Peace River Arch - Alberta
Natural Gas & Crude Oil exploration, development and production.
Message: Birchcliff Energy Ltd. Announces Record Third Quarter Financial Results, and Con
Birchcliff Energy Ltd. Announces Record Third Quarter Financial Results, and Continued Success With Its Montney/Doig Natural Gas Resource Play
CALGARY, ALBERTA--(Marketwire - Nov. 12, 2008) -
THIS PRESS RELEASE IS NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES.
Birchcliff Energy Ltd. ("Birchcliff") (TSX:BIR) is pleased to announce its record financial and operating results for the third quarter of 2008. The full text of Birchcliff's Third Quarter Report containing the Financial Statements for the three and nine month periods ended September 30, 2008 and the related Management's Discussion and Analysis is set forth below and will be available on SEDAR at www.sedar.com.
CURRENT UPDATE:
- 2008 exit production target remains at 13,500 to 14,000 BOE per day
- We expect significant reserve additions at year end due to Montney/Doig results
- Increased potential horizontal Montney/Doig well locations to approximately 590 (net) on 148.2 net sections of land, assuming 4 wells per section
THIRD QUARTER HIGHLIGHTS:
- Record average production for the third quarter of 10,000 BOE per day
- Cash flow of $37.9 million ($0.34 per basic share) - an increase of 307% from $9.3 million from Q3, 2007
- Earnings of $16.6 million ($0.15 per basic share) up from a loss of $5.7 for the same quarter last year
- Operating netback of $47.63 and cash flow netback of $41.18
- Increased undeveloped land to 370,894 gross (319,585 net) acres all in the Peace River Arch (an average 86% working interest)
- Our Montney/Doig natural gas resource play continued to meet or exceed Birchcliff's original expectations
- The Worsley light oil program continued to exceed our original expectations
- Commenced planning and engineering to build a large gas plant in Pouce Coupe to continue growth in 2009 and beyond.
- Drilled 23 gross (21.7 net) oil and gas wells with 100% success
Birchcliff Energy Ltd. - Third Quarter 2008 Report
The full Text of the 2008 Third Quarter Report Follows:
November 12, 2008
Dear Shareholder:
We remain confident that we will achieve our 2008 exit target production rate of 13,500 to 14,000 BOE per day. Our third quarter drilling and completion results have substantially increased management's confidence in our two resource plays.
Our production rate on Monday, November 10, 2008 was estimated to be approximately 12,000 BOE per day immediately before a pipeline in Pouce Coupe operated by a third party began to leak, temporarily shutting in approximately 1,250 BOE per day of production. Including the wells shut-in by this pipeline incident, Birchcliff now has 7 gross (6.0 net) horizontal Montney/Doig natural gas wells behind pipe which it expects to have on production before year end. We are currently drilling our last horizontal Montney/Doig natural gas well (0.7 net) in 2008 and we expect this well will also be on production before year end. The average first month initial production rate of all the wells in our horizontal drilling program to date exceeds 600 BOE per day. I am pleased to advise you that one of the horizontal wells, (0.7 net), that will be on production shortly, was tested at a stabilized rate of 11 mmcf per day of raw gas.
There are 18 gross (14.5 net) wells that are in various stages of completion and awaiting tie-in, including the horizontal Montney/Doig natural gas wells noted above.
Our Montney/Doig natural gas resource play results continue to meet or exceed our original expectations. Accordingly, we expect significant reserve additions at year end.
Birchcliff continues to add to its undeveloped land position on its Montney/Doig play trend primarily through Crown land sales boosting its proven and trend land to date to 148.2 net sections and increasing its potential horizontal Montney/Doig drilling locations to at least 590 net locations, assuming four wells per section.
We are very comfortable with the performance of our asset base, drilling results, reserve growth, land accumulations, drilling inventory and potential infrastructure growth. We believe that our assets are worth significantly more than the current trading value of our shares. In light of the financial markets and extreme commodity swings, we currently plan to be conservative in the first quarter and spend our cash flow (excluding expenditures on the Pouce Coupe sour gas plant referred to below) and then evaluate our future capital expenditure plans during spring break up of 2009. As a result of discussions with our Bank Syndicate, we expect to increase our credit facilities during the second quarter of 2009 for the purpose of maintaining our financial flexibility.
2008 THIRD QUARTER RESULTS
Production
Production for the third quarter of 2008 averaged 10,000 BOE per day. This is a 66% increase from the 6,014 BOE per day we averaged during the third quarter of 2007 and ahead of our first and second quarter of 2008. We are pleased with this production profile which exhibits strong base production and will continue to grow as our horizontal Montney/Doig natural gas wells are brought on production. Our Worsley light oil property continues to exhibit strong base production and actual production at Worsley is ahead of our internal budgets. As stated above and in light of the wells which we have tested and are awaiting tie in, we are comfortable with our 2008 exit production target.
Cash Flow and Earnings
Cash flow was $37.9 million or $0.34 per share for the third quarter of 2008, as compared to $9.3 million or $0.14 per share for the third quarter of 2007. Birchcliff had earnings of $16.6 million or $0.15 per share for the third quarter of 2008 as compared to a loss of $5.7 million or $0.09 per share for the third quarter of 2007. Birchcliff recognized a realized loss from its oil price risk management contract (hedging loss) in the amount of $3.6 million in the third quarter which related to a volume of 1,000 BOE per day of light oil. The volume under this oil price risk management contract is fixed at 1,000 BOE per day for the remainder of the year. Birchcliff has no current intention of hedging any further production. During October 2008, there was no payment made or received under the oil price risk management contract as average oil prices were within the collar. At current oil prices this oil price risk management contract accrues a small benefit to Birchcliff.
Capital Expenditures and Drilling
During the third quarter of 2008, capital spending aggregated $89.2 million as compared to $288.3 million ($265.7 million related to the Worsley acquisition) for the same period last year. Details of our capital expenditures are set forth in the Management's Discussion and Analysis portion of the quarterly report. Birchcliff was extremely active in the third quarter. The third quarter program consisted of 23 gross (21.7 net) wells. All wells were cased, representing 100% success for the program. Eight gross (6.7 net) exploration wells were successful, 1 gross (1.0 net) well was successfully drilled as an acid gas injection well, and the other 14 gross (14.0 net) wells were development wells. Birchcliff drilled 6 gross (5.1 net) horizontal Montney/Doig natural gas wells and at Worsley 10 gross (10.0 net) vertical oil wells and 3 gross (3.0 net) horizontal oil wells.
Indebtedness
On September 30, 2008 Birchcliff was drawn to $181 ?million on its $240 million credit facilities. Total indebtedness at September 30, 2008, including working capital deficiency was $214.6 million.
Land
Birchcliff has continued to grow its undeveloped land base in the Peace River Arch. At September 30, 2008 it owned 370,894 gross (319,585 net) undeveloped acres with an average 86% working interest.
In the third quarter Birchcliff added an additional 6.7 net sections of land to its inventory of proven lands on the Montney/Doig natural gas resource play, being lands on which the Montney/Doig formations have been penetrated by logged well bores or lands which are adjacent to such penetrations. At September 30, 2008 we had 47.4 net sections which we consider proven lands for the Montney/Doig play, an increase from 40.7 net sections at June 30, 2008. These additional lands have increased our horizontal Montney/Doig natural gas well drilling inventory on proven lands on 47.4 net sections to approximately 190? potential drilling locations (assuming 4 wells/section). Since September 30, 2008 we have acquired additional lands containing potential horizontal drilling locations as noted below.
Birchcliff has also added significant trend land to its Montney/Doig natural gas resource play. Birchcliff believes that its trend land has a high likelihood of extending the Montney/Doig natural gas resource play based on technical information including geological and geophysical data. Through, crown sales, farm-ins, poolings, and drilling, Birchcliff added 23.7 net sections to its trend land inventory during the third quarter, for a total of 62.9 net sections of trend land at September 30, 2008, a significant increase from 39.3 net sections of trend land at June 30, 2008. This represents approximately 250 additional horizontal well locations on its trend lands of 62.9? net sections based on 4 wells per section.
These additions to our drilling inventory continue to add significant depth to our repeatable, sustainable Montney/Doig opportunities which continue to provide Birchcliff with the economies of scale necessary to fully develop these lands. We believe the concentration of high working interest land and the large footprint we have on the play enhances ultimate value of all of our lands.
OPERATIONAL UPDATE
Birchcliff is currently very active operationally with, completion, tie-in and new facility operations. Currently, we have one rig drilling a horizontal Montney/Doig natural gas well, which is the last well of the 2008 15 well Montney/Doig horizontal drilling program. Year to date, Birchcliff has drilled 58 gross (53.1 net) wells, 56.9% were oil wells, 39.7% were natural gas wells,1.7% (1.0 net well) was drilled and abandoned and 1.7% (1.0 net) was a successful acid gas disposal well.
Montney/Doig Natural Gas Resource Play Update
Industry success in the Montney/Doig natural gas resource play continues to generate considerable attention and interest. Significant increases in estimates of original gas in place (OGIP), and technical advancements enhancing exploitation of unconventional gas resources have been reported by industry in general and specifically for the Montney/Doig play. Furthermore, industry operators have reported operational and economic successes related to the "shales" of the Montney/Doig, including the organic rich Doig Phosphate. These advancements and successes have lead to increased OGIP assessments, increased productivity and improved project economics.
Birchcliff believes the Montney/Doig natural gas resource play consists of reservoirs in tight sands, siltstones and shales. Birchcliff continues to evaluate the resource and reserve potential of these reservoirs on its lands and areas of interest. Birchcliff has conducted a number of integrated projects including, hydrodynamics, rock properties, petrophysics and geochemistry. Birchcliff believes that this work coupled with state of the art drilling, completions and production practices has the potential to significantly increase Birchcliff reserves and ultimately production from this complex resource play.
We are pleased to announce that since September 30, 2008, through Crown land sales, drilling and completion results, and updated evaluation, Birchcliff has increased its proven and trend acreage on the Montney/Doig natural gas resource play. Since September 30 we have increased our proven land to 60.5 net sections from 47.4 net sections and increased our trend land to 87.7 net sections from 62.9 net sections. At 4 wells per section that represents an inventory in excess of 590 net potential horizontal drilling locations (up from 440 as of September 30, 2008) of which 16 (14.3 net) horizontal wells have been drilled to date and 1 gross (0.7 net) well is currently drilling.
Of the 16 (14.3 net) horizontal Montney/Doig natural gas wells drilled to date, currently 9 (8.3 net) wells are on production. The first month average initial production rate of all the wells in our horizontal drilling program to date exceeds 600 BOE per day and the production profiles continue to meet or exceed our original expectations. With one well left to drill, Birchcliff expects to have the remaining 8 gross (6.7 net) horizontal wells, (of 17 gross,15.0 net in total), on production by year end. We have achieved a 100% success rate with the 16 Montney/Doig horizontal wells we have drilled to date on this play.
In a continued effort to expand the stratigraphic potential of the Montney/Doig interval on Birchcliff lands, Birchcliff recently drilled a second horizontal well in the Middle/Lower Montney stratigraphic interval. This well adds to the previously announced 2 vertical wells and 1 horizontal well Birchcliff has drilled in the Middle/Lower Montney. To date, most of our capital and efforts on the Montney/Doig play have been focused on the Basal Doig and Upper Montney zones. Birchcliff and other industry competitors believe that the Middle/Lower Montney reservoir characteristics are similar to the Basal Doig and Upper Montney producing zones, including the potential for 4 horizontal gas wells per stratigraphic section for each section of land. Both of these new horizontal wells in the Middle/Lower Montney are expected to be on production for year end. These successful tests of these new stratigraphic zones have increased the scope and depth of drilling opportunities on Birchcliff lands.
Worsley Light Oil Resource Play Update
Birchcliff has drilled 31 gross (31.0 net) light oil wells at Worsley during 2008. All of the wells were 100% working interest. Of the wells drilled, 23 were vertical and 8 were horizontal, all of which were cased. In addition to the infill drilling, our drilling program was very successful in delineating extensions to the pool to the south and the north which increased Birchcliff's estimate of original oil in place. During the third quarter Birchcliff initiated a 15 square mile 3-D seismic program. Birchcliff controls essentially 100% of all rights on the lands being evaluated. The 3-D program has multiple purposes, including, increasing the knowledge of the geometry of the pool, identifying infill and delineation drilling locations as well as evaluating a number of geological exploration prospects of new stratigraphic intervals. The data from the program was recently received and is currently being evaluated.
Pouce Coupe Sour Gas Plant
We have been making steady progress with the development of a sour gas plant at Pouce Coupe. To date we have invested approximately $4 million for the front end engineering studies and the successful drilling and testing of an acid gas disposal well adjacent to our proposed plant site. We are continuing with the detailed engineering and are currently pursuing a number of potential financing arrangements to fund the capital requirements relating to this project. We expect the sour gas plant to be commissioned later in 2009.
I confirm that any capital spending quoted herein for the first quarter of 2009 does NOT include the capital Birchcliff will spend on the sour gas plant in 2009, as such capital will be provided on some form of construction loan basis.
OUTLOOK
We continue to be excited about the development of our two resource plays. The recent success of our horizontal Montney/Doig natural gas wells, the incremental potential locations, the increase in proven and trend land on the play, and the addition of owned and operated natural gas facilities all point to the future success of this resource play. Birchcliff is pursuing other resource plays in its focus area and continues to evaluate the potential for the development of tight gas and shale gas production and reserves on its lands.
Birchcliff is early in the exploration cycle of the Montney/Doig resource play. To date we have concentrated on expanding our footprint on the Montney/Doig natural gas resource play by drilling step-out wells to extend the play boundaries and building pipeline and compression infrastructure to support that expansion. As a result we continue to drill one horizontal Montney/Doig well per section. We believe we can drill at least 4 horizontal wells per section for each prospective interval on this play. Accordingly, we have a large inventory of horizontal well locations that can be drilled from existing drilling pads with very short tie-ins requiring minimal capital for infrastructure. This low risk development inventory will allow us to continue to expand our production from this play notwithstanding weak commodity prices.
We believe that our asset base has huge potential, however, in light of the severe financial downturn in the equity markets, the significant decrease in the crude oil price and Birchcliff's corresponding share price performance, Birchcliff has adopted a very conservative approach to its business and will not out-spend its cash flow in the first quarter of 2009 (excluding expenditures on the Pouce Coupe sour gas plant referred to above). We anticipate that during spring break up 2009, we will evaluate current market conditions and determine the prudent level of capital spending for the remainder of 2009. Birchcliff with its very high working interest and operatorship is well positioned to increase or decrease its capital spending very quickly, and can react to positive or negative market conditions.
On behalf of our management team and Directors we thank our shareholders for their continued support and our staff for their hard work and dedication.
A. Jeffery Tonken, President and Chief Executive Officer
FINANCIAL AND OPERATIONAL HIGHLIGHTS
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Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
30, 30, 30, 30,
2008 2007 2008 2007
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OPERATING
Daily Average Production
Light Oil - barrels 3,150 804 2,903 750
Natural Gas - thousands
of cubic feet 38,924 30,134 38,415 29,524
NGLs - barrels 363 188 380 181
Total - barrels of oil
equivalent (6:1) 10,000 6,014 9,685 5,852
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Average Sales Price ($ Canadian)
Light oil - per barrel 115.95 76.95 110.78 70.48
Natural Gas - per
thousand cubic feet 8.47 5.48 9.25 6.86
NGLs - per barrel 108.58 75.38 104.14 69.36
Total - barrels of oil
equivalent (6:1) 73.44 40.10 73.98 45.80
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Undeveloped Land
Gross (acres) 370,894 294,224 370,894 294,224
Net (acres) 319,585 247,788 319,585 247,788
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NETBACK AND COST
($ per barrel of oil
equivalent at 6:1)
Petroleum & natural gas
revenue 73.85 40.60 74.39 46.50
Royalties (13.59) (7.24) (12.27) (7.22)
Operating expense (9.85) (9.55) (10.31) (9.08)
Transportation and
marketing expense (2.78) (1.65) (2.78) (1.64)
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Netback 47.63 22.16 49.03 28.56
General & administrative
expense (0.32) (2.51) (1.46) (3.09)
Stock-based compensation
expense - - (0.01) (0.03)
Realized loss on risk
management contracts (3.92) - (4.13) -
Realized loss on foreign
exchange (0.31) - (0.16) -
Interest expense (1.90) (2.75) (3.02) (2.53)
Taxes - (0.05) - (0.17)
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Cash Flow Netback 41.18 16.85 40.25 22.74
Depletion and
depreciation expense (23.91) (28.34) (24.38) (27.81)
Accretion expense (0.43) (0.66) (0.40) (0.52)
Stock-based compensation
expense (1.54) (1.34) (1.51) (0.81)
Unrealized gain (loss)
on risk management contracts 10.17 (2.12) 1.78 (0.74)
Unrealized gain (loss)
on foreign exchange (0.16) - 0.06 -
Future income tax
recovery (expense) (7.21) 5.29 (4.41) 2.24
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Net Earnings (Loss) 18.10 (10.32) 11.39 (4.90)
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FINANCIAL
Petroleum & Natural Gas
Revenue ($000) 67,942 22,467 197,407 74,298
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Cash Flow from
Operations ($000) 37,886 9,327 106,826 36,364
Per share - basic ($) 0.34 0.15 0.99 0.57
Per share - diluted ($) 0.33 0.14 0.95 0.56
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Net Earnings (Loss) ($000) 16,649 (5,707) 30,253 (7,787)
Per share - basic ($) 0.15 (0.09) 0.28 (0.12)
Per share - diluted ($) 0.14 (0.09) 0.27 (0.12)
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Common Shares Outstanding
End of Period - Basic 112,395,970 94,472,583 112,395,970 94,472,583
End of Period - Diluted 121,451,823 103,046,582 121,451,823 103,046,582
Weighted Average for
Period Basic 112,386,829 64,205,283 107,841,267 64,187,801
Weighted Average for
Period Diluted 116,859,500 64,836,852 112,425,211 65,116,650
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Capital Expenditures ($000) 89,158 288,321 178,163 319,867
Working Capital
(Deficiency) ($000) (1) (33,647) (11,766) (33,647) (11,766)
Non-Revolving Credit
Facility ($000) - (97,431) - (97,431)
Revolving Credit
Facilities ($000) (180,995) (153,360) (180,995) (153,360)
Total Debt ($000) (214,642) (262,557) (214,642) (262,557)
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(1) This amount excludes both the accrued liability for the unrealized loss
on oil price risk management contracts and the related future income tax
asset.
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") in respect of the three and nine month periods ended September 30, 2008 (the "Reporting Periods") as compared to the three and nine month periods ended September 30, 2007 (the "Comparable Prior Periods") is dated November 12, 2008.
The following discussion and analysis is management's assessment of the historical financial and operating results of Birchcliff Energy Ltd. (the "Corporation" or "Birchcliff") and should be read in conjunction with the unaudited financial statements of the Corporation for the Reporting Periods and the audited financial statements as at and for the years ended December 31, 2007 and 2006 together with the notes thereto, all of which has been prepared in accordance with Canadian Generally Accepted Accounting Principles.
Additional information relating to the Corporation is available on SEDAR at www.sedar.com. Birchcliff is listed for trading on the Toronto Stock Exchange under the symbol "BIR".
All dollar amounts are stated in Canadian dollars unless otherwise stated.
FORWARD LOOKING STATEMENTS
This disclosure includes forward-looking statements and assumptions respecting the Corporation's strategies, future operations, expected financial results, financing sources, commodity prices, costs of production and quantum of petroleum and natural gas reserves and discusses certain issues, risks and uncertainties that can be expected to impact on any of such matters.
By their nature, forward-looking statements are subject to numerous risks and uncertainties that can significantly affect future results. Actual future results may differ materially from those assumed or described in such forward-looking statements as a result of the impact of issues, risks and uncertainties whether described herein or not, which the Corporation may not be able to control. The reader is therefore cautioned not to place undue reliance on such forward-looking statements.
The Corporation disclaims any intention or obligation to update or revise these forward-looking statements as a result of new information, future events or otherwise, except to the extent required by law.
NON-GAAP MEASURES
This MD&A and the Corporation's Third Quarter Report for 2008 make references to terms commonly used in the petroleum and natural gas industry, such as cash flow or cash generated from operations, cash flow per share, operating netback, netback and cash flow netback.
Cash flow, as discussed in this MD&A and in the Corporation's Annual Report for 2007, appears as a separate line on the Corporation's Statements of Cash Flows above "changes in non-cash working capital" and is reconciled to net earnings or loss. In the Corporation's disclosure, netback and/or operating netback denotes petroleum and natural gas revenue less royalties, less operating expenses and less transportation and marketing expenses. Cash flow netback as used herein denotes net earnings plus future income tax expense (less any recovery), depletion, depreciation and accretion expense, unrealized losses on risk management contracts and foreign exchange (less any unrealized gains thereon) and non-cash stock-based compensation expense.
These terms are not defined by Generally Accepted Accounting Principles and consequently, they are referred to as non-GAAP measures. The reader should be cautioned that these amounts may not be directly comparable to measures for other companies where similar terminology is used.
BOE CONVERSION
Barrel of oil equivalent ("BOE") amounts may be misleading, particularly if used in isolation. A BOE conversion ratio has been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel and is based on an energy equivalent conversion method primarily applicable at the burner tip and does not necessarily represent an economic value equivalency at the wellhead. This conversion basis conforms to National Instrument 51-101 Standards for Oil and Gas Activities of the Canadian Securities Administrators.
DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the Corporation is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure. The Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") have evaluated the effectiveness of the Corporation's disclosure controls and procedures as at September 30, 2008 and have concluded that such disclosure controls and procedures were effective as at that date to provide reasonable assurance that material information relating to Birchcliff is made known to them by others within the Corporation possessing such information. It should be noted that while the Corporation's CEO and CFO believe that the Corporation's disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that the disclosure controls and procedures will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
The CEO and CFO of the Corporation are able to certify the design of the Corporation's internal controls over financial reporting as required under Multilateral Instrument 52-109 of the Canadian Securities Administration with no significant weaknesses in design of these internal controls that require commenting on in the MD&A.
For the third quarter of 2008 there were no changes to the design of internal controls over financial reporting.
OVERALL PERFORMANCE
Average production in the third quarter of 2008 increased by 4% to 10,000 BOE per day, as compared to 9,583 BOE per day in the second quarter of 2008. The increase in average production volumes was less than anticipated due to delays of completion and tie-ins of wells as a result of shortages of supplies for service providers and availability of service providers for Birchcliff's projects. However, the results of these projects were better than anticipated and it is expected that the tie-ins for the delayed projects will occur during the fourth quarter of 2008. Accordingly, Birchcliff expects to achieve its exit production target of 13,500 to 14,000 BOE per day.
Capital expenditures for the three month Reporting Period were $89.2 million, as compared to $37.5 million in the second quarter of 2008 and $51.5 million in the first quarter of 2008. The total year to date 2008 capital expenditures are $178.2 million.
Total debt at September 30, 2008 was $214.6 million as compared to $272.9 million at December 31, 2007. This decrease in debt of $58.3 million is primarily due to the repayment and cancellation of the $100 million non-revolving credit facility in the first quarter of 2008 as a result of an equity issue. To September 30, 2008 the Corporation had drawn upon only $181 million of its $240 million credit capacity. This allows for maximum flexibility in terms of increasing its capital spending or capitalizing on small acquisitions without issuing further equity. However, given the current environment, Birchcliff will remain prudent in its 2009 capital program.
