The market is starting to normalize again. We’re about half-way done on the up-side, and I estimate while there will be some minor panics here and there that will bring things down 3-5%, in balance you’re going to see things get back to at least where they were before the end of the year.
I’ve taken my fair share of these shares (earlier in the month), so I’ll post it to the public since there is plenty of upside. I’ve written about them before, so this is going to be somewhat redundant.
Birchcliff Energy (TSX: BIR) is a natural gas heavy producer. They are a low cost producer, refine their own gas, and they will survive. They are primarily financed by a low cost line of credit which is not in any danger of having the plug pulled. While their equity remains undervalued (and insiders also believe the same, especially those that were buying when the stock was under a dollar), the even better risk/reward are the preferred shares.
There are two series. BIR.PR.A is a standard fixed-reset perpetual preferred share, currently 8.374% coupon with a +6.83% reset rate, resetting September 2022. Even at the present Government of Canada’s 5 year bond yield of 0.41%, at current market rates it will reset at a 10.5% yield. It is conceivable that they will trade up to par again, just as they were for most of 2017 to 2019. A ‘quick’ capital gain of roughly 50%, plus you’re given a very healthy 12% eligible dividend. Even with the Bank of Canada turning our currency into toilet paper, your real return will be positive.
BIR.PR.C is a straight perpetual share with a coupon of 7%. After June 30, holders can put their preferred shares back to Birchcliff at par, which BIR has the option of paying cash, or giving stock at the 20 day VWAP or $2 minimum per share. Considering BIR is trading at $1.57/share, this works out to a discount to the current preferred share value ($17 for the preferred shares vs. $19.60 in BIR stock). I don’t know what the term is in finance, but it creates a “Mexican standoff” situation where if this continues past June 30th, I don’t think holders will be too eager to redeem, nor will Birchcliff be too eager to redeem either. In the meantime, you can collect a 10.3% yield (assuming a $17 purchase price) for waiting. The obvious price target is par, although if you get fancy you might be able to get a mild premium.
I generally believe the worst is over for oil and gas, and as a result, all of this is going to be a moot point when BIR goes higher later this year. Why not buy the equity? There are worse things you can do, but the preferred shares are pretty much a lock for appreciation on a risk/reward spectrum. For every 1% the equity goes up, the preferreds will probably get around 75% of it until they get closer to par.
Of course there aren’t any guarantees of 50% gains in a few months’ time, but this one seems feasible. The risk scenario is that the common stock meanders about and you collect an ultra-high coupon while waiting for natural gas demand to rise. In the case of BIR.PR.C you end up with 12.5 shares of BIR.
Sacha,
Are you concerned about half of the revenue comes from oil / NGL / condensate which are typically priced in relation to WTI and they are already guiding negative funds flow under assumption of $48 WTI? I do see natural gas prices potentially higher than their projection with shut-in but not sure if it is enough to offset the extremely low oil price.
Of course there is concern, otherwise they wouldn’t have cratered to their existing valuation where the prefs are trading at 70 cents on the dollar. They gave $5.8 million sensitivity per US$1 change in WTIC spot pricing in their March 11 press release, and their 2020 average guidance assumed US$48 WTIC. Below a certain point it doesn’t scale linearly. If anything I suspect they will suspend their next quarterly dividend until their free cash flow situation stabilizes.
Do you run screens for distressed corporate debt?
Yup, lots of distressed debt out there…
May I know what tool you use? Trace shows prices if you have the symbol but I don’t think you can screen by prices.
IB has a reasonable built-in screener.
Deadline for Client Instructions: May 28, 2020 11:59 AM Toronto time
Issue Expiry Date: May 29, 2020 05:00 PM Eastern Standard time
Instructions: Should be given to your account representative by telephone.
Holders are advised to read the “Important Information” section of this notice prior to selecting an option(s).
TERMS:
The cumulative redeemable preferred shares, Series C (the “Series C Preferred Shares”) of Birchcliff Energy Ltd.
(the “Corporation”) are redeemable by the holders (each, a “Holder”) on and after June 30, 2020.
The corporation currently has no intention to exercise its option to redeem the Series C Preferred Shares, but rather,
to leave such shares outstanding and continue paying a quarterly cash dividend of $0.4375 CAD per share. The
corporation has been paying a quarterly cash dividend on the Series C Preferred Shares since 2013.
The Series C Preferred Shares do not have a fixed maturity date. Any Series C Preferred Shares that are not
submitted by Holders for redemption as described herein will continue to remain outstanding unless and until such
shares are either redeemed (by the Corporation or the Holder) or converted into common shares of the Corporation
(“Common Shares”) at the option of the Corporation, in each case, in accordance with the provisions attached to the
Series C Preferred Shares, as contained in the Corporation’s articles (the “Provisions”).
Holders have the option of:
Option 1: Redemption – Submit a Notice of Redemption to the Corporation. The Corporation has the
option to:
(a) redeem the Series C Preferred Shares and pay to the Holder the Holder’s Redemption Price. See
“Redemption by the Holders”, or
(b) elect to convert any Series C Preferred Shares into Common Shares (090697103) (BIR (TSX) / BIREF
(OTC)) using a conversion price equal to the greater of $2.00 CAD and 95% percent of the “Current Market
Price” of the Common Shares. This means that a Holder’s Series C Preferred Shares may be converted into
Common Shares based on a conversion price of $2.00 CAD, even though the Common Shares may trade
below this price from time to time. For example, if 95% percent of the Current Market Price is less than
$2.00 CAD, a Holder of 1,000 Series C Preferred Shares would receive 12,500 Common Shares on the
applicable conversion date. As at May 1, 2020, the closing price of the Common Shares on the Toronto
Stock Exchange was $1.49 CAD. See “Conversion Election of the Corporation”.
Whether the Corporation elects to convert any Series C Preferred Shares into Common Shares on receipt of a
Notice of Redemption is dependent on the trading price of the Common Shares, the amount of Series C
Preferred Shares to be redeemed, the Corporation’s available funds and liquidity, and other factors
considered relevant by the Corporation.
SHAREHOLDERSWHO DO NOT WISH TO REDEEM THEIR SHARES IN THIS REDEMPTION
PRIVILEGE NEED NOT SUBMIT INSTRUCTIONS
Yup, this is the quarterly redemption. We’ll be getting these every three months. BIR will go above $2 at some point, the prefs will trade above par, and then it will be a moot point.