulations to manage
GHG emissions. See “Risk Factors – Regulatory”, “Risk Factors – Environmental”, “Risk Factors – Evolving Corporate Governance,
Sustainability and Reporting Framework” and “Risk Factors – Carbon Pricing Risk” for further details.
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 – Litigation”.
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 – Cost of New Technologies”.
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ANNUAL REPORT 2020 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 – 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. In addition, 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 – 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
regulators by special interest groups, which may include Indigenous groups, landowners, environmental interest groups (including
those opposed to oil and natural 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
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BIRCHCLIFF ENERGY 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 the time required or on acceptable terms and conditions. Any failure to renew, maintain or obtain required permits, licences,
registrations, approvals and authorizations or the revocation or termination of existing permits, licences, registrations, approvals
and authorizations may disrupt such third-party lessee and/or operator operations and could have a resulting material adverse effect
on the Corporation’s business and financial condition. 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.
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. Environmental
legislation is evolving in a manner expected to result in stricter standards and enforcement, larger fines and liability and potentially
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ANNUAL REPORT 2020 increased capital expenditures and 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 – 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 – Climate Change”
and “Risk Factors – Environmental”.
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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BIRCHCLIFF ENERGY 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 oil
and natural gas commodity prices, and the securities of issuers involved in the oil and natural gas business, has increased due, in part,
to the implementation of computerized trading and the decrease of discretionary commodity trading. Similarly, recent market prices
in the securities of oil and natural gas issuers relative to other industry sectors have led to lower oil and natural gas representation in
certain key equity market indices. The volatility, trading volume and market price of oil and natural gas issuers have been impacted
by increasing investment levels in passive funds that track major indices and only purchase securities included in such indices and
subsequently dispose of those securities if they are excluded from such indices. In addition, many institutional investors, pension
funds and insurance companies, including government sponsored entities, have implemented investment strategies increasing their
investments in low-carbon assets and businesses while decreasing the carbon intensity of their portfolios through, among other
measures, divestments. These factors have impacted the volatility and liquidity of certain securities and put downward pressure on
the market 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 high 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.
Seismic events are common in certain parts of Alberta and the Alberta Energy Regulator (the “AER”) has introduced seismic monitoring
and reporting requirements for hydraulic fracturing operators in the Fox Creek, Red Deer and Brazeau regions. 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. Although the Corporation does not currently have operations
subject to these requirements, 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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ANNUAL REPORT 2020 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
reserves 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 – 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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BIRCHCLIFF ENERGY 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 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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ANNUAL REPORT 2020 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.
There is competition for qualified personnel in the oil and natural gas industry 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.
84
BIRCHCLIFF ENERGY 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, including a cyber-security incident response plan, 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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ANNUAL REPORT 2020 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.
Litigation
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, environmental issues (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.
86
BIRCHCLIFF ENERGY 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 or ability to participate in Birchcliff’s ongoing capital development or well abandonment and
site reclamation programs. This could potentially delay capital investment in an asset until the Corporation finds a suitable alternative
partner, or in the case of well abandonment and site reclamation activities, require the Corporation to finance such activities. 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 licensee liability rating 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, may result in the denial of licence or permit transfers 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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ANNUAL REPORT 2020 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 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.
88
BIRCHCLIFF ENERGY 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.
89
ANNUAL REPORT 2020 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 the
shareholder’s home currency.
Evolving Corporate Governance, Sustainability and Reporting Framework
Evolving corporate governance, sustainability 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.
90
BIRCHCLIFF ENERGY 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.
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”.
91
ANNUAL REPORT 2020 ABBREVIATIONS
AECO
ATP
bbl
bbls
bbls/d
boe
boe/d
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
condensate
pentanes plus (C5+)
finding and development
finding, development and acquisition
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
thousand cubic feet
thousand cubic feet per day
thousand cubic feet of gas equivalent
megajoule
millions of dollars
million barrels of oil equivalent
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
Organization of the Petroleum Exporting Countries (“OPEC”), with certain non-OPEC oil
exporting countries
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
F&D
FD&A
G&A
GAAP
GHG
GJ
GJ/d
HH
IFRS
LNG
m3
Mcf
Mcf/d
Mcfe
MJ
MM$
MMboe
MMBtu
MMBtu/d
MMcf
MMcf/d
MSW
NGLs
NGTL
NYMEX
OPEC+
P&NG
TCPL
WTI
000s
$000s
92
BIRCHCLIFF ENERGY NON-GAAP MEASURES
This MD&A uses the terms “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, preferred share redemptions, 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,
2020
71,431
(6,269)
1,347
66,509
(41,291)
25,218
2019
85,557
(5,058)
442
80,941
2020
188,180
(5,977)
2,323
2019
327,066
5,153
2,285
184,526
334,504
(56,800)
(287,967)
(256,395)
24,141
(103,441)
78,109
“Transportation and other expense” denotes transportation expense plus marketing purchases minus marketing revenue on a per
boe basis. 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.
93
ANNUAL REPORT 2020 “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, less any realized losses (plus realized
gains) on financial instruments and plus any other cash income sources. 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:
Three months ended
December 31,
Twelve months ended
December 31,
2020
2019
2020
2019
($000s)
($/boe)
($000s)
($/boe)
($000s)
($/boe)
($000s)
($/boe)
Petroleum and natural gas revenue
158,283
21.88
164,759
(6,522)
(0.90)
(8,263)
22.97
(1.15)
528,505
18.90
613,559
21.56
(18,204)
(0.65)
(27,452)
(0.96)
(21,942)
(3.03)
(21,977)
(3.06)
(82,357)
(2.95)
(87,903)
(3.09)
Royalty expense
Operating expense
Transportation and other expense
(35,690)
(4.94)
(32,278)
(4.51)
(138,014)
(4.93)
(126,135)
(4.44)
Operating netback
G&A, net
Interest expense
94,129
(8,028)
13.01
(1.11)
102,241
(9,035)
14.25
(1.26)
289,930
10.37
372,069
13.07
(24,615)
(0.88)
(26,815)
(0.94)
(8,652)
(1.20)
(5,852)
(0.82)
(26,067)
(0.93)
(25,073)
(0.88)
Realized gain (loss) on financial instruments
(11,819)
(1.63)
(6,565)
(0.92)
(59,665)
(2.13)
13,673
Other income
Adjusted funds flow netback
879
66,509
0.12
9.19
152
80,941
0.03
11.28
4,943
0.17
650
184,526
6.60
334,504
0.48
0.02
11.75
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” denotes royalty, operating, transportation and other, G&A and interest expenses 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. Management believes that adjusted working capital deficit assists management and
investors in assessing Birchcliff’s short-term liquidity requirements. 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
Financial instrument – current liability
Capital securities – current liability
Adjusted working capital deficit
December 31,
2020
December 31,
2019
93,988
(23,479)
(39,930)
30,579
100,199
(26,949)
(49,845)
23,405
“Total debt” is calculated as the amount outstanding under the 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, ($000s)
Revolving term credit facilities
Adjusted working capital deficit
Total debt
December 31,
2020
December 31,
2019
731,372
30,579
761,951
609,177
23,405
632,582
94
BIRCHCLIFF ENERGY ADVISORIES
Currency
Unless otherwise indicated, all dollar amounts are expressed in Canadian dollars and all references to “$” 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 of 37.4 MJ/m3 or a heat uplift of 1.055 when converting from $/GJ.
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 indicated, 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 independent qualified reserves evaluator, Deloitte LLP (“Deloitte”), 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, 2020. Such evaluation was 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, 2020.
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, strategy, performance or financial
position and are based on Birchcliff’s current expectations, estimates, projections, beliefs and assumptions. Such forward-looking
statements have been made by Birchcliff in light of the information available to it at the time the statements were made and reflect
its experience and perception of historical trends. All statements and information other than historical fact may be forward-looking
statements. Such forward-looking statements are often, but not always, identified by the use of words such as “seek”, “plan”, “focus”,
“future”, “outlook”, “position”, “expect”, “project”, “intend”, “believe”, “anticipate”, “estimate”, “forecast”, “guidance”, “potential”,
“proposed”, “predict”, “budget”, “continue”, “targeting”, “may”, “will”, “could”, “might”, “should”, “would”, “on track” and other
similar words and expressions.
95
ANNUAL REPORT 2020 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 “Current Operating Environment and COVID-19”, “Risk Factors” and elsewhere in
this MD&A as it relates to the expected impacts of the COVID-19 pandemic (including that the COVID-19 pandemic is expected
to continue to have a significant impact on future demand for the commodities Birchcliff produces and on the Corporation’s
cash flow, access to capital, results of operations, financial condition and the environment in which it operates, as well as on the
Corporation’s suppliers and employees);
the information set forth under the heading “2021 Outlook and Guidance” and elsewhere in this MD&A as it relates to Birchcliff’s
outlook and guidance for 2021 and the 2021 Capital Program (including: that Birchcliff is focused on maximizing free funds flow
and strengthening its balance sheet; that Birchcliff’s F&D capital budget of $210 million to $230 million for 2021 targets an annual
average production rate of 78,000 to 80,000 boe/d; that the 2021 Capital Program contemplates the drilling of 27 (27.0 net)
wells and bringing on production of a total of 33 (33.0 net) wells during 2021; 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; and the expected impact of changes in commodity prices and the CDN/US exchange rate on Birchcliff’s
estimate of adjusted funds flow);
Birchcliff’s market diversification and risk management activities and any anticipated benefits to be derived therefrom;
estimates of reserves and future development costs;
the Corporation’s estimated income tax pools and management’s expectation that future taxable income will be available to
utilize the accumulated tax pools;
the information set forth under the heading “Capital Resources and Liquidity” and elsewhere in this MD&A as it relates to the
Corporation’s liquidity and capital resources (including: that the capital-intensive nature of Birchcliff’s operations requires
it to maintain adequate sources of liquidity to fund its short-term and long-term financial obligations; that Birchcliff’s capital
resources primarily consist of adjusted funds flow and available Credit Facilities, which the Corporation believes are sufficient to
fund its working capital requirements, capital expenditure programs and dividend payments for the foreseeable future; that the
Corporation continues to proactively look for strategic risk management and market diversification activities; that Birchcliff’s priority
is to strengthen its balance sheet in the current operating environment; the Corporation’s belief that its internally generated adjusted
funds flow and its existing undrawn Credit Facilities will provide sufficient liquidity to fund the 2021 Capital Program, dividend
distributions and working capital requirements and also decrease the Corporation’s outstanding debt; that the disruption and
volatility that has resulted from the COVID-19 pandemic may continue and could impact future oil price recovery and increase
future costs of capital; the Corporation’s expectation that counterparties will be able to meet their financial obligations; and 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 2021 NCIB (including: potential purchases under the 2021 NCIB; and the cancellation of
common shares under the 2021 NCIB); 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:
the degree to which the Corporation’s results of operations and financial condition will be disrupted by circumstances attributable
to the COVID-19 pandemic and the responses of governments and the public to the pandemic; 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, G&A and other expenses; Birchcliff’s ability to access capital and obtain financing on acceptable terms; the
timing and amount of capital expenditures and the sources of funding for capital expenditures and other activities; the sufficiency
96
BIRCHCLIFF ENERGY 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 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 2021 guidance assumes the following commodity prices and exchange rate: an average WTI price of US$50.00/bbl;
an average WTI-MSW differential of CDN$6.00/bbl; an average AECO 5A price of CDN$2.50/GJ; an average Dawn price of
US$2.75/MMBtu; an average NYMEX HH price of US$2.80/MMBtu; and an exchange rate (CDN$ to US$1) of 1.27.
