Birchcliff's Chris Carlsen on His First Year as CEO

Speaker 1:
Welcome to TD Cowen Insights. A space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.
Aaron Bilkoski:
Hey, everyone. I'm Aaron Bilkoski, a research analyst at TD Cowen, specializing in Canadian oil and gas equities. We're here live at the TD Cowen Energy Conference in New York. With me today is Chris Carlsen from Birchcliff Energy, a natural gas and liquids producer targeting the Montney Formation in Alberta. Chris has been with Birchcliff for over a decade, holding multiple roles over that time. He's been VP engineering, and then chief operating officer, before becoming president and CEO at the end of 2023. So Chris, you've now formerly been in the seat for almost a year... Well, let's roll that back a bit. How did you first find your way to Birchcliff back in 2008?
Chris Carlsen:
Sure. And thanks a lot to TD for having us, and doing this podcast, it's quite interesting. If you rewind back time, I was at a private company called Greenfield Resources, and we had ended up selling that company in 2008 to Harvest Energy Trust. And at that time, I knew a few people working at Birchcliff. Birchcliff essentially was founded and went public in 2005, so it was three years after that. We're probably four or 5,000 BBs a day at the time. And just through network of great individuals in the energy sector, I ended up coming over to Birchcliff and working a Charlie Lake asset called Worsley, and became the team lead of that, doing development engineering. And then from there, you sort of summarize it already, Aaron, but was given the opportunity to become the vice president of engineering in 2013. And really learned a ton at Birchcliff, largely through the experience of that executive team that founded the company, and has been there for quite a number of years.
So really was able to learn a ton, and soak up a whole bunch of different information, and different perspectives over the last decade. And then Jeff Tonken, our chair of the board who was the previous CEO and founder of the company, he and I worked on a succession plan for quite a while, and our goal was to have a seamless succession plan, and both internally and externally. And from our point of view, we think it worked well. Certainly took a lot of time and carrying attention to it, but at the end of '23 and into this year, we feel it's been pretty seamless. And it's not without its ups and downs and challenges, but that's the energy sector.
Aaron Bilkoski:
So since Jeff's retired from the management team, migrated to the board, you've become, I'll call it fully in charge of the management team, what are some of the highlights that you've come across this year?
Chris Carlsen:
Yeah, I'd say, think about 2024, it's certainly been a volatile year, but I think when we came right out of the gates as a new executive team, because... Again, just for the listeners, we had three executives that retired at the end of 2023, and our whole strategy there was, a couple of them were at that age where they're going to retire, Jeff and I had been working on what we were working on, and we wanted to do it once and do it seamless. So we were able to then have three newly appointed executives take their roles, and their first thing out of the gates in January was to really set the tone on what we're about, have the buy-side, sell-side, sort of meet the executive team. We went up to the field.
And this year's really been focused on operational execution. Capital efficiency being one of the number one drivers, where we can improve our well performance and drive down our costs. When I say cost, I mean capital costs, but also other costs in the business. And I think we've been pretty successful in that this year. We've really launched the campaign internally to try and reduce our cost structure, and select our wells, complete our wells a little bit differently, and then challenge our teams to drive down costs. And even mid-year, we came with a deal where we essentially took operatorship of that AltaGas plant, which is just another lever, if you will, to continue to reduce our costs. So I think it's been pretty, I'd say fun, rewarding, but also challenging at the same time.
Aaron Bilkoski:
Yeah, great. And honestly, it's been fun to watch. So in January, I made the trip up to your asset with me and a handful of others on the street. We talked about things like tweaking completions, selection of well results for the 2024 and beyond program. You almost have a year of those results in place. How are those shaping up relative to what we talked about back then?
Chris Carlsen:
When we came out of the gates, I think we set our 2024 budget where, first off, where we were drilling our wells was a key piece of it to make sure that we're getting some of the better parts of our field, but also a well-balanced program. So you're seeing us drill in the southeast part of our field, we're also drilling in Gordondale, and then we have some dry gas in the southwest. So it's still a bit of a mix. And then I'd say the second piece of the puzzle is when it comes to spacing and stacking of our wells. So we spaced the wells out a little bit further, and really let the frack do a lot of the work, instead of, previously, we'd be a lot more focused on drilling wells relatively close together, what we were calling cube style development. And that worked in that period of time when well costs were 4, $4.5 million, and you could really drive your cost down, but we saw overcapitalization potentially as time went on there.
So with the focus this year of spacing and stacking, spraying the wells out, and then really tailoring that frack. So we've increased our frack tonnage, if you will, by about 50%. So we used to be one ton per meter, now we're about one and a half tons per meter. I'd say the other thing we've done a really efficient job at is the cluster spacing through those fracks. So we used to be, every 25 meters, we'd have a perf cluster. Well, now we're down to 12.5 meters, and we're fracking more perf clusters at a time.
And that allows us to get up to rate a lot faster, and hence place those fracks faster, and save on the capital cost side. I think we've really seen the benefit of that all the way through. And you look at our first 16 wells that we brought online, and I'd say they're outperforming our expectations internally, and I think that was the goal at the beginning of the year, is to tell the street that, "Hey, each quarter, our goal is to outperform the expectations." And I think we've done that from Q1, Q2, and just recently here in Q3.
Aaron Bilkoski:
Great. So beyond what I'll call like Pouce and Gordondale, which I think are the more known drivers of your near-term business, you have that Elmworth property you've built up. What drove you to build up a property that size outside of your core area? And what are your plans for that going forward?
Chris Carlsen:
Yeah, so one of the things we've always had at Birchcliff, Aaron, is a really strong technical team, and that's all the way through. So from subsurface, geo, geophysics, petrophysics, all the way through the engineering, from reservoir engineering to obviously all the operations. So the Pouce, Gordondale area is certainly a cashflow engine. We've got all our infrastructure, all our production coming out of Pouce Coupe, Gordondale. And if we fill the existing infrastructure, because today we probably have about 10,000 buoys a day of capacity in that infrastructure that we're working to fill up pending gas prices, but we'll fill that up, and the company will be 90,000 barrels a day. That is priority one.
But in behind that, once we fill that infrastructure up, we probably have 20 plus years of drilling to keep that full, and maybe there's any other expansion there at some point. But we've always been pretty passionate about exploration, specific to the Montney, it's got to be in the Montney, we believe that's the best formation in North America from our point of view. So we started putting that Elmworth picture together probably 10 plus years ago, quite quietly under a broker. And it's really just recently that we came public with that as... It got really competitive down there in terms of land sales and land prices, so that forced our course of action a little bit to come public with our land position, drill a couple wells to continue lands down there, and we'll continue to spend that. But that is the third leg of the stool, if you will, with respect to Birchcliff, and that's the future development area. When you think about LNG, and all the opportunities upcoming, one thing, Canada's long, and Birchcliff is long is inventory. So it puts us in a really strong position into the future.
Aaron Bilkoski:
Do you see that as a core position under the Birchcliff banner? Or could you foresee a situation where that gets spun out into a separate entity, somewhat like Spartan did with Logan?
Chris Carlsen:
Yeah, there's certainly potential for that. I think our current plan A would be, you've got a bunch of cashflow potentially coming from a full Pouce, Gordondale asset, to deploy that capital back into some high rate of return, high profitable growth. That Elmworth property is... We can take all the learnings and all of our from building infrastructure, building roads, owning and controlling our land position, drilling completion, we can take all those learnings and all the power that we have in Birchcliff today and really deploy it down in Elmworth, which, from our point of view, could be just as big as Pouce and Gordondale is today. It's a little bit deeper, it's a little bit higher pressure, so we're expecting higher deliverability from the wells, so it can really rival what we already have.
Aaron Bilkoski:
I'm going to move over a little bit to hedging, and you know where this is going. So Jeff, your predecessor, who was hostile towards hedging, and I'm probably saying that kindly, is that a core principle of Birchcliff that you remain on hedge? Do you have a different view on that? Could you see your view on hedging softening over time?
Chris Carlsen:
Yeah, I think so. The famous quote certainly is, "The road to hell is paved with hedging." When you think about your word softening, I think that that's one of the differentiating factors of Birchcliff, to be honest, is that we use three key things to remain on hedge, and have exposure to that commodity price. So first one being our diversification of our sales points. We can talk about that. About 80% of our gas is sold in U.S. prices. We sell 40% at Dawn, 40% at NYMEX, 20% at ACO. So we've got that diversification of our gas sales points. And it's the same on the liquids, it's just in a smaller purview.
The second thing would be, we own and control all our infrastructure. So we can control the pace of development, which is key to our success when prices are moving up and moving down and you're exposed to them. You can flex your muscle when it comes to, are you growing or are you not? And then the third thing would be a strong balance sheet. And so we've always used those three things to allow ourselves to have full exposure to the commodity price. So I think that's a differentiating factor at Birchcliff, so we're not today trying to change that.
