Topics Energy Stocks

Birchcliff Energy $7.86 - Toronto symbol BIR

BIRCHCLIFF ENERGY $7.86 (Toronto symbol BIR; TSINetwork Rating: Speculative) (403-261-6401; www.birchcliffenergy.com; Shares outstanding: 152.3 million; Market cap: $1.2 billion; No dividends paid) explores for, develops and produces oil and gas, mainly in the Peace River Arch area near the Alberta-B.C. border. About 87% of its output is gas. The remaining 13% is oil.

In the three months ended March 31, 2016, Birchcliff’s cash flow per share dropped 41.7%, to $0.14 from $0.24 a year earlier. Sharply lower oil and gas prices offset a 9.2% rise in daily production.

The company is now buying Encana Corp.’s Gordondale natural gas fields in northwestern B.C. for $625 million in cash. Encana (symbol ECA on Toronto) is a recommendation of our Successful Investor newsletter.

The deal is a big one for Birchcliff: the purchase price is equal to more than half of its current market cap; and it will expand its daily production by 55%, to 65,000 barrels of oil equivalent from 42,000.

To pay for the purchase, the company is selling 107.5 million shares at $6.25 each to raise $675.0 million. It will also sell 3.0 million shares at the same price to Seymour Schulich. That will let the prominent Toronto investor maintain his 27.6% stake in Birchcliff. Schulich is the company’s largest shareholder.

The direction of oil and gas prices depends on economic growth rates around the world and other key factors. We assume that oil prices will turn around later this year or in 2017. But if not, junior oil and gas producers such as Birchcliff will struggle to sustain drilling, and their cash flow will drop even lower.

Birchcliff remains a buy for aggressive investors.

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