• With respect to estimates of 2021 capital expenditures and Birchcliff’s spending plans for 2021, such estimates and plans assume
that the 2021 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 estimates of adjusted and free funds flow for 2021, such estimates assume that: the 2021 Capital
Program will be carried out as currently contemplated and the level of capital spending for 2021 set forth herein will be achieved;
and the targets for production, production commodity mix, costs 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 for 2021, such guidance assumes that: the 2021 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 regarding 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 in its independent
reserves evaluation.
Birchcliff’s actual results, performance or achievements could differ materially from those anticipated in the forward-looking statements
as a result of both known and unknown risks and uncertainties including, but not limited to: the risks posed by pandemics (including
COVID-19) and epidemics and their impacts on supply and demand and commodity prices; actions taken by OPEC and other major
producers of crude oil and the impact such actions may have on supply and demand and commodity prices; 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 oil and natural gas prices; fluctuations in currency exchange and interest rates; stock market
volatility; loss of market demand; an inability to access sufficient capital from internal and external sources on terms acceptable to
the Corporation; risks associated with Birchcliff’s Credit Facilities, including a failure to comply with covenants under the agreement
governing the Credit Facilities and the risk that the borrowing base limit may be redetermined; fluctuations in the costs of borrowing;
operational risks and liabilities inherent in oil and natural gas operations; the occurrence of unexpected events such as fires, severe
weather, explosions, blow-outs, equipment failures, transportation incidents and other similar events 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; 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
97
ANNUAL REPORT 2020 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; shortages in equipment and skilled personnel;
the absence or loss of key employees; competition for, among other things, capital, acquisitions of reserves, undeveloped lands,
equipment and skilled personnel; management of Birchcliff’s growth; environmental and climate change risks, claims and liabilities;
potential litigation; default under or breach of agreements by counterparties and potential enforceability issues in contracts; claims by
Indigenous peoples; the reassessment by taxing or regulatory authorities of the Corporation’s prior transactions and filings; unforeseen
title defects; third-party claims regarding the Corporation’s right to use technology and equipment; uncertainties associated with the
outcome of litigation or other proceedings involving Birchcliff; uncertainties associated with counterparty credit risk; risks associated
with Birchcliff’s risk management 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.
There is significant ongoing uncertainty surrounding COVID-19 and the extent and duration of the impacts that Birchcliff may
experience. While the duration and full impact of the COVID-19 pandemic is not yet known, the effect of low commodity prices as
a result of reduced demand associated with the impact of COVID-19 has had, and may continue to have, a negative impact on the
Corporation’s business, results of operations, financial condition and the environment in which it operates. The Corporation’s current
expectations, estimates, projections, beliefs and assumptions underlying the Corporation’s forward-looking statements, including
those that pertain to the 2021 Capital Program are subject to change in light of the COVID-19 pandemic, including potential future
waves and actions taken by governments and businesses in response thereto.
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 this MD&A and Birchcliff’s most recent
Annual Information Form under the heading “Risk Factors” and in other reports filed with Canadian securities regulatory authorities.
This MD&A contains information that may constitute future-orientated financial information or financial outlook information
(collectively, “FOFI”) about Birchcliff’s prospective financial performance, financial position or cash flows, all of which is subject to the
same assumptions, risk factors, limitations and qualifications as set forth above. Readers are cautioned that the assumptions used in the
preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise or inaccurate
and, as such, undue reliance should not be placed on FOFI. Birchcliff’s actual results, performance and achievements could differ
materially from those expressed in, or implied by, FOFI. Birchcliff has included FOFI in order to provide readers with a more complete
perspective on Birchcliff’s future operations and management’s current expectations relating to Birchcliff’s future performance. Readers
are cautioned that such information may not be appropriate for other purposes. FOFI contained herein was made as of the date of
this MD&A. Unless required by applicable laws, Birchcliff does not undertake any obligation to publicly update or revise any FOFI
statements, whether as a result of new information, future events or otherwise.
Management has included the above summary of assumptions and risks related to forward-looking statements provided in this MD&A
in order to provide readers with a more complete perspective on Birchcliff’s future operations and management’s current expectations
relating to Birchcliff’s future performance. Readers are cautioned that this information may not be appropriate for other purposes.
The forward-looking statements contained in this MD&A are expressly qualified by the foregoing cautionary statements. The
forward-looking statements contained herein are made as of the date of this MD&A. Unless required by applicable laws, Birchcliff
does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
98
BIRCHCLIFF ENERGY Management’s Report
To the Shareholders of Birchcliff Energy Ltd.
The annual financial statements of Birchcliff Energy Ltd. for the year ended December 31, 2020 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 10, 2021
99
ANNUAL REPORT 2020 Independent Auditors’ Report
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, 2020 and December 31, 2019
the statements of net loss and comprehensive 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, 2020 and December 31, 2019, 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.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements
for the year ended December 31, 2020. These matters were addressed in the context of our audit of the financial statements as a whole,
and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
We have determined the matters described below to be the key audit matters to be communicated in our auditors’ report.
Assessment of the recoverable amount of the cash generating unit
Description of the matter
We draw attention to notes 3 and 5 to the financial statements. The Company identified an indicator of impairment at March 31, 2020
and performed an impairment test to estimate the recoverable value of the cash generating unit (“CGU”).
The estimated recoverable amount of the CGU involves significant estimates, including:
•
•
The estimate of proved and probable oil and gas reserves and the related cash flows
The discount rates.
The estimate of proved and probable oil and gas reserves and the related cash flows includes significant assumptions related to:
•
•
•
•
•
Forecasted oil and gas commodity prices
Forecasted production
Forecasted operating costs
Forecasted royalty costs
Forecasted future development costs.
The Company engaged independent third-party reserve evaluators to estimate the proved and probable oil and gas reserves and the
related cash flows as at December 31, 2019, which were updated by internal reserve evaluators to March 31, 2020.
100
BIRCHCLIFF ENERGY Why the matter is a key audit matter
We identified the assessment of the recoverable amount of the CGU as a key audit matter. Significant auditor judgment was required
to evaluate the results of our audit procedures regarding the estimate of proved and probable oil and gas reserves and the related cash
flows and the discount rates.
How the matter was addressed in the audit
The following are the primary procedures we performed to address this key audit matter:
With respect to the estimate of proved and probable oil and gas reserves and the related cash flows as at March 31, 2020:
• We evaluated the competence, capabilities and objectivity of the internal reserve evaluators
• We compared forecasted oil and gas commodity prices to those published by independent third-party reserve evaluators
• We evaluated the appropriateness of forecasted production and forecasted operating costs, royalty costs and future
development costs assumptions by comparing to the corresponding amounts in the proved and probable oil and gas
reserves and the related cash flows estimated by the independent third-party reserve evaluators as at December 31, 2019
and by comparing to 2020 actual results. We took into account changes in conditions and events affecting the Company
to assess the adjustments or lack of adjustments made by the Company in arriving at the assumptions.
With respect to the estimate of proved and probable oil and gas reserves and the related cash flows as at December 31, 2019:
• We evaluated the competence, capabilities and objectivity of the independent third-party reserve evaluators engaged
by the Company
• We compared forecasted oil and gas commodity prices to those published by independent third-party reserve evaluators
• We compared the 2019 actual production, operating costs, royalty costs and development costs of the Company to those
estimates used in the prior year’s estimate of proved oil and gas reserves and the related cash flows to assess the Company’s
ability to accurately forecast
• We evaluated the appropriateness of forecasted production and forecasted operating costs, royalty costs and future
development costs assumptions by comparing to 2019 historical results. We took into account changes in conditions and events
affecting the Company to assess the adjustments or lack of adjustments made by the Company in arriving at the assumptions.
We involved valuation professionals with specialized skills and knowledge, who assisted in:
•
Evaluating the appropriateness of the Company’s discount rates by comparing the discount rates to market and other external data
• Assessing the reasonableness of the Company’s estimate of the recoverable amount of the CGU by comparing the Company’s
estimate to market metrics and other external data.
Assessment of indicators of impairment for the cash generating unit
Description of the matter
We draw attention to notes 3 and 5 to the financial statements. The Company assesses at each reporting date if there is an indication
that petroleum and natural gas properties and equipment within the cash generating unit (the “CGU”) may be impaired.
Management judgement is required to assess when external and internal indicators of impairment exist with the estimate of proved and
probable oil and gas reserves and the related cash flows being significant to the assessment.
The estimate of proved and probable oil and gas reserves and the related cash flows includes significant assumptions related to:
•
•
•
•
•
Forecasted oil and gas commodity prices
Forecasted production
Forecasted operating costs
Forecasted royalty costs
Forecasted future development costs.
The Company engaged independent third-party reserve evaluators to estimate the proved and probable oil and gas reserves and the
related cash flows as at December 31, 2020.
101
ANNUAL REPORT 2020 Why the matter is a key audit matter
We identified the assessment of indicators of impairment for the CGU as a key audit matter. Significant auditor judgment was required
to evaluate the results of our audit procedures with respect to the internal and external indicators of impairment including the estimate
of proved and probable oil and gas reserves and the related cash flows.
How the matter was addressed in the audit
The following are the primary procedures we performed to address this key audit matter:
We evaluated the Company’s assessment of internal and external indicators of impairment by considering whether quantitative and
qualitative information in the analysis was consistent with external market and industry data, the Company’s press releases and certain
minutes of the meetings of the Board of Directors and the estimate of proved and probable oil and gas reserves and the related cash flows.
