STRONGER
TOGETHER
2 0 2 2 A N N U A L R E P O R T
“For 2023, we remain committed to the payment of our annual
base dividend of $0.80 per common share, maintaining capital
discipline and generating free funds flow.”
Overview
Birchcliff Energy Ltd. (“Birchcliff ”) is a Calgary, Alberta based intermediate sized, low emissions intensity energy
producer that explores for, develops and produces natural gas, light oil, condensate and other natural gas liquids.
Birchcliff is focused on the Montney/Doig Resource Play in Alberta, which is considered by management to be one of
the premier resource plays in North America. Birchcliff’s operations are primarily concentrated in the Pouce Coupe and
Gordondale areas of Alberta, where Birchcliff operates the vast majority of its production, owns large contiguous blocks
of high working interest land and owns and/or controls many of the significant facilities and infrastructure that it relies
upon to handle the majority of its production. Birchcliff’s common shares are listed on the TSX under the symbol BIR.
Table of Contents
01
2022 Financial
and Operational
Highlights
03
06
CEO’s Message
to Shareholders
Montney/Doig
Resource Play
09
Management’s
Discussion and
Analysis
77
78
Management’s
Report
Independent
Auditor’s Report
81
Financial
Statements
85
Notes to the
Financial
Statements
110
Abbreviations
111
Non-GAAP and
Other Financial
Measures
114
Advisories
119
Corporate
Information
References to “Birchcliff ”, the “Corporation”, “we”, “our”, “us” and “its” mean Birchcliff Energy Ltd. This report contains forward-looking statements within the meaning of applicable securities laws.
For further information regarding the forward-looking statements contained herein, see “Advisories – Forward-Looking Statements” in this report. With respect to the disclosure of Birchcliff ’s production
contained herein, see “Advisories – Production” in this report. In addition, this report uses various “non-GAAP financial measures”, “non-GAAP ratios”, “supplementary financial measures” and “capital
management measures” as such terms are defined in National Instrument 52-112 – Non-GAAP and Other Financial Measures Disclosure (“NI 52-112”). Non-GAAP financial measures and non-GAAP
ratios are not standardized financial measures under GAAP and might not be comparable to similar financial measures disclosed by other issuers. For further information regarding the non-GAAP and other
financial measures used herein, see “Non-GAAP and Other Financial Measures” in this report.
2022 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)(2)
Light oil (per bbl)
Condensate (per bbl)
NGLs (per bbl)
Natural gas (per Mcf)
Total (per boe)
NETBACK AND COST ($/boe)(2)
Petroleum and natural gas revenue(1)
Royalty expense
Operating expense
Transportation and other expense(3)
Operating netback(3)
G&A expense, net
Interest expense
Realized gain (loss) on financial instruments
Other cash income
Adjusted funds flow(3)
Depletion and depreciation expense
Unrealized gain (loss) on financial instruments
Other (expense) income(4)
Dividends on preferred shares
Deferred income tax expense
Net income to common shareholders
FINANCIAL
Petroleum and natural gas revenue ($000s)(1)
Cash flow from operating activities ($000s)
Adjusted funds flow ($000s)(5)
Per basic common share ($)(3)
Free funds flow ($000s)(5)
Per basic common share ($)(3)
Net income 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)(6)
Total capital expenditures ($000s)(5)
Revolving term credit facilities ($000s)
Total debt ($000s)(7)
Three months ended
December 31,
Twelve months ended
December 31,
2022
2021
2022
2021
2,413
4,822
7,963
387,604
79,799
115.24
114.32
35.80
6.11
43.63
43.64
(4.86)
(4.06)
(5.37)
29.35
(1.82)
(0.53)
2.57
-
29.57
(7.97)
(8.31)
(0.77)
-
(3.06)
9.46
320,358
224,447
217,099
0.82
110,337
0.41
69,453
0.26
266,047
265,922
58,503
-
106,762
107,471
131,981
138,549
2,604
5,330
7,570
379,275
78,716
92.79
98.66
38.24
5.52
40.02
40.02
(3.93)
(3.50)
(5.06)
27.53
(1.45)
(0.72)
1.37
0.01
26.74
(7.44)
-
(0.01)
(0.23)
(4.41)
14.65
289,806
196,142
193,649
0.73
157,923
0.60
106,102
0.40
264,790
265,197
2,646
1,717
35,726
36,075
500,870
499,397
2,223
4,679
7,471
375,315
76,925
119.78
122.27
41.09
6.73
47.73
47.73
(5.74)
(3.62)
(5.52)
32.85
(1.27)
(0.49)
2.88
-
33.97
(7.61)
4.67
(0.43)
(0.18)
(7.14)
23.28
1,340,180
925,275
953,683
3.59
589,062
2.22
653,682
2.46
266,047
265,548
71,788
5,162
364,621
368,230
131,981
138,549
2,899
5,715
7,705
373,217
78,520
79.24
85.65
30.54
4.29
32.53
32.53
(2.66)
(3.19)
(5.18)
21.50
(0.99)
(1.00)
(0.75)
0.07
18.83
(7.42)
2.94
0.03
(0.24)
(3.31)
10.83
932,406
515,369
539,733
2.03
309,254
1.16
310,489
1.17
264,790
265,990
6,639
6,905
230,479
232,480
500,870
499,397
(1) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.
(2) Average realized sales prices and the component values of netback and costs set forth in the table above are supplementary financial measures unless otherwise indicated. See “Non-GAAP and Other
Financial Measures” in this report.
(3) Non-GAAP ratio. See “Non-GAAP and Other Financial Measures” in this report.
(4) Includes non-cash items such as compensation, accretion, amortization of deferred financing fees and other gains and losses.
(5) Non-GAAP financial measure. See “Non-GAAP and Other Financial Measures” in this report.
(6) See “Advisories – F&D Capital Expenditures” in this report.
(7) Capital management measure. See “Non-GAAP and Other Financial Measures” in this report.
2022 ANNUAL REPORT
1
2022 ACHIEVEMENTS:
We generated record annual adjusted funds
flow(1) of $953.7 million, or $3.59 per basic
common share(2), both of which increased
77% from 2021. Our cash flow from operating
activities was $925.3 million, an
We delivered record annual free funds flow(1) of
or $2.22 per basic common share.(2)
We earned record annual net
income to common shareholders of
We retired approximately
or $2.46 per basic common share.
or $2.46 per basic common share.
We returned
including reducing total debt(3) by $360.8 million
(72%) from $499.4 million at December 31, 2021
and the redemption of all of Birchcliff’s issued and
outstanding Series A and Series C preferred shares
for an aggregate redemption value of $88.2 million.
We grew our proved developed producing
(“PDP”) reserves at year-end 2022 by 4% over
2021, with PDP F&D costs(4) of $10.24/boe, which
has resulted in our PDP reserves having an
to common shareholders in 2022 through dividends
to common shareholders in 2022 through dividends
and purchases under our normal course issuer bid.
and purchases under our normal course issuer bid.
highlighting the profitability of our business.
2
BIRCHCLIFF ENERGY
INCREASE FROM 2021.80%$653.7 MILLION$128.9 MILLION$589.1 MILLION3.3XADJUSTED FUNDS FLOW RECYCLE RATIO(2) OF (1) Non-GAAP financial measure. See “Non-GAAP and Other Financial Measures” in this report. (2) Non-GAAP ratio. See “Non-GAAP and Other Financial Measures” in this report. OF DEBT AND PREFERRED SHARES IN 2022$449.0 MILLION(3) Capital management measure. See “Non-GAAP and Other Financial Measures” in this report. (4) Supplementary financial measure. See “Non-GAAP and Other Financial Measures” in this report. CEO’s Message to Shareholders
Jeff Tonken
Chief Executive Officer
and Chairman of the Board
Chris Carlsen
President and
Chief Operating Officer
DEAR FELLOW SHAREHOLDERS,
LOOKING BACK ON 2022
I am extremely proud of what Birchcliff accomplished in 2022,
which was a record year for our company in many respects. We
generated record annual adjusted funds flow of $953.7 million,
record annual free funds flow of $589.1 million and record annual
net income to common shareholders of $653.7 million, with
annual average production of 76,925 boe/d.
Over the last number of years, we have been committed to
maximizing our free funds flow and reducing our indebtedness
in order to increase our financial flexibility and reduce the risks to
our business. As a result of the significant free funds flow that
we have generated over the past two years, we have retired an
aggregate of $768.1 million of total debt and preferred shares
since June 30, 2020. In addition, we returned an aggregate of
$128.9 million to shareholders in 2022 through our base common
share dividend, a special dividend of $0.20 per common share
and common share repurchases.
Birchcliff was able to replace 127% of its annual production
with new PDP reserves at year-end 2022, with PDP F&D costs
of $10.24/boe, which has resulted in our PDP reserves having
an adjusted funds flow recycle ratio of 3.3x, highlighting the
profitability of our business.
All of these achievements speak to the continued strong
performance of our 100% Alberta-based assets and the benefits
of our low-cost operating structure.
“I am extremely proud of
what Birchcliff accomplished
in 2022, which was a record
year for our company in
many respects.“
- Jeff Tonken
LOOKING FORWARD – 2023 AND BEYOND
For 2023, we remain committed the payment of our annual
base dividend of $0.80 per common share, maintaining capital
discipline and generating free funds flow. Our significant
ownership and operatorship of our assets gives us a strong
competitive advantage, providing us with the flexibility to
actively manage our capital program in response to changing
economic conditions in order to protect our strong financial
position and base common share dividend. We will continue to
closely monitor commodity prices and, where deemed prudent,
adjust our 2023 capital program, giving consideration to increasing
or decreasing our rate of drilling and capital investment depending
on commodity prices. We are taking a conservative approach to
capital investment in 2023 as a result of the significant ongoing
volatility in natural gas prices.
2022 ANNUAL REPORT 3
OUR COMMITMENT TO ESG
At Birchcliff, we recognize the importance of, and our responsibility for, environmental
stewardship while developing our assets. We continue to be a leader in many aspects
of environmental, social and governance (“ESG”) performance and are committed
to the safe and responsible production and delivery of clean, reliable natural gas and
oil. In 2022, we demonstrated our ongoing commitment to ESG performance and
reporting with the release of our annual ESG Report.
Our commitment to ESG is reflected in our status as one of the lowest GHG emissions
intensity producers amongst our peer group and we remain focused on ongoing
initiatives and investments to further reduce our GHG emissions intensity. Birchcliff
has developed the acronym “LEIP”, meaning Low Emissions Intensity Producer, which
describes what we are today and what we endeavour to accomplish in the future. The
LEIP program at Birchcliff reminds us, as well as our stakeholders and others interested
in our industry’s emissions reductions initiatives, of our commitment as a company to
reducing our environmental impact.
We 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. Birchcliff continues to invest financial resources and time to support
our commitment to further reduce our impact, and the impact of the oil and gas
industry as a whole, on the environment. Birchcliff is proud to be a partner in the
NGIF Capital Corporation through two of its divisions: NGIF Industry Grants and
NGIF Cleantech Ventures. Birchcliff has been a member of NGIF Industry Grants
(originally the Natural Gas Innovation Fund) since 2018, when it was expanded to
include natural gas producers, and is a founding limited partner of NGIF Cleantech
Ventures. Both NGIF Industry Grants and NGIF Cleantech Ventures are projects
created by the Canadian Gas Association to support the funding of cleantech
innovations in the natural gas value chain.
LOW EMISSIONS
INTENSITY PRODUCER
4
BIRCHCLIFF ENERGY
BIRCHCLIFF CONTINUES TO BE A COMMITTED SUPPORTER
OF THE COMMUNITIES WHERE WE OPERATE.
Each year, Birchcliff participates in a number of community support endeavours
in Calgary, Alberta and the areas surrounding our field operations. During 2022,
Birchcliff furthered its commitment as a major contributor to STARS Air Ambulance,
both in Northern Alberta and Calgary. This commitment will help STARS to purchase
new helicopters that offer the latest in safety, technology and avionics, resulting in
significantly increased safety measures, reduced crew fatigue, increased fuel efficiency
and coverage area and overall cost savings, all the while upholding STARS life-saving
mission. Birchcliff also supported many other charitable initiatives during 2022,
including the United Way of Calgary and Area.
We acknowledge that our field operations are located within the ancestral
and traditional territory of the Treaty 8 First Nations, as well as the Métis people.
At Birchcliff, we pride ourselves on our open and honest consultation with the
Indigenous peoples whose traditional lands could be affected by our operations,
which has led to strong and lasting relationships. We always strive to go above and
beyond Alberta’s stringent regulatory requirements for consultation by building
partnerships with Indigenous communities that are beneficial to Birchcliff, our
Indigenous partners and the environment. In addition, we believe that providing
economic opportunities is critical to developing and maintaining positive
relationships. As such, we are focused on hiring local employees and using local
contractors whenever possible, including contractors that are partnered with
or owned by members of the Indigenous communities in the Pouce Coupe and
Gordondale areas. As part of our commitment to the First Nations and Métis
communities where we operate, we provide support through community-led
investment in youth, culture and heritage, including by supporting local cultural
events and by providing education and scholarship programs, student
employment and career opportunities.
Whether it is by reducing our environmental footprint through the use of technology,
by making our communities stronger by lifting up the less fortunate or through our
strong connections to the Indigenous peoples who have inhabited this land for
centuries, Birchcliff continues to be commited to corporate responsibility. Further
information regarding our ESG initiatives and activities can be found in our ESG
Report, which is available on our website at birchcliffenergy.com.
I want to sincerely thank our Board of Directors and the other members of our
Executive Team for their hard work, support and determination. On behalf of
our Executive Team and the Board of Directors, I want to thank all of our employees
for their dedication and extraordinary efforts in 2022. It is their focus, hard work and
teamwork that has allowed us to deliver the exceptional results set forth herein.
Jeff Tonken
Chief Executive Officer
March 15, 2023
COMMITMENT TO SAFETY
Our continued effforts and
programs are leading to top-tier
safety performance.
BIRCHCLIFF IS A PROUD
PARTNER OF THE NATURAL
GAS INNOVATION FUND
2022 ANNUAL REPORT 5
MONTNEY/DOIG
RESOURCE PLAY
Our operations are concentrated within our one core area in northwest
Alberta, adjacent to the Alberta/British Columbia border. Our
Montney/Doig Resource Play is considered by management to be one of
the most desirable natural gas and light oil drilling areas in North America.
529
MONTNEY/DOIG
HORIZONTAL WELLS
DRILLED AND CASED
(526.6 NET)
At December 31, 2022
DISCLAIMER: The IHS Markit reports, data
and information referenced herein (the “IHS
Markit Materials”) are
the copyrighted
property of IHS Markit Ltd. and its subsidiaries
(“IHS Markit”) and represent data, research,
opinions or viewpoints published by
IHS
Markit, and are not representations of fact. The
IHS Markit Materials speak as of the original
publication date thereof and not as of the
date of this document. The information and
opinions expressed in the IHS Markit Materials
are subject to change without notice and IHS
Markit has no duty or responsibility to update
the IHS Markit Materials. Moreover, while the
IHS Markit Materials reproduced herein are
from sources considered reliable, the accuracy
and completeness thereof are not warranted,
nor are the opinions and analyses which are
based upon it. IHS Markit is a trademark of
IHS Markit. Other trademarks appearing in
the IHS Markit Materials are the property
of IHS Markit or their respective owners.
6
BIRCHCLIFF ENERGY
BIRCHCLIFF MONTNEY/DOIG NATURAL GAS RESOURCE PLAY FULL DEVELOPEMENT PLAN: HEXASTACK
Production Interval
Basal Doig/Upper Montney
96 Wells
Montney D4
12 Wells
Montney D3
Exploration
0 Wells
Montney D2
63 Wells
Montney D1
328 Wells
Montney C
16 Wells
515 Wells Total
Mature Developed/Commercial
Future Potential
As of December 31, 2022
Over the past 18 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.
Our Montney/Doig Resource Play is 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 is developing its Montney/Doig Resource Play through the use of horizontal drilling and multi-stage fracture stimulation technology.
Over the last several years, Birchcliff has focused on multi-well pad drilling which allows Birchcliff to reduce its environmental footprint
and helps it to keep its per well costs low. Birchcliff continues to utilize geology, geophysics, engineering and data science/analytics
to assist with its land evaluation, portfolio optimization and well planning, including acquiring and utilizing 3D seismic and subsurface
diagnostics to reduce risk and optimize well placement of its horizontal wells.
2022 ANNUAL REPORT 7
BIRCHCLIFF 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 2022
FINANC IALS
8
BIRCHCLIFF ENERGY
Management’s Discussion and Analysis
GENERAL
This Management’s Discussion and Analysis (“MD&A”) for Birchcliff Energy Ltd. (“Birchcliff” or the “Corporation”) dated
March 15, 2023 is with respect to the three and twelve months ended December 31, 2022 (the “Reporting Periods”) as compared
to the three and twelve months ended December 31, 2021 (the “Comparable Prior Periods”). This MD&A has been prepared
by management and approved by the Corporation’s audit committee and board of directors (the “Board”) and should be read in
conjunction with the annual audited financial statements of the Corporation and related notes for the year ended December 31, 2022
and 2021 (the “financial statements”), which have been prepared in accordance with IFRS. All dollar amounts are expressed in
Canadian currency unless otherwise stated.
This MD&A uses various “non-GAAP financial measures”, “non-GAAP ratios”, “supplementary financial measures” and “capital
management measures” as such terms are defined in National Instrument 52-112 – Non-GAAP and Other Financial Measures Disclosure
(“NI 52-112”). Non-GAAP financial measures and non-GAAP ratios are not standardized financial measures under GAAP and might not
be comparable to similar financial measures disclosed by other issuers. For further information, including reconciliations to the most
directly comparable GAAP financial measures where applicable, see “Non-GAAP and Other Financial 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” 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. For further information, see “Advisories” 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.
Regulations relating to climate and climate-related matters continue to evolve and may have additional disclosure requirements in the
future. See “Risk Factors” in this MD&A and Note 2 “Basis of Preparation – Climate Change and Environmental Reporting Regulations” in
the financial statements. Birchcliff publishes an annual Environmental, Social and Governance (“ESG”) Report containing comprehensive
information relating to its ESG performance, which can be found on the Corporation’s website at www.birchcliffenergy.com.
ABOUT BIRCHCLIFF
Birchcliff is a Calgary, Alberta based intermediate oil and natural gas company with operations focused on the Montney/Doig
Resource Play in Alberta. Birchcliff’s common shares are listed for trading on the Toronto Stock Exchange (the “TSX”) under the
symbol “BIR”. Additional information relating to the Corporation, including its Annual Information Form for the financial year ended
December 31, 2022 (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
Benchmark oil and natural gas prices remained volatile during 2022 primarily due to supply and demand uncertainty attributed to
regional impacts of the ongoing restrictions and lockdowns in China resulting from the novel coronavirus (“COVID-19”) pandemic,
the potential for a global economic slowdown attributed to rising inflation and interest rates, geopolitical tensions arising from the
Russian invasion of Ukraine and global commodity supply constraints and labour shortages, which have increased inflationary
pressures on global economies. Birchcliff has incorporated the current and anticipated impacts of these conditions in its preparation
of this MD&A and the financial statements. See Note 2 “Basis of Preparation – Current Environment and Estimation Uncertainty” in the
financial statements.
2022 ANNUAL REPORT 9
HIGHLIGHTS
2022 Full-Year Highlights
• Achieved annual average production of 76,925 boe/d, a 2% decrease from the twelve month Comparable Prior Period.
Liquids accounted for 19% of Birchcliff’s total production in the twelve month Reporting Period as compared to 21% in the
Comparable Prior Period.
• Generated record annual adjusted funds flow(1) of $953.7 million, or $3.59 per basic common share(2), both of which increased
by 77% from the twelve month Comparable Prior Period. Cash flow from operating activities was a record $925.3 million,
an 80% increase from the twelve month Comparable Prior Period.
• Delivered record annual free funds flow(1) of $589.1 million, or $2.22 per basic common share(2), a 90% and 91% increase,
respectively, from the twelve month Comparable Prior Period.
•
Earned record annual net income to common shareholders of $653.7 million, or $2.46 per basic common share, a 111% and
110% increase, respectively, from the twelve month Comparable Prior Period.
• Achieved an operating netback(2) of $32.85/boe and adjusted funds flow per boe(2) of $33.97, a 53% and 80% increase,
respectively, from the twelve month Comparable Prior Period.
•
•
•
•
Realized an operating expense(3) of $3.62/boe, a 13% increase from the twelve month Comparable Prior Period.
Successfully executed the Corporation’s 2022 capital program, bringing on production a total of 39 wells. F&D capital
expenditures were $364.6 million in the twelve month Reporting Period.
Retired approximately $449.0 million of total debt(4) and preferred shares in the twelve month Reporting Period, including
reducing total debt by $360.8 million (72%) from $499.4 million at December 31, 2021 and the redemption of all of its issued and
outstanding cumulative redeemable preferred shares, Series A (the “Series A Preferred Shares”) and cumulative redeemable
preferred shares, Series C (the “Series C Preferred Shares”) for an aggregate redemption value of $88.2 million.
Returned $128.9 million to common shareholders in the twelve month Reporting Period through dividends and purchases under
the Corporation’s normal course issuer bid which included the purchase of 6,340,192 common shares at an average price of
$9.01 per share (before fees).
Q4 2022 Highlights
• Achieved quarterly average production of 79,799 boe/d, a 1% increase from the three month Comparable Prior Period.
Liquids accounted for 19% of Birchcliff’s total production in the three month Reporting Period as compared to 20% in the
Comparable Prior Period.
• Generated quarterly adjusted funds flow of $217.1 million, or $0.82 per basic common share, both of which increased by
12% from the three month Comparable Prior Period. Cash flow from operating activities was $224.4 million, a 14% increase from
the three month Comparable Prior Period.
• Delivered quarterly free funds flow of $110.3 million, or $0.41 per basic common share, a 30% and 32% decrease, respectively,
from the three month Comparable Prior Period.
•
Earned quarterly net income to common shareholders of $69.5 million, or $0.26 per basic common share, both of which
decreased by 35% from the three month Comparable Prior Period.
• Achieved an operating netback of $29.35/boe and adjusted funds flow per boe of $29.57, a 7% and 11% increase, respectively,
from the three month Comparable Prior Period.
•
•
•
Realized an operating expense of $4.06/boe, a 16% increase from the three month Comparable Prior Period.
F&D capital expenditures were $106.8 million in the three month Reporting Period.
Returned $61.3 million to common shareholders in the three month Reporting Period through dividends and purchases under the
Corporation’s normal course issuer bid, including the payment of a special dividend of $0.20 per common share for an aggregate
of approximately $53.2 million and the purchase of 300,000 common shares at an average price of $9.30 per share (before fees).
See “Cash Flow From Operating Activities and Adjusted Funds Flow”, “Net Income to Common Shareholders”, “Discussion of Operations”,
“Capital Expenditures”, “Capital Resources and Liquidity”, “Share Information” and “Dividends” in this MD&A for further information
regarding the financial and operational results for the Reporting Periods and Comparable Prior Periods.
(1) Non-GAAP financial measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
(2) Non-GAAP ratio. See “Non-GAAP and Other Financial Measures” in this MD&A.
(3) Supplementary financial measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
(4) Capital management measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
10
BIRCHCLIFF ENERGY
2023 GUIDANCE
Birchcliff remains committed to the payment of its annual base dividend of $0.80 per common share(5), maintaining capital discipline
and generating free funds flow in 2023. As a result of the recent weakness and volatility in natural gas prices and the potential for
weakness in summer natural gas prices, Birchcliff has decided to slow the rate of its 2023 capital program by moving the drilling of
9 (9.0 net) wells to Q3 2023 that were originally scheduled to be drilled in Q2 2023. These wells are now anticipated to be brought on
production in Q4 2023 (originally scheduled for Q3 2023), which is expected to result in strong production in Q4 2023 and Q1 2024,
when commodity prices are forecast to be significantly higher. Birchcliff’s F&D capital expenditures for 2023 are still forecast to be in
the range of $260 million to $280 million.
Birchcliff’s significant ownership and operatorship of its assets gives it a strong competitive advantage, providing it with the flexibility
to actively manage its capital program in response to changing economic conditions in order to protect its strong financial position
and base common share dividend. The Corporation will continue to closely monitor commodity prices and, where deemed prudent,
make further adjustments to its 2023 capital program, giving consideration to increasing or decreasing its rate of drilling and capital
investment depending on commodity prices. Birchcliff is taking a conservative approach to capital investment in 2023 as a result of
the significant ongoing volatility in natural gas prices.
With respect to production, Birchcliff is reducing its annual average production guidance for 2023 to reflect the impact of an
unexpected outage on Pembina Pipeline Corporation’s Northern Pipeline system, which resulted in an unplanned outage impacting
a substantial portion of the volumes on the system, including the Corporation’s NGLs volumes (see Birchcliff’s press release dated
March 15, 2023). Birchcliff’s revised production guidance for 2023 also reflects the 9 wells coming on production later in 2023 than
previously planned and other forecast adjustments. Annual average production in 2023 is currently expected to be in the range of
77,000 to 80,000 boe/d (as compared to Birchcliff’s previous guidance of 81,000 to 83,000 boe/d).
Birchcliff is reaffirming its 2023 annual base common share dividend amount and its 2023 guidance for F&D capital expenditures.
The Corporation is updating certain items of its 2023 guidance to reflect its revised production guidance and a lower commodity price
forecast for 2023.
(5) This annual base dividend is expected to be declared and paid quarterly at the rate of $0.20 per common share. Other than the dividend declared for the quarter ending March 31, 2023, the declaration
of dividends is subject to the approval of the Board and is subject to change. See “Advisories – Forward-Looking Statements” in this MD&A.
2022 ANNUAL REPORT
11
The following table sets forth Birchcliff’s updated and previous guidance and commodity price assumptions for 2023, its 2022 actual
audited results and 2022 guidance for comparative purposes, as well as its free funds flow sensitivity for 2023:
Updated 2023
guidance and
assumptions –
March 15, 2023(1)
Previous 2023
guidance and
assumptions –
January 18, 2023
2022
actual
results
2022 revised
guidance and
assumptions –
October 13, 2022
Production
Annual average production (boe/d)
77,000 – 80,000
81,000 – 83,000
76,925
78,000
% Light oil
% Condensate
% NGLs
% Natural gas
Q4 average production (boe/d)
Average Expenses ($/boe)
Royalty(2)
Operating(2)
Transportation and other(3)
Interest(2)
Adjusted Funds Flow (millions)(4)
3%
7%
9%
81%
-
4.25 – 4.45
3.55 – 3.75
5.25 – 5.45
-
$475
3%
7%
10%
80%
-
4.25 – 4.45
3.45 – 3.65
5.20 – 5.40
-
$570
F&D Capital Expenditures (millions)
$260 – $280
$260 – $280
Free Funds Flow (millions)(4)
Annual Base Dividend (millions)
$195 – $215
$290 – $310
$213(5)
$213
Excess Free Funds Flow (millions)(4)
($18) – $2(5)
$77 – $97
Total Debt at Year End (millions)(6)
$145 – $165(7)
$50 – $70
Natural Gas Market Exposure
AECO exposure as a % of total natural gas production
Dawn exposure as a % of total natural gas production
NYMEX HH exposure as a % of total natural gas production
Alliance exposure as a % of total natural gas production
Commodity Prices
Average WTI price (US$/bbl)
Average WTI-MSW differential (CDN$/bbl)
Average AECO price (CDN$/GJ)
Average Dawn price (US$/MMBtu)
Average NYMEX HH price (US$/MMBtu)
Exchange rate (CDN$ to US$1)
17%(8)
41%(8)
36%(8)
6%(8)
78.50(9)
3.25(9)
3.00(9)
3.05(9)
3.50(9)
1.35(9)
17%
41%
36%
6%
76.00
4.75
3.30
3.55
3.85
1.34
3%
6%
10%
81%
3%
6%
10%
81%
79,799
81,000 – 83,000
5.74
3.62
5.52
0.49
$953.7
$364.6
$589.1
$71.8
$517.3
$138.5
12%
43%
7%
38%
94.31
2.42
5.04
6.04
6.64
1.3004
6.70 – 6.80
3.40 – 3.50
5.40 – 5.50
0.40 – 0.50
$1,020
$355 – $365
$655 – $665
$72
$585 – $595
$60 – $70
15%
42%
38%
5%
95.00
2.50
5.25
6.35
6.85
1.30
Forward ten months’ free funds flow sensitivity(10)
Estimated change to 2023 free funds flow (millions)
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
$4.5
$5.8
$7.1
$3.4
$5.1
(1) Birchcliff’s updated guidance for its production commodity mix, adjusted funds flow, free funds flow, excess free funds flow, total debt and natural gas market exposure in 2023 is based on an annual
average production rate of 78,500 boe/d in 2023, which is the mid-point of Birchcliff’s updated annual average production guidance range for 2023. Birchcliff’s updated guidance for its free funds flow,
excess free funds flow and total debt in 2023 is based on F&D capital expenditures of approximately $270 million in 2023, which is the mid-point of the Corporation’s F&D capital expenditures guidance
range for 2023. Birchcliff has not disclosed guidance for its 2023 Q4 average production or interest expense per boe. For further information regarding the risks and assumptions relating to
the Corporation’s guidance, see “Advisories – Forward-Looking Statements” in this MD&A.
(2) Supplementary financial measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
(3) Non-GAAP ratio. See “Non-GAAP and Other Financial Measures” in this MD&A.
(4) Non-GAAP financial measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
12
BIRCHCLIFF ENERGY
(5) Assumes that an annual base dividend of $0.80 per common share is paid and that there are 266 million common shares outstanding, with no changes to the base dividend rate and no special dividends
paid. Other than the dividend declared for the quarter ending March 31, 2023, the declaration of dividends is subject to the approval of the Board and is subject to change.
(6) Capital management measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
(7) The forecast of total debt at December 31, 2023 is expected to be comprised of any amounts outstanding under the Corporation’s extendible revolving term credit facilities (the “Credit Facilities”) plus
accounts payable and accrued liabilities and less cash, accounts receivable and prepaid expenses and deposits at the end of the year.
(8) Birchcliff’s natural gas market exposure for 2023 takes into account its physical and financial basis swap contracts outstanding as at March 14, 2023.
(9) Birchcliff’s updated commodity price and exchange rate assumptions for 2023 are based on the settled benchmark commodity prices and CDN/US exchange rate for January and February 2023 and the
forward strip benchmark commodity prices and CDN/US exchange rate from March 2023 to December 2023 as of March 3, 2023.
(10) Illustrates the expected impact of changes in commodity prices and the CDN/US exchange rate on the Corporation’s updated forecast of free funds flow for 2023, holding all other variables constant.
The sensitivity is based on the commodity price and exchange rate assumptions set forth in the table above. The calculated impact on free 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 and/or when the
magnitude of the change increases.
Comparison of 2022 Actual Results to 2022 Revised Guidance
Birchcliff’s 2022 annual and Q4 average production was 76,925 boe/d and 79,799 boe/d, respectively, both of which were 1% below
its 2022 annual average production guidance and the low end of its Q4 average production guidance.