Birchcliff is comfortable with its anticipated year end debt levels, due to the strong operational performance of its two resource plays. These two resource plays provide Birchcliff with the ability to add significant reserves and production on an annual basis with relatively low risk drilling allowing Birchcliff to use the lower cost of debt funding rather than the higher cost of equity financing. Based on recent discussions with its lead lender and its expected year-end reserves additions, the Corporation expects that its credit facilities will be increased in 2009 beyond the current limit of $240 million.
In its usual course of business, the Corporation frequently reviews potential property acquisitions, joint venture opportunities and corporate mergers and acquisitions with the intention of completing such a transaction if acceptable terms can be negotiated. As a result, Birchcliff may often be involved in negotiations with other parties in respect of property acquisitions and corporate merger/acquisition opportunities. At present, the Corporation is not pursuing any significant acquisition or merger opportunities as Birchcliff believes that its own asset base has significantly more opportunities than those that are for sale. Management is confident that in the current environment, the Corporation is capable of raising sufficient equity and/or debt financing to fund one or more of these transactions should it be necessary.
MAJOR TRANSACTIONS AFFECTING FINANCIAL RESULTS
On March 14, 2008, Birchcliff completed a bought deal equity financing whereby it issued 1,522,843 flow-through common shares at a price of $9.85 per flow-through share and 14,375,000 common shares at a price of $8.00 per common share for total gross proceeds of $130 million and net proceeds of approximately $123 million. Proceeds of the offering were used to retire the $100 million syndicated non-revolving credit facility used for the Worsley acquisition and to reduce the amount outstanding under the Corporation's revolving credit facility.
During the second quarter of 2008, the Corporation's $200 million syndicated credit facilities were increased to $240 million and extended until May 2009. The Corporation's Bank Syndicate performed a mid year review of Birchcliff's reserves during October 2008 and agreed to maintain the $240 million of credit facilities.
LIQUIDITY AND BANK DEBT
Working Capital
The Corporation's working capital deficit decreased to $33.6 million at September 30, 2008, as compared to $109.2 million at September 30, 2007 primarily due to the repayment of the $100 million non-revolving credit facility in the first quarter of 2008. The non-revolving credit facility was drawn on September 27, 2007 to complete the Worsley Acquisition.
Throughout this MD&A the Corporation has excluded from its working capital deficit the accrued liability for the mark-to-market unrealized loss on its oil price risk management contracts and the associated future income tax asset because the benefit the Corporation receives from higher oil prices in the future will offset substantially all of this liability. This liability is categorically different than the other current liabilities in that it does not represent indebtedness but rather an opportunity cost when oil prices go beyond the ceiling price in the oil price risk management contracts. In order to estimate this liability, future oil prices were estimated beyond the ceiling of our costless collars, yet there is no offsetting asset recorded for the future value that the same estimated future oil price will provide Birchcliff in increased cash flows. Therefore Birchcliff believes excluding this amount from the working capital deficit calculation is appropriate.
At September 30, 2008 the largest component of Birchcliff's current assets (58%) is the cash to be received from its marketers in respect of September 2008 production which was subsequently received in October 2008. In contrast, the current liabilities consist of trade payables (50%); accrued capital and operating costs (30%); and royalties and other minor amounts. Management expects this working capital deficiency to continue into the foreseeable future as result of its continuing capital program in the Peace River Arch area.
Bank Debt
The Corporation's bank debt or revolving credit facilities which have an aggregate limit of $240 million were drawn to $181 million at September 30, 2008 as compared to $153.4 million at September 30, 2007. In response to higher commodity prices during the first half of 2008, and the Worsley Acquisition in the third quarter of 2007, the Corporation increased its capital program in 2008 as compared to 2007, due to its increased cash flow.
At September 30, 2008 the interest rate applicable to the working capital facility was 5.4% and slightly less for the syndicated facility because bankers' acceptances, which have a lower effective rate of interest, are used in the syndicated facility.
Overall, the Corporation did not have any liquidity issues with respect to the operations of its petroleum and natural gas business in the Reporting Periods nor does it anticipate a liquidity issue in the foreseeable future.
The Corporation intends to finance its oil and natural gas business primarily through cash generated from operations, proceeds from bank debt, and equity financings to the extent required. Management expects to be able to continue to raise additional equity and debt financing sufficient to meet both its short-term and long-term growth requirements in the current environment. Birchcliff is now at such a size that it anticipates it will not require additional equity except to fund a significant acquisition or to significantly increase its capital spending.
CASH FLOW FROM OPERATIONS
Cash generated by the Corporation was $37.9 million and $106.8 million for the three and nine month Reporting Periods as compared to $9.3 million and $36.4 million for the Comparable Prior Periods. The $28.6 million and $70.4 million increases for the three and nine month periods, respectively, were due to increased natural gas production as a result of drilling success, increased oil production resulting from the Worsley Acquisition which was only 4 days in the Comparable Prior Periods and much higher commodity prices than in the prior year. However, this was mitigated by higher interest costs in the first three months of 2008 than in the first three months of 2007 due to the Worsley Acquisition and the related $100 million non-revolving credit facility, and the realized loss on oil price risk management contracts. Future cash flow will be dependent mainly on production levels and commodity prices.
OUTSTANDING SHARE DATA
The common shares of Birchcliff began trading on the TSX Exchange on July 21, 2005 under the symbol "BIR" and were at the same time de-listed from the TSX Venture Exchange where they were trading under the same symbol prior to such time. The following table summarizes the common shares issued from December 31, 2007 to September 30, 2008 which are the only class of shares outstanding:
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Common Shares
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance at December 31, 2007 94,554,269
Issue of Common Shares upon Exercise of Options and Warrants 1,410,977
Issue of Common Shares 14,375,000
Issue of Flow Through Shares 1,522,843
----------------------------------------------------------------------------
Balance at March 31, 2008 111,863,089
Issue of Common Shares upon Exercise of Options 512,881
----------------------------------------------------------------------------
Balance at June 30, 2008 112,375,970
Issue of Common Shares upon Exercise of Options 20,000
----------------------------------------------------------------------------
Balance at September 30, 2008 112,395,970
----------------------------------------------------------------------------
----------------------------------------------------------------------------
RESULTS OF OPERATIONS
Petroleum and Natural Gas Revenue
Petroleum and natural gas revenues totaled $67.9 million for the three month Reporting Period and $197.4 million for the nine month Reporting Period as compared to $22.5 million and $74.3 million for the three and nine month Comparable Reporting Periods. The increases were primarily due to additional production volumes associated with the Worsley Acquisition, as well as significantly higher commodity prices in 2008. The following table details Birchcliff's petroleum and natural gas revenue, production and sales prices by category for each of the Reporting Periods and Comparable Prior Periods:
Three months ended Three months ended
September 30, 2008 September 30, 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Average Total Average
Revenue Daily Average Revenue Daily Average
($000's) Production % ($/unit) ($000's) Production ($/unit)
----------------------------------------------------------------------------
Natural
gas (mcf) 30,340 38,924 65 8.47 15,194 30,134 84 5.48
Light oil
(bbls) 33,599 3,150 32 115.95 5,694 804 13 76.95
Natural
gas
liquids
(bbls) 3,623 363 3 108.58 1,301 188 3 75.38
----------------------------------------------------------------------------
Total
sales
(BOE) 67,562 10,000 100 73.44 22,189 6,014 100 40.10
Royalty
revenue 380 0.41 278 0.50
----------------------------------------------------------------------------
Total
revenue 67,942 73.85 22,467 40.60
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Nine months ended Nine months ended
September 30, 2008 September 30, 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Average Total Average
Revenue Daily Average Revenue Daily Average
($000's) Production % ($/unit) ($000's) Production % ($/unit)
----------------------------------------------------------------------------
Natural
gas (mcf) 97,361 38,415 66 9.25 55,307 29,524 84 6.86
Light oil
(bbls) 88,105 2,903 30 110.78 14,432 750 13 70.48
Natural
gas
liquids
(bbls) 10,850 380 4 104.14 3,434 181 3 69.36
----------------------------------------------------------------------------
Total
sales
(BOE) 196,316 9,685 100 73.98 73,173 5,852 100 45.80
Royalty
revenue 1,091 0.41 1,125 0.70
----------------------------------------------------------------------------
Total
revenue 197,407 74.39 74,298 46.50
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Commodity Prices
Birchcliff sells virtually all of its natural gas production at the AECO daily spot price. Birchcliff receives premium pricing for its natural gas due to the high heat content of its natural gas. The following table details the average sales price and differential received by Birchcliff:
----------------------------------------------------------------------------
Three months Three months
ended ended
September 30, September 30,
2008 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Sales Price ($/mcf) 8.47 5.48
Average of the AECO Daily Spot Prices
($/mmbtu) (1) 7.92 5.16
----------------------------------------------------------------------------
Positive Differential 0.55 0.32
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) $1.00/mmbtu = $1.00/mcf based on a standard heat value mcf.
----------------------------------------------------------------------------
Nine months Nine months
ended ended
September 30, September 30,
2008 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Sales Price ($/mcf) 9.25 6.86
Average of the AECO Daily Spot
Prices ($/mmbtu) (1) 8.71 6.55
----------------------------------------------------------------------------
Positive Differential 0.54 0.31
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) $1.00/mmbtu = $1.00/mcf based on a standard heat value mcf.
The price the Corporation receives for its production depends on a number of factors, including AECO Canadian dollar spot market prices for natural gas, U.S. dollar oil prices, the U.S./Canadian dollar exchange rate, and transportation and product quality differentials. Birchcliff regularly considers managing the risk associated with fluctuating spot market prices for natural gas and U.S. dollar oil prices and the U.S./Canadian dollar exchange rate. Birchcliff currently has no fixed commodity price contracts or other hedge type contracts for its natural gas production, but entered into the following oil price risk management contracts during 2007 for its light oil production for the terms noted below:
Risk Management Contracts
----------------------------------------------------------------------------
Term Type Quantity WTI Price
(USD) (3)
November 1, 2007 - December 31, 2007(1) Put 2,500 $ 65.00
November 1, 2007 - December 31, 2007(1) Call 2,500 $ 81.00
January 1 - March 31, 2008(2) Put 1,000 $ 67.50
January 1 - March 31, 2008(2) Call 1,000 $ 81.40
January 1 - December 31, 2008 Costless $ 67.50 -
collar 1,000 $ 79.10
----------------------------------------------------------------------------
(1) Each contract was entered into separately on different dates but the two
contracts essentially form a costless collar.
(2) Each contract was entered into separately on different dates but the two
contracts essentially form a costless collar.
(3) Each contract is settled on the average of the daily NYMEX WTI US$
price.
The Corporation entered into the above contracts during the month of September 2007 and has not entered into any new commodity price risk management contracts since then.
During October, 2008, there was no payment made or received under the oil price risk management contract as average oil prices were within the collar. At current crude oil prices, the remaining risk management contract is accruing a benefit to Birchcliff.
The Corporation actively monitors the market to determine whether any additional commodity price risk management contracts are warranted. The Corporation has no current intention to enter into further commodity price risk management contracts.
Gain or Loss on Oil Price Risk Management Contracts
Due to the significant time and costs required to document the effectiveness of commodity price risk management contracts as hedges, Birchcliff does not account for its risk management contracts as hedges in its financial statements. The commodity price risk management contracts are instead recorded at their fair values (mark to market) at each period end date, and realized and unrealized gains or losses on risk management contracts are shown as a separate category in the statement of income.
As a result of changes in the fair value of its oil price risk management contracts during the three and nine month Reporting Periods, the Corporation recorded a realized oil price risk management loss of $3.6 million and $11.0 million and an unrealized oil price risk management gain of $9.4 million and $4.7 million, respectively. In the three and nine month Comparable Prior Periods the Corporation recorded an unrealized oil price risk management loss of $1.2 million. The contracts were entered into in September 2007 and there was no settlement until November 2007, so there was no realized gain or loss during the Comparable Prior Periods.