With respect to the estimate of proved and probable oil and gas reserves and the related cash flows as at December 31, 2020:
• We evaluated the competence, capabilities and objectivity of the independent third-party reserve evaluators engaged
by the Company
• We compared forecasted oil and gas commodity prices to those published by independent third-party reserve evaluators
• We compared the 2020 actual production, operating costs, royalty costs and development costs of the Company to those
estimates used in the prior year’s estimate of proved oil and gas reserves and the related cash flows to assess the Company’s
ability to accurately forecast
• We evaluated the appropriateness of forecasted production and forecasted operating costs, royalty costs and future
development costs assumptions by comparing to 2020 actual results. We took into account changes in conditions and events
affecting the Company to assess the adjustments or lack of adjustments made by the Company in arriving at the assumptions.
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 documented entitled
“2020 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 financial statements and the auditors’ report thereon, included in a documented entitled “2020 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.
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.
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.
102
BIRCHCLIFF ENERGY 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.
• Determine, from the matters communicated with those charged with governance, those matters that were of most significance in
the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our
auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances,
we determine that a matter should not be communicated in our auditors’ report because the adverse consequences of doing so
would reasonably be expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this auditors’ report is Timothy Arthur Richards.
(signed) “KPMG LLP”
Chartered Professional Accountants
Calgary, Canada
March 10, 2021
103
ANNUAL REPORT 2020 Birchcliff Energy Ltd.
Statements of Financial Position
(Expressed in thousands of Canadian dollars)
As at December 31,
ASSETS
Current assets:
Cash
Accounts receivable
Prepaid expenses and deposits
Non-current assets:
Investment in securities (Note 6)
Petroleum and natural gas properties and equipment (Note 5)
Total assets
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities
Financial instruments (Note 19)
Capital securities (Note 10)
Non-current liabilities:
Revolving term credit facilities (Note 7)
Decommissioning obligations (Note 8)
Deferred income taxes (Note 9)
Other liabilities (Note 15)
Financial instruments (Note 19)
Total liabilities
SHAREHOLDERS’ EQUITY
Share capital (Note 10)
Common shares
Preferred shares (perpetual)
Contributed surplus
Retained earnings
Total shareholders’ equity and liabilities
Commitments and Contingencies (Note 20)
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
104
2020
2019
60
64,691
2,177
66,928
1,805
2,833,310
2,835,115
2,902,043
97,507
23,479
39,930
160,916
731,372
146,232
65,192
26,207
144,557
1,113,560
1,274,476
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
1,478,294
1,478,356
41,434
89,868
17,971
1,627,567
2,902,043
41,434
84,884
90,947
1,695,621
2,816,685
BIRCHCLIFF ENERGY
Birchcliff Energy Ltd.
Statements of Net Loss and Comprehensive Loss
(Expressed in thousands of Canadian dollars, except per share information)
Years Ended December 31,
REVENUE
Petroleum and natural gas revenue (Note 12)
Marketing revenue (Note 12)
Royalties
Realized gain (loss) on financial instruments (Note 19)
Unrealized loss on financial instruments (Note 19)
Other income
EXPENSES
Operating (Note 13)
Transportation
Marketing purchases (Note 12)
Administrative, net (Note 14)
Depletion and depreciation (Note 5)
Finance (Note 16)
Dividends on capital securities (Note 10)
Other (gains) and losses (Notes 5 & 6)
Net loss before taxes
Income tax recovery (Note 9)
NET LOSS AND COMPREHENSIVE LOSS
Net loss per common share (Note 11)
Basic
Diluted
The accompanying notes are an integral part of these financial statements.
2020
2019
528,505
13,687
(18,204)
(59,665)
(35,446)
4,943
433,820
82,357
140,574
11,127
27,044
212,404
30,111
3,467
(2,026)
505,058
71,238
(13,417)
57,821
$0.23
$0.23
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
105
ANNUAL REPORT 2020 Birchcliff Energy Ltd.
Statements of Changes in Shareholders’ Equity
(Expressed in thousands of Canadian dollars)
As at December 31, 2018
Dividends on common shares (Note 10)
Dividends on perpetual preferred shares (Note 10)
Exercise of stock options (Note 17)
Stock-based compensation (Notes 14 & 17)
Net loss and comprehensive loss
As at December 31, 2019
As at December 31, 2019
Dividends on common shares (Note 10)
Dividends on perpetual preferred shares (Note 10)
Exercise of stock options (Note 17)
Conversion of Series C Preferred Shares (Note 10)
Repurchase of common shares (Note 10)
Stock-based compensation (Notes 14 & 17)
Net loss and comprehensive loss
As at December 31, 2020
Share Capital
Common
Shares
1,478,260
Preferred
Shares
Contributed
Surplus
Retained
Earnings
(Deficit)
Total
41,434
76,747
178,449
1,774,890
-
-
96
-
-
-
-
-
-
-
1,478,356
1,478,356
41,434
41,434
-
-
18
530
(610)
-
-
-
-
-
-
-
-
-
-
-
(23)
8,160
(27,923)
(27,923)
(4,187)
-
-
(4,187)
73
8,160
-
(55,392)
(55,392)
84,884
90,947
1,695,621
84,884
90,947
1,695,621
-
-
(4)
-
-
4,988
(10,968)
(10,968)
(4,187)
(4,187)
-
-
-
-
14
530
(610)
4,988
-
(57,821)
(57,821)
1,478,294
41,434
89,868
17,971
1,627,567
The accompanying notes are an integral part of these financial statements.
106
BIRCHCLIFF ENERGY Birchcliff Energy Ltd.
Statements of Cash Flows
(Expressed in thousands of Canadian dollars)
Years ended December 31,
Cash provided by (used in):
OPERATING
Net loss
Adjustments for items not affecting operating cash:
Unrealized loss on financial instruments (Note 19)
Depletion and depreciation (Note 5)
Other compensation (Note 14)
Finance (Note 16)
Other (gains) and losses (Notes 5 & 6)
Income tax recovery (Note 9)
Interest paid (Note 16)
Dividends on capital securities (Note 10)
Decommissioning expenditures (Note 8)
Changes in non-cash working capital (Note 21)
FINANCING
Issue (repurchase) of common shares (Notes 10 &17)
Repurchase of capital securities (Note 10)
Lease payments (Note 15)
Financing fees on paid 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 gas assets (Note 5)
Acquisition of petroleum and natural gas assets (Note 5)
Disposition of petroleum and natural gas assets (Note 5)
Changes in non-cash working capital (Note 21)
Net change in cash
Cash, beginning of year
CASH, END OF YEAR
The accompanying notes are an integral part of these financial statements.
2020
2019
57,821
55,392
35,446
212,404
2,429
30,111
(2,026)
(13,417)
(26,067)
3,467
(2,323)
5,977
188,180
(596)
(9,141)
(2,292)
-
(10,968)
(4,187)
(3,467)
121,120
90,469
(289,672)
-
12,887
(1,874)
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
(278,659)
(292,033)
(10)
70
60
17
53
70
107
ANNUAL REPORT 2020 Birchcliff Energy Ltd.
Notes to the Financial Statements
For the Years Ended December 31, 2020 and 2019
(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 oil and 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, cumulative redeemable preferred shares, Series A (the “Series A Preferred
Shares”) and cumulative redeemable preferred shares, Series C (the “Series C Preferred Shares”) are listed for trading on the
Toronto Stock Exchange (the “TSX”) 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 10, 2021.
2. BASIS OF PREPARATION
These financial statements present Birchcliff’s financial results of operations and financial position under International Financial
Reporting Standards (“IFRS”) as at and for the years ended December 31, 2020 and December 31, 2019. 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 gains and losses
in profit or loss are presented in a separate line by their nature, while net administrative expenses 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.
COVID-19 Estimation Uncertainty
On January 30, 2020, the World Health Organization declared the novel Coronavirus disease (“COVID-19”) outbreak a public
health emergency of international concern and, on March 11, 2020, declared it to be a pandemic. The outbreak of the COVID-19
pandemic has had a significant negative impact on global economic conditions in 2020. This has included a sharp decrease in
crude oil demand which, combined with other macro-economic conditions, has resulted in significant volatility in oil and natural
gas commodity prices, as well as economic uncertainty. The extent and duration of the impacts of COVID-19 on future demand
for the commodities Birchcliff produces, on the Corporation’s cash flow and access to capital, on the Corporation’s suppliers and
employees continues to remain uncertain.
Birchcliff has taken a number of proactive measures to ensure liquidity and financial flexibility in the current environment,
including reducing its original capital budget and its common share dividend. The Corporation has also increased its monitoring
of receivables due from petroleum and natural gas marketers and from joint asset partners to manage credit risk. Birchcliff
historically has not experienced any significant collection issues with petroleum and natural gas marketers as a significant portion
of these receivables are with creditworthy purchasers.
In response to the COVID-19 pandemic, Birchcliff has implemented a number of initiatives to protect the well-being of its
employees and contractors. The Corporation has established a response team to coordinate and implement such initiatives and
continues to closely monitor the recommendations of applicable government and health authorities. In addition, the Corporation
has established remote working capabilities and procedures to ensure business continuity and the reliability of its operations in the
event of future COVID-19 related restrictions or lockdowns.
The COVID-19 pandemic remains an evolving situation that has had, and may continue to have, a significant impact on Birchcliff’s
business, results of operations, financial condition and the environment in which it operates. Management cannot reasonably
estimate the length or severity of this pandemic, or the extent to which the disruption will impact the Corporation’s go-forward
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BIRCHCLIFF ENERGY financial position, profit or loss and cash flows. The potential direct and indirect impacts of the economic downturn have been
considered in management’s estimates and assumptions at December 31, 2020 and have been reflected in the Corporation’s results.
Birchcliff determined there were no impairment indicators present at December 31, 2020. Current and forward commodity prices
for oil and natural gas have improved and market capitalization have increased since March 31, 2020, when impairment indicators
were last identified.
Capital Management
During this period of uncertainty, Birchcliff remains committed to preserving its strong balance sheet and financial liquidity. At
December 31, 2020, the Corporation has $263.2 million in unused credit capacity available under its extendible revolving credit
facilities (the “Credit Facilities”). In connection with the semi-annual review of the borrowing base limit under the Credit Facilities
which was last completed by the Corporation’s syndicate of lenders in December 2020, the borrowing base limit was confirmed at
$1.0 billion. The Credit Facilities do not mature until May 11, 2022 and do not contain any financial maintenance covenants. Birchcliff
was eligible under the Federal Government’s Canada Emergency Wage Subsidy Program and has received $3.8 million in
assistance in the year ended December 31, 2020.
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.
(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 jointly
owned assets 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.
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ANNUAL REPORT 2020 (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 and probable oil and gas 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.
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).
