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

Good morning. Welcome, everyone, to the Tamarack Valley Energy Ltd. webcast on January 13, 2022, discussing this morning's press release. 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. I'm joined here today with Steve Buytels, VP Finance and CFO. We are pleased to announce our 2022 corporate budget, along with our updated 5-year plan and declaration of our inaugural dividend. We will continue to focus on building our commitment on delivering sustainable and responsible free funds flow growth. Our 2022 program is designed to provide an optimal balance of investment across our asset base with Clearwater as our growth driver, free funds flow maximization of the quick payout Charlie Lake and decline mitigation across our waterflood portfolio in Veteran and Eyehill. We've also updated our 5-year pro forma Crestwynd acquisition, which generates robust free funds flow greater than $1.1 billion at USD 55 barrels WTI and greater than $2.1 billion at USD 70 per barrel WTI. I'll pass it over to Steve to walk through our budget highlights.

Thanks, Brian. Our 2022 budget contemplates spending $250 million to $270 million pro forma of the Crestwynd and Clearwater acquisition, which includes the drilling of 126 gross or 116.3 net wells corporately and is funded through less than 50% of our adjusted funds flow at budget pricing of USD 70 WTI and $3 per GJ AECO for 2022. This level of capital investment will generate a production range of between 45,000 to 46,000, representing approximately 4% growth on a year-over-year basis. We expect to generate $250 million to $300 million of free cash flow, which will be directed towards funding the base dividend, further debt reduction and the potential for enhanced return of capital through buybacks and/or special dividends. Our updated 5-year plan is underpinned by significant free cash flow of greater than $1.1 billion at $55 WTI and greater than $2.1 billion at $70 WTI. The plan contemplates a production range of 46,000 to 49,000 BOE a day, which represents approximately 2% to 3% annual growth on average, on annual capital of $220 million to $270 million, representing 40% to 50% of adjusted funds flow. This provides significant optionality for returning capital to shareholders over the course of the plan as we forecast to be debt-free in 2023, assuming the $70 WTI price scenario. I will turn it back over to Brian for some additional detail on the budget breakdown.

We plan to direct about 40% of our capital program to the Clearwater, where we forecast to average 12,000 BOE per day of production with the plan to bring on 83 net wells. As part of the investment, we'll direct approximately $25 million to the Nipisi Waterflood program. 30% of our capital will be allocated to Charlie Lake, where we plan to drill 14 net wells with an additional two drilling uncompleted to be brought on this year. We look to maximize free funds free cash flow from this quick payout asset and keep production to 12,000 to 13,000 range, consistent with our prior guidance. We will further direct 15% of our program to Eyehill and Veteran waterfloods with a 2-rig program planned. In total, including the waterflood investment in Clearwater, we'll be allocating 20% to 25% of our entire capital program to EOR initiatives to manage declines for the company going forward. Finally, we expect to direct approximately 10% of our program to exploration and to continue to expand our portfolio opportunities with 5% of our budget allocated to ESG initiatives, including our abandonment and reclamation programs as well as further gas conservation projects in the Clearwater play. With that, I will conclude by thanking our employees, shareholders and other stakeholders for their support over the last year, and I look forward to continuing our high-quality assets to create shareholder value in a sustainable and responsible way. Thank you. I'll turn it back to the moderator for questions.

Our first question is for Brian Schmitt. On your map, it shows Crestwynd having a waterflood pilot in Jarvie. Do we have any results on that yet?

I think now we're just looking at the results they've got in Jarvie. We did not build any future plans in there and didn't pay for any waterflood secondary in Jarvie. But similar to other Clearwater plays, we'll be looking at the going forward. And we'll probably be using some of our results that we gain in our Nipisi program to see how we can expand that across the other Clearwaters.

Our next question is for Steve Buytels. Given a partial quarter of the Crestwynd, where do you expect production to land Q1 2022?

You bet. So just given the timing of our Clearwater program, and then obviously, the closing of the acquisition, we see the first quarter really being as the lowest quarter for us production-wise and then ramping up through the year. We see it probably in and around about 41,000 to 41,500 BOE a day. Like I said, when we kick off our Clearwater program, it takes about a good few weeks to a month to get up to those peak rates. So anything we're doing here in January, you're not really seeing into February. So you're only getting a couple of months of that. The real impact of that program comes through into April. And the same thing just with some timing through some of the Charlie Lake completions. So when we look at our layout of our production for the year, like I say, your Q1 is going to be 41,000 to sort of 41,500 and then we step up into that 46,000 to 47,000 barrel a day range for the remainder of the year of pro forma Crestwynd.

The next question is also for Steve Buytels. In the current commodity environment, when do you expect to reach your debt target of $325 million to $375 million?

