Investors looking for a contrarian energy strategy need go no further than Birchcliff Energy Ltd. - a Calgary intermediate that's proudly and profitably a dry gas producer.
"The key to Birchcliff to understand is that today, when we have very low natural gas prices, we have earnings," insisted Jeffrey Tonken, president and chief executive, at an investment conference Tuesday.
"So we don't need to make the comment we're going to bring on infrastructure that will reduce our operating costs or we're going to reduce drilling costs or we're going to reduce our finding costs to prop up earnings.
"In the fourth quarter, when gas was $3.62 (Cdn per 1,000 cubic feet), Birchcliff was profitable."
In its first quarter, Birchcliff reported $9.6 million in net profit on cash flow of $32 million and production of 17,700 boe/d. Its 2011 exit output is estimated at 27,000 to 28,000 boe/d -mainly due to a gas plant expansion -with 72 per cent of it in natural gas.
The presentation contrasted with those from most junior and intermediate names at the Canadian Association of Petroleum Producers' event, who emphasized their pursuit of oil and liquids and abandonment of natural gas.
While benchmark New York-traded oil futures have jumped from a low of $33.87 US per barrel at the end of 2008 to at or above $100 recently, natural gas has been stuck at around $4 US per million British thermal units.
Craig Hansen, president and CEO of Zargon Oil & Gas Ltd., said the company's current 62 per cent oil weighting resulted from a deliberate campaign to buy oil-producing assets over gas.
"Over the last few years, we've simplified and sharpened our focus," he said. "We work an oil exploitation business focused on increasing oil recovery factors in existing reservoirs."
The company has increased its oil output from 42 per cent in 2007 and hopes to get it to 70 per cent by the end of 2012.
Hansen added the price of oil-producing acreage has grown rich enough that Zargon is now considering selling some of it to help pay for its priority areas.
Jonathan Wright, named president and CEO of NuVista Energy Ltd. last month, said the company is working to correct its 70 per cent weighting to gas.
"Not surprisingly, we have shifted our drilling program to oil and liquids-rich natural gas and it's starting to pay off," he told the conference.
The company sharply reduced first quarter capital spending to $40 million this year from $76 million last year and terminated its dividend to keep spending close to estimated cash flow which has been hurt by gas prices.
Tonken said Birchcliff is making money on dry gas because it is restricting itself to one main gas play -the Montney/Doig in northwestern Alberta -and because it owns the gathering infrastructure it uses.
It does have a light oil play, the nearby Worsley Charlie Lake pool, but most of its $227-million 2011 capital budget is bound for the gas play.
Tonkin said investors have a long-term strategy of building the company and selling it as a unit. He said Birchcliff is not interested in joint ventures.
