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

Good morning, everyone. Welcome to the Tamarack Valley Energy Limited Conference Call and Webcast on Thursday, October 31, 2024, discussing the recent Q3 2024 results press release. I would like to introduce today's speakers. Mr. Brian Schmidt, President and CEO; and Mr. Steve Buytels, Chief Financial Officer. [Operator Instructions] Mr. Schmidt, you may begin your conference.

Good morning, and thank you, Nina. Welcome to everyone to the call to discuss our third quarter operating and financial results. My name is Brian Schmidt, President and CEO, and I'm joined here today by Steve Buytels, our CFO. The focus of the company in this phase of our strategic transition is to deliver consistent, reliable and improving results. This quarter backstops that objective with third quarter delivering yet another outstanding quarter for Tamarack and highlighted by the outperformance on our production volumes that averaged [ 65,024 ] BOE per day, driven by exceptional Clearwater and Charlie Lake drilling programs and our ongoing waterflood initiatives. Starting with our Clearwater portfolio. Q3 '24 Clearwater production increased to 43,300 BOE per day, reflecting a 15% or 19% per share increase year-on-year as Tamarack continues to expand its heavy oil operations. At West Marten, the company continues to see positive results from the stacked C sand delineation program with an IP30 rate of 200 barrels a day observed at the 02/13 well. Stacked sand development continues in the area where the company rig released 6 B sand and 2 C sand wells in Q3 '24 from its Section 14 pad. Given the strength of initial productivity in the area, the company plans to pursue waterflood in both sands. Our continued refinement of drilling designs and program optimizations are driving overall efficiency enhancement, lowering overall capital costs throughout our Clearwater development program. It has so far resulted in a 5% reduction in per meter cost across the Clearwater, highlighted by a 15% or approximately $10 million reduction in capital in the Marten Hills area. The application of fan designs in Clearwater have improved efficiency through lower costs and increased recoveries in areas where secondary recovery potential has not been established. Success of the fan is demonstrated through results in South Clearwater with a Newbrook 13-30 pad, continued to exhibit strong production in terms -- both in terms of IP rate and lower decline. The average daily oil rate exceeds 235 barrels per day after 7 months of production. This pad represents the best wells drilled by industry across the trend to date, and Tamarack's overall South Clearwater fan production has grown to 650 barrels per day. Results demonstrate that fan design contributes to lower shallower declines and higher per well estimated ultimate recoveries compared to the conventional design historically applied in the area. Clearwater secondary recoveries are executing strong results across multiple areas and sands in the play. Pilots initiated by Tamarack continued to demonstrate strong performance from secondary recovery, with wells trending ahead of expectations, indicating the potential to more than double primary EUR of the well. Total water injection across the Clearwater started the year at 2,000 barrels per day and is currently doing 8,650 and forecast to grow to 14,000 barrels a day injection by year-end, representing a 60% growth through Q4 '24. Waterflood activity to date has resulted in an estimated 1,500 barrels a day of incremental oil production and the company expects to have over 90% of its clearwater production supported by waterflood by year-end '24. Moving on to Charlie Lake. During the quarter, Tamarack achieved production of 16,200 BOEs a day, which continued to benefit from sustained outperformance related to wells brought on in the first half of '24, primarily in the Wembley area. Tamarack resumed drilling in the Charlie Lake play in July, rig released 4 horizontal wells in Q3 '24. Two of the wells were brought online in the Pipestone area that were drilled from the 14-34 pad and achieved IP30 rates of 1,320 BOEs per day per well. Also in Q3 '24, the company has brought online 2 Wembley wells from Section 11 pad that have exhibited encouraging test rates similar to the prior 2 Q4 '23 drills from this location. Looking ahead, we remain focused on our core assets. Our strategy is continuing to reduce sustaining capital requirements through waterflood initiatives, improved pricing margins and implement projects with multiple payouts. I'll now pass it on to Steve Buytels to run through the financial results as our outlook.

Thanks, Brian. Tamarack delivered adjusted funds flow of approximately $220 million during the third quarter and generated free funds flow of approximately $109 million. Year-to-date, Tamarack has generated approximately $298 million of free funds flow, which on a per share basis represents a 72% increase year-over-year. A couple of other key highlights from the quarter to mention. The strong production performance exceeded the high end of our prior guidance, and we'll get to more of that a little bit later with respect to an update to guidance. Continued cost reductions and better wellhead realizations are driving stronger margins across the business. We see the majority of these cost reductions carrying forward on the back of our infrastructure investments over the past few years. The expanded Clearwater Infrastructure Limited partnership added a 13th indigenous community and transferred an additional $50.8 million of Clearwater assets to the partnership for $43.2 million in cash and retained 15% operated working interest in the assets. During the quarter, we repurchased 12.3 million common shares. In total, during the first 9 months of the year, the company has bought back approximately 22 million shares, representing 4% of the year-end 2023 shares outstanding, for a total repurchase value of approximately $83 million. Total shareholder return value for the first 9 months of '24 was $144.7 million or approximately $0.26 per share, including base dividends of $61.4 million. In addition, during this period, we further strengthened our balance sheet with third quarter exit net debt of just over $807 million. In total, net debt has been reduced by approximately $176 million year-to-date. While share buybacks remain our preferred method to return capital to shareholders, the company has elected to modestly raise our monthly dividend by 2% per share. This will represent the fourth increase and a 53% uplift since announcing the inaugural dividend in December of 2021. In response to the continued strong well performance and benefits from the infrastructure optimization during the year, the company has increased the full year production guidance range to 63,000 to 64,000 BOE a day. The 2024 program, which is delivering higher production than originally budgeted, is forecasted to be achieved at a lower cost, benefiting from drilling and facility efficiencies. As previously released and utilizing a portion of the Clearwater infrastructure partnership expansion proceeds, we will drill 4 Charlie Lake wells in the fourth quarter, expand regional pipeline capacity in advance of the third-party plant commissioning of the CSV gas plant in early 2025. In addition to this, we will expand our waterflood investment program in the Clearwater. Tamarack anticipates spending for the year to be approximately $440 million, consistent with our prior guidance, which is inclusive of the incremental Charlie Lake wells, I just mentioned, and the waterflood investment as the company continues to outdeliver against the capital deployed. Tamarack is also updating our '24 corporate cost guidance on the back of the continued focus on reducing costs and enhancing margin with improved expenses for transport cost, carbon tax and interest. I'm going to pass it back over to Brian here to wrap up our call.