Yes, you bet. So at the budget pricing of $70, we'd see that really in the third quarter, flat -- or call it, second half of the year. When we look at current strip, which would be average for the year about $75, you would see that accelerate to early third quarter where we'd see that start to come through. So it is dependent, obviously, here where we see some good strength in pricing, but let's call it, second half to be conservative.

The next question is also for Steve Buytels. Is the $1.60 to $1.70 BOE in tax -- cash taxes?

Yes. That's about what it would get to for the year here. Obviously, that's going to be dependent on commodity prices. But assuming the $70 per barrel WTI pricing and $3 AECO, we would be about $1.60 to $1.70 in cash tax.

Our next question is for Brian Schmidt. Spur has a polymer pilot case pilot close to us in Nipisi. Any indication yet on whether it's working?

Yes. So in doing our designs, of course, we extract the public data from the Spur asset. We see that waterflood is working and Spur itself has acknowledged that it's working as well. That's quite encouraging and gives us a lot of confidence in what we're doing in Nipisi. Our Nipisi on the west side is very amenable to water flooding because of the lighter crude that it has. And so we're looking forward to commencing injection here in the first quarter on that.

The next question is for Steve Buytels. What quantum of free cash do you anticipate being generated in the Charlie Lake?

Yes. So we see in the budget here, like we say, about 30% of our program being allocated there and on strip pricing here today, we see about $100 million, give or take, maybe even a little bit more of free cash flow coming out of the Charlie Lake. So that's really a function of keeping that production in that 12,000 to 13,000 BOE a day range that Brian referred to, which is consistent with the prior guidance that we've given. We probably more like average closer to the high end of that for the year. But the quick payout nature of those wells at strip here being, call it, 2 to 3 months, really allows us to maximize that free cash corporately out of that program.

Our next question is for Brian Schmidt. What formations or fields are contemplated for exploration?

Well, I think the most -- the likely scenario is a lot of the -- will be focused in the Clearwater and expanding our reach there. We'll also be doing some work in the Charlie Lake. So mainly, it's going to be around our core areas. In the waterflood, I guess you wouldn't call it traditional exploration, but we are also looking for waterflood opportunities that are away from our -- similar to our existing assets but can be -- then we can expand our operations.

Our next question is for Steve Buytels. How much production is hedged and for how long and at what price?

Yes. So when you look at us corporately, and we'll have an updated slide here in the deck up shortly on the website. And when we look at it, we'd be about 50% of our oil volumes protected for the year. The one thing I want to make sure we're clear on is we use structures for the most part that put a floor in. So we would average between $55 and $70 floor pricing protection, but all of the structures we have allow for significant participation upside pricing. So we really use a combination of what I would say are straight out puts and also enhanced collars that we may pay a budget for using a bit of a premium to get enhanced calls that we can sell on the upside, i.e. in the $95 to $100 range to protect the risk that goes both ways here. A good example when you guys see the updated hedging slide, you'll see back in the fall when we had the run up into the mid-80s, we were able to actually restrike some of our Q1 puts from $55 upwards to $68 to $70 floors, just ensuring that we lock in a minimum level of cash flow for the quarter. You'll see us do that through the year as we optimize the price strength but also ensure that we continue to bring that floor pricing up to deliver on the cash flow that we're illustrating here and ensuring that we can look to return some of that enhanced portion of the return on capital to shareholders.

Our next question is for Steve Buytels. The 5-year plan generates significant free cash flow. Do you see the opportunity to enhance the growth?

Yes. I think when we look at the 5-year plan, we look at it really from a total return standpoint. And as Brian highlighted, the numbers at $55 and $70 oil are quite significant, pushing over $2 billion on what would be more of a current price deck, which would have us debt-free through 2023. So we do have the opportunity, given we have quite a significant subset of inventory past the 5-year plan that we could bring in and accelerate that. But again, we look to balance that free cash flow use between debt repayment, return on capital and then that element to growth. And the growth can also take on some subsets of M&A like we just did to that Crestwynd acquisition.

Our next question is for Brian Schmidt. Tamarack has really emerged as a leader in ESG. Can you comment on the gas conservation projects?

Yes. So I think one thing we're very proud of is our GHG emissions per BOE. We're in top quartile relative to our peers on that. It's through a lot of hard work. We've -- as you know, when we acquired a number of the Clearwater assets, the gas was not gathered. It was being vented or flared on site. And we've invested last in 2021 about $10 million in gas collection systems. I think that's going to continue here in 2022. With the acquisition of Crestwynd, we'll be working on gas gathering in that part of the world as well. And so we should be -- after you get these all collected, we should be in top quartile on those assets in terms of GHG emissions.

There are no more 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.