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

Good morning. Welcome, everyone, to the Tamarack Valley Energy Limited Conference Call and Webcast on December 7, 2022, discussing the recent press release. Today's call is being recorded. 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. We're pleased to announce our 2023 capital and operating budget. 2023 will represent Tamarack's most active program which focuses on high-return Clearwater primary and EOR development. The approved budget prioritizes the delivery of strong, sustainable free funds flow while pursuing a culture focused on safety -- focused on enhanced safety. For 2023, Tamarack plans to invest $425 million to $475 million, funded entirely through adjusted funds flow and equal to approximately 50% to 60% of total 2023 adjusted funds flow at budget pricing. Tamarack has built in flexibility with respect to capital allocations and we'll adjust accordingly to address volatility in commodity prices, including WCS differentials, if needed. I will pass it over to Steve for a run-through on further details relating to the plan.

Thanks, Brian. Our '23 program is highlighted by disciplined investment across our portfolio of assets, which is optimized to focus on free funds flow generation, managing our corporate decline through continued investment in our enhanced recovery projects and lower long-term costs through strategic infrastructure investment. We will direct approximately 55% of our capital program to primary development in the Clearwater and Charlie Lake, 20% to enhance oil recovery waterflood projects in the Clearwater as well as our Sparky pools, approximately 10% to infrastructure initiatives in the Charlie Lake and Clearwater assets, 5% to exploration and delineation to expand our inventory and finally, approximately 10% to ESG and corporate initiatives. At budget pricing, free funds flow will initially be directed to debt repayment and then enhance return initiatives as debt thresholds are met. I'll pass it back to Brian for some more details.

Primary development expenditures of $225 million to $255 million for 2023 will be focused in the Clearwater and Charlie Lake plays, drilling 69 and 19 wells respectively. Building on the success of waterflood initiatives, the company will be directing $95 million to $100 million toward EOR projects in 2023, with the focus on the Clearwater assets. Every 1% reduction in corporate decline rate equates to about $10 million to $15 million reduction in annual sustaining capital. So this adds to our debt-adjusted free cash flow per share. Given the scale of our current operations and our growth through 2022, increasing our infrastructure ownership and operatorship is critical to delivering on our development plans. With this in mind, Tamarack is investing in key projects to drive long-term savings, enable optimal flexibility to manage corporate production and enhance operating netbacks. Our 2023 program includes 2 key infrastructure projects. First one, the Nipisi Clearwater oil pipeline terminal project, Tamarack has signed on as an anchor tenant in a new Nipisi oil terminal project with third-party infrastructure partner. The project will provide pipeline transportation for 7,000 to 10,000 barrels a day of Tamarack operated production from our major Nipisi battery directly to Edmonton. Projected transportation savings expected to drive annual savings of $8 million to $15 million and will require Tamarack to invest approximately $20 million in 2023. The second is the Charlie Lake processing plant. Tamarack has completed [Audio Gap] with construction scheduled in early 2023. The project is estimated to be on-stream by the end of the second quarter [Audio Gap] standard cubic feet per day. In addition to delivering long-term operating expense reductions, this strategic investment secures required processing capacity to enable solution gas egress and to mitigate the risks associated with third-party downtime. Steve?

With respect to guidance for '23, we expect that our $425 million to $475 million of capital investment will deliver annual average production of 68,000 to 72,000 BOE a day. With the integration of the Deltastream assets now complete, we are seeing a reduction in operating costs corporately on a per unit basis, which we expect to average between $9 to $9.50 per BOE in 2023. With the low cost, low decline nature of our asset base, having transitioned into 3 of the top 4 of the most economic plays in North America, Tamarack continues to see a sustaining free funds flow breakeven cost of approximately USD 37 per barrel WTI, inclusive of our base dividend, which underpins the resilient nature of our business model. The company remains committed to balancing long-term sustainable free funds flow growth while returning capital to shareholders. With the transformational acquisition of Deltastream, debt repayment remains the immediate focus to achieve our enhanced return on capital thresholds, whereby we will return from 25% up to 75% of excess funds flow on a quarterly basis as our debt thresholds are met. I'll pass it back to Brian for some final comments.