These Q3 '24 results continue to highlight the quality of the clearwater and the Charlie Lake asset base that has been built over the past 3 years as well as the operational excellence of the team that's driving this performance. Growth in the Clearwater of 15% relative to the same period '23 was achieved while at the same time, debt has been materially reduced and enhanced return to shareholders have been increasing. By demonstrating improved efficiencies, the company continues to deliver more while spending less. I'd like to thank our employees and all their hard work, the Board of Directors, shareholders, stakeholders for all your continued support. I'll pass it back to the moderator for questions. Thank you.

[Operator Instructions] And your first question comes from the line of Jeremy McCrea, BMO Capital Markets.

A question on your waterflood here. You talked about showing and putting a lot more expanding the play much more into 2025. Is there anything you're doing differently though, in terms of accelerating the voyage replacement here? And how much of your guidance reflects the improvement in potentially some of this waterflood? Like how easy is that to forecast when you expect to see the response from waterflood and how conservative have you guys been with that guidance, I guess? And then kind of the second part there is, what do you expect to see anything on your reserves here or some preliminary results that you may be having so far?

Yes. Good question, Jeremy. And listen, there's a lot of questions on waterflood and because it's been a while since we -- since the basin itself has been doing much waterflood. But the way I would look at it here, Jeremy, is that we haven't issued 2025 guidance with respect to what we're going to get out of the waterflood. I would look to get -- be able to give you some more clarity when we do that. I think that what I'm really excited about is that ramp-up from 2,000 barrels a day to 14,000 barrels a day. And if you don't put the water in, you're not going to get the oil out. So that's going to be a good leading indicator. If you kind of dissect the pattern by pattern, I would tell you, Jeremy, that most of the response has been a little bit faster than what the engineers have thought. And I'm encouraged by that. So I'm hoping that this ramp-up up to 14,000 barrels a day is going to significantly increase the percent hydrocarbon [ core ] volume we inject per year. And we should see some decent response coming here in '25. The good thing on all our patterns, and I think we all compare notes between -- we're all watching just waterflood between ourselves and [indiscernible]. None of the operators have seen some breakthrough problems that the water breakthrough. And so it's really encouraging that we're injecting water. It's soaking in. It's building up pressure. And you'd be much more -- you're much more confident of a nice uniform sweep when you see waterfloods exhibited that way. As one of the specialists told me that I worked with 3 years, he said, you guys are too careful with these floods, said, you got to get something to break. And we just haven't seen that. It's been -- it's a real exciting -- it's a really exciting waterflood, and I've worked on a lot of these over my years and this is really encouraging.

There are no questions over the phone. Please proceed.

Thank you, we will now go to the online Q&A. Our first question is for Mr. Steve Buytels. How should we think about Tamarack potentially being interested in M&A at current levels? Respecting that 2025 driven has not been an issue, how should we think about the company's strategic priorities for our general outlook for 2025 based on current oil pricing?

Yes. Thanks, Jamie. Let's start with '25, you're right. We haven't issued '25 yet. But I think when we look back to June at our Investor Day, we laid out a plan -- the 5-year plan for investors, which contemplated roughly $450 million of capital annually that we're going to spend and generate around a 3% to 5% CAGR over those 5 years. So that's kind of how we look at it right now and what we'd say about it. I think we're pretty excited when you see this momentum around the cost reductions we're seeing in the business as well as the well ahead realizations and the increasing realized pricing we're seeing as well that's going to help drive margin enhancement. But for now, I think that's what we can give. And I think it will be pretty consistent when we look at '25 in December here with respect to the budget. In terms of M&A, the way Brian and I really look at it is we're always going to look at the small, little good, strategic, synergistic thesis that could bolt on to our core areas. But I think you all would have seen that. We've really done nothing major. In fact, it's all been taking pieces out of the portfolio that don't compete for capital. We have such a significant amount of resource in the Clearwater here on the lands that we have, we really have to focus on bringing that value forward and Brian just talked about the waterflood opportunity. It is just significant. We've got 8.7 billion barrels of OIP here we have to go after. So for us, the best M&A right now is buying back our stock and bringing forward value to the waterflood as we look at things right now.

Thank you, Steve. Our next question is for Mr. Brian Schