My TFSA Update December 2017 - Projecting Bellatrix Exploration's Finances

Last update on Jan. 15, 2018.

Image Credit: Sundry Photography /


In this series, I (Jin Choi) talk about my goal of reaching $1 million in my TFSA account by 2033. If you want to know what a TFSA is, I recommend you read my free book. In this article, I’ll also share my financial projections on a Canadian oil and gas company called Bellatrix Exploration.


December Results: Down 6.3%

At the end of December, I had $45,090, which was down by 6.3% since the start of the month. By comparison, the Canadian stock market went up by 1.2% while the U.S. stock market went up by 3.1% in Canadian dollar terms. Therefore, my portfolio underperformed.

The majority of my portfolio consists of oil and gas stocks. In December, oil prices climbed yet again from $57.40/bbl to $60.46/bbl (in US dollars), but strangely, my oil stocks lost value during the month.

I’m at a loss to explain why my oil stocks continue to go down in the face of rising oil prices. To be sure, there are a few unfavourable developments. Because of pipeline constraints, Canadian oil companies are currently receiving lower prices for their oil. But such constraints are temporary since, if they want to, those companies can choose to deliver their oil by rail instead.

Notwithstanding the effects of the pipeline constraints, I believe current oil prices are enough to generate healthy profits for Canadian oil companies in general. Therefore, I’ll continue to ignore the stock price slump and hold onto my oil stocks.

Unfortunately, the situation is rather different for Canadian gas companies. A year ago, companies could promise to deliver 1 mcf (thousand cubic feet) of natural gas in 2018 for around $3.00. But as of the time of this writing, companies wouldn’t even get $2 per mcf.

The problem, as with with oil, lies with pipeline constraints. TransCanada, which operates the biggest network of natural gas pipelines in Alberta, announced in August that they would change the way it prioritizes gas shipments.

TransCanada’s clients fall into two categories - firm and spot. Firm service shippers commit to sending a fixed amount of gas through TransCanada’s pipelines. Spot shippers have no such commitments when they send gas.

Before the changes in August, TransCanada always devoted 20% of its capacity for spot shippers, even when firm shippers had more gas to send. With these changes, however, that minimum capacity has disappeared, which means that if firm shippers use up all the capacity, spot shippers won’t be able to send their gas.

In addition, TransCanada shut down major portions of its natural gas pipelines in order to expand its capacities. The shutdowns and the contract changes combined have had a severe impact on natural gas prices in Alberta, at one point even sending the price down to negative territory.

I don’t expect the situation to improve dramatically in the near term, as more pipelines are due to shut down this summer. Whether prices rise this year or not will therefore depend on how much Canadian gas producers rein in their production. Canadian gas producers did limit production growth to only a small amount in these last two years, so there is some hope that they will stay disciplined with production.

On the other hand, the long term future looks somewhat better. Several major pipelines are due to be built or expanded in the next several years. If Canadian gas producers can get anywhere close to the price that American producers get, they’ll be very happy. But until then, my gas stocks may continue to lose money.


Projecting BXE’s Finances

One such Canadian gas stock I hold is Bellatrix Exploration (Ticker: BXE). The company currently produces about 170 mmcf/day (million cubic feet per day) of natural gas, as well as over 9,000 barrels/day of oil and NGLs. ‘NGL’ stands for ‘natural gas liquids’, hydrocarbons that are too light to be considered oil. Propane is a prominent example of an NGL.

I’ve held BXE stocks for nearly three years, during which time the stock has lost some 80% of its value. As you can imagine, BXE’s decline has been painful for me, and I also feel bad to have recommended the stock to others.

The reason I held on to BXE is simple: The company makes money with oil at $70/barrel and gas at $3/mcf, (both in Canadian dollars). I figured that oil and gas prices would get there, and I believed that BXE’s stock would rise significantly if it did.

Fast forward three years, and oil prices more than caught to up to my initial expectations. As of the time of this writing, oil is trading at roughly $80/barrel. However, gas has merely averaged close to $2/mcf so far this year. This raised a question for me: Can the company still generate profits even with these low gas prices if oil continued to trend higher? To answer the question, I created some scenarios of BXE’s finances, given below.


2017 Estimate

2018 Base

2018 Higher Oil

Oil & NGL production (barrels/day)




Oil price in USD




USD/CAD exchange rate




Oil price in CAD




Liquids price received by BXE




Revenue from liquids




Gas production (mmcf/day)




Gas price in CAD




Gas price received by BXE




Revenue from gas




Total revenue








Transportation expense




Operating expense




General & administrative




Interest expense




Maintenance capital expenditures




Total expense




Cash profit




The projections above are based on BXE’s reported financials up until the third quarter of 2017 (i.e. up to September 2017). We don’t yet have data on the fourth quarter, which is why 2017 is still labelled an ‘Estimate’.

My projections don’t follow the accounting standards. Whereas accounting standards require a company to expense non-cash items, I only dealt with those items that affect cash. For example, if BXE bought land for $3 million years ago, and sold it for $2 million today, they would be forced to recognize the $1 million loss as an expense. But BXE doesn’t actually pay $1 million in cash to anyone, so I removed such items from consideration.

I believe most of the financial items are self explanatory, but let me explain a few items that may not be clear.

BXE receives different prices for their liquids (oil + NGLs) and gas from prevailing market prices for a few reasons. First, NGLs tend to fetch a much lower price than oil, and BXE produces a lot of NGLs. Second, BXE pre-sold a lot of gas contracts at higher prices, somewhat protecting them from gas price declines. Third, BXE sells gas with some ethane mixed in it. Since ethane has more energy content, BXE generally gets a slightly higher price for their gas.

‘Maintenance capital expenditures’ refers to the amount that BXE needs to spend in order to keep production rates steady - i.e. drilling new wells to replace depletion. Currently, I think they need to spend $65 million a year to keep production at 9,400 barrels/day of liquids and 165 mmcf/day of gas.

‘Cash profit’ is a term I invented, and it refers to my total revenues minus total expenditures. The cash profit amount is different from the company’s reported net income for the reasons I’ve mentioned earlier about non-cash items.

As you can see from the cash profit line, BXE made substantial losses in 2017, and will probably continue to lose money in 2018 if gas prices stay where they are, and oil prices average $74 CAD. This explains why BXE’s stock price has continued to decline throughout 2017.

Because of the substantially lower gas prices, BXE can expect to lose a similar amount of money in 2018 if oil prices end up averaging $74/barrel. Had gas prices stuck around $3/mcf, as some people predicted in early 2017, I believe they would have forecast to make $10 million in 2018.

But what happens if oil prices go higher, to $83/barrel? Then, I believe BXE would eek out a small profit. In other words, oil prices can indeed rescue BXE this year.

Now, there are some reasons to be more optimistic about the stock beyond what I’ve discussed so far. Much of BXE’s debt is denominated in US dollars, so the recent strength in the Canadian dollar helps the company. The company has also protected its gas price exposure in subtle ways, which could help them achieve higher gas prices than I’ve projected. Furthermore, the company can refocus its drilling on oil wells instead of gas wells, which could bump up its profits.

However, these effects are relatively minor and in many cases uncertain, so I’m personally keeping my focus purely on the financial projections. In summary, the financial picture doesn’t look great for BXE this year unless either oil and/or gas prices rise. This explains why the stock has continued to go down. But, since I believe gas prices will eventually rebound, I continue to hold the stock.

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