Thanks, Steve. 2023 will be an exciting year for Tamarack, with plans to drill approximately 145 net wells and investments made to improve long-term sustainable debt-adjusted free cash flow per share. We offer a focused asset base with core holdings in place offering high economic returns and repeatable, predictable results. I'd like to thank our employees, shareholders and stakeholders for all their support in the past year. Many of our employees worked long hours and gave up holidays to make things happen that we did in '22. 2022 was a transformative year and it would not have happened without the hard work of our employees. We look forward -- we look forward to continue to develop our high-quality assets to create shareholder value in a sustainable and responsible way. Thank you.

[Operator Instructions] We'll take our first question from the line of Patrick O'Rourke with ATB Capital Markets.

I'm just curious with respect to the $95 million to $100 million in waterflood spending for 2023, what sort of volumes that considers that are today pre-injection basis? And when can we expect an impact on the production profiles of those assets, I would assume 6, 9 months or even into 2024?

Yes. Good, Patrick. So this is quite a unique waterflood in that what we're not doing here is going into an older reservoir and re-pressurizing and bring it back up and then waiting a couple of years for production impact. So in that $100 million, there's about -- about half of it goes to drilling -- producing wells that come on right away. And so yes, we call that all waterflood capital because we're going to be putting in injectors in at the same time. If you look in our corporate presentation, you'll find that we started injection after 120 days after the start of the primary wells. And we saw a response at about 190 to 200. Now I didn't put that aggressive production build in the forecast. But that's a far cry from waterfloods that our listeners might be used to, where you're waiting a fairly long time for fill-up. So -- and for a lot of engineers that kind of work waterfloods, you're better to go in right off the hop and put your injection right away, keep your pressure up. And that's what's delivering those superior results that we see in Nipisi right now.

And to your question on the production adds for this year with that. So when you look at just, like Brian said, half of it has the primary component with the way we set up the pattern. So you're going to see typical Nipisi and Marten Hills type of production with that. The other half, you'll see, just given the timing when we start those -- the real true just injection part of the floods probably is more like midyear. So you'll see a little bit of production this year. But based on the timing of, call it, give or take, 6-ish months or so, the majority of that really comes next year to the tune of probably a couple of thousand barrels a day, Patrick. So when you look at what Spur has done and having the success in the Clearwater on waterfloods, Headwaters had some success and then our Nipisi flood, which is a bit of a poster child for the line drive there, that pilot is doing 500 barrels a day, up from 300 barrels a day on that 1 well. So we're pretty excited. So again, you can see that the quantum of the ads and more importantly, like Brian highlighted, that 1% decline equates to $10 million to $15 million reduction in annual sustaining capital. So when we look and we put it in the press release, we think the 2023 investment forecasted on a risk basis is going to reduce our decline by roughly a couple percent. And you'll see annual savings of $20 million to $30 million in sustaining capital just on this '23 investment. So you can see how this sets up that longer-term balance and discipline in the plan around building free cash and sustaining that free cash, right?

Yes. I think you guys do a pretty good job, a very good job of conveying sort of the results on the 13 and 19 well in the presentation there. So when we think about the quantum of spending here $95 million to $100 million, I know this is only a '23 budget, maybe this will be part of the 5-year plan in January. But how persistent through the years do you foresee the waterflood spending levels being as we go out into the future years?

Yes. So we've been very cautious about putting waterflood into our 5-year plan. And right now really, the only thing we have in the 5-year plan is the capital commitments we did in '22 and these specific projects that we're going to do in '23. Anything that expansion on the waterflood after that will be gravy to the debt-adjusted free cash flow per share that we're expected to improve on later.

Yes. So -- and again, when you look at it, Brian has always talked about targeting 20% to 25% of your total capital investment into the waterflood corporately as we look at balancing the resiliency of the dollars we invest and balancing that PIR with payback. So this falls right in line, Patrick. So when you look at our sustaining capital throughout our 5-year plan that we would have presented to you guys before, we would see with the waterflood, which is part of that, you're probably in and around $350 million to $370 million annually, which would include your primary plus the waterflood plus ARO and the corporate pieces that you have to do to sustain your business and keep that production flat on a run rate basis over that 8 years. So again, this year is heavier with infrastructure and some of the other pieces we're doing. But true sustaining capital, inclusive of all this waterflood spend would be in that sort of mid-$300 million level for the company.

Really appreciate the color on the waterflood there. And then one other sort of very quick question. In terms of the overall capital budget level here, what sort of inflation is baked in there? And assuming a lot of those pressures are sort of on long-term contracts or medium-term contracts and protected for 2023?

