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

Good morning. Welcome, everyone, to Tamarack Valley Energy Ltd. conference call and webcast on Thursday, October 26, 2023, discussing the recent Q3 2023 results press release. I would like to introduce today's speakers, Mr. Brian Schmidt, President and CEO; and Mr. Steve Buytels, CFO. [Operator Instructions] Thank you. Mr. Schmidt, you may now begin your conference.

Good morning, and thank you, John. Welcome, everyone, on the call to discuss our third quarter operating and financial results. I'm joined this morning by Steve Buytels, CFO. The third quarter delivered solid results following on Tamarack's previous commitment to: firstly, high-grade our assets to the best plays in North America; secondly, to demonstrate disciplined capital deployment; third, focus on maximizing free funds flow through enhancing our margins; and fourthly, to position the balance sheet to achieve our enhanced return thresholds. Record production and significant growth in adjusted funds flow and free funds flow reflect the successful execution of the ongoing drilling and field activity across our portfolio of core development prospects. Benefiting from the infrastructure investment through the first half of '23, the company has increased our ownership and control of strategic facilities in our plays, resulting in enhanced market access, reduced exposure to third-party downtime and driving our cost structure lower. Tamarack has significantly expanded its Clearwater and Charlie Lake footprint to date. Tamarack's owned and operated Wembley gas plant continue to provide consistent and reliable processing capacity within the company's operational control. Since commissioning in mid-June, approximately 40% of the Charlie Lake production is processed through the facility. And Tamarack has materially reduced its exposure to third-party downtime at the Wembley to approximately 1.2%, and that's from June '23 to October '23, representing a material improvement from 12% downtime experienced from January '22 to May '23. At West Marten Hills, Tamarack is expanding its capacity at Marten Creek plant to increase gas conservation and reduce emissions intensity in our Clearwater development moves forward. This facility offers the potential to become a regional conservation hub and is expected to initially conserve 6 million standard cubic feet of natural gas per day commencing in Q1 '24. Lastly, Nipisi terminal and pipeline project, which has been commissioned with line fill, delivered in October. On the heels of this start-up, Tamarack was able to secure the sale of initial batches of its Clearwater heavy oil barrels in October for November delivery, which attracted premium pricing relative to existing benchmarks the company sells into. Moving on to production. West Marten Hills continue to see strong results as Tamarack has recently brought on 13 new B sand wells from 2 pads onstream with IP30 rates per well of 225 to over 250 barrels of oil per day. Demonstrating the stacked potential in this area, the company also brought 2 C sand wells onstream from these pads with initial per-well average of 245 to 314 barrels of oil per day. Tamarack plans to waterflood both the B and C sands from these pads, leveraging interconnect infrastructure to improve the economics of both zones. At Marten Hills, Tamarack increased water injection at 15-02 beginning in April '23 and observed a material subsequent oil response of 150 barrels per day higher than pre-ramp rates. The well now has produced over 420,000 barrels of oil on a cumulative basis, representing the highest recovery of any Clearwater multilateral drilled in the history of the play. In Southern Clearwater fairway, the company has drilled 4 wells year-to-date, utilizing the fan well design. 2 of the 4 wells have been producing for over 30 days, and the average IP of those 2 wells is 244 barrels of oil per day. The fan design drives efficiency through cutting future pad requirements by over 50%, resulting in lower lease and infrastructure costs. Secondly, single centralized pad can be utilized to develop over 4 sections of land. And thirdly, it increases the drill efficiency with more lateral meters per well and fewer turns. Turning to Charlie Lake. With the new Wembley gas plant onstream, Tamarack's Charlie Lake assets achieved a new record production of 16,200 barrels of oil -- BOE per day during the third quarter. Resulting in continued field development success, the 5 wells drilled ahead of the commissioning of the Wembley area achieved IP90 rates of 900 barrel -- BOE per day, with the strongest of these delivering an IP90 rate of 1,185 BOE per day. I'll now pass it on to Steve to run through the financial results as well as our outlook for the remainder of the year.

Thanks, Brian. Corporately, Tamarack achieved record production of 68,597 BOE a day during the quarter. This represents a 58% year-over-year increase and 16% uplift to debt-adjusted per share production on a quarter-over-quarter basis. With record production and strong Canadian oil prices, third quarter adjusted funds flow came in at $255 million, which was 44% higher than the same quarter in 2022. Net production expense dropped by 17% year-over-year to $8.47 per BOE, reflecting the impact of the company's Wembley gas plant, additional infrastructure development in the Clearwater area and higher production during the quarter. Another key driver of the increased funds flow was the heavy oil price realizations in the quarter. With our increased production base and scale in the Clearwater, our marketing team has been able to enhance our wellhead realizations. We expect to continue to see further improvement with the commissioning of the Nipisi pipeline and blending terminal, which was commissioned at the beginning of October. From a capital perspective, we spent $123 million during the quarter, which included $86 million on development capital and $37 million of facility capital. Third quarter activity included 41 and 40.3 net Clearwater heavy oil wells and 1 Charlie Lake light oil well. Net debt was reduced by 17% quarter-over-quarter to $1.128 billion as at September 30, reflecting the benefit of the significant free funds flow generation, noncore dispositions and assets held for sale at the end of the quarter. In terms of outlook, Tamarack continues to focus on maximizing free funds flow for debt repayment and enhancing shareholder returns as debt thresholds are met. Fourth quarter '23 funds flow is expected to reflect increased oil weighting, driving improving netback realizations through our continued infrastructure initiatives. Tamarack has updated its '23 production guidance to reflect the west central noncore Cardium asset disposition, which was previously announced on October 19, '23. Updated full year 2023 production is expected to be in the range of 65,500 to 69,500 BOE a day with fourth quarter volumes of 65,000 to 66,000 BOE a day. Production guidance reflects the strong performance of our Clearwater and Charlie Lake drilling programs and the impact of the disposition, which represented approximately 4,500 BOE a day for the fourth quarter and approximately 1,500 BOE a day for the year. Tamarack expects to provide 2024 budget guidance premarket on December 6. I will pass it back to Brian for some closing comments before we open it up to questions.

