Practical political reality leads the government of Alberta to cut royalties on new oil and gas wells with the largest incentives targeted to small producers like Birchcliff Energy Ltd. (OTCPK:BIREF). Announced on March 3 for wells drilled in the next year, the changes limit the maximum royalty rate to 5% and give a credit, depending on depth drilled, of about US$600,000 for a 12,000 foot typical well. The total would exceed a million dollars a well.
The provincial government cites that each well drilled supports 120 jobs. Aside from global economic concerns, Alberta royalties (taxes) have been the main negative factor inhibiting investor interest and consequently drilling activity in the province. Meanwhile we are awaiting fourth quarter results to update our cash flow projections.
Estimated Net Present Value (NPV) of US$10 a share includes about half for large resource potential in an important emerging area. Pointing to expected oil price recovery, futures prices for the next six years averaged US$58 a barrel recently.
Disclosure: A large individual shareholder in Birchcliff and an officer of Birchcliff are research clients of McDep LLC.
Originally published on March 4, 2009.