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

Good morning. Welcome, everyone, to the Tamarack Valley Energy Ltd. conference call and webcast on Thursday, May 11, 2023, discussing the recent Q1 2023 results 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, and thank you, Paul, and I welcome everyone to the call to discuss our first quarter operating and financial results. I'm joined here this morning with Steve Buytels, VP Finance and CFO. Q1 was an extremely active quarter at Tamarack. At our peak, we had 9 active drilling rigs during the quarter. Success of our field program was highlighted by our exploration successes at Seal, Nipisi and West Marten Hills. The first quarter of 2023 represented the first full quarter of Tamarack having Deltastream assets under our control with the assets now fully integrated. Operational and capital synergies are beginning to be realized as Tamarack executes our expanded Clearwater development program. These Clearwater assets continue to deliver at or above forecast at the time of the acquisition with additional upside and potential capital efficiency improvements being identified. Today, I'm excited to share the results of our Clearwater Seal asset delineation activity highlighted by 3 stacked sands with all 3 brought on production through March, exhibiting IP30 rates of 380 barrels of oil per day combined. Two of the 3 wells, drilled with 6 legs, consistent with our drilling program, while one was drilled with 3 legs to test the productivity of that specific sand. The 'C' sand produced over 206 barrels of oil per day, IP30, with the 'B' sand greater than 130 barrels of oil per day and the 'D' sand, our 3-legged well, had IP30 rates of 43 barrels per day. So what does this mean to Tamarack? We have 17 sections in the area with 3 sands that present an incremental 7 sections with 2 sands of development potential at this time, which adds 16% to our overall Clearwater resource in place. Putting this a different way, we see the opportunity to produce 2,200 to 3,000 barrels of oil per day with a 1.5-mile development where 3 sands are present with a total full cycle capital cost per section of between $35 million and $40 million, driving significant infrastructure and pad savings and capital efficiencies of approximately $13,000 to $15,000 per flowing barrel or less. West Marten Hills continues to exceed the company's expectations, where production has grown organically from 400 barrels per day in Q4 '22 to over 3,400 barrels per day currently. At Nipisi, we're deploying multilateral injectors with 2 of the 14 injectors as part of our waterflood expansion. The application of multilateral injection in this area is expected to significantly lower overall project cost while achieving similar recoveries relative to single leg schemes. The original waterflood pilot producer at Nipisi has produced, cumulatively, 180,000 barrels per date -- to date and the water cut remains stable at approximately 20%. After more than 500 days of production, this well is still producing 400 barrels per day. At West Nipisi, the second well of our joint venture exploration program, exhibited peak IP30 rates of 175 barrels of oil per day, with the first well showing low decline, delivering an IP90 rate of 160 barrels of oil per day. Together, these results pushed the fairway of the 2 Clearwater sands further west. Tamarack expects future drilling on these lands given the success of the program. Corporately, production for this first quarter averaged 67,938 barrels -- BOE per day, which represents a 64% increase year-over-year and a 6% increase of the fourth quarter '22. The success of our drilling and exploration program, however, was somewhat muted by an unplanned TC Energy pipeline outage in March, which reduced total quarterly production 1,000 barrels of oil per day. Adjusting for this unplanned third-party event, production for Q1 was on track to exceed budget expectations. I'll now pass it over to Steve to run through the financial results as well as our outlook for the remainder of the year.

Thanks, Brian. Our first quarter adjusted funds flow came in at $157 million, which was slightly impacted by the lower commodity prices and the wider heavy oil differentials that we saw through Q1. Further to this, we did deal with the Keystone pipeline apportionment, which impacted our wellhead differentials or realized heavy prices by about $1.70 per barrel relative to what we would see more on a normal run rate basis. But when we look ahead, the WCS differential has narrowed significantly from Q1, and we see very little to no apportionment. So as such, we'd expect wellhead price realization to narrow moving forward here through Q2 and then onward through the back half of the year. On the operating cost side of things, we did have PPAs related to third-party non-op charges that hit in the first quarter. If we adjust out for those PPAs, our OpEx was at or below our guidance range, we continue to expect all of our guidance with respect to royalties, OpEx, G&A and interest to be unchanged for the year and within the ranges that we have provided previously with our budget. From a capital perspective, we spent $148 million in the quarter drilling, completing and equipping 32 Clearwater wells and 7.8 net Charlie Lake oil wells. We spent approximately $30 million on our major facility projects being the Wembley gas plant in the Charlie Lake and on our Nipisi pipeline and blending terminal. These projects remain on time and on budget and will drive significant OpEx and transportation expense reduction through the back half of the year, along with upside to our Clearwater netbacks at Nipisi through our blending terminal that will be in service. These 2 initiatives have the potential to reduce the company's free funds flow breakeven by approximately USD 1 to USD 1.10 per barrel WTI moving forward and are key to enhancing the free funds flow generation over our 5-year plan. We also announced an update and extension to our sustainability linked bank facility. The facility has been expanded to $875 million from $700 million and extended to 2026, while the term loan has been reduced down to $200 million from $235 million. Within our debt stack, we have reduced the deferred acquisition payments associated with the Deltastream acquisition by $93 million as that has been repaid -- and will continue to be repaid over the next 4 quarters. We continue to focus on advancing the rationalization of our asset base through the divestment of noncore holdings. This will help to accelerate debt repayment and get to our enhanced return thresholds. Subsequent to the first quarter, we entered an agreement to sell approximately 400 BOE a day of noncore natural gas assets, which includes approximately $4 million of undiscounted abandonment liabilities. Further to this, we currently have our Redwater Viking assets in market and plan to continue to divest additional assets in an effort to core up our portfolio in the Clearwater and the Charlie Lake fairways. With the ability to enhance our focus on these highly economic plays, we can capitalize on the successes we are seeing with our recent wells at West Marten Hills, which demonstrate a more than 30% improvement versus 2021. In addition, we continue to see success in the Charlie Lake where results are improving with execution over time and the installation of our first owned and operated gas plant will function to further enhance our economics by lowering our cost structure. In terms of outlook, as mentioned earlier, our guidance remains intact with respect to the expense components for 2023. We have updated our production guidance for the year to reflect the noncore asset sale along with the third-party impacts in the first quarter volumes. We will say we're still working through the Alberta forest fire situation. It does remain fluid here. And we will provide any material impacts or updates as that continues to provide more information. Our CapEx guidance remains unchanged at $425 million to $475 million. However, given the volatility in the commodity space, we will remain flexible and continue to target the low to mid-end of the range for 2023 to ensure the balance sheet and debt repayment remains in focus. I'm going to pass it back over to Brian here for some closing comments before we open it up for questions.

