Crestwynd Exploration Ltd. (TVE) Earnings Call Transcript & Summary

Good morning. Welcome, everyone, to the Tamarack Valley Energy Limited webcast on December 15, 2021, discussing yesterday's press release. I would like to introduce today's speakers, Mr. Brian Schmidt, President and CEO; and Mr. Steve Buytels, Vice President of Finance and CFO. [Operator Instructions] Mr. Schmidt, you may begin your conference.

Good morning, everyone. I'm joined here today with Steve Buytels, VP, Finance and CFO. We're pleased to announce the acquisition of Crestwynd Exploration, a privately held Clearwater oil producer for consideration of $184.7 million. This acquisition consists of 4,500 barrels a day of oil in Southern Clearwater Fairway, and 200, or 150 net, future development drilling locations across only 50% of the 99,360 net acres. It provides significant exploration potential upside. In addition to the highly economic drilling inventory, the assets have an attractive environmental and ESG profile with minimal ARO of less than $8 million and limited freshwater requirements. Pro forma, the acquisition will control 445 net sections of Clearwater land across Nipisi, West Martin Hills and Southern Clearwater areas with over 650 future drilling locations. Our Clearwater oil production is expected to average approximately 12,000 of BOE per day in 2022. I'll pass it over to Steve to walk through the transaction metrics and the financial accretion numbers, and our new sustainably linked lending facility.

Thanks, Brian. The Crestwynd transaction is highly accretive to Tamarack shareholders. The $184.7 million purchase price implies a 2.1x annualized operating netback multiple with the free funds flow yield in excess of 25%. The transaction is accretive on a per share basis to forecast 2022 adjusted funds flow by 7% and free funds flow by 9% at strip prices, while maintaining our resilient sustaining funds flow breakeven, including the base dividend of approximately USD 35 per barrel WTI. The transaction is leverage neutral on a pro forma 2022 basis with forecasted year-end net debt to adjusted funds flow of less than 0.6x on strip and increases our debt adjusted free funds flow per share by more than 5% throughout Tamarack's 5-year plan at USD 55 per barrel WTI, and enhances our long-term return of capital framework given the debt adjusted free cash flow accretion. We are pleased to announce our lending syndicate and has provided an extension of the company's existing $600 million revolving credit facility to December of 2023 and transition this facility to a sustainability-linked lending facility. In conjunction with the acquisition, National Bank is lead lender and has provided commitments for a separate $100 million credit facility and association with the Crestwynd acquisition. This sustainability-linked facility incorporated incentive pricing terms. Through the SLL facility, 3 of Tamarack's long-term goals have been identified as key performance indicators and structured into the performance targets that will decrease Tamarack's cost of borrowing by up to 5 basis points if the targets are achieved or increase the cost in the event they are missed. The 3 targets include GHG emission intensity, decommissioning management and indigenous workforce participation. We are extremely proud and excited to launch the sustainability linked loan with our lending syndicate partners and continue to be a leader in ESG amongst our peers. I will turn it back over to Brian for some closing remarks.

In closing, the Crestwynd acquisition further delivers on our commitment to growing free funds flow per share for shareholders and providing long-term accretive return for capital growth. This, coupled with the sustainability linked loan facility, drives home the commitment Tamarack has to being a responsible corporate citizen and is aligned to our core values. I'd like to thank all of our employees, Board of Directors and shareholders for their support, and I wish everyone a happy holidays and a new year. I'll pass it back to the moderator for questions.

Our first question is for Steve Buytels. What will be the split in drilling and capital between the Southern and Northern Clearwater lands in 2022?

Yes. No, that's a great question. So we'll run between $30 million to $35 million down in the southern Clearwater. We had working interest in some of the Crestwynd land. So that includes some of the capital we would have already have baked in there for our 50% interest that was existing. And then we still see upwards of let's call it, anywhere from $50 million to $70 million in the Northern Clearwater, and we give the range there because we are kicking off our waterflood on the west side of Nipisi, so that incremental $20 million to get us to $70 million would be moving and allocating some more dollars into that waterflood to kick that off here early in the new year.

