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

Good morning, and welcome, everybody, to the Tamarack Valley Energy Ltd. Conference Call and Webcast on Thursday, July 27, 2023, discussing the recent Q2 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 now will begin your conference.

Good morning, and thank you, Daryl. I welcome everyone to the call to discuss our second quarter operating and financial highlights. I am here this morning with Steve Buytels, VP Finance and CFO. The second quarter remained focused on developing Tamarack's core areas by drilling 24 wells in the Clearwater and Charlie Lake, with well significantly outperforming expectations, plus adding strategic infrastructure that will drive lower operating costs and transportation costs, enhancing corporate free funds flow in the second half of 2023. Tamarack's dominant position in the Clearwater and Charlie Lake plays are the foundation of our long-term strategic plan, which is underpinned by leading low sustaining free funds flow breakeven in North America's most economic oil plays. Tamarack has significantly expanded the Clearwater and Charlie Lake infrastructure footprint year-to-date. I'm excited to share with you that we have completed the construction and commissioning of our owned and operated 15 million standard cubic feet a day Wembley gas plant, which will process associated natural gas from the company's highly economic and core Charlie Lake play. The plant was commissioned on budget and brought on stream June 9, 2023, 3 weeks ahead of schedule. Secondly, as development continues to expand across Tamarack's Clearwater lands, the company is investing in gas conservation and recently acquired strategic natural gas infrastructure at West Marten Hills. This facility offers the potential to become a conservation hub for the area and is expected to initially conserve 6 million standard cubic feet per day of natural gas commencing Q1 2024. The expansion of this facility is underway and expected to support long-term regional development of the Clearwater play, while also delivering line of sight to lowering Tamarack's emissions intensity. Lastly, Nipisi terminal and pipeline project continues to track on time, affording enhanced netback realizations through blending cost benefits and reduced transportation expense. In addition, Tamarack is working with third parties to establish a new Clearwater heavy oil benchmark, which could provide improved pricing over time. West Marten Hills results continue to exceed the company's expectations. Recent activity has Tamarack producing 3,750 barrels of oil per day in June from 13 wells on 2 pads in highlighting the highly prolific nature of the Clearwater program. Expansion of the Nipisi waterflood is ongoing with successful 13, 19 pilot, 13 and 19 pilot, which continues to produce at 390 barrels of oil per day having delivered cumulative production of over 190,000 barrels of oil to date. Water injection rates at Nipisi averaged 2,100 barrels per day in June and completion of the centralized water facility at the 15 to 22 battery in Q4 '23 will support the ongoing ramp of total injection exiting the year. At Marten Hills, Tamarack has more than doubled the rate of the 15 to 2 injectors since acquiring Deltastream in Q4 '22. Current injection is demonstrating a positive result as the offsetting producer are now 30% or 50 barrels higher than the production rates prior to increasing injection. Tamarack's first W pattern well conversion has been online since May and shows very encouraging injectivity. Moving to Charlie Lake. Production averaged 15,000 barrels of oil per day, representing 22% of the corporate production for the period. Benefiting from early commissioning of the Wembley plant, recent production Charlie Lake is achieving rates of approximately 17,000 BOE per day. This compares to rates of 12,500 BOE per day at the announcement Q2 '21, underscoring Tamarack's ability to successfully deliver on organic development, secure access and egress and ownership of key infrastructure while executing on and integrating strategic acquisitions to become a dominant Charlie Lake producer. Corporately, production for the second quarter averaged 66,738 BOE per day, which represents a 52% year-over-year increase. A successful second quarter drilling program was partially offset by the company's loss of about 1,500 BOE per day of production owing to direct and indirect impacts of the Alberta wildfire situation and unplanned third-party outages. Production impacts were largely restricted prior to June 30, with H2 production. I will now pass it on to -- H2 production expected to average 68,000 to 70,000 BOE per day. I'll now pass it on to Steve Buytels to run through the financial results as well as our outlook for the remainder of the year.