Thanks, Steve. While 2022 was the year that defined us as a Clearwater consolidator, 2023 is a year that will demonstrate our committed discipline to reshaping the asset base through exploration, rationalization to enhance profit margins, continue to pay down debt and position ourselves to grow free funds flow and return for shareholders. I want to thank our employees, Board of Directors, shareholders and stakeholders for all of your continued support. I'll pass it back to the moderator for questions. Thank you.

[Operator Instructions] Okay. It appears there are no questions over the phone. I will now hand the call over to Mandy, who will be fielding some questions from the online platform. Please go ahead.

Our first question is for Steve Buytels. Do you expect to look at any incremental M&A in the foreseeable future?

Yes. No, thanks. And that's a good question. I think as I just walk through here, we're going to focus in the short term here on accelerating the debt repayment. We did the Deltastream acquisition in the fall, which really cored up our Clearwater position. So now for us, it's going to be integrating and digesting that and then further rationalizing the portfolio. So I think if anything, that's going to be on more of the disposition side of our portfolio. And as I mentioned, we did a small deal here subsequent to the quarter, getting rid of some Southern Alberta shallow gas. You're going to see us -- like I said, we've got another Viking package in the market right now that's being marketed. And then we'll look to move off some other noncore pieces that just don't compete for capital with respect to the Clearwater or the Charlie Lake. So I think as we look into the -- through the summer and into the fall, we're hoping to have a few of those bigger assets out the door and come to investors with a nice reduction in debt and accelerate that enhanced return profile for the company.

Our next question is for Brian Schmidt. Could you give us an idea of the time line regarding development at Seal?

Yes. So it's pretty early on in the development. We'll be watching the well results that we see on a little bit longer term. And then in the meantime, we're going to be looking at some different kinds of well configuration. There's 1 zone there that's actually 12 meters thick. So we may be drilling 2 layers of wells, for example, in there. Once we get the development plan consolidated, then we'll get our permits and get issued up there. I don't expect a lot of Seal development to happen here, maybe some in the late Q4, but most of it will be probably in the Q1 of '24.

Our next question is for Steve Buytels. At current strip prices, when do you expect to hit your debt thresholds and shift focus to return of cash flow?

Yes. So obviously, with the commodity, with the WTI price coming off here over the last month or so, that pushes things out a bit, likely to Q1, I'd say, of next year, probably up earliest if you're looking at this sort of low $70 environment. That being said, the differential has come in a lot, which provides quite a bit of sensitivity to cash flow for Tamarack here, given where over 50% of our production is heavy oil. So I think continued strength in that is going to help. But then more importantly, like I just got finished talking about, we are going to find ways, and we're committed to find ways to accelerate that debt repayment and get to those enhanced return thresholds as soon as we can. So again, it's got to be the right business decision, a smart business decision. But again, we're still targeting to hopefully get there at some point in the back half of this year as we look at finding ways to bring additional proceeds in the door here.

Our next question is for Brian Schmidt. Are there any plans to revisit Peavine with a different approach? Headwater is going back to their Peavine with fishbone-style drilling.

Yes, that's a good question. And with the Peavine result that we had there, for those listeners that may not have been aware of the results, we ended up with a well with 40 barrels a day, hitting a zone where we had API gravities quite heavy. And that happens every once in a while in the Clearwater. It changes quite rapidly from section to section. So for example, just to the south, there's a nice Baytex well that's got relatively lighter oil. So we think that moving east, we'll be doing some delineation drilling starting the end of Q4 and then into Q1, and that will just be a pilot hole and testing for zone thickness. And we'll probably get an idea on viscosity as well. So it's a low-cost way to delineate the resource and that's what we'll be deploying in Peavine. But we still see some good upside in Peavine. There's lots of areas where we've got nice, thick pay. And so look for more of that to continue here into '24.

Our next question is for Brian Schmidt. Can you talk about the methods you're using to advance decarbonization? And are there other methods you're currently exploring?