Royalties
Oil and natural gas royalties totaled $12.5 million ($13.59 per BOE) for the three month Reporting Period and $32.6 million ($12.27 per BOE) for the nine month Reporting Period as compared to $4.0 million ($7.24 per BOE) and $11.5 million ($7.22 per BOE) for the Comparable Prior Periods. The overall effective royalty rate in the three and nine month Reporting Periods was 18% and 17% as compared to 18% and 16% in the Comparable Prior Periods.
Operating Costs
Operating costs were $9.1 million ($9.85 per BOE) for the three month Reporting Period and $27.4 million ($10.31 per BOE) for the nine month Reporting Period as compared to $5.3 million ($9.55 per BOE) and $14.5 million ($9.08 per BOE) for the Comparable Prior Periods. It is important to note that the Worsley property was acquired at the end of the third quarter of 2007 and therefore did not materially impact the operating costs for that period. Field operating costs and expensed workovers were virtually unchanged on a per BOE basis; the $0.30 per BOE increase in the three month Reporting Period as compared to the three month Comparable Reporting Period was primarily due to lower third party recoveries.
The $1.23 per BOE increase in the nine month Reporting Period as compared to the nine month Comparable Prior Period was comprised of $0.24 per BOE relating to expensed workovers (including the Worsley facility turnaround), $0.21 per BOE resulting from lower third party recoveries, $0.38 as a result of booking prior years equalizations and $0.40 due to generally higher costs of supplies and services.
Recoveries continue to decrease on a per BOE basis since the Comparable Prior Periods because Birchcliff's production volumes have increased significantly as a result of the Worsley Acquisition in September 2007, without a corresponding increase in third party recoveries and recoveries from third parties in other areas have remained relatively constant on a total dollar basis. Recoveries were $0.34 per BOE lower and $0.21 per BOE lower in the three and nine month Reporting Periods, respectively, as compared to the Comparable Prior Periods.
The following table compares operating costs for the Reporting Periods and the Comparable Prior Periods:
----------------------------------------------------------------------------
Three months ended Three months ended
September 30, 2008 September 30, 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Total
($000's) $/BOE ($000's) $/BOE
----------------------------------------------------------------------------
Field operating costs 9,346 10.16 5,631 10.17
Recoveries (497) (0.54) (490) (0.88)
----------------------------------------------------------------------------
Field operating costs, net of
recoveries 8,849 9.62 5,141 9.29
Expensed workovers and other 212 0.23 142 0.26
----------------------------------------------------------------------------
Total operating costs 9,061 9.85 5,283 9.55
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Nine months ended Nine months ended
September 30, 2008 September 30, 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Total
($000's) $/BOE ($000's) $/BOE
----------------------------------------------------------------------------
Field operating costs 27,731 10.45 15,446 9.67
Recoveries (1,567) (0.59) (1,273) (0.80)
----------------------------------------------------------------------------
Field operating costs, net of
recoveries 26,164 9.86 14,173 8.87
Expensed workovers and other 1,197 0.45 330 0.21
----------------------------------------------------------------------------
Total operating costs 27,361 10.31 14,503 9.08
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Transportation and Marketing Expenses
Transportation and marketing expenses were $2.6 million ($2.78 per BOE) and $7.4 million ($2.78 per BOE) for the three and nine month Reporting Periods as compared to $911,000 ($1.65 per BOE) and $2.6 million ($1.64 per BOE) in the Comparable Prior Periods. These costs consist primarily of transportation costs. The aggregate and per unit costs for the Reporting Periods are higher than in the Comparable Prior Periods because the light oil produced at Worsley is transported by truck a significant distance to a sales terminal. The Worsley Acquisition was not closed until September 27, 2007 so these additional costs did not significantly impact the transportation and marketing expenses for the Comparable Prior Periods.
General and Administrative Expense
Net general and administrative costs ("G&A") in the three and nine month Reporting Periods were $294,000 ($0.32 per BOE) and $3.9 million ($1.46 per BOE) as compared to the Comparable Prior Periods of $1.4 million ($2.51 per BOE) and $4.9 million ($3.09 per BOE).
The components of G&A are as follows:
----------------------------------------------------------------------------
($000's, except for $/BOE amounts) Three months ended Three months ended
September 30, 2008 September 30, 2007
----------------------------------------------------------------------------
Salaries, benefits and consultants 1,783 52% 1,407 58%
Other 1,665 48% 1,027 42%
----------------------------------------------------------------------------
G & A expense, gross 3,448 100% 2,434 100%
Overhead recoveries (2,823) (82%) (802) (33%)
Capitalized overhead (331) (10%) (242) (10%)
----------------------------------------------------------------------------
G & A expense, net 294 8% 1,390 57%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
G & A expense, net per BOE 0.32 $ 2.51
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
($000's, except for $/BOE amounts) Nine months ended Nine months ended
September 30, 2008 September 30, 2007
----------------------------------------------------------------------------
Salaries, benefits and consultants 5,997 57% 4,426 62%
Other 4,610 43% 2,736 38%
----------------------------------------------------------------------------
G & A expense, gross 10,607 100% 7,162 100%
Overhead recoveries (5,653) (53%) (1,435) (20%)
Capitalized overhead (1,080) (10%) (795) (11%)
----------------------------------------------------------------------------
G & A expense, net 3,874 37% 4,932 69%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
G & A expense, net per BOE 1.46 $ 3.09
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net G&A expense per BOE has decreased due to additional volumes added via the Worsley acquisition and drilling success, and due to significant increases in overhead recoveries which is directly attributable to the increased capital spent in the Reporting Periods.
The low net G&A expense for the three and nine month reporting periods is directly attributable to the Corporation's large capital program in 2008 and resulting capital overhead recoveries. The capital overhead recoveries are charged to each AFE as per industry standard. Accordingly, some of the recovery is a true third party recovery, from partners who participate in Birchcliff's capital projects, but the majority of the amount is a recovery from Birchcliff's own capital spent and this is in effect another method of capitalizing a portion of Birchcliff's G&A costs.
The capitalization of costs in the overhead recoveries category reflects an industry standard charge per AFE, whereas the capitalized overhead category reflects a portion of costs in relation to Birchcliff's exploration group.
Interest Expense
Interest expense for the three and nine month Reporting Periods was $1.8 million ($1.90 per BOE) and $8.0 million ($3.02 per BOE). In the Comparable Prior Periods it was $1.5 million ($2.75 per BOE) and $4.0 million ($2.53 per BOE). The increase in aggregate interest expense and interest expense per BOE in the nine month Reporting Period was a result of the Corporation maintaining a higher debt level due to the Worsley Acquisition and related non-revolving credit facility that was outstanding for most of the first quarter of 2008, and slightly higher interest rates during the Reporting Period. The Corporation's average bank debt was approximately $217.8 million for the nine month Reporting Period as compared to $166.0 million for the Comparable Prior Period, in each case calculated as the simple average of the month end amounts.
Depletion, Depreciation and Accretion Expense ("DD&A")
Depletion, depreciation and accretion ("DD&A") expenses in the three and nine month Reporting Periods were $22.4 million ($24.34 per BOE) and $65.8 million ($24.78 per BOE) as compared to the three and nine month Comparable Prior Periods of approximately $16.0 million ($29.00 per BOE) and $45.3 million ($28.33 per BOE). The DD&A expense on a per BOE basis is 16% and 13% lower in the three and nine month Reporting Periods than in the Comparable Prior Periods mainly due to the reduced costs of adding proven reserves during the last three quarters and during 2007. The components of DD&A are as follows:
----------------------------------------------------------------------------
Three months ended Three months ended
September 30, 2008 September 30, 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
($000's) $/BOE ($000's) $/BOE
----------------------------------------------------------------------------
Depletion & depreciation 22,001 23.91 15,684 28.34
Accretion 392 0.43 364 0.66
----------------------------------------------------------------------------
TOTAL DD&A expense 22,393 24.34 16,048 29.00
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Nine months ended Nine months ended
September 30, 2008 September 30, 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
($000's) $/BOE ($000's) $/BOE
----------------------------------------------------------------------------
Depletion & depreciation 64,696 24.38 44,428 27.81
Accretion 1,061 0.40 834 0.52
----------------------------------------------------------------------------
TOTAL DD&A expense 65,757 24.78 45,262 28.33
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Depletion and depreciation expense is a function of the proved reserve additions and the cost of petroleum and natural gas properties in the full cost pool attributable to those proved reserves. At September 30, 2008, Birchcliff has excluded from its full cost pool $41.8 million (September 30, 2007 - $33.9 million) of costs for undeveloped land acquired by Birchcliff and for unproved properties relating to opportunities in the probable reserve category and the potential drilling, recompletion and workover opportunities which have not yet been assigned any reserves.
Petroleum and Natural Gas Properties Impairment Test
The Corporation follows the full cost method of accounting which requires periodic review of capitalized costs to ensure that they do not exceed the recoverable value of the petroleum and natural gas properties and that they do not exceed the fair value of the assets.
Birchcliff performed an impairment (ceiling) test review at September 30, 2008 on its petroleum and natural gas assets. Based on this review, Birchcliff determined there was no impairment of its petroleum and natural gas assets.
Taxes
Birchcliff recorded a future income tax expense of $6.6 million ($7.21 per BOE) and $11.7 million ($4.41 per BOE) during the three and nine month Reporting Periods, as compared to recoveries of $2.9 million ($5.29 per BOE) and $3.6 million ($2.24 per BOE) during the Comparable Prior Periods. These increases result primarily from the higher net income recorded during the Reporting Periods as compared to the Comparable Prior Periods, mainly as a result of higher commodity prices and lower finding and development costs in 2007 and in 2008.
Birchcliff recovered $NIL and $6,000 of Part XII.6 taxes in the three and nine month Reporting Periods as a result of the issue of $16,029,000 of flow-through shares in November 2006. During the three and nine month Comparable Prior Periods, the Corporation incurred $28,000 ($0.05 per BOE) and $269,000 ($0.17 per BOE) of Part XII.6 taxes with respect to the November 2006 flow-through share issuance.
Stock-Based Compensation
Birchcliff accounts for its stock-based compensation programs, including performance warrants and stock options, using the fair value method. Under this method, the Corporation records compensation expense related to the stock-based compensation programs in the income statement over the vesting period.
During the three month Reporting Period, the Corporation granted options to purchase 249,800 common shares at a weighted average exercise price of $12.08 per common share. Of these options, at September 30, 2008 there remained outstanding options to purchase 249,800 common shares.
The Corporation recorded a $1.4 million expense ($1.54 per BOE) and a $4.0 million expense ($1.51 per BOE) for stock-based compensation relating to stock options in the three and nine month Reporting Periods, as compared to a $738,000 expense ($1.34 per BOE) and a $1.3 million expense ($0.84 per BOE) during the Comparable Prior Periods.
During the three month Reporting Period, the Corporation issued 20,000 shares due to exercise of vested stock options, and stock options in respect of 68,334 common shares were forfeited. In addition, the cancellation of vested stock options resulted in a cash-paid stock-based compensation expense of $NIL and $20,000 in the three and nine month Reporting Periods as compared to $NIL and $44,000 in the Comparable Prior Periods. The cash-paid expense is included in total stock-based compensation expense.
CAPITAL EXPENDITURES AND CAPITAL RESOURCES
Capital expenditures amounted to $89.2 million and $178.2 million during the three and nine month Reporting Periods due to increased cash flows as a result of higher commodity prices and the Worsley Acquisition in the third quarter of 2007. In the Comparable Prior Periods, $288.3 million and $319.9 million of capital expenditures were incurred. The increase in expenditures, excluding acquisitions, was the result of significant growth in drilling and operational activity in the three and nine month Reporting Periods.