Thanks, Steve. Our continued focus on strategically enhancing the portfolio culminated with the recently announced noncore Cardium disposition. Tamarack provides investors with differentiated yet focused exposure in 2 of North America's most economic plays. Exiting 2023, we expect 88% of our production to be derived from our remaining core holdings in the Clearwater and Charlie Lake. We expect to deliver increased free funds flow resulting in continued material debt reduction exiting the year. As mentioned previously, this reflects the tale of 2 halves in 2023, with infrastructure investment in the first half enabling higher production and improved cost structure and price realizations through the second half, along with reduced infrastructure investments in the second half. I would like to thank our employees, Board of Directors, shareholders and stakeholders for all your continued support. I'll pass it back to the moderator for questions. Thank you.

[Operator Instructions] There are no further questions at this time. I will now hand the call back to Mr. Brian Schmidt. Please go ahead.

Our first question for the day is for Mr. Brian Schmidt. Given the strong implied economics are flowing through your Wembley plant, is there a plan for timing on expansion to Phase 2?

Yes. So with the wells we drilled here and filling up the plant, I don't see any material need for any future expansion. We wouldn't be doubling the size of the plant or anything like that. There will be some optimizations and some minor debottlenecking. That will enable some slight increases in Charlie Lake production, but nothing major here in the foreseeable future.

The next question is for Steve Buytels. Tamarack invested heavily in infrastructure in H1 '23. The second half of this year looks very different. Do you anticipate more large-scale infrastructure construction or capital deployment as you look to 2024?

Thank you, and great question. As Brian talked about in the -- in his opening statements, the first half of 2023, we did embark on some significant projects with the Wembley gas plant and then the Nipisi terminal and blending facility. So we do see that infrastructure capital ramp down significantly here in the second half. And as we look forward, I would say there's always a run rate amount of facility capital that will be spent as we continue to build out our Clearwater footprint with tying and building new pads, tying infrastructure and pipelines into central gathering facilities. But from a major infrastructure standpoint, no, we don't see anything that's going to be driven by Tamarack itself. There is a large third-party expansion in the Charlie Lake with the [ CSV ] plant that is going to be looking to be commissioned by late 2024, early 2025 that we will participate in. But again, that's a third-party expenditure, and we'll just look to flow volumes there and grow our Charlie Lake on the back of that.

The other thing -- this is Brian. The other thing I would add on to that is because of the investments we've made in infrastructure this year, in particular to the Clearwater, we'll be drilling more wells per pad here going forward. We've already increased the number of wells significantly per pad from last year. And we expect that trend to continue, thereby reducing the need for infrastructure, roads, pipelines, that sort of thing.

Our next question is for Brian Schmidt. With the recent Central Alberta disposition and the Wembley gas plant operational, can we expect a greater focus in the Charlie Lake area with more capital allocation? And will you continue to rebalance your asset portfolio?

Yes. So there's a couple of good questions there, one on capital, the other on M&A rationalization. Let's deal with capital first. Almost -- we had been focused on the Charlie Lake and Clearwater anyway on the capital side, so I don't see much change there. I think that's why when I reported 88% of our new production, our production is coming from our core areas, it's largely because a lot of capital has been going to Charlie Lake and Clearwater at the expense of the other properties. With respect to portfolio rationalization, with the Cardium out of the way, that's a big -- that was a big one. But we've been working on a number of smaller ones through the year. I expect we'll get some more cleaned up here by year-end. And we're always -- going into 2024, we're always looking at some rationalization opportunities. So I expect that to continue. But with 88% of our production coming from core, we've taken the major steps there in that direction.

Our next question is for Steve Buytels. With the significant debt reduction from the Central Alberta disposition and positive results this quarter, can we expect you to move to an enhanced return in the near future? And would you -- and would reaching the second threshold for increased enhanced returns become a possibility in the next 12 months?

Yes, great questions. So let's start with the first one around the Cardium proceeds and the free funds flow. At the end of the day here, it looks like, and we talked about that in the Cardium disposition press release, that based on strip and where we see things going, that we would reach the debt threshold by the end of Q4, which in turn would see us being able to deliver on the enhanced return on the back of us releasing our Q4 results. And in the press release today, we talked about our propensity and are leaning towards doing buybacks as such. So in short, yes, given strip holds in, we do see that first debt threshold being met. With respect to the second threshold or the 50% return, again, as we look through the year here and look forward, we haven't put our capital guidance and so forth out for '24. But again, on strip, with the way we're scoping things out, we could see ourselves getting close to that within the next 12 months.