Mr. Jeffery Tonken reports
BIRCHCLIFF ENERGY LTD. ANNOUNCES PRODUCTION GAINS, UNAUDITED YEAR-END FINANCIAL RESULTS AND MATERIAL RESERVES AND RESOURCE ADDITIONS
Birchcliff Energy Ltd. has released its 2013 fourth quarter and 2013 year-end unaudited financial and operational results; highlights from its 2013 independent reserves evaluation and from its 2013 independent Montney/Doig natural gas resource assessment; its 2014 capital budget; and is providing an operational update. All financial amounts referred to in this press release are management's best estimates, and information from the year-end financial statements has not yet been audited.
The company is pleased to report that Birchcliff has achieved record production, funds flow and net earnings, reduced operating costs, added a significant amount of undeveloped land in its core area, and added material reserves and resources.
Current production is approximately 33,000 barrels of oil equivalent per day. To date in 2014, Birchcliff has produced an average of approximately 31,400 boe per day. Birchcliff is receiving high natural gas prices for its current production as it is unhedged for the winter months of 2014.
Press release highlights
Fourth quarter 2013 results
-
Fourth quarter production averaged 28,391 boe per day, a 15.1-per-cent increase
over production of 24,662 boe per day in the third quarter of 2013 and a
6.5-per-cent increase from 26,655 boe per day in the fourth quarter of 2012;
- Record quarterly funds flow of $50.1 million, a 16.3-per-cent increase from the
third quarter of 2013 and a 25.6-per-cent increase from the fourth quarter of
2012;
- Net income of $37.1-million in the fourth quarter of 2013, a 265-per-cent
increase from the third quarter of 2013 and a 488-per-cent increase from the
fourth quarter of 2012. Excluding the impact of the sale of assets in
the fourth quarter, Birchcliff had net income of $11.8-million in the
fourth quarter of 2013;
- Operating costs of $5.44 per boe, down 3.9 per cent from $5.66 per boe in the
third quarter of 2013 and down 7.5 per cent from $5.88 per boe in the fourth
quarter of 2012;
- $54.7-million strategic disposition, net of adjustments, of
predominately non-operated, low-working-interest, non-core assets in the
Progress area of Alberta;
- Capital expenditures in the fourth quarter of $73.0-million, $18.2-million net of dispositions;
- Drilled 12 (11.5 net) wells in the fourth quarter of 2013, comprising seven (seven net) Montney/Doig horizontal natural gas wells, four (four net)
Charlie Lake horizontal oil wells and one (0.5 net) Halfway horizontal oil
well, all of which were successful.
Year-end 2013 financial and operational results
- Average 2013 production of 25,829 boe per day, a 13.3-per-cent increase over
2012 average production of 22,802 boe per day;
- Record funds flow of $174.4-million, or $1.22 per basic share, a 45.0-per-cent
increase from 2012;
- Net income of $65.4-million, a 396-per-cent increase from $13.2-million in 2012.
Net income in 2013, excluding the impact of the sale of assets, was
$40.1-million;
- Long-term bank debt of $394-million against available lines of credit of
approximately $600-million. Total year-end debt, including working
capital deficiency of $60-million, was $454-million;
- Operating costs of $5.68 per boe, down 6.3 per cent from $6.06 per boe in 2012;
- General and administrative costs of $2.19 per boe, down 20.4 per cent from $2.75
per boe in 2012;
- Top-tier operating performance at Pouce Coupe South natural gas plant
(PCS gas plant). From the AECO natural gas price averaging $3.17 per
thousand cubic feet during 2013 Birchcliff realized $3.77 per thousand cubic feet equivalent, resulting in an
operating netback of $2.99 per thousand cubic feet equivalent for natural gas processed at the PCS
gas plant;
- Capital expenditures in 2013 were $270.1-million, $215.8-million net of
dispositions;
- Drilled a total of 43 (41.67 net) wells in 2013, consisting of:
- 26 (26.0 net) wells on the Montney/Doig natural gas resource play,
including 25 (25.0 net) horizontal natural gas wells and one (one net)
vertical exploration well;
- 13 (13.0 net) wells on the Worsley Charlie Lake light oil resource
play, all of which were horizontal wells;
- Four (2.67 net) wells on the Halfway light oil play, all of which were
horizontal wells;
-
Undeveloped land base of 576,893 (544,917 net) acres at Dec. 31,
2013, up from 544,129 (506,024 net) acres at Dec. 31, 2012, with a
94-per-cent average working interest;
- Added 90,645.3 (90,325.3 net) acres or 141.3 (141.1 net) sections of
undeveloped land in 2013, substantially all at 100-per-cent working interest
and all within Birchcliff's core area of the Peace River Arch of
Alberta.
Independent reserves evaluation for 2013
-
Proved plus probable reserves of 370.1 million boe, a 16.5-per-cent increase from
Dec. 31, 2012;
- Added 6.9 boe of proved plus probable reserves for
each boe that was produced and sold in 2013;
- Proved reserves of 220.0 million boe, an 18.3-per-cent increase from Dec. 31,
2012;
-
Proved developed producing reserves of 62.0 million boe, a 13.6-per-cent increase.
This is a net increase of 7.4 million boe from 54.6 million boe at Dec. 31, 2012;
- After taking into account 2013 production of 9.4 million boe and 2013
dispositions of 1.1 million boe, Birchcliff added 17.9 million boe of proved
developed producing reserves, which is 32.9 per cent of Birchcliff's proved
developed producing reserves at Dec. 31, 2012;
- Increased potential net future Montney/Doig horizontal natural gas well
drilling locations to 2,254 at Dec. 31, 2013, up from 1,929 at
Dec. 31, 2012, as a result of land acquisitions and drilling.