Are there places where we have done small, short-term, like, "Hey, we saw Dawn run..." I can't remember exactly what year it was, 2017, 2018. Dawn ran and was like $6 plus in I think the first quarter of 2017 or 2018. We did actually crystallize some of our Dawn position there, which actually worked quite well. The other point we've discussed potentially is, is there a place for hedging when we think about filling our existing infrastructure, where your base program's exposed to prices, but if you wanted to drill the 7 to 10 wells that are required to fill our infrastructure, and you saw prices go 3.50, $4.00, 4.50, somewhere in that range, and you had an opportunity to lock that in and secure a payout, to take that, I call it timing risk, to fill that infrastructure, that's maybe something we'd look at. But I think the foundation of the company, and the whole differentiating factor for us is to have exposure to the commodity prices. So I don't see that softening too, too much at all.
Aaron Bilkoski:
Which brings me to the dividend. So I think the dividend's been the focus of a lot of investors over the past year or so since it was implemented. Birchcliff hasn't always had a dividend, at least of this size, it's been pretty material to the business. Do you feel that your current dividend level is a distraction from the base operations that have been taking place?
Chris Carlsen:
Yeah, the dividend, if you rewind back a little bit for the viewer, so we have had a dividend since 2017. It's been 8 to 10 cents for quite a long time. And then when 2021 and 2022 came around, because we were exposed to commodity prices, we were able to essentially pay off the lion's share of our debt. I think we ended 2022 at about $130 million of debt. And all through that year, I think we had 950 million of cash in 2022. We said that we were going to pay a dividend once we get the debt down into check, and so we set the dividend at 80 cents a share, and started paying it in 2023. And obviously prices fell away in '23, they also fell away here in 2024. And we did update and changed the dividend at the beginning of 2024 here.
Well, each quarter we obviously have a look at the dividend, but I think we take even more focus on a yearly basis when it comes to, what's our 2025 budget? What are we seeing for commodity prices into that current year? And then what does that capital allocation strategy that should pair with that? And I think our main priority if you ask today is our balance sheet. And so we've had two years where, "Hey, great, we've been able to pay down that debt." And now we've spent some of that money giving it back to our shareholders, and we have about %525 million in debt probably at the end of this year.
We don't want to go too much more than one times debt to cashflow in the long-term, that's sort of our overarching principle. So we'll see where January comes, and we'll have a look at our budget with respect to '25, see what the capital program may lie or may... I think the key thing for us in '25 is flexibility with all these volatile commodity prices. But we'll have a good look, we don't want to take that balance sheet somewhere to where we're uncomfortable. We'll make sure that we're not going to sell Elmworth, we're not going to sell infrastructure. Those things are obviously paramount to the business. So we'll have a good look at the capital allocation strategy when we get to January, and make the right decision for the business.
Aaron Bilkoski:
When you mentioned leverage target, or a leverage goal of somewhere around that one times, what gas price do you use when you think about one times debt to cashflow?
Chris Carlsen:
Yeah, I think just for rough's sake, I'd say the last three years, if you looked at where's the range of the cashflow that have been between 2.50 and 3.50 as sort of a, "Hey, that's a general one year's cashflow in a operating environment that we've been in the last three years." So give you some perspective.
Aaron Bilkoski:
If I could ask you a high level question. This isn't a Birchcliff question. You could turn it into a Birchcliff question. LNG Canada is set to fire up here very shortly, how do you think that changes either the basin dynamics for supply and demand of gas? Or what do you think it means for Birchcliff?
Chris Carlsen:
This is kudos to Shell and the consortium of LNG Canada, they really trailblazed the LNG path. And I say that because we're part of a LNG project called [inaudible 00:14:56] LNG, we're part of the Rockies group supplying the gas. But Tonken, Jeff Tonken has been very, since the beginning, pushing that project, and it's... From where it was five, six, seven years ago to where it is now is light years ahead. I think we're passionate at Birchcliff for LNG, but if you really think about, "Okay, what's that going to do for us?" I think today, all that gas, or a good chunk of that gas is in the market, and we're oversupplied on the gas side.
Once that two BCF starts to go west, I think you're going to see, locally, at ACO, quite a different price regime. And I think the question then is, "Well, how long will that last?" And so we think about that in 2 or 3 different ways. The first being, what's the processing capabilities in BC on some of these LNG producers? I'll use one of them as an example. They're full with their processing today, they have a working interest, or a partnership in that LNG facility. Well, part of that gas now is going to go west, and they may have the Trans-Canada transportation to still be able to go east, but they don't have the processing capacity to do that.