Birchcliff’s 2022 royalty expense per boe, adjusted funds flow, free funds flow and excess free funds flow were lower than its guidance
and Birchcliff’s total debt was above its guidance, all primarily due to lower than anticipated annual average benchmark natural gas
prices. Birchcliff’s operating expense per boe and transportation and other expense per boe were both slightly above its guidance,
primarily due to lower than anticipated annual average production.
F&D capital expenditures and interest expense per boe in 2022 were in line with Birchcliff’s guidance.
2022 ANNUAL REPORT
13
SELECTED ANNUAL INFORMATION
The following table sets forth a summary of the Corporation’s annual results for the three most recently completed financial years:
2022
2,223
4,679
7,471
375,315
76,925
119.78
122.27
41.09
6.73
47.73
925,275
953,683
3.59
589,062
2.22
656,831
653,682
2.46
1,340,180
364,621
368,230
3.62
3,169,365
131,981
138,549
266,047
265,548
-
-
71,788
0.2700
3,149
1.5744
2,013
1.3161
2021
2,899
5,715
7,705
373,217
78,520
79.24
85.65
30.54
4.29
32.53
515,369
539,733
2.03
309,254
1.16
314,676
310,489
1.17
932,406
230,479
232,480
3.19
2,959,967
500,870
499,397
264,790
265,990
2,000
1,531
6,639
0.0250
4,187
2.0935
2,718
1.7500
2020
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
(103,441)
(0.39)
(57,821)
(62,008)
(0.23)
528,505
287,967
276,785
2.95
2,902,043
731,372
761,951
265,943
265,936
2,000
1,597
10,968
0.0413
4,187
2.0935
3,467
1.7500
Average production
Light oil (bbls/d)
Condensate (bbls/d)
NGLs (bbls/d)
Natural gas (Mcf/d)
Total (boe/d)
Average realized sales price ($)(1)(2)
Light oil (per bbl)
Condensate (per bbl)
NGLs (per bbl)
Natural gas (per Mcf)
Total (per boe)
Cash flow from operating activities ($000s)
Adjusted funds flow ($000s)(3)
Per basic common share ($)(4)
Free funds flow ($000s)(3)
Per basic common share ($)(4)
Net income (loss) ($000s)
Net income (loss) to common shareholders ($000s)
Per basic common share ($)
Petroleum and natural gas revenue ($000s)(1)
F&D capital expenditures ($000s)(5)
Total capital expenditures ($000s)(3)
Operating expense ($/boe)(2)
Total assets ($000s)
Revolving term credit facilities ($000s)
Total debt ($000s)(6)
End of period basic common shares (000s)
Weighted average basic common shares (000s)
End of period Series A Preferred Shares (000s)
End of period Series C Preferred Shares (000s)
Dividends on common shares ($000s)
Per common share ($)
Dividends on Series A Preferred Shares ($000s)
Per Series A Preferred Share ($)
Dividends on Series C Preferred Shares ($000s)
Per Series C Preferred Share ($)
(1) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.
(2) Supplementary financial measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
(3) Non-GAAP financial measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
(4) Non-GAAP ratio. See “Non-GAAP and Other Financial Measures” in this MD&A.
(5) See “Advisories” in this MD&A.
(6) Capital management measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
14
BIRCHCLIFF ENERGY
Annual average production in 2022 was comparable to the prior two years. Annual average production in each year was positively
impacted by incremental production volumes from new Montney/Doig light oil and liquids-rich natural gas wells brought on
production and negatively impacted by natural production declines. The decrease in the Corporation’s liquids production from the
prior two years was primarily due to the Corporation specifically targeting natural gas wells in liquids-rich zones in Pouce Coupe in
2022, natural production declines from light oil and liquids-rich natural gas wells brought on-stream in 2021 and 2020 and the major
scheduled turnaround at AltaGas’ deep-cut sour gas processing facility (the “AltaGas Facility”) in the second quarter of 2022,
which resulted in lower liquids being produced in the Gordondale area.
Cash flow from operating activities and adjusted funds flow increased substantially from the prior two years primarily due to higher
reported petroleum and natural gas revenue, partially offset by a higher royalty expense, both of which were largely impacted by a
47% and 153% increase in the average realized sales price received for Birchcliff’s production in 2022 as compared to 2021 and 2020,
respectively. Birchcliff’s 2022 average realized sales price benefited from increases in benchmark oil and natural gas prices in 2022.
Birchcliff’s cash flow from operating activities and adjusted funds flow were also positively impacted by a realized gain on financial
instruments of $80.7 million in 2022 as compared to a realized loss on financial instruments of $21.5 million and $59.7 million in
2021 and 2020, respectively.
Free funds flow in 2022 increased substantially from the prior two years primarily due to higher adjusted funds flow, partially offset by
higher F&D capital expenditures in 2022 as compared to 2021 and 2020.
Birchcliff earned net income to common shareholders of $653.7 million ($2.46 per basic common share) in 2022, as compared to
net income to common shareholders of $310.5 million ($1.17 per basic common share) in 2021 and net loss to common shareholders
of $62.0 million ($0.23 per basic common share) in 2020. The increase in net income to common shareholders was primarily due to
higher adjusted funds flow and an unrealized mark-to-market gain on financial instruments largely resulting from the changes in the
fair value of the Corporation’s NYMEX HH/AECO 7A basis swap contracts, partially offset by a higher income tax expense in 2022.
Birchcliff recorded an unrealized mark-to-market gain on financial instruments of $131.0 million in 2022 as compared to an unrealized
mark-to-market gain on financial instruments of $84.2 million in 2021 and an unrealized mark-to-market loss on financial instruments of
$35.4 million in 2020.
F&D capital expenditures in 2022 were higher than the prior two years. The Corporation’s F&D capital expenditures fluctuate each
year based on: (i) the Corporation’s outlook for commodity prices and market conditions; and (ii) the level of drilling and completions
operations and other capital projects and the timing and cost thereof. Capital expenditures in the last three years were largely directed
towards: (i) the drilling and completions of horizontal light oil and liquids-rich natural gas wells in Gordondale and Pouce Coupe; and
(ii) the addition of the inlet-liquids handling facility at the Corporation’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 2020.
Operating expense on a per boe basis in 2022 increased from the prior two years primarily due to inflationary pressures on power
prices and fuel, chemicals and lubricants costs used in Birchcliff’s field operations and higher field labour costs.
Total debt at December 31, 2022 decreased substantially from the prior two years primarily due to the significant free funds flow
generated in 2022 and 2021, which was largely allocated towards debt reduction due to the Corporation’s continued focus on
reducing its indebtedness. See “Capital Resources and Liquidity” in this MD&A.
Common share dividend distributions in 2022 increased substantially from the prior two years primarily due to the Corporation paying
a special dividend of $0.20 per common share in the fourth quarter of 2022. See “Dividends” in this MD&A.
Birchcliff redeemed all of its issued and outstanding Series A and Series C Preferred Shares in 2022 for an aggregate redemption value
of $88.2 million. See “Share Information” in this MD&A for further information.
2022 ANNUAL REPORT
15
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 ($000s)(1)
Per basic common share ($)(2)
Per diluted common share ($)(2)
Adjusted funds flow per boe ($)(2)
(1) Non-GAAP financial measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
(2) Non-GAAP ratio. See “Non-GAAP and Other Financial Measures” in this MD&A.
Three months ended
December 31,
Twelve months ended
December 31,
2022
224,447
217,099
0.82
0.79
29.57
2021
196,142
193,649
0.73
0.70
26.74
2022
925,275
953,683
3.59
3.47
33.97
2021
515,369
539,733
2.03
1.97
18.83
Cash flow from operating activities increased by 14% and 80% from the three and twelve month Comparable Prior Periods,
respectively. Adjusted funds flow increased by 12% and 77% from the three and twelve month Comparable Prior Periods, respectively.
The increases were primarily due to higher petroleum and natural gas revenue, partially offset by a higher royalty expense, both of
which were largely impacted by a 9% and 47% increase in the average realized sales price received for Birchcliff’s production in the
three and twelve month Reporting Periods, respectively, as compared to the Comparable Prior Periods. The Corporation’s average
realized sales price in the Reporting Periods benefited from increases in benchmark oil and natural gas prices as compared to the
Comparable Prior Periods. Birchcliff’s cash flow from operating activities and adjusted funds flow were also positively impacted by
realized gains on financial instruments of $18.8 million and $80.7 million in the three and twelve month Reporting Periods, respectively,
as compared to a realized gain on financial instruments of $9.9 million in the three month Comparable Prior Period and a realized loss
on financial instruments of $21.5 million in the twelve month Comparable Prior Period.
See “Discussion of Operations” in this MD&A for further information regarding the period-over-period movement in revenue,
commodity prices, realized gains and losses on financial instruments and royalties.
NET INCOME TO COMMON SHAREHOLDERS
The following table sets forth the Corporation’s net income to common shareholders for the periods indicated:
Net income to common shareholders ($000s)
Per basic common share ($)
Per diluted common share ($)
Net income to common shareholders per boe ($)(1)
(1) Supplementary financial measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
Three months ended
December 31,
Twelve months ended
December 31,
2022
69,453
0.26
0.25
9.46
2021
2022
2021
106,102
653,682
310,489
0.40
0.38
14.65
2.46
2.38
23.28
1.17
1.13
10.83
Net income to common shareholders in the three month Reporting Period decreased by 35% from the Comparable Prior Period.
The decrease was primarily due to an unrealized mark-to-market loss on financial instruments due to changes in the fair value of the
Corporation’s NYMEX HH/AECO 7A basis swap contracts, partially offset by higher adjusted funds flow and a lower deferred income
tax expense in the three month Reporting Period. Birchcliff recorded an unrealized mark-to-market loss on financial instruments of
$61.0 million in the three month Reporting Period as compared to a negligible unrealized mark-to-market gain on financial instruments
in the Comparable Prior Period.
Net income to common shareholders in the twelve month Reporting Period increased by 111% from the Comparable Prior Period.
The increase was primarily due to higher adjusted funds flow and an increase in the unrealized mark-to-market gain on financial
instruments due to changes in the fair value of the Corporation’s NYMEX HH/AECO 7A basis swap contracts, partially offset by a higher
deferred income tax expense in the twelve month Reporting Period. Birchcliff recorded an unrealized mark-to-market gain on financial
instruments of $131.0 million in the twelve month Reporting Period as compared to $84.2 million in the Comparable Prior Period.
See “Discussion of Operations” in this MD&A for further details regarding the period-over-period movement in unrealized gains and
losses on financial instruments and deferred income tax expense.
16
BIRCHCLIFF ENERGY
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 natural gas and liquids-rich natural gas trends of the Montney/Doig Resource Play
(the “Pouce Coupe assets”), the Corporation’s Gordondale operating assets geologically situated in the light oil and liquids-rich
trends 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
Three months ended
December 31, 2022
Three months ended
December 31, 2021
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
236
34,129
7,705
159,479
201,549
1
25,325
16,537
18,501
58,081
118,444
5
25,588
50,712
26,224
217,822
320,346
12
183
32,776
7,064
137,876
177,899
1
201,550
118,449
320,358
177,900
22,032
15,601
19,571
54,676
111,880
1
111,881
39%
22,231
48,377
26,635
192,553
289,796
10
289,806
% of corporate P&NG revenue
63%
37%
61%
($000s)
Light oil
Condensate
NGLs
Natural gas
P&NG sales(2)
Royalty income
P&NG revenue
Twelve months ended
December 31, 2022
Twelve months ended
December 31, 2021
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
870
140,741
36,272
689,102
866,985
6
96,208
67,897
75,722
231,964
471,791
12
97,185
208,828
112,049
922,060
1,340,122
58
618
123,979
23,983
419,668
568,248
5
83,145
54,672
61,908
164,316
364,041
7
83,836
178,651
85,891
583,991
932,369
37
866,991
471,803
1,340,180
568,253
364,048
932,406
% of corporate P&NG revenue
65%
35%
61%
39%
(1) Includes other minor oil and natural gas properties that were not individually significant during the respective periods.
(2) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.
On a corporate basis, P&NG revenue increased by 11% and 44% from the three and twelve month Comparable Prior Periods,
respectively. The increases were primarily due to a $25.3 million (13%) and $338.1 million (58%) increase in natural gas revenue from
the three and twelve month Comparable Prior Periods, respectively, that largely resulted from a higher average realized natural gas
sales price and increased natural gas production in the Reporting Periods. The details regarding the period-over-period movement in
Birchcliff’s production and the average realized sales price received for its natural gas production are discussed below.
2022 ANNUAL REPORT
17
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, 2022
Three months ended
December 31, 2021
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
23
3,236
1,669
281,836
51,901
17.5
65%
2,388
1,581
6,292
105,353
27,820
97.4
35%
2,413
4,822
7,963
387,604
79,799
39.2
21
3,574
1,511
268,607
49,875
19.0
63%
2,581
1,755
6,059
110,670
28,840
93.9
37%
2,604
5,330
7,570
379,275
78,716
40.9
Twelve months ended
December 31, 2022
Twelve months ended
December 31, 2021
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
20
3,130
1,774
277,764
51,217
17.7
67%
2,201
1,545
5,695
97,135
25,631
97.2
33%
2,223
4,679
7,471
375,315
76,925
38.3
21
3,984
1,750
265,620
50,025
21.7
64%
2,875
1,731
5,954
107,591
28,492
98.2
36%
2,899
5,715
7,705
373,217
78,520
43.7
(1) Includes other minor oil and natural gas properties that were not individually significant during the respective periods.
On a corporate basis, Birchcliff’s production in the three month Reporting Period increased by 1% from the Comparable Prior Period.
In the twelve month Reporting Period, Birchcliff’s corporate production decreased by 2% from the Comparable Prior Period.
Birchcliff’s production in the three month Reporting Period was positively impacted by incremental production volumes from the
9 (9.0 net) wells on its 06-35 pad that were brought on production in Gordondale in late September 2022 and 4 (4.0 net) wells on
its 03-06 pad that were brought on production in Pouce Coupe in December 2022, partially offset by natural production declines.
Birchcliff’s production in the twelve month Reporting Period was negatively impacted by: (i) natural production declines; (ii) a major
scheduled turnaround in the second quarter of 2022 at the AltaGas Facility that decreased annual average production in Gordondale
by approximately 900 boe/d; and (iii) the timing of new wells brought on production in the twelve month Reporting Period as
compared to the Comparable Prior Period, which resulted from scheduling differences in Birchcliff’s drilling and completions program
year-over-year. Birchcliff’s production in the twelve month Reporting Period was positively impacted by incremental production
volumes from the 39 new Montney/Doig light oil and liquids-rich natural gas wells brought on production in 2022.
18
BIRCHCLIFF ENERGY
The following table sets forth Birchcliff’s production weighting by product category for the Pouce Coupe assets, the Gordondale assets
and on a corporate basis for the periods indicated:
% Light oil production
% Condensate production
% NGLs production
% Natural gas production
% Light oil production
% Condensate production
% NGLs production
% Natural gas production
Three months ended
December 31, 2022
Three months ended
December 31, 2021
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
-
6
3
91
9
6
22
63
3
6
10
81
-
7
3
90
9
6
21
64
3
7
10
80
Twelve months ended
December 31, 2022
Twelve months ended
December 31, 2021
Pouce Coupe
assets
Gordondale
assets
Corporate(1)
Pouce Coupe
assets
Gordondale
asset
Corporate(1)
-
6
4
90
9
6
22
63
3
6
10
81
-
9
3
88
10
6
21
63
4
7
10
79
(1) Includes other minor oil and natural gas properties that were not individually significant during the respective periods.
Liquids accounted for 19% of Birchcliff’s total production in both the three and twelve month Reporting Periods as compared to
20% and 21% in the three and twelve month Comparable Prior Periods, respectively. Birchcliff’s liquids-to-gas ratio in the three and
twelve month Reporting Periods was 39.2 bbls/MMcf and 38.3 bbls/MMcf, respectively (48% high-value light oil and condensate
in both periods). Liquids production weighting decreased in the Reporting Periods from the Comparable Prior Periods primarily due
to: (i) the Corporation specifically targeting horizontal natural gas wells in liquids-rich zones in the Pouce Coupe area; and (ii) natural
production declines from light oil and liquids-rich natural gas wells producing since December 31, 2021. Liquids production in the
twelve month Reporting Period was also negatively impacted by the AltaGas Facility turnaround in the second quarter of 2022,
which resulted in lower liquids being produced in the Gordondale area.
Commodity Prices
The following table sets forth the average benchmark commodity 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)
Natural gas – AECO 5A Daily (CDN$/GJ)
Natural gas – AECO 7A Month Ahead (US$/MMBtu)
Natural gas – Dawn Day Ahead (US$/MMBtu)
Natural gas – ATP 5A Day Ahead (CDN$/GJ)
Exchange rate (CDN$ to US$1)
Exchange rate (US$ to CDN$1)
Three months ended
December 31,
2021
79.78
96.12
5.83
4.41
3.93
4.65
4.74
1.2598
0.7938
% Change
4
15
7
10
5
11
(4)
8
(8)
2022
94.31
119.95
6.64
5.04
4.28
6.04
5.14
1.3004
0.7690
2022
82.64
110.18
6.26
4.85
4.11
5.16
4.53
1.3573
0.7368
Twelve months ended
December 31,
2021
% Change
68.70
80.67
3.88
3.44
2.84
3.62
4.03
1.2537
0.7976
37
49
71
47
51
67
28
4
(4)
2022 ANNUAL REPORT
19
Birchcliff physically sells substantially all of its liquids production based on the MSW benchmark price and substantially all of its natural
gas production based on the AECO 5A and Dawn benchmark prices. 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. Birchcliff has also diversified a portion of its AECO 5A production to NYMEX HH-based pricing, predominantly on
a financial basis, with various terms ending no later than December 31, 2027. Birchcliff had financial NYMEX HH/AECO 7A basis swap
contracts for 147,500 MMBtu/d at an average contract price of NYMEX HH less US$1.227/MMBtu during the Reporting Periods and
Comparable Prior Periods.
The average realized sales price the Corporation receives for its liquids and natural gas production depend on a number of factors,
including, but not limited to, 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 index prices that Birchcliff compares its oil price to are the WTI price and the MSW price. These
index prices can fluctuate due to a number of factors, including, but not limited to, local, regional and global oil supply and demand
fundamentals, North American refinery utilization rates, changing demographics, economic activity, inventory levels and pipeline
infrastructure capacity connecting key oil consuming domestic and export markets. The WTI benchmark oil index price increased
from the Comparable Prior Periods primarily due to the continued global recovery from the COVID-19 pandemic (with the exception
of China) and geopolitical tensions arising from the Russian invasion of Ukraine that resulted in increased demand for North American
crude oil in the Reporting Periods, partially offset by crude oil releases from US Strategic Petroleum Reserves.
Canadian natural gas prices are influenced by local, regional and global 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 natural gas consuming
markets, changing demographics, economic activity, inventory levels, access to underground storage, net import and export of LNG,
pipeline supply takeaway capacity, maintenance on key natural gas infrastructure, costs of competing renewable and non-renewable
energy alternatives, drilling and completions rates and efficiencies in extracting natural gas from North American natural gas basins.
Natural gas benchmark prices increased from the Comparable Prior Periods predominantly due to higher weather-related domestic
and global demand for natural gas and increased US LNG export demand resulting from geopolitical tensions arising from the Russian
invasion of Ukraine, partially offset by a major outage at the Freeport US LNG export facility that began in June 2022 and was still
ongoing in the first quarter of 2023, which accounts for approximately 20% of the LNG export capacity in North America.
Significant volatility in benchmark oil and natural gas prices persisted throughout the Reporting Periods primarily due to supply and
demand uncertainty attributed to regional impacts of the ongoing restrictions and lockdowns in China resulting from the COVID-19
pandemic, the potential for a global economic slowdown attributed to rising inflation and interest rates, geopolitical tensions arising
from the Russian invasion of Ukraine and global commodity supply constraints and labour shortages that increased inflationary
pressures on global economies.
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,
2021
92.79
98.66
38.24
5.52
40.02
% Change
24
16
(6)
11
9
Twelve months ended
December 31,
2021
% Change
79.24
85.65
30.54
4.29
32.53
51
43
35
57
47
2022
119.78
122.27
41.09
6.73
47.73
2022
115.24
114.32
35.80
6.11
43.63
(1) Supplementary financial measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
(2) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.
The Corporation’s average realized sales price increased by 9% and 47% from the three and twelve month Comparable Prior Periods,
respectively, primarily due to increases in benchmark oil and natural gas prices which positively impacted the sales prices Birchcliff
received for its production in the Reporting Periods.
20
BIRCHCLIFF ENERGY
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 physical natural gas market
for the periods indicated, before taking into account the Corporation’s financial instruments:
Three months ended
December 31, 2022
Three months ended
December 31, 2021
Natural
gas sales
($000s)(1)
101,194
106,494
10,134
Natural gas
production
(Mcf/d)
208,042
161,671
17,891
(%)
46
49
5
(%)
53
42
5
217,822
100
387,604 100
Average
realized
sales price
($/Mcf)(1)(2)
5.31
7.16
6.16
6.11
Natural
gas sales
($000s)(1)
85,230
88,932
18,391
Natural gas
production
(Mcf/d)
185,870
156,618
36,787
(%)
44
46
10
(%)
49
41
10
192,553
100
379,275
100
Average
realized
sales price
($/Mc f)(1)(2)
4.98
6.17
5.43
5.52
Twelve months ended
December 31, 2022
Twelve months ended
December 31, 2021
Natural
gas sales
($000s)(1)
388,167
479,726
54,166
Natural gas
production
(Mcf/d)
189,311
160,837
25,167
(%)
42
52
6
(%)
50
43
7
922,059
100
375,315
100
Average
realized
sales price
($/Mcf)(1)(2)
5.66
8.17
5.90
6.73
Natural
gas sales
($000s)(1)
234,229
274,381
75,381
Natural gas
production
(Mcf/d)
163,418
158,712
51,087
(%)
40
47
13
(%)
44
43
13
583,991
100
373,217
100
Average
realized
sales price
($/Mcf)(1)(2)
3.92
4.74
4.04
4.29
Natural gas markets
AECO
Dawn
Alliance(3)
Total
Natural gas markets
AECO
Dawn
Alliance(3)
Total
(1) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.
(2) Supplementary financial measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
(3) Birchcliff has short-term physical sales agreements with third-party marketers to sell and deliver into the Alliance pipeline system. Alliance sales are recorded net of transportation tolls.
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. The Board has authorized the Corporation to execute a risk management
strategy whereby Birchcliff is authorized, subject to compliance with the agreement governing the Corporation’s Credit Facilities,
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, 2022, 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.
Birchcliff’s average notional quantity and contract price for its financial NYMEX HH/AECO 7A basis swap contracts outstanding at
December 31, 2022 are set forth below:
Product
Type of Contract
Average Notional Quantity
Period(1)
Average Contract Price
Natural gas
AECO 7A basis swap(2)
147,500 MMBtu/d
Jan. 1, 2023 – Dec. 31, 2023
NYMEX HH less US$1.227/MMBtu
Natural gas
AECO 7A basis swap(2)
147,500 MMBtu/d
Jan. 1, 2024 – Dec. 31, 2024
NYMEX HH less US$1.120/MMBtu
Natural gas
AECO 7A basis swap(2)
147,500 MMBtu/d
Jan. 1, 2025 – Dec. 31, 2025
NYMEX HH less US$1.088/MMBtu
Natural gas
AECO 7A basis swap(2)
10,000 MMBtu/d
Jan. 1, 2026 – Dec. 31, 2026
NYMEX HH less US$0.895/MMBtu
Natural gas
AECO 7A basis swap(2)
25,000 MMBtu/d
Jan. 1, 2027 – Dec. 31, 2027
NYMEX HH less US$0.788/MMBtu
(1) Transactions with common terms have been aggregated and presented at the weighted average price.
(2) Birchcliff sold AECO basis swap.
2022 ANNUAL REPORT 21
The following financial derivative contracts were entered into subsequent to December 31, 2022 to manage commodity price risk:
Product
Type of Contract
Average Notional Quantity
Period(1)
Average Contract Price
Natural gas
AECO 7A basis swap(2)
40,000
Jan. 1, 2026 – Dec. 31, 2026
NYMEX HH less US$0.989/MMBtu
(1) Transactions with common terms have been aggregated and presented at the weighted average price.
(2) Birchcliff sold AECO basis swap.
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, 2022, 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, 2023 – 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, 2022 to manage commodity price risk.
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, 2022, 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, 2023 – 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”).
There were no financial derivative contracts entered into subsequent to December 31, 2022 to manage interest rate risk.
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,
2022
2021
2022
2021
($000s)
($/boe)(1)
($000s)
($/boe)(1)
($000s)
($/boe)(1)
($000s)
($/boe)(1)
18,764
2.57
9,908
1.37
80,742
(61,013)
(8.31)
29
-
131,042
2.88
4.67
(21,451)
(0.75)
84,242
2.94
(1) Supplementary financial measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
Birchcliff’s realized gains and losses on financial instruments were primarily impacted by the settlement of the NYMEX HH/AECO 7A
basis swap contracts during the Reporting Periods and Comparable Prior Periods.
The Corporation records a realized gain on its NYMEX HH/AECO 7A basis swap contracts when the average realized settlement
price (the average spread between NYMEX HH and AECO 7A) of the contracted volume is higher than the average contract price in
the period. Conversely, the Corporation records a realized loss on its NYMEX HH/AECO 7A basis swap contracts when the average
realized settlement price of the contracted volume is lower than the average contract price in the period. The average contract volume
and price for Birchcliff’s NYMEX HH/AECO 7A basis swap contracts were 147,500 MMbtu/d and US$1.227/MMbtu, respectively,
during the Reporting Periods and Comparable Prior Periods. The average realized settlement price of the Corporation’s financial
NYMEX HH/AECO 7A basis swap contracts during the three and twelve month Reporting Periods was US$2.14/MMBtu and
US$2.36/MMBtu, respectively, as compared to US$1.90/MMBtu and US$1.04/MMBtu during the Comparable Prior Periods.
22
BIRCHCLIFF ENERGY
The unrealized loss on financial instruments of $61.0 million in the three month Reporting Period resulted from a decrease in the fair value
net asset position to $47.2 million at December 31, 2022 from the fair value net asset position of $108.2 million at September 30, 2022.
The decrease in the fair value of the Corporation’s financial instruments was primarily due to the decrease (or tightening) in the forward
basis spread between the Corporation’s financial NYMEX HH/AECO 7A basis swap contracts outstanding at December 31, 2022 as
compared to the fair value previously assessed at September 30, 2022. The unrealized gain on financial instruments of $131.0 million
in the twelve month Reporting Period resulted from the change to a fair value net asset position to $47.2 million at December 31, 2022
from a net liability position of $83.8 million at December 31, 2021 on the Corporation’s financial instruments. The change in the fair
value of the Corporation’s financial instruments in the twelve month Reporting Period was primarily due to: (i) the increase (or widening)
in the forward basis spread between the Corporation’s financial NYMEX HH/AECO 7A basis swap contracts outstanding at
December 31, 2022 as compared to the fair value previously assessed at December 31, 2021; and (ii) the settlement of the
Corporation’s financial NYMEX HH/AECO 7A basis swap contracts during the twelve month Reporting Period.
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 a period.
Royalties
The following table sets forth Birchcliff’s royalty expense for the periods indicated:
Royalty expense ($000s)(1)
Royalty expense per boe ($)(2)
Effective royalty rate (%)(2)(3)
(1) Royalties are paid primarily to the Government of Alberta.
(2) Supplementary financial measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
(3) The effective royalty rate is calculated by dividing the aggregate royalties into P&NG sales for the period.
Three months ended
December 31,
Twelve months ended
December 31,
2022
35,679
4.86
11%
2021
28,452
3.93
10%
2022
161,226
5.74
12%
2021
76,271
2.66
8%
Royalty expense per boe increased by 24% and 116% from the three and twelve month Comparable Prior Periods, respectively,
primarily due to a higher average realized sales price received for Birchcliff’s production in the Reporting Periods.
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(1)
Three months ended
December 31,
Twelve months ended
December 31,
2022
30,952
(1,169)
29,783
$4.06
2021
26,208
(893)
25,315
$3.50
2022
106,203
(4,622)
101,581
$3.62
2021
96,533
(5,018)
91,515
$3.19
(1) Supplementary financial measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
Operating expense per boe increased by 16% and 13% from the three and twelve month Comparable Prior Periods, respectively,
primarily due to: (i) inflationary pressures on power prices and fuel, chemicals and lubricant costs used in Birchcliff’s field operations,
which together increased by 61% and 42% on a per boe basis in the three and twelve month Reporting Periods, respectively; and
(ii) higher field labour costs. Operating expense per boe in the three month Reporting Period was also negatively impacted by higher
natural gas processing costs at the AltaGas Facility due to incremental production coming on-stream in the Reporting Period.
2022 ANNUAL REPORT 23
Transportation and Other
The following table sets forth Birchcliff’s transportation and other expense for the periods indicated:
Three months ended
December 31,
Twelve months ended
December 31,
($000s)
Natural gas transportation
Liquids transportation
Fractionation
Other fees
Transportation expense
Transportation expense per boe(1)
Marketing purchases(2)
Marketing revenue(2)
Marketing loss (gain)(3)
Marketing loss (gain) per boe(4)
Transportation and other expense(3)
Transportation and other expense per boe(4)
2022
28,277
8,118
2,298
100
38,793
$5.29
9,529
(8,916)
613
$0.08
39,406
$5.37
2021
28,288
7,194
1,942
30
2022
115,833
29,639
10,222
170
37,454
155,864
$5.55
17,866
2021
114,607
28,212
8,285
159
151,263
$5.28
18,034
(18,806)
(20,722)
(940)
($0.03)
154,924
$5.52
(2,688)
($0.10)
148,575
$5.18
$5.17
5,413
(6,169)
(756)
($0.11)
36,698
$5.06
(1) Supplementary financial measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
(2) Marketing purchases and marketing revenue primarily represent the volumes purchased and sold to third parties, which are recorded on a gross basis for financial statement presentation purposes.
Birchcliff enters into certain marketing purchase and sale arrangements to reduce its take-or-pay fractionation fees associated with third-party commitments. Any gains or losses from the purchase and sale
of third-party products primarily relate to the commodity price differential.
(3) Non-GAAP financial measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
(4) Non-GAAP ratio. See “Non-GAAP and Other Financial Measures” in this MD&A.
Transportation and other expense per boe increased by 6% and 7% from the three and twelve month Comparable Prior Periods,
respectively, primarily due to higher liquids-handling costs and third-party fractionation processing fees that resulted from
inflationary pressures, partially offset by lower liquids pipeline tariffs. Transportation and other expense per boe in the twelve month
Reporting Period was also negatively impacted by increased take-or-pay fractionation fees and higher NGTL tolling charges for
natural gas deliveries.