Capital Expenditures
The following table sets forth a summary of the Corporation's capital expenditures incurred during the Reporting Periods and the Comparable Prior Periods:
----------------------------------------------------------------------------
Three Months Ended September 30 ($000's) 2008 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Land 7,106 909
Seismic 2,730 655
Other 2,596 456
Drilling and Completions 52,673 17,145
Well equipment and facilities 22,530 3,166
Capitalized general and administrative expenses 332 243
----------------------------------------------------------------------------
Total Finding & Development Costs 87,967 22,574
Acquisitions and divestitures 458 265,721
----------------------------------------------------------------------------
Total Finding, Development & Acquisition Costs 88,425 288,295
Administrative assets 733 26
----------------------------------------------------------------------------
Total Capital Expenditures 89,158 288,321
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Nine Months Ended September 30 ($000's) 2008 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Land 16,846 3,612
Seismic 6,683 1,583
Other 3,547 1,076
Drilling and Completions 97,795 32,291
Well equipment and facilities 40,898 9,293
Capitalized general and administrative expenses 1,080 796
----------------------------------------------------------------------------
Total Finding & Development Costs 166,849 48,651
Acquisitions and divestitures 10,313 271,159
----------------------------------------------------------------------------
Total Finding, Development & Acquisition Costs 177,162 319,810
Administrative assets 1,001 57
----------------------------------------------------------------------------
Total Capital Expenditures 178,163 319,867
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Capital Resources
The following table sets forth a summary of the Corporation's capital
resources for the Reporting Periods and the Comparable Prior Periods:
----------------------------------------------------------------------------
Three Months Ended September 30 ($000's) 2008 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash generated by operations 37,886 9,327
Changes in working capital from operations 5,735 779
Equity issues, net of issue costs 94 108,976
Increase in non-revolving credit facility - 97,431
Increase in revolving credit facility 32,074 64,527
Asset retirement expenditures (89) (320)
Changes in working capital from investing 13,458 7,601
----------------------------------------------------------------------------
Total Capital Resources 89,158 288,321
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Nine Months Ended September 30 ($000's) 2008 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash generated by operations 106,826 36,364
Changes in working capital from operations (2,677) (783)
Equity issues, net of issue costs 129,764 109,126
Increase (decrease) in non-revolving credit facility (98,830) 97,431
Increase (decrease) in revolving credit facility 25,142 72,055
Asset retirement expenditures (155) (396)
Changes in working capital from investing 18,092 6,071
----------------------------------------------------------------------------
Total Capital Resources 178,162 319,868
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SELECTED QUARTERLY INFORMATION
Quarter Ended
($000's, except share September 30, June 30, March 31, December 31,
and per share amounts) 2008 2008 2008 2007
----------------------------------------------------------------------------
Petroleum and natural
gas production (BOE per day) 10,000 9,583 9,470 9,260
Petroleum and natural
gas commodity price (BOE
per day) 73.44 83.58 64.83 54.18
Natural gas commodity
price at wellhead ($ per mcf) 8.47 10.93 8.35 6.71
Petroleum commodity
price at wellhead ($ per bbl) 115.95 121.39 94.72 80.94
Total petroleum and
natural gas revenue 67,942 73,273 56,192 46,398
Total royalties (12,502) (11,361) (8,700) (7,804)
Total interest and
other revenue - - 2 8
Total revenues, net 55,440 61,912 47,494 38,602
Capital expenditures 89,158 37,487 51,518 30,306
Net income (loss) 16,649 9,776 3,828 (6,457)
Per share - basic $ 0.15 $ 0.09 $ 0.04 ($0.07)
Per share - diluted $ 0.14 $ 0.08 $ 0.04 ($0.07)
Cash generated by
operations 37,886 41,676 27,264 19,881
Per share - basic $ 0.34 $ 0.37 $ 0.28 $ 0.21
Per share - diluted $ 0.33 $ 0.36 $ 0.27 $ 0.21
Book value of total
assets 774,794 719,292 699,567 662,252
Non-revolving credit
facility - - - 98,830
Revolving credit
facilities 180,995 148,922 133,035 155,854
Total indebtedness 214,642 163,378 169,614 272,916
Shareholders' equity 506,742 488,579 475,453 340,756
Common share
outstanding
end of period
Basic 112,395,970 112,375,970 111,863,089 94,554,269
Diluted 121,451,823 121,270,357 121,175,691 103,639,748
Weighted average common
shares outstanding
Basic 112,386,829 112,234,676 98,852,346 94,486,372
Diluted 116,859,500 117,074,630 102,589,422 96,548,884
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarter Ended
($000's, except share September 30, June 30, March 31, December 31,
and per share amounts) 2007 2007 2007 2006
----------------------------------------------------------------------------
Petroleum and natural
gas production (BOE
per day) 6,014 5,712 5,829 5,861
Petroleum and natural
gas commodity price
(BOE per day) 40.10 48.20 49.43 46.86
Natural gas commodity
price at wellhead
($ per mcf) 5.48 7.39 7.78 7.33
Petroleum commodity
price at wellhead
($ per bbl) 76.95 69.92 63.86 60.99
Total petroleum and
natural gas revenue 22,467 25,462 26,369 25,750
Total royalties, net of
ARTC (4,007) (3,233) (4,288) (4,407)
Total interest and
other revenue - - 1 28
Total revenues, net 18,460 22,229 22,082 21,371
Capital expenditures 288,321 13,727 17,819 12,577
Net loss (5,707) (707) (1,373) (2,313)
Per share - basic ($0.09) ($0.01) ($0.02) ($0.04)
Per share - diluted ($0.09) ($0.01) ($0.02) ($0.04)
Cash generated by
operations 9,327 13,641 13,396 11,657
Per share - basic $ 0.14 $ 0.21 $ 0.21 $ 0.19
Per share - diluted $ 0.14 $ 0.21 $ 0.21 $ 0.19
Book value of total
assets 644,876 359,423 360,164 362,255
Revolving credit
facilities 97,431 88,833 85,431 81,304
Non-revolving credit
facilities 153,360 - - -
Total indebtedness 262,557 92,218 92,099 87,783
Shareholders' equity 342,451 240,250 241,065 246,399
Common share
outstanding
- end of period
Basic 94,472,583 64,189,413 64,189,413 64,139,413
Diluted 103,046,582 72,709,078 73,709,246 72,168,746
Weighted average common
shares outstanding
Basic 65,521,290 64,189,413 64,168,302 60,701,424
Diluted 66,152,795 65,394,368 64,174,235 61,347,463
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Discussion of Quarterly Results
Birchcliff has increased its average quarterly production by 8% to 10,000 BOE per day over the quarter ended December 31, 2007, when the quarterly average production was 9,260 BOE per day. Due to the significant capital investment during the current year and long lead time required to drill, complete, equip and tie-in a natural gas well, Birchcliff expects to increase its production in the fourth quarter of this year and to achieve its exit production target of 13,500 to 14,000 BOE per day.
Cash flow remained strong during the third quarter of 2008 due to increased production and commodity pricing levels which, although somewhat lower than the second quarter of 2008, were still strong.
The Corporation continues to show earnings in 2008, due to the strong reserve additions and strong commodity prices.
This quarter was a record for the amount of capital spent in one quarter by Birchcliff at $89.2 million. Birchcliff is working diligently to ensure all wells drilled during 2008 are tied-in before the end of the year. The Corporation continues to spend a significant amount of capital on natural gas infrastructure as it expands its Montney/Doig resource play. Birchcliff also spent significant capital on infrastructure and injection well conversions and drilling for the waterflood project at Worsley. In future quarters the company will recognize the benefit of this infrastructure spending as it will to be able to apply a larger portion of its capital expenditure budget directly to drilling, completions and tie-ins.
OUTLOOK
Given the crisis in both the financial and credit markets, the Corporation has done an internal review of its projects for the remainder of 2008. Birchcliff had to balance its increased spending due to drilling success with the level of debt that it is comfortable carrying during these uncertain times. Birchcliff's decision to hold firm its previously announced expansion to $220 million of capital spending for 2008 and to continue to invest its capital into its two resource plays during these times demonstrates the Corporation's belief that both of these plays are low risk. The Corporation views the increased debt leverage during these times as a benefit to shareholders due to the low cost of debt leverage as compared to the high cost of capital by way of equity. The Birchcliff asset base is comprised of two large resource plays with a significant number of low risk projects that can add significant production and reserves into the future at low cost and at a a relatively low risk profile. During the next year, Birchcliff will continue to build out its network of infrastructure in order to capture and hold as large a land position as possible, with the ultimate goal of significantly increasing its production and reserves to the benefit of all shareholders.
The Corporation's cash flow remains strong at current commodity prices and the underlying asset base underpins Birchcliff's strong financial position. Management has had positive discussions with the Corporation's lead lender and expects that its credit facilities will be increased in 2009. Management believes Birchcliff is in a strong position to continue to develop its assets and weather the current financial and credit crisis.
BIRCHCLIFF ENERGY LTD.
Balance Sheets
(Unaudited) ($000's)
----------------------------------------------------------------------------
September 30, December 31,
2008 2007
----------------------------------------------------------------------------
ASSETS
CURRENT
Cash and cash equivalents 65 66
Accounts receivable 24,915 20,036
Prepaid and other 3,142 2,879
Future income tax benefit 560 2,004
----------------------------------------------------------------------------
28,682 24,985
Future income tax benefit - 6,287
Petroleum and natural gas properties and
equipment (Note 4) 746,112 630,980
----------------------------------------------------------------------------
774,794 662,252
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES
CURRENT
Accounts payable and accrued liabilities 61,769 41,213
Non-revolving credit facility (Note 5) - 98,830
Risk management contracts (Note 8) 1,899 6,793
----------------------------------------------------------------------------
63,668 146,836
Revolving credit facilities (Note 6) 180,995 155,854
Asset retirement obligations (Note 9) 21,378 18,806
Future income tax liability 2,011 -
SHAREHOLDERS' EQUITY
Share capital (Note 10) 477,483 342,819
Contributed surplus (Note 11) 11,999 10,930
Retained Earnings (Deficit) 17,260 (12,993)
----------------------------------------------------------------------------
506,742 340,756
----------------------------------------------------------------------------
774,794 662,252
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Commitments (Note 12)
See accompanying notes to the financial statements.
APPROVED BY THE BOARD
"Larry A. Shaw" "A. Jeffery Tonken"
Director Director
BIRCHCLIFF ENERGY LTD.
Statements of Net Income (Loss), Comprehensive Income (Loss) and Retained
Earnings (Deficit)
(Unaudited) ($000's)
----------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
2008 2007 2008 2007
----------------------------------------------------------------------------
REVENUE
Petroleum and natural
gas 67,942 22,467 197,407 74,298
Royalties (12,502) (4,007) (32,563) (11,528)
Interest and other - - 2 1
----------------------------------------------------------------------------
55,440 18,460 164,846 62,771
Gain (loss) on risk
management contracts
(Note 8)
Realized (3,610) - (10,956) -
Unrealized 9,352 (1,175) 4,737 (1,175)
----------------------------------------------------------------------------
61,182 17,285 158,627 61,596
----------------------------------------------------------------------------
EXPENSES
Production 9,061 5,283 27,361 14,503
Transportation 2,555 911 7,368 2,613
General and
administrative 294 1,390 3,874 4,932
Stock-based compensation
(Note 11) 1,419 738 4,019 1,333
Depletion, depreciation
and accretion (Notes 4 & 9) 22,393 16,048 65,757 45,262
Realized foreign
exchange (gain) loss
(Note 8) 284 - 432 -
Unrealized foreign
exchange (gain) loss
(Note 8) 145 - (157) -
Interest 1,750 1,521 8,016 4,046
----------------------------------------------------------------------------
37,901 25,891 116,670 72,689
----------------------------------------------------------------------------
INCOME (LOSS) BEFORE
TAXES 23,281 (8,606) 41,957 (11,093)
TAXES
Other taxes (recovery) - 28 (7) 269
Future income taxes
(recovery) 6,632 (2,927) 11,711 (3,575)
----------------------------------------------------------------------------
6,632 (2,899) 11,704 (3,306)
----------------------------------------------------------------------------
NET INCOME (LOSS) AND
COMPREHENSIVE INCOME
(LOSS) 16,649 (5,707) 30,253 (7,787)
RETAINED EARNINGS
(DEFICIT), BEGINNING OF
PERIOD 611 (829) (12,993) 1,251
----------------------------------------------------------------------------
RETAINED EARNINGS
(DEFICIT), END OF PERIOD 17,260 (6,536) 17,260 (6,536)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) per
common share
basic $ 0.15 ($0.09) $ 0.28 ($0.12)
diluted $ 0.14 ($0.09) $ 0.27 ($0.12)
Weighted average common
shares
basic 112,386,829 64,205,283 107,841,267 64,187,801
diluted 116,859,500 64,205,283 112,425,211 64,187,801
See accompanying notes to the financial statements.