Finding and development costs, and recycle ratios for 2013
- Finding, development and acquisition (FD&A) costs on a proved-plus-probable basis of $3.46 per boe, excluding future development capital,
and $8.60 per boe, including future development capital;
- Operating netback recycle ratio of 6.5 and funds flow netback recycle
ratio of 5.3, in each case excluding future development costs, based on
finding, development and acquisition costs, and proved plus probable
reserves.
Independent Montney/Doig natural gas resource assessment for 2013
-
Assessment of Birchcliff's land that has potential for the Montney/Doig
natural gas resource play. On a best-estimate basis, reflecting
Birchcliff's working interest:
- Total petroleum initially in place of 52.0 trillion cubic feet equivalent, a 31-per-cent increase from
Dec. 31, 2012;
- Prospective resources of 15.8 trillion cubic feet equivalent, a 22-per-cent increase from Dec. 31,
2012;
- Contingent resources of 6.5 trillion cubic feet equivalent, a 35-per-cent increase from Dec. 31,
2012.
Budget and guidance for 2014
- Capital budget for 2014 of $347.1-million (including $56.1-million for
acquisitions), with plans to drill 40 (39.5 net) wells;
- Exit production for 2014 expected to be between 37,500 and 39,500 boe per
day, ahead of the 2014 exit estimate in the current 2018 five-year plan.
Production and operational update for 2014
-
Current production is approximately 33,000 boe per day. To date in 2014,
Birchcliff has produced an average of approximately 31,400 boe per day
(83 per cent natural gas, and 17 per cent crude oil and natural gas liquids);
- Drilling results to date of six (six net) successful wells, consisting of
four (four net) Montney/Doig horizontal natural gas wells in the Pouce Coupe
area and two (two net) Charlie Lake horizontal light oil wells in the
Worsley area;
- Four drilling rigs currently working: three in the Pouce Coupe area
drilling Montney/Doig horizontal wells and one in the Worsley area
drilling Charlie Lake horizontal wells;
- Birchcliff is receiving high natural gas prices for its current
production as it is unhedged for the winter months of 2014. Birchcliff
has a hedging program in place for the 2014 summer months only;
- Initiated a hedging program in 2014, with Birchcliff contracting forward
physical sales of 65,000 gigajoules per day, representing 35 per cent of its estimated
gas volumes during the summer months, April 1 to Oct. 31, 2014, for
approximately $4.24 per thousand cubic feet (up from information contained in
Birchcliff's Jan. 15, 2014, press release) and West Texas Intermediate put options for
1,000 barrels per day of crude oil for the calendar year 2014, 500
barrels per day with a strike price of $90 (U.S.) and 500 barrels per day
with a strike price of $85 (U.S.).
Strategic acquisition in 2014
-
Strategic acquisition completed on Jan. 15, 2014, purchasing a
partner's 30-per-cent working interest in Montney/Doig resource play lands and
production in the Pouce Coupe area, giving Birchcliff a 100-per-cent working
interest in 38 sections of land. Approximately 9.6 million cubic feet equivalent (1,600 boe per
day) of production was acquired, the majority of which goes to
Birchcliff's PCS gas plant.
2013 FINANCIAL AND OPERATIONAL HIGHLIGHTS
Three months ended Dec. 31, 12 months ended Dec. 31,
2013 2012 2013 2012
Operating
Average daily production
Light oil -- (barrels) 4,227 3,986 4,030 4,270
Natural gas --
(thousands of cubic
feet) 138,132 131,120 125,712 106,868
NGLs -- (barrels) 1,142 816 847 721
Total -- barrels of oil
equivalent (6:1) 28,391 26,655 25,829 22,802
Average sales price
Light oil -- (per
barrel) $ 81.52 $ 83.38 $ 89.89 $ 84.45
Natural gas -- (per
thousand cubic feet) 3.81 3.43 3.41 2.63
NGLs -- (per barrel) 85.45 80.44 88.45 83.78
Total -- barrels of oil
equivalent(6:1) 34.10 31.78 33.52 30.80
Netback and cost ($ per
barrel of oil
equivalent at 6:1)
Petroleum and natural
gas revenue 34.11 31.81 33.59 30.82
Royalty (expense) (2.68) (2.52) (2.92) (2.90)
Operating (expense) (5.44) (5.88) (5.68) (6.06)
Transportation and
marketing (expense) (2.52) (2.09) (2.46) (2.28)
Netback 23.47 21.32 22.53 19.58
General and
administrative
(expense), net (2.54) (2.66) (2.19) (2.75)
Interest (expense) (1.77) (2.41) (2.28) (2.42)
Other income - - 0.44 -
Funds flow netback 19.16 16.25 18.50 14.41
Stock-based
compensation (expense),
net (0.37) (0.41) (0.43) (0.60)
Depletion and
depreciation (expense) (11.70) (11.75) (11.54) (11.48)
Accretion (expense) (0.24) (0.18) (0.23) (0.21)
Amortization of
deferred financing
fees (0.10) (0.08) (0.09) (0.09)
Gain on sale of assets 12.93 - 3.58 0.46
Unrealized (loss) on
financial instruments (0.15) - (0.04) -
Dividends on preferred
shares, Series C (0.33) - (0.20) -
Income tax (expense) (5.01) (1.26) (2.61) (0.91)
Net income 14.19 2.57 6.94 1.58
Dividends on preferred
shares, Series A (0.38) (0.41) (0.43) (0.19)
Net income to common
shareholders 13.81 2.16 6.51 1.39
Financial
Petroleum and natural
gas revenue ($000) $ 89,092 $ 78,001 $316,637 $257,206
Funds flow from
operations ($000) 50,060 39,848 174,361 120,259
Per common share --
basic 0.35 0.28 1.22 0.88
Per common share --
diluted 0.34 0.28 1.20 0.86
Net income ($000) 37,062 6,305 65,417 13,196
Net income to common
shareholders
($000) 36,062 5,305 61,417 11,617
Per common share --
basic 0.25 0.04 0.43 0.08
Per common share --
diluted 0.25 0.04 0.42 0.08
Fourth quarter 2013 results
Fourth quarter production averaged 28,391 boe per day, which is a 15.1-per-cent increase over production of 24,662 boe per day in the third quarter of 2013 and a 6.5-per-cent increase from 26,655 boe per day in the fourth quarter of 2012.