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BIRCHCLIFF ENERGY 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.
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.
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ANNUAL REPORT 2020 (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 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 measured at amortized cost. 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.
The fair value of risk management contracts is determined by discounting the difference between the contracted prices/rates
and published forward price/rates 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
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BIRCHCLIFF ENERGY 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 internal and external indicators of impairment. Such indicators may include, but
are not limited to, changes in the Corporation’s business plan, deterioration in forecasted oil and gas commodity prices or a
significant downward revision of the estimated recoverable amount from proved and probable oil and gas reserves and the
related cash flows. If indicators of impairment exist, an impairment test is performed by comparing a CGU’s carrying value to
its estimated 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 estimated recoverable amount involves significant estimates including the estimate of proved and probable
oil and gas reserves and the related cash flows and the discount rates. The estimate of proved and probable oil and gas
reserves and the related cash flows is sensitive to the significant assumptions regarding forecasted oil and gas commodity
prices, forecasted production, forecasted operating costs, forecasted royalty costs and forecasted future development costs.
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 oil and gas 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 forecasted oil and gas commodity prices used in the impairment test are
based on period-end forecasted oil and gas commodity prices estimated by the Corporation’s independent third-party
reserves evaluators.
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.
113
ANNUAL REPORT 2020 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.
(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 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
114
BIRCHCLIFF ENERGY 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 an adjustment to the right-of-use asset. 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 internal or external indicators that its petroleum
and natural gas properties and equipment within a CGU may be impaired. Birchcliff is required to consider information from
both external sources (such as negative downturn in forecasted oil and gas 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 proved and probable oil and gas reserves and the related cash flows, 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.
(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 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:
(i) Reserves
Reported recoverable quantities of proved and probable oil and gas reserves and the related cash flows requires
estimation and are subject to assumptions regarding forecasted production profile, forecasted oil and gas commodity
prices, forecasted operating costs, forecasted royalty costs and forecasted future development costs. 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 proved
115
ANNUAL REPORT 2020 and probable oil and gas reserves may change from period to period. Changes in reported proved and probable oil and
gas 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 estimated recoverable quantities of proved and probable
oil and gas reserves and the related cash flows from Birchcliff’s petroleum and natural gas interests are evaluated by
independent third-party reserves evaluators at least annually.
The Corporation’s proved and probable oil and 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
proved and probable oil and gas 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 proved and probable 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.
(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 proved and
probable oil and gas reserves and the related cash flows considering significant assumptions including forecasted oil and
gas commodity prices, forecasted production, forecasted operating costs, forecasted royalty costs and forecasted future
development costs. These significant assumptions are subject to change as new information becomes available. Changes
in economic conditions can also affect the discount rate estimate used to discount the cash flow estimates related to proved
and probable oil and gas reserves. 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.
116
BIRCHCLIFF ENERGY 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.
(s) Governments Grants
Government grants are recognized when there is reasonable assurance that the grant will be received and all attached conditions
will be complied with. If a grant is received but reasonable assurance and compliance with conditions is not achieved, the grant
is recognized as a deferred liability until such conditions are fulfilled. When the grant relates to an expense item in nature, it is
recognized as “other income” in profit or loss on a systematic basis in the period in which the costs are incurred.
4. CHANGES IN ACCOUNTING POLICIES
Accounting Pronouncements Adopted
Business Combinations
On January 1, 2020, Birchcliff adopted the amendment as issued on October 22, 2018 to IFRS 3: Business Combinations (“IFRS 3”).
IFRS 3 sets out the principles in accounting for the acquisition of a business.
The amendments to this standard include a change in the definition of a business and the addition of an optional concentration test
to determine if the acquisition is a business for any acquisition occurring on or after January 1, 2020. The amended definition of a
business under IFRS 3 is that a business consists of inputs and processes applied to those inputs that have the ability to contribute to
the creation of outputs. The three elements of a business are defined as follows:
•
•
Input: any economic resource that creates outputs, or has the ability to contribute to the creation of outputs, when one or
more processes are applied to it.
Process: any system, standard, protocol, convention or rule that, when applied to an input or inputs, creates outputs or has
the ability to contribute to the creation of outputs.
• Output: the result of inputs and processes applied to those inputs that provide goods or services to customers, generate
investment income or generate other income from ordinary activities.
The optional concentration test permits a simplified assessment of whether an acquired set of activities and assets is in fact a
business. An entity may elect to apply, or not apply, the test. An entity may make such an election separately for each transaction
or other event. If the concentration test is met, the set of activities and assets is determined not to be a business and no further
assessment is needed. The adoption had no impact.
117
ANNUAL REPORT 2020 5. PETROLEUM AND NATURAL GAS PROPERTIES AND EQUIPMENT
The continuity for petroleum and natural gas (“P&NG”) properties and equipment is as follows:
($000s)
Cost:
As at December 31, 2018
Additions
Acquisitions(1)
As at December 31, 2019
Additions
Dispositions(2)
As at December 31, 2020(3)
Accumulated depletion and depreciation:
As at December 31, 2018
Depletion and depreciation expense(4)
As at December 31, 2019
Dispositions(2)
Depletion and depreciation expense(4)
As at December 31, 2020
Net book value:
As at December 31, 2019
As at December 31, 2020
Exploration
& Evaluation
Assets(5)
Developed
& Producing
Assets
Lease Assets
Corporate
Assets
Total
112
209
3,549,526
253,060
-
47,503
-
19,931
-
17,737
2,480
-
3,567,375
275,680
47,503
321
33
-
354
-
-
-
-
-
-
3,850,089
19,931
20,217
3,890,558
315,200
(17,563)
-
-
1,713
-
316,946
(17,563)
4,147,726
19,931
21,930
4,189,941
(920,923)
(209,315)
(1,130,238)
3,253
(208,137)
(1,335,122)
-
(12,992)
(933,915)
(1,925)
(1,925)
-
(2,021)
(3,946)
(2,325)
(213,565)
(15,317)
(1,147,480)
-
3,253
(2,246)
(212,404)
(17,563)
(1,356,631)
321
354
2,719,851
2,812,604
18,006
15,985
4,900
4,367
2,743,078
2,833,310
(1) Birchcliff completed the acquisition of various Montney lands and assets on January 3, 2019 for total cash consideration of $39.4 million and assumed decommissioning obligations totalling
$6.1 million (see Note 8).
(2) Birchcliff completed the disposition of various Gordondale lands and assets on December 22, 2020, with a net book value totaling $14.3 million, relinquished $5.9 million related to
decommissioning obligations (see Note 8) and received cash consideration of $12.7 million. Birchcliff recognized a gain on sale of $4.2 million.
(3) 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.
(4) Future development costs required to develop and produce proved and probable oil and gas reserves totalled $4.4 billion at December 31, 2020 (December 31, 2019 – $4.4 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 year. 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 2020 and 2019.
Impairment Assessment
In accordance with IFRS, an impairment test is performed if Birchcliff identifies an indicator of impairment at the end of the reporting
period. At December 31, 2020, Birchcliff determined there were no impairment indicators present and therefore an impairment test
was not required.
Birchcliff determined there were indicators of impairment at March 31, 2020 due to the decline in forecasted oil and gas commodity
prices and reduction in market capitalization since its previously completed impairment assessment at December 31, 2019. An
impairment is recognized if the carrying value of a Cash Generating Unit (“CGU”) exceeds the estimated recoverable amount for
that CGU. A CGU’s estimated recoverable amount is the greater of its fair value less cost to sell and its current value in use. The
estimated recoverable amount involves significant estimates including the estimate of proved and probable oil and gas reserves
and the related cash flows and the discount rate. The estimate of proved and probable oil and gas reserves and the related cash
flows is sensitive to the significant forecasted assumptions regarding oil and gas commodity prices, production, operating costs,
royalty costs and future development costs.
118
BIRCHCLIFF ENERGY At March 31, 2020, the Corporation used value in use derived from the estimate of proved and probable oil and gas reserves and
the related cash flows estimated by the Corporation’s independent third-party reserves evaluators at December 31, 2019, which
were internally updated to forecasted period-end oil and gas commodity prices, future development costs and production. The
estimated future cash flows are discounted at pre-tax rates between 8% and 17.5% depending on the risk profile of the reserves
category. Birchcliff’s P&NG properties and equipment were not impaired at March 31, 2020 and December 31, 2019.
The following forecasted oil and gas commodity prices and exchange rate were used in determining whether an impairment to the
carrying value of the P&NG properties and equipment existed at March 31, 2020:
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
30.00
41.18
49.88
55.87
57.98
59.22
60.39
61.60
62.84
65.38
1.78
2.22
2.42
2.54
2.61
2.69
2.75
2.81
2.86
3.00
2.08
2.54
2.79
2.92
2.99
3.05
3.11
3.18
3.24
3.30
1.93
2.40
2.65
2.78
2.85
2.92
2.98
3.04
3.10
3.16
0.71
0.73
0.75
0.76
0.76
0.76
0.76
0.76
0.76
0.76
0.76
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 forecasts from Deloitte, McDaniel, GLJ Petroleum Consultants Ltd. and Sproule Associates Ltd.
effective April 1, 2020.
Birchcliff and its independent third-party reserves evaluators also assess many other forecasted financial estimates regarding
operating costs, royalty costs and future development costs along with several other non-financial assumptions that affect reserves
volumes. Birchcliff has considered these assumptions for the impairment test at March 31, 2020, however, it should be noted that
all estimates are subject to uncertainty. For the period ended March 31, 2020, a 1% increase in the assumed discount rate or a
5% decrease in the future cash flows would not have resulted in an impairment.
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.
As at December 31, 2020, the Corporation determined the Securities had a fair value of $1.8 million (December 31, 2019 -
$4.4 million). Birchcliff recorded a loss on investment of $2.6 million during 2020 (2019 - $5.6 million). Birchcliff did not receive
any dividend distributions in respect to the Securities in 2020 (2019 - $0.6 million).
119
ANNUAL REPORT 2020 7. REVOLVING TERM CREDIT FACILITIES
The components of the Corporation’s Credit Facilities include:
As at December 31, ($000s)
Syndicated credit facility
Working capital facility
Drawn revolving term credit facilities
Unamortized deferred financing fees
Revolving term credit facilities
2020
727,645
4,958
732,603
(1,231)
731,372
2019
593,557
17,926
611,483
(2,306)
609,177
At December 31, 2020, the aggregate principal amount of the Corporation’s Credit Facilities was $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, 2020. 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, gains and losses on
securities, depletion, depreciation and amortization and impairment charges.
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 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.
