Tamarack Valley Energy Ltd. (TVE) Earnings Call Transcript & Summary

Good morning and welcome everyone to the Tamarack Valley Energy Ltd. Webcast on July 28, 2021, discussing Quarter 2, 2021 Results. I would like to introduce today's speaker, Mr. Brian Schmidt, President and CEO; and Mr. Steve Buytels, Vice President, Finance and CFO. If you have any questions, please type in the Q&A field provided. Mr. Schmidt, you may now begin your conference.

Good morning, and thank you. I'm joined here today with Steve Buytels, VP, Finance and CFO. We are pleased to announce our second quarter results along with an update on our Charlie Lake and Clearwater drilling programs as well as executive changes. The second quarter was another very strong quarter for the company, driven by successful integration of Anegada Oil Corporation, along with our continued execution of ongoing operations. The Anegada acquisition complements our balanced asset portfolio and provides further upside and resiliency to generate consistent, predictable free cash flow and demonstrates our corporate return of capital profile. I will pass it on to Steve to run through the first quarter highlights.

Thanks, Brian. As Brian mentioned, this was another really strong quarter with production of 32,416 BOE a day and adjusted funds flow of $71.7 million or approximately $0.21 per share on a basic and fully diluted basis. We invested $30.8 million in capital expenditures during the quarter, excluding acquisitions, which contributed to the drilling of 20 wells, generating free adjusted funds flow for the quarter of $40.9 million and net income of $230 million. We exited the quarter with $506 million of net debt on our syndicated bank credit facility of $600 million, with a forecasted year end net debt of -- to Q4 '21 annualized adjusted funds flow of less than 1.2x. I will turn it back over to Brian for an operations update and executive change rundown.

Operationally, we successfully integrated and executed on the acquisitions the company has undertaken over the course of the last year. In the Charlie Lake, we brought on our first two operated wells, which exhibited IP30 rates of 1,367 BOE a day and 1,157 BOE -- barrels per day and another well at 1,048 BOE per day or 650 barrels of oil per day, respectively. This compares to the internal TVE Tier type 8 type curve of 482 barrels of oil per day. Production for June and July was impacted by third-party plant outages due to extreme temperatures in the province. However, we remained on track in our planned production range of 12,000 to 13,000 BOE for the asset with current production of 13,000 BOE per day. In the Clearwater, we drilled eight wells in Nipisi, with all of those wells having eight laterals per well. Average per well production rates for the second quarter of the program is 210 barrels per day after cleanup versus the 160 barrels per day in the winter program with the six leg average in the core Nipisi development block. The eight leg well drive significant capital efficiency with incremental well cost of only $105,000 per well. Total Clearwater production for June averaged about 5,000 barrels per day with plans to drill another 13 to 14 net wells in Nipisi for the remainder of the year, with an additional three to four partner wells in the greater Jarvie area. We continue to work down the path of installing our gas conservation infrastructure in Nipisi and plan to pilot our inaugural Waterflood in Nipisi in Q4. We have significantly transformed the company over the last year and with that, we have some executive and Board changes to highlight. First, I'd like to congratulate Mr. Floyd Price, Chairman of the Board on his retirement effective July 27th. He will be succeeded by Mr. John Rooney as Chairman of the Board. John brings extensive CEO and Board experience with him, and we'd like to thank Floyd for his instrumental leadership and guidance in building Tamarack to what it is today. With respect to the executives, I'd also like to congratulate Dave Christensen on his retirement as VP Engineering. Dave has been instrumental over the last 7 years, and we wish to thank him for his contributions. Dave has made the following -- Tamarack has made the following executive appointments as a result of Dave's retirement and the growth of the business. Kevin Screen has been promoted to Chief Operating Officer. Kevin has served as VP Operations since 2011. Martin Malek has been appointed to a successor as -- of Mr. Christensen as VP Engineering. Martin has served in various roles across the organization since 2014 and was most recently VP Business Development. Mr. Scott Shimek has been appointed to -- as successor to Mr. Screen as VP Operations and Production. Scott brings more than 15 years of engineering and operations experience. Most recently, he was VP of Reservoir Development at Bonavista Energy. Ms. Christine Ezinga has been appointed to VP of the Business Development and Corporate Planning. Ms. Ezinga brings more than 20 years of business experience in finance, Investor Relations and business development, including M&A. Most recently, she held the role of VP Strategy and Planning of Black Swan Energy. I would like to congratulate Floyd and Dave on their retirements as well as Kevin, Martin, Christine and Scott on their executive appointments. I will finish by thanking our employees, Board and shareholders for the continued support, and I'll turn it back to the moderator for questions.

Our first question is for Brian Schmidt, is Tamarack still looking to buy oil assets?

So right now, our priority is to -- is for debt repayment and bring that down as we work toward looking at dividend and return of capital to shareholders. If there were to be oil assets acquired, they would be tuck-ins in and around our core areas and I would classify our core areas as being Clearwater, Charlie Lake and Waterflood.

Our second question is for Steve Buytels. Given substantial free cash flow generation, when would you be comfortable moving away from debt repayment and returning capital to shareholders through a dividend and/or NCIB?

Yes. So as Brian just mentioned, we do have a target debt level that we want to get to for the company here, and we want to be sub 1x before we would put a dividend or look at other return on capital mechanisms for the company. So we do see that given the strong free cash profile that was evident in the quarter, likely in -- through year end here. I think, we'll provide some more information and roll out a 5 year plan and so forth for the Street to really understand the resiliency of that free cash that the business can drive here and the return on capital that really would be an output of that free cash flow as such. So stay tuned on that front, but that is definitely top of mind.

Steve, the question is for you. With the second rig coming on in the Clearwater later this year, where do you see production levels moving to for 2022 in the play?

Yes. So we -- as most of you probably noticed, we -- in June here, we're up around that 5,000 barrel a day mark, which really is where we expect it to be exiting this year in Q4. So things have gone very well in the Clearwater. We are looking, as Brian mentioned in his comments, at Waterflood and we have another 13, 14 wells to be drilled for the remainder of the year. So we still are going to leave guidance where it is, and we'll see where we get as we move through the back half. But we do see the growth coming from the Clearwater really in the company, and that will be next year. So we could see that moving into that 8,000 barrel a day range next year, maybe a little bit higher as we firm up our plant.

And Brian, this question is for you. Can you discuss any drilling and completion changes with recent wells?

Well, I think the biggest change is going to be in the Clearwater, and that's where we went to the eight legs. And you have to find the right balance there of more legs versus the royalty and reduction in the extra cost to get -- putting more on then because you have to spread out a little bit further and it takes up drilling time. So we think that eight legs is the maximum net present value that we can get off that play as opposed to going to 6 or as opposed to going to 10 seems to be the right balance. In the Charlie Lake, I think the -- coming out of the gate, these are big wells and we don't want to change completions and drilling too much until we actually get a good established run rate there. Then you'll see us start to work on cost reduction ideas and changes in operations in the field, but I'd say we're probably not going to be doing anything too drastic there until September-October time frame.

Okay. Brian, one more question for you. Does the well productivity in Charlie Lake and Clearwater warrant a reallocation of capital or a potential capital budget increase?

Yes. So as I mentioned earlier, the priority for the company is debt repayment and establishing ourselves as long term, credible, sustainable free cash flow generators. So right now, I don't see a significant increase in anything -- actually an increase at all in those programs. There may be some expiries or things we need to allocate some smaller amounts of capital to, that could be classified as a minor increase. But by and large, the goals of the company are debt repayment.

The next question is for Steve Buytels. Do you have any change in the 2021 guidance as a result of the strong quarter?

No. We didn't put any change in guidance yet. As we felt -- we've only had Anegada in our hands here for 2 months and although things have gone really well operationally for us and in integrating the asset, we thought it was a little bit too early to start to get ahead of ourselves. We talked about the downtime in late-June there, early-July with the plants, given the extreme temperatures. It is still supposed to be quite hot in the province, so we just want to make sure we understand where we are exiting, I think, the summer here before we do anything with respect to guidance. But it was a very strong quarter as -- ahead of most analyst estimates. So sort of stay tuned. We feel pretty good about the setup for the second half here.

The next question is for Brian Schmidt. Can you speak to the performance of the Veteran waterflood/expectations for the next couple of years? And how will this impacts the corporate decline?

Yes. It's a good question on the Waterflood, because that is really going to be key to controlling the corporate declines. Veteran, of course, is the largest of our waterfloods. But we kind of look at those as an entire group and so in order to control the decline, if you look at our plan, for every dollar we spend about $0.25 needs to go into Waterflood. And so the Veteran waterflood will play a key role here going forward as a larger piece. However, we're very excited about the Eyehill waterflood. We just drilled a water-source well there and that was a key requirement of finding good water source and so -- and we -- so we won't be using freshwater for that waterflood. We do have a nice clean source. We'll be testing deliverability of that well here shortly, but that's a key -- success is us drilling the Belly River source water well. That project -- the Eyehill project itself yields the highest rate of return in the company of any dollar invested. So we're probably going to be looking at increasing the allocation of capital into Eyehill, but we will also be doing some additional patterns in Veteran here as well.

