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

Good morning. Welcome, everyone, to the Tamarack Valley Energy Limited webcast on October 28, 2021, discussing Q3 2021 results. I would like to introduce today's speakers, Mr. Brian Schmidt, President and CEO; and Mr. Steve Buytels, Vice President, Finance, and CFO. [Operator Instructions] Mr. Schmidt, you may begin your conference.

Good morning, and thank you. I'm joined here today with Steve Buytels, Vice President, Finance, and CFO. We're pleased to announce our third quarter results highlighted by exceptionally strong operational results in the Charlie Lake and Clearwater. Our team's execution and integration of the Charlie Lake and Clearwater assets drove significant production beat, which underpins our guidance increase for the year. We are also very pleased to announce our inaugural dividend and return of capital framework with our first monthly dividend set to be paid in early 2022. I'll pass it over to Steve to talk to the financial highlights.

Thanks, Brian. Q3 was a very strong quarter with production of 41,256 BOE a day and adjusted funds flow of $102.5 million or approximately $0.25 per share on a basic and fully diluted basis, which represented another beat to consensus estimates. We invested approximately $70 million in capital expenditures during the quarter, excluding acquisitions, which contributed to the drilling of 18 wells, generating free adjusted funds flow for the quarter of $32.5 million and net income of $20 million. We exited the quarter with $520 million of net debt on our bank facility of $600 million with a forecasted year-end net debt Q4 '21 annualized adjusted funds flow of less than 1.2x. I will turn it back over to Brian for an operations update.

Operationally, we successfully integrated and executed the newly acquired Charlie Lake assets with the drilling of 7 wells and production exceeding our acquisition type curve estimates and driving a significant beat for the quarter. We plan to drill 2 wells during the fourth quarter and execute on a small 12.5 section net tuck-in. And that will enhance our resiliency and with our inventory with half-cycle free funds flow breakeven prices on these wells in the low to mid-$20 per barrel range. In the Clearwater, we drilled 8 wells with all of those having 8 laterals per well. Average per well production rates continue to exceed the acquisition type curve. Total Clearwater production for the quarter averaged 5,450 barrels per day with plans to drill another 8 gross wells, 7 net for the remainder of the year. Current production in the play is 5,750 BOE per day, which puts us ahead of our internal forecast and represents a tripling of production from the beginning of the year. Finally, we're very proud to announce the commissioning of the Clearwater Nipisi gas gathering project, which is currently conserving about 2 million cubic feet of gas per day in the play. I'll pass it over to Steve to talk through our return of capital framework and our dividend announcement.

Thanks, Brian. The free funds flow return of capital framework will be achieved through modest base dividend growth, special dividends and tactical share buybacks. Our inaugural base dividend will be paid on Feb 15, 2022, to shareholders on record as of Jan 31. We have separated our framework into 2 distinct buckets. The first being the sustainable base dividend and the second bucket being an enhanced return to shareholders that is predicated around our long-term debt target. The sustainable base dividend Tamarack is initiating will allocate up to 25% of free funds flow at our 5-year plan long-term price deck of USD 55 WTI per barrel crude and $2.50 AECO. The remainder of free funds flow will be allocated to net debt reduction and potential strategic acquisitions in existing core areas. We plan to grow the base dividend in conjunction with earnings on an annual basis. The enhanced return to shareholders' bucket, this is predicated on our long-term debt target range of $250 million to $300 million. Tamarack plans to return up to 50% of the previous quarter's free funds flow inclusive of the base dividend to shareholders through share buybacks and special dividends. The remaining 50% will be allocated to further debt repayment and potential acquisitions. The long-term debt target is based on a forecasted year-end to net debt trailing annual adjusted funds flow of 1x at USD 45 WTI. Based on current strip, we see the company potentially achieving our long-term debt target in mid-2022, which could see the implied yield inclusive of the base dividend, enhanced return allocation at current share prices reach approximately 8%. Strategic and opportunistic M&A will continue to be carried out in a disciplined manner and aligned with our core return on capital framework. I will pass it back to Brian for a few comments.

I'm very pleased with the strong results in the quarter and the confidence the team has in integrating and executing on M&A and driving operational performance. This success, combined with the strong free funds flow growth that underpins our business has allowed Tamarack to position return of capital to shareholders in a meaningful manner while ensuring the resiliency of our business and base dividend at low commodity prices. The outlook for the company and the industry has never looked so good. And in my career, I look forward to continuing to drive the business model ahead. I'll finish with thanking our employees, the Board and our shareholders for continued support. I'll turn it back to the moderator for questions.

The first question is the production, light oil.

So the -- most of the production that we brought on in this last quarter is light oil in the Charlie Lake and the Clearwater is, I would say, medium to heavy oil.

The next question is for Steve Buytels. Are there any hedges in place for 2022?

Yes. Good question. We do have hedging in place. For 2022, for the most part, we look at risk management really as insurance. So we've used puts with floors in and around that $55 price range that aligns with our 5-year plan to protect the downside. But it's allowed us to obviously participate here with the strength in oil over the past 6 months to ensure that for investors, we're participating in the upside. I'd say moving forward, as prices move higher, we will look potentially to lock some of that in as we move to this return on capital strategy to ensure that we're getting to that long-term debt target in a quick and meaningful pace to enhance that return on capital going forward to shareholders.