Our next question is for Brian Schmidt. Is the expectation to hold this asset flat at 4,500 BOE per day? Or is there some room for growth in 2023?

Yes. So we'd be looking at keeping this asset flat -- pretty much flat for next year. And that's consistent with how we're looking at the business in returning how it affects our dividend and returning capital back to shareholders.

Our next question is for Steve Buytels. With this deal, we think of capital going up $30 million to $35 million next year? Or will there be some reallocation from other assets?

Yes. No, that's probably a fair estimate. I think when we rolled out the 5-year plan, we gave the market a range for a stand-alone Tamarack of 41,000 to 43,000 BOE a day, with the capital budget of $200 million to $250 million. So the way we look at it, we would probably be closer to the midpoint on a stand-alone basis as we look at 2022. And by adding this $30 million to $35 million, it probably brings you to the high end of that original range. But then obviously, we're going to add that 4,500 BOE a day out moving forward on the production side. We will be providing our formal 2022 guidance, inclusive of the Crestwynd acquisition in early January. So we'll be able to come back to you guys with some more detail then.

Our next question is for Brian Schmidt. Does Crestwynd have land anywhere other than Southern Clearwater? And is it included in the deal?

Yes. So this acquisition includes the lands right around the greater Jarvie assets and does not include some of the other acreage that Crestwynd had.

Our next question is for Steve Buytels. How does this acquisition change your capital projections with the 5-year plan? Should we think about it as additive or a shift between assets?

Yes. Again, this one would be, in our view, additive here. You may see a little bit of shifting of capital as we roll out the budget, as I mentioned before. But for the most part, we do plan, as Brian said, to hold this production flat at 4,500 barrels a day on the acquired assets here. If you recall, we also bought the Jarvie asset from Spur back in September, which fits this whole southern core fairway. So we do have some committed capital in that region as well. But again, as we look at it, we would see this as being additive right now. When you look at the free cash flow associated with this, as we mentioned in the press release, we plan to spend on the Crestwynd acquisition, about $30 million to $35 million annually to keep that flat. And at strip pricing, we would see somewhere around $45 million to $50 million of free cash flow after we take into account the taxes and the incremental interest that comes with this acquisition.

Our next question is for Steve Buytels. Are there any tax pools that come with the transaction? And what would the impact be to your tax horizon?

Yes, there are tax pools. However, it's all resource pools. There are no NCLs here. The company did a good job of becoming profitable here quite early. Hence, why we saw this asset attractive from a free cash flow standpoint. When we look at our forecast for next year on strip, this would add approximately -- I think, it was about $7 million in tax that we'd have to pay. But again, we'll formalize updated tax pools for everybody through year-end here as we do the budget, but we will see a little bit of tax on this. And that's why when we look at and I quoted you the free cash flow associated with the funds flow here. There is a little bit of a tax grind on that off that NOI.

Another question for Steve Buytels. Are there any material hedges included with the acquired production?

They have some small hedges. They actually have a couple really good WCS hedges that are in the money here that run through until June of this year. And then there's a couple of WTI swaps that also run through to April and June that we'll provide some information here for the analysts today with an updated hedging chart. We also pro forma -- or Tamarack stand-alone, we did do some risk management adjustments here with the run in oil a few weeks ago. We did restrike our full first quarter put program from $55 puts up to $70 puts. So we'll again provide an update here for you guys in the presentation. Just to lock in a minimum for a cash flow, which from a risk management standpoint for Q1, when we spend the highest percentage of capital, I think we'll look very good and provide a significant amount of free cash to continue to pay down debt.

Our next question is for Brian Schmidt. How do these Crestwynd undrilled locations likely compare to Nipisi and Jarvie?

Yes. So you're going to be -- in Nipisi, there's quite a range of production rate, [indiscernible] production rates. We've got wells in the first months were as high as 300 barrels a day. We've also got some areas in Nipisi that average about 185. What we're seeing here on the IPs is the [indiscernible] area, we just did a test well there that proved up a new area, and it looks like it's going to be about 235 barrels a day, IP 30. And if you get over into other areas, you're probably talking around that 180. So I'd say the 180 to 230 is a pretty good range to be thinking about for most of the areas here that we bought from Crestwynd.