Our next question is for Steve Buytels. With respect to potential 5 year plans, is a 5% production growth rate the right range for investors to think about or could it be something higher?

Yes. When we look at what we model in our 5 year plan internally, we would model somewhere between 3% to 5% growth. I think, optimally, the Clearwater, obviously, is at a stage of growth, and that's what will drive the majority of it. So early years in the 5 year plan, it's probably 5% and then as we move through to the later years of the 5 year plan, that probably falls off to about 3. But right now, that's where we see sort of the optimal level of growth for the company, balancing that return of capital as part of the total return strategy.

The next question is also for Steve. What are you seeing in terms of pricing pressure on services?

You know what, so far, I would say the biggest thing and most management teams have talked about it has been the price of steel. So that's definitely something we've seen come through. The next piece you're starting to see is definitely the cost of labor. I think, the pumpers have all talked about that, just trying to secure labor and they've had trouble doing it. So that normally means you're going to have to pay more to get these people back into those seats. So we expect that we're going to see some pressure really with labor. The CAODC already increased the day rates earlier in June there, so I think, we see pricing pressure for sure. We model it internally, some inflation, but I think it's too early to really see -- I think we -- in the fall, we'll get a better sense of where things really will go.

The next question is for Brian Schmidt. Brian, why do you feel the share price is so sluggish? Do you see improvement moving forward?

Yes. Well, I think there's probably a couple of reasons for that. I think, people are really wanting to -- these days, you do want to see demonstrated performance with new assets. So I think, we established ourselves in the Clearwater in Q1 quite easily. In fact, those well results that we got, in particular, on the second wave and the second acquisition we did here in February are outstanding, and they're almost a factor of 2x multiplier what we expected. So I think, the market has given ourselves credit for that. Anegada is a large -- that's a large acquisition and I think people want to see demonstrated the integration of those assets and quarter-by-quarter performance before they step in and realize where we're at. I think, what you're seeing in this last quarter is that a lot of the analysts -- we had a huge beat on the quarter results and a lot of analysts are painting a relatively conservative picture to what the demonstrated performance of the assets are until they get comfortable with it. So I think, I'm not too worried about it, because I think over time, results speak for themselves and you're going to see numbers move up on analysts here as they look at results.

The next question is also for Brian. You mentioned tuck-ins in core areas, would you look at adding exposure to other zones in Northwest Alberta beyond the Charlie Lake like the Montney?

Yes. I don't see -- right now, we see enough runway in the Charlie Lake that we'll be sticking to that and I think when you look at the results of the Charlie Lake, we just brought in some employees that work for Montney in, and they're looking at it. They're saying, well, geez, it looks like the rates are about the same and the costs are down almost a third. So I think the -- what -- the way we're looking at the business is we can generate more free cash flow if we stick to the Charlie Lake. There may be some synergies down the road with facilities and such but Charlie Lake will be the focus on the tuck-ins.

The next question is for Steve Buytels. What is the approximate expected debt owing at the end of the fourth quarter?

Yes. We would be forecasting right now on our budget pricing in and around $420 million to $425 million, leaving, obviously, ample capacity on our credit facility of 600. And that we see really in through next year, again, just on planned budget pricing moving, that'd be around $180 million at the end of December 2022.

The next question is for Brian. How does Penny fit into longer term plans with strengthening oil prices?

Yes. So Penny is a great asset, nice shallow decline, good solid cash flow and reliable. So that Penny asset, we fit in the waterflood core assets in general, along with Slave Point waterflood, along with Eyehill, along with Veteran and soon to be Clearwater. So I think, just by some minor tweaks and managing waterfloods, we've really changed the performance of that asset. So I still that -- see that remaining as a key.

The next question is for Steve. If there are plans for share buyback, would it not make more sense to buy now while share price is low?

Yes. That's a great point, and it's something we and the Board talk about all of the time and would be obviously a pressing issue. The thing for us here is we took on debt to do the Anegada acquisition that closed in June. We want to see that debt profile come down before we commit capital to buybacks or a potential dividend. So stay tuned. I think for us, really, it means getting through the third quarter here, another quarter really understanding where operations are at for us corporately, but more importantly, another good quarter of what looks to be big free cash that can pay down debt and leave us in a position where we feel comfortable from that debt target range going forward of about 1x.

There are no more questions.

Thank you. I guess we'll turn it back to the moderator, please. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.