The next question is for Brian Schmidt. Will you be updating your operations web page to include Clearwater and Charlie Lake?

Yes. We'll be -- in the presentation that we're going to be loading up, we will have some posted results on the Charlie Lake. We'll also talk to the results in the Clearwater. We -- on the slide that is there right now, it does point to some very successful wells on the west side of our Clearwater land base. And it shows you the areas where we're going to be active here in Q1.

Our next question is for Steve Buytels. What does 2022 capital look like?

Yes. We provided a base preliminary outlook here of $200 million to $225 million of capital for 2022. If you recall, when we released our 5-year plan, we have a range of $200 million to $250 million that we contemplate spending on an annual basis. So this would bring us on the lower end of that. And I would say, as we look through the year and we understand -- have a better understanding of where we are with the debt target in terms of being able to return capital along with the type of accretion that we could get to our debt-adjusted free funds flow, we may look to augment that later in the year. But for now, that aligns well with the 5-year plan offering, low single-digit growth. Now you'll have on top of that, roughly a 3% yield in the base dividend, and based on current strip, something more like 5% enhanced return yield on top of that.

Another question for Steve Buytels. Why is the debt target $250 million to $300 million and not 0?

Yes, that's a great question. So in our business, from an optimal capital strategy, when we look at these things, we want to build a business that is resilient at very low price. We have a free cash flow breakeven in the company that is in the low $30 WTI per barrel range. And with the dividend on it here, the base dividend would be sort of low to mid-30s range. So we've built a resilient business. We can handle obviously, lower prices. But when we look at that, it was set at a 1x debt target at $45 oil that we also hedge to protect down to those prices. So for us, long term, that makes sense. Does it mean that it's going to stay there and we won't pay debt down further to have dry powder to be opportunistic if we get into a lower part of the cycle, yes, potentially. We're -- as you can see in the return on capital bucket, we've allocated, for now, 75% of our free cash to go to debt to get us to that target and thereafter 50%. So we're not saying we won't go to a point where we're 0 debt, but I think optimally in our cap stack, it makes sense to run something there from a returns perspective.

Our next question is for Brian Schmidt. Are you seeing any pressure on service costs at this time?

I think, yes, everybody's got their eye on service costs because it's expected to be very busy in the first quarter. A couple of things I'll say on that. It looks like casing steel is probably up around 10%. I would say that if you're going to pull in frac crews, you're probably looking at a 10% increase on that as well. And then I would say the rest of the services are probably flat to maybe about 5%. The good news is for Tamarack is that certainly in the Clearwater, we're not doing any fracking in the Clearwater. So we're not affected by inflation of frackers there. And that will be our biggest growth area is in the Clearwater. Secondly, on casing that -- the Clearwater wells are relatively shallow. And so you're not running a whole bunch of casing per well. And of course, the legs are open hole. So we're not expected to be affected that much in the Clearwater. In the Charlie Lake, the casing, you're about 2,700 meters depth, so you'll be affected by casing, and we run the casing right to the end. That will affect that. But in terms of the fracking, these are relatively small fracs, probably about, I'm going to say, about 20% of the size of a typical Montney frac. So even on the frac side, we're going to be a little bit sheltered from some of the inflation you would normally see.

The next question is also for Brian Schmidt. Brian, how much of the production is waterflood simulated?

So right now, our waterflooded assets, we're producing about 6,000 barrels a day. We'll be expected to increase that to about 6,500 to 6,800 just based on the capital that we've spent this year. I'm very pleased on probably the biggest asset that we're going to be working is going to be the Eyehill. We just acquired that in February. We bought that specifically to implement a large-scale waterflood. We'll be doing about 12 injector conversions. We've just completed the drilling of the Belly River source water well that -- so we've got the source water to do the waterflood. And I would tell everybody that, that particular project is the highest profit to investment ratio project that we have in our portfolio. So we're very excited to see that. So look forward to continuing to ramp up. In our 5-year plan, we're continuing to ramp up waterflood production as we go forward. and roughly about $0.25 on every dollar that we spend in capital goes to waterflood to maintain -- keep your declines in check.

The next question is for Steve Buytels. What is the cost of production?

Yes. Thanks. So as we look forward here on a fully integrated basis, we talk to OpEx and transportation together when we forecast that out. But to split it out for next year, I'd see about $9 of BOE of OpEx in the company. And that really -- that includes inflation. One of the big drivers here that we're seeing pressure on would be power prices. That being said, given the Charlie Lake and the Clearwater are low-cost operations, that helps keep that in check for us and keep our netback really healthy. And then the other piece of that is transportation. That is about $1.75 a BOE, and that's going to change quarter-to-quarter depending on what we're doing to optimize and enhance netbacks specifically coming out of the Clearwater. So I think that's a good number to use for now. But I think, again, that will change. But if it does change, it's usually as a result of us achieving a much higher netback for that production.

Thank you, Steve. We have no more questions. Thank you very much for joining us today.

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