Birchcliff’s Credit Facilities 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 at December 31, 2020 was 18.0. 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. In December 2020, Birchcliff’s syndicate of lenders completed its review and the borrowing base limit was
confirmed at $1.0 billion.
The maturity dates of the Credit Facilities are May 11, 2022. 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. During 2020, Birchcliff did not request an extension on
the Credit Facilities.
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.
120
BIRCHCLIFF ENERGY 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 $221.3 million at December 31, 2020
(December 31, 2019 - $226.7 million) and is expected to be incurred up until 2067. A reconciliation of the decommissioning
obligations is set forth below:
As at December 31, ($000s)
Balance, beginning
Obligations incurred
Obligations acquired(1)
Obligations divested(2)
Changes in estimated future cash flows(3)
Accretion
Decommissioning expenditures
Balance, ending(4)
2020
128,128
3,624
258
(5,867)
20,512
1,900
(2,323)
146,232
2019
129,264
5,236
6,096
(51)
(12,724)
2,592
(2,285)
128,128
(1) Includes decommissioning obligations from the acquisition of various Montney lands and assets in January 2019.
(2) Includes decommissioning obligations from the disposition of various Gordondale lands and assets in December 2020.
(3) Primarily relates to changes in the nominal risk-free rate, inflation rate, abandonment cost and abandonment date estimates of future obligations used to calculate the present value of the
decommissioning obligation.
(4) Birchcliff applied a nominal risk-free rate of 1.26% and an inflation rate of 1.54% to calculate the present value of the decommissioning obligation at December 31, 2020 and a nominal risk-free rate
of 1.74% and an inflation rate of 1.33% at December 31, 2019.
9. INCOME TAXES
Included in income tax expense is a deferred income tax recovery of $16.5 million in 2020 (2019 – $37.9 million). Part VI.I dividend
tax totalling $3.1 million in 2020 (2019 – $3.1 million) resulted from preferred share dividends paid during the year. For the purposes
of determining the current and deferred income taxes, the Corporation applied a combined Canadian federal and provincial
income tax rate of 24% in 2020 (2019 – 26.5%).
On May 28, 2019, the Government of Alberta reduced the general provincial corporate income tax rate to 8% (from 12%) over a
four year period. Starting July 1, 2019, the general corporate tax rate decreased to 11% (from 12%), with further 1% rate reductions
expected every year on January 1 until the general corporate tax rate is 8% on January 1, 2022. On July 1, 2020, the Alberta
Government, as part of Alberta’s Recovery Plan, accelerated the planned reduction of the corporate tax rate to 8% resulting in
a combined Canadian federal and provincial income tax rate of 23%.
The components of income tax recovery are set forth below:
Years ended December 31, ($000s)
Net loss before taxes
Computed expected income tax recovery
Decrease (increase) in taxes resulting from:
Non-deductible stock-based compensation
Non-deductible dividends on capital securities
Non-deductible expenses and other
Change in tax rate
Change in deferred tax assets not recognized
Balance, ending
2020
71,238
2019
90,198
(17,097)
(23,916)
872
867
580
763
598
1,393
928
470
(14,969)
1,288
(13,417)
(34,806)
121
ANNUAL REPORT 2020 The components of net deferred income tax liabilities are set forth below:
As at December 31, ($000s)
Deferred income tax liabilities:
P&NG properties and equipment and E&E assets
Deferred financing fees
Capital securities
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
Other Obligations
Risk management contracts
Bank financing and share issue costs
Non-capital losses and other
2020
2019
372,456
303,058
283
-
530
35
(33,633)
(29,470)
(3,917)
(4,267)
(38,648)
(30,496)
(960)
(2,672)
(230,389)
(155,046)
65,192
81,672
Balance
Jan. 1, 2020
Recognized in
Profit or Loss
Balance
Dec. 31, 2020
303,058
530
(29,470)
(4,267)
(30,496)
(2,672)
(155,011)
81,672
69,398
(247)
(4,163)
350
(8,152)
1,712
(75,378)
(16,480)
372,456
283
(33,633)
(3,917)
(38,648)
(960)
(230,389)
65,192
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
As at December 31, 2020, the Corporation had approximately $2.2 billion (2019 – $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 $968.8 million
that expire between 2029 and 2040 and unrecognized temporary differences on marketable securities of $7.9 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.
122
BIRCHCLIFF ENERGY 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 and outstanding:
As at December 31, (000s)
Common shares:
Outstanding at beginning of year
Conversion of Series C Preferred Shares(1)
Repurchase of common shares(2)
Exercise of stock options
Outstanding at end of year(1)
Series A Preferred Shares (perpetual):
Outstanding at beginning of year
Outstanding at end of year(3)
2020
2019
265,935
265,911
465
(465)
8
-
-
24
265,943
265,935
2,000
2,000
2,000
2,000
(1) See “Capital Securities” below.
(2) On November 18, 2020, Birchcliff announced that the TSX had accepted the Corporation’s notice of intention to make a normal course issuer bid (the “2021 NCIB”). Pursuant to the 2021 NCIB,
Birchcliff may purchase up to 13,296,936 of its outstanding common shares over the period from November 25, 2020 to November 24, 2021. Under the 2021 NCIB, common shares may be
purchased in open market transactions on the TSX and/or alternative Canadian trading systems at the prevailing market price at the time of such transaction. Pursuant to the rules of the TSX, the total
number of common shares that Birchcliff is permitted to purchase is subject to a daily purchase limit of 286,843 common shares. However, Birchcliff may make one block purchase per calendar
week which exceeds the daily purchase restriction. All common shares purchased under the 2021 NCIB will be cancelled. The 2021 NCIB effectively renewed the Corporation’s previous normal
course issuer bid under which the Corporation was permitted to purchase up to 13,296,761 common shares over the period from November 25, 2019 to November 24, 2020 (the “2020 NCIB”).
During 2020, Birchcliff purchased 464,562 common shares under the 2020 NCIB for an aggregate value of approximately $610,000, before fees. All such common shares were cancelled.
(3) The holders of the Series A Preferred Shares are entitled to receive, as and when declared by the Board of Directors of Birchcliff, fixed cumulative preferential cash dividends, payable quarterly.
The dividend rate of the Series A Preferred Shares reset on September 30, 2017 and will reset every five years thereafter at a rate equal to the then current five-year Government of Canada bond
yield plus 6.83%. The dividend rate for the five-year period from and including September 30, 2017 to, but excluding September 30, 2022, is 8.374% ($2.0935 per annum or $0.523375
quarterly). The Series A Preferred Shares are redeemable by the Corporation on September 30, 2022 and on September 30 in every fifth year thereafter at a redemption price of $25.00 per
share, plus all accrued and unpaid dividends. In addition, the holders of the Series A Preferred Shares have the right, subject to certain conditions, to convert their Series A Preferred Shares into
cumulative redeemable floating rate Series B Preferred Shares on September 30, 2022 and on September 30 in every fifth year thereafter. The holders of the Series B Preferred Shares will be
entitled to receive quarterly floating rate cumulative preferential cash dividends, if declared by Birchcliff’s Board of Directors, at a rate equal to the sum of the then current 90 day Government of
Canada Treasury Bill rate plus 6.83%.
Capital Securities
The following table sets forth the number and amount of capital securities outstanding:
As at December 31, (000s)
2020
2019
Outstanding at beginning of year
Conversion of Series C Preferred Shares(1)(2)
Cash redemption of Series C Preferred Shares(1)
Amortization
Outstanding at end of year(3)
Number
Amount ($)
Number
Amount ($)
2,000
(37)
(366)
-
1,597
49,845
(929)
(9,141)
155
39,930
2,000
49,535
-
-
-
2,000
-
-
310
49,845
(1) Subject to the provisions of the Business Corporations Act (Alberta) and the provisions governing the Series C Preferred Shares (the “Provisions”), a holder of Series C Preferred Shares may, at its
option, upon giving notice in accordance with the Provisions (the “Notice of Redemption”), redeem for cash, all or any number of Series C Preferred Shares held by such holder on the last day of
a 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 (subject, if required, to stock exchange approval), upon not less than 20 days’ prior written notice, elect to convert all
such Series C Preferred Shares into common shares. The number of common shares into which each Series C Preferred Share may be so converted will be determined by dividing the amount of
$25.00, together with all accrued and unpaid dividends to but excluding the date fixed for conversion, by the greater of $2.00 and 95% of the “Current Market Price” (as determined in accordance
with the Provisions) of the common shares.
(2) The Corporation elected to convert 37,165 Series C Preferred Shares into common shares and accordingly issued a total of 464,562 common shares. This increased share capital by approximately
$530,000 using an implied value of $1.14 per common share based on the closing price of the common shares on the TSX at the date conversion.
(3) Each outstanding Series C Preferred Share is recorded at its redemption value of $25.00 per share.
123
ANNUAL REPORT 2020 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 ($000s)
Per common share ($)
Series A Preferred Shares:
Series A dividend distribution ($000s)
Per Series A Preferred Share ($)
Series C Preferred Shares:
Series C dividend distribution ($000s)
Per Series C Preferred Share ($)
All dividends have been designated as “eligible dividends” for the purposes of the Income Tax Act (Canada).
11. LOSS PER SHARE
The following table sets forth the computation of net loss per common share:
Years ended December 31, ($000s, except for per share information)
Net loss
Dividends on Series A Preferred Shares
Net loss to common shareholders
Weighted average common shares (000s):
Weighted average basic common shares outstanding
Weighted average diluted common shares outstanding(1)
Net loss per common share:
Basic
Diluted
2020
2019
10,968
0.0413
27,923
0.1050
4,187
4,187
2.0935
2.0935
3,467
1.7500
3,500
1.7500
2020
57,821
4,187
62,008
2019
55,392
4,187
59,579
265,936
265,930
265,936
265,930
$0.23
$0.23
$0.22
$0.22
(1) As the Corporation reported a loss in 2020 and 2019, the basic and diluted weighted average shares outstanding are the same for the periods and all stock options and performance warrants were
considered anti-dilutive.
12. 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
2020
68,498
102,397
38,123
2019
118,182
127,816
36,488
319,473
330,973
528,491
613,459
14
100
528,505
613,559
13,687
20,131
542,192
633,690
(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, 2020 was $58.1 million (December 31, 2019 - $60.0 million) in P&NG sales to be received from its marketers in respect of December 2020
production, which was subsequently received in January 2021.
(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, 2020, the Corporation had marketing purchases from third parties of $11.1 million
(December 31, 2019 - $18.5 million).
