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

Good morning. Welcome, everyone, to Tamarack Valley Energy Limited Conference Call and Webcast on Wednesday, May 8, 2024, discussing the recent Q1 2024 results press release. I would like to introduce today's speaker, Mr. Brian Schmidt, President and CEO; Mr. Steve Buytels, Vice President, Finance and CFO; Scott Shimek, Vice President of Production and Operations. [Operator Instructions] Thank you. Mr. Schmidt, you may begin the conference.

Good morning, and thank you, Lester. Welcome, everyone, to the call to discuss our outstanding first quarter operating and financial results. I'm joined today by Steve Buytels, CFO; and Scott Shimek, Vice President, Operations. The first quarter of '24 was highly successful to Tamarack. It was our first full quarter of operating with the transformed asset base with over 90% of our production coming from our core Clearwater and Charlie Lake assets. During the quarter, production averaged 62,022 BOE per day, in line with our prior guidance range. With efforts focused on our core assets, we established a new high watermark in our Charlie Lake light oil assets which averaged 16,800 BOE per day for the quarter and achieved a record high production of 18,500 BOE per day for the month of March. In the quarter, we initialized production of 2 Charlie Lake wells that have record production, record 30-day oil production, the highest ever in the play. Looking to our heavy oil portfolio. We have seen significant year-over-year growth from our North Clearwater properties, where Q1 '24 volumes of 18,600 barrels oil per day, represented a 41% increase for Q1 '23. This result was pretty [indiscernible] due to the drill depth. The success was highlighted by our recent wells of West Marten Hills where the area C Sand production has increased over 1,800 barrels of oil per day and the B Sand wells are demonstrated better than forecasted rates with a flatter production profile. Our Marten Hills development program realized cost savings, up 10% on the latest eight well pad drilled in Q1. This pad is currently cleaning up and had initial production of over 1,100 barrels of oil per day. On our South Clearwater assets, we are seeing positive results from the implementation of the fan design. The approach -- this approach to drilling is strategic in this part of the play, given the sands here are thinner and so it enables us to access more reservoir utilizing less capital, wider spacing intervals and access more reservoir. Ultimately, that translates into higher recoveries, improved capital efficiencies, lower costs, which drive higher economic returns. So far, we have brought on 3 wells in 2024 with IP30 rates in the 200 to 245 barrels of oil per day range, with another 3 wells currently in the process of cleaning up for finished drilling. The Clearwater enhanced recovery continues to progress with our -- aligned with our expectations. At Nipisi, where injection is currently stable at 3,000 barrels per day, we are seeing good initial response and have 18 injectors supporting 12 wells with further injection growth forecasted in the second half of the year. At Marten Hills, the company plans to initiate its first C Sand waterflood pilot in the second half of 2024 to begin development of a stacked waterflood potential in the area exhibiting excellent primary production results to date. Finally, Tamarack's most prolific producer in Marten Hills, the 102/15-02-075-25W4, has now produced over 470,000 barrels of oil per day and has seen an increase in oil rate from 110 barrels of oil per day at the start of injection to more than 300 barrels of oil per day in early May, representing nearly a 300% increase. Looking ahead, we remain focused on our core assets. Our strategy includes continuing to increase oil weighting, reducing sustainable capital -- sustaining capital requirements and improving pricing margins as well as implementing projects with multiple payouts. I'll now pass it on to Steve to run through the financial results as well as our outlook.

Thanks, Brian. Having delivered adjusted funds flow of $182 million during the quarter which was a 15% year-over-year improvement, we were able to generate free funds flow of $53 million through disciplined capital phasing and strong pricing, all while achieving the solid operational performance, as Brian just noted, with production coming in ahead of consensus estimates. Reflecting our emphasis on returning capital to shareholders during the quarter, we returned over $46 million in the form of cash dividends and $25.6 million of share buybacks. This represented a combined return of capital value of approximately $0.08 per share. Looking forward at strip prices, we expect to reach the second tranche of our enhanced return framework in the second half of this year where we would direct 50% of the quarterly access funds flow to enhance returns through buybacks. Our strong financial performance was driven by our increased oil weighting, we were at 86% in Q1 '24 relative to 82% in Q1 of 2023. Higher realized price margins where we have been able to leverage improved market access and lower wellhead deductions, which contribute directly to the bottom line. We also improved our production costs, which were lower on a per barrel basis by 10% year-over-year, and we expect that to continue to improve as we move through the year. Looking to the balance sheet. During the quarter, we were able to repay both our deferred acquisition payment notes and term facility that have been utilized to fund the Deltastream acquisition in 2022. Subsequent to the quarter, we extended our bank line at $875 million. And at the same time, we were able to add an uncommitted accordion feature providing the ability to access an incremental $125 million of secured debt. This ensures we maintain financial flexibility without incurring additional standby fees for capacity. I'm going to pass it over to Scott Shimek for an update on our Nipisi production.