Funds flow was $50.1-million, which is a 16.3-per-cent increase from $43.1-million in the third quarter of 2013 and a 25.6-per-cent increase from $39.8-million the fourth quarter of 2012.
Net income available to common shareholders increased to $36.1-million in the fourth quarter of 2013 as compared with $9.2-million in the third quarter of 2013 and $5.3-million in the fourth quarter of 2012. Excluding the gain from the sale of assets, Birchcliff had net income available to common shareholders of $10.8-million in the fourth quarter of 2013.
Operating costs per boe (excluding transportation and marketing costs) were $5.44 per boe, down 3.9 per cent from $5.66 per boe in the third quarter of 2013 and down 7.5 per cent from $5.88 per boe in the fourth quarter of 2012. This reduction in operating costs on a per-boe basis was largely due to the cost benefits achieved from processing increased volumes of natural gas through the PCS gas plant and implementation of various optimization initiatives.
In November, 2013, Birchcliff made a strategic disposition of non-core assets in the Progress area for $54.7-million, net of adjustments. The transaction included approximately 520 boe per day of Doe Creek light oil production, 2.7 million boe of proved reserves and 4.5 million boe of proved plus probable reserves. This transaction resulted in a financial gain of $33.8-million, $25.3-million net of tax.
Capital expenditures in the fourth quarter were $73.0-million, $18.2-million net of dispositions.
Drilling activities during the fourth quarter of 2013 resulted in 12 (11.5 net) wells, being seven (seven net) natural gas wells and five (4.5 net) oil wells. The seven natural gas wells were all Montney/Doig horizontal natural gas wells. The oil wells included four (four net) Charlie Lake horizontal light oil wells and one (0.5 net) Halfway horizontal light oil well. All the horizontal wells drilled in the fourth quarter of 2013 utilized the latest advancements in multistage fracture stimulation technology.
Year-end 2013 financial and operational results
Production
Production in 2013 averaged 25,829 boe per day, which is a 13.3-per-cent increase over 2012 average production of 22,802 boe per day. Production per common share increased 9.0 per cent from 2012. This increase was achieved through the success of Birchcliff's capital drilling program and increased incremental production from new horizontal natural gas wells on the Montney/Doig natural gas resource play that are processed through Birchcliff's PCS gas plant.
Production consisted of approximately 81 per cent natural gas, and 19 per cent crude oil and natural gas liquids in 2013. Approximately 73 per cent of Birchcliff's natural gas production and 61 per cent of corporate production were processed at the PCS gas plant during 2013.
Funds flow and earnings
Funds flow was approximately $174.4-million, or $1.22 per common share, a 45.0-per-cent increase from 2012. This increase was a result of increased natural gas production, the 32.6-per-cent increase in the average AECO natural gas spot price from $2.39 per thousand cubic feet in 2012 to $3.17 per thousand cubic feet in 2013 and lower operating costs on a per-unit basis.
Birchcliff recorded net income available to common shareholders of $61.4-million, or 43 cents per common share, in 2013 as compared with $11.6-million, or eight cents per common share, in 2012. This was a 429-per-cent increase in net income from 2012. Net income available to common shareholders in 2013, excluding the impact of the sale of assets, was $36.1-million.
Debt and capitalization
At Dec. 31, 2013, Birchcliff's long-term bank debt was $394-million from available credit facilities of approximately $600-million. Total debt, including the working capital deficit of $60-million, was $454-million, as compared with $462-million at Dec. 31, 2012.
Birchcliff expects that as a result of significant reserve additions in 2013, its bank credit facilities will be increased during its normal credit review in May, 2014.
At Dec. 31, 2013, Birchcliff had 143,676,661 basic common shares outstanding.
Operating, and general and administrative (G&A) costs
Operating costs in 2013 were $5.68 per boe, down 6.3 per cent from $6.06 per boe in 2012. This reduction of operating costs on a per-boe basis was largely due to the cost benefits achieved from processing increased volumes of natural gas through the PCS gas plant and implementation of various optimization initiatives.
General and administrative expenses of $2.19 per boe were down 20.4 per cent from $2.75 per boe in 2012, and the corporation expects this trend to continue as Birchcliff increases production without having to add significant additional resources.
Capital expenditure
During the year ended Dec. 31, 2013, Birchcliff had capital expenditures of $270.1-million, $215.8-million net of dispositions. Capital expenditures in 2013 were $23.5-million above Birchcliff's budgeted capital program of $246.6-million, with the expanded portion of the budget primarily directed toward strategic land sale purchases in the fourth quarter and the drilling of additional wells in late 2013, which kept drilling rigs working until year-end. These additional wells were brought on production early in the first quarter of 2014.
