Seymour Schulich Gobbles Up More Shares Of Birchcliff Energy

| About: Birchcliff Energy (BIREF)

Summary

Seymour Schulich, a major shareholder for some years, recently purchased 2,500,000 shares to control about 14% of the shares outstanding.

The company is reporting outstanding oil well results from the acquired properties. Continuing excellent oil well results could turn the acquired properties into a very profitable bargain.

Oil production topped 5,000 BOD recently. Even with the projected Lake Charlie sale, oil production should increase. This will enhance the company's profitability.

Cash flow from operations more than tripled when compared to the previous quarter.  So cash flow per share increased despite the additional shares outstanding.

When Mr. Schulich purchased shares in January 2016, the value of his holding roughly tripled in about six months. Observers may be wondering if a triple is again quickly possible.

On March 27, 2017, Birchcliff Energy (OTCPK:BIREF) announced that Seymour Schulich purchased 2,500,000 common shares to increase his ownership interest to 14%. On April 3, 2017, another announcement noted that he acquired another 500,000 common shares at C$7.67 per share. Back in January 2016, he purchased about 2,000,000 shares and grew his stake to nearly 27% of the outstanding shares. They cost about $5 million United States dollars to purchase. The stock peaked around $8 per share in the United States, so it is safe to say that Mr. Schulich had a tidy profit from the shares he sold.

Now he is clearly buying again, so there may be another sizable six-month stock price move in the offing. Mr. Schulich has been a major shareholder in Birchcliff in some years. Plus, he has a history of profitable trades; so following his lead may be a rather riskless way to profit in the investment of Birchcliff Energy.

When the Encana (ECA) deal was announced in the summer of 2016, Mr. Schulich purchased (through related entities) about 3,000,000 shares at the same C$6.25 as the regular public shareholders. His backing was a huge vote of confidence in the deal. The total public deal was increased and the proceeds to the company were C$690 million. The company not only purchased the properties but also reduced long-term debt at the same time.

Source: Birchcliff Energy June 21, 2016, Press Release

Whatever the public may have thought about the deal, the land was contiguous to the operations of the company. There were many operational advantages to this deal just from the details given above. Cash flow was not that great, but there had not been new drilling on the leases for some time. The properties were ignored. Corresponding cash flow from the production was low. Birchcliff was actually doing much better producing dry gas than Encana was at producing liquids and gas on the properties sold.

Maybe the metrics looked a little high per flowing barrel, especially since Birchcliff Energy produced dry gas without much value added to the production. But both Mr. Schulich and Birchcliff may about to be vindicated on this deal. When he purchased shares back in the beginning of 2016, it took about six months for the value of his holdings to triple. The shares purchased last summer to help fund the Encana acquisition may take a little longer to appreciate. But the preliminary evidence is looking convincing that Birchcliff common stock may again be a bargain.

Source: Birchcliff Energy Corporate Presentation, May 2017

Encana previously discovered oil in 2010 and then really lost interest in the properties. Even a new zone discovery from one of the last wells drilled failed to excite management about the possibilities of these properties. Production began to decline, cash flow dried up and interest waned. Birchcliff Energy management, however, knew an opportunity when it saw one.

Source: Birchcliff Energy Corporate Presentation, May 2017

It goes without saying that if a company makes an acquisition, then the company will probably aim to get as much cash back as quickly as possible. So exploring the oil discovery makes clear sense. But an unexpected benefit is the effect of new completion and drilling techniques. Those oil well results drilled above are huge and a real game changer for the company. A lot of the wells in the area are assumed to be fairly low decline rate wells. Plus, these are not the most expensive wells to drill in the industry. Although, costs appear to be rising as optimum completion techniques are tested. So the oil wells shown above are going to make a lot of money for shareholders.

A previous article comparing Tourmaline (OTCPK:TRMLF) and Peyto (OTCPK:PEYUF) showed that just a little bit of oil makes a significant difference in the margin.