24
BIRCHCLIFF ENERGY
Operating Netback
The following table sets forth Birchcliff’s average production and operating netback for the Pouce Coupe assets, the Gordondale assets
and on a corporate basis for the periods indicated:
Three months ended
December 31,
Twelve months ended
December 31,
2022
2021
2022
2021
Pouce Coupe assets
Average production
Light oil (bbls/d)
Condensate (bbls/d)
NGLs (bbls/d)
Natural gas (Mcf/d)
Total (boe/d)
% of corporate production
Liquids-to-gas ratio (bbls/MMcf)
Netback and cost ($/boe)(1)
Petroleum and natural gas revenue(2)
Royalty expense
Operating expense
Transportation and other expense(3)
Operating netback(3)
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 ($/boe)(1)
Petroleum and natural gas revenue(2)
Royalty expense
Operating expense
Transportation and other expense(3)
Operating netback(3)
Corporate(4)
Average production
Light oil (bbls/d)
Condensate (bbls/d)
NGLs (bbls/d)
Natural gas (Mcf/d)
Total (boe/d)
Liquids-to-gas ratio (bbls/MMcf)
Netback and cost ($/boe)(1)
Petroleum and natural gas revenue(2)
Royalty expense
Operating expense
Transportation and other expense(3)
Operating netback(3)
23
3,236
1,669
281,836
51,901
65%
17.5
42.21
(4.42)
(3.38)
(5.32)
29.09
2,388
1,581
6,292
105,353
27,820
35%
97.4
46.28
(5.69)
(5.31)
(5.45)
29.83
2,413
4,822
7,963
387,604
79,799
39.2
43.64
(4.86)
(4.06)
(5.37)
29.35
21
3,574
1,511
268,607
49,875
63%
19.0
38.77
(3.21)
(2.81)
(5.24)
27.51
2,581
1,755
6,059
110,670
28,840
37%
93.9
42.17
(5.18)
(4.67)
(4.77)
27.55
2,604
5,330
7,570
379,275
78,716
40.9
40.02
(3.93)
(3.50)
(5.06)
27.53
20
3,130
1,774
277,764
51,217
67%
17.7
46.38
(4.65)
(2.89)
(5.48)
33.36
2,201
1,545
5,695
97,135
25,631
33%
97.2
50.43
(7.93)
(5.02)
(5.60)
31.88
2,223
4,679
7,471
375,315
76,925
38.3
47.73
(5.74)
(3.62)
(5.52)
32.85
21
3,984
1,750
265,620
50,025
64%
21.7
31.12
(2.12)
(2.47)
(5.43)
21.10
2,875
1,731
5,954
107,591
28,492
36%
98.2
35.01
(3.61)
(4.44)
(4.75)
22.21
2,899
5,715
7,705
373,217
78,520
43.7
32.53
(2.66)
(3.19)
(5.18)
21.50
(1) The component values of netback and cost set out in the table above are supplementary financial measures unless otherwise indicated. See “Non-GAAP and Other Financial Measures” in this MD&A.
(2) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.
(3) Non-GAAP ratio. See “Non-GAAP and Other Financial Measures” in this MD&A.
(4) Includes other minor oil and natural gas properties which were not individually significant during the respective periods.
2022 ANNUAL REPORT 25
Pouce Coupe Assets
Birchcliff’s production from the Pouce Coupe assets increased by 4% and 2% from the three and twelve month Comparable Prior
Periods, respectively. The increases in the Reporting Periods were primarily due to incremental production volumes from the new
natural gas wells brought on production in the Pouce Coupe area since the three and twelve month Comparable Prior Periods, partially
offset by natural production declines.
Birchcliff’s liquids-to-gas ratio for the Pouce Coupe assets decreased by 8% and 18% from the three and twelve month Comparable Prior
Periods, respectively. The decreases were primarily due to the Corporation specifically targeting natural gas wells with lower liquids
yields in the Pouce Coupe area in the Reporting Periods and natural production declines from liquids-rich natural gas wells producing in
Pouce Coupe since December 31, 2021.
Birchcliff’s operating netback for the Pouce Coupe assets increased by 6% and 58% from the three and twelve month Comparable
Prior Periods, respectively. The increases were primarily due to higher per boe petroleum and natural gas revenue, partially offset by
a higher per boe royalty expense, both of which were largely impacted by increases in the average realized sales price received for
Birchcliff’s Pouce Coupe production in the Reporting Periods. Birchcliff’s operating netback in Pouce Coupe was negatively impacted
by higher operating expense per boe as a result of inflationary pressures on power prices and fuel, chemicals and lubricants costs used
in Birchcliff’s field operations and higher field labour costs.
Gordondale Assets
Birchcliff’s production from the Gordondale assets decreased by 4% and 10% from the three and twelve month Comparable Prior
Periods, respectively. The decreases in the Reporting Periods were primarily due to: (i) natural production declines; (ii) a major
scheduled turnaround in the second quarter of 2022 at the AltaGas Facility that negatively impacted annual average production in
Gordondale by approximately 900 boe/d; and (iii) the timing of new wells brought on production in the Gordondale area as compared
to the Comparable Prior Periods, which resulted from scheduling differences in Birchcliff’s drilling and completions program year-over-
year. Production in Gordondale was positively impacted by incremental production volumes from its 9 light oil wells on its 06-35 pad
brought on production in the area in late September 2022.
Birchcliff’s liquids-to-gas ratio for the Gordondale assets increased by 4% from the three month Comparable Prior Period and
decreased by 1% from the twelve month Comparable Prior Period. The increase in the three month Reporting Period was primarily due
to incremental production volumes from the 06-35 pad brought on production in Gordondale in late September 2022. The decrease
in the twelve month Reporting Period was primarily due to natural production declines from light oil and liquids-rich natural gas wells
producing since December 31, 2021.
Birchcliff’s operating netback for the Gordondale assets increased by 8% and 44% from the three and twelve month Comparable Prior
Periods, respectively. The increases were primarily due to higher per boe petroleum and natural gas revenue, partially offset by a higher
per boe royalty expense, both of which were largely impacted by increases in the average realized sales price received for Birchcliff’s
Gordondale production in the Reporting Periods. Birchcliff’s operating netback in Gordondale was negatively impacted by higher per
boe operating expense and transportation and other expense. Operating expense per boe in Gordondale increased as a result of:
(i) inflationary pressures on power prices and fuel, chemicals and lubricants costs used in Birchcliff’s field operations and higher field
labour costs; and (ii) higher natural gas processing costs at the AltaGas Facility due to incremental production coming on-stream from
the 06-35 pad in the twelve month Reporting Period. Transportation and other expense per boe in Gordondale increased primarily as
a result of higher liquids-handling costs and third-party fractionation processing fees that resulted from inflationary pressures, partially
offset by lower liquids pipeline tariffs. Transportation and other expense per boe in the twelve month Reporting Period was also
negatively impacted by increased take-or-pay fractionation fees.
26
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(4)
Non-cash:
Other compensation
Capitalized compensation(3)
Other compensation, net
Other compensation, net per boe(4)
Administrative expense, net
Administrative expense, net per boe(4)
Three months ended
December 31,
Twelve months ended
December 31,
2022
2021
2022
($000s)
(%)
($000s)
(%)
($000s)
(%)
($000s)
18,377
4,967
23,344
(31)
(9,979)
13,334
$1.82
4,081
(1,920)
2,161
$0.29
15,495
$2.11
79
21
100
-
(43)
57
100
(47)
53
16,327
2,860
19,187
(37)
85
15
100
(1)
38,049
17,831
55,880
(139)
68
32
100
-
35,504
12,426
47,930
(144)
(8,667)
(44)
(19,967)
(36)
(19,540)
10,483
$1.45
1,625
(872)
753
$0.10
11,236
$1.55
55
100
(54)
46
35,774
$1.27
12,956
(6,500)
6,456
$0.23
42,230
$1.50
64
28,246
100
(50)
50
$0.99
5,605
(3,175)
2,430
$0.08
30,676
$1.07
2021
(%)
74
26
100
(1)
(40)
59
100
(57)
43
(1) Includes salaries, benefits and incentives paid to officers and employees of the Corporation and retainer fees, meeting fees and benefits paid to directors of the Corporation.
(2) Includes costs such as corporate travel, rent, legal fees, taxes, insurance, computer hardware and software and other business expenses incurred by the Corporation.
(3) Includes a portion of gross G&A expense and other compensation directly attributable to the exploration and development activities of the Corporation, which have been capitalized.
(4) Supplementary financial measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
Net administrative expense on an aggregate basis increased by 38% from both the three and twelve month Comparable Prior Periods,
primarily due to increases in net G&A expense and other compensation expense. Net G&A expense increased primarily due to higher
employee-related expenses, higher corporate costs due to the easing of Birchcliff’s COVID-19 restrictions and higher general business
costs due to inflationary pressures. Other compensation expense increased primarily due to a higher Black-Scholes fair value expense
associated with stock options granted by Birchcliff during the Reporting Periods.
Stock Options
The following table sets forth the Corporation’s outstanding stock options for the periods indicated:
Three months ended
December 31,
Twelve months ended
December 31,
2022
2021
2022
2021
Number Price ($)(1)
Number Price ($)(1)
Number Price ($)(1)
Number Price ($)(1)
Outstanding, beginning
Granted(2)
Exercised
Forfeited
Expired
15,114,414
5,683,900
4.00
9.34
19,005,656
5,436,100
3.17
6.54
23,116,919
5,995,300
3.96
9.34
26,134,201
5,689,100
(469,530)
(2.39)
(1,260,336)
(3.09)
(6,786,665)
(3.03)
(4,090,375)
(6,000)
(4.26)
(19,501)
(3.73)
(359,670)
(4.50)
(2,082,940)
-
-
(45,000)
(8.53)
(1,643,100)
(7.84)
(2,533,067)
Outstanding, ending
20,322,784
5.53
23,116,919
3.96
20,322,784
5.53
23,116,919
3.56
6.45
(3.09)
(7.53)
(3.90)
3.96
(1) Calculated on a weighted average basis.
(2) Each stock option granted entitles the holder to purchase one common share at the exercise price.
2022 ANNUAL REPORT 27
Performance Warrants
On January 18, 2005, Birchcliff issued 4,049,665 performance warrants as part of its initial restructuring to become a public entity.
Each performance warrant is exercisable at a price of $3.00 to purchase one common share of Birchcliff.
During the twelve month Reporting Period, there were 809,933 performance warrants exercised at a price of $3.00 per common
share. On May 26, 2022, there were 1,724,832 performance warrants purchased by the Corporation for a total cash cost of
$14.5 million. As at December 31, 2022, there remained 404,967 performance warrants (December 31, 2021 – 2,939,732)
outstanding with an expiry date of January 31, 2025.
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:
Depletion and depreciation expense ($000s)
Depletion and depreciation expense per boe ($)(1)
(1) Supplementary financial measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
Three months ended
December 31,
Twelve months ended
December 31,
2022
58,490
7.97
2021
53,916
7.44
2022
213,808
7.61
2021
212,757
7.42
D&D expense per boe increased by 7% and 3% from the three and twelve month Comparable Prior Periods, respectively. The increases
were primarily due to negative revisions to the Corporation’s proved and probable reserves and an increase in future development
costs required to recover the proved and probable reserves at December 31, 2022.
Included in the depletion assessment at December 31, 2022 was 986.4 MMboe (December 31, 2021 – 1,022 MMboe) of total
proved plus probable reserves and $4.5 billion (December 31, 2021 – $4.3 billion) of future development costs as estimated by the
Corporation’s independent third-party reserves evaluator. See “Advisories” in this MD&A.
Asset Impairment Assessment
In accordance with IFRS, an impairment test is performed if Birchcliff identifies indicators of impairment at the end of a reporting period.
At December 31, 2022 and 2021, Birchcliff determined there were no impairment indicators present and therefore an impairment test
was not required.
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)(2)
Non-cash:
Accretion(3)
Amortization of deferred financing fees
Other finance expenses
Other finance expenses per boe(2)
Finance expense
Finance expense per boe(2)
Three months ended
December 31,
Twelve months ended
December 31,
2022
2021
2022
2021
3,856
$0.53
1,016
426
1,442
$0.20
5,298
$0.73
5,183
$0.72
940
239
1,179
$0.16
6,362
$0.88
13,738
$0.49
4,050
1,451
5,501
$0.19
19,239
$0.68
28,797
$1.00
3,473
968
4,441
$0.15
33,238
$1.15
(1) Birchcliff’s interest expense consists of interest incurred on amounts drawn under the Corporation’s Credit Facilities and standby charges. Standby charges reflect fees paid by Birchcliff on the undrawn
portion of its Credit Facilities. For a description of the Credit Facilities, see “Capital Resources and Liquidity” in this MD&A.
(2) Supplementary financial measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
(3) Includes accretion on decommissioning obligations, post-employment benefit obligations and lease obligations.
28
BIRCHCLIFF ENERGY
Finance expense on an aggregate basis decreased by 17% and 42% from the three and twelve month Comparable Prior Periods,
respectively, primarily due to a decrease in interest expense.
Birchcliff’s aggregate interest expense decreased by 26% and 52% from the three and twelve month Comparable Prior Periods,
respectively, primarily due to a lower average outstanding Credit Facilities balance.
The average outstanding balance under the Syndicated Credit Facility (as defined herein) was approximately $171.0 million and
$285.1 million in the three and twelve month Reporting Periods, respectively, as compared to $694.1 million and $709.2 million in the
Comparable Prior Periods, calculated as the simple average of the month-end amounts.
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)(2)(3)
Three months ended
December 31,
Twelve months ended
December 31,
2022
6.8
5.9
2021
4.5
3.0
2022
5.1
3.6
2021
5.1
3.8
(1) The average effective interest rate under the Syndicated Credit Facility was determined primarily based on: (i) the market interest rate applicable to LIBOR and SOFR loans; and (ii) the stamping
pricing margin applicable to LIBOR and SOFR loans. Birchcliff’s stamping pricing margin 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) deferred income taxes, other
compensation, gains and losses on sale of assets and securities, unrealized gains and losses on financial instruments, depletion, depreciation and amortization and impairment charges. The effective
interest rate excludes the impact of standby charges.
(2) Effective May 3, 2022, the agreement governing the Credit Facilities was amended to, among other things, convert any outstanding LIBOR loans into SOFR loans. The SOFR rates increased during the
Reporting Periods primarily due to increases in the prime lending rates by the Bank of Canada.
(3) The Comparable Prior Periods have been restated to exclude standby charges. During the three and twelve month Reporting Periods, standby charges were $0.9 million and $3.0 million, respectively,
as compared to $0.5 million and $2.2 million in the Comparable Prior Periods.
Other Income
The following table sets forth the components of the Corporation’s other cash income sources for the periods indicated:
Three months ended
December 31,
Twelve months ended
December 31,
2022
2021
2022
2021
($000s)
($/boe)(1)
($000s)
($/boe)(1)
($000s)
($/boe)(1)
($000s)
($/boe)(1)
Other income
35
-
68
0.01
4
-
2,182
0.07
(1) Supplementary financial measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
Birchcliff’s other income in the twelve month Comparable Prior Period primarily included the sale of Emissions Performance Credits
(“EPCs”) for $1.7 million (net of purchases) for the 2019 and 2020 emissions reporting period under Alberta’s Technology Innovation
and Emissions Reduction (“TIER”) program. A facility regulated under TIER, such as the Pouce Coupe Gas Plant, must reduce emissions
beyond its established facility benchmarks in order to generate EPCs.
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,
2022
2021
2022
2021
($000s)
($/boe)(1)
($000s)
($/boe)(1)
($000s)
($/boe)(1)
($000s)
($/boe)(1)
Other gains (losses)
(2,080)
(0.03)
1,792
0.25
370
-
7,312
0.26
(1) Supplementary financial measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
On August 31, 2017, Birchcliff acquired securities consisting of 4,500,000 common A LP units (the “Common A Units”) in a limited
partnership and 10,000,000 preferred trust units (the “Preferred Trust Units”) in a Trust (collectively, the “Securities”) at a combined
investment value of $10.0 million. The Securities are not publicly listed and do not constitute significant investments. Birchcliff
recorded a gain on investment of $1.8 million during the twelve month Reporting Period, as compared to $6.4 million during the
Comparable Prior Period.
2022 ANNUAL REPORT 29
On September 20, 2022, Birchcliff provided notice to the Trust to tender the Securities for cash redemption. During the twelve month
Reporting Period, Birchcliff redeemed 566,109 Preferred Trust Units and 254,750 Common A Units for aggregate proceeds of
$0.6 million. As at December 31, 2022, Birchcliff held a total of 9,433,891 Preferred Trust Units and 4,245,250 Common A Units
which collectively had a fair value of $9.4 million (December 31, 2021 – $8.2 million).
During the Reporting Periods, Birchcliff recorded a loss of $2.3 million related to an initial investment in the development of certain
carbon capture technology. Birchcliff has withdrawn from the project and will incur no further material costs related to this investment.
Income Tax Expense
The following table sets forth the components of the Corporation’s income tax expense for the periods indicated:
($000s)
Deferred tax expense
Dividend tax expense on preferred shares
Deferred income tax expense
Deferred income tax expense per boe(1)
Three months ended
December 31,
Twelve months ended
December 31,
2022
22,460
-
22,460
$3.06
2021
31,117
687
31,804
$4.41
2022
198,421
2,065
200,486
$7.14
2021
91,503
2,762
94,265
$3.31
(1) Supplementary financial measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
Birchcliff’s deferred income tax expense on an aggregate basis in the three month Reporting Period decreased by 29% from the
Comparable Prior Period primarily due to: (i) lower before-tax net income; and (ii) the redemption of the Series A and Series C Preferred
Shares on September 30, 2022 which resulted in no dividend tax expense on preferred shares being incurred in the three month
Reporting Period. Deferred income tax expense on an aggregate basis in the twelve month Reporting Period increased by 113% from
the Comparable Prior Periods primarily due to higher before-tax net income.
The Corporation’s estimated income tax pools were $1.3 billion at December 31, 2022. 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:
As at December 31, ($000s)
Canadian oil and gas property expense
Canadian development expense
Canadian exploration expense(1)
Undepreciated capital costs
Non-capital losses(1)
Scientific research and experimental development expenditures(1)
Investment tax credits(2)
Financing costs and other
Estimated income tax pools
(1) Immediately available to reduce any taxable income in future periods.
(2) Immediately available to reduce any cash taxes owing in future periods.
2022
295,524
309,587
290,167
228,830
153,547
20,844
3,096
4,296
1,305,891
30
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 expenditures(1)
Acquisitions
Dispositions
FD&A capital expenditures(2)
Administrative assets
Total capital expenditures(2)
Three months ended
December 31,
Twelve months ended
December 31,
2022
807
416
5,250
70,909
29,380
106,762
-
-
106,762
709
107,471
2021
447
514
1,024
26,333
7,408
35,726
56
-
2022
2,854
879
13,482
248,433
98,973
364,621
2,348
(315)
2021
1,807
1,117
9,116
171,435
47,004
230,479
283
-
35,782
366,654
230,762
293
1,576
1,718
36,075
368,230
232,480
(1) See “Advisories” in this MD&A.
(2) Non-GAAP financial measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
During the three month Reporting Period, Birchcliff had F&D capital expenditures of $106.8 million, which primarily included
$66.5 million (62%) for the drilling and completions of new wells in Pouce Coupe and $29.4 million (28%) on large gas gathering
and pipeline infrastructure projects in Pouce Coupe and Gordondale. During the three month Reporting Period, Birchcliff drilled
14 (14.0 net) wells and brought 4 (4.0 net) wells on production.
During the twelve month Reporting Period, Birchcliff had F&D capital expenditures of $364.6 million, which primarily included
$208.4 million (57%) for the drilling and completions of new wells in Pouce Coupe, $39.9 million (11%) for the drilling and completions
of new wells in Gordondale and $99.0 million (27%) on plant turnarounds and large gas gathering and pipeline infrastructure projects
in Pouce Coupe and Gordondale. During the twelve month Reporting Period, Birchcliff drilled 44 (44.0 net) wells and brought
39 (39.0 net) wells on production.
The remaining capital during the Reporting Periods was primarily spent on land, seismic, workovers, well equipment and facilities,
including minor gas gathering and optimization projects in the Montney/Doig Resource Play.
2022 ANNUAL REPORT 31
CAPITAL RESOURCES AND LIQUIDITY
Working Capital
The Corporation’s adjusted working capital deficit(6) was $6.6 million at December 31, 2022 as compared to an adjusted working
capital surplus(6) of $1.5 million at December 31, 2021. Adjusted working capital consists of items from normal day-to-day operations
which includes cash, trade receivables and payables, accruals, prepaid expenses and deposits and excludes the current portion of the
fair value of financial instruments, other liabilities and capital securities (if any). The change to an adjusted working capital deficit position
at December 31, 2022 was attributed to an increase in the Corporation’s accounts payable and accrued liabilities balance, which was
largely comprised of costs incurred on the drilling and completions of new wells and large gas gathering and pipeline infrastructure
projects in Pouce Coupe during the three month Reporting Period, partially offset by an increase in the accounts receivable balance
associated with higher revenue from December 2022 production.
At December 31, 2022, the major component of Birchcliff’s current assets was cash to be received from its commodity marketers in
respect of December 2022 production (94%), which was subsequently received in January 2023. 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, 2022 primarily consisted of trade payables and accrued capital and operating expenses.
The Corporation’s adjusted working capital varies from quarter to quarter primarily due to the timing and size of items included from its
normal operations and total capital expenditures, as well as volatility in commodity prices and changes in revenue, among other things.
Birchcliff manages its adjusted working capital using adjusted funds flow and advances under its Credit Facilities. The adjusted working
capital position does not impact the borrowing base available under Birchcliff’s Credit Facilities.
Debt
At December 31, 2022, the Corporation’s Credit Facilities were comprised of an extendible revolving syndicated term credit facility
(the “Syndicated Credit Facility”) of $750.0 million and an extendible revolving working capital facility (the “Working Capital
Facility”) of $100.0 million. 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. The agreement governing the Credit Facilities also contains provisions that
give the lenders the right to redetermine the borrowing base in certain circumstances. Effective May 3, 2022, the agreement governing
the Credit Facilities was amended to extend the maturity dates of each of the Syndicated Credit Facility and Working Capital Facility
from May 11, 2024 to May 11, 2025. In addition, the lenders confirmed the aggregate borrowing base limit under the Corporation’s
Credit Facilities at $850.0 million. The Credit Facilities do not contain any financial maintenance covenants.
Total debt at December 31, 2022 was $138.5 million, a decrease of 72% from $499.4 million at December 31, 2021. Total debt
decreased primarily due to the significant free funds flow generated in the Reporting Periods, which was primarily allocated to debt
reduction. During the twelve month Reporting Period, Birchcliff generated $953.7 million in adjusted funds flow and incurred
$364.6 million in F&D capital expenditures, resulting in free funds flow of $589.1 million. Total debt in the twelve month Reporting
Period was also reduced by proceeds in the amount of $23.0 million received from the exercise of stock options and performance
warrants and increased by the cost to repurchase common shares under Birchcliff’s normal course issuer bid of $57.2 million, the
redemption of the Series A and Series C Preferred Shares of $88.3 million, the purchase of performance warrants of $14.5 million
and the payment of dividends of $77.0 million. See “Discussion of Operations”, “Share Information” and “Dividends” in this MD&A for
details on the Corporation’s stock option and performance warrant exercises, the repurchases of common shares, the redemption of
the Series A and Series C Preferred Shares, performance warrant purchases and dividend distributions.
(6) Capital management measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
32
BIRCHCLIFF ENERGY
The following table sets forth the Corporation’s unused Credit Facilities for the periods indicated:
As at December 31, ($000s)
Maximum borrowing base limit:
Revolving term credit facilities
Principal amount utilized:
Revolving term credit facilities
Unamortized deferred financing fees
Outstanding letters of credit(1)
Unused credit
% unused credit
2022
2021
850,000
850,000
(131,981)
(3,541)
(185)
(135,707)
714,293
84%
(500,870)
(3,718)
(4,185)
(508,773)
341,227
40%
(1) Letters of credit are issued to various service providers. The letters of credit reduce the amount available under the Corporation’s Working Capital Facility.
Liquidity and Capital Resources
The following table sets forth a summary of the Corporation’s capital resources for the periods indicated:
($000s)
Cash flow from operating activities
Issuance of common shares
Repurchase of common shares(1)
Redemption of capital securities(2)
Redemption of perpetual preferred shares(3)
Purchase of performance warrants
Financing fees paid
Lease payments
Dividend distributions
Net change in revolving term credit facilities
Investments
Changes in non-cash working capital from investing
Capital resources(4)
Three months ended
December 31,
Twelve months ended
December 31,
2022
224,447
1,122
(2,793)
-
-
-
-
2021
196,142
3,892
(14,139)
(60)
-
-
-
(615)
(614)
2022
925,275
23,005
(57,207)
(38,268)
(50,000)
(14,506)
(1,275)
(2,458)
2021
515,369
12,641
(31,506)
(1,662)
-
-
(3,454)
(2,444)
(58,503)
(4,363)
(76,950)
(13,544)
(65,433)
(147,695)
(369,066)
(228,015)
(328)
9,604
107,501
(1,097)
4,009
36,075
(1,956)
31,647
368,241
(1,252)
(13,650)
232,483
(1) Represents common shares that have been purchased and cancelled pursuant to the Corporation’s normal course issuer bid. See “Share Information” in this MD&A.
(2) Represents the Series C Preferred Shares that were redeemed by the Corporation during the Reporting Periods. See “Share Information” in this MD&A.
(3) Represents the Series A Preferred Shares that were redeemed by the Corporation on September 30, 2022. See “Share Information” in this MD&A.
(4) Non-GAAP financial measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
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 its adjusted funds flow and available Credit Facilities.
The Corporation believes that its anticipated adjusted funds flow and available Credit Facilities in 2023 will be sufficient to fund
its working capital requirements, its capital program and future dividend payments in 2023. For further information, see
“2023 Guidance”, “Dividends” and “Advisories” in this MD&A.
At December 31, 2022, Birchcliff had a balance outstanding under its Credit Facilities of $132.0 million as compared to $500.9 million
at December 31, 2021 from available Credit Facilities of $850.0 million, leaving the Corporation with $714.3 million of unutilized
credit capacity after adjusting for outstanding letters of credit and unamortized deferred financing fees. This unutilized credit capacity
provides Birchcliff with significant financial flexibility and additional capital resources to fund its capital expenditure programs and
dividend payments if required.
2022 ANNUAL REPORT 33
OFF-BALANCE SHEET TRANSACTIONS
The Corporation has certain arrangements that are excluded from its financial statements, all of which are reflected in the contractual
obligations and commitments table below, which were entered into in the normal course of operations.
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, 2022:
($000s)
Accounts payable and accrued liabilities
Drawn revolving term credit facilities
Firm transportation and fractionation(1)
Natural gas processing(2)
Operating commitments(3)
Capital commitments(4)
Lease payments
2023
143,787
-
155,901
19,327
2,078
1,448
3,174
2024
2025-2027
Thereafter
-
-
151,929
19,380
2,078
-
3,174
-
135,522
336,324
55,625
6,234
-
8,456
542,161
-
-
85,754
85,869
173
-
484
172,280
Estimated contractual obligations(5)
325,715
176,561
(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) Includes drilling commitments.
(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, 2022 to be approximately $281.0 million and are estimated to be incurred as follows: 2023 – $3.5 million, 2024 – $3.5 million and $274.0 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.
SHARE INFORMATION
At March 15, 2023, Birchcliff had common shares outstanding. Birchcliff’s common shares are listed on the TSX under the symbol “BIR”.
The following table sets forth the common shares issued by the Corporation for the periods indicated:
Balance at December 31, 2021
Issuance of common shares(1)
Repurchase of common shares(2)
Balance at December 31, 2022
Exercise of stock options
Balance at March 14, 2023
Common Shares
264,790,404
7,596,598
(6,340,192)
266,046,810
882,018
266,928,828
(1) Relates to the exercise of stock options and performance warrants.
(2) Represents common shares that have been purchased and cancelled pursuant to the Corporation’s normal course issuer bid.
At March 14, 2023, the Corporation had the following securities outstanding: 266,928,828 common shares; 19,463,466 stock options
to purchase an equivalent number of common shares; and 404,967 performance warrants to purchase an equivalent number of
common shares.
34
BIRCHCLIFF ENERGY
Normal Course Issuer Bid
On November 17, 2022, Birchcliff announced that the TSX had accepted the Corporation’s notice of intention to make a normal course
issuer bid (the “2023 NCIB”). Pursuant to the 2023 NCIB, Birchcliff may purchase up to 13,295,786 of its outstanding common shares
over a period of twelve months commencing on November 25, 2022 and terminating no later than November 24, 2023. Under the
2023 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. The total number of common shares that Birchcliff is permitted to purchase
on the TSX during a trading day is subject to a daily purchase limit of 455,368 common shares. However, Birchcliff may make one block
purchase per calendar week which exceeds the daily purchase restriction. All common shares purchased under the 2023 NCIB will be
cancelled. The 2023 NCIB renewed the Corporation’s previous normal course issuer bid under which the Corporation was permitted
to purchase 13,267,554 common shares over the period from November 25, 2021 to November 24, 2022 (the “2022 NCIB”). During
the twelve month Reporting Period, Birchcliff purchased and cancelled 6,340,192 common shares pursuant to the 2022 NCIB and
2023 NCIB at an average price of $9.01 for an aggregate cost of $57.1 million (before fees). Birchcliff did not purchase any common
shares pursuant to the 2023 NCIB from January 1, 2023 to March 14, 2023.
A security holder of the Corporation may obtain, for no charge, a copy of the notice in respect of the 2023 NCIB filed with the TSX by
contacting the Corporation at 403-261-6401.
Series A Preferred Shares
On September 30, 2022, Birchcliff redeemed 2,000,000 issued and outstanding Series A Preferred Shares for a redemption price
equal to $25.00 per share for a total redemption amount of $50.0 million. In addition, a final quarterly cash dividend of $0.527677 per
Series A Preferred Share was paid on October 3, 2022 to the holders of record at the close of business on September 15, 2022. The
aggregate redemption amount of the Series A Preferred Shares, including all accrued and unpaid dividends, totalled approximately
$51.1 million.
Series C Preferred Shares
On September 30, 2022, Birchcliff redeemed 1,528,219 issued and outstanding Series C Preferred Shares for a redemption price
equal to $25.00 per share for a total redemption amount of $38.2 million. In addition, a final quarterly cash dividend of $0.441096 per
Series C Preferred Share was paid on October 3, 2022 to the holders of record at the close of business on September 15, 2022. The
aggregate redemption amount of the Series C Preferred Shares, including all accrued and unpaid dividends, totalled approximately
$38.9 million.
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,
2022
2021
2022
2021
58,503
0.2200
-
-
-
-
2,646
0.0100
1,047
0.5234
670
0.4375
71,788
0.2700
3,149
1.5744
2,013
1.3161
6,639
0.0250
4,187
2.0935
2,718
1.7500
During the twelve month Reporting Period, the Corporation paid a: (i) quarterly base dividend of $0.01 per common share for the
quarter ended March 31, 2022; (ii) quarterly base dividend of $0.02 per common share for the quarters ended June 30, 2022,
September 30, 2022 and December 31, 2022; and (iii) special dividend of $0.20 per common share on October 28, 2022.
On January 18, 2023, the Board declared a quarterly cash dividend of $0.20 per common share for the quarter ending March 31, 2023.
The dividend will be payable on March 31, 2023 to shareholders of record at the close of business on March 15, 2023.
All dividends have been designated as “eligible dividends” for the purposes of the Income Tax Act (Canada).
2022 ANNUAL REPORT 35
SUMMARY OF QUARTERLY RESULTS
The following table sets forth a summary of the Corporation’s quarterly results for the eight most recently completed quarters:
Quarter ending,
Average light oil production (bbls/d)
Average condensate production (bbls/d)
Average NGLs production (bbls/d)
Dec. 31,
2022
Sep. 30,
2022
Jun. 30,
2022
Mar. 31,
2022
Dec. 31,
2021
Sep. 30,
2021
Jun. 30,
2021
Mar. 31,
2021
2,413
4,822
7,963
2,254
4,601
7,593
1,855
4,500
6,349
2,369
4,796
7,976
2,604
5,330
7,570
2,878
5,990
6,889
2,766
6,070
7,647
3,355
5,467
8,734
Average natural gas production (Mcf/d)
387,604
381,788
366,256
365,296
379,275
415,005
352,694
345,057
Average production (boe/d)
79,799
78,079
73,746
76,024
78,716
84,924
75,265
75,065
Average realized light oil sales price ($/bbl)(1)(2)
Average realized condensate sales price ($/bbl)(1)(2)
Average realized NGLs sales price ($/bbl)(1)(2)
Average realized natural gas sales price ($/Mcf)(1)(2)
Average realized sales price ($/boe)(1)(2)
115.24
114.32
35.80
6.11
43.63
115.94
115.84
38.18
6.83
47.26
135.91
138.28
48.26
8.61
58.75
115.47
121.56
43.56
5.40
41.79
92.79
98.66
38.24
5.52
40.02
83.52
88.04
35.13
4.46
33.70
76.50
81.90
25.27
3.48
28.27
67.02
74.22
24.69
3.52
27.47
P&NG revenue ($000s)(1)
Operating expense ($/boe)(2)
F&D capital expenditures ($000s)(3)
Total capital expenditures ($000s)(4)
320,358
339,531
394,315
285,976
289,806
263,348
193,643
185,609
4.06
3.50
3.40
3.49
3.50
2.96
3.14
3.18
106,762
85,330
84,247
88,282
35,726
18,026
80,887
95,840
107,471
86,485
86,150
88,124
36,075
18,622
81,160
96,625
Cash flow from operating activities ($000s)
224,447
272,965
273,711
154,152
196,142
155,606
81,013
82,608
Adjusted funds flow ($000s)(4)
217,099
267,350
285,535
183,699
193,649
168,076
90,188
87,820
Per basic common share ($)(5)
Per diluted common share ($)(5)
Free funds flow ($000s)(4)
Net income ($000s)
0.82
0.79
1.01
0.97
1.08
1.03
0.69
0.67
0.73
0.70
0.63
0.61
0.34
0.33
0.33
0.33
110,337
182,020
201,288
95,417
157,923
150,050
9,301
(8,020)
69,453
245,637
214,902
126,839
107,149
139,413
44,901
Net income to common shareholders ($000s)
69,453
244,582
213,855
125,792
106,102
138,367
43,854
Per basic common share ($)
Per diluted common share ($)
Total assets ($ millions)
0.26
0.25
3,169
0.92
0.89
3,188
0.81
0.77
0.47
0.46
0.40
0.38
0.52
0.50
0.16
0.16
3,066
3,006
2,960
2,993
2,996
23,213
22,166
0.08
0.08
2,941
Revolving term credit facilities ($000s)
131,981
196,989
276,030
397,752
500,870
648,327
720,920
701,735
Total debt ($000s)(6)
138,549
186,064
266,894 408,998
499,397
637,905
770,897
777,385
Dividends on common shares ($000s)
58,503
Dividends on Series A Preferred Shares ($000s)
Dividends on Series C Preferred Shares ($000s)
Series A Preferred Shares outstanding (000s)
Series C Preferred Shares outstanding (000s)
End of period common shares outstanding (000s)
-
-
-
-
5,317
1,055
675
-
-
5,310
1,047
668
2,000
1,528
2,658
1,047
670
2,000
1,529
2,646
1,047
670
2,000
1,531
1,330
1,046
671
2,000
1,533
1,333
1,047
678
2,000
1,533
1,330
1,047
699
2,000
1,550
Basic
Diluted
266,047
265,877
265,204
266,810
264,790
265,573
266,953
266,045
286,775
281,397
281,940
287,829
290,847
287,518
289,806
292,757
Weighted average common shares outstanding (000s)
Basic
Diluted
265,922
265,298
265,440
265,530
265,197
266,547
266,231
265,989
275,567
274,223
276,015
275,980
276,600
276,282
270,155
266,370
(1) Excludes the effects of financial instruments but includes the effects of physical delivery contracts.
(2) Supplementary financial measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
(3) See “Advisories” in this MD&A.
(4) Non-GAAP financial measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
(5) Non-GAAP ratio. See “Non-GAAP and Other Financial Measures” in this MD&A.
(6) Capital management measure. See “Non-GAAP and Other Financial Measures” in this MD&A.
36
BIRCHCLIFF ENERGY
Quarterly average daily production volumes were primarily impacted by Birchcliff’s successful drilling of liquids-rich natural gas and
light oil horizontal wells in Pouce Coupe and Gordondale and the timing thereof, as well as natural production declines during those
periods. Light oil and condensate production has generally trended lower over the last eight quarters primarily due to the Corporation
specifically targeting natural gas wells in liquids-rich zones in the Pouce Coupe and Gordondale areas. Light oil production during the
second quarter of 2022 was significantly lower compared to the other disclosed quarters due to a major scheduled turnaround in the
second quarter of 2022 at the AltaGas Facility.
P&NG revenue and adjusted funds flow in the last eight quarters were largely impacted by the average realized sales price received for
Birchcliff’s production. Birchcliff’s average realized sales price has benefited from increases in benchmark oil and natural gas prices since
the first quarter of 2021. Over the last eight quarters, Birchcliff’s adjusted funds flow was primarily impacted by increasing P&NG revenue,
realized gains and losses on the settlement of financial instruments due to market diversification initiatives and higher trending royalties.
Birchcliff’s net income in each of the last eight quarters was largely impacted by adjusted funds flow, unrealized mark-to-market gains
and losses on financial instruments which resulted from changes in the fair value of the Corporation’s NYMEX HH/AECO 7A basis swap
contracts and certain other adjustments, including depletion and depreciation expense and deferred income tax expense and recoveries.
The Corporation’s F&D capital expenditures fluctuate quarter to quarter based on the Corporation’s outlook for commodity prices and
market conditions, the level of drilling and completions operations and other capital projects and the timing thereof.
Quarterly fluctuations in the revolving term credit facilities and total debt are primarily driven by available free funds flow, which is
impacted by changes in adjusted funds flow and the amount and timing of F&D capital expenditures. The revolving term credit facilities
in the last seven quarters has trended lower due to significant free funds flow generation, which was primarily allocated towards debt
reduction in line with management’s commitment to significantly reduce indebtedness.
The Corporation pays dividends on its common shares when declared and approved by the Board. The dividend payments on the
Corporation’s common shares have increased substantially since the three month Comparable Prior Period as a result of the increased
quarterly base dividend that was paid for the quarters ended June 30, 2022, September 30, 2022 and December 31, 2022 and the
special dividend of $0.20 per common share that was paid on October 28, 2022. See “Dividends” in this MD&A.
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 by National Instrument 52-109 –
Certification of Disclosure in Issuers’ 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, 2022 and have concluded that the Corporation’s DC&P
were effective at December 31, 2022.
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.
2022 ANNUAL REPORT 37
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, 2022 and
have concluded that the Corporation’s ICFR was effective at December 31, 2022. There were no changes in the Corporation’s ICFR
that occurred during the period beginning on October 1, 2022 and ended on December 31, 2022 that have materially affected,
or are reasonably likely to materially affect, the Corporation’s ICFR.
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 objective 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.
Benchmark oil and natural gas prices remained volatile during 2022 primarily due to supply and demand uncertainty attributed to
regional impacts of ongoing restrictions and lockdowns in China resulting from the COVID-19 pandemic, the potential for a global
economic slowdown attributed to rising inflation and interest rates, global tensions arising from the Russian invasion of Ukraine and
global commodity supply constraints and labour shortages, which have increased inflationary pressures on global economies. These
events and economic conditions remain evolving situations that have 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 these events and conditions, or the extent to which they will impact
the Corporation’s go-forward financial position, profit or loss and cash flows. The potential direct and indirect impacts of these events
and economic conditions have been considered in management’s estimates and assumptions at December 31, 2022 and have been
reflected in the Corporation’s results.
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 cash-generating units (“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 the estimate
of 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.
38
BIRCHCLIFF ENERGY
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 Obligations
IFRS requires Birchcliff to make certain judgments in reviewing each of its contractual arrangements to determine whether the
arrangement contains a lease. Leases that are recognized are subject to further management judgment and estimation in various areas
specific to the arrangement. In determining the lease term to be recognized, management considers all facts and circumstances that
create an economic incentive to exercise an extension option, or not to exercise a termination option.
Key and Other 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 require estimation and
are subject to assumptions regarding forecasted production, forecasted oil and gas commodity prices, forecasted operating costs,
forecasted royalty costs and forecasted future development costs. They also require 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. The Corporation uses estimated proved and probable oil and gas reserves to deplete petroleum and natural gas properties
and equipment, to assess for indicators of impairment on the Corporation’s CGU and, if any indicators exist, to perform an impairment
test to estimate the recoverable amount of a CGU. The Corporation engages an independent third-party reserves evaluator to evaluate
its proved and probable oil and gas reserves. 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 an independent third-party reserves
evaluator 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.
2022 ANNUAL REPORT 39
Post-Employment Benefit Obligations
The Corporation estimates the post-employment benefit obligations at the end of each reporting period. In most instances,
the obligations occur many years into the future. The Corporation uses estimates related to the initial measurement of the obligations
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 obligations recorded by
the Corporation to change.
Lease Obligations
Lease obligations are estimated using the rate implicit in the lease unless this rate is not readily determinable, in which case a
discount rate equal to the Corporation’s incremental borrowing rate is used. This rate represents the rate that the Corporation
would incur to obtain the funds necessary to purchase an asset of a similar value, with similar payment terms and security in a
similar economic environment.
Impairment of Non-Financial Assets
For the purposes of determining the extent of any impairment or its reversal, if any, 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, if any, 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.
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 common shares.
Commodity Prices
The prices of oil, natural gas and NGLs are volatile, outside of the Corporation’s control and affect the Corporation’s financial
condition, financial performance, cash flow and future rate of growth
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BIRCHCLIFF ENERGY
The Corporation’s revenue, profitability, cash flow and future rate of growth are highly dependent on commodity prices. Commodity
prices may fluctuate widely in response to relatively minor changes in the supply of, and demand for, oil, natural gas and NGLs, 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:
• domestic and global supply of, and demand for, oil, natural gas and NGLs;
• market expectations with respect to the future supply of, demand for and price of, oil, natural gas and NGLs;
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concerns regarding COVID-19 and its impact on the supply of, and demand for, oil, natural gas and NGLs;
• global oil, NGLs and natural gas inventory levels;
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volatility and trading patterns in the commodity-futures markets;
the proximity, capacity, cost and availability of pipelines and other transportation facilities;
the capacity of refiners to utilize available supplies of oil and NGLs;
• weather conditions affecting supply and demand;
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overall domestic and global economic conditions;
• political conditions, instability and hostilities, including conflicts in the Middle East, Eastern Europe and elsewhere;
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sanctions imposed on certain oil producing nations (such as Russia) by other countries;
the actions of OPEC, its members and other state-controlled oil companies relating to oil price and production controls;
currency fluctuations;
the price and quantity of oil, NGLs and LNG imports to, and exports from, the US and other countries;
the development of new hydrocarbon exploration, production and transportation methods or technological advancements in
existing methods;
capital investments by oil and natural gas companies relating to the exploration, development and production of hydrocarbons;
social attitudes or policies affecting energy consumption and energy supply;
• domestic and foreign governmental regulations, including environmental regulations, climate change regulations and taxation;
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shareholder activism or activities by non-governmental organizations to limit sources of capital for the energy sector or restrict the
exploration, development and production of oil, NGLs and natural gas;
the effects of energy conservation efforts and GHG reduction measures; and
the price, availability and acceptance of alternative energies, including renewable energy.
Crude 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 due to the current state of the world economies, shale oil production in the United States, OPEC actions,
political uncertainties, sanctions imposed on certain oil producing nations by other countries, conflicts in the Middle East, the war
in Ukraine and ongoing credit and liquidity concerns. Prices for crude oil and natural gas are also subject to the availability of foreign
markets and the ability to access such markets.
Any substantial and prolonged decline in the price of oil and natural gas would have an adverse effect on the carrying value of the
Corporation’s assets, borrowing capacity, revenue, profitability and cash flow from operating activities 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 price of the common shares.
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, natural gas or
NGLs. The Corporation might also elect not to produce from certain wells at lower prices. In addition, any prolonged period of low
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 of such
properties. Price volatility also makes it difficult to budget for and project the return on potential acquisitions or development and
exploitation projects.
2022 ANNUAL REPORT 41
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, 2022 are estimated using forecast prices and costs. If oil and natural gas
prices 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 this MD&A.
In addition, lower commodity prices restrict the Corporation’s cash flow resulting in less funds 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.
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, the Corporation’s existing
reserves and the production therefrom, will decline over time as the Corporation produces from such reserves. 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. 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. Adverse 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.
The Corporation utilizes multi-well pad drilling where practicable. Wells drilled on a pad are typically not placed on production until all
wells on the pad are drilled and completed. In addition, problems affecting a single well could adversely affect production from all of
the wells on the pad. As a result, multi-well pad drilling can cause delays in the scheduled commencement of production or interruption
in ongoing production. These delays or interruptions may cause volatility in the Corporation’s operating results.
The Corporation’s business is subject to all the risks and hazards typically associated with oil and natural gas exploration, development
and production 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.
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BIRCHCLIFF ENERGY
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” in this MD&A.
Restrictions on the availability and cost of materials and equipment may impede the Corporation’s exploration, development and
operating activities as such activities are dependent on the availability and cost of specialized materials and equipment (typically
sourced from third parties) in the areas where such activities are conducted. The availability of such material and equipment is limited.
An increase in demand or cost, or a decrease in the availability of such materials and equipment may impede the Corporation’s
exploration, development and operating activities. See “Risk Factors – Availability and Cost of Equipment, Materials and
Services and Inflation” in this MD&A.
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, natural gas and NGLs depends upon numerous factors beyond the Corporation’s
control, including:
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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, flooding and extreme temperatures;
the availability of drilling and related equipment;
unexpected cost increases;
accidental events;
currency fluctuations;
regulatory changes;
the availability and productivity of skilled labour;
environmental and Indigenous activism or land claims that result in delays or cancellations of projects;
litigation and judicial interpretation and application of laws, including with respect to Indigenous rights and historical treaties; and
the regulation of the oil and natural gas industry by various levels of government and governmental agencies.
If cash flow from operating activities and funds from external financing sources are not sufficient to cover the Corporation’s capital
expenditure requirements, the Corporation may be required to reallocate available capital among its projects or modify its capital
expenditure plans, which may result in delays in, or cancellation of, certain projects or the deferral of certain capital expenditures. Any
change to the Corporation’s capital expenditure plans could, in turn, have a material adverse effect on the Corporation’s business,
financial position, results of operations and plans.
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, natural gas and NGLs that it produces.
2022 ANNUAL REPORT 43
Market Price of the Common Shares
The market price of the common shares 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 common shares may be volatile, which may affect the ability of holders to sell such shares at an advantageous
price. The market prices 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. The volatility, trading volume and
market prices 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 prices of those securities.
Similarly, the market price of the common shares could be subject to significant fluctuations in response to variations in the
Corporation’s operating results, financial condition, liquidity, debt levels and other internal factors. In addition, market price fluctuations
in the common shares 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” in this
MD&A. Accordingly, the prices at which the common shares will trade cannot be accurately predicted.
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 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; current and future levels of cash flow; production levels; results of operations; capital expenditure, working
capital, debt service and liquidity requirements; operating costs; royalty burdens; foreign exchange and interest rates; tax laws; the
Corporation’s risk management activities or programs; available investment opportunities; the Corporation’s business plan, strategies
and objectives; legal, regulatory and contractual restrictions; the satisfaction of the solvency and liquidity tests imposed by the
Business Corporations Act (Alberta) (the “ABCA”) for the declaration and payment of dividends; and other factors that the Board 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.
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 all classes. 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 operating activities. 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. 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
operating activities, 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
operating activities 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.
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BIRCHCLIFF ENERGY
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 Board may amend, revoke or suspend the Corporation’s dividend policy at any time. A decline in the market price, liquidity or
both, of the common shares may result if the Corporation reduces or eliminates the payment of dividends, which may result in losses
to shareholders. 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.
Availability and Cost of Equipment, Materials and Services and Inflation
Restrictions on the availability and cost of equipment, materials and services may impede the Corporation’s exploration,
development and operating activities and the Corporation’s operations may be negatively impacted by inflationary pressures
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) in the areas where such activities will be conducted. The availability
of such equipment and materials is limited.
The cost or availability of oil and gas field equipment may adversely affect the Corporation’s ability to undertake exploration,
development and construction projects. The oil and gas industry is cyclical in nature and is prone to shortages of supply of equipment
and services, including drilling rigs, geological and geophysical services, engineering and construction services, major equipment
items for infrastructure projects and construction materials generally. These materials and services may not be available when required
at reasonable prices. A failure to secure the services and equipment necessary to the Corporation’s operations for the expected price,
on the expected timeline, or at all, may have an adverse effect on the Corporation’s financial performance and cash flow.
The Corporation’s operating costs could escalate and become uncompetitive due to supply chain disruptions, inflationary cost
pressures, equipment limitations, escalating supply costs, commodity prices and additional government intervention through stimulus
spending or additional regulations, which may reduce the Corporation’s revenue. The Corporation’s inability to manage costs may
impact project returns and future development decisions, which could have a material adverse effect on its financial performance and
cash flow.
Infectious Disease Risks (Including COVID-19)
Infectious diseases (including COVID-19) may cause disruptions in economic activity in Canada and internationally and impact the
demand for oil and natural gas
Pandemics, epidemics or outbreaks of an infectious disease in Canada or worldwide could have an adverse impact on the
Corporation’s business, including changes to the way the Corporation and its counterparties operate, and on the Corporation’s
financial results and condition. The spread of the COVID-19 pandemic continues to pose risks to the global economy and the oil and
natural gas industry more broadly.
While the duration and full impact of the COVID-19 pandemic are not yet known, effects of COVID-19 may include disruptions to
production operations, reduced access to materials and services, increased employee absenteeism from illness and temporary
closures of the Corporation’s facilities. The prolonged effects of any disruption may have adverse impacts on the Corporation’s
business strategies and initiatives, resulting in ongoing effects to its financial results, including the increase of counterparty, market
and operational risks. If the COVID-19 pandemic is further prolonged, including the possibility of additional subsequent waves and
the introduction of new variants, or further diseases emerge that give rise to similar effects, the adverse impact on the economy
could deepen and result in further volatility and declines in commodity and financial markets. Moreover, it remains uncertain how the
macroeconomic environment will be impacted following the COVID-19 pandemic. Unexpected developments in commodity and
financial markets, regulatory environments, industrial activity or consumer behavior and confidence may also have adverse impacts on
the Corporation’s business and financial condition, potentially for a substantial period of time.
2022 ANNUAL REPORT 45
Gathering and Processing Facilities, Pipeline Systems, Trucking 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, by truck and, in certain
circumstances, by rail. The amount of oil, natural gas and NGLs that the Corporation can produce and sell is subject to the accessibility,
availability, proximity and capacity of these gathering and processing facilities, pipeline systems, trucks and railway lines. The lack of
firm pipeline capacity, production limits and limits on availability of capacity in gathering and processing facilities, pipeline systems and
railway lines continues to affect the oil and natural gas industry and limits the ability to transport produced oil, natural gas and NGLs to
market. 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, operations and financial results.
Federal 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. In
2019, the Canadian Energy Regulator Act (Canada) and the Impact Assessment Act (Canada) came into force and the National Energy
Board Act and the Canadian Environmental Assessment Act, 2012 were repealed. In addition, the Impact Assessment Agency of
Canada replaced the Canadian Environmental Assessment Agency. The impact of the new federal regulatory scheme on proponents,
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 operating activities.
Geopolitical Events
Geopolitical events or instability may have wide-ranging consequences for the global market and economic conditions, including
energy and commodity prices
The Corporation’s business may be adversely affected by recent geopolitical events and decisions made in Canada, the United States,
China, Europe and elsewhere.
The current war in Ukraine and the international response has had, and may continue to have, potential wide-ranging consequences
for global market volatility and economic conditions, including energy and commodity prices, which may, in turn, increase inflationary
pressures and interest rates. Certain countries, including Canada and the United States, have imposed strict financial and trade
sanctions against Russia, which have had, and may continue to have, far-reaching effects on the global economy and energy and
commodity prices. The short, medium and long-term implications of the war in Ukraine are difficult to predict with any certainty at
this time and there remains uncertainty relating to the potential direct and indirect impact of the war on the Corporation, and it could
have a material and adverse effect on its business, financial condition and results of operations. Depending on the extent, duration
and severity of the war, it may have the effect of heightening many of the other risks described herein, including, without limitation,
the risks relating to the Corporation’s exposure to commodity prices; the successful completion of the Corporation’s growth and
expansion projects, including the expected return on investment thereof; supply chains and the Corporation’s ability to obtain required
equipment, materials or labour; cybersecurity risks; inflationary pressures; and restricted access to capital and increased borrowing
costs as a result of increased interest rates.
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BIRCHCLIFF ENERGY
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 making substantial capital expenditures for the acquisition, exploration, development and production of
oil, natural gas and NGLs 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.
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. A failure to obtain financing on a timely basis could cause the Corporation to forfeit its interest in certain
properties, miss certain acquisition opportunities and reduce its operations.
Political Uncertainty
The Corporation’s business may be adversely affected by political and social events and decisions made in Canada and elsewhere
The Corporation’s results can be adversely impacted by political, legal or regulatory developments in Canada and elsewhere that
affect local operations and local and international markets. Changes in government, government policy or regulations, changes in
law or the interpretation of settled law, third-party opposition to industrial activity generally or projects specifically, and the duration
of regulatory reviews could impact the Corporation’s existing operations and planned projects. This includes actions by regulators
or other political actors to delay or deny necessary licenses and permits for the Corporation’s activities or restrict the operation of
third-party infrastructure that the Corporation relies on. Additionally, changes in environmental regulations, assessment processes
or other laws, and increasing and expanding stakeholder consultation (including Indigenous stakeholders), may increase the cost
of compliance or reduce or delay available business opportunities and adversely impact the Corporation’s results.
Other government and political factors that could adversely affect the Corporation’s financial results include increases in taxes
or government royalty rates (including retroactive claims) and changes in trade policies and agreements. Further, the adoption
of regulations mandating efficiency standards, the sale of electric vehicles and the use of alternative fuels or uncompetitive fuel
components could affect the demand for the Corporation’s products. Many governments are providing tax advantages and other
subsidies to support alternative energy sources or are mandating the use of specific fuels, technologies or the use of electric vehicles.
Governments and others are also promoting research into new technologies to reduce the cost and increase the scalability of
alternative energy sources and the success of these initiatives may decrease the demand for the Corporation’s products.
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. 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. Protests,
blockades, demonstrations and vandalism have the potential to delay and disrupt the Corporation’s activities. See “Risk Factors – Public
Opposition and Non-Governmental Organizations” in this MD&A.
2022 ANNUAL REPORT 47
Danielle Smith was elected as the Premier of Alberta on October 11, 2022. Shortly after her appointment, Premier Smith introduced
Bill 1: Alberta Sovereignty Within a United Canada Act (the “Sovereignty Act”). The Sovereignty Act was passed on December 8, 2022
and received Royal Assent on December 15, 2022. The Sovereignty Act, amongst other things, enables the Alberta Government to
choose which federal legislation, policies or programs it will enforce in Alberta, providing an overriding right to not enforce those which
the Alberta Government deems to be “harmful” to Alberta’s interests or infringe on the Federal Constitution and its division of powers.
The Sovereignty Act has been opposed by many, including Alberta’s New Democratic Party and various Indigenous groups who have
expressed concern as to how the Sovereignty Act will affect Indigenous rights and consultation obligations in Alberta. It is unclear
what effect the Sovereignty Act will have on Alberta, including the oil and natural gas industry, Alberta businesses and the Province’s
federal and interprovincial relationships, including the application of certain federal legislation in Alberta, such as the Greenhouse Gas
Pollution Pricing Act (Canada) and the Impact Assessment Act (Canada) and the way in which the Alberta Government may address any
legislative and policy gaps created. Although the Sovereignty Act has not yet been challenged in court, it is possible the Sovereignty
Act’s constitutionality will be challenged.
The Federal Government was re-elected in a minority position in September 2021. 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, which effect could prove to be material over time.
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
Global climate issues continue to attract public and scientific attention. Numerous reports, including reports from the Intergovernmental
Panel on Climate Change, have engendered concern about the impacts of human activity, especially hydrocarbon combustion, on
global climate issues. In turn, increasing public, government and investor attention is being paid to global climate issues and to emissions
of GHGs, including emissions of CO2 and methane from the production and use of oil, NGLs and natural gas. The majority of countries
across the globe, including Canada, have agreed to reduce their carbon emissions in accordance with the Paris Agreement. During the
course of the 2021 United Nations Climate Change Conference in Glasgow, Scotland, Canada’s Prime Minister Justin Trudeau made
several pledges aimed at reducing Canada’s GHG emissions and environmental impact.
As discussed in further detail below, the Corporation faces various risks associated with climate change. 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 an increased severity and frequency of extreme weather. 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. For example, extreme weather may impact the Corporation’s ability to complete capital projects, facility
turnarounds, maintenance and repairs on time. 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. Extreme weather also increases the risk of damage
to infrastructure and equipment and the risk of injury to the Corporation’s personnel due to dangerous working conditions. Certain
of the Corporation’s properties are situated in locations that are proximate to forests and rivers and a wildfire or flood may lead to
significant downtime and/or damage to the Corporation’s assets. See “Risk Factors – Seasonality and Extreme Weather” in this MD&A.
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Physical Risks – Chronic
Climate change has been linked to long-term shifts in climate patterns, including rising mean temperature and sea levels and long-term
changes in precipitation patterns. 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. 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 “Risk Factors –
Seasonality and Extreme Weather” and “Risk Factors – Hydraulic Fracturing” in this MD&A.
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.
Given the perceived elevated long-term risks associated with policy development, regulatory changes, public and private legal
challenges, or other market developments related to climate change, there have also been efforts in recent years affecting the financial
community, including investment advisors, sovereign wealth funds, banks, public pension funds, universities and other institutional
investors, promoting direct engagement and dialogue with companies in their portfolios on climate change action (including
exercising their voting rights on matters relating to climate change) and increased capital allocation to investments in low-carbon assets
and businesses, while decreasing the carbon intensity of their portfolios through, among other measures, divestments of companies
with high exposure to GHG-intensive operations and products. Certain stakeholders have also pressured insurance providers and
commercial and investment banks to reduce or stop providing insurance coverage and financing to oil and natural gas companies
and related infrastructure businesses and projects. The impact of such efforts may require the Corporation’s management to dedicate
significant time and resources to these climate change-related concerns and may adversely affect the Corporation’s operations,
the demand for and price of the common shares, the Corporation’s cost of capital and the Corporation’s access to the capital markets,
which negative impact could prove to be material over time.
See “Risk Factors – Changing Investor Sentiment”, “Risk Factors – Public Opinion and Reputational Risk” and “Risk Factors – Public
Opposition and Non-Governmental Organizations” in this MD&A.
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 “Risk Factors – Energy Transition and Alternatives to and Changing Demand for
Petroleum Products” in this MD&A.
Transition Risks – Regulatory and Policy
Foreign and domestic governments continue to evaluate and implement policy, legislation and regulations focused on restricting
GHG emissions and promoting adaptation to climate change and the transition to a low-carbon economy. It is not possible to predict
what measures foreign and domestic governments may implement in this regard, nor is it possible to predict the requirements that such
measures may impose or when such measures may be implemented. However, international multilateral agreements, the obligations
adopted thereunder and legal challenges concerning the adequacy of climate-related policy brought against foreign and domestic
governments may accelerate the implementation of these measures.
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.
2022 ANNUAL REPORT 49
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 emissions and resulting requirements, including carbon taxes and carbon pricing schemes implemented by varying
levels of government, 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, natural gas and NGLs 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 TIER and may become subject to future regional,
provincial and/or federal climate change regulations to manage GHG emissions. See “Description of the Business – Environmental
Protection Regulation and Costs” in this MD&A.
Emissions, carbon and other regulations impacting climate and climate-related matters are constantly evolving. With respect to ESG
and climate reporting, the International Sustainability Standards Board has issued an IFRS Sustainability Disclosure Standard with the
aim to develop sustainability disclosure standards that are globally consistent, comparable and reliable. In addition, the Canadian
Securities Administrators published for comment the proposed National Instrument 51-107 – Disclosure of Climate Related Matters,
which is intended to introduce climate-related disclosure requirements for reporting issuers in Canada. If the Corporation is not able
to meet future sustainability reporting requirements of regulators or current and future expectations of investors, insurance providers,
lenders or other stakeholders, its business and ability to attract and retain skilled employees, obtain regulatory permits, licences,
registrations, approvals and authorizations from various governmental authorities,
and raise capital may be adversely affected.
See “Risk Factors – Regulatory”, “Risk Factors – Environmental”, “Risk Factors – Evolving Corporate Governance, Sustainability and
Reporting Framework” and “Risk Factors – Carbon Pricing Risk” in this MD&A.
Transition Risks – Legal
Claims have been made against certain energy companies alleging that GHG emissions from oil and natural gas operations constitute
a public nuisance under certain laws or that such energy companies provided misleading disclosure to the public and investors of
current or future risks associated with climate change. As a result, individuals, government authorities or other organizations may
make claims against oil and natural gas companies, including the Corporation, for alleged personal injury, property damage or other
potential liabilities. While the Corporation is not a party to any such litigation or proceedings, it could be named in actions making
similar allegations. An unfavorable ruling in any such case could adversely affect the demand for and price of securities issued by the
Corporation, impact its operations and have an adverse effect on its financial condition, which could prove to be material. See
“Risk Factors – Litigation” in this MD&A.
Transition Risks – Technology
The adoption of new technologies by the Corporation to deal with climate change could require a significant capital investment.
Limitations related to the development, adoption and success of these technologies or the development of disruptive technologies
may have a material adverse effect on the Corporation’s business, financial condition, results of operations and prospects. See
“Risk Factors – Cost of New Technologies” in this MD&A.
Regulatory
Modification to current, or implementation of additional, regulations and the failure to obtain any necessary regulatory approvals
could negatively impact the Corporation
Various levels of governments impose extensive controls and regulations on oil and natural gas operations (including exploration,
development, production, pricing, marketing, transportation, infrastructure and mergers and acquisitions). Governments may regulate
or intervene with respect to exploration and production activities, prices, taxes, royalties, the exportation of oil and natural gas,
infrastructure projects and the transfer of assets pursuant to acquisition and divestiture activities. Amendments to these controls and
regulations may occur from time to time in response to economic or political conditions. The implementation of new regulations or the
modification of existing regulations affecting the oil and natural gas industry could reduce the demand for 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.
In order to conduct oil and natural gas operations, the Corporation requires regulatory permits, licences, registrations, approvals
and authorizations from various governmental authorities. Obtaining certain approvals from regulatory authorities can involve,
among other things, stakeholder and Indigenous consultation, environmental impact assessments and public hearings. Regulatory
approvals obtained may be subject to the satisfaction of certain conditions including, but not limited to, security deposit obligations,
ongoing regulatory oversight of projects, mitigating or avoiding project impacts, environmental and habitat assessments and other
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commitments or obligations. The ongoing third-party challenges to regulatory decisions and orders have 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. 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 the required permits, licences,
registrations, approvals and authorizations or the revocation or termination of the same may disrupt the Corporation’s operations and
have a 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
common shares 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. 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 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.
Environmental legislation is evolving in a manner expected to result in stricter standards and enforcement, larger fines and liability and
potentially increased capital expenditures and operating costs. 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, new environmental legislation may increase uncertainty among oil and natural gas participants as the new legislation is
implemented. The implementation of new environmental legislation or the modification of existing legislation affecting the oil and
natural gas industry generally could reduce the demand for oil and natural gas and increase costs. See “Risk Factors – Climate Change”
in this MD&A.
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’, lenders’ and insurers’ sentiments towards investing in, lending to and insuring participants in,
the oil and natural gas industry. As a result of these concerns, some institutional, retail and governmental investors, lenders and insurers
have announced that they no longer are willing to fund or invest in, lend to or insure oil and natural gas properties or companies,
or are reducing the amount thereof over time. In addition, certain institutional investors, lenders and insurers are requesting that issuers
develop and implement more robust ESG policies and practices and make related disclosures. Developing and implementing such
policies and practices, and making such related disclosures, can involve significant costs and require a significant time commitment
from the Corporation’s Board, management and employees. Failing to implement the policies and practices, and make the related
disclosures, as requested by institutional investors, lenders and insurers, may result in such investors reducing their investment in or
loan to the Corporation, or not investing in or lending to the Corporation at all, or such insurers refusing to insure the Corporation.
Any reduction in the investor, lender or insurance base interested or willing to invest in, lend to or insure participants in the oil and
natural gas industry and more specifically, the Corporation, may result in limiting the Corporation’s access to, or increasing the cost
of, capital or insurance and decreasing the price and liquidity of the common shares, even if the Corporation’s operating results,
underlying asset values or prospects have not changed or improved.
2022 ANNUAL REPORT 51
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, increased costs and/or cost overruns
and reduced access to (or an increase in the cost of) capital, credit and/or insurance. See “Risk Factors – Public Opposition and Non-
Governmental Organizations” in this MD&A.
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 and public opinion could be
affected by the actions and activities of other companies 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” in this MD&A.
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,
or increasing the cost of, capital, credit and/or insurance and decreasing the price and liquidity of the common shares.
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. 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 of 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.
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Energy Transition and Alternatives to and Changing Demand for Petroleum Products
The global energy transition to a low-carbon economy, 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
A transition away from the use of petroleum products, which may include fuel conservation measures, alternative fuel requirements,
electric vehicle mandates, increasing consumer demand for alternatives to oil, natural gas and NGLs and technological advances in fuel
economy and renewable energy, could reduce the demand for oil and natural gas. 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. In addition, advancements in energy efficient products have
a similar effect on the demand for oil, natural gas and NGLs products. The Corporation cannot predict the impact of the changing
demand for oil, natural gas and NGLs 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.
In addition, the Corporation may invest in technologies and other opportunities related to energy transition, which may involve
investments in businesses, operations or assets relating to renewable or other alternative forms of energy. Such investments may involve
certain risks and uncertainties in addition to those identified herein in respect of the Corporation’s existing business, operations and
assets, including the obligation to comply with additional regulatory and other legal requirements associated with such businesses,
operations or assets and the potential requirement for additional sources of capital to make, develop and/or maintain such investments
and the Corporation’s ability to access such sources of capital. In the event the Corporation were to complete such investments, there
can be no guarantee that the Corporation will realize a return on those investments or businesses, operations or assets that is similar to
the returns it receives in respect of its existing business, operations and assets.
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.
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, natural gas and NGLs reserves. The Corporation’s lenders use the Corporation’s
reserves, commodity prices and other factors to determine the Corporation’s borrowing base. A decline 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 under the Credit Facilities 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.
2022 ANNUAL REPORT 53
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, 2025. The Corporation may each year, at its option, request an extension
to the maturity date of the Syndicated Credit Facility and the Working Capital Facility, or either of them, for an additional period of
up to three years from May 11 of the year in which the extension request is made. In the event that either of the Credit Facilities is not
extended before the maturity date, all outstanding indebtedness under such Credit Facility will be repayable at the maturity date. There
is also a risk that the Credit Facilities will not be renewed for the same principal amount or on the same terms. Any of these events could
adversely affect the Corporation’s ability to fund its ongoing operations and to pay dividends.
The Corporation is required to comply with covenants under the Credit Facilities. In the event that the Corporation does not comply
with these covenants, the Corporation’s access to capital could be restricted or repayment could be required. Events beyond
the Corporation’s control may contribute to the failure of the Corporation to comply with such covenants. A failure to comply with
covenants could result in an event of default under the Credit Facilities, which could result in the Corporation being required to
repay amounts owing thereunder and may prevent the payment of dividends to shareholders. The acceleration of the Corporation’s
indebtedness under one agreement may permit acceleration of indebtedness under other agreements that contain cross-default or
cross-acceleration provisions. In addition, the Credit Facilities impose certain restrictions on the Corporation, including, but not limited
to, restrictions on the payment of dividends, incurring of additional indebtedness, dispositions of properties and the entering into
of amalgamations, mergers, plans of arrangements, reorganizations or consolidations with any person. The Credit Facilities do not
currently contain any financial maintenance covenants; however, there is no assurance that the Corporation’s lenders will not impose
any such covenants on the Corporation in the future. Any such covenants may either affect the availability or price of additional funding.
If the Corporation’s lenders require repayment of all or portion of the amounts outstanding under the Credit Facilities for any reason,
including for a default of a covenant, there is no certainty that the Corporation would be in a position to make such repayment. Even if
the Corporation is able to obtain new financing in order to make any required repayment under the Credit Facilities, it may not be on
commercially reasonable terms or terms that are acceptable to the Corporation. If the Corporation is unable to repay amounts owing
under the Credit Facilities, the lenders under the Credit Facilities could proceed to foreclose or otherwise realize upon the collateral
granted to them to secure the indebtedness.
Issuance of Debt
Increased debt levels may impair the Corporation’s ability to borrow additional capital on a timely basis to fund opportunities
as they arise
From time to time, the Corporation may finance its activities (including asset acquisitions) in whole or in part with debt, which may
increase the Corporation’s debt levels above industry standards for oil and natural gas companies 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 and may adversely affect the market
price of the common shares.
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Risk Management Activities
Risk management activities expose the Corporation to the risk of financial loss and counter-party risk
From time to time, the Corporation may enter into physical or financial agreements to receive fixed prices on its oil, natural gas and
NGLs 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, natural gas and NGLs 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 risk management arrangements
expose it to the risk of financial loss in certain circumstances, including instances in which:
• production falls short of the contracted 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
arrangement;
the counterparties to the arrangements or other risk management contracts fail to perform under those arrangements; and/or
a sudden unexpected material event impacts oil and natural gas prices.
On the other hand, a failure to diversify commodity prices into different markets exposes the Corporation to reduced liquidity when
prices decline in a single market. A sustained lower commodity price environment in that single market would result in lower realized
prices for undiversified volumes and reduce the prices at which the Corporation would enter into derivative contracts on future
volumes. This could make such diversification transactions unattractive, and, as a result, some or all of the Corporation’s production
volumes forecasted for the current fiscal year and beyond may not be protected by derivative arrangements.
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 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.
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 financial position. The Corporation’s operations are dependent upon the
availability of water and its ability to dispose of produced water from drilling and production activities
Hydraulic fracturing involves the injection of water, sand and small amounts of additives under high pressure into tight rock formations
that were previously unproductive to stimulate the production of oil, NGLs and natural gas. Concerns about seismic activity, including
earthquakes, caused by hydraulic fracturing has resulted in regulatory authorities implementing additional protocols for areas that
are prone to seismic activity or completely banning hydraulic fracturing in other areas. 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, NGLs
and natural gas resources from shale formations, which are not commercial without the use of hydraulic fracturing. Restrictions or bans
on hydraulic fracturing in the areas where the Corporation operates could reduce the amount of oil, natural gas and NGLs that the
Corporation is ultimately able to produce from its reserves and/or result in the Corporation being unable to economically recover certain
of its oil, natural gas and NGLs reserves, which in either case could result in a significant decrease in the value of the Corporation’s assets.
Water is an essential component of the Corporation’s drilling and hydraulic fracturing processes. Limitations or restrictions on the
Corporation’s ability to secure sufficient amounts of water (including limitations resulting from natural causes such as drought), could
materially and adversely impact its operations. Severe drought conditions can result in local water authorities taking steps to restrict the
use of water in their jurisdiction for drilling and hydraulic fracturing in order to protect the local water supply. If the Corporation is unable
to obtain water to use in its operations from local sources, it may need to be obtained from new sources and transported to drilling sites,
resulting in increased costs, which could have a material adverse effect on its financial condition, results of operations and cash flows.
In addition, the Corporation must dispose of the fluids produced from oil, natural gas and NGLs production operations, including
produced water, which it does directly or through the use of third-party vendors. The legal requirements related to the disposal of
produced water into a non-producing geologic formation by means of underground injection wells are subject to change based on
concerns of the public or governmental authorities regarding such disposal activities. See “Risk Factors – Disposal of Fluids
Used in Operations” in this MD&A.
2022 ANNUAL REPORT 55
Government authorities may issue orders to shut down or curtail the injection depth of existing wells in the vicinity of seismic events.
Another consequence of seismic events may be lawsuits alleging that disposal well operations have caused damage to neighboring
properties or otherwise violated laws and regulations regarding waste disposal. These developments could result in additional
regulation and restrictions on the use of injection wells by the Corporation or by commercial disposal well vendors that the Corporation
may use from time to time to dispose of produced water. Increased regulation and attention given to induced seismicity could also lead
to greater opposition, including litigation to limit or prohibit oil and natural gas activities utilizing injection wells for produced water
disposal. Any one or more of these developments may result in the Corporation or its vendors having to limit disposal well volumes,
disposal rates and pressures or locations, or require the Corporation or its vendors to shut down or curtail the injection of produced
water into disposal wells, which events could have a material adverse effect on the Corporation’s business, financial condition and
results of operations.
Minor earthquakes are common in certain parts of Alberta. Since 2015, the Alberta Energy Regulator (the “AER”) has introduced
seismic protocols for hydraulic fracturing operators in the Seismic Protocol Regions initially in response to significant induced seismic
activity in the Duvernay formation in Fox Creek. The AER may extend seismic protocols to other areas of the province if necessary,
which may adversely affect the Corporation’s operations.
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.
Competition
The Corporation competes with other oil and natural gas companies, some of which have greater financial and operational resources
or other competitive advantages
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, natural gas and NGLs, 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, natural gas and NGLs 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. To a
lesser extent, the Corporation also faces competition from companies that supply alternative sources of energy, such as wind and solar
power. Other factors that could affect competition in the marketplace include additional discoveries of hydrocarbon reserves by our
competitors, the cost of production, and political and economic factors and other factors outside of the Corporation’s control.
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, which was upheld by the Supreme Court of Canada as constitutional, currently applies in
provinces and territories without their own system that meets federal standards.
Any taxes placed on carbon emissions may have the effect of decreasing the demand for oil, natural gas and NGLs 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 “Risk Factors – Climate Change” and
“Risk Factors – Environmental” in this MD&A.
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BIRCHCLIFF ENERGY
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. 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 commodity prices, historical production
from the properties, production rates, ultimate reserves recovery, the timing and amount of capital expenditures, marketability of oil,
natural gas and NGLs, royalty rates, the assumed effects of regulation by governmental agencies and future operating costs, all of
which may vary materially from actual results. For these reasons, estimates of the economically recoverable oil, natural gas and NGLs
reserves attributable to any particular group of properties, the classification of such reserves based on risk of recovery and estimates of
future net revenue associated with reserves prepared by different engineers, or by the same engineer at different times, may vary. The
Corporation’s actual production, revenue, taxes and development and operating expenditures with respect to its reserves will vary
from estimates thereof and such variations could be material.
The estimation of proved and probable 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, natural gas and NGLs, curtailments or increases in
consumption by oil, natural gas and NGLs 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 are not undertaken or, if undertaken, do not achieve the level of success assumed in the evaluation.
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, natural gas and NGLs 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 are risks
associated with such activities. See “Risk Factors – Risk Management Activities” in this MD&A.
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 price of the common shares.
2022 ANNUAL REPORT 57
Seasonality and Extreme Weather
Oil and natural gas operations are subject to seasonal conditions and extreme weather 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, which may prevent, delay or make operations more difficult. 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, cause operational difficulties and delays, damage infrastructure or equipment and
contribute to personnel injury because of dangerous working conditions.
The Corporation’s operations are susceptible to the impacts of wildfires and flooding. In addition to the loss of revenue that would result
from the loss of production if the Corporation’s operations were affected by wildfires and/or flooding, the Corporation would incur
delays and expenses responding to such events, repairing damaged equipment and resuming operations. Although the Corporation’s
insurance policies may compensate it for part of the Corporation’s losses, they will not compensate the Corporation for all of its losses.
In addition, wildfires and/or flooding consume both financial resources and management and employee time.
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.
Asset Concentration
All of the Corporation’s properties are located on the Montney/Doig Resource Play in 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 on the Montney/Doig Resource Play in 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.
In addition, industry activity is high in the Corporation’s areas of operations, as are the demand for and costs of personnel, equipment,
power, services and resources. Any delay or inability to secure the necessary personnel, equipment, power, services and resources
could result in the Corporation’s actual production volumes being below its forecasted production volumes, which could have a
material adverse effect on the Corporation’s financial condition, results of operations, cash flow and profitability.
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 materially adversely affected.
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 materially adversely affected.
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BIRCHCLIFF ENERGY
Reliance on a Skilled Workforce and Key Personnel
An inability to recruit and retain a skilled workforce and key personnel could negatively impact the Corporation
The operations and management of the Corporation require the recruitment and retention of a skilled workforce, including engineers,
technical personnel and other professionals. The loss of key members of such workforce, or a substantial portion of the workforce as
a whole, could result in the failure to implement the Corporation’s business plans, which could have a material adverse effect on the
Corporation’s business, financial condition, results of operations and prospects.
Competition for qualified personnel in the oil and natural gas industry is intense and there can be no assurance that the Corporation
will be able to continue to attract and retain all personnel necessary for the development and operation of its business. In addition,
the decline in market conditions in recent years has resulted in a significant number of skilled personnel exiting the oil and natural gas
industry and fewer young people entering the industry. 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 have
significant institutional knowledge that must be transferred to other employees prior to their departure from the Corporation. 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.
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, consultants, securityholders and other stakeholders, regulators and other third parties.
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 disguising themselves as a trustworthy
entity in an electronic communication attempts to obtain sensitive information such as usernames, passwords, credit card or banking
details (and money) or to have phony wire transfer or cheque requests approved, 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. Further, the Corporation maintains policies and
procedures that address and implement employee protocols with respect to electronic communications and electronic devices and
the Corporation periodically conducts cyber-security risk assessments and education and training for its employees. Despite the
Corporation’s efforts to mitigate such cyber-phishing attacks through education and training, cyber-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.
2022 ANNUAL REPORT 59
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.
Insurance
Not all risks are insurable and the occurrence of an uninsurable event may have a material adverse effect on the Corporation
The Corporation’s involvement in the exploration for and development of oil and natural gas properties may result in the Corporation
becoming subject to liability for pollution, blowouts, leaks of sour natural gas, property damage, personal injury or other hazards.
Although the Corporation maintains insurance in accordance with industry standards to address certain of these risks, such insurance
has limitations on liability and may not be sufficient to cover the full extent of such 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 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, the Corporation’s
inability to obtain insurance against one or more risks at acceptable premiums or at all 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.
The Corporation’s insurance policies are generally renewed on an annual basis and, depending on factors such as market conditions,
the premiums, policy limits and/or deductibles for certain insurance policies can vary substantially. In some instances, certain insurance
may become unavailable or available only for reduced amounts of coverage. Significantly increased costs could lead the Corporation
to decide to reduce or possibly eliminate, coverage. In addition, insurance is purchased from a number of third-party insurers, often
in layered insurance arrangements, some of whom may discontinue providing insurance coverage for their own policy or strategic
reasons. Should any of these insurers refuse to continue to provide insurance coverage, the Corporation’s overall risk exposure could
be increased and the Corporation could incur significant costs.
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), securities law matters, employment matters 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.
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BIRCHCLIFF ENERGY
Indigenous Land and Rights Claims
Indigenous land and rights claims and opposition by Indigenous groups to the conduct of the Corporation’s operations, development
or exploratory activities may negatively impact the Corporation
Opposition by Indigenous groups to the conduct of the Corporation’s operations, development or exploratory activities may
negatively impact the Corporation in terms of public perception, diversion of management’s time and resources, legal and other
advisory expenses, and could adversely impact the Corporation’s progress and ability to explore and develop properties.
Some Indigenous groups have established or asserted Indigenous treaty, title and rights to portions of Canada. There are outstanding
Indigenous and treaty rights claims, which may include Indigenous title claims, on the lands where the Corporation operates. Such
claims, if successful, could have a material adverse impact on the Corporation’s ability to operate on such lands, which could in turn
have a material adverse impact on the Corporation’s financial condition, results of operations and/or growth plans.
The Canadian federal and provincial governments have a duty to consult with Indigenous people when contemplating actions that may
adversely affect the asserted or proven Indigenous or treaty rights and, in certain circumstances, accommodate their concerns. The
scope of the duty to consult by federal and provincial governments varies with the circumstances and is often the subject of litigation.
The fulfillment of the duty to consult Indigenous people and any associated accommodations may adversely affect the Corporation’s
ability to, or increase the timeline to, obtain or renew, permits, leases, licences and other approvals, or to meet the terms and conditions
of those approvals. For example, regulatory authorities in British Columbia ceased granting approvals, and, in some cases, revoked
existing approvals, for, among other things, oil and natural gas activities relating to drilling, completions, testing, production and
transportation infrastructure following the decision in Yahey v British Columbia (the “Blueberry Decision”) that the cumulative impacts
of government-sanctioned industrial development on the traditional territories of the Blueberry River First Nation (the “BRFN”) in
Northeast British Columbia breached that group’s treaty rights. Although the Corporation does not have any assets in British Columbia,
the BRFN may lead to similar claims of cumulative effects across Canada in other areas covered by numbered treaties. For example,
in July 2022, Duncan’s First Nation filed a lawsuit against the Government of Alberta relying on similar arguments to those advanced
successfully by the BRFN. While a settlement between the British Columbia government and BRFN was recently entered into and
the regulatory authorities have resumed granting certain approvals for oil and natural gas activities in British Columbia, the long-term
impacts of, and associated risks with, the Blueberry Decision and the Duncan’s First Nation lawsuit on the Canadian oil and natural gas
industry remain uncertain.
In addition, Canada is a signatory to the United Nations Declaration on the Rights of Indigenous Peoples (“UNDRIP”) and the principles
set forth therein may continue to influence the role of Indigenous engagement in the development of the oil and natural gas industry
in Western Canada. In November 2019, the Declaration on the Rights of Indigenous Peoples Act (“DRIPA”) became law in British
Columbia. The DRIPA aims to align British Columbia’s laws with UNDRIP. In June 2021, the United Nations Declaration on the Rights of
Indigenous Peoples Act (the “UNDRIP Act”) came into force in Canada. Similar to British Columbia’s DRIPA, the UNDRIP Act requires the
Government of Canada to take all measures necessary to ensure the laws of Canada are consistent with the principles of UNDRIP and to
implement an action plan to address UNDRIP’s objectives. Continued development of common law precedent regarding existing laws
relating to Indigenous consultation and accommodation as well as the adoption of new laws such as the DRIPA and the UNDRIP Act
are expected to continue to add uncertainty to the ability of entities operating in the Canadian oil and gas industry to execute on major
resource development and infrastructure projects, including, among other projects, pipelines.
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, natural gas and NGLs production, counterparties to its risk management contracts 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 and from purchasers of assets from the Corporation for various liabilities, including well abandonment and reclamation
obligations assumed by the purchasers. 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. The
use of risk management contracts involves the risk that the counterparties will be unable to meet the financial terms of such transactions.
The Corporation is unable to predict changes in a counterparty’s creditworthiness or ability to perform. Even if the Corporation
accurately predicts such changes, its ability to negate this risk may be limited depending upon market conditions and the contractual
terms of the agreements. During periods of high volatility in commodity prices, the Corporation’s derivative receivable positions
may increase, which would increase the Corporation’s counterparty credit exposure. 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.
2022 ANNUAL REPORT 61
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.
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, natural gas and NGLs therefrom,
may vary from the Corporation’s records. Although title reviews may be conducted prior to the purchase of oil and natural gas
producing properties or the commencement of drilling wells, such reviews do not guarantee or certify that an unforeseen defect in the
chain of title will not arise. 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.
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.
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, companies that may operate some of the assets in which the Corporation has an interest may be in or encounter 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.
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
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
62
BIRCHCLIFF ENERGY
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 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, and may also result in the loss of key employees, the disruption of ongoing business, supplier, customer and
employee relationships and deficiencies in internal controls or information technology controls.
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.
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.
Liability Management
Liability management programs enacted by regulators may prevent or interfere with the Corporation’s ability to acquire properties or
require a substantial cash deposited with the regulator
Alberta has developed a liability management program 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 licencee or permit holder
is unable to satisfy its regulatory obligations. The AER continues to implement the Liability Management Framework (the “AB LM
Framework”), completing the remaining amendments to the necessary directive and regulations to entirely phase-out Alberta’s
Liability Management Rating Program. The implementation of the AB LM Framework or other changes to the requirements of liability
management programs may result in significant increases to the security that must be posted, increased and more frequent financial
disclosure obligations or the denial of licence or permit transfers, which could impact the availability of capital to be spent by the
Corporation. In addition, the AB LM Framework 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 liability management programs
(both before and after the transfer of the assets) for the AER to allow for the transfer of such assets.
Internal Controls
Material weaknesses in the Corporation’s internal controls may negatively affect the Corporation and the market price of the
common shares
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 market
price of the common shares.
2022 ANNUAL REPORT 63
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 market price of the common shares could decrease.
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.
Conflicts of Interest
Conflicts of interest may arise for the Corporation’s directors and officers
Certain of the Corporation’s directors and officers are engaged in, and will continue to engage in, other activities in the oil and natural
gas industry and as a result, may become subject to conflicts 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 or a material transaction or
proposed material transaction, 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 or transaction, unless otherwise permitted under the ABCA.
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 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 or other laws or government incentive programs relating to the oil and natural gas industry, such as the treatment of
resource taxation, dividends, share repurchases or capital gains, may in the future be changed or interpreted in a manner that adversely
affects the Corporation and/or its shareholders. 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
and/or the detriment of its shareholders.
64
BIRCHCLIFF ENERGY
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.
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.
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 on oil and natural gas production, exploration
and development on the Montney/Doig Resource Play in 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” in this MD&A.
2022 ANNUAL REPORT 65
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+)
F&D
FD&A
G&A
GAAP
GJ
GJ/d
HH
IFRS
LIBOR
LNG
Mcf
Mcf/d
MMboe
MMBtu
finding and development
finding, development and acquisition
general and administrative
generally accepted accounting principles for Canadian public companies, which are currently IFRS
gigajoule
gigajoules per day
Henry Hub
International Financial Reporting Standards as issued by the International Accounting Standards Board
London Interbank Offered Rate
liquefied natural gas
thousand cubic feet
thousand cubic feet per day
million barrels of oil equivalent
million British thermal units
MMBtu/d
million British thermal units per day
MMcf
MSW
NGLs
NGTL
million cubic feet
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.
NYMEX
New York Mercantile Exchange
OPEC
P&NG
SOFR
TCPL
WTI
000s
$000s
Organization of the Petroleum Exporting Countries
petroleum and natural gas
Secured Overnight Financing Rate
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
66
BIRCHCLIFF ENERGY
NON-GAAP AND OTHER FINANCIAL MEASURES
This MD&A uses various “non-GAAP financial measures”, “non-GAAP ratios”, “supplementary financial measures” and
“capital management measures” (as such terms are defined in NI 52-112), which are described in further detail below. These
measures facilitate management’s comparisons to the Corporation’s historical operating results in assessing its results and strategic
and operational decision-making and may be used by financial analysts and others in the oil and natural gas industry to evaluate
the Corporation’s performance.
Non-GAAP Financial Measures
NI 52-112 defines a non-GAAP financial measure as a financial measure that: (i) depicts the historical or expected future financial
performance, financial position or cash flow of an entity; (ii) with respect to its composition, excludes an amount that is included in, or
includes an amount that is excluded from, the composition of the most directly comparable financial measure disclosed in the primary
financial statements of the entity; (iii) is not disclosed in the financial statements of the entity; and (iv) is not a ratio, fraction, percentage
or similar representation. The non-GAAP financial measures used in this MD&A are not standardized financial measures under GAAP
and might not be comparable to similar measures presented by other companies. Investors are cautioned that non-GAAP financial
measures should not be construed as alternatives to or more meaningful than the most directly comparable GAAP financial measures
as indicators of Birchcliff’s performance. Set forth below is a description of the non-GAAP financial measures used in this MD&A.
Adjusted Funds Flow, Free Funds Flow and Excess Free Funds Flow
Birchcliff defines “adjusted funds flow” as cash flow from operating activities before the effects of decommissioning expenditures and
changes in non-cash operating working capital. 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. Adjusted
funds flow can also be derived from petroleum and natural gas revenue less royalty expense, operating expense, transportation and
other expense, net G&A expense, interest expense and any realized losses (plus realized gains) on financial instruments and plus any
other cash income and expense sources. Management believes that adjusted funds flow assists management and investors in assessing
Birchcliff’s financial performance after deducting all operating and corporate cash costs, as well as its ability to generate the cash
necessary to fund sustaining and/or growth capital expenditures, repay debt, settle decommissioning obligations, buy back common
shares and pay dividends.
Birchcliff defines “free funds flow” as adjusted funds flow less F&D capital expenditures. Management believes that free funds flow
assists management and investors in assessing Birchcliff’s ability to generate shareholder returns through a number of initiatives,
including but not limited to, debt repayment, common share buybacks, the payment of dividends and acquisitions.
Birchcliff defines “excess free funds flow” as free funds flow less common share dividends paid. Management believes that excess free
funds flow assists management and investors in assessing Birchcliff’s ability to further enhance shareholder returns after the payment
of common share dividends, which may include debt repayment, special dividends, increases to the Corporation’s base dividend,
common share buybacks, acquisitions and other opportunities that would complement or otherwise improve the Corporation’s
business and enhance long-term shareholder value.
2022 ANNUAL REPORT 67
The most directly comparable GAAP financial measure to adjusted funds flow, free funds flow and excess free funds flow is cash flow
from operating activities. The following table provides a reconciliation of cash flow from operating activities to adjusted funds flow,
free funds flow and excess 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
Dividends on common shares
Excess free funds flow
Three months ended
December 31,
Twelve months ended
December 31,
2022
224,447
(7,919)
571
2021
196,142
(4,255)
1,762
2022
2021
925,275
515,369
25,662
2,746
21,161
3,203
2020
188,180
(5,977)
2,323
217,099
193,649
953,683
539,733
184,526
(106,762)
(35,726)
(364,621)
(230,479)
(287,967)
110,337
(58,503)
51,834
157,923
(2,646)
155,277
589,062
(71,788)
517,274
309,254
(103,441)
(6,639)
(10,968)
302,615
(114,409)
Birchcliff has disclosed full-year 2023 guidance for adjusted funds flow, free funds flow and excess free funds flow, which are forward-
looking non-GAAP financial measures (see “2023 Guidance” in this MD&A). The equivalent historical non-GAAP measures are adjusted
funds flow, free funds flow and excess free funds flow for the twelve months ended December 31, 2022. The table above provides
a reconciliation of the equivalent historical non-GAAP financial measures from cash flow from operating activities, as determined
in accordance with GAAP, for the twelve months ended December 31, 2022. Birchcliff anticipates the forward-looking non-GAAP
financial measures for adjusted funds flow, free funds flow and excess free funds flow disclosed herein to be lower than their respective
historical amounts for the twelve months ended December 31, 2022, primarily due to lower anticipated benchmark oil and natural
gas prices which are expected to decrease the average realized sales prices the Corporation receives for its production. The forward-
looking non-GAAP financial measure for excess free funds flow disclosed herein is also expected to be lower as a result of a higher
targeted annual base common share dividend payment forecast during 2023. The commodity price assumptions on which the
Corporation’s guidance is based are set forth in the table under the heading “2023 Guidance”.
Capital Resources
Birchcliff defines “capital resources” as cash flow from operating activities less the aggregate of issuance of common shares, repurchase
of common shares, redemption of capital securities, redemption of perpetual preferred shares, purchase of performance warrants,
financing fees paid, lease payments, dividend distributions, net change in revolving term credit facilities, investments and changes
in non-cash working capital from investing. Management believes capital resources assists management and investors in assessing
Birchcliff’s ability to fund its short and long-term financial obligations. The most directly comparable GAAP financial measure to capital
resources is cash flow from operating activities. Please refer to “Capital Resources and Liquidity” in this MD&A for the reconciliation of
cash flow from operating activities to capital resources.
FD&A and Total Capital Expenditures
Birchcliff defines “FD&A capital expenditures” as exploration and development expenditures plus acquisitions and less dispositions.
Birchcliff defines “total capital expenditures” as FD&A capital expenditures plus administrative assets. Management believes that
FD&A capital expenditures and total capital expenditures assist management and investors in assessing Birchcliff’s overall capital cost
structure associated with its petroleum and natural gas activities. The most directly comparable GAAP financial measure to FD&A capital
expenditures and total capital expenditures is exploration and development expenditures. The following table provides a reconciliation of
exploration and development expenditures to FD&A capital expenditures and total capital expenditures for the periods indicated:
Three months ended
December 31,
Twelve months ended
December 31,
($000s)
Exploration and development expenditures(1)
Acquisitions
Dispositions
FD&A capital expenditures
Administrative assets
Total capital expenditures
(1) Disclosed as F&D capital expenditures elsewhere in this MD&A. See “Advisories” in this MD&A.
68
BIRCHCLIFF ENERGY
2022
106,762
-
-
2021
35,726
56
-
2022
2021
2020
364,621
230,479
287,967
2,348
(315)
283
-
106,762
35,782
366,654
230,762
709
293
1,576
1,718
-
(12,877)
275,090
1,695
107,471
36,075
368,230
232,480
276,785
Transportation and Other Expense and Marketing Loss (Gain)
Birchcliff defines “transportation and other expense” as transportation expense plus marketing loss (less marketing gain), which
denotes marketing purchases less marketing revenue. Birchcliff may enter into certain marketing purchase and sales arrangements
with the objective of reducing any available transportation and/or fractionation fees associated with its take-or-pay commitments.
Management believes that transportation and other expense assists management and investors in assessing Birchcliff’s total cost
structure related to transportation activities. Management believes that marketing loss (gain) assists management and investors in
assessing the success of Birchcliff’s marketing arrangements. The most directly comparable GAAP financial measure to transportation
and other expense is transportation expense. The following table provides a reconciliation of transportation expense to marketing
loss (gain) and transportation and other expense for the periods indicated:
($000s)
Transportation expense
Marketing purchases
Marketing revenue
Marketing loss (gain)
Transportation and other expense
Operating Netback
Three months ended
December 31,
Twelve months ended
December 31,
2022
38,793
9,529
(8,916)
613
39,406
2021
37,454
5,413
(6,169)
(756)
36,698
2022
155,864
17,866
2021
151,263
18,034
(18,806)
(20,722)
(940)
154,924
(2,688)
148,575
Birchcliff defines “operating netback” as petroleum and natural gas revenue less royalty expense, operating expense and transportation
and other expense. Management believes that operating netback assists management and investors in assessing Birchcliff’s operating
profits after deducting the cash costs that are directly associated with the sale of its production, which can then be used to pay other
corporate cash costs or satisfy other obligations. The following table provides a breakdown of Birchcliff’s operating netback for its
Pouce Coupe assets, Gordondale assets and on a corporate basis for the periods indicated:
($000s)
Petroleum and natural gas revenue
Royalty expense
Operating expense
Transportation and other expense
Operating netback – Pouce Coupe assets
Petroleum and natural gas revenue
Royalty expense
Operating expense
Transportation and other expense
Operating netback – Gordondale assets
Petroleum and natural gas revenue
Royalty expense
Operating expense
Transportation and other expense
Operating netback – Corporate
Three months ended
December 31,
Twelve months ended
December 31,
2022
201,550
(21,092)
(16,120)
(25,414)
138,924
118,449
(14,575)
(13,578)
(13,946)
76,350
320,358
(35,679)
(29,783)
2021
177,900
(14,716)
(12,904)
2022
866,991
(86,987)
(54,037)
2021
568,253
(38,721)
(45,112)
(24,054)
(102,331)
(99,202)
126,226
623,636
385,218
111,881
(13,736)
(12,395)
(12,643)
73,107
471,803
(74,164)
(46,967)
(52,422)
298,250
289,806
1,340,180
(28,452)
(161,226)
(25,315)
(101,581)
364,048
(37,549)
(46,188)
(49,367)
230,944
932,406
(76,271)
(91,515)
(39,406)
(36,698)
(154,924)
(148,575)
215,490
199,341
922,449
616,045
2022 ANNUAL REPORT 69
Non-GAAP Ratios
NI 52-112 defines a non-GAAP ratio as a financial measure that: (i) is in the form of a ratio, fraction, percentage or similar representation;
(ii) has a non-GAAP financial measure as one or more of its components; and (iii) is not disclosed in the financial statements of the entity.
The non-GAAP ratios used in this MD&A are not standardized financial measures under GAAP and might not be comparable to similar
measures presented by other companies. Set forth below is a description of the non-GAAP ratios used in this MD&A.
Adjusted Funds Flow Per Boe and Adjusted Funds Flow Per Basic and Diluted Common Share
Birchcliff calculates “adjusted funds flow per boe” as aggregate adjusted funds flow in the period divided by the production (boe)
in the period. Management believes that adjusted funds flow per boe assists management and investors in assessing Birchcliff’s
financial profitability and sustainability on a cash basis by isolating the impact of production volumes to better analyze its performance
against prior periods on a comparable basis. The Corporation previously referred to adjusted funds flow per boe as “adjusted funds
flow netback”.
Birchcliff calculates “adjusted funds flow per basic common share” and “adjusted funds flow per diluted common share” as aggregate
adjusted funds flow in the period divided by the weighted average basic or diluted common shares outstanding, as the case may be,
at the end of the period. Management believes that adjusted funds flow per basic common share and adjusted funds flow per diluted
common share assist management and investors in assessing Birchcliff’s financial strength on a per common share basis.
Free Funds Flow Per Basic Common Share
Birchcliff calculates “free funds flow per basic common share” as aggregate free funds flow in the period divided by the basic common
shares outstanding at the end of the period. Management believes that free funds flow per basic common share assists management
and investors in assessing Birchcliff’s financial strength and its ability to deliver shareholder returns on a per common share basis.
Transportation and Other Expense Per Boe
Birchcliff calculates “transportation and other expense per boe” as aggregate transportation and other expense in the period divided
by the production (boe) in the period. Management believes that transportation and other expense per boe assists management
and investors in assessing Birchcliff’s cost structure as it relates to its transportation and marketing activities by isolating the impact
of production volumes to better analyze its performance against prior periods on a comparable basis.
Marketing Loss (Gain) Per Boe
Birchcliff calculates “marketing loss (gain) per boe” as aggregate marketing loss (gain) in the period divided by the production (boe) in
the period. Management believes that marketing losses and marketing gains per boe assists management and investors in assessing
the success of Birchcliff’s marketing arrangements by isolating the impact of production volumes to better analyze its performance
against prior periods on a comparable basis.
Operating Netback Per Boe
Birchcliff calculates “operating netback per boe” as aggregate operating netback in the period divided by the production (boe) in
the period. Management believes that operating netback per boe assists management and investors in assessing Birchcliff’s operating
profitability and sustainability by isolating the impact of production volumes to better analyze its performance against prior periods on
a comparable basis.
70
BIRCHCLIFF ENERGY
Supplementary Financial Measures
NI 52-112 defines a supplementary financial measure as a financial measure that: (i) is, or is intended to be, disclosed on a periodic basis
to depict the historical or expected future financial performance, financial position or cash flow of an entity; (ii) is not disclosed in the
financial statements of the entity; (iii) is not a non-GAAP financial measure; and (iv) is not a non-GAAP ratio. The supplementary financial
measures used in this MD&A are either a per unit disclosure of a corresponding GAAP measure, or a component of a corresponding
GAAP measure, presented in the financial statements. Supplementary financial measures that are disclosed on a per unit basis are
calculated by dividing the aggregate GAAP measure (or component thereof) by the applicable unit for the period. Supplementary
financial measures that are disclosed on a component basis of a corresponding GAAP measure are a granular representation of a
financial statement line item and are determined in accordance with GAAP.
The supplementary financial measures used in this MD&A include: operating expense per boe; royalty expense per boe; interest
expense per boe; average realized sales price per bbl, Mcf and boe; net income to common shareholders per boe; realized gain (loss)
per boe; unrealized gain (loss) per boe; effective royalty rate; transportation expense per boe; petroleum and natural gas revenue per
boe; G&A expense, net per boe; other compensation, net per boe; administrative expense, net per boe; depletion and depreciation
expense per boe; other finance expenses per boe; finance expense per boe; other income per boe; other gains (losses) per boe; and
deferred income tax expense per boe.
Capital Management Measures
NI 52-112 defines a capital management measure as a financial measure that: (i) is intended to enable an individual to evaluate an entity’s
objectives, policies and processes for managing the entity’s capital; (ii) is not a component of a line item disclosed in the primary
financial statements of the entity; (iii) is disclosed in the notes to the financial statements of the entity; and (iv) is not disclosed in the
primary financial statements of the entity. Set forth below is a description of the capital management measures used in this MD&A.
Total Debt and Adjusted Working Capital Deficit (Surplus)
Birchcliff calculates “total debt” as the amount outstanding under the Corporation’s Credit Facilities (if any) plus adjusted working capital
deficit (less adjusted working capital surplus) at the end of the period. “Adjusted working capital deficit (surplus)” is calculated as working
capital deficit (surplus) plus the fair value of the current asset portion of financial instruments less the fair value of the current liability
portion of financial instruments less the current liability portion of other liabilities and less capital securities (if any) at the end of the period.
Management believes that total debt assists management and investors in assessing Birchcliff’s overall liquidity and financial position at
the end of the period. Management believes that adjusted working capital deficit (surplus) assists management and investors in assessing
Birchcliff’s short-term liquidity. The following table provides a reconciliation of the amount outstanding under the Credit Facilities and
working capital deficit (surplus), as determined in accordance with GAAP, to total debt and adjusted working capital deficit (surplus),
respectively, for the periods indicated:
As at December 31, ($000s)
Revolving term credit facilities
Working capital deficit (surplus)(1)
Fair value of financial instruments – asset(2)
Fair value of financial instruments – liability(2)
Other liabilities(2)
Capital securities
Adjusted working capital deficit (surplus)
Total debt(3)
2022
131,981
(7,902)
17,729
(1,345)
(1,914)
-
6,568
138,549
2021
500,870
53,312
69
(16,586)
-
(38,268)
(1,473)
499,397
2020
731,372
93,988
-
(23,479)
-
(39,930)
30,579
761,951
(1) Current liabilities less current assets.
(2) Reflects the current portion only.
(3) Total debt can also be derived from the amounts outstanding under the Corporation’s Credit Facilities plus accounts payable and accrued liabilities and less cash, accounts receivable and prepaid
expenses and deposits at the end of the period.
2022 ANNUAL REPORT 71
ADVISORIES
Currency
Unless otherwise indicated, all dollar amounts are expressed in Canadian dollars and all references to “$” and “CDN$” are to
Canadian dollars and all references to “US$” are to United States dollars.
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 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 and Other Financial Measures” in this MD&A.
F&D Capital Expenditures
Unless otherwise stated, references in this MD&A to “F&D capital expenditures” denotes exploration and development expenditures
as disclosed in the Corporation’s financial statements in accordance with GAAP, and is primarily comprised of capital for land, seismic,
workovers, drilling and completions, well equipment and facilities and capitalized G&A costs and excludes any net acquisitions and
dispositions, administrative assets and the capitalized portion of cash incentive payments that have not been approved by the Board.
Management believes that F&D capital expenditures assists management and investors in assessing Birchcliff capital cost outlay
associated with its exploration and development activities for the purposes of finding and developing its reserves.
Reserves
Birchcliff retained independent qualified reserves evaluator, Deloitte LLP (“Deloitte”), to evaluate and prepare a report on
100% of Birchcliff’s light crude oil and medium crude oil (combined), conventional natural gas, shale gas and NGLs reserves effective
December 31, 2022. 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 AIF.
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 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, strategy,
operations, 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”, “maintain”, “deliver” and other similar words and expressions.
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BIRCHCLIFF ENERGY
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:
•
•
•
•
•
•
•
•
•
Birchcliff’s plans and other aspects of its anticipated future financial performance, results, operations, focus, objectives, strategies,
opportunities, priorities and goals;
statements with respect to dividends, including that the annual base dividend of $0.80 per common share for 2023 is expected
to be declared and paid quarterly at the rate of $0.20 per common share; and
the information set forth under the heading “2023 Guidance” and elsewhere in this MD&A as it relates to Birchcliff’s 2023
guidance and capital program, including: that Birchcliff remains committed to the payment of its annual base dividend of
$0.80 per common share, maintaining capital discipline and generating free funds flow in 2023; the potential for weakness in
summer natural gas prices; the anticipated number of and timing of wells to be drilled and brought on production; that the wells
now anticipated to be brought on production in Q4 2023 is expected to result in strong production in Q4 2023 and Q1 2024,
when commodity prices are forecast to be significantly higher; that Birchcliff’s significant ownership and operatorship of its
assets gives it a strong competitive advantage, providing it with the flexibility to actively manage its capital program in response
to changing economic conditions in order to protect its strong financial position and base dividend; that the Corporation will
continue to closely monitor commodity prices and, where deemed prudent, will make further adjustments to its 2023 capital
program, giving consideration to increasing or decreasing its rate of drilling and capital investment depending on commodity
prices; that Birchcliff is taking a conservative approach to capital investment in 2023 as a result of the significant ongoing volatility
in natural gas prices; forecasts of annual average production, production commodity mix, average expenses, adjusted funds flow,
F&D capital expenditures, free funds flow, annual base common share dividend, excess free funds flow, total debt at year end and
natural gas market exposure; the expected impact of changes in commodity prices and the CDN/US exchange rate on Birchcliff’s
forecast of free funds flow; and that the forecast of total debt at December 31, 2023 is expected to be comprised of any amounts
outstanding under the Credit Facilities plus accounts payable and accrued liabilities and less cash, accounts receivable and
prepaid expenses and deposits at the end of the year;
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: the Corporation’s expectation that counterparties will be able to meet
their financial obligations; 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 its adjusted
funds flow and available Credit Facilities; that the Corporation believes that its anticipated adjusted funds flow and available
Credit Facilities in 2023 will be sufficient to fund its working capital requirements, its capital program and future dividend
payments in 2023; and that the unutilized credit capacity under the Corporation’s Credit Facilities provides it with significant
financial flexibility and additional capital resources to fund its capital expenditure programs and dividend payments if required;
estimates of Birchcliff’s material contractual obligations and commitments and decommissioning obligations;
statements relating to the 2023 NCIB, including: potential purchases under the 2023 NCIB; and the cancellation of common
shares under the 2023 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; prevailing and future commodity prices and differentials, 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 laws; future cash flow, debt and dividend levels; future operating,
2022 ANNUAL REPORT 73
transportation, 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 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; 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 approval of the Board of future dividends; 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 results of the Corporation’s risk management and market diversification activities; 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:
• With respect to Birchcliff’s 2023 guidance (as updated on March 15, 2023), such guidance is based on the commodity price,
exchange rate and other assumptions set forth under the heading “2023 Guidance”. In addition:
•
•
•
•
•
•
Birchcliff’s production guidance assumes that: the 2023 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 forecast of capital expenditures assumes that the 2023 capital program will be carried out as currently
contemplated and excludes any net potential acquisitions and dispositions and the capitalized portion of cash
incentive payments that have not been approved by the Board.
Birchcliff’s forecasts of adjusted funds flow and free funds flow assume that: the 2023 capital program will be carried
out as currently contemplated and the level of capital spending for 2023 set forth herein is met; and the forecasts of
production, production commodity mix, expenses and natural gas market exposure and the commodity price and
exchange rate assumptions set forth herein are met. Birchcliff’s forecast of adjusted funds flow takes into account its
physical and financial basis swap contracts outstanding as at March 14, 2023 and excludes cash incentive payments
that have not been approved by the Board.
Birchcliff’s forecast of excess free funds flow assumes that: the forecasts of adjusted funds flow and free funds flow
are achieved; and an annual base dividend of $0.80 per common share is paid during 2023 and there are 266 million
common shares outstanding, with no changes to the base dividend rate and no special dividends paid.
Birchcliff’s forecast of year end total debt assumes that: (i) the forecasts of adjusted funds flow, free funds flow and
excess free funds flow are achieved, with the level of capital spending for 2023 met and the payment of an annual
base dividend of $213 million; (ii) any free funds flow remaining after the payment of dividends, asset retirement
obligations and other amounts for administrative assets, financing fees and capital lease obligations is allocated
towards debt reduction; (iii) there are no buybacks of common shares during 2023; (iv) there are no significant
acquisitions or dispositions completed by the Corporation during 2023; (v) there are no equity issuances during 2023;
and (vi) there are no further proceeds received from the exercise of stock options or performance warrants during
2023. The forecast of total debt excludes cash incentive payments that have not been approved by the Board.
Birchcliff’s forecast of its natural gas market exposure assumes: (i) 175,000 GJ/d being sold on a physical basis at
the Dawn price; (ii) 152,500 MMBtu/d being contracted on a financial and physical basis at an average fixed basis
differential price between AECO 7A and NYMEX HH of approximately US$1.23/MMBtu; and (iii) 27,500 GJ/d being
sold at Alliance on a physical basis at the AECO 5A price plus a premium. Birchcliff’s natural gas market exposure takes
into account its physical and financial basis swap contracts outstanding as at March 14, 2023.
• With respect to statements of future wells to be drilled and brought on production, such statements 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 estimates of reserves, the key assumption is the validity of the data used by Deloitte in its independent
reserves evaluation.
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BIRCHCLIFF ENERGY
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), epidemics and global conflict (including the Russian invasion of Ukraine) 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; the uncertainty of estimates and projections relating to production, revenue, costs, expenses
and reserves; the risk that any of the Corporation’s material assumptions prove to be materially inaccurate (including the Corporation’s
commodity price and exchange rate assumptions for 2023); general economic, market and business conditions which will, among
other things, impact the demand for and market prices of Birchcliff’s products and Birchcliff’s access to capital; volatility of crude oil
and natural gas prices; risks associated with increasing costs, whether due to high inflation rates, supply chain disruptions or other
factors; fluctuations in 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; 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
operate its assets and achieve expected future results; 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; 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; political uncertainty and
uncertainty associated with government policy changes; actions by government authorities; an inability of the Corporation to comply
with existing and future laws and the cost of compliance with such laws; dependence on facilities, gathering lines and pipelines;
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 and market diversification activities; risks associated
with the declaration and payment of future dividends, including the discretion of the Board to declare dividends and change the
Corporation’s dividend policy and the risk that the amount of dividends may be less than currently forecast; 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; 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; and the accuracy of the Corporation’s accounting estimates and judgments.
The declaration and payment of any future dividends are subject to the discretion of the Board and may not be approved or may vary
depending on a variety of factors and conditions existing from time to time, including commodity prices, free funds flow, current and
forecast commodity prices, fluctuations in working capital, financial requirements of Birchcliff, applicable laws (including solvency tests
under the ABCA for the declaration and payment of dividends) and other factors beyond Birchcliff’s control. The payment of dividends
to shareholders is not assured or guaranteed and dividends may be reduced or suspended entirely. In addition to the foregoing, the
Corporation’s ability to pay dividends now or in the future may be limited by covenants contained in the agreements governing any
indebtedness that the Corporation has incurred or may incur in the future, including the terms of the Credit Facilities. The agreement
governing the Credit Facilities provides that Birchcliff 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.
2022 ANNUAL REPORT 75
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 the AIF 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.
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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, 2022 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
Executive Vice President and Chief Financial Officer
(signed) “A. Jeffery Tonken”
A. Jeffery Tonken
Chief Executive Officer
Calgary, Canada
March 15, 2023
2022 ANNUAL REPORT 77
Independent Auditor’s Report
To the Shareholders of Birchcliff Energy Ltd.
Opinion
We have audited the financial statements of Birchcliff Energy Ltd. (the “Corporation”), which comprise:
•
•
•
•
•
•
the statements of financial position as at December 31, 2022 and December 31, 2021
the statements of net income and comprehensive income 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 Corporation as
at December 31, 2022 and December 31, 2021, 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 “Auditor’s Responsibilities for the Audit of the Financial Statements” section of our auditor’s report.
We are independent of the Corporation 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, 2022. 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 auditor’s report.
Assessment of the impact of estimated proved and probable oil and gas reserves on petroleum and natural gas properties
and equipment.
Description of the matter
We draw attention to note 3 to the financial statements. The Corporation uses estimated proved and probable oil and gas reserves to
deplete petroleum and natural gas properties and equipment (“PP&E”), to assess for indicators of impairment on the Corporation’s
cash generating unit (“CGU”) and if any such indicators exist, to perform an impairment test to estimate the recoverable amount of
the CGU. The Corporation has $2.97 million of PP&E as at December 31, 2022. The Corporation’s net carrying value of PP&E, 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 depleted, taking
into account total capitalized costs plus estimated future development costs necessary to bring those reserves into production.
The estimate of proved and probable oil and gas reserves requires the expertise of independent third-party reserve evaluators and
includes significant assumptions related to:
•
•
•
•
•
Forecasted oil and gas commodity prices
Forecasted production
Forecasted operating costs
Forecasted royalty costs
Forecasted future development costs.
The Corporation engages independent third-party reserve evaluators to evaluate the proved and probable oil and gas reserves.
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BIRCHCLIFF ENERGY
Why the matter is a key audit matter
We identified the assessment of the impact of estimated proved and probable oil and gas reserves on PP&E 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.
How the matter was addressed in the audit
The following are the primary procedures we performed to address this key audit matter:
We assessed the depletion expense calculation for compliance with IFRS as issued by the IASB.
With respect to the estimate of proved and probable oil and gas reserves:
• We evaluated the competence, capabilities and objectivity of the independent third-party reserve evaluators engaged by the
Corporation
• We compared forecasted oil and gas commodity prices to those published by independent third-party reserve evaluators
• We compared the 2022 actual production, operating costs, royalty costs and development costs of the Corporation to those
estimates used in the prior year’s estimate of proved oil and gas reserves to assess the Corporation’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 2022 historical results. We took into account changes in conditions and events
affecting the Corporation to assess the adjustments or lack of adjustments made by the Corporation 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 auditor’s report thereon, included in a document entitled “2022
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 auditor’s report thereon, included in a document entitled
“2022 Annual Report” as at the date of this auditor’s 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 auditor’s 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 International
Financial Reporting Standards (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 Corporation’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 Corporation or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Corporation’s financial reporting process.
Auditor’s 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 auditor’s 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.
2022 ANNUAL REPORT 79
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 Corporation’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
Corporation’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw
attention in our auditor’s 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 auditor’s report. However,
future events or conditions may cause the Corporation 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
auditor’s 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 auditor’s 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 auditor’s report is Timothy Arthur Richards.
(signed) “KPMG LLP”
Chartered Professional Accountants
Calgary, Canada
March 15, 2023
80
BIRCHCLIFF ENERGY
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
Financial instruments (Note 18)
Non-current assets:
Investments (Note 5)
Petroleum and natural gas properties and equipment (Note 4)
Financial instruments (Note 18)
Total assets
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities
Financial instruments (Note 18)
Other liabilities (Note 14)
Capital securities (Note 9)
Non-current liabilities:
Revolving term credit facilities (Note 6)
Decommissioning obligations (Note 7)
Deferred income taxes (Note 8)
Other liabilities (Note 14)
Financial instruments (Note 18)
Total liabilities
SHAREHOLDERS’ EQUITY
Share capital (Note 9)
Common shares
Preferred shares (perpetual)
Contributed surplus
Retained earnings
Total shareholders’ equity and liabilities
Commitments and contingencies (Note 19)
The accompanying notes are an integral part of these financial statements.
Approved by the Board
(signed) “Debra A. Gerlach”
Debra A. Gerlach
Independent Director
(signed) “A. Jeffery Tonken”
A. Jeffery Tonken
Director
2022
2021
74
125,005
12,140
17,729
154,948
10,961
2,972,592
30,864
3,014,417
3,169,365
143,787
1,345
1,914
-
147,046
131,981
99,720
355,115
22,850
-
609,666
756,712
63
92,414
5,732
69
98,278
9,457
2,852,232
-
2,861,689
2,959,967
96,736
16,586
-
38,268
151,590
500,870
140,603
156,695
25,329
67,277
890,774
1,042,364
1,430,944
1,463,424
-
86,560
895,149
2,412,653
3,169,365
41,434
90,924
321,821
1,917,603
2,959,967
2022 ANNUAL REPORT 81
Birchcliff Energy Ltd.
Statements of Net Income and Comprehensive Income
(Expressed in thousands of Canadian dollars, except per share information)
Years ended December 31,
2022
2021
REVENUE
Petroleum and natural gas revenue (Note 11)
Marketing revenue (Note 11)
Royalties
Realized gain (loss) on financial instruments (Note 18)
Unrealized gain on financial instruments (Note 18)
Other income
EXPENSES
Operating (Note 12)
Transportation
Marketing purchases (Note 11)
Administrative, net (Note 13)
Depletion and depreciation (Note 4)
Finance (Note 15)
Dividends on capital securities (Note 9)
Other gains (Notes 5 & 7)
Net income before taxes
Deferred income tax expense (Note 8)
NET INCOME AND COMPREHENSIVE INCOME
Net income per common share (Note 10)
Basic
Diluted
The accompanying notes are an integral part of these financial statements.
1,340,180
18,806
(161,226)
80,742
131,042
4
1,409,548
101,581
155,864
17,866
42,230
213,808
19,239
2,013
(370)
552,231
857,317
(200,486)
656,831
932,406
20,722
(76,271)
(21,451)
84,242
2,182
941,830
91,515
151,263
18,034
30,676
212,757
33,238
2,718
(7,312)
532,889
408,941
(94,265)
314,676
$2.46
$2.38
$1.17
$1.13
82
BIRCHCLIFF ENERGY
Preferred
Shares
Contributed
Surplus
Retained
Earnings
Total
Birchcliff Energy Ltd.
Statements of Changes in Shareholders’ Equity
(Expressed in thousands of Canadian dollars)
Share Capital
As at December 31, 2020
Issuance of common shares (Notes 9 & 16)
Repurchase of common shares (Note 9)
Dividends on common shares (Note 9)
Dividends on perpetual preferred shares (Note 9)
Stock-based compensation (Notes 13 & 16)
Net income and comprehensive income
Common
Shares
1,478,294
16,636
(31,506)
-
-
-
-
41,434
-
-
-
-
-
-
89,868
(3,995)
-
-
-
5,051
-
As at December 31, 2021
1,463,424
41,434
90,924
As at December 31, 2021
Issuance of common shares (Notes 9 & 16)
Repurchase of common shares (Note 9)
1,463,424
32,940
(57,207)
41,434
-
-
Redemption of perpetual preferred shares (Note 9)
-
(41,434)
Purchase of performance warrants (Note 16)
(8,213)
Dividends on common shares (Note 9)
Dividends on perpetual preferred shares (Note 9)
Stock-based compensation (Notes 13 & 16)
Net income and comprehensive income
-
-
-
-
As at December 31, 2022
1,430,944
-
-
-
-
-
-
90,924
(9,935)
-
-
(6,293)
-
-
11,864
-
86,560
The accompanying notes are an integral part of these financial statements.
17,971
1,627,567
-
-
(6,639)
(4,187)
-
314,676
321,821
12,641
(31,506)
(6,639)
(4,187)
5,051
314,676
1,917,603
321,821
1,917,603
-
-
(8,566)
-
(71,788)
(3,149)
-
656,831
895,149
23,005
(57,207)
(50,000)
(14,506)
(71,788)
(3,149)
11,864
656,831
2,412,653
2022 ANNUAL REPORT 83
Birchcliff Energy Ltd.
Statements of Cash Flows
(Expressed in thousands of Canadian dollars)
Years ended December 31,
Cash provided by (used in):
OPERATING
Net income
Adjustments for items not affecting operating cash:
Unrealized (gain) on financial instruments (Note 18)
Depletion and depreciation (Note 4)
Other compensation (Note 13)
Finance (Note 15)
Other gains (Notes 4 & 5)
Deferred income tax expense (Note 8)
Interest paid (Note 15)
Dividends on capital securities (Note 9)
Decommissioning expenditures (Note 7)
Changes in non-cash working capital (Note 20)
FINANCING
Issuance of common shares (Notes 9 & 16)
Repurchase of common shares (Note 9)
Redemption of capital securities (Note 9)
Redemption of perpetual preferred shares (Note 9)
Purchase of performance warrants (Note 16)
Financing fees paid
Lease payments (Note 14)
Dividend distributions (Note 9)
Net change in revolving term credit facilities (Note 6)
INVESTING
Exploration and development (Note 4)
Acquisitions (Note 4)
Dispositions (Note 4)
Administrative assets (Note 4)
Investments (Note 5)
Changes in non-cash working capital (Note 20)
Net change in cash
Cash, beginning of year
CASH, END OF YEAR
The accompanying notes are an integral part of these financial statements.
84
BIRCHCLIFF ENERGY
2022
2021
656,831
314,676
(131,042)
213,808
6,456
19,239
(370)
200,486
(13,738)
2,013
(2,746)
(25,662)
925,275
23,005
(57,207)
(38,268)
(50,000)
(14,506)
(1,275)
(2,458)
(76,950)
(369,066)
(586,725)
(84,242)
212,757
2,430
33,238
(7,312)
94,265
(28,797)
2,718
(3,203)
(21,161)
515,369
12,641
(31,506)
(1,662)
-
-
(3,454)
(2,444)
(13,544)
(228,015)
(267,984)
(364,621)
(230,479)
(2,348)
315
(1,576)
(1,956)
31,647
(338,539)
11
63
74
(283)
-
(1,718)
(1,252)
(13,650)
(247,382)
3
60
63
Birchcliff Energy Ltd.
Notes to the Financial Statements
For the Years Ended December 31, 2022 and 2021
(Expressed in 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 are listed for trading on the Toronto Stock Exchange (the “TSX”)
under the symbol “BIR”.
These financial statements were approved and authorized for issuance by the board of directors (the “Board”) on March 15, 2023.
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, 2022 and December 31, 2021. 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.
Current Environment and Estimation Uncertainty
Benchmark oil and natural gas prices remained volatile during 2022 primarily due to supply and demand uncertainty attributed to
regional impacts of the ongoing restrictions and lockdowns in China resulting from the novel coronavirus (“COVID-19”) pandemic,
the potential for a global economic slowdown attributed to rising inflation and interest rates, geopolitical tensions arising from
the Russian invasion of Ukraine and global commodity supply constraints and labour shortages, which have increased inflationary
pressures on global economies. These events and economic conditions remain evolving situations that have 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 these events and conditions, or the extent to which
they will impact the Corporation long-term.
Climate Change and Environmental Reporting Regulations
Regulations relating to climate and climate-related matters continue to evolve and may have additional disclosure requirements
in the future. The International Sustainability Standards Board has issued an IFRS Sustainability Disclosure Standard with the aim
to develop an environment sustainability disclosure framework that is accepted globally. In addition, the Canadian Securities
Administrators have proposed National Instrument 51-107 – Disclosure of Climate-related Matters, with additional climate-related
disclosure requirements for Canadian Public Companies. If the Corporation is unable to meet future sustainability reporting
requirements of regulators or current and future expectations of stakeholders, its business and ability to attract and retain skilled
employees, obtain regulatory permits, licenses, registrations, approvals and authorizations from various government authorities,
and raise capital may be adversely affected. The cost to comply with these standards, and others that may be developed or evolved
over time, has not yet been quantified.
2022 ANNUAL REPORT 85
The Corporation has considered the impact of the evolving worldwide demand for energy and the global advancement of
alternative sources of energy that are not derived from fossil fuels in its assessment of depletion and indicators of impairment
on its PP&E in the preparation of these financial statements. The timeframe for which the global economy can transition from
carbon-based sources to alternative energy is unknown, however, it is the Corporation’s view that cash flows associated with
proved and probable oil and gas reserves at December 31, 2022 will be realized before fossil fuel energy is replaced by alternative
sources. The Corporation engaged an independent third-party reserves evaluator to evaluate the proved and probable oil and gas
reserves at December 31, 2022. The reserves report includes anticipated impacts from emissions related taxes, most notably the
estimated carbon tax related to the Corporation’s operations.
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 (“E&E”) 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.
86
BIRCHCLIFF ENERGY
(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 consist 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 PP&E is expensed in profit or loss as
incurred.
PP&E 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 interests, 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 depleted, 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 evaluated by the Corporation’s independent
third-party 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 PP&E
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).
2022 ANNUAL REPORT 87
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 third-party reserves
evaluator 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 PP&E. 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 PP&E 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 PP&E. 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, 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.
88
BIRCHCLIFF ENERGY
(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.
2022 ANNUAL REPORT 89
(l)
Impairment
Impairment of financial assets
(i)
Impairment of financial assets is determined by measuring the assets’ expected credit loss (“ECL”). Birchcliff’s financial
assets are not considered to have a significant financing component and a lifetime ECL is measured at the date of initial
recognition of the financial asset. ECL allowances have not been recognized for cash and cash equivalents due to the virtual
certainty associated with their collection. The ECL pertaining to accounts receivable is assessed at initial recognition and
this provision is re-assessed at each reporting date. ECLs are a probability-weighted estimate of all possible default events
related to the financial asset (over the lifetime or within 12 months after the reporting period, as applicable) and are measured
as the difference between the present value of the cash flows due to Birchcliff and the cash flows the Corporation expects
to receive, including cash flows expected from collateral and other credit enhancements that are a part of contractual
terms. In making an assessment as to whether financial assets are credit-impaired, the Corporation considers historically
realized bad debts, evidence of a debtor’s present financial condition and whether a debtor has breached certain contracts,
the probability that a debtor will enter bankruptcy or other financial reorganization, changes in economic conditions that
correlate to increased levels of default, the number of days a debtor is past due in making a contractual payment, and the term
to maturity of the specified receivable. The carrying amounts of financial assets are reduced by the amount of the ECL through
an allowance account and losses are recognized within general and administrative expense in profit and loss.
Based on contractual terms and conditions, the Corporation considers its financial assets to be in default when the
counterparty fails to make contractual payments as required. Once the Corporation has pursued collection activities and it
has been determined that the incremental cost of pursuing collection outweighs the benefits, Birchcliff derecognizes the
gross carrying amount of the financial asset and the associated allowance from the statement of financial position.
Impairment of non-financial assets
(ii)
The Corporation’s PP&E 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 CGUs carrying
value to its estimated recoverable amount. A CGUs 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 assumptions 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 evaluator.
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.
90
BIRCHCLIFF ENERGY
(m) Income Taxes
Birchcliff is a corporation as defined under the Income Tax Act (Canada) and is subject to Canadian Federal and provincial taxes.
Birchcliff is subject to provincial taxes in Alberta as the Corporation operates in this jurisdiction. The Corporation’s income tax
expenses include current and/or deferred tax. Income tax expense is recognized through profit or loss except to the extent that
it relates to items recognized directly in equity, in which case the related income taxes are also recognized in equity.
Current tax is the expected tax payable on taxable income and Part VI.I dividend tax payable on taxable preferred shares for the
period, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of
previous years.
Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable income. Deferred tax liabilities are generally
recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary
differences to the extent that it is probable that taxable income will be available against which those deductible temporary
differences can be utilized. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and
reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the
asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is
expected to be settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by
the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would
follow from the manner in which Birchcliff expects, at the end of the reporting period, to recover or settle the carrying amount of its
assets and liabilities.
(n) Per Common Share
The Corporation calculates per common share amounts using net income available to Birchcliff’s shareholders, reduced for
perpetual preferred share dividends and divided by the weighted average number of common shares outstanding. Basic per
share information is computed using the weighted average number of basic common shares outstanding during the period.
Diluted per share information is calculated using the treasury stock method, which assumes that any proceeds from the exercise
of “in-the-money” stock options and performance warrants, plus the unamortized stock-based compensation expense amounts,
would be used to purchase common shares at the average market price during the period. No adjustment to diluted earnings per
share is made if the result of these calculations is anti-dilutive. The average market value of the Corporation’s shares for the purpose
of calculating the dilutive effect is based on average quoted market prices for the time that the stock options and performance
warrants were outstanding during the period.
(o) Business Combinations
The purchase method of accounting is used to account for acquisitions of businesses and assets that meet the definition of a business
under IFRS. The cost of an acquisition is measured as the fair value of the assets given and liabilities incurred or assumed at the date
of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured
initially at their fair values at the acquisition date. If the consideration given up is less than the fair value of the net assets received,
the difference is recognized immediately in the income statement. If the consideration is greater than the fair value of the net assets
received, the difference is recognized as goodwill on the statement of financial position. Acquisition costs incurred are expensed.
(p) Post-Employment Benefit Obligations
Birchcliff’s post-employment benefits are defined benefit obligations under IFRS. The cost of the post-employment benefit
obligations are determined using the projected unit credit method. The obligations are 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 obligations are presented on the statements of financial position as other liabilities. Past
service cost is the change in the present value of the obligations and can arise from the introduction, amendment or curtailment
of a plan. Current service cost is the increase in the present value of the obligations 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 obligations are recorded as accretion (interest) expense and is presented in profit and loss as
a finance expense.
2022 ANNUAL REPORT 91
Remeasurements of the post-employment benefit obligations 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 obligations 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 obligations in the
period incurred. Any difference between the actual costs incurred upon settlement of the obligations and the recorded liability
is recognized as a gain or loss in profit or loss.
(q) Lease Obligations
When Birchcliff is a party to a lease arrangement as the lessee, a lease liability, herein referred to as a “lease obligations”, and
corresponding right-of-use asset, herein referred to as a “lease asset”, for each identified lease is recognized under IFRS. The lease
obligations are 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 obligations are reduced by actual cash lease payments made during
the period. Lease obligations are presented as other liabilities on the statements of financial position. The lease assets are included
in PP&E 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 obligations are 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 obligations will result in an adjustment to the right-of-use asset. Remeasurements result from
increases or decreases in the present value of the obligations 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 and other 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 PP&E
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 the estimate of 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.
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BIRCHCLIFF ENERGY
(iv) Lease Obligations
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 and other 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, 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. The Corporation uses estimated proved and probable oil and gas
reserves to deplete PP&E to assess for indicators of impairment on the Corporation’s CGU and if any such indicators exist,
to perform an impairment test to estimate the recoverable amount of a CGU. The Corporation engages an independent
third-party reserves evaluator to evaluate its proved and probable oil and gas reserves. 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 an independent third-party reserves evaluator 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 Obligations
The Corporation estimates the post-employment benefit obligations at the end of each reporting period. In most instances,
the obligations occur many years into the future. The Corporation uses estimates related to the initial measurement of the
obligations 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
obligations recorded by the Corporation to change.
2022 ANNUAL REPORT 93
(v) Lease Obligations
Lease obligations are estimated using the rate implicit in the lease, unless this rate is not readily determinable, in which case a
discount rate equal to the Corporation’s incremental borrowing rate is used. This rate represents the rate that the Corporation
would incur to obtain the funds necessary to purchase an asset of a similar value, with similar payment terms and security in a
similar economic environment.
Impairment of Non-Financial Assets
(vi)
For the purposes of determining the extent of any impairment or its reversal, if any, 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, if any, will affect profit or loss.
(vii) Income Taxes
Birchcliff files corporate income tax, goods and services tax and other tax returns with various provincial and federal taxation
authorities in Canada. There can be differing interpretations of applicable tax laws and regulations. The resolution of these tax
positions through negotiations or litigation with tax authorities can take several years to complete. The Corporation does not
anticipate that there will be any material impact upon the results of its operations, financial position or liquidity.
Tax provisions are based on enacted or substantively enacted laws. Changes in those laws could affect amounts recognized
in profit or loss both in the period of change, which would include any impact on cumulative provisions, and in future periods.
Deferred tax assets (if any) are recognized only to the extent it is considered probable that those assets will be recoverable.
This involves an assessment of when those deferred tax assets are likely to reverse and a judgment as to whether or not there
will be sufficient taxable profits available to offset the tax assets when they do reverse. This requires assumptions regarding
future profitability and is therefore inherently uncertain. Estimates of future taxable income are based on forecasted cash
flows from operations. To the extent that any interpretation of tax law is challenged by the tax authorities or future cash flows
and taxable income differ significantly from estimates, the ability of Birchcliff to realize the deferred tax assets recorded at the
statement of financial position date could be impacted.
(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.
94
BIRCHCLIFF ENERGY
4. PETROLEUM AND NATURAL GAS PROPERTIES AND EQUIPMENT
The continuity for petroleum and natural gas properties and equipment is as follows:
($000s)
Cost:
As at December 31, 2020
Additions
Acquisitions
As at December 31, 2021
Additions
Acquisitions
Dispositions
Exploration
& Evaluation
Assets(3)
Developed
& Producing
Assets
Lease
Assets
Corporate
Assets
Total
354
35
-
389
17
-
-
4,147,726
228,913
866
19,931
147
-
21,930
1,718
4,189,941
230,813
-
866
4,377,505
20,078
23,648
4,421,620
330,114
2,776
(315)
-
-
-
1,576
331,707
-
-
2,776
(315)
As at December 31, 2022(1)
406
4,710,080
20,078
25,224
4,755,788
Accumulated depletion and depreciation:
As at December 31, 2020
Depletion and depreciation expense(2)
As at December 31, 2021
Depletion and depreciation expense(2)
As at December 31, 2022
Net book value:
As at December 31, 2021
As at December 31, 2022
-
-
-
-
-
(1,335,122)
(208,821)
(1,543,943)
(210,049)
(1,753,992)
(3,946)
(2,035)
(5,981)
(2,035)
(8,016)
(17,563)
(1,356,631)
(1,901)
(212,757)
(19,464)
(1,569,388)
(1,724)
(213,808)
(21,188)
(1,783,196)
389
406
2,833,562
2,956,088
14,097
12,062
4,184
4,036
2,852,232
2,972,592
(1) The Corporation’s PP&E were pledged as security for its revolving term credit facilities. Although the Corporation believes that it has title to its PP&E, it cannot control or completely protect itself
against the risk of title disputes and challenges. There were no borrowing costs capitalized to the Corporation’s PP&E during 2022 and 2021.
(2) Future development costs required to develop and produce proved and probable oil and gas reserves totalled $4.5 billion at December 31, 2022 (December 31, 2021 – $4.3 billion) and are
included in the depletion expense calculation.
(3) 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 developing and producing assets. There were no exploration costs reclassified
from the E&E category to developing and producing category during 2022 and 2021.
Impairment Assessment
In accordance with IFRS, an impairment test is performed if Birchcliff identifies indicators of impairment at the end of a reporting
period. At December 31, 2022 and December 31, 2021, Birchcliff determined there were no impairment indicators present and
therefore an impairment test was not required.
2022 ANNUAL REPORT 95
5. INVESTMENTS
On August 31, 2017, Birchcliff acquired securities consisting of 4,500,000 Common A LP Units (the “Common A Units”) in a
limited partnership and 10,000,000 Preferred Trust Units (the “Preferred Trust Units”) in a Trust (collectively, the “Securities”)
at a combined value of $10.0 million. The Securities are not publicly listed and do not constitute a significant investment. Birchcliff
recorded a gain on investment of $1.8 million in 2022 as compared to a gain on investment of $6.4 million in 2021.
On September 20, 2022, Birchcliff provided notice to the Trust to tender the Securities for cash redemption. During 2022,
Birchcliff redeemed 566,109 Preferred Trust Units and 254,750 Common A Units for aggregate proceeds of $0.6 million. As at
December 31, 2022, Birchcliff held a total of 9,433,891 Preferred Trust Units and 4,245,250 Common A Units which collectively
had a fair value of $9.4 million (December 31, 2021 – $8.2 million).
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.
6. 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
2022
109,201
26,321
135,522
(3,541)
131,981
2021
477,958
26,630
504,588
(3,718)
500,870
At December 31, 2022, the aggregate principal amount of the Corporation’s credit facilities was $850.0 million with maturity
dates of May 11, 2025 which were comprised of: (i) an extendible revolving syndicated term credit facility (the “Syndicated
Credit Facility”) of $750.0 million; and (ii) an extendible revolving working capital facility (the “Working Capital Facility”) of
$100.0 million (collectively, the “Credit Facilities”). Birchcliff has outstanding $0.2 million in letters of credit at December 31, 2022.
The letters of credit reduce the amount available under the Working Capital Facility from $100.0 million to approximately $99.8 million.
Effective May 3, 2022, the agreement governing the Credit Facilities was amended to extend the maturity dates of each of the
Syndicated Credit Facility and the Working Capital Facility from May 11, 2024 to May 11, 2025. In addition, the lenders confirmed
the aggregate borrowing base limit under the Corporation’s Credit Facilities at $850.0 million. 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, 2022 was 17.3. 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 November 2022,
Birchcliff’s syndicate of lenders completed its semi-annual review and the borrowing base limit was confirmed at $850.0 million.
The maturity date of the Credit Facilities may, at the request of the Corporation and with consent of the lenders, be extended
on an annual basis, for an additional period of up to three years from May 3 of the year in which the extension request is made.
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.
The amended agreement governing the Credit Facilities allows for prime rate loans, SOFR term loans, U.S. base rate loans,
bankers’ acceptances and, in the case of the Working Capital Facility only, letters of credit, plus applicable margins. Effective
May 3, 2022, LIBOR loans were no longer available under the amended agreement and were replaced with SOFR term loans. 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) deferred income taxes, other compensation, gains and losses on
sale of assets, unrealized gains and losses on financial instruments, gains and losses on investments, depletion, depreciation and
amortization and impairment charges.
96
BIRCHCLIFF ENERGY
7. DECOMMISSIONING OBLIGATIONS
The Corporation estimates the total undiscounted (inflated) amount of cash flow required to settle its decommissioning
obligations is approximately $281.0 million at December 31, 2022 (December 31, 2021 – $245.0 million). A reconciliation of the
decommissioning obligations is set forth below:
As at December 31, ($000s)
Balance, beginning
Obligations incurred
Obligations acquired
Obligations divested
Changes in estimated future cash flows(1)
Accretion
Decommissioning expenditures(2)
Balance, ending(3)
2022
140,603
4,004
428
(19)
(44,996)
3,248
(3,548)
99,720
2021
146,232
4,907
582
(620)
(9,611)
2,608
(3,495)
140,603
(1) Primarily relates to changes in the nominal risk-free rate and inflation rate used to calculate the present value of the decommissioning obligations.
(2) Includes $0.3 million and $0.8 million of funding from the Alberta Site Rehabilitation Program in 2021 and 2022, respectively.
(3) Birchcliff applied an inflation rate of 2.09% and a discount nominal risk-free rate of 3.28% to calculate the present value of the decommissioning obligations at December 31, 2022 and an inflation
rate of 1.82% and a discount nominal risk-free rate of 1.68% at December 31, 2021.
8. INCOME TAXES
Included in deferred income tax expense is a deferred tax expense of $198.4 million in 2022 (2021 – $91.5 million) and a Part VI.I
dividend tax totaling $2.1 million in 2022 (2021 – $2.8 million) attributed to 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 23% in 2022 (2021 – 23%).
The components of deferred income tax expense are set forth below:
Years ended December 31, ($000s)
Net income before taxes
Computed expected income tax expense
(Increase) decrease in taxes resulting from:
Non-deductible stock-based compensation
Non-deductible dividends on capital securities
Non-deductible expenses and other
Change in deferred tax assets not recognized
Deferred income tax expense
The components of net deferred income tax liabilities are set forth below:
As at December 31, ($000s)
Deferred income tax liabilities:
PP&E
Deferred financing fees
Risk management contracts
Deferred income tax assets:
Decommissioning obligations
Other obligations
Risk management contracts
Bank financing and share issue costs
Non-capital losses and other
Deferred income tax liabilities
2022
2021
857,317
408,941
(197,183)
(94,056)
(1,628)
(463)
(1,108)
(104)
(822)
(625)
(234)
1,472
(200,486)
(94,265)
2022
2021
413,127
815
10,867
(22,936)
(3,276)
-
(988)
(42,494)
355,115
381,349
855
-
(32,496)
(3,550)
(19,273)
(873)
(169,317)
156,695
2022 ANNUAL REPORT 97
A continuity of the net deferred income tax liabilities is set forth below:
($000s)
PP&E
Deferred financing fees
Risk management contracts
Decommissioning obligations
Other obligations
Bank financing and share issue costs
Non-capital losses and other
($000s)
PP&E
Deferred financing fees
Decommissioning obligations
Other obligations
Risk management contracts
Bank financing and share issue costs
Non-capital losses and other
Balance
Jan. 1, 2022
Recognized in
Profit or Loss
Balance
Dec. 31, 2022
381,349
855
(19,273)
(32,496)
(3,550)
(873)
(169,317)
156,695
31,778
(40)
30,140
9,560
274
(115)
126,823
198,420
413,127
815
10,867
(22,936)
(3,276)
(988)
(42,494)
355,115
Balance
Jan. 1, 2021
Recognized in
Profit or Loss
Balance
Dec. 31, 2021
372,456
283
(33,633)
(3,917)
(38,648)
(960)
(230,389)
65,192
8,893
572
1,137
367
19,375
87
61,072
91,503
381,349
855
(32,496)
(3,550)
(19,273)
(873)
(169,317)
156,695
As at December 31, 2022, the Corporation had approximately $1.3 billion (2021 – $1.9 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
$153.5 million that expire between 2030 and 2041 and unrecognized temporary differences on marketable securities of $2.0 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.
98
BIRCHCLIFF ENERGY
9. 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
Issuance of common shares(1)
Repurchase of common shares(2)
Outstanding at end of year
Series A Preferred Shares (perpetual):
Outstanding at beginning of year
Redemption of Series A Preferred Shares(3)
Outstanding at end of year
2022
2021
264,790
7,597
(6,340)
266,047
2,000
(2,000)
-
265,943
4,090
(5,243)
264,790
2,000
-
2,000
(1) Relates to the exercise of stock options and performance warrants (see Note 16).
(2) On November 17, 2022, Birchcliff announced that the TSX had accepted the Corporation’s notice of intention to make a normal course issuer bid (the “2023 NCIB”). Pursuant to the
2023 NCIB, Birchcliff may purchase up to 13,295,786 of its outstanding common shares over a period of twelve months commencing on November 25, 2022 and terminating no later
than November 24, 2023. Under the 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. The total number of common shares that Birchcliff is permitted to purchase on the TSX during a trading day is subject to a daily purchase limit
of 455,368 common shares. However, Birchcliff may make one block purchase per calendar week which exceeds the daily purchase restriction. All common shares purchased under
the 2023 NCIB will be cancelled. The 2023 NCIB effectively renewed the Corporation’s previous normal course issuer bid under which the Corporation was permitted to purchase
13,267,554 common shares over the period from November 25, 2021 to November 24, 2022 (the “2022 NCIB”). The 2022 NCIB effectively renewed the Corporation’s previous
normal course issuer bid under which the Corporation was permitted to purchase up to 13,296,936 common shares over the period from November 25, 2020 to November 24, 2021
(the “2021 NCIB”). During 2021, the Corporation purchased and cancelled 5,242,700 common shares pursuant to the 2021 NCIB and 2022 NCIB at an average price of $6.00 for an
aggregate cost of $31.5 million, before fees. During 2022, the Corporation purchased and cancelled 6,340,192 common shares pursuant to the 2022 NCIB and 2023 NCIB at an
average price of $9.01 for an aggregate cost of $57.1 million, before fees.
(3) On September 30, 2022, Birchcliff redeemed 2,000,000 issued and outstanding cumulative redeemable, preferred shares Series A (the “Series A Preferred Shares”) for a redemption
price equal to $25.00 per share for a total redemption amount of $50.0 million. In addition, a final quarterly cash dividend of $0.527677 per Series A Preferred Share was paid on
October 3, 2022 to the holders of record at the close of business on September 15, 2022. The aggregate redemption amount of the Series A Preferred Shares, including all accrued
and unpaid dividends, totalled approximately $51.1 million and was funded using the Corporation’s Credit Facilities.
Capital Securities
The following table sets forth the number and amount of capital securities outstanding:
As at December 31,
Outstanding at beginning of year
Redemption of Series C Preferred Shares(1)
Outstanding at end of year
Number
(000s)
1,531
(1,531)
-
2022
Amount
($000s)
38,268
(38,268)
-
Number
(000s)
1,597
(66)
1,531
2021
Amount
($000s)
39,930
(1,662)
38,268
(1) On September 30, 2022, Birchcliff redeemed 1,528,219 issued and outstanding cumulative redeemable, preferred shares Series C (the “Series C Preferred Shares”) for a redemption price
equal to $25.00 per share for a total redemption amount of $38.2 million. In addition, a final quarterly cash dividend of $0.441096 per Series C Preferred Share was paid on October 3, 2022 to
the holders of record at the close of business on September 15, 2022. The aggregate redemption amount of the Series C Preferred Shares, including all accrued and unpaid dividends, totalled
approximately $38.9 million and was funded using the Corporation’s Credit Facilities.
2022 ANNUAL REPORT 99
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 ($000s)
Per Series C Preferred Share ($)
2022
2021
71,788
0.2700
3,149
1.5744
2,013
1.3161
6,639
0.0250
4,187
2.0935
2,718
1.7500
On January 18, 2023, the Board declared a quarterly common share base dividend of $0.20 per common share for the quarter
ending March 31, 2023. The dividend will be payable on March 31, 2023 to shareholders of record at the close of business on
March 15, 2023. The ex-dividend date is March 14, 2023. The dividend has been designated as an eligible dividend for the
purposes of the Income Tax Act (Canada).
10. EARNINGS PER SHARE
The following table sets forth the computation of net income per common share:
Years ended December 31, ($000s, except for per share information)
Net income
Dividends on Series A Preferred Shares
Net income to common shareholders
Weighted average common shares (000s):
Weighted average basic common shares outstanding
Dilutive securities
Weighted average diluted common shares outstanding(1)
Net income per common share:
Basic
Diluted
2022
656,831
(3,149)
653,682
2021
314,676
(4,187)
310,489
265,548
265,990
9,671
8,369
275,219
274,359
$2.46
$2.38
$1.17
$1.13
(1) The weighted average diluted common shares outstanding excludes 5,971,300 stock options that were anti-dilutive as at December 31, 2022 (December 31, 2021 – 7,709,600).
100
BIRCHCLIFF ENERGY
11. REVENUE
The following table sets forth Birchcliff’s petroleum and natural gas (“P&NG”) sales and 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
2022
97,185
208,828
112,049
2021
83,836
178,651
85,891
922,060
583,991
1,340,122
932,369
58
37
1,340,180
932,406
18,806
1,358,986
20,722
953,128
(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, 2022 was $118.0 million (December 31, 2021 – $88.8 million) in P&NG sales to be received from its marketers in respect of December 2022
production, which was subsequently received in January 2023.
(5) Marketing revenue primarily 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, 2022, the Corporation had marketing purchases from third parties of $17.9 million
(2021 – $18.0 million).
12. OPERATING EXPENSE
The Corporation’s operating expenses include all costs with respect to day-to-day production operations. The components of
operating expenses are set forth below:
Years ended December 31, ($000s)
Field operating costs
Recoveries
Operating expense
13. ADMINISTRATIVE EXPENSE
The components of administrative expenses are set forth below:
Years ended December 31, ($000s)
Cash:
Salaries and benefits(1)
Other(2)
General and administrative, gross
Operating overhead recoveries
Capitalized overhead(3)
General and administrative, net
Non-cash:
Other compensation(4)
Capitalized compensation(3)
Other compensation, net
Administrative expense, net
2022
106,203
(4,622)
101,581
2021
96,533
(5,018)
91,515
2022
2021
38,049
17,831
55,880
(139)
35,504
12,426
47,930
(144)
(19,967)
(19,540)
35,774
28,246
12,956
(6,500)
6,456
42,230
5,605
(3,175)
2,430
30,676
(1) Includes salaries, benefits and 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 corporate travel, rent, legal fees, tax, insurance, 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 $11.9 million and post-employment benefit expense of $1.1 million in 2022 (2021 - $5.1 million and $0.5 million, respectively) (Notes 14 & 16).
2022 ANNUAL REPORT
101
Total 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
2022
9,214
3,414
1,091
13,719
2021
7,325
1,237
554
9,116
(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 granted to the executive officers.
(3) Represents service costs associated with post-employment benefits of the Corporation’s executive officers (Note 14).
14. OTHER LIABILITIES
Post-Employment Benefit Obligations
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 “Retirement Plan”). The Retirement
Plan is not funded and as such no plan assets exist. The post-employment benefit obligations arising from the Retirement 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 Retirement 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 obligations.
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 $15.3 million at December 31, 2022
(December 31, 2021 – $14.8 million).
A reconciliation of the discounted post-employment benefit obligations is set forth below:
As at December 31, ($000s)
Balance, beginning
Obligations incurred(1)
Accretion
Balance, ending(2)
Current portion
Long-term portion
2022
9,895
1,091
184
11,170
-
11,170
2021
9,177
554
164
9,895
-
9,895
(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 obligations at December 31, 2022 and December 31, 2021.
Lease Obligations
The Corporation’s total undiscounted (inflated) amount of cash flow required to settle its lease obligations is approximately
$15.3 million at December 31, 2022 (December 31, 2021 – $17.7 million) and is expected to be settled by 2029. A reconciliation
of the discounted lease obligations is set forth below:
As at December 31, ($000s)
Balance, beginning
Lease payments
Change in estimate
Accretion
Balance, ending(1)
Current portion
Long-term portion
2022
15,434
(2,458)
-
618
13,594
1,914
11,680
2021
17,030
(2,444)
147
701
15,434
1,841
13,593
(1) Birchcliff applied a discount rate of 4.7% to calculate the discounted value of the lease obligations at December 31, 2022 and December 31, 2021.
102
BIRCHCLIFF ENERGY
15. FINANCE EXPENSE
The components of finance expenses are set forth below:
Years ended December 31, ($000s)
Cash:
Interest on credit facilities
Non-cash:
Accretion(1)
Amortization of deferred financing fees
Finance expense
(1) Includes accretion on decommissioning obligations, post-employment benefit obligations and lease obligations.
16. SHARE-BASED PAYMENT
Stock Options
2022
2021
13,738
28,797
4,050
1,451
19,239
3,473
968
33,238
At December 31, 2022, the Corporation’s stock option plan (the “Option Plan”) permitted the grant of options in respect of a
maximum of 26,604,681 (December 31, 2021 – 26,479,040) common shares. At December 31, 2022, there remained 6,281,897
(December 31, 2021 – 3,362,121) stock options available for issuance. For the stock options exercised during 2022, the weighted
average common share trading price on the TSX was $9.24 (2021 – $4.67) per common share.
A summary of the outstanding stock options is set forth below:
Years ended December 31,
Outstanding, beginning
Granted(2)
Exercised
Forfeited
Expired
Outstanding, ending
2022
2021
Number
Price ($)(1)
Number
Price ($)(1)
23,116,919
5,995,300
(6,786,665)
(359,670)
(1,643,100)
20,322,784
3.96
9.34
(3.03)
(4.50)
(7.84)
5.53
26,134,201
5,689,100
(4,090,375)
(2,082,940)
(2,533,067)
23,116,919
3.56
6.45
(3.09)
(7.53)
(3.90)
3.96
(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 2022 was $4.42 (2021 – $3.03). In determining the stock-based
compensation expense for options issued during 2022, the Corporation applied a weighted average estimated forfeiture rate
of 7.5% (2021 – 7.8%).
The weighted average assumptions used in calculating the Black-Scholes fair values are set forth below:
Years ended December 31,
Risk-free interest rate
Expected life (years)
Expected volatility
Dividend yield
2022
3.1%
4.0
62.5%
0.8%
2021
1.2%
4.2
61.4%
0.3%
2022 ANNUAL REPORT
103
A summary of the stock options outstanding and exercisable under the Option Plan at December 31, 2022 is set forth below:
Grant Price ($)
Awards Outstanding
Awards Exercisable
Low
0.78
3.01
6.01
9.01
High
3.00
6.00
9.00
11.65
Quantity
6,703,972
2,379,612
5,412,900
5,826,300
20,322,784
Performance Warrants
Weighted
Average
Remaining
Contractual
Life (years)
Weighted
Average
Exercise
Price ($)
2.49
1.15
3.95
4.94
3.42
2.03
3.56
6.59
9.38
5.53
Weighted
Average
Remaining
Contractual
Life (years)
Weighted
Average
Exercise
Price ($)
2.35
1.03
3.93
-
2.33
2.10
3.54
6.54
-
3.31
Quantity
5,101,729
2,259,277
1,763,022
-
9,124,028
On January 18, 2005, Birchcliff issued 4,049,665 performance warrants as part of its initial restructuring to become a public entity.
Each performance warrant is exercisable at a price of $3.00 to purchase one common share of Birchcliff.
During 2022, there were 809,933 performance warrants exercised at a price of $3.00 per common share. On May 26, 2022,
there were 1,724,832 performance warrants purchased by the Corporation for a total cash cost of $14.5 million. As at
December 31, 2022, there remained 404,967 performance warrants (December 31, 2021 – 2,939,732) outstanding with
an expiry date of January 31, 2025.
17. CAPITAL MANAGEMENT
The Corporation’s general policy is to maintain a sufficient capital base in order to manage its business in the most effective manner
with the goal of increasing the value of its assets and thus its underlying share value. The Corporation’s objectives when managing
capital are to maintain financial flexibility in order to preserve its ability to meet financial obligations, to maintain a capital structure
that allows Birchcliff to finance its business strategy using primarily internally-generated cash flow and its available debt capacity
and to optimize the use of its capital to provide an appropriate investment return to its shareholders. There were no changes in the
Corporation’s approach to capital management during the year ended December 31, 2022.
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:
Revolving term credit facilities
Unamortized deferred financing fees
Outstanding letters of credit(2)
Unused credit
2022
2021
850,000
850,000
(131,981)
(500,870)
(3,541)
(185)
(3,718)
(4,185)
(135,707)
(508,773)
714,293
341,227
(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 most recent
semi-annual review of the borrowing base limit under the Credit Facilities, which was completed by the Corporation’s syndicate of lenders in November 2022, the borrowing base limit was
confirmed at $850.0 million and the maturity date was extended to May 11, 2025.
(2) Letters of credit are issued to various service providers. The letters of credit reduce the amount available under the Corporation’s Working Capital Facility.
104
BIRCHCLIFF ENERGY
The capital structure of the Corporation is as follows:
As at December 31, ($000s)
Shareholders’ equity(1)
Capital securities(2)
2022
2021
% Change
2,412,653
1,917,603
-
38,268
Shareholders’ equity & capital securities
2,412,653
1,955,871
23
Shareholders’ equity & capital securities as a % of total capital
95%
80%
Revolving term credit facilities
Working capital deficit (surplus)(3)
Fair value of financial instruments - asset(4)
Fair value of financial instruments - liability(4)
Other liabilities(4)
Capital securities(2)
Adjusted working capital deficit (surplus)(5)
Total debt
Total debt as a % of total capital
Total capital
131,981
(7,902)
17,729
(1,345)
(1,914)
-
6,568
138,549
5%
500,870
53,312
69
(16,586)
-
(38,268)
(1,473)
499,397
20%
2,551,202
2,455,268
(72)
4
(1) Shareholders’ equity is defined as share capital plus contributed surplus plus retained earnings, less any deficit.
(2) Fully redeemed on September 30, 2022 (Note 9).
(3) Current liabilities less current assets.
(4) Reflects the current portion only.
(5) Represents items related to the day-to-day operations of Birchcliff and excludes the current portion of financial instruments, other liabilities and capital securities (if any) where the benefit or
obligation has not been realized by the Corporation.
18. RISK MANAGEMENT
Birchcliff is exposed to credit risk, liquidity risk and market risk as part of its normal course of business. The Board 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
2022
117,996
5,440
1,569
125,005
2021
88,843
2,143
1,428
92,414
(1) At December 31, 2022, approximately 14% was due from one marketer (2021 – 23%, one marketer). During 2022, the Corporation received 21%, 11% and 10% of its revenue, respectively, from
three marketers (2021 – 23%, 13% and 10% of its revenue, respectively, from three marketers).