BIRCHCLIFF ENERGY LTD.
Statements of Cash Flows
(Unaudited) ($000's)
----------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
2008 2007 2008 2007
----------------------------------------------------------------------------
CASH FLOWS RELATED TO THE
FOLLOWING ACTIVITIES:
OPERATING
Net income (loss) 16,649 (5,707) 30,253 (7,787)
Adjustments for items not
affecting cash:
Depletion, depreciation
and accretion 22,393 16,048 65,757 45,262
Stock-based compensation 1,419 738 3,999 1,289
Unrealized risk management
contracts (gain) loss (9,352) 1,175 (4,737) 1,175
Unrealized foreign
exchange
(gain) loss 145 - (157) -
Future income taxes
(recovery) 6,632 (2,927) 11,711 (3,575)
----------------------------------------------------------------------------
37,886 9,327 106,826 36,364
Changes in non-cash
working capital
(Note 13) 5,735 779 (2,677) (783)
Asset retirement
expenditures
incurred (89) (320) (155) (396)
----------------------------------------------------------------------------
43,532 9,786 103,994 35,185
FINANCING
Increase (decrease) in
non-revolving credit
facility (Note 5) - 97,431 (98,830) 97,431
Increase (decrease) in
revolving credit facility
(Note 6) 32,074 64,527 25,142 72,055
Issuance of share capital,
net of issue costs
(Notes 10 & 11) 94 108,976 129,764 109,126
----------------------------------------------------------------------------
32,168 270,934 56,076 278,612
INVESTING
Purchase of petroleum and
natural gas properties and
equipment (458) (265,721) (10,313) (271,159)
Development of petroleum
and natural gas
properties and equipment (88,700) (22,600) (167,850) (48,708)
Changes in non-cash
investing working
capital (Note 13) 13,458 7,601 18,092 6,071
----------------------------------------------------------------------------
(75,700) (280,720) (160,071) (313,796)
----------------------------------------------------------------------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS - - (1) 1
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 65 66 66 65
----------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD 65 66 65 66
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash interest paid 1,750 1,521 8,016 4,046
Cash taxes paid - - 254 6
See accompanying notes to the financial statements.
1. BASIS OF PRESENTATION
Birchcliff Energy Ltd. ("Birchcliff" or the "Corporation") is engaged in the exploration for and the development, production and acquisition of, petroleum and natural gas reserves in Western Canada. Birchcliff's financial year end is December 31.
The interim financial statements of Birchcliff Energy Ltd. have been prepared by management in accordance with accounting principles generally accepted in Canada and are unaudited. The interim financial statements have been prepared following the same accounting policies and methods of computation as the audited financial statements for the period ended December 31, 2007 except as discussed in Note 2. The disclosure which follows does not include all disclosures required for the annual financial statements. These unaudited interim financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2007.
2. CHANGES IN ACCOUNTING POLICIES
On January 1, 2008 the Corporation adopted the following Canadian Institute of Chartered Accountants ("CICA") Handbook Sections:
Section 1535 Capital Disclosures establishes standards for disclosing information about an entity's capital and how it is managed. It describes the disclosure requirements of the entity's objectives, policies and processes for managing capital; the quantitative data relating to what the entity regards as capital; whether the entity has complied with capital requirements and, if it has not complied, the consequences of such non-compliance. The only effect of adopting this standard is disclosures on the Corporation's capital and how it is managed, as included in Note 7.
Section 3862 Financial Instruments - Disclosures describes the required disclosure for the assessment of the significance of financial instruments for an entity's financial position and performance and of the nature and extent of risks arising from financial instruments to which the entity is exposed and how the entity manages those risks. Section 3863 Financial Instruments - Presentation, establishes standards for presentation of financial instruments and non-financial derivatives. These sections replaced Section 3861 Financial Instruments - Disclosure and Presentation. The additional disclosures required under these standards are included in Note 8.
The adoption of Section 3031 Inventories had no impact on the Corporation's financial statements.
Future Accounting Policy Changes
The CICA has amended Section 1400 General Standards of Financial Statement Presentation, which is effective for interim periods beginning on or after October 1, 2008, to include requirements to assess and disclose the Corporation's ability to continue as a going concern. The adoption of this new section will not have an impact on the financial statements.
Effective January 1, 2009 the Corporation will be required to adopt CICA Handbook Section 3064 Goodwill and Intangible Assets, which defines the criteria for the recognition of intangible assets. The adoption of this section is not expected to have a significant impact on the financial statements.
Recent Accounting Pronouncements
The Accounting Standards Board has confirmed the convergence of Canadian GAAP with International Financial Reporting Standards ("IFRS") will be effective January 1, 2011. The Corporation will continue to monitor the transition process but due to the period of time until implementation, Birchcliff cannot assess the impact of IFRS at this time.
3. ACQUISITIONS
On September 27, 2007, Birchcliff acquired certain oil and natural gas assets in the Worsley area ("Worsley Acquisition"), effective July 1, 2007, for $270 million before closing adjustments and related costs.
The following table details the purchase price allocation for the Worsley Acquisition:
---------------------------------------------------------------------------
Net assets acquired: $000's
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Petroleum and natural gas properties and equipment 269,753
Asset retirement costs (5,919)
---------------------------------------------------------------------------
Total net assets acquired 263,834
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Consideration: $000's
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Purchase price, net of adjustments, paid in cash 261,321
Costs related to the Worsley Acquisition 2,513
---------------------------------------------------------------------------
Total consideration paid 263,834
---------------------------------------------------------------------------
---------------------------------------------------------------------------
In relation to the Worsley Acquisition, the Corporation has made its best estimate as to the net assets acquired and the consideration given. The final purchase price adjustment has not yet been determined by the Corporation and the vendor, and all costs have not yet been finalized. Therefore, the above amount may be subject to adjustment.
4. PETROLEUM AND NATURAL GAS PROPERTIES AND EQUIPMENT
---------------------------------------------------------------------------
September 30, 2008
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Accumulated
Depletion and Net Book
($000's) Cost Depreciation Value
---------------------------------------------------------------------------
Petroleum and natural gas
properties and equipment 937,193 (192,369) 744,824
Office and other equipment 2,331 (1,043) 1,288
---------------------------------------------------------------------------
939,524 (193,412) 746,112
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
December 31, 2007
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Accumulated
Depletion and Net Book
($000's) Cost Depreciation Value
---------------------------------------------------------------------------
Petroleum and natural gas
properties and equipment 758,365 (128,011) 630,354
Office and other equipment 1,331 (705) 626
---------------------------------------------------------------------------
759,696 (128,716) 630,980
---------------------------------------------------------------------------
---------------------------------------------------------------------------
As at September 30, 2008, the cost of petroleum and natural gas properties includes $41.8 million (as at December 31, 2007 - $31.8 million) relating to unproved properties which have not been included in costs subject to depletion and depreciation.
Birchcliff has capitalized general and administrative costs of $332,000 in the three month period ended September 30, 2008 (three months ended September 30, 2007 - $243,000) and $1.1 million in the nine month period ended September 30, 2008 (nine months ended September 30, 2007 - $796,000) related to exploration and development activities.
5. NON-REVOLVING CREDIT FACILITY
Birchcliff entered into an Acquisition Credit Agreement with a syndicate of banks on September 4, 2007. The agreement allowed for Birchcliff to make a one time draw of up to $100 million on a non-revolving credit facility for the purpose of closing the Worsley Acquisition. The credit facility was to mature one year from the date of drawdown and had no other terms for extension. The interest applicable to prime loan advances under the agreement was prime plus 2.5% for the first six months and prime plus 3% for the final six months. The interest applicable to advances using bankers' acceptances was the prevailing bankers' acceptance rate at the time plus a 3.5% stamping fee. On September 27, 2007 the Corporation gave notice to draw the entire amount of the credit facility in bankers' acceptances. The drawn amount at December 31, 2007 was $98.8 million with the $1.2 million difference being the discounted value from the $100 million credit facility limit based on the market interest rate at that time for bankers' acceptances. The facility was subordinate to the revolving term credit facilities and was secured by a fixed and floating debenture, an instrument of pledge, and a general security agreement encompassing all of the Corporation's assets. On March 14, 2008 the facility was repaid in full and cancelled, following the completion of the equity financing described in Note 10 (g).
6. REVOLVING CREDIT FACILITY
The Corporation has available to it an extendible revolving term credit facility with an authorized limit of $220 million and an extendible revolving working capital facility with an authorized limit of $20 million, for a total credit limit of $240 million. The $220 million credit facility is provided by a syndicate of four banks (the "Syndicate"). The $20 million working capital facility is provided by the lead bank in the current bank syndicate. As at September 30, 2008, Birchcliff had drawn $181 million on the credit facilities. At September 30, 2008 the rate applicable to the working capital facility was 5.4%. The overall effective interest rate applicable to the bankers' acceptances in the revolving credit facility was 3.5% and 3.8% for the three and nine month periods ended September 30, 2008 (three and nine months ended September 30, 2007 - 4.8% and 4.7%), respectively.
The credit facilities allow for prime rate loans, US base rate loans, bankers' acceptances, letters of credit and LIBOR loans. The interest rates applicable to the drawn loans are based on a pricing grid and will increase as a result of the increased ratio of outstanding indebtedness to earnings before interest, taxes, depreciation and amortization.
The credit facilities are subject to the Syndicate's redetermination of the borrowing base twice a year as of October 31 and the conversion date. 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. The facility is secured by a fixed and floating charge debenture, an instrument of pledge, and a general security agreement encompassing all of the Corporation's assets.
The syndicated credit facility has a conversion date of May 22, 2009 and a maturity date which is two years after the conversion date. Birchcliff may request an extension of the conversion date with such an extension not exceeding 364 days, in order to maintain the revolving term facility. If the Syndicate does not grant an extension of the conversion date, then upon the expiry of the conversion date, the revolving term facility will convert to a term loan whereby all principal and interest will be required to be repaid at the maturity date.
The working capital facility has a conversion date of May 22, 2009 and a maturity date which is two years after the conversion date. Birchcliff may request an extension of the conversion date with such an extension not exceeding 364 days, in order to maintain the revolving working capital facility. If the Syndicate does not grant an extension of the conversion date, then upon 4 months after the expiry of the conversion date, the revolving working capital facility will convert to a term loan whereby all principal and interest will be required to be repaid at the maturity date.
7. 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, including potential obligations arising from additional acquisitions; to maintain a capital structure that allows Birchcliff to favor the financing of its growth strategy using internally-generated cash flow and its debt capacity; and to optimize the use of its capital to provide an appropriate investment return to its shareholders.
Birchcliff strives to properly exploit its current asset base and to acquire top quality assets. To that end, the Corporation is not averse to maintaining a high ratio of debt to total capital if management determines the assets it is acquiring or the projects it is drilling are of high quality.
The capital structure of the Corporation is as follows:
---------------------------------------------------------------------------
($000's) September 30, 2008 December 31, 2007 Change %
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total shareholders' equity 506,742 340,756 49%
---------------------------------------------------------------------------
Total shareholders' equity
as a % of total capital 70% 56%
Working capital deficit (1) 33,647 18,232
Non-revolving credit facility - 98,830
Revolving credit facilities 180,995 155,854
---------------------------------------------------------------------------
Total indebtedness 214,642 272,916 (21%)
Total debt as a % of total capital 30% 44%
---------------------------------------------------------------------------
Total capital 721,384 613,672 18%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Working capital deficit is defined as current assets (excluding the
current portion of future income tax benefit) less current liabilities
(excluding the risk management contracts).