Yes. That's a good -- that's a really good question because industry is really struggling with how to kind of forecast where costs are going. We have seen kind of a leveling out on our costs here in Q4. But there's a couple of areas where we're still a little bit concerned about. And so what we've done is we've built in about a 2% -- 2% to 3% growth over our Q4 estimates that we've got for next year. And we think that that's going to be -- that represents kind of a bit of cooling off on the high inflation rates that we had. And who knows what's going to happen with oil prices here, too? We have talked to the Board about escalation if the oil prices run, then that 2% might be a little light. But if they stay where they are, we feel pretty good about where we're at.

Yes. And when you look at it from '22 over '21 average, average was probably -- I think if you look at the industry, you'll find the median in between 20% and 30%, somewhere in there. And I think we probably would be in that range, too. And then through Q4 here, like Brian said, took that and ran that out. But -- and then on the operating side, labor is a big piece. Utilities is a big piece. So on the operating side, we're maybe a little bit more than that, 5% to 10% just to take into account diesel, fuel and some of the utility elements of the OpEx side of things.

[Operator Instructions] We'll take our next question from the line of Dan Payne with National Bank Financial.

So I'm just kind of curious, inclusive of the spend on waterflood and the Clearwater, what do you anticipate the aggregate growth in the Clearwater alone to be through the 2023 budget?

Yes. No, it's a great question, Dan. So if you look at where we are on exit and through next year on what we'll be doing, you're probably pushing around that 7% to 10% range in the Clearwater dependent. So you'll see that's really where -- what's seeing the growth given the really quick payback nature of those assets. But on top of that, the high PIRs and the compounding effect of the cash flows you see on a multi-time basis there in terms of multiple payouts on those wells. That's where the growth is. The Charlie Lake sees what I'd say small amount to flat growth just given the timing of our infrastructure coming on. And then on some of the plays that just aren't seeing capital investment, you see a little bit of the natural decline coming through to balance to the lower total corporate growth number of a couple of percent. So the Clearwater is obviously getting the majority of the capital, but also you're seeing the biggest growth there. I think the big key there though, Dan, as you know and as Patrick just asked about, you really have to measure it on almost look at '24 on the back of the waterflood spend there, too, which would be another couple of thousand barrels on top of that. So that's what would push that growth even higher if you look at it on almost a July to July type time frame with what you're really doing out of the winter program nature of the Clearwater, right?

Yes. And similarly, I'm kind of curious, like, so 7% to 10% production growth, I've got to imagine just with support of the waterflood and some of the infrastructure initiatives, et cetera. I mean the free cash flow growth that comes out of the Clearwater probably is disproportionate to that 7% to 10% number, correct?

Yes. Oh, yes, absolutely. Yes. I don't have the figures in front of me here from last year, but it was just amazing that you -- we just looked at the Tamarack without Deltastream. It's just amazing you can fund a very significant growth program, while at the same time taking a ton of free cash flow out. And I've been in this business a long time. I've never seen -- I've seen a lot of plays. I've never seen plays like this one where you can do that. Usually, you have to pause your free cash flow on an asset and then go put your growth in and get your free cash flow to pay for it later. Not the case with us. You're turning a lot of free cash flow over at the same time you're doing waterfloods, at the same time you're doing primary. Pretty impressive.

Yes. And with that, I've got to imagine that that kind of pushes those inflection points to free cash flow and return of capital and the enhanced dividend forward. So can you give us a sense for when you expect to hit those next inflection points towards increasing the enhanced returns?

Yes. And Dan, when we gave our prelim guidance out on the back of Deltastream there, we were guiding to the second half of next year. With where the differential is right now at the current time, that pushes that out a little bit into the later part of next year. But what I would say is when you look at that differential and all that's going on, we do see that as well as a lot of the commodity shops, see that coming back in. But that would really be just the primary driver of right now what we see pushing that out a little bit. But you're bang on. I think we've built a budget that's risked accordingly, but has a lot of potential to bring that hopefully forward to just given the way we would look at the risk production curbs and things like that and the waterflood response [indiscernible] and things like that in the Clearwater, right? So I think we do have some different levers there to make sure that that's a focus and that time frame, hopefully, can be honored.

This does conclude today's conference call. Thank you for your participation and you may now disconnect.