Typically, Birchcliff’s maximum credit exposure from its marketers is revenue from its commodity sales. Receivables from marketers
are normally collected on the 25th day of the month following production. Birchcliff mitigates the credit risk associated with these
receivables by establishing marketing relationships with credit worthy purchasers, obtaining guarantees from their ultimate parent
companies and obtaining letters of credit, if and when appropriate. The Corporation historically has not experienced any material
collection issues with its marketers.
2022 ANNUAL REPORT
105
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
2022
118,040
2,553
3,587
825
2021
88,062
2,315
1,505
532
125,005
92,414
At December 31, 2022, approximately $0.8 million or 0.7% (2021 – $0.5 million or 0.6%) 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 2022 and 2021.
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 and are regularly reviewed
and updated as considered necessary. P&NG 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 P&NG 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 $850.0 million reserve-based bank credit facilities
at the end of 2022 and 2021 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, 2022 was $135.7 million (2021 – $508.8 million) and $714.3 million
in unused credit was available at the end of 2022 (2021 – $341.2 million) to fund future obligations.
The following table details the undiscounted cash flows of the Corporation’s significant contractual financial liabilities at
December 31, 2022 in the period they are due:
($000s)
Accounts payable and accrued liabilities
Drawn revolving credit facilities
Lease payments
Financial liabilities
Market Risk
2023
143,787
-
3,174
146,961
2024
2025-2027
Thereafter
-
-
3,174
3,174
-
135,522
8,456
143,978
-
-
484
484
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.
106
BIRCHCLIFF ENERGY
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 P&NG are not only influenced
by Canadian (“CDN”) and the United States (“US”) demand, but also by world events that dictate the levels of supply and
demand globally.
Financial Derivative Contracts
At December 31, 2022, 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, 2022, 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, 2023 – Dec. 31, 2023 NYMEX HH less US$1.298/MMBtu
Natural gas
AECO 7A basis swap(2)
10,000 MMBtu/d
Jan. 1, 2023 – Dec. 31, 2023
NYMEX HH less US$1.320/MMBtu
Natural gas
AECO 7A basis swap(2)
30,000 MMBtu/d
Jan. 1, 2023 – Dec. 31, 2023
NYMEX HH less US$1.330/MMBtu
Natural gas
AECO 7A basis swap(2)
15,000 MMBtu/d
Jan. 1, 2023 – Dec. 31, 2024
NYMEX HH less US$1.185/MMBtu
Natural gas
AECO 7A basis swap(2)
5,000 MMBtu/d
Jan. 1, 2023 – Dec. 31, 2024 NYMEX HH less US$1.200/MMBtu
Natural gas
AECO 7A basis swap(2)
5,000 MMBtu/d
Jan. 1, 2023 – Dec. 31, 2024 NYMEX HH less US$1.200/MMBtu
Natural gas
AECO 7A basis swap(2)
12,500 MMBtu/d
Jan. 1, 2023 – Dec. 31, 2025
NYMEX HH less US$1.108/MMBtu
Natural gas
AECO 7A basis swap(2)
10,000 MMBtu/d
Jan. 1, 2023 – Dec. 31, 2025
NYMEX HH less US$1.115/MMBtu
Natural gas
AECO 7A basis swap(2)
10,000 MMBtu/d
Jan. 1, 2023 – Dec. 31, 2025
NYMEX HH less US$1.050/MMBtu
Natural gas
AECO 7A basis swap(2)
5,000 MMBtu/d
Jan. 1, 2023 – Dec. 31, 2025
NYMEX HH less US$1.178/MMBtu
Natural gas
AECO 7A basis swap(2)
10,000 MMBtu/d
Jan. 1, 2023 – Dec. 31, 2025
NYMEX HH less US$1.175/MMBtu
Natural gas
AECO 7A basis swap(2)
5,000 MMBtu/d
Jan. 1, 2023 – 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
Natural gas
AECO 7A basis swap(2)
10,000 MMBtu/d
Jan. 1, 2026 – Dec. 31, 2026 NYMEX HH less US$0.895/MMBtu
Natural gas
AECO 7A basis swap(2)
25,000 MMBtu/d
Jan. 1, 2027 – Dec. 31, 2027 NYMEX HH less US$0.788/MMBtu
Fair value
Asset
(Liability)
($000s)
1,389
(1,106)
577
2,930
909
835
4,027
2,971
2,461
370
2,293
963
5,239
7,317
1,475
1,972
531
591
1,427
37,171
(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, 2022, if the future AECO/NYMEX basis changed by US$0.10/MMBtu, with all other variables held constant,
after-tax net income in 2022 would have changed by approximately $18.2 million.
The following financial derivative contracts were entered into subsequent to December 31, 2022 to manage commodity price risk:
Product
Natural gas
Natural gas
Type of Contract
AECO 7A basis swap(2)
AECO 7A basis swap(2)
Quantity
30,000
10,000
Remaining Term(1)
Contract Price
Jan. 1, 2026 – Dec. 31, 2026
NYMEX HH less US$0.992/MMBtu
Jan. 1, 2026 – Dec. 31, 2026
NYMEX HH less US$0.980/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.
2022 ANNUAL REPORT
107
Physical Delivery Contracts
Birchcliff also enters into physical delivery contracts to manage commodity price risk. These contracts are considered normal
executory sales contracts and are not recorded at fair value through profit or loss.
At December 31, 2022 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, 2023 – Dec. 31, 2023
NYMEX HH less US$1.205/MMBtu
(1) Birchcliff sold AECO basis swap.
There were no physical delivery contracts entered into subsequent to December 31, 2022.
Interest Rate Risk
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Corporation’s Credit
Facilities are exposed to interest rate risk. The remainder of Birchcliff’s financial assets and liabilities are not directly exposed to
interest rate risk.
At December 31, 2022, Birchcliff had the following financial derivative contracts in place in order to manage interest rate risk:
Type of Contract
Index
Remaining Term(1)
Notional
Amount
($million)
Fixed Rate
(%)
Fair Value
Asset
($000s)
Interest rate swap One-month banker’s acceptance – CDOR(2)
Jan. 1, 2023 – Mar. 1, 2024
350
2.215
10,077
(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, 2022, if the one-month banker’s acceptance CDOR index changed by 0.10%, with all other variables held
constant, after-tax net income in 2022 would have changed by approximately $0.3 million. There were no financial derivative
contracts entered into subsequent to December 31, 2022 to manage interest rate risk.
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 P&NG sales. The Corporation had no long-term forward exchange rate
contracts in place as at or during the year ended December 31, 2022.
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:
Years ended December 31, ($000s)
Realized gain (loss)
Unrealized gain
2022
80,742
131,042
2021
(21,451)
84,242
The fair value asset of the Corporation’s financial instruments at December 31, 2022 was $47.2 million as compared to a fair value
liability of $83.8 million at December 31, 2021.
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.
108
BIRCHCLIFF ENERGY
Level 3 – Valuations in this level are those with inputs for the asset or liability that are not based on observable market data.
Assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement
within the fair value hierarchy level.
The carrying value and fair value of the Corporation’s financial assets and liabilities at December 31, 2022 are set forth below:
($000s)
Loans and receivables:
Cash
Accounts receivable
Deposits
Investments(1)
Financial derivatives(2)
Other liabilities:
Accounts payable and accrued liabilities
Drawn revolving term credit facilities
(1) Investments are fair valued based on level 3.
(2) Financial derivative contracts are fair valued based on level 2.
19. COMMITMENTS AND CONTINGENCIES
Carrying Value
Fair Value
74
74
125,005
125,005
8,874
10,961
47,248
143,787
135,522
8,874
10,961
47,248
143,787
135,522
The Corporation enters into contracts and commitments in the normal course of operations. The following table lists Birchcliff’s
commitments at December 31, 2022:
($000s)
Operating commitments(1)
Capital commitments(2)
Firm transportation and fractionation(3)
Natural gas processing(4)
Commitments
2023
2,078
1,448
155,901
19,327
178,754
2024
2,078
-
151,929
19,380
173,387
2025 - 2027
Thereafter
6,234
-
336,324
55,625
398,183
173
-
85,754
85,869
171,796
(1) Includes variable operating components associated with Birchcliff’s head office premises.
(2) Includes drilling commitments.
(3) Includes firm transportation service arrangements and fractionation commitments with third parties.
(4) 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, 2022.
20.SUPPLEMENTARY CASH FLOW INFORMATION
Years ended December 31, ($000s)
Provided by (used in):
Accounts receivable
Prepaid expenses and deposits
Accounts payable and accrued liabilities
Dividend tax
Provided by (used in):
Operating
Investing
2022
2021
(32,591)
(27,723)
(6,408)
47,051
(2,067)
(3,555)
(771)
(2,762)
5,985
(34,811)
(25,662)
(21,161)
31,647
5,985
(13,650)
(34,811)
2022 ANNUAL REPORT
109
Abbreviations
bbl
bbls/d
boe
boe/d
barrel
barrels per day
barrel of oil equivalent
barrel of oil equivalent per day
condensate
pentanes plus (C5+)
F&D
G&A
GAAP
GHG
Mcf
Mcf/d
MMBtu
NGLs
OPEC
000s
$000s
finding and development
general and administrative
generally accepted accounting principles for Canadian public companies, which are currently International
Financial Reporting Standards as issued by the International Accounting Standards Board
greenhouse gas
thousand cubic feet
thousand cubic feet per day
million British thermal units
natural gas liquids consisting of ethane (C2), propane (C3) and butane (C4) and specifically excluding condensate
Organization of the Petroleum Exporting Countries
thousands
thousands of dollars
110
BIRCHCLIFF ENERGY
Non-GAAP and Other Financial Measures
This report uses various “non-GAAP financial measures”, “non-GAAP ratios”, “supplementary financial measures” and “capital
management measures” (as such terms are defined in NI 52-112), which are described in further detail below. These measures
facilitate management’s comparisons to the Corporation’s historical operating results in assessing its results and strategic and
operational decision-making and may be used by financial analysts and others in the oil and natural gas industry to evaluate
the Corporation’s performance.
NON-GAAP FINANCIAL MEASURES
NI 52-112 defines a non-GAAP financial measure as a financial measure that: (i) depicts the historical or expected future financial
performance, financial position or cash flow of an entity; (ii) with respect to its composition, excludes an amount that is included in, or
includes an amount that is excluded from, the composition of the most directly comparable financial measure disclosed in the primary
financial statements of the entity; (iii) is not disclosed in the financial statements of the entity; and (iv) is not a ratio, fraction, percentage
or similar representation. The non-GAAP financial measures used in this report are not standardized financial measures under GAAP
and might not be comparable to similar measures presented by other companies. Investors are cautioned that non-GAAP financial
measures should not be construed as alternatives to or more meaningful than the most directly comparable GAAP financial measures
as indicators of Birchcliff’s performance. Set forth below is a description of the non-GAAP financial measures used in this report.
Adjusted Funds Flow and Free Funds Flow
Birchcliff defines “adjusted funds flow” as cash flow from operating activities before the effects of decommissioning expenditures
and changes in non-cash operating working capital. 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. Adjusted funds flow can also be derived from petroleum and natural gas revenue less royalty expense,
operating expense, transportation and other expense, net G&A expense, interest expense and any realized losses (plus realized gains)
on financial instruments and plus any other cash income and expense sources. Management believes that adjusted funds flow assists
management and investors in assessing Birchcliff’s financial performance after deducting all operating and corporate cash costs, as well
as its ability to generate the cash necessary to fund sustaining and/or growth capital expenditures, repay debt, settle decommissioning
obligations, buy back common shares and pay dividends.
Birchcliff defines “free funds flow” as adjusted funds flow less F&D capital expenditures. Management believes that free funds flow
assists management and investors in assessing Birchcliff’s ability to generate shareholder returns through a number of initiatives,
including but not limited to, debt repayment, common share buybacks, the payment of dividends and acquisitions.
The most directly comparable GAAP financial measure to adjusted funds flow and free funds flow is cash flow from operating activities.
The following table provides a reconciliation of cash flow from operating activities 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,
2022
224,447
(7,919)
571
2021
196,142
(4,255)
1,762
Twelve months ended
December 31,
2022
2021
925,275
515,369
25,662
2,746
21,161
3,203
217,099
193,649
953,683
539,733
(106,762)
(35,726)
(364,621)
(230,479)
110,337
157,923
589,062
309,254
2022 ANNUAL REPORT
111
Transportation and Other Expense
Birchcliff defines “transportation and other expense” as transportation expense plus marketing purchases less marketing revenue.
Birchcliff may enter into certain marketing purchase and sales arrangements with the objective of reducing any available transportation
and/or fractionation fees associated with its take-or-pay commitments. Management believes that transportation and other expense
assists management and investors in assessing Birchcliff’s total cost structure related to transportation activities. The most directly
comparable GAAP financial measure to transportation and other expense is transportation expense. The following table provides a
reconciliation of transportation expense to transportation and other expense for the periods indicated:
($000s)
Transportation expense
Marketing purchases
Marketing revenue
Transportation and other expense
Operating Netback
Three months ended
December 31,
Twelve months ended
December 31,
2022
38,793
9,529
(8,916)
39,406
2021
37,454
5,413
(6,169)
36,698
2022
155,864
17,866
(18,806)
154,924
2021
140,574
11,127
(13,687)
138,014
Birchcliff defines “operating netback” as petroleum and natural gas revenue less royalty expense, operating expense and transportation
and other expense. Management believes that operating netback assists management and investors in assessing Birchcliff’s operating
profits after deducting the cash costs that are directly associated with the sale of its production, which can then be used to pay other
corporate cash costs or satisfy other obligations. The following table provides a breakdown of Birchcliff’s operating netback for the
periods indicated:
($000s)
Petroleum and natural gas revenue
Royalty expense
Operating expense
Transportation and other expense
Operating netback
Total Capital Expenditures
Three months ended
December 31,
Twelve months ended
December 31,
2022
320,358
(35,679)
(29,783)
2021
2022
289,806
1,340,180
(28,452)
(161,226)
(25,315)
(101,581)
2021
932,406
(76,271)
(91,515)
(39,406)
(36,698)
(154,924)
(148,575)
215,490
199,341
922,449
616,045
Birchcliff defines “total capital expenditures” as exploration and development expenditures, plus acquisitions, less dispositions and plus
administrative assets. Management believes that total capital expenditures assists management and investors in assessing Birchcliff’s
overall capital cost structure associated with its petroleum and natural gas activities. The most directly comparable GAAP financial
measure to total capital expenditures is exploration and development expenditures. The following table provides a reconciliation of
exploration and development expenditures to total capital expenditures for the periods indicated:
Three months ended
December 31,
Twelve months ended
December 31,
2022
2021
364,621
230,479
2,348
(315)
1,576
175
108
1,718
2021
35,726
56
-
293
36,075
368,230
232,480
($000s)
Exploration and development expenditures(1)
Acquisitions
Dispositions
Administrative assets
Total capital expenditures
2022
106,762
-
-
709
107,471
(1) Disclosed as F&D capital expenditures elsewhere in this report. See “Advisories – F&D Capital Expenditures”.
112
BIRCHCLIFF ENERGY
NON-GAAP RATIOS
NI 52-112 defines a non-GAAP ratio as a financial measure that: (i) is in the form of a ratio, fraction, percentage or similar representation;
(ii) has a non-GAAP financial measure as one or more of its components; and (iii) is not disclosed in the financial statements of the entity.
The non-GAAP ratios used in this report are not standardized financial measures under GAAP and might not be comparable to similar
measures presented by other companies. Set forth below is a description of the non-GAAP ratios used in this report.
Adjusted Funds Flow Per Boe and Adjusted Funds Flow Per Basic Common Share
Birchcliff calculates “adjusted funds flow per boe” as aggregate adjusted funds flow in the period divided by the production (boe) in
the period. Management believes that adjusted funds flow per boe assists management and investors in assessing Birchcliff’s financial
profitability and sustainability on a cash basis by isolating the impact of production volumes to better analyze its performance against
prior periods on a comparable basis. The Corporation previously referred to adjusted funds flow per boe as “adjusted funds flow netback”.
Birchcliff calculates “adjusted funds flow per basic common share” as aggregate adjusted funds flow in the period divided by the
weighted average basic common shares outstanding at the end of the period. Management believes that adjusted funds flow per basic
common share assists management and investors in assessing Birchcliff’s financial strength on a per common share basis.
Free Funds Flow Per Basic Common Share
Birchcliff calculates “free funds flow per basic common share” as aggregate free funds flow in the period divided by the weighted
average basic common shares outstanding at the end of the period. Management believes that free funds flow per basic common
share assists management and investors in assessing Birchcliff’s financial strength and its ability to deliver shareholder returns on a per
common share basis.
Transportation and Other Expense Per Boe
Birchcliff calculates “transportation and other expense per boe” as aggregate transportation and other expense in the period divided
by the production (boe) in the period. Management believes that transportation and other expense per boe assists management
and investors in assessing Birchcliff’s cost structure as it relates to its transportation and marketing activities by isolating the impact of
production volumes to better analyze its performance against prior periods on a comparable basis.
Operating Netback Per Boe
Birchcliff calculates “operating netback per boe” as aggregate operating netback in the period divided by the production (boe) in
the period. Management believes that operating netback per boe assists management and investors in assessing Birchcliff’s operating
profitability and sustainability by isolating the impact of production volumes to better analyze its performance against prior periods on
a comparable basis.
Adjusted Funds Flow Recycle Ratio
Birchcliff calculates “adjusted funds flow recycle ratio” for its PDP reserves as adjusted funds flow per boe in the period divided by F&D
costs for its PDP reserves in the period. Management believes that adjusted funds flow recycle ratio assists management and investors
in assessing Birchcliff’s ability to profitably find and develop its PDP reserves.
SUPPLEMENTARY FINANCIAL MEASURES
NI 52-112 defines a supplementary financial measure as a financial measure that: (i) is, or is intended to be, disclosed on a periodic basis
to depict the historical or expected future financial performance, financial position or cash flow of an entity; (ii) is not disclosed in the
financial statements of the entity; (iii) is not a non-GAAP financial measure; and (iv) is not a non-GAAP ratio. The supplementary financial
measures used in this report are either a per unit disclosure of a corresponding GAAP measure, or a component of a corresponding
GAAP measure, presented in the financial statements. Supplementary financial measures that are disclosed on a per unit basis are
calculated by dividing the aggregate GAAP measure (or component thereof) by the applicable unit for the period. Supplementary
financial measures that are disclosed on a component basis of a corresponding GAAP measure are a granular representation of a
financial statement line item and are determined in accordance with GAAP.
The supplementary financial measures used in this report include: average realized commodity sales price per bbl, Mcf and boe, as
the case may be; petroleum and natural gas revenue per boe; royalty expense per boe; operating expense per boe; G&A expense,
net per boe; interest expense per boe; realized gain (loss) on financial instruments per boe; other cash income per boe; depletion and
depreciation expense per boe; unrealized gain (loss) on financial instruments per boe; other (expense) income per boe; dividends on
preferred shares per boe; deferred income tax expense per boe; and PDP F&D costs per boe.
2022 ANNUAL REPORT
113
CAPITAL MANAGEMENT MEASURES
NI 52-112 defines a capital management measure as a financial measure that: (i) is intended to enable an individual to evaluate an entity’s
objectives, policies and processes for managing the entity’s capital; (ii) is not a component of a line item disclosed in the primary
financial statements of the entity; (iii) is disclosed in the notes to the financial statements of the entity; and (iv) is not disclosed in the
primary financial statements of the entity. Set forth below is a description of the capital management measure used in this report.
Total Debt
Birchcliff calculates “total debt” as the amount outstanding under the Corporation’s extendible revolving term credit facilities
(the “Credit Facilities”) (if any) plus working capital deficit (less working capital surplus) plus the fair value of the current asset portion
of financial instruments less the fair value of the current liability portion of financial instruments less the current liability portion of
other liabilities and less capital securities (if any) at the end of the period. Management believes that total debt assists management
and investors in assessing Birchcliff’s overall liquidity and financial position at the end of the period. The following table provides a
reconciliation of the amount outstanding under the Credit Facilities, as determined in accordance with GAAP, to total debt for the
periods indicated:
As at December 31, ($000s)
Revolving term credit facilities
Working capital deficit (surplus)(1)
Fair value of financial instruments - asset(2)
Fair value of financial instruments - liability(2)
Other liabilities(2)
Capital securities
Total debt(3)
2022
131,981
(7,902)
17,729
(1,345)
(1,914)
-
138,549
2021
500,870
53,312
69
16,586
-
(38,268)
499,397
(1) Current liabilities less current assets.
(2) Reflects the current portion only.
(3) Total debt can also be derived from the amounts outstanding under the Corporation’s Credit Facilities plus accounts payable and accrued liabilities and less cash, accounts receivable and prepaid
expenses and deposits at the end of the period.
Advisories
CURRENCY
Unless otherwise indicated, all dollar amounts are expressed in Canadian dollars and all references to “$” and “CDN$” are to
Canadian dollars and all references to “US$” are to United States dollars.
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.
114
BIRCHCLIFF ENERGY
PRESENTATION OF OIL AND GAS RESERVES
The information contained in this report relating to reserves is based upon the evaluation prepared by Deloitte LLP (“Deloitte”),
independent qualified reserves evaluator, with an effective date of December 31, 2022 as contained in the report of Deloitte dated
February 15, 2023 (the “Deloitte Report”). The Deloitte Report was prepared in accordance with the standards contained in
National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities (“NI 51-101”) and the Canadian Oil and Gas Evaluation
Handbook. In this report, 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). There are numerous
uncertainties inherent in estimating quantities of reserves and the future net revenue attributed to such reserves. See “Risk Factors –
Uncertainty of Reserves Estimates” in the Corporation’s management’s discussion and analysis for the year ended December 31, 2022
(the “MD&A”).
OIL AND GAS METRICS
This report contains metrics commonly used in the oil and natural gas industry, including PDP F&D costs, reserves replacement,
adjusted funds flow recycle ratio and operating netback, 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. 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.
•
•
•
•
PDP F&D costs are calculated by dividing exploration and development costs (F&D capital expenditures) incurred in the period
by the additions to PDP reserves after adding back production in the period. F&D costs exclude the effects of acquisitions and
dispositions. In calculating the amount of PDP F&D costs for a year, the additions during the year in estimated PDP reserves are
based upon the Deloitte Report. The aggregate of the exploration and development costs incurred in the most recent financial year
generally will not reflect total F&D costs related to PDP reserves additions for that year. PDP F&D costs may be used as a measure of
the Corporation’s efficiency with respect to finding and developing its PDP reserves.
Reserves replacement is calculated by dividing PDP reserves additions before production by total annual production in the
applicable period. Reserves replacement may be used as a measure of the Corporation’s sustainability and its ability to replace its
PDP reserves.
For information regarding adjusted funds flow recycle ratio and how such metric is calculated, see “Non-GAAP and Other
Financial Measures”.
For information regarding operating netback and how such metric is calculated, see “Non-GAAP and Other Financial Measures”.
PRODUCTION
With respect to the disclosure of Birchcliff’s production contained in this report: (i) references to “light oil” mean “light crude oil and
medium crude oil” as such term is defined in NI 51-101; (ii) except where otherwise stated, references to “liquids” mean “light crude
oil and medium crude oil” and “natural gas liquids” (including condensate) as such terms are defined in NI 51-101; and (iii) references
to “natural gas” mean “shale gas”, which also includes an immaterial amount of “conventional natural gas”, as such terms are defined in
NI 51-101. In addition, NI 51-101 includes condensate within the product type of natural gas liquids. Birchcliff has disclosed condensate
separately from other natural gas liquids as the price of condensate as compared to other natural gas liquids is currently significantly
higher and Birchcliff believes presenting the two commodities separately provides a more accurate description of its operations and
results therefrom.
F&D CAPITAL EXPENDITURES
Unless otherwise stated, references in this report to “F&D capital expenditures” denotes exploration and development expenditures
as disclosed in the Corporation’s financial statements in accordance with GAAP, and is primarily comprised of capital for land, seismic,
workovers, drilling and completions, well equipment and facilities and capitalized G&A costs and excludes any net acquisitions and
dispositions, administrative assets and the capitalized portion of cash incentive payments that have not been approved by the board
of directors. Management believes that F&D capital expenditures assists management and investors in assessing Birchcliff capital cost
outlay associated with its exploration and development activities for the purposes of finding and developing its reserves.
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FORWARD-LOOKING STATEMENTS
Certain statements contained in this 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 report relate to future events or Birchcliff’s future plans, strategy, operations, 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”,
“maintain”, “deliver” 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 report contains forward-looking statements relating to: Birchcliff’s plans and other aspects of its anticipated future
financial performance, results, operations, focus, objectives, strategies, opportunities, priorities and goals, including those as
they relate to ESG and Birchcliff’s status as a low emissions intensity producer; that Birchcliff remains committed to the payment of
its annual base dividend of $0.80 per common share, maintaining capital discipline and generating free funds flow in 2023; that
Birchcliff’s significant ownership and operatorship of its assets gives it a strong competitive advantage, providing it with the flexibility
to actively manage its capital program in response to changing economic conditions in order to protect its strong financial position
and base dividend; that the Corporation will continue to closely monitor commodity prices and, where deemed prudent, adjust
its 2023 capital program, giving consideration to increasing or decreasing its rate of drilling and capital investment depending
on commodity prices; that Birchcliff is taking a conservative approach to capital investment in 2023 as a result of the significant
ongoing volatility in natural gas prices; that Birchcliff remains focused on ongoing initiatives and investments to further reduce its
GHG emissions intensity; that Birchcliff continually looks to identify, develop and utilize new technology, systems and processes
that will reduce its environmental footprint and create a safer work environment; that Birchcliff continues to invest financial resources
and time to support its commitment to further reduce its impact, and the impact of the oil and gas industry as a whole, on the
environment; 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); and that multi-well pad drilling allows
Birchcliff to reduce its environmental footprint and helps it to keep its per well costs low. In addition, forward-looking statements in this
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 be profitably produced in the future. See
“Advisories – Presentation of Oil and Gas Reserves”.
With respect to the forward-looking statements contained in this 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; prevailing and future commodity prices and differentials, 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 laws; future cash flow,
debt and dividend levels; future operating, transportation, 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 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; 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
approval of the board of directors of future dividends; 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 results of the Corporation’s
risk management and market diversification activities; and Birchcliff’s natural gas market exposure. Statements regarding the
future potential and prospectivity of properties and assets assume the continuing validity of the geological and other technical
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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.
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), epidemics and global conflict (including the Russian invasion of Ukraine) 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; the uncertainty of estimates and projections relating to production, revenue,
costs, expenses and reserves; the risk that any of the Corporation’s material assumptions prove to be materially inaccurate;
general economic, market and business conditions which will, among other things, impact the demand for and market prices of
Birchcliff’s products and Birchcliff’s access to capital; volatility of crude oil and natural gas prices; risks associated with increasing
costs, whether due to high inflation rates, supply chain disruptions or other factors; fluctuations in 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;
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 operate
its assets and achieve expected future results; 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; 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; political uncertainty and uncertainty associated with government policy changes; actions by government
authorities; an inability of the Corporation to comply with existing and future laws and the cost of compliance with such laws;
dependence on facilities, gathering lines and pipelines; 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 and market diversification activities; risks associated with the declaration and payment of future
dividends, including the discretion of the board of directors to declare dividends and change the Corporation’s dividend policy
and the risk that the amount of dividends may be less than currently forecast; 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; 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; and the accuracy of the Corporation’s accounting estimates and judgments.
The declaration and payment of any future dividends are subject to the discretion of the board of directors and may not be approved
or may vary depending on a variety of factors and conditions existing from time to time, including commodity prices, free funds
flow, current and forecast commodity prices, fluctuations in working capital, financial requirements of Birchcliff, applicable laws
(including solvency tests under the Business Corporations Act (Alberta) for the declaration and payment of dividends) and other
factors beyond Birchcliff’s control. The payment of dividends to shareholders is not assured or guaranteed and dividends may be
reduced or suspended entirely. In addition to the foregoing, the Corporation’s ability to pay dividends now or in the future may be
limited by covenants contained in the agreements governing any indebtedness that the Corporation has incurred or may incur in
the future, including the terms of the Credit Facilities. The agreement governing the Credit Facilities provides that Birchcliff is not
2022 ANNUAL REPORT
117
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.
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 the MD&A under the heading
“Risk Factors” and in other reports filed with Canadian securities regulatory authorities.
This 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 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 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 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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BIRCHCLIFF ENERGY
Corporate Information
EXECUTIVE TEAM
Jeff Tonken
Chief Executive Officer
and Chairman of the Board
Chris Carlsen
President and Chief Operating Officer
Bruno Geremia
Executive Vice President and
Chief Financial Officer
Myles Bosman
Executive Vice President, Exploration
David Humphreys
Executive Vice President, Operations
Robyn Bourgeois
Vice President, Legal, General Counsel
and Corporate Secretary
Hue Tran
Vice President, Business Development
and Marketing
Theo van der Werken
Vice President, Engineering
DIRECTORS
Jeff Tonken
Chief Executive Officer
and Chairman of the Board
Calgary, Alberta
Dennis Dawson
Lead Independent Director
Calgary, Alberta
Debra Gerlach
Independent Director
Calgary, Alberta
Stacey McDonald
Independent Director
Calgary, Alberta
James Surbey
Non-Independent Director
Calgary, Alberta
MANAGEMENT TEAM
BANK SYNDICATE
The Bank of Nova Scotia
HSBC Bank Canada
National Bank of Canada
Canadian Imperial Bank of Commerce
Bank of Montreal
ATB Financial
Business Development Bank of Canada
Wells Fargo Bank, N.A., Canadian Branch
United Overseas Bank Limited
ICICI Bank Canada
HEAD OFFICE
1000, 600 – 3rd Avenue S.W.
Calgary, Alberta T2P 0G5
Phone: 403-261-6401
Fax: 403-261-6424
Email: info@birchcliffenergy.com
SPIRIT RIVER OFFICE
5604 – 49th Avenue
Spirit River, Alberta T0H 3G0
Phone: 780-864-4624
Fax: 780-864-4628
TRANSFER AGENT
Computershare Trust Company of Canada
Calgary, Alberta & Toronto, Ontario
TSX: BIR
Gates Aurigemma
Manager, General Accounting
Jesse Doenz
Controller and Investor Relations Manager
Andrew Fulford
Surface Land Manager
Paul Messer
Manager of Information Technology
Tyler Murray
Mineral Land Manager
Landon Poffenroth
Montney Asset Manager
Michelle Rodgerson
Manager, Human Resources
and Corporate Services
Jeff Rogers
Facilities Manager
Randy Rousson
Drilling and Completions Manager
Victor Sandhawalia
Manager of Finance
Daniel Sharp
Manager of Geology
Ryan Sloan
Health and Safety Manager
Duane Thompson
Production Manager
AUDITORS
KPMG LLP,
Chartered Professional Accountants
Calgary, Alberta
RESERVES EVALUATOR
Deloitte LLP
Calgary, Alberta
birchcliffenergy.com
2022 ANNUAL REPORT
119
2 0 2 2 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