124
BIRCHCLIFF ENERGY 13. 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
14. 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
2020
87,120
(4,763)
82,357
2019
91,679
(3,776)
87,903
2020
2019
33,404
11,633
45,037
(133)
32,335
14,057
46,392
(156)
(20,289)
(19,421)
24,615
26,815
5,527
8,684
(3,098)
(4,406)
2,429
27,044
4,278
31,093
(1) Includes salaries, benefits and other incentives 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 $5.0 million and post-employment benefit expense of $0.5 million in 2020 (2019 - $8.2 million and $0.5 million, respectively) (Notes 15 & 17).
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(3)
Executive officer’s and director’s compensation
2020
7,267
1,027
539
8,833
2019
6,710
3,171
524
10,405
(1) Includes salaries, benefits and other incentives 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 15).
15. 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.
125
ANNUAL REPORT 2020 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, 2020
(December 31, 2019 – $14.8 million).
A reconciliation of the discounted post-employment benefit obligation is set forth below:
As at December 31, ($000s)
Balance, beginning
Obligations incurred(1)
Accretion
Balance, ending(2)
Current portion
Long-term portion
2020
8,494
539
144
9,177
-
9,177
2019
7,844
524
126
8,494
-
8,494
(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, 2020 and December 31, 2019.
Lease Obligation
The Corporation’s total undiscounted (inflated) amount of cash flow required to settle its lease obligations is approximately
$20.0 million at December 31, 2020 (December 31, 2019 – $22.3 million) and is expected to be substantially settled by 2029.
A reconciliation of the discounted lease obligation is set forth below:
As at December 31, ($000s)
Balance, beginning
Obligations incurred
Lease payments
Accretion
Balance, ending(1)
Current portion
Long-term portion
(1) Birchcliff applied a discount rate of 4.7% to calculate the discounted value of the lease obligation.
16. 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.
17. SHARE-BASED PAYMENT
Stock Option
2020
18,552
-
(2,292)
770
17,030
1,596
15,434
2019
17,311
2,620
(2,172)
793
18,552
1,522
17,030
2020
2019
26,067
25,073
2,815
1,229
30,111
3,517
1,528
30,118
At December 31, 2020, the Corporation’s stock option plan (the “Option Plan”) permitted the grant of options in respect of a
maximum of 26,594,273 (December 31, 2019 – 26,593,523) common shares. At December 31, 2020, there remained available for
issuance options in respect of 460,072 (December 31, 2019 – 3,110,155) common shares. For the stock options exercised during
2020, the weighted average common share trading price on the TSX was $1.50 (2019 – $2.69) per common share.
126
BIRCHCLIFF ENERGY A summary of the outstanding stock options is set forth below:
Outstanding, beginning
Granted(2)
Exercised
Forfeited
Expired
Outstanding, ending
2020
2019
Number
Price ($)(1)
Number
Price ($)(1)
23,483,368
5,403,200
(7,500)
(194,067)
(2,550,800)
26,134,201
4.28
1.79
(1.91)
(2.92)
(6.52)
15,847,570
10,107,200
(23,867)
(229,736)
(2,217,799)
3.56
23,483,368
5.74
2.90
(3.08)
(4.22)
(8.47)
4.28
(1) Calculated on a weighted average basis.
(2) Each stock option granted entitles the holder to purchase one common share at the exercise price.
The weighted average fair value per option granted during 2020 was $0.78 (2019 – $0.93). In determining the stock-based
compensation expense for options issued during 2020, the Corporation applied a weighted average estimated forfeiture rate
of 9% (2019 – 10%).
The weighted average assumptions used in calculating the Black-Scholes fair values are set forth below:
Years ended December 31,
Risk-free interest rate
Expected life (years)
Expected volatility
Dividend yield
2020
0.4%
4.2
61.1%
1.2%
2019
1.7%
4.1
50.8%
3.7%
A summary of the stock options outstanding and exercisable under the Option Plan at December 31, 2020 is set forth below:
Grant Price ($)
Awards Outstanding
Awards Exercisable
Weighted
Average
Remaining
Contractual
Life (years)
4.44
2.14
1.11
2.91
Weighted
Average
Exercise
Price ($)
2.05
3.41
7.81
3.56
Weighted
Average
Remaining
Contractual
Life (years)
3.92
1.69
1.11
1.81
Weighted
Average
Exercise
Price ($)
2.32
3.40
7.81
4.68
Quantity
1,748,785
6,881,057
4,136,000
12,765,842
Low
0.78
3.01
6.01
High
3.00
6.00
9.43
Quantity
10,582,200
11,416,001
4,136,000
26,134,201
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, 2020 (December 31, 2019 – 2,939,732)
with an expiry date of January 31, 2025. Each performance warrant is exercisable at a price of $3.00 to purchase one common
share of Birchcliff.
18. 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. Except for the common share
dividend reduction, there were no further changes in the Corporation’s approach to capital management during 2020 and 2019.
127
ANNUAL REPORT 2020 The following table sets forth the Corporation’s total available credit:
As at December 31, ($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
2020
2019
1,000,000
1,000,000
(732,603)
(611,483)
(4,185)
(4,185)
(736,788)
(615,668)
263,212
384,332
(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 oil and gas reserves. In connection with the semi-annual review
of the borrowing base limit under the Credit Facilities, which was completed by the Corporation's syndicate of lenders in December 2020, the borrowing base limit was confirmed at $1.0 billion.
(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 December 31, ($000s)
Shareholders’ equity(1)
Capital securities
2020
2019
% Change
1,627,567
1,695,621
39,930
49,845
Shareholders’ equity & capital securities
1,667,497
1,745,466
(4)%
Shareholders’ equity & capital securities as a % of total capital(2)
69%
73%
Working capital deficit(3)
Drawn revolving term credit facilities
Drawn debt
Drawn debt as a % of total capital
Total capital
30,579
732,603
763,182
31%
23,405
611,483
634,888
27%
20%
2,430,679
2,380,354
2%
(1) Shareholders’ equity is defined as share capital plus contributed surplus plus retained earnings, less any deficit.
(2) Of the 69%, approximately 94% relates to common capital stock and 6% 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).
19. 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 December 31, ($000s)
Marketers(1)
Jointly owned assets
Other
Accounts receivable
2020
58,075
5,363
1,253
64,691
2019
59,963
3,488
1,296
64,747
(1) At December 31, 2020, approximately 29% was due from one marketer (2019 – 28%, one marketer). During 2020, the Corporation received 29%, 13% and 16% of its revenue, respectively, from
three marketers (2019 – 29%, 13% and 15% of its revenue, respectively, from three marketers).
128
BIRCHCLIFF ENERGY
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 December 31, ($000s)
Current (less than 30 days)
30 to 60 days
61 to 90 days
Over 90 days
Accounts receivable
2020
58,057
3,477
2,392
765
2019
58,676
3,208
1,926
937
64,691
64,747
At December 31, 2020, approximately $0.8 million or 1.2% (2019 – $0.9 million or 1.4%) of Birchcliff’s total accounts receivable
are aged over 90 days. The majority of these accounts are due from various partners of jointly owned assets. Birchcliff attempts
to mitigate the credit risk of receivables from jointly owned assets 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 partners of jointly owned assets as disagreements occasionally arise that increases the potential
for non-collection. The Corporation does not typically obtain collateral from partners of jointly owned assets; however, the
Corporation does have the ability to withhold production or proceeds from the eventual sale of jointly owned assets in the event
of non-payment. Birchcliff determined that the ultimate collection of accounts receivable were not in doubt and therefore no
allowance to profit or loss was recorded in 2020 and 2019.
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 2020 (2019 – $1.0 billion) 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, 2020 was $736.8 million (2019 – $615.7 million) and
$263.2 million in unused credit was available at the end of 2020 (2019 – $384.3 million) to fund future obligations.
The following table details the undiscounted cash flows of the Corporation’s significant contractual financial liabilities at
December 31, 2020 in the period they are due:
($000s)
Accounts payable and accrued liabilities
Drawn revolving credit facilities
Capital securities
Lease payments
Financial liabilities
2021
97,507
-
39,930
3,008
140,445
2022
-
732,603
-
3,174
735,777
2023-2025
Thereafter
-
-
-
7,795
7,795
-
-
-
6,061
6,061
129
ANNUAL REPORT 2020 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.
Financial Derivative Contracts
At December 31, 2020, 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, 2020, 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, 2021 – Dec. 31, 2023 NYMEX HH less US$1.298/MMBtu
Natural gas
AECO 7A basis swap(2)
10,000 MMBtu/d
Jan. 1, 2021 – Dec. 31, 2023 NYMEX HH less US$1.320/MMBtu
Natural gas
AECO 7A basis swap(2)
30,000 MMBtu/d
Jan. 1, 2021 – Dec. 31, 2023 NYMEX HH less US$1.330/MMBtu
Natural gas
AECO 7A basis swap(2)
15,000 MMBtu/d
Jan. 1, 2021 – Dec. 31, 2024
NYMEX HH less US$1.185/MMBtu
Natural gas
AECO 7A basis swap(2)
5,000 MMBtu/d
Jan. 1, 2021 – Dec. 31, 2024 NYMEX HH less US$1.200/MMBtu
Natural gas
AECO 7A basis swap(2)
5,000 MMBtu/d
Jan. 1, 2021 – Dec. 31, 2024 NYMEX HH less US$1.200/MMBtu
Natural gas
AECO 7A basis swap(2)
12,500 MMBtu/d
Jan. 1, 2021 – Dec. 31, 2025
NYMEX HH less US$1.108/MMBtu
Natural gas
AECO 7A basis swap(2)
10,000 MMBtu/d
Jan. 1, 2021 – Dec. 31, 2025
NYMEX HH less US$1.115/MMBtu
Natural gas
AECO 7A basis swap(2)
10,000 MMBtu/d
Jan. 1, 2021 – 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
Liability
($000s)
22,891
7,910
24,315
12,055
4,130
4,176
10,638
8,840
7,255
5,099
10,056
5,286
11,143
11,458
1,369
3,119
707
Fair value
150,447
(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.
At December 31, 2020 if the future AECO/NYMEX basis changed by US$0.10/MMBtu, with all other variables held constant, after-tax
net loss in 2020 would have changed by approximately $24.7 million.
There were no financial derivative contracts entered into subsequent to December 31, 2020.
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.
130
BIRCHCLIFF ENERGY At December 31, 2020 the Corporation had the following physical delivery contract in place:
Product
Type of Contract
Quantity
Remaining Term
Contract Price
Natural gas
AECO 7A basis swap(1)
5,000 MMBtu/d
Jan. 1, 2021 – Dec. 31, 2023
NYMEX HH less US$1.205/MMBtu
(1) Birchcliff sold AECO basis swap.
There were no physical delivery contracts entered into subsequent to December 31, 2020.
Interest Rate Risk
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Corporation’s Credit
Facilities are exposed to interest rate risk. The remainder of Birchcliff’s financial assets and liabilities are not directly exposed to
interest rate risk.
At December 31, 2020, Birchcliff had the following financial derivative contracts in place in order to manage interest rate risk:
Type of Contract
Index
Remaining Term(1)
Notional
Amount
($million)
Fixed Rate
(%)
Fair Value
Liability
($000s)
Interest rate swap One-month banker’s acceptance – CDOR(2)
Jan. 1, 2021 – Mar. 1, 2024
350
2.215
17,589
(1) Transactions with common terms and the same counterparty have been aggregated and presented at the weighted average price.
(2) Canadian Dollar Offered Rate (“CDOR”).
At December 31, 2020 if the one-month banker’s acceptance CDOR index changed by 0.10%, with all other variables held
constant, after-tax net loss in 2020 would have changed by approximately $0.9 million.
The following table provides a summary of the realized and unrealized gains and losses on financial derivatives:
Years ended December 31, ($000s)
Realized gain (loss) on derivatives
Unrealized loss on derivatives
2020
(59,665)
2019
13,673
(35,446)
(192,765)
The fair value liability of the Corporation’s financial derivative contracts at December 31, 2020 was $168.0 million (2019 – $132.6 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 year ended December 31, 2020.
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 revolving term 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.
131
ANNUAL REPORT 2020 The carrying value and fair value of the Corporation’s financial assets and liabilities at December 31, 2020 are set forth below:
($000s)
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
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.
Carrying Value
Fair Value
60
64,691
1,629
1,805
97,507
39,930
732,603
168,036
60
64,691
1,629
1,805
97,507
39,131
732,603
168,036
20. COMMITMENTS AND CONTINGENCIES
The Corporation enters into contracts and commitments in the normal course of operations. The following table lists Birchcliff’s
commitments at December 31, 2020:
($000s)
Operating commitments(1)
Firm transportation and fractionation(2)
Natural gas processing(3)
Commitments
2021
1,996
136,813
17,155
155,964
2022
1,996
130,858
17,155
150,009
2023 - 2025
Thereafter
5,989
307,912
51,512
365,413
4,159
183,269
120,179
307,607
(1) Includes variable operating components associated with Birchcliff’s head office premises.
(2) Includes firm transportation service arrangements and fractionation commitments with third parties.
(3) Includes natural gas processing commitments at third-party facilities.
The Corporation may be involved in litigation and disputes arising in the normal course of operations. Management is of the opinion
that any potential litigation will not have a material adverse impact on the Corporation’s financial position or results of operations at
December 31, 2020.
21. 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
132
2020
2019
56
(12,806)
2,209
4,913
(3,075)
4,103
5,977
(1,874)
4,103
(999)
16,040
(3,075)
(840)
(5,153)
4,313
(840)
BIRCHCLIFF ENERGY Glossary
DEFINITIONS
In this Annual Report, the terms set forth below have the following meanings:
“AER”
means the Alberta Energy Regulator.
“Birchcliff”, the “Corporation”,
“its”, “our”, “us” or “we”
means Birchcliff Energy Ltd.
“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.
“DCCET”
“ESG”
“GAAP”
“GHG”
means drilling, casing, completion, equipping and tie-in.
means environmental, social and governance.
means generally accepted accounting principles for Canadian public companies which
are currently International Financial Reporting Standards as issued by the International
Accounting Standards Board.
means greenhouse gas.
“Gordondale Gas Plant”
means the deep-cut sour gas processing facility in Gordondale which is owned and
operated by AltaGas Ltd.
“Montney/Doig Resource Play”
means Birchcliff’s Montney and Doig formations resource play located northwest of
Grande Prairie, Alberta.
“OPEC”
means the Organization of the Petroleum Exporting Countries.
“TIER” and “TIER Regulation”
means the Technology Innovation and Emissions Reduction Regulation (Alberta).
“TSX”
means the Toronto Stock Exchange.
133
ANNUAL REPORT 2020 ABBREVIATIONS
2P
AECO
bbl
bbls/d
boe
boe/d
proved plus probable
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
condensate
pentanes plus (C5+)
finding and development
finding, development and acquisition
future development costs
general and administrative
gigajoule
Henry Hub
kilometre
metre
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
New York Mercantile Exchange
proved developed producing
total proved
West Texas Intermediate, the reference price paid in U.S. dollars at Cushing, Oklahoma, for crude oil of
standard grade
thousands
thousands of dollars
F&D
FD&A
FDC
G&A
GJ
HH
km
m
Mbbls
Mboe
Mcf
Mcf/d
MM$
MMboe
MMBtu
MMcf
MMcf/d
MSW
NGLs
NYMEX
PDP
TP
WTI
000s
$000s
134
BIRCHCLIFF ENERGY CONVENTIONS
Certain terms used herein are defined in NI 51-101, CSA Staff Notice 51-324 or the COGE Handbook and, unless the context otherwise
requires, shall have the same meanings in this Annual Report as in NI 51-101, CSA Staff Notice 51-324 or the COGE Handbook, as the
case may be.
Unless otherwise indicated, all information contained herein is given at or for the year ended December 31, 2020. Unless otherwise
indicated, all dollar amounts are expressed in Canadian dollars and all references to “$”, “CDN$” or “dollars” are to Canadian dollars
and all references to “US$” are to United States dollars. Except where 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.
Non-GAAP Measures
This Annual Report uses the terms “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
on a per boe basis. “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, less any realized
losses (plus realized gains) on financial instruments and plus any other cash income sources. Netbacks are calculated on a per unit basis,
unless otherwise indicated. “Total debt” is calculated as the amount outstanding under the Corporation’s extendible revolving credit
facilities plus adjusted working capital deficit, which is calculated as current assets minus current liabilities excluding the effects of any
current portion of financial instruments and capital securities. For additional information regarding these non-GAAP measures, including
reconciliations to the most directly comparable GAAP measure where applicable, see “Non-GAAP Measures” in the MD&A.
Presentation of Oil and Gas Reserves
Deloitte prepared the 2019 Deloitte Reserves Report, the 2019 Consolidated Reserves Report and the 2020 Deloitte Reserves Report.
McDaniel prepared the 2019 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, 2011 to December 31, 2018. 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. 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, commodity prices, 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.
135
ANNUAL REPORT 2020 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 evaluator 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. With
respect to the disclosure of reserves contained herein relating to portions of Birchcliff’s properties, the estimates of reserves and future
net revenue for individual properties may not reflect the same confidence level as estimates of reserves and future net revenue for all
properties, due to the effects of aggregation.
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 FDC constitutes forward-looking
statements and is subject to certain risks and uncertainties. See “Advisories – Forward-Looking Statements”.
Advisories
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 plus probable reserves additions before production by total annual
production in the applicable period. Reserves replacement may be used as a measure of a company’s sustainability and its ability
to replace its proved plus probable reserves.
• With respect to F&D and FD&A costs:
o F&D costs for proved developed producing reserves, proved reserves or proved plus probable reserves, as the case may be,
are calculated by taking the sum of: (i) exploration and development costs (F&D capital expenditures) incurred in the period;
and (ii) where appropriate, 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.
136
BIRCHCLIFF ENERGY 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, see “Non-GAAP Measures”.
DRILLING LOCATIONS
This Annual Report discloses potential net future horizontal drilling locations, specifically: (i) in Pouce Coupe and Gordondale,
769 potential net future horizontal drilling locations to which proved plus probable reserves have been attributed by Deloitte, and
approximately 3,065 unbooked potential net future horizontal drilling locations; and (ii) in Elmworth, approximately 3,300 unbooked
potential net future horizontal drilling locations.
Proved plus probable locations consist of proposed drilling locations identified in the 2020 Deloitte Reserves Report that have
proved and/or probable reserves, as applicable, attributed to them. 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 2020 Deloitte 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. In certain cases, 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.
137
ANNUAL REPORT 2020 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, strategy,
performance or financial position and are based on Birchcliff’s current expectations, estimates, projections, beliefs and assumptions.
Such forward-looking statements have been made by Birchcliff in light of the information available to it at the time the statements
were made and reflect its experience and perception of historical trends. All statements and information other than historical fact
may be forward-looking statements. Such forward-looking statements are often, but not always, identified by the use of words such
as “seek”, “plan”, “focus”, “future”, “outlook”, “position”, “expect”, “project”, “intend”, “believe”, “anticipate”, “estimate”, “forecast”,
“guidance”, “potential”, “proposed”, “predict”, “budget”, “continue”, “targeting”, “may”, “will”, “could”, “might”, “should”, “would”,
“on track” 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, operations, focus, objectives, strategies,
opportunities, priorities and goals (including: that the Pouce Coupe Gas Plant is the cornerstone of the Corporation’s strategy
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; 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; that the Corporation’s operatorship, land position and infrastructure
ownership gives it a competitive advantage in its areas of operation and supports its low-cost structure, which helps Birchcliff
to maximize returns to shareholders; 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; and that Birchcliff is focused on the
Montney/Doig Resource Play);
the performance and other characteristics of Birchcliff’s oil and natural gas properties and expected results from its assets
(including statements regarding the potential or prospectivity of Birchcliff’s properties) (including: that the Corporation’s
Montney/Doig Resource Play provides it with an extensive inventory of repeatable, low-cost drilling opportunities targeting
natural gas, light oil, condensate and NGLs; and that the results from Birchcliff’s 14-well pad demonstrate the extension of the
Gordondale light oil pool into the northeastern area of Pouce Coupe, which provides the Corporation with significantly more
potential condensate/light oil drilling opportunities);
the information set forth under the heading “Message to Shareholders” as it relates to Birchcliff’s outlook and guidance (including:
Birchcliff’s expectation that it will generate approximately $360 million of adjusted funds flow with F&D capital expenditures
of between $210 million and $230 million, resulting in free funds flow of $130 million to $150 million in 2021; that Birchcliff is
focused on strengthening its balance sheet and free funds flow in 2021 will be used primarily for debt reduction; and that Birchcliff
must return value to shareholders and that in order to do this, it must first drive its debt down in order to confidently move forward
with sustainable shareholder returns; and that commodity prices look very strong for 2021);
the benefits of the infrastructure build-out projects completed in 2020 (including: that these projects are expected to last for
decades; that they allow Birchcliff to increase its cash flow and make its operations safer; and that the Inlet-Liquids Handling
Facility gives Birchcliff the ability to increase its condensate production to 10,000 bbls/d in Pouce Coupe);
the information set forth under the heading “2021 Key Objectives”;
statements regarding Birchcliff’s 2021 capital program and exploration, production and development activities and the
timing thereof;
the benefits of multi-interval cube style development and other technologies;
estimates of potential future drilling locations and opportunities;
the Corporation’s five year plan (including the Corporation is targeting drilling 158 wells in the next five years to achieve average
annual production of 91,000 boe/d in 2025);
138
BIRCHCLIFF ENERGY •
•
the information set forth under the heading “Environmental, Social & Governance” regarding the treatment under and the impact
of existing and proposed governmental regulatory regimes and laws, including climate change and GHG legislation (including:
the Corporation’s expectation that it will receive emission performance credits for 2019 in the first half of 2021; that at the present
time, the operational and financial impacts of complying with applicable GHG legislation are not material to the Corporation; the
Corporation’s expectation 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; and estimates of decommissioning obligations); and
the information set forth under the heading “2020 Year-End Reserves” and elsewhere in this Annual Report relating to the
Corporation’s reserves (including: estimates of reserves; estimates of the net present values of future net revenue associated with
Birchcliff’s reserves; FDC; and that Birchcliff anticipates that as a result of improved commodity prices, the Corporation’s netbacks
and recycle ratios will improve in 2021 to be more comparable to its historical recycle ratios prior to COVID-19).