PCS gas plant netbacks
Processing increased volumes of natural gas at the PCS gas plant has materially improved Birchcliff's funds flow and net earnings. In 2013, net operating costs for natural gas processed at the PCS gas plant were 37 cents per thousand cubic feet equivalent ($2.24 per boe), and the estimated operating netback was $2.99 per thousand cubic feet equivalent ($17.92 per boe). The table details Birchcliff's annual net production and operating netback for wells producing to the PCS gas plant, on a production-month basis.
PRODUCTION PROCESSED THROUGH THE PCS GAS PLANT
12 months ended Dec. 31,
2013 2012
Average daily production, net to
Birchcliff
Natural gas (Mcf) 91,666 59,327
Oil and NGLs (bbl) 527 204
Total boe (6:1) 15,805 10,092
Percentage of corporate natural
gas production 73% 56%
Percentage of corporate
production 61% 44%
Netback and cost $/Mcfe $/boe $/Mcfe $/boe
Petroleum and natural gas
revenue 3.77 22.64 2.91 17.44
Royalty (expense) (0.16) (0.93) (0.11) (0.67)
Operating (expense), net of
recoveries (0.37) (2.24) (0.35) (2.08)
Transportation and marketing
(expense) (0.25) (1.55) (0.23) (1.37)
Estimated operating netback 2.99 17.92 2.22 13.32
Operating margin 79% 79% 76% 76%
(1) The PCS gas plant processed an average of 109 million cubic feet per day
of gross raw gas at the inlet in 2013, against a licensed inlet capacity of
150 million cubic feet per day at Dec. 31, 2013.
(2) AECO natural gas price averaged $3.17 per thousand cubic feet and $2.39
per thousand cubic feet during 2013 and 2012, respectively.
(3) Operating margin at the PCS gas plant is determined by dividing the
estimated operating netback by petroleum and natural gas revenue in the
period.
After Birchcliff began processing natural gas at the PCS gas plant in early 2010, total corporate operating costs on a per-boe basis have trended downward as increasing production volumes have been processed at the PCS gas plant.
Drilling program
Birchcliff's 2013 drilling program was focused on its two proven resource plays, the Montney/Doig natural gas resource play and the Worsley Charlie Lake light oil resource play. Birchcliff actively employs the evolving technology utilized by leaders in the industry regarding horizontal well drilling and the related multistage fracture stimulation technology.
During 2013, Birchcliff drilled 43 (41.67 net) wells, consisting of 26 (26.0 net) natural gas wells and 17 (15.67 net) oil wells. The natural gas wells included 25 (25.0 net) Montney/Doig horizontal wells and one (one net) Montney/Doig vertical exploration well. The oil wells included 13 (13.0 net) Worsley Charlie Lake horizontal light oil wells and four (2.67 net) Halfway horizontal light oil wells. All horizontal wells drilled in 2013 utilized the latest advancements in multistage fracture stimulation technology.
Land
Birchcliff's undeveloped land base at Dec. 31, 2013, was 576,893 (544,917 net) acres, up from 544,129 (506,024 net) acres at Dec. 31, 2012, with a 94-per-cent average working interest.
During 2013, Birchcliff added 90,645.3 (90,325.3 net) acres, or 141.6 (141.1 net) sections of undeveloped land, substantially all at 100-per-cent working interest and all in Birchcliff's core area of the Peace River Arch of Alberta. The undeveloped land acquired during 2013 includes 12.5 (12.5 net) sections right in the middle of the Pouce Coupe development area, as well as 33 (33.0 net) sections in the Elmworth/Sinclair area where Birchcliff is planning further drilling to delineate the Montney/Doig natural gas resource play.
Birchcliff's land base primarily consists of large contiguous blocks of high-working-interest acreage located near facilities owned and/or operated by Birchcliff or near third party infrastructure. Substantially all of the new land has been purchased without partners at 100-per-cent working interest.
Birchcliff continued to strategically add lands on resource plays during 2013. The table summarizes Birchcliff's landholdings on resource plays at Dec. 31, 2013.
RESOURCE PLAY LAND HOLDINGS AT DEC. 31, 2013
Working Gross Net
interest (acres) (acres)
Middle/Lower Montney play 93.3% 209,920 195,821
Basal Doig/Upper Montney play 92.4% 196,640 181,715
Worsley Charlie Lake light oil play 98.7% 125,280 123,610
Duvernay play 99.8% 168,320 167,936
Nordegg play 85.8% 432,960 371,571
Banff/Exshaw play 99.3% 447,360 443,669
Independent reserves evaluation for 2013
Deloitte LLP, independent qualified reserves evaluators of Calgary, Alta., prepared a reserves estimation and economic evaluation, effective Dec. 31, 2013, in respect of Birchcliff's oil and natural gas properties, which is contained in a report dated Feb. 5, 2014. Deloitte also prepared reserves estimations and economic evaluations effective Dec. 31, 2012, and Dec. 31, 2011. Reserves estimates stated herein as at Dec. 31, 2013, 2012 and 2011 are extracted from the relevant evaluation. The 2013 reserves evaluation and the prior reserves evaluations have been prepared in accordance with the standards contained in the Canadian Oil and Gas Evaluation Handbook and National Instrument 51-101.
At Dec. 31, 2013, Deloitte estimated that Birchcliff had 370.1 million boe of proved plus probable reserves and 220.0 million boe of proved reserves. Birchcliff's proved plus probable reserves comprise 86.5 per cent natural gas, and 13.5 per cent light oil and natural gas liquids.
Reserves summary
The table summarizes Deloitte's estimates of Birchcliff's working interest oil and natural gas reserves at Dec. 31, 2013, and Dec. 31, 2012, using the Deloitte forecast price assumptions in effect at the applicable reserves evaluation date.