So in our minds, that's certainly a bottleneck that takes some time to work through, if they decide to grow and say, "Okay, we want to fill that Trans-Canada transportation, we need two two and a half years to fill the... Or build new processing capacity." That's a big win, I think, for all of us. Two, three years, and we'll see where it ends up going, but I just think LNG on the West Coast is something that Canada needs, 100%, and we've been late to the game. So more, the merrier.
Aaron Bilkoski:
Does that change what benchmarks you like your gas to be exposed to?
Chris Carlsen:
Yeah, we're constantly looking at LNG type deals, and whether that's... We've looked at Gulf Coast related stuff, we obviously looked at stuff on the West Coast. Because there is more than just LNG Canada being... That has been FID'd. And then we're part of our [inaudible 00:16:43] project. So I think over the long-term, yeah, LNG will be a piece of the mix. Generally, how we thought about it is, if you had 50-ish percent of your gas going east, so I'm thinking Dawn and NYMEX, 50% of your gas, I say west, but essentially, local, i.e. ACO, plus some LNG exposure, that's probably the right mix. How we get there is the path that we're trying to chart as we speak today.
Aaron Bilkoski:
So I guess my final question is M&A, and this isn't necessarily a Birchcliff question, but more of an industry question. I think when a lot of investors, especially here, look at the Canadian Basin, they see a relatively high number of relatively small companies compared to the United States, especially in that Montney window. I think there's a view that a lot of these companies could be combined into one larger company. Why do you think that hasn't happened more aggressively? Or why haven't we seen more mergers of equals like we have in the United States?
Chris Carlsen:
Yeah, that's a good question. I think there's a few reasons. When you think about just the simple land bases, you look at a map, and you see Birchcliff close to company X, or company Y, close to company X, and you're like, "On a map sheet, that looks like there should be a bunch of efficiencies." But it's a little different than a checkerboard that may occur down in the U.S., where you've got a ton of synergies, and your lands or mineral rights are essentially over top of each other. We've done a really good job in Canada of swapping, and trading on the edges, and everybody building their own contiguous land bases. So when those land bases actually touch, that's the smallest piece of pipe you have.
So the synergies of tying one asset into another asset is actually not... It takes a little bit of... Well, it'll take a lot of money, to be honest, to build some significant pipe to connect assets together in a meaningful way. So on a map sheet, it looks quite easy to put things together, but in real life, it's maybe a little tougher. I think the valuations are very similar, we're all sort of grouped in the same valuation. So it's not like some... One company has a larger valuation than other company, and you should use that. I don't think that exists a ton in the mid, SMID cap space, so that's another issue.
I have had some positives though on... What one investor told me was, "Hey, my menu choices in the U.S. are getting smaller and smaller, and I'm more interested now to come up to Canada, because I've got a lot better menu up in Canada to choose from." And some companies are buying back shares and growing. Some companies are relatively flat and dividending. And there's a whole bunch of different choices there. I don't think anyone in Canada is entrenched, I've had that asked as well, like, "Oh, you guys are entrenched." I don't necessarily believe that. I think you have a bunch of entrepreneurs, specifically to Calgary and Canada, that, "Hey, we're working for the shareholders, and if the shareholders, and the management, and the executive, and the board feel it's a good deal, then great, it's a good deal. We're happy to start up, find other resources, and put our skillset to work." So I don't think that is a prohibiting factor either, but... I don't know, we're working for the shareholders, and our job today in these low commodity prices, that doesn't really spur on M&A to be honest either.
Aaron Bilkoski:
Perfect. Well, let's leave it there. Thanks for taking your time. I appreciate you coming in. Thanks for joining the conference. Thank you very much.
Chris Carlsen:
Thanks for having us.
Speaker 1:
Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.

This podcast should not be copied, distributed, published or reproduced, in whole or in part. The information contained in this recording was obtained from publicly available sources, has not been independently verified by TD Securities, may not be current, and TD Securities has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of recording. The views and opinions expressed in this podcast are not necessarily those of TD Securities and may differ from the views and opinions of other departments or divisions of TD Securities and its affiliates. TD Securities is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this podcast. The information contained in this podcast does not constitute investment advice or an offer to buy or sell securities or any other product and should not be relied upon to evaluate any potential transaction. Neither TD Securities nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this podcast and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed.