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

Good morning. Welcome, everyone, to the Tamarack Valley Energy Ltd. conference call and webcast on October 28 discussing the Tamarack Valley Energy Limited Q3 2022 results. Today's call is being recorded. I would like to introduce today's speaker, 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. We're pleased to announce our third quarter financial results. Q3 was an outstanding quarter for Tamarack as funds flow generation and production continue to trend ahead of plan. We successfully closed the previously announced Viking disposition and announced the $1.4 billion acquisition of Deltastream. This has solidly positioned Tamarack as the largest producer in the Clearwater, which is recognized as the most economic play in North America. With Deltastream deal having closed on October 13, Tamarack is focused on asset development, funds flow generation and debt reduction in order to position the company for future enhanced returns as part of our return of capital framework. I'll pass it on to Steve Buytels, CFO, to run through our financial highlights.

Thanks, Brian. Tamarack delivered adjusted funds flow of $177.8 million and free funds flow of $79.4 million during the quarter. We exited the quarter with $286.8 million of net debt, which includes the proceeds from the equity financing completed in conjunction with the Deltastream acquisition in September. The equity financing represented the first material Canadian E&P bought deal financing since the first quarter of 2021, ahead of the acquisition, which closed in October. During the third quarter, we invested $98.5 million in capital expenditures to advance development in both our Clearwater and Charlie Lake plays where results continue to meet or exceed expectations. I will pass it over to Brian for an operations rundown.

Tamarack delivered production levels of 43,476 BOE per day during the quarter despite forecasted third-party downtime in the Charlie Lake area, which impacted volumes of approximately 1,500 BOE per day. Production has since been restored and is trending in line with our corporate forecast. We are also advancing plans to construct a new owned and operated gas plant in the region with engineering and design work under way. Phase 1 will add about 15 million to 20 million standard cubic feet of processing capacity and is forecasted to be onstream in the second quarter of 2023. Our Charlie Lake's results continue to impress, with the 15 to 24 wells drilled during the quarter, achieving IP30 rate of over 1,300 BOE per day. The Clearwater continues to deliver robust results as we advance development and exploration across our properties. In South Clearwater, year-over-year production has increased by over 6,500 barrels of oil per day, reflecting our acquisitions to date and ongoing drilling program. Development has been focused at extensions in Perryvale, with the results exceeding type curve. We have rig released 39 wells in 2022, with 36 of those now on stream across the Southern Clearwater asset base and an additional 6 wells remaining to be drilled prior to year-end. At West Marten Hills, we rig released 4 wells, including the Nipisi A sand test. 2 of the 4 wells are on production, with the Clearwater A sand exhibiting rates of over 200 barrels of oil per day. This opens up an additional 50 locations across our land base and is additive to the development inventory in our location count. Tamarack's strategy at West Nipisi is focused on optimizing our waterflood development moving forward. The company has rig released 15 of 17 wells planned from 4 different pad sites, all of which are being developed under Tamarack's Nipisi Clearwater waterflood configuration. We would note that the initial rate on our 6-well pad in this area is exceeding expectations with current pad production of over 2,000 barrels of oil per day. With respect to our Peavine/Seal Clearwater lands, Tamarack has licensed our first 8-leg multilateral well, and surface construction is ongoing with plans to spud this well in mid-November. At Seal, we are on track to spud our first 3-well pad in early December, which will test 3 separate Clearwater sands. With the Deltastream acquisition now closed, we are currently running 3 rigs on Deltastream lands, with activity ongoing through year-end. We've allocated $50 million of capital in Q4 that is expected to drill 22 100% working interest wells and includes the costs associated with ongoing pipe facility and surface construction projects. Total production from the Deltastream assets averaged 20,400 BOE per day through the first 3 weeks of October, with 13,300 barrels a day coming from Marten Hills and 5,300 barrels of oil BOE per day from the Nipisi area. I'll pass it over to Steve to run through our updated pro forma fourth quarter guidance.

To reflect the acquisition of Deltastream, we have provided updated Q4 guidance with capital expenditures expected to be in the range of $125 million to $135 million and production expected to average between 62,000 and 64,000 BOE a day. Looking ahead to next year, we plan to release Tamarack's 2023 full year budget guidance in early December. The company remains committed to balancing long-term sustainability free funds flow growth with returning capital to shareholders. As previously disclosed with the Deltastream acquisition, the company further refined its return of capital framework to balance debt repayment and enable future strategic acquisitions that bolster long-term inventory resiliency and increased clarity around delivering enhanced returns to shareholders through opportunistic share buybacks and/or enhanced dividends. Accordingly, Tamarack is in the process of applying to the TSX to renew the NCIB for November 2022 through October 2023. As previously announced, the company will increase the base dividend by 25% to $0.15 per share annually for the upcoming November dividend declaration payable in December. In total, Tamarack has increased its annual base dividend by 50% year-to-date from $0.10 per share to $0.15 per share annually. The increase in the base dividend is driven by the enhanced sustainable free funds flow achieved in conjunction with the success of our 2022 capital program and strategic Clearwater acquisitions, which are accretive to the 5-year plan at flat pricing of USD 55 per barrel WTI and $2.50 per GJ AECO. I'll pass it back to Brian for some final comments.

Thanks, Steve. 2022 has been an exciting pivotal year for Tamarack, and we're on track to deliver record production and funds flow while also balancing and delivering our commitment on return of cash to shareholders. I'd like to thank our Board, staff and shareholders and stakeholders for your ongoing support. Tamarack has established ourselves as a Clearwater -- leader in the Clearwater, and we're excited to be advancing our Charlie Lake in order to further enhance returns and future upside for our investors. I'll pass it over to the moderator for questions.

[Operator Instructions] Our first question comes from Trevor Reynolds with Acumen Capital.

I was wondering if you could go through what you're seeing in terms of cost inflations.

Yes. So we had a pretty thorough review with the Board yesterday on that. So if you kind of look at the big picture, relative to what we had budgeted at the -- in January, we're up around 15%. And so -- and I think we put in about -- if I go back to the year before, we probably put in an additional 5% the year before. So we're probably rolling in that 18% to 20%. Now in terms of going forward, it's always a question of, well, where do you think costs are going. And I think we're probably going to budget for a little bit more but not very much. I think we've probably seen a point where we're getting some efficiencies. We're getting some labor back in the market. Supply chain issues aren't quite as tight as they were before. So I think we're kind of seeing our way to a plateau, but we're not quite there yet.

Got it. And then just in terms of CapEx for Q4 up a little bit, I think, relative to where expectations were. Maybe you can just kind of break down where those -- where that additional spending is going.