SUMMARY OF OIL AND NATURAL GAS RESERVES
Dec. 31, 2013 Dec. 31, 2012
(MMboe) (MMboe)
Proved developed producing 62.0 54.6
Total proved 220.0 186.0
Probable 150.0 131.8
Total proved plus probable 370.1 317.8
(1) Numbers may not total due to rounding.
Net present value of future net revenue
The table is a summary of the net present value of future net revenue associated with Birchcliff's reserves at Dec. 31, 2013, before deducting future income tax expense and calculated at various discount rates. The net present value of future net revenue attributable to the corporation's reserves is based on Deloitte's Dec. 31, 2013, forecast price assumptions of commodity prices, which can be found on-line.
NET PRESENT VALUE OF FUTURE NET REVENUE BEFORE INCOME TAXES
(Forcasted prices and costs, in millions, per year)
Discounted at
0% 5% 8% 10% 15% 20%
Proved
Developed producing $1,643.7 $1,220.0 $1,057.3 $ 972.2 $ 813.3 $ 703.9
Developed non-producing 255.5 188.6 161.8 147.5 120.1 101.0
Undeveloped 3,175.8 1,725.2 1,220.5 971.9 544.0 284.0
Total proved 5,074.9 3,133.8 2,439.6 2,091.5 1,477.5 1,088.9
Probable 4,920.2 2,191.2 1,437.3 1,106.8 606.7 350.2
Total proved plus probable 9,995.2 5,325.0 3,876.9 3,198.3 2,084.1 1,439.1
(1) Estimates of future net revenue, whether discounted or not, do not
represent fair market value.
(2) Future net revenue is after deduction of estimated costs of abandonment
of existing and future wells, and reclamation of future wells, and does not
include costs of abandonment of facilities, reclamation of facilities and
reclamation of existing wells.
(3) Numbers may not total due to rounding.
The natural gas price forecast used by Deloitte in the 2013 reserves evaluation for the years 2014 through 2018 is approximately 26 cents per million British thermal units lower than the forecast used by Deloitte for the same period in its 2012 reserves evaluation. Notwithstanding the natural gas price forecast for these years decreased by 6 per cent, the net present value of the proved developed producing reserves (at a 10-per-cent discount rate) increased by 17.2 per cent as a result of increased reserves volumes, increased oil prices and reduced operating costs recognized in the 2013 reserves evaluation.
From the 2013 reserves evaluation to the 2012 reserves evaluation, Birchcliff had:
- 190-per-cent reserve replacement on a proved-developed-producing basis.
Birchcliff added 1.90 boe of proved developed producing reserves for
each boe that was produced and sold during the year (calculated by
dividing 2013 proved developed producing reserves additions before
production, acquisition and dispositions by total production in 2013);
- 486-per-cent reserve replacement on a proved basis. Birchcliff added 4.86 boe of
proved reserves for each boe that was produced or sold during the year
(calculated by dividing 2013 proved reserves additions before
production, acquisition and dispositions by total production in 2013);
- 692-per-cent reserve replacement on a proved-plus-probable basis. Birchcliff
added 6.92 boe of proved plus probable reserves for each boe that was
produced or sold during the year (calculated by dividing 2013 proved
plus probable reserves additions before production, acquisition and
dispositions by total production in 2013).
Reserves on the Montney/Doig natural gas resource play
Deloitte estimated at Dec. 31, 2013, Birchcliff had 319.2 million boe of proved plus probable reserves attributed to horizontal wells on the Montney/Doig natural gas resource play. This is an increase of 20 per cent from 266.8 million boe of proved plus probable reserves attributed to horizontal wells on the Montney/Doig natural gas resource play at Dec. 31, 2012.
The tables summarize Deloitte's estimates of reserves attributable to Birchcliff's horizontal wells on the Montney/Doig natural gas resource play, the number of horizontal wells to which reserves were attributed and the future capital associated with such reserves.
MONTNEY/DOIG NATURAL GAS RESOURCE PLAY RESERVES DATA
Oil and natural gas
Natural gas liquids Total
(Bcf) (Mbbl) (Mboe)
2013 2012 2013 2012 2013 2012
Proved developed
producing 291.6 241.0 1,940.6 1,334.9 50,538.1 41,493.6
Total proved 1,113.0 907.6 8,202.1 5,243.2 193,704.5 156,509.7
Total proved
plus probable 1,828.0 1,541.6 14,550.3 9,922.2 319,214.6 266,848.4
MONTNEY/DOIG NATURAL GAS RESOURCE PLAY RESERVES DATA
Existing horizontal wells and future
horizontal well locations Net future capital
(MM$)
Gross Net
2013 2012 2013 2012 2013 2012
Proved developed
producing 117 93 105.2 80.8 1.25 0
Total proved 384 325 330.9 272.7 1,306.1 1,129.4
Total proved
plus probable 549 472 470.8 397.5 2,146.2 1,849.9
(1) Estimates of reserves and future net revenue for reserves relating to
individual properties may not reflect the same confidence level as estimates
of reserves and future net revenue for all properties due to the effects of
aggregation.
(2) Includes approximately $68.2-million of capital for the expansion of the
PCS gas plant to 240 million cubic feet per day of total capacity, together
with the related gathering pipelines, sales pipeline expansion and
compression, plus $32.2-million of capital for the expansion of the PCS gas
plant to 270 million cubic feet of total capacity.
