Schulich’s Birchcliff Leads Canada Energy Stocks After Shale Buy

  • Shares rise to more than twice investor’s initial 2007 cost
  • Deal seen delivering growth at attractive price, cutting debt

Seymour Schulich’s bet on Birchcliff Energy Ltd. is paying off as a transformational acquisition by the Canadian natural gas producer sends the stock on a tear.

As Birchcliff’s largest shareholder, Schulich is among investors benefiting from the company’s 29 percent gain since June 21, when it announced an agreement to acquire shale properties in the Montney formation in Alberta from Encana Corp. for C$625 million ($478 million).

The Calgary-based producer is now the best-performing energy stock in Canada, more than doubling this year, compared with an increase of less than 20 percent for the S&P/TSX energy index.

The purchase is being heralded by analysts including TD Securities Inc.’s Travis Wood as a game-changer for Birchcliff. Wood cites the deal’s attractive price, output growth potential from complimentary assets and Birchcliff’s steps to pay down debt from a related equity offering as positives for the company. Add to that significant oil and gas price gains that Schulich is expecting, and he’s set to reap big rewards from his 2007 Birchcliff bet.

Price Uplift

“I believe strongly that dramatic hydrocarbon price gains will occur in the next 18 months,” Schulich, 76, said in an e-mail, praising the Birchcliff management as among the most operationally competent of teams he’s worked with in more than a dozen oil and gas investments since the 1970s. “To produce gains of five to 10 times one’s original investment, a favorable oil and gas price uplift must occur.”

While North American gas prices have risen more than 15 percent since the end of May as hot summer weather in the U.S. drives demand for air conditioning, they’re still down nearly 60 percent from 2014 highs and well below the average price of about $4.63 over the last 10 years.

The prominent investor and former mining executive, based in Toronto, is known for making large, focused bets, often in unloved stocks during price downturns, and engages with executives on strategy. 

Schulich has bought Birchcliff shares at various prices in the commodity cycle and now owns about 45 million of them after picking up an additional 3 million, according to a July 13 statement. That represents a stake of about 30 percent, according to Bloomberg calculations based on the company’s annual report.

The stock, which Schulich said he first acquired at C$3.90 in September 2007, has since more than doubled to C$8.76 on Thursday in Toronto. The shares rose 0.6 percent to C$8.81 at 9:56 a.m. on Friday.

‘Home Run’

Schulich has recently accumulated a similar large investment in Calgary-based oil producer Pengrowth Energy Corp., expanding his holdings to 14.6 percent of the company. In a March interview, Schulich said he expects his investment in Pengrowth will be a “home run,” delivering a return of 10 times.

Schulich is also the co-founder of Franco-Nevada Mining Corp., past chairman of Newmont Capital Ltd. and spent 22 years at pension fund manager Beutel, Goodman & Co., including three years as president.

Investors other than him are piling into Birchcliff now, too, with the purchase of the Encana assets. Birchcliff boosted the size of its equity financing for the acquisition after investor interest, raising C$690.8 million including a private placement by Schulich.

Leaner Leverage

Jeff Tonken, the company’s chief executive officer, declined an interview request, citing securities restrictions tied to the equity offering.

With the purchase and related equity deal, Birchcliff’s leverage will fall to a ratio of 1.3 times its cash flow next year, from a pre-deal estimate of 3.6, according to TD’s Wood, who is based in Calgary. The roughly C$24,000 per equivalent barrel of oil Birchcliff is paying for the properties is “attractive” and compares to recent deals in the area of at least C$60,000 a barrel, he said.

“In our view, Birchcliff now provides investors with an attractive valuation and torque to natural gas prices within a more stable entity,” he said in a July 13 research note.

The stock is now recommended as the equivalent of a buy by 14 analysts, while two rate it a hold.

Encana Assets

Birchcliff was seen as a natural purchaser of the Encana assets as its existing Pouce Coupe and Gordondale properties surround the lands. Encana has been selling assets as it focuses on reducing debt and costs amid the oil price slump. Birchcliff’s production is expected to rise to the equivalent of about 65,000 barrels of oil a day with the deal, according to the company, from about 42,000 as of the first quarter. Production will be 23 percent oil and natural gas liquids once the purchase closes, up from 11 percent previously.

The deal “checks all the right boxes,” Michael Harvey, an analyst at RBC Dominion Securities in Calgary, wrote in a June 23 note. The company “is in a much better financial position following the deal, with balance sheet metrics (a key investor focus) and valuation now screening amongst the best in the group.”

It was smart for Birchcliff to buy in the downturn, said David Winters, another of the company’s largest shareholders who is chief executive officer and portfolio manager at Wintergreen Advisers LLC. Schulich’s big bet on the company throughout the commodity cycle has helped give Winters confidence to hang on for the more than five years he’s been in the stock, said the fund manager, who is based in Mountain Lakes, New Jersey.

“Part of the reason that we’ve believed in Birchcliff is because of Seymour,” Winters said in a phone interview. “When things looked the darkest, Seymour bought more stock.”

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