Birchcliff Energy Ltd. (BIR.TO)

Natural gas names are on fire during this deep winter freeze. BR is a higher beta and small cap name vs. peers, like Tourmaline (he owns). BIR will likely trade at 4x PE. He sees 64% upside and a $4.30 price targets, but wants 100% in oil stocks.

Billy Kawasaki’s Insights - Billy’s most-liked answers from 5i Research. The production loss was in line with estimates. The cut in production forecast probably disappointed some investors. Looking forward, cash flow is expected to increase on higher prices. A couple brokers upgraded the stock and consensus is for decent overall growth and strong net earnings in 2021. Unlock Premium - Try 5i Free

He is bullish on natural gas with less swamping of the market from the US. Global demand is improving for LNG. It is his small cap pick. They are aggregating free cash to pay all debt and then pay dividends.

Debt concerns? BXE took bankruptcy protection when debt became too much. There is no equity value in it any longer. Companies that have debt that matures in 2020 or 2021 will have issues. He sees no issues with BIR or TVE on this topic. The new Federal relief program for large companies may be difficult for companies to accept as it has provisions for up to 15% of ownership being made available in warrants to the government.

Gas vs oil? As there is less oil production, associated natural gas production is falling. He owns BIR and was buying yesterday. AAV has performed well relative to other gas producers. He took profits on AAV recently and moved it into oil producers. BIR is trading at 2 times EV, but cuts its dividend by 81% recently. BIR is more cavalier on its spending, but feels it has more upside.

If oil recovers. He looks for price momentum, cash flow, balance sheet and low volatility. Oil stocks have none of these. He was net-short energy stocks yesterday. BIR has too much debt vs. their cash flow. He'd look at low-cost Suncor, which has a strong balance sheet, or CNQ (stronger balance sheet despite debt), or Parex which has net cash and a strong balance sheet.

TOU is too high of a natural gas exposure for him. BIR is overspending their cash flow to fill a plant they invested in for the promise of free cash flow next year. If you believe the strip pricing next year, they will generate a 26% free cash flow yield. However, it is also natural gas related. He just thinks there are better buying opportunities from the over selling in the oil markets from the Corona virus.