MONTNEY/DOIG LAND AND HORIZONTAL WELL DATA
Dec. 31, Dec. 31, Dec. 31,
2013 2012 2011
Gross Net Gross Net Gross Net
Number of sections to which Deloitte
attributed proved plus probable
reserves 131.6 115.2 114.3 98.3 98.5 83.4
For existing and future horizontal
wells, number of well locations to
which Deloitte attributed proved
plus probable reserves 549 470.8 472 397.5 425 352.7
For existing and future horizontal
wells, average number of net well
locations per net section to which
Deloitte attributed proved plus
probable reserves 4.1 4.1 4.2
For existing horizontal wells,
average remaining recoverable proved
plus probable reserves attributed by
Deloitte, plus cumulative production 4.9 Bcfe 4.8 Bcfe 4.3 Bcfe
For future horizontal wells, average
remaining recoverable proved plus
probable reserves attributed by
Deloitte 4.2 Bcfe 4.1 Bcfe 4.0 Bcfe
Average cost per well, forecast by
Deloitte $5.2-million $5.2-million $4.8-million
(1) Currently, for existing and future horizontal wells, the average number
of net well locations per net section to which Deloitte attributed proved
plus probable reserves is 3.2 for the Basal Doig/Upper Montney play and 2.9
for the Middle/Lower Montney play.
Deloitte has attributed Montney/Doig proved plus probable reserves to 131.6 (115.2 net) sections of land. Drilling success during 2013 in the Middle/Lower Montney play has resulted in significant reserve assignments by Deloitte to 106.6 (92.5 net) sections of land, an increase of 17.5 net sections of land from 2012. Deloitte has attributed reserves in the Basal Doig/Upper Montney play to 78.2 (65.3 net) sections of land. There are now 53.2 (42.6 net) sections to which Deloitte has attributed reserves to both the Basal Doig/Upper Montney play and the Middle/Lower Montney play.
Management believes that the ultimate recovery from the corporation's Montney/Doig horizontal natural gas wells will continue to improve year over year as production declines continue to flatten. In addition, as drilling and completion technologies continue to improve, recovery factors and production rates in this unconventional reservoir should also improve.
Reserves on the Worsley Charlie Lake light oil resource play
At Dec. 31, 2013, Deloitte estimated that in the Worsley Charlie Lake light oil pool on the Worsley Charlie Lake light oil resource play, Birchcliff had 38.9 million boe of proved plus probable reserves and 19.6 million boe of proved reserves. This continues the growth trend for Birchcliff's Worsley Charlie Lake reserves since July 1, 2007 (being the effective date of the acquisition of this property), when recoverable reserves were estimated at 15.1 million boe on a proved-plus-probable basis and 11.3 million boe on a proved basis. Both the original oil in place and the estimated recoverable reserves continue to grow, and Birchcliff is pleased to report that the Worsley Charlie Lake light oil pool continues to be a top-quality asset.
HISTORY OF RESERVES ESTIMATED FOR THE WORSLEY CHARLIE LAKE POOL (MMBOE)
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, July 1,
2013 2012 2011 2010 2009 2008 2007 2007
Proved 19.6 19.6 18.8 18.8 18.3 17.5 15.0 11.3
Proved plus
probable 38.9 34.7 31.3 28.2 26.3 24.6 21.2 15.1
(1) Estimates of reserves relating to individual properties may not reflect the
same confidence level as estimates of reserves for all properties due to the
effects of aggregation.
Finding and development costs 2013
During 2013, Birchcliff's finding and development (F&D) costs were $268.1-million, and its finding, development and acquisition (FD&A) costs were $213.8-million.
Deloitte's estimates of future development costs are $1.45-billion on a proved basis and $2.5-billion on a proved-plus-probable basis, which includes approximately $100.4-million for the expansion of the PCS gas plant to 270 million cubic feet per day of total capacity, together with the related gathering pipelines, sales pipeline expansion and compression. The increase in future development capital for 2013 over 2012 is $147.1-million on a proved basis and $316.7-million on a proved-plus-probable basis.
Both the 2013 reserves evaluation and the 2012 reserves evaluation included, on average, $5.2-million for each future Montney/Doig horizontal natural gas well to which reserves were assigned, which includes drill, case, complete and tie-in costs.
Independent Montney/Doig natural gas resource assessment for 2013
Deloitte conducted an independent review and audit of resources, effective Dec. 31, 2013, in respect of Birchcliff lands that have potential for the Montney/Doig natural gas resource play, which is contained in a report dated Feb. 6, 2014. Deloitte also prepared a resource assessment effective Dec. 31, 2012. The 2013 Resource assessment and 2012 resource assessment have been prepared in accordance with the standards contained in the COGE handbook and NI 51-101.
Resource estimates stated herein as at Dec. 31, 2013, and 2012 are extracted from the relevant evaluation and reflect only Birchcliff's working interest share of resources for its lands in the area covered by the resource assessment. The resource assessment does not include Birchcliff's Worsley Charlie Lake light oil resource play or any of Birchcliff's other properties.
Montney/Doig natural gas resource assessment summary
The table summarizes Deloitte's estimates of Birchcliff's natural gas resources on the Montney/Doig natural gas resource play at Dec. 31, 2013, and Dec. 31, 2012, on a best-estimate case.
SUMMARY OF MONTNEY/DOIG NATURAL GAS RESOURCES
Dec. 31, 2013 Dec. 31, 2012
(Bcfe) (Bcfe)
Total petroleum initially in place
(PIIP) 52,036.4 39,709.5
Total undiscovered PIIP 34,443.3 26,331.8
Prospective resources 15,809.9 13,003.3
Total discovered PIIP 17,593.2 13,377.7
Contingent resources 6,547.8 4,869.1
Compared with the 2012 resource assessment, the best estimate of total PIIP has grown from 39.7 trillion cubic feet equivalent to 52.0 trillion cubic feet equivalent, a 31-per-cent increase. Additionally, Birchcliff was very successful with its strategy to promote resources from undiscovered to discovered in 2013 through its exploration program. Discovered PIIP increased 31.5 per cent from the 2012 resource assessment, from 13.4 trillion cubic feet equivalent to 17.6 trillion cubic feet equivalent. Compared with the 2012 resource assessment, the best estimate of contingent resources has grown from 4.9 trillion cubic feet equivalent to 6.5 trillion cubic feet equivalent, a 35-per-cent increase. These increases are a result of land acquisitions and drilling.
Background to the Montney/Doig natural gas resource assessment
Birchcliff holds significant high-working-interest acreage in large contiguous blocks on the Montney/Doig natural gas resource play in the Peace River Arch area of Alberta. Birchcliff's lands are proximal to the PCS gas plant, and to third party gathering and processing infrastructure.
The study area assessed by Deloitte comprises the Doig phosphate, Basal Doig and Montney formations in the greater Pouce Coupe, Elmworth, Sinclair and Bezanson areas of the Peace River Arch region of Alberta, ranging from townships 69 to 81, ranges two to 13W6. The study area is bounded in a northwest-southeast direction by the Montney/Doig deep basin edges and covered a total of 340.5 gross sections of land held by Birchcliff at Dec. 31, 2013, which include:
-
328.0 (306.0 net) sections, with a 93.3-per-cent working interest, which have
potential for the Middle/Lower Montney play;
- 307.25 (283.9 net) sections, with a 92.4-per-cent working interest, which have
potential for the Basal Doig/Upper Montney play.
Birchcliff's total landholdings on the two plays described above are 635.25 (589.9 net) sections. On full development of four horizontal wells per section per play, Birchcliff has 2,359.6 net horizontal drilling locations. With 117 (105.2 net) horizontal locations drilled at the end of 2013, there remain 2,254.4 net future horizontal drilling locations.
Deloitte utilized probabilistic methods to generate high, best and low estimates of reserves and resources volumes. Results from the 2013 resource assessment are presented in the table for Birchcliff's working interest share of gross volumes. Proved, proved plus probable and proved plus probable plus possible reserves determined by the 2013 reserves evaluation are included in this table for completeness, however reserves were not the focus of the 2013 resource assessment.
SUMMARY OF BIRCHCLIFF RESERVES AND RESOURCES
Reserves and resource
Resource class volumes (Bcfe)
Low Best High
estimate estimate estimate
case case case
Discovered
Cumulative production(3) 130.7 130.7 130.7
Remaining reserves(3)(4) 1,163.5 1,912.5 2,792.1
Surface loss/shrinkage 66.2 104.6 149.9
Total commercial 1,360.4 2,147.8 3,072.7
Contingent resources 4,456.0 6,547.8 9,961.1
Unrecoverable(5) 7,147.5 8,897.6 11,027.4
Total subcommercial 11,603.5 15,445.3 20,988.5
Total discovered PIIP 12,964.0 17,593.2 24,061.2
Undiscovered
Prospective resources 10,168.6 15,809.6 24,619.8
Unrecoverable(5) 16,273.4 18,633.7 20,888.1
Total undiscovered PIIP 26,442.0 34,443.3 45,507.9
Total petroleum initially in place (PIIP) 39,406.0 52,036.4 69,569.1
(1) All reserves and resources are gross volumes at Dec. 31, 2013, which
are equal to Birchcliff's working interest share before deduction of
royalties and without including any royalties held by Birchcliff.
(2) Numbers may not total due to rounding.
(3) Sales gas and related natural gas liquids.
(4) Includes reserves assigned to both vertical and horizontal
Montney/Doig wells. The best estimate reflects the estimate of proved plus
probable reserves contained in the 2013 reserves evaluation. The low
estimate reflects the estimate of proved reserves contained in the 2013
reserves evaluation. The high estimate reflects the estimate of proved
plus probable plus possible reserves contained in the 2013 reserves
evaluation.
(5) Unrecoverable includes surface loss/shrinkage on volumes of contingent
resources and prospective resources. The unrecoverable portion of
undiscovered PIIP is those quantities determined not to be recoverable by
future development projects. A portion of these resources may become
recoverable in the future as commercial circumstances change or
technological developments occur, but the remaining portion may never be
recovered due to physical and/or chemical constraints of the reservoir
rock and the fluid within it.
Strategic acquisition of partner's interest in 2014
Birchcliff completed a strategic acquisition on Jan. 15, 2014, with an effective date of Jan. 1, 2014, where Birchcliff bought a partner's 30-per-cent working interest in land and production in the Pouce Coupe area. The acquisition included 38 (11.3 net) sections of land on the Montney/Doig natural gas resource play and 9.6 million cubic feet equivalent per day (1,600 boe per day) of Birchcliff operated production, the majority of which is processed at the PCS gas plant. This transaction has allowed Birchcliff to consolidate lands it formerly held at a 70-per-cent working interest with lands it holds at 100-per-cent working interest, allowing for a contiguous development plan, eliminating holding buffers and increasing flexibility of capital allocation. By extrapolation from the reserves assigned by Deloitte at Dec. 31, 2013, to the lands held at 70-per-cent working interest, the 30-per-cent working interest acquired represents additional reserves as shown in the table.
RESERVES ACQUIRED JAN. 15, 2014
(MMboe)
Proved developed producing 5.4
Total proved 26.9
Probable 13.9
Total proved plus probable 40.8
Reserve life index
Birchcliff's reserve life index is 34.1 years on a proved-plus-probable basis and 20.5 years on a proved basis, in each case using reserves estimates by Deloitte at Dec. 31, 2013, plus the reserves added in the strategic acquisition of a partner's interest on Jan. 15, 2014, and assuming an average daily production rate of 33,000 boe per day.
Budget and guidance for 2014
Birchcliff is very pleased to announce its 2014 capital budget of $347.1-million (including $56.1-million for acquisitions). Birchcliff expects to drill 40 (39.5 net) wells in 2014. Details of the budget are as shown in the table.
2014 CAPITAL BUDGET
Net
Gross capital
wells Net wells (M$)
Drilling and development(1)
Basal Doig/Upper Montney horizontal natural
gas wells 4.0 4.0 25.8
Middle/Lower Montney horizontal oil and
natural gas wells 25.0 25.0 155.8
Worsley Charlie Lake horizontal oil wells 8.0 8.0 29.2
Halfway oil wells 2.0 1.5 3.5
Other oil wells 1.0 1.0 5.6
Total drilling and development(1) 40.0 39.5 219.9
Facilities 30.2
Production optimization 13.1
Land and seismic 12.9
Acquisition and dispositions 56.1
Other 14.9
Total net capital 347.1
(1) On a drill, case, complete, equip and tie-in basis.
Birchcliff expects 2014 exit production to be between 37,500 and 39,500 boe per day.
The company expects to finance its 2014 capital program using internally generated funds flow and available credit facilities. The company expects that the ratio of 2014 year-end debt to one year's forward funds flow will decrease from year-end 2013. These expectations are based on Birchcliff realizing $87.00 per barrel of oil and $4.10 per gigajoue ($4.67 per thousand cubic feet) of natural gas. Birchcliff's realized natural gas price from Jan. 1 to Feb. 10, 2014, was $5.38 per gigajoule ($6.12 per thousand cubic feet).
Production and operational update 2014
Current update
Current production is approximately 33,000 boe per day. To date in 2014 Birchcliff has produced an average of approximately 31,400 boe per day. Birchcliff expects 2014 exit production to be between 37,500 and 39,500 boe per day.
The PCS gas plant is currently processing approximately 136 million cubic feet per day. The phase IV expansion of the PCS gas plant, which will expand processing capacity to 180 million cubic feet per day by adding additional compression and sales pipeline capacity, will start up in the fall of 2014. The estimated cost of the phase IV expansion is approximately $11.6-million.
Birchcliff currently has four drilling rigs at work: three rigs are active in the Pouce Coupe area, drilling Montney/Doig horizontal natural gas wells; and one rig is active in the Worsley area, drilling Charlie Lake horizontal oil wells. Year-to-date drilling results include the drilling of six (six net) wells, consisting of four (four net) Montney/Doig horizontal natural gas wells in the Pouce Coupe area and two (two net) Charlie Lake horizontal light oil wells in the Worsley area.
Hedging
Birchcliff is receiving high natural gas prices for its current production as it is unhedged for the winter months of 2014.
The corporation initiated a hedging program in 2014, with Birchcliff contracting forward physical sales of 65,000 gigajoules per day, representing approximately 35 per cent of its estimated natural gas volumes during the summer months, April 1 to Oct. 31, 2014, for approximately $4.24 per thousand cubic feet. This is up from the natural gas hedging information disclosed in the Jan. 15, 2014, press release of 50,000 gigajoules per day, representing 30 per cent of its estimated natural gas volumes during that same time, for approximately $4.20 per thousand cubic feet. Birchcliff has also purchased oil hedges, with WTI put options for 1,000 barrels per day of crude oil for the calendar year 2014, comprising 500 barrels per day with a strike price of $90 (U.S.) and 500 barrels per day with a strike price of $85 (U.S.).
Five-year plan
Highlights of the 2018 five-year plan include exit production in 2018 of approximately 61,500 boe per day, made up of approximately 320 million cubic feet per day of natural gas, and 8,000 barrels of oil and natural gas liquids.
Birchcliff expects to finance the 2018 five-year plan using internally generated funds flow and available credit facilities. Based on the forecast production rates and commodity prices contained in the 2018 five-year plan, the ratio of year-end debt to the next year's forward funds flow is expected to decrease each year, based on the assumptions set out in the advisories.
Birchcliff currently owns and controls the land base necessary to achieve this production growth profile, allowing it to execute the program without relying on land, asset or corporate acquisitions. The company is confident that its has the asset base, the people, the capital and the defined strategy required to successfully execute the 2018 five-year plan.
Shareholder support
The company thanks Seymour Schulich, its largest shareholder, for his unwavering commitment and his continuing financial support. Mr. Schulich holds 40 million common shares, representing 27.8 per cent of the current issued and outstanding common shares.
Summary
The company remains focused on its strategy -- growth by the drill bit, in its core area of the Peace River Arch of Alberta. The company continues to use the same services, in the same area, directed by the same experienced Birchcliff personnel, which provide consistency, repeatability and reliability in operations.
The company is very pleased and excited with the current and future outlook for Birchcliff. The production and opportunity portfolio continues to increase while the cost structure continues to decrease. Focus, low-cost operations and financial flexibility have positioned Birchcliff to execute its long-term strategy.
The recent strength in natural gas prices has provided material financial momentum to the company's low-cost business. The gas hedges for approximately $4.24 per thousand cubic feet during the summer months, April 1 to Oct. 31, 2014, protect summer cash flow.
The company recently increased its exit production targets to 37,500 to 39,500 boe per day from 36,000 to 38,000 boe per day. With strong gas prices and increased production momentum, the company looks forward to a very strong 2014.
We seek Safe Harbor.
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