Thank you, Brian. Second quarter adjusted funds flow came in at approximately $157 million with free funds flow of $39 million. Looking ahead, the strengthening of the WCS differentials, coupled with the completion of our infrastructure initiatives that Brian alluded to, will contribute to a stronger forecasted net back through the back half of the year and over our 5-year plan. From a capital perspective, we spent $118 million during the quarter, including the drilling, completion and equipping of 19 Clearwater wells and 5 Charlie Lake wells. The enhanced scale and scope of our Clearwater operations has led to greater capital efficiencies offsetting the increase in unit cost inflation that occurred through 2022 and delivering costs not seen since the first quarter of 2022. We spent approximately $20 million in the second quarter on strategic infrastructure, including costs associated with the Wembley plant, and the Nipisi pipeline terminal. These 2 initiatives have the potential to reduce the company's free funds flow breakeven by approximately $1 to $1.10 per barrel U.S. WTI and are key to enhancing free funds flow generation within the context of Tamarack's 5-year plan and return of capital framework. We also published the 2023 Annual Sustainability Report, highlighting Tamarack's commitment to environmental, social and governance principles and sustainable practices during the year. Subsequent to the quarter, we entered into a definitive agreement for the sale of a minority interest in the Wembley gas plant and a gross overriding royalty on select Charlie Lake properties for total consideration of $39.5 million. Following the closing of the sale, Tamarack will continue to be the operator of the Wembley gas plant and will retain full access to 100% of the capacity. In terms of outlook, Tamarack continues to focus on managing or maximizing free funds flow for debt repayment and enhancing shareholder returns as debt thresholds are met. Second half 2023 free funds flow is expected to increase given the tighter WCS differentials, increased operating netback realizations through our infrastructure initiatives, resulting in lower OpEx and transportation expense, along with lower capital expenditures relative to the first half of 2023. Our capital budget range remains unchanged at $425 million to $475 million, and we maintain our prior 2023 production guidance range of 67,000 to 71,000 BOE a day. The production guidance includes the impacts of the wildfires through the second quarter, but is expected to be offset through the second half of the year by strong performance from our Clearwater and Charlie Lake programs. I will pass it back to Brian for some closing comments before we open it up to questions.

While the first half of 2023 saw significant investments in the Clearwater and Charlie Lake infrastructure to ensure development, thereby, we will reduce our cost structure. We'll continue to expand across the company's core areas. Capital balance for 2023 second half will be more focused on the drill bit. The company anticipates delivering increased free funds flow and material debt reduction exiting the year, reflecting a higher second half '23 production and a narrowing of WCS differentials. I would like to thank our employees, the Board of the Directors and shareholders and stakeholders for all your continued support. I'll pass it back to the moderator for questions. Thank you.

[Operator Instructions]

Ladies and gentlemen, our first question for today is, do you have any updates on the 8,000 barrels per day Cardium sale? And what type of pricing are you looking for here to make a deal.

Yes. Thank you, and great question. Update on the sale would be -- we're in the middle of that process here. Currently, we would expect bids to come in sort of through mid-August to late August. And in terms of the ranges on pricing and so forth, we won't get into that. I think the key here is the commodity price strength over the past month or so should help there, but we'll have to see how the bids come in and then the financing risk elements around some of those. But again, let's kind of target a mid-10 to August time frame in terms of when the bids will be due.

And our next question is for Steve Buytels again. Given the positive free funds flow outlook for TVE, what made the infrastructure/GORR disposition attractive at the current time?

Yes. So really, what we got to look at here in terms of the infrastructure, when we look at our cost of capital relative to the infrastructure company's cost of capital, it makes sense to crystallize that. We own and control 100% of the throughput on that plant in doing so. So we're not giving up anything from an operating standpoint there. It is a little bit convoluted as there was a core element to it. And the GORR was -- really, there's 2 pieces. There's some new Charlie Lake lines and then an amendment to one of the Clearwater GORRs or existing GORRs. So again, we won't get into much more there. But again, in an effort to ensure that we're maximizing our free funds flow, our debt repayment here through the back half of 2023 strategically, this was always something we were looking at to ensure we maintained 100% to that throughput, but could look at crystallizing some of the differences in cost of capital in an accretive manner with respect to the plant.

Our next question is for Brian Schmidt. Do you expect continued or even better capital efficiencies as a result of scale and scope in the Clearwater?

Yes. I think one thing where that we had good results with in the first half is increasing our focus on pad drilling. And this is actually dropping some costs here that we've got with our existing operations and that we're forecasting going forward. The other thing that we're trying is a [ Ven ] well design in Jarvie, and we expect that to bring in some good results, not just in lower cost, but actually an increased profitability through reservoir access.