Shareholders' equity is defined as share capital plus contributed surplus plus retained earnings, less any deficit. During the nine months ended September 30, 2008, total equity increased due to the exercise of options and warrants for common shares (Note 10 (f)), due to issuance of common and flow-through shares (Note 10 (g) and (h)), and due to recording stock-based compensation expense (Note 11).
Total indebtedness decreased during the nine months ended September 30, 2008 by $58.3 million. Repayment and cancellation of the $100 million non-revolving credit facility described in Note 5 after the equity issuance described in Note 10 (g) was offset by capital spending exceeding cash flows by $71.3 million.
8. FINANCIAL INSTRUMENTS & FINANCIAL RISK MANAGEMENT
Birchcliff is exposed to credit risk, liquidity risk and market risk as part of its normal course of business. These risks are consistent with risks disclosed in the notes to the audited financial statements for the year ended December 31, 2007. This Note presents information about the Corporation's exposure to each of these risks, as well as Birchcliff's objectives, policies and processes for measuring and managing risk. Further quantitative disclosures are included throughout these financial statements.
The Board of Directors 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. Management identifies and analyzes the risks faced by the Corporation and may utilize financial instruments to mitigate these risks.
Credit Risk
A substantial portion of the Corporation's accounts receivable are with customers in the oil industry and are subject to normal industry credit risks. The carrying amount of accounts receivable reflects management's assessment of the credit risk associated with these customers. Typically, Birchcliff's maximum credit exposure to customers is revenue from two months of commodity sales.
The following table illustrates the Corporation's receivables:
---------------------------------------------------------------------------
($000's) September 30, 2008 December 31, 2007
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Marketers 16,353 16,018
Joint venture partners 8,429 3,737
Other 133 281
---------------------------------------------------------------------------
TOTAL 24,915 20,036
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Receivables from marketers are normally collected on the 25th day of the month following production. Birchcliff's policy to mitigate credit risk associated with these balances is to establish marketing relationships with credit worthy purchasers, to obtain guarantees from their ultimate parent companies and to obtain letters of credit as appropriate. The Corporation historically has not experienced any material collection issues with its marketers.
Cash and cash equivalents consist of bank balances and short term deposits maturing in less than 90 days. Historically the Corporation has not carried short term investments. Should this change in the future, counterparties will be selected based on credit ratings and management will monitor all investments to ensure a stable return, and complex investment vehicles with higher risk will be avoided.
The carrying amounts of accounts receivable and cash and cash equivalents represent the maximum credit exposure. The Corporation has a $99,000 allowance for doubtful accounts as at September 30, 2008 due to provision for doubtful accounts during the three and nine months ended September 30, 2008.
Birchcliff's accounts receivables are aged as follows:
---------------------------------------------------------------------------
($000's) September 30, 2008 December 31, 2007
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Current (less than 30 days) 23,601 17,120
30 to 60 days 126 1,283
61 to 90 days 1,939 1,146
Over 90 days (751) 487
---------------------------------------------------------------------------
TOTAL 24,915 20,036
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Liquidity Risk
Liquidity risk is the risk that the Corporation will not be able to meet its financial obligations 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 liabilities when due, under both normal and unusual conditions without incurring unacceptable losses or risking harm to the Corporation's reputation.
Birchcliff prepares annual capital expenditure budgets, which are regularly monitored and updated as considered necessary. Petroleum and natural gas production is monitored weekly and is used to provide monthly current cash flow estimates. Further, the Corporation utilizes authorizations for expenditures and for projects to manage capital expenditures. To facilitate the capital expenditure program, the Corporation has a revolving reserves-based credit facility, as outlined in Note 6, that is reviewed at least annually by the lender. Birchcliff also attempts to match its payment cycle with collection of petroleum and natural gas revenues.
The following table lists the contractual maturities of financial liabilities as at September 30, 2008:
---------------------------------------------------------------------------
less than 1 - 2 2 - 5
Financial Liability ($000's) 1 Year Years Years Thereafter
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Accounts payable and
accrued liabilities 61,769 - - -
Risk management liabilities 1,899 - - -
Bank debt - principal - - 180,995 -
---------------------------------------------------------------------------
TOTAL 63,668 - 180,995 -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Market Risk
Market risk is the risk that changes in market prices, such as commodity prices and interest rates, will affect the Corporation's net earnings or the value of financial instruments. 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.
Birchcliff may utilize derivative instruments to manage market risk. The Board of Directors periodically reviews the results of all risk management activities and all outstanding positions.
Foreign Currency Risk
Foreign currency risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in foreign currency exchange rates. Birchcliff is exposed to foreign currency fluctuations with respect to its WTI oil option contracts which are denominated in United States dollars. As at September 30, 2008 if the US dollar had depreciated 10% against the Canadian dollar with all other variables held constant, Birchcliff's net income and other comprehensive income for the three and nine months ended September 30, 2008 would have been $921,000 and $190,000 higher, respectively (2007 - $118,000 and $118,000) with respect to the US dollar denominated WTI oil price risk management contracts.
Commodity Price Risk
Commodity price risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in commodity prices. Significant changes in commodity prices can materially impact the Corporation's borrowing base under its credit facility. Lower commodity prices can also reduce the Corporation's ability to raise capital. Commodity prices for crude oil are impacted by world economic events that dictate the levels of supply and demand. From time to time the Corporation may attempt to mitigate commodity price risk through the use of financial derivatives.
The Corporation had the following oil price risk management contract outstanding at September 30, 2008:
---------------------------------------------------------------------------
Volume Put Call
Term Contract (bbls/d) ($US/bbl) ($US/bbl)
---------------------------------------------------------------------------
October 1 - December 31, 2008 Costless collar 1,000 67.50 79.10
---------------------------------------------------------------------------
---------------------------------------------------------------------------
For the three and nine months ended September 30, 2008, the realized and unrealized gain (loss) ("total gain (loss)") related to the oil price risk management contracts, recognized in net income, was $5.7 million gain and $6.2 million loss respectively (2007 - $1.2 million loss and $1.2 million loss).
Included in the three and nine months ended September 30, 2008 is a cash outlay of $3.6 million and $11.0 million (three and nine months ended 2007 - $NIL and $NIL) relating to the actual monthly settlements incurred in the period. An unrealized gain of $9.4 million and $4.7 million for the three and nine month periods ended September 30, 2008, respectively (three and nine months ended 2007 - $1.2 million loss and $1.2 million loss) is also included within the total loss, identified as "unrealized risk management contracts loss" on the statements of cash flows. The unrealized loss represents the change in the fair value of the contracts related to expected future settlements.
The fair value of these risk management liabilities at September 30, 2008 was $1.9 million (2007 - $1.1 million). As of September 30, 2008 if WTI crude oil prices had been $1.00 USD higher or lower, with all other variables held constant, the change in the fair value of the risk management contracts would have resulted in net income and other comprehensive income that was $86,000 and $352,000 higher or lower (2007 - $231,000 and $231,000) for the three and nine month periods, respectively.
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 is exposed to interest rate cash flow risk on floating interest rate bank debt due to fluctuations in market interest rates. The remainder of Birchcliff's financial assets and liabilities are not exposed to interest rate risk.
As at September 30, 2008 if the interest rate had changed 1% with all other variables held constant, Birchcliff's net income and other comprehensive income for the three and nine months ended September 30, 2008 would have changed by $386,000 and $1.3 million (2007 - $293,000 and $719,000), respectively. A sensitivity of 1% is considered reasonable given the current level of the bank prime rate and market expectations for future movements. The Corporation considers this risk to be limited and thus does not hedge its interest rate risk.
The Corporation had no interest rate swaps or financial contracts in place as at or during the nine months ended September 30, 2008.
Fair Value of Financial Instruments
Birchcliff's financial instruments are classified as cash and cash equivalents, accounts receivable and other current assets, accounts payable and accrued liabilities, risk management contracts, and revolving credit facilities on the balance sheet.
The carrying value and fair value of these financial instruments at September 30, 2008 is disclosed below by financial instrument category, as well as any related loss and interest expense for the nine months ended September 30, 2008:
Carrying Fair Interest
Financial Instrument Value Value Loss(1) Expense(2)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
$000's
Assets Held for Trading
Cash and cash equivalents 65 65 - -
Loans and Receivables
Accounts receivable and other
current assets 24,915 24,915 - -
Liabilities Held for Trading
Risk management contracts 1,899 1,899 6,219 -
Other Liabilities
Accounts payable and
accrued liabilities 61,769 61,769 - -
Revolving credit facilities 180,995 180,995 - 1,750
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Included in the "loss on risk management contracts" on the statements
of net income (loss) and comprehensive income (loss) and retained
earnings (deficit) is an unrealized gain of $4.7 million and a realized
loss of $11.0 million for the nine months ended September 30, 2008.
(2) Included in interest expense on the statements of net income (loss) and
comprehensive income (loss) and retained earnings (deficit).
The risk management contracts are recorded at their fair value based on quoted market prices in the futures market on the balance sheet date; accordingly, there is no difference between fair value and carrying value. The revolving 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 the remaining deferred financing costs. Due to the short term nature of cash and cash equivalents, accounts receivable and other current assets, accounts payable and accrued liabilities, their carrying values approximate their fair values.
9. ASSET RETIREMENT OBLIGATIONS
The Corporation's asset retirement obligations result from net ownership interests in petroleum and natural gas properties including well sites, gathering systems and processing facilities. Birchcliff estimates the total undiscounted amount of cash flows required to settle its asset retirement obligations as at September 30, 2008 to be approximately $66 million to be incurred between 2008 and 2057. A credit-adjusted risk-free interest rate of 8% and an inflation rate of 2% were used to calculate the fair value of the asset retirement obligation.
A reconciliation of the asset retirement obligations is provided below:
September 30, 2008 December 31, 2007
---------------------------------------------------------------------------
Opening Balance, January 1 18,806 11,270
Obligations incurred 1,398 1,368
Obligations acquired 89 5,919
Changes in estimate 179 (415)
Accretion expense 1,061 1,252
Actual expenditures (155) (588)
---------------------------------------------------------------------------
Ending Balance 21,378 18,806
---------------------------------------------------------------------------
---------------------------------------------------------------------------
10. SHARE CAPITAL
(a) Authorized: Unlimited number of voting common shares
Unlimited number of non-voting preferred shares
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) Issued:
Number of
Common Shares Amount $
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Balance, December 31, 2006 64,139,413 236,157,989
Issued upon exercise of stock options 151,686 681,017
Tax effect of flow-through shares (Note (c)) - (4,770,000)
Issued, net of costs (Note (d)) 30,263,170 108,913,115
Tax effect of shares issue costs (Note (e)) - 1,836,500
---------------------------------------------------------------------------
Balance, December 31, 2007 94,554,269 342,818,621
Issued upon exercise of stock options 601,044 3,074,206
Issued upon exercise of warrants (Note (f)) 809,933 3,596,103
Issued, net of costs (Note (g)) 15,897,843 123,088,169
Tax effect of share issue costs (Note (h)) - 1,970,000
---------------------------------------------------------------------------
Balance, March 31, 2008 111,863,089 474,547,099
Issued upon exercise of stock options 512,881 2,800,991
---------------------------------------------------------------------------
Balance, June 30, 2008 112,375,970 477,348,090
Issued upon exercise of stock options 20,000 134,340
---------------------------------------------------------------------------
Balance, September 30, 2008 112,395,970 477,482,430
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(c) On November 22, 2006, Birchcliff issued 2,740,000 flow-through shares at a price of $5.85 per share and 3,200,000 common shares at a price of $4.40 per share for total net proceeds of $28,437,352. As at December 31, 2007, the commitment to spend and renounce $16,029,000 of qualified 100% deductible tax pools with respect to the flow-through shares was fulfilled.