Thank you, Steve. The team at Tamarack has worked diligently over the recent weeks to recover volumes at Nipisi that had been shown as a result of the April 13 Mitsue third-party incident. Our success in rebounding from this unplanned outage is a reflection of the commitment to people in the field and in our head office. To date, we have restored all but 1,050 to 1,250 BOEs a day, of these volumes, approximately 60% is natural gas, resulting in only 400 to 500 barrels of oil currently being off-line. The production recovery to date is the result of the hard work, focus and creativity of our team and the utilization of various temporary mitigation strategies. These strategies include redirection of gas to an alternate third-party gas plant, gas injection and storage. Our team continues to explore additional solutions to bring the remaining volume stock online. With respect to the Mitsue facility, based on current available information, the preliminary estimate is to resume normal operations on June 30. We would note this estimate is subject to change as further information is received and is subject to a number of variables, including the availability of parts, materials and third-party contractors. Tamarack estimates that Q2 2024 production will be impacted by approximately 2,300 to 2,700 BOEs a day and an annual average 2024 production could be impacted by approximately 575 to 675 BOEs a day. Reflecting the strong performance of our Q1 2024 program, an existing base, Tamarack's budget guidance of 61,000 to 63,000 BOEs a day remains unchanged despite this unplanned outage and impacts of disposition as the company continues to track with our original budget volumes. I'll pass it over to Brian to wrap up our [ call ].

2024 is up to a solid start for Tamarack despite some temporary operational challenges. We are anticipating strong free funds flow in 2024, and the company is poised for a promising year. I want to thank our employees, Board of Directors, shareholders and stakeholders for all your continued support. The one thing [ is known ] as well, I want to note Scott's team in getting the Nipisi production back online. I think that's the difference between average companies and great companies as these guys found a way to accelerate production in a meaningful way. I'll pass it back to the moderator for questions. Thank you.

[Operator Instructions] Your first question comes from Jamie Kubik from CIBC.

Just wondering if you can talk a bit about the water availability in the Grande Prairie region and how that might impact your Charlie Lake program for the balance of the year.

Yes. So in -- just one thing to comment here is the fraction that we do in the Charlie Lake are orders of magnitude smaller. So we're not subject to large water volumes that perhaps, let's say, a Montney operator would be expected to do. These are small fracs just to get past well bore damage to open things up a little bit, but we're near the capacity. So we don't anticipate for those volumes that we're going to have any problems with volumes that we require for our fracs.

Okay. Great. And then can you talk a bit about the well outperformance that you saw in the Charlie Lake wells that you indicated in your press release, just what drove some of that? And is it repeatable and things of that nature?

Yes, good question there. And let me comment on the program. I think that some of the statements we're saying here that we're -- we're overcoming asset dispositions. We're overcoming some downtime, and that's largely due to outperformance not only in Charlie Lake, but also in some of the Clearwater performance we're seeing too in the form of reduced declines and there's still some optimization on these wells to go. In Charlie Lake, that -- a lot of people probably aren't aware, but there's a number of different layers in Charlie Lake. These are -- there's a lot of varying permeability and porosity. And so the geologists have been pinpointing on what specific areas have the best potential. In this particular area, we not only have some good perm and porosity there, but there's also -- it's suspected there was some water injection nearby that [ bang ] some oil towards these wells. So we'll see what happens with that. And for -- Jamie, you may not be aware, we are going to start a second -- another waterflood in Charlie Lake here, our first but -- waterflood here in this quarter. So I think it bodes well for that. So a little bit more steady work on our part to look at that. But we're certainly proud of that -- of those performances. Also, we've got another 2 wells that we'll be able to report on this quarter that are coming and look quite similar to those 2.

Great. And then maybe a couple more questions here, actually. How do you expect your capital program is going to phase over the next few quarters and what that might mean for free cash flow?

Yes. Steve will take that question.

Yes, you bet. Thanks, Jamie. So we left our capital guidance unchanged as you would have seen for the year there. So we did underspend and rephase a little bit of Q1 to manage debt and some of the free cash that we talked about. So as we look into the remainder of the year, you'll shift some of that Q1 really probably into Q2 and Q3. So we would see CapEx in that, call it, $120 million to $125 million now for Q2. Q3 will be around, again, $120 million to $130 million. And then Q4 is lighter by design because we will make a decision pending commodity price and the timing of the CSV plant start-up. But in the base budget, that would be looking around $40 million to $60 million as we sit here today. But again, in July, we'll be back to the Street with a decision on whether we go and pull some capital in for that CSV expansion that we've previously talked about. Does that answer your question?

Yes. That's good. And then can you talk a bit about the upcoming Investor Day, just some key topics that you want to address at that and how we should think about that coming up?

Yes, you bet. I think the big thing there is at year-end, you would have all saw us come out with that contingent prospective report in the Clearwater. So we want to really help, I think, investors understand the duration of our asset portfolio and the inventory, specifically in the Clearwater that we have. The other element is that Clearwater is unique in that we can not only develop it on a primary basis, but you all -- you're doing the secondary work or the enhanced oil recovery work really in conjunction with the primary program. So we want to bring some more light to how that's going to work and really what it means by lowering your declines in your sustaining capital going forward, which in turn should enhance free funds flow and the returns available to shareholders. So that will be a big part of it. And then you asked some questions around the Charlie Lake. I think that we'll spend more time there, letting the technical team walk through what Brian just talked about on how we're targeting to continue to improve our deliverability, our cost efficiencies and so forth through that play and really bring to light the strength of the inventory, the duration of the inventory and what that means for investors moving forward.

[Operator Instructions] There are no further questions at this time. Mr. Brian Schmidt. Please go ahead.