Source: Birchcliff Energy First-Quarter 2017 Earnings Release on May 10, 2017

The increase in oil production above "guarantees" that some of the margin improvement shown below will be permanent. Management will be drilling more wells to full test the extent of the oil pool, but that oil has the potential to turn the deal into a real bargain quickly. It will not take all that many wells with the initial rates shown above to turn the economics of the acquisition into some very profitable metrics. That roughly 2,000 BOD equates to US$100,000 at WTI $50. Combine that with low level declines and plans to drill more wells and the cash quickly rolls in.

The Encana production costs were higher than the Birchcliff Energy production costs. So acquisition of the Encana properties caused the average company production costs to rise. Continuing operational review of the acquired properties may reverse some of that decline. But some of the cost rise may be related to the increased liquids production. So the higher costs may make good economic sense.

Management announced that the Lake Charlie properties will be sold. These leases also had the potential for oil production. But the fact that management will sell them to concentrate on this latest purchase speaks volumes about the future of the Encana deal. The lenders agree with this strategy because they will not be lowering the credit limit after completion of the sale. They also agreed to extend the maturity date of the credit line as well. So the results could be very interesting for common shareholders (also potentially very profitable).

In the meantime, the company posted first-quarter funds flow from operations of C$68 million in the first quarter of 2017 vs. C$21 million in the previous first quarter of 2016. The commodity price rally and increasing liquids production have ensured that the sale of more than 100 million shares of stock last year is not dilutive. Birchcliff Energy management not only reduced the balance sheet leverage considerably but they have also increased the funds flow from operations per share in a short period of time. That is no small accomplishment.

Source: Birchcliff Energy Corporate Presentation, May 2017

The capital program demonstrates that the oil wells are not expected to be particularly expensive. So those wells will be paying back in less than a year. There will be only 12 wells budgeted, but if the rates maintain or improve above the three shown before, the profits from those wells will be positively obscene. The gas wells and natural gas liquids production are also above expectation. This will only add to the apparent bargain purchase.

A large acquisition such as this one often takes more than a year to completely integrate into company operations. This purchase shows signs of benefits relatively early. There could be more benefits realized as the corporate year continues. Plus, the company only has one rig drilling on the acquired properties. That could change as management becomes more familiar with the acquired assets.

The acquisition has the ability to tremendously improve the profitability of the company. Mr. Schulich, a major company shareholder, likes the future prospects enough to add to his current holdings. The commodity price rally obscured some of the acquisition benefits. A few more oil wells should make the bargain very apparent to the market. The increased cash flow from these properties should be very apparent before fiscal year-end. So the stock price of this company will be considerably higher in short order as long as the production improvements continue. Last time around, Mr. Schulich tripled his money by summer. The preliminary results after show that his purchases may result in a similar profit picture. The annualized cash flow from the latest quarter is about one-sixth of the stock price of the company. That is a fairly cheap ratio for a fast growing company such as this one.

Management aims to average production of about 70,000 BOED for the year. Unlike previous years, management expects to fund the capital program from cash flow. No additional borrowing is anticipated. The increasing oil production as well as the sizable jump in production from the last fiscal year ensure at least 30% jump in cash flow per share for the next fiscal year as long as commodity prices do not sustain a significant drop from current levels. The company does have a hedging program to buffer any declines.

A lot of shareholders in Pengrowth Energy (PGH) cited the involvement of Mr. Schulich as a reason for purchasing the shares of that company. The Pengrowth Energy investment may take a little longer to succeed because cash flow has not yet increased and the company has yet to stabilize its finances. Plus, a few warnings need to be removed from the financial statements.

Birchcliff Energy has far healthier finances along with an increasing cash flow per share. That cash flow will currently fund a production growth rate usually only seen in high tech industries. The increasing oil production and liquids production could dramatically increase the cash flow per share even if commodity prices sag a little bit as they have lately. Birchcliff Energy may turn out to be a safer way to reap windfall profits.

Disclaimer: I am not an investment advisor and this is not a recommendation to buy or sell a security. Investors are recommended to read all of the company's filings and press releases as well as do their own research to determine if the company fits their own investment objectives and risk portfolios.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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