Our next question is for Steve Buytels. How do you see this impacting the return of the capital model that you rolled out this fall?

Yes, that's a great question. Again, given it's leverage neutral here and the amount of free cash that comes off the Crestwynd acquisition, we don't see it impacting the enhanced return roll out very much when we look on strip, we still see a second half rollout of the enhanced return portion. With respect to the base dividend, as we stated when we came out with the return on capital program, we want this to be something that's sustainable that we grow annually or maybe twice a year that we'll come out with. But again, it will be small increases that's balanced at 25% of free cash flow at $55 WTI. So most of the analysts are going to go through the math and say, hey, you guys got some room to potentially add to that. Yes, the math would tell you that. But we want some time here. We haven't even paid our first dividend payment. But what we want to make sure our shareholders and stakeholders understand is this is accretive to our return on capital framework over time. And we'll be sure to continue to be prudent with that and we've a prescriptive with that as we move forward. So again, on close of this deal, we'll look to provide some more commentary there.

Another question for Steve Buytels. Can you walk through how the SLL components work and why you chose these 3 KPIs?

Yes, that's a great question. And again, I can't tell you how proud we are as a company to really be the first E&P with this tied to our revolving facility here in Canada, with some very rigorous targets. So obviously, when it comes to GHG, that's top of mind for all oil producers in North America. Our Scope 1 and 2 emissions reduction of 39% is a very aggressive target. And again, it's something that's going to keep and hold our feet to the fire but we're comfortable we can get there specifically with some of the gas conservation projects that we have in the likes of the Clearwater and we can have Brian talk about our plans on gas conservation here on these new assets in a second. Decommissioning management is another top of mind commitment here for us with respect to taking care of business. As we drill new wells and we continue to grow this company, you've got to clean up what you leave behind. So this target is 150% of the Alberta Energy Regulatory Volunteer Closure Program targets, which again, puts us in the camp of doing more than what we have to and more than what our peers would do. So we track that regularly. And again, just make sure that we invest in cleaning up after ourselves. And lastly, and I think this is the most unique and most important one and speaks to the culture of what Brian specifically here has done as CEO and partnering and working with First Nations is having this indigenous workforce participation. We've done a good job continuing to bring indigenous employees and contractors into the company, and we want to make sure that we grow that given we operate on various First Nations within the Treaty 8 up in the Clearwater and then traditional lands over in the Charlie Lake. So again, this is a target that's in line with federal government initiatives for the public service sector to get to 6% by 2025. And these -- again, these are aggressive targets and are going to take a commitment and investment on our part to reach them. And as mentioned, from a cost to borrow standpoint, if we hit these, we can reduce our cost of borrowing by up to 5 basis points. And in the event that they're missed, obviously, that will impact us by increasing our cost there as well. So I think it's a very good balanced approach and some very good hard measured targets to achieve here. Brian, did you want to talk a little bit about the gas conservation that we're going to take on here?

Yes. So similar to one of the things that we did with our ESG program is really take a look at the weighting on an impact on ESG when you bring new assets into the company. And either we select assets that are very -- have very low GHG intensity numbers or we have a plan to execute and bring them into range. So just like we did in Nipisi, we put in a large gas gathering system. We spent about $8 million there and took the GHG intensity from somewhere around 80 when we bought it down to around 20 kilograms per barrel. With this particular asset, as we develop it, we will be extending lines gas lines into the area and collecting gas that's currently being vented right now and all the new gas that we bring on here with the new drills. We will seek some of the funding that the government provides on GHG just like we did in Nipisi. So this won't come out of all of it. We're anticipating about 75% will come out of the funds on the GHG program that the federal government has out. So -- We built that in, and we have plans to execute that over the next couple of years.

Thank you very much. That is the end of our questions.

Ladies and gentlemen, this concludes your conference call for today. We thank you very much for participating and ask that you please disconnect your lines.