Why Birchcliff Energy (TSX:BIR) Soared 10% Last Week, and Why it Still Has Steam Left

Strong earnings-growth prospects and a discounted stock underlines a huge growth potential for Birchcliff Energy stock.

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What happened?

Natural gas stocks have been unstoppable this year. The rally continued last week as well, with Birchcliff Energy (TSX:BIR) gaining more than 10%. A $1.6 billion gas-focused energy producer Birchcliff has gained 180% in the last 12 months.

The company management has issued an encouraging financial outlook, focusing on balance sheet strength and production growth for the next few years. With natural gas prices rallying to record levels, the stock could imitate similar movements in the near future.

So what?

Natural gas prices have been surging fast this year based on a host of factors like cold weather, supply constraints, and a short squeeze. However, we might see prices cooling down once the demand for heating requirements normalizes.

Birchcliff Energy looks well placed for superior earnings growth for the next few quarters. The management expects potential cumulative free cash flows of $1.9 billion in the next five years.

The company intends to turn debt-free by next year with such steep financial growth. Interestingly, if the company does achieve this feat, the excess cash flow will likely be distributed as dividends. The improved balance sheet will likely make it more impervious to tackle the low-price environment.

In the last 12 months, Birchcliff Energy saw its net income growing to $249 million from a net loss of $58 million in 2020. Natural gas prices have increased 53% in the last 12 months.

Energy commodities and stocks have unheeded Omicron fears for long. The demand for oil and gas continued to mount irrespective of accelerated coronavirus cases in the last few months.

Now what?

Birchcliff management sees its guidance materializing if natural gas prices average around US$4.00 MMBtu (million British Thermal Units) in 2022. That means the company could see windfall gains at current gas prices. We should get more clarity when it reports its Q4 2021 earnings later this week.

BIR stock looks well placed to play the natural gas rally this year. Despite steep gains, the stock is still trading eight times its earnings. This looks way discounted against peers and implies a huge growth potential for the future.  

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool has no position in any of the stocks mentioned. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

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