(d) On September 27, 2007, Birchcliff issued 30,263,170 common shares at a price of $3.80 per share for total net proceeds of $108,913,115.
(e) Birchcliff recognized a future tax benefit of $1,836,500 in respect of share issue costs of $6,086,931 incurred with respect to the issuance of 30,263,170 common shares on September 27, 2007.
(f) In January 2008, 809,933 common shares were issued to a former officer in exchange for 809,933 performance warrants with an exercise price of $3.00 for gross proceeds to the Corporation of $2,429,799. In addition, $1,166,304 of non-cash costs attributable to these warrants, which was previously recorded to contributed surplus, was reclassified from contributed surplus to share capital.
(g) On March 14, 2008, Birchcliff issued 1,522,843 flow-through shares at a price of $9.85 per share and 14,375,000 common shares at a price of $8.00 per share for total net proceeds of $123,088,169. Birchcliff is thus committed to spend and renounce $15 million of qualified 100% deductible tax pools with respect to the flow-through shares by December 31, 2009. At September 30, 2008, Birchcliff had fulfilled this obligation.
(h) Birchcliff recognized a future income tax benefit of $1,970,000 in respect of share issue costs of $6,911,832 incurred with respect to the issuance of 15,897,843 shares on March 14, 2008.
11. STOCK-BASED COMPENSATION
The Corporation has established a stock-based compensation plan whereby officers, employees, directors and consultants may be granted options to purchase one common share for each option granted, at a fixed price not less than the fair market value of the stock at the time of grant, subject to certain conditions being met. Stock options granted under this plan vest over a three year period at the rate of one-third on each anniversary date of the stock option grant. All stock options granted are for a five year term.
In order to calculate the compensation expense, the fair value of the stock options is estimated using the Black-Scholes option-pricing model that takes into account, as of the grant date: exercise price, expected life, current price, expected volatility, expected dividends, and risk-free interest rates.
Stock Options
For the three and nine months ended September 30, 2008, the Corporation recorded $1.4 million and $4.0 million (three and nine months ended September 30, 2007 - $738,000 and $1.3 million) of non-cash stock-based compensation expense and a corresponding increase to contributed surplus related to the issuance of stock options and forfeiture of unvested options during the period. During the three and nine months ended September 30, 2008 the Corporation also recorded cash stock-based compensation expense of $NIL and $20,000 (three and nine months ended September 30, 2007 - $NIL and $44,000).
Using the fair value method, the weighted average fair value of stock options granted during the three and nine months ended September 30, 2008 was $6.48 per share and $5.02 per share under option, respectively.
At September 30, 2008, the Corporation's Amended and Restated Stock Option Plan permitted the grant of options in respect of 11,239,597 common shares. At September 30, 2008, there remained available for grant options in respect of 5,123,476 common shares.
A summary of the changes during the nine months ended September 30, 2008 is presented below:
Weighted Average
Number Exercise Price $
---------------------------------------------------------------------------
Outstanding, December 31, 2007 5,335,814 4.00
Granted 1,703,100 7.47
Exercised (601,044) (3.58)
Forfeited (60,000) (4.72)
Cancelled (5,000) (3.75)
---------------------------------------------------------------------------
Outstanding, March 31, 2008 6,372,870 4.96
Granted 169,000 13.15
Exercised (512,881) (3.90)
Forfeited (74,334) (4.86)
---------------------------------------------------------------------------
Outstanding, June 30, 2008 5,954,655 5.29
Granted 249,800 12.08
Exercised (20,000) 4.71
Forfeited (68,334) (4.64)
---------------------------------------------------------------------------
Outstanding, September 30, 2008 6,116,121 5.58
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The fair value of each option was determined on the date of the grant using
the Black-Scholes option-pricing model. The weighted average assumptions
used in calculating the fair values are set forth below:
2008 2007
---------------------------------------------------------------------------
Risk-free interest rate 3.3% 4.1%
Expected maturity (years) 5.0 5.0
Expected volatility 69.2% 55.5%
Dividend yield 0% 0%
---------------------------------------------------------------------------
A summary of the stock options outstanding and exercisable under the plan at
September 30, 2008 is presented below:
Exercise Price Awards Outstanding Awards Exercisable
---------------------------------------------------------------------------
Weighted Weighted
Average Average
Remaining Weighted Remaining Weighted
Contrac- Average Contrac- Average
tual Exercise tual Exercise Expiry
Low High Quantity Life Price Quantity Life Price Date
---------------------------------------------------------------------------
$3.00 $6.30 1,515,003 1.47 $3.37 1,510,003 1.47 $3.36 2010
$4.00 $7.60 163,447 2.63 $6.10 101,109 2.60 $6.24 2011
$3.87 $6.29 2,361,771 3.60 $4.40 492,081 3.41 $3.97 2012
$7.31 $14.25 2,075,900 4.41 $8.48 - - - 2013
---------------------------------------------------------------------------
$3.00 $14.25 6,116,121 3.32 $5.58 2,103,193 1.98 $3.64
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Performance Warrants
In January 2005, as part of the Corporation's initial restructuring to become a public entity, the Corporation issued performance warrants with an exercise price of $3.00 to members of its management team as a long term incentive. Each performance warrant entitles the holder to purchase one common share at the exercise price. At September 30, 2008, there were 2,939,732 performance warrants outstanding.
In order to calculate the compensation expense, the fair value of the performance warrants was estimated using the Black-Scholes option-pricing model that takes into account, as of the grant date: exercise price, expected life, current price, expected volatility, expected dividends, and risk-free interest rates. For the three and nine months ended September 30, 2008, the Corporation recorded $NIL and $NIL (three and nine months ended September 30, 2007 - $NIL and $NIL) compensation expense in the statements of net income (loss), comprehensive income (loss) and retained earnings (deficit) relating to stock-based compensation for the performance warrants.
A summary of the changes during the three and nine months ended September 30, 2008 and the Corporation's outstanding performance warrants as at September 30, 2008 is presented below:
Weighted Average
Number Exercise Price $
---------------------------------------------------------------------------
Outstanding, December 31, 2007 3,749,665 3.00
Issued - -
Exercised (809,933) 3.00
---------------------------------------------------------------------------
Outstanding, March 31 and June 30
and September 30, 2008 2,939,732 3.00
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Number Number
Outstanding at Exercisable at
September 30, Exercise September 30,
Date of Grant 2008 Date of Expiry Price 2008
---------------------------------------------------------------------------
January 14, 2005 2,939,732 January 31, 2010 $3.00 2,939,732
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Contributed Surplus Continuity
($000's) ($000's)
---------------------------------------------------------------------------
Balance, December 31, 2006 8,990
Stock-based compensation expense - stock options 3,340
Stock-based compensation expense - forfeiture
of stock options (1,112)
Stock-based compensation expense - cancellation
of stock options (21)
------------------------------------------------------------
Stock-based compensation expense 2,207
Exercise of stock options (213)
Cancellation of stock options (54)
---------------------------------------------------------------------------
Balance, December 31, 2007 10,930
Stock-based compensation expense - stock options 1,269
Stock-based compensation expense - forfeiture
of unvested stock options (33)
Stock-based compensation expense - cancellation
of stock options 14
------------------------------------------------------------
Stock-based compensation expense 1,250
Exercise of stock options (2,089)
Cancellation of stock options (20)
---------------------------------------------------------------------------
Balance, March 31, 2008 10,071
Stock-based compensation expense - stock options 1,405
Stock-based compensation expense - forfeiture
of unvested stock options (55)
------------------------------------------------------------
Stock-based compensation expense 1,350
Exercise of stock options (801)
---------------------------------------------------------------------------
Balance, June 30, 2008 10,620
Stock-based compensation expense - stock options 1,485
Stock-based compensation expense - forfeiture
of unvested stock options (66)
------------------------------------------------------------
Stock-based compensation expense 1,419
(40)
Exercise of stock options
---------------------------------------------------------------------------
Balance, September 30, 2008 11,999
---------------------------------------------------------------------------
---------------------------------------------------------------------------
12. COMMITMENTS
Office Premises
The Corporation is committed under an operating lease which expires on November 30, 2017. Birchcliff will not use all of the space and has sublet the excess space to an arms' length party on a basis that recovers approximately 50% of the rental costs for the first five years. The Corporation is committed to the following aggregate minimum lease payments (not reduced by rents receivable by the Corporation):
Year ($000's)
---------------------------------------------------------------------------
2008 754
2009 3,020
2010 3,020
2011 3,020
2012 3,029
Thereafter 15,424
---------------------------------------------------------------------------
---------------------------------------------------------------------------
It is also committed to March 29, 2011 under an operating lease for another premises that it does not use and has sublet to an arms' length party on a basis that recovers all of its rental costs.
Flow-Through Shares
In the second quarter of 2008, the Corporation committed to renounce $15 million of exploration expenses pursuant to a flow-through share issue completed on March 14, 2008. Birchcliff has until December 31, 2009 to incur these exploration expenditures. The Corporation will be subject to a Part XII.6 tax based on the prescribed rate and the balance of exploration expenditures not yet incurred at the end of each month subsequent to January 31, 2009. As at September 30, 2008 the Corporation had fulfilled its obligation with respect to the flow-through shares.
13. SUPPLEMENTARY CASH FLOW INFORMATION
The following table details the components of non-cash working capital:
($000's) Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2008 2007 2008 2007
---------------------------------------------------------------------------
Provided by (used in)
Accounts receivable 6,950 (1,686) (4,878) (140)
Prepaid and other 536 (138) (263) 194
Accounts payable and
accrued liabilities 11,707 10,204 20,556 5,234
---------------------------------------------------------------------------
19,193 8,380 15,415 5,288
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Operating 5,735 779 (2,677) (783)
Investing 13,458 7,601 18,092 6,071
---------------------------------------------------------------------------
19,193 8,380 15,415 5,288
---------------------------------------------------------------------------
---------------------------------------------------------------------------
14. SUBSEQUENT EVENTS
During October 2008, a pipeline failure occurred at one of Birchcliff's 100% owned and operated facilities that resulted in approximately 150m3 of salt water being released. Birchcliff believes the bulk of the costs of remediation of the affected area will be covered under its insurance policies. The Corporation's best estimate of the costs of remediation at this time is approximately $1 million. Birchcliff will record as operating costs only its $100,000 insurance deductible in the fourth quarter of 2008. Should it be determined that the costs of remediation will not be covered under Birchcliff's insurance policies then the full amount of the actual remediation costs will be charged to operating expenses following such determination and/or as they are incurred. The Corporation's insurers are currently in the process of reviewing this matter.
FORWARD LOOKING STATEMENTS
Certain information set forth in this press release contains forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond Birchcliff's control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry participants, the competition for qualified personnel and management, stock market volatility and ability to access sufficient capital from internal and external sources. 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 incorrect and, as such, undue reliance should not be placed on forward-looking statements. Birchcliff's actual results, performance or achievement could differ materially from those expressed in or implied by these forward-looking statements, and accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits will derive therefrom. Except as required by law, Birchcliff disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
BOE Conversions: The term barrels of oil equivalent ("boe") may be misleading, particularly if used in isolation. Per barrel of oil equivalent ("boe") amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil equivalent ("6:1"). A boe conversion ratio of 6:1 is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
Birchcliff is a publicly traded company that trades on the TSX Exchange under the symbol "BIR".
The TSX Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of this release.
For more information, please contact
Birchcliff Energy Ltd.Jeff Tonken
President and Chief Executive Officer
(403) 261-6401
(403) 261-6424 (FAX)
or
Birchcliff Energy Ltd.
Bruno Geremia
Vice President and Chief Financial Officer
(403) 261-6401
(403) 261-6424 (FAX)
or
Birchcliff Energy Ltd.
Jim Surbey
Vice President, Corporate Development
(403) 261-6401
(403) 261-6424 (FAX)
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