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”. 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”.
With respect to the forward-looking statements contained in this Annual Report, assumptions have been made regarding, among
other things: the degree to which the Corporation’s results of operations and financial condition will be disrupted by circumstances
attributable to the COVID-19 pandemic and the responses of governments and the public to the pandemic; 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 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 2021 guidance and five year plan assume the following commodity prices and exchange rate: an average WTI
price of US$50.00/bbl; an average WTI-MSW differential of CDN$6.00/bbl; an average AECO 5A price of CDN$2.50/GJ;
an average Dawn price of US$2.75/MMBtu; an average NYMEX HH price of US$2.80/MMBtu; and an exchange rate
(CDN$ to US$1) of 1.27.
• With respect to estimates of 2021 capital expenditures, such estimates assume that the 2021 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 estimates of adjusted funds flow and free funds flow for 2021, such estimates assume: that the
2021 capital program will be carried out as currently contemplated and the level of capital spending for 2021 set forth herein
will be achieved; and that the Corporation’s targets for production, production commodity mix, costs and natural gas market
exposure and the commodity price and exchange rate assumptions are met.
139
ANNUAL REPORT 2020 •
Birchcliff’s targeted annual average production of 91,000 boe/d for 2025 in its five year plan assumes: that the Corporation’s
capital programs 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, such statements and estimates assume: 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 performed 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 in the 2020 Deloitte Reserves Report.
Birchcliff’s actual results, performance or achievements could differ materially from those anticipated in the forward-looking
statements as a result of both known and unknown risks and uncertainties including, but not limited to: the risks posed by pandemics
(including COVID-19) and epidemics and their impacts on supply and demand and commodity prices; actions taken by OPEC and
other major producers of crude oil and the impact such actions may have on supply and demand and commodity prices; 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 oil and natural gas prices; fluctuations in currency exchange and interest rates;
stock market volatility; loss of market demand; an inability to access sufficient capital from internal and external sources on terms
acceptable to the Corporation; risks associated with Birchcliff’s credit facilities, including a failure to comply with covenants under
the agreement governing the credit facilities and the risk that the borrowing base limit may be redetermined; fluctuations in the
costs of borrowing; operational risks and liabilities inherent in oil and natural gas operations; the occurrence of unexpected events
such as fires, severe weather, explosions, blow-outs, equipment failures, transportation incidents and other similar events 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; 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; shortages in equipment and skilled personnel; the absence or loss of
key employees; competition for, among other things, capital, acquisitions of reserves, undeveloped lands, equipment and skilled
personnel; management of Birchcliff’s growth; environmental and climate change risks, claims and liabilities; potential litigation;
default under or breach of agreements by counterparties and potential enforceability issues in contracts; claims by Indigenous
peoples; the reassessment by taxing or regulatory authorities of the Corporation’s prior transactions and filings; unforeseen title
defects; third-party claims regarding the Corporation’s right to use technology and equipment; uncertainties associated with the
outcome of litigation or other proceedings involving Birchcliff; uncertainties associated with counterparty credit risk; risks associated
with Birchcliff’s risk management 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
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BIRCHCLIFF ENERGY 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.
There is significant ongoing uncertainty surrounding COVID-19 and the extent and duration of the impacts that Birchcliff may
experience. While the duration and full impact of the COVID-19 pandemic is not yet known, the effect of low commodity prices
as a result of reduced demand associated with the impact of COVID-19 has had, and may continue to have, a negative impact on
the Corporation’s business, results of operations, financial condition and the environment in which it operates. The Corporation’s
current expectations, estimates, projections, beliefs and assumptions underlying the Corporation’s forward-looking statements,
including those that pertain to the 2021 capital program and the five year plan, are subject to change in light of the COVID-19
pandemic, including potential future waves and actions taken by governments and businesses in response thereto.
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 financial performance, financial position or cash flows, all of which is subject
to the same assumptions, risk factors, limitations and qualifications as set forth above. Readers are cautioned that the assumptions
used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise
or inaccurate and, as such, undue reliance should not be placed on FOFI. Birchcliff’s actual results, performance and achievements
could differ materially from those expressed in, or implied by, FOFI. Birchcliff has included FOFI in order to provide readers with a
more complete perspective on Birchcliff’s future operations and management’s current expectations relating to Birchcliff’s future
performance. Readers are cautioned that such information may not be appropriate for other purposes. FOFI contained herein
was made as of the date of this 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.
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 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.
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ANNUAL REPORT 2020 This page is left blank intentionally.
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BIRCHCLIFF ENERGY Photo taken in 2019
Thank You Team Birchcliff
Jeffrey Akeroyd, Bradley Alexander, Karen Allen, Diana Almeida, Tracy Anderson, Camille Ashton, Gaetano Aurigemma, Angela Belbeck,
Curtis Mah, Maggie Malapad, Kevin Matiasz, Angie Mcgonigal, Tyler Mcinnis, Marc Mcintosh, Ryan Mcintosh, Jerilyn Mcpherson,
Tyrus Bender, Riley Berge, Lindsey Berlinger, Daniel Blattler, Calvin Bohdan, Angela Boire, Darryl Bolch, Deborah Borthwick, Myles Bosman,
Richard Melling, Paul Messer, Alfred Michetti, Derek Michetti, Nicole Mitchell, Emelyia Moghaddami, Thomas Moult, Steve Mueller,
Jeff Boswell, Robyn Bourgeois, David Boyle, Tony Bozzi, Monica Brookwell, Shane Burgess, Jordan Calderwood, Haley Campbell,
Mckenzie Murdoch, Tyler Murray, Kody Naka, Sarah Nance-Redcliffe, Michael Ng, Tam Nguyen, Matteo Niccoli, Matthew O’Connell,
Matthew Campbell, Chris Carlsen, Caitlin Carrigy, Ann Ceccanese, Scott Cedergren, Benjamin Christenson, Ian Clarke, Wendy Clay,
Keely Olivier-Lintner, Christopher Olson, Hilary Ostrander, Tammy Page, Philomena Paisley, Bruce Palmer, Dean Paterson, Chase Peirce,
Dallas Cline, Jacob Cloutier, Kalen Conrad, Laura Conroy, Michael Cordingley, Kaleigh Cuthbertson, Loren Damer, Lara De Paula,
Jess Peterson, Paul Picco, Allan Pickel, Landon Poffenroth, Luisa Porras, Austin Power, Glenn Power, Terrence Power, Thomas Power,
Elle Devost, Mark Dilworth, Jesse Doenz, Joe Doenz, Tommy Doenz, Kelly Dolen, Terrance Dyck, Darryl Easter, Jennifer Elder,
Adam Preston, Shoni Proctor, Evan Pugh, Kate Ramage, Lisa Reusch, Brian Ritchie, Michelle Rodgerson, Jeff Rogers, Blaine Rogers,
Luke Embree, Cliff Ennis, Tim Etcheverry, Eric Ewin, Lindsay Fast, Laura Ferguson, Mikaela Fero, Grant Friesen, Marshall Fritz, Colin Fry,
Sherri Rosia, Randy Rousson, Jared Rousson, Brandon Rowley, Todd Sajtovich, Lee Sallenbach, Victor Sandhawalia, Aaron Sandnes,
George Fukushima, Andy Fulford, Carrie Fyfe, Bruno Geremia, Melina Geremia, Katie Giesbrecht, Chad Goddard, David Graham,
Wade Schultz, Sadeq Shahamat, Dan Sharp, Ryan Sloan, Colin Smith, Tanner St.julian, Brent Sterling, Darby Stolk, Lindsay Sturrock,
Lee Grant, Hannah Grigore, Ryan Gugyelka, Rylan Gulka, Tania Haberlack-Dolan, Mike Hale, Samuel Hampton, Trevor Harley,
Tracey Suchlandt, Tyson Suderman, Jim Surbey, Theresa Sutton, Ryan Swanson, Mathew Thiessen, Duane Thompson, Austen Thompson,
Ryley Harrigan, Wanda Hiebert, Warren Hingley, Paul Hirsekorn, Jasen Holmstrom, Lory-Ann Hoppe, Daryl Hudak, Dave Humphreys,
Gerald Thornton, Dejan Timotijevic, Janet Tkachuk, Jeff Tonken, Gillian Topping, Terry Tracey, Hue Tran, Kevin Urness, Joshua Uy,
Derek Jamieson, Anna Johnson, David Johnson, Lorn Johnson, Dustin Kelm, Melissa Kinzner, Phyllis Kinzner, Diane Knoblauch, Jesse Kurjata,
Joshua Van Der Raadt, Theo Van Der Werken, Kara Vance, Kris Veach, Greg Vreim, Blair Walsh, Linda Wang, Michael Warrick,
Danny Kutrowski, Chase Lajeunesse, Anji Lawrence, Katherine Lazaruk, Calvin Leithead, Kirby Lenart, Kristen Lewicki, Ryan Linsley,
Shelby Watson, Matthew Weiss, David Wetta, Blake Wilson, Philip Wu, John Yeo, Kent Zahara, Mike Zimmerman
Scott Lundquist, Thomas Lundquist, Joseph Lyste, John Macgillivray, Mason Mackay, Dallas Maclean, Darcy Macleod, Mary Macneill,
ANNUAL REPORT 2020
143
Corporate Information
OFFICERS
MANAGEMENT CONT’D
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
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
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
ANNUAL REPORT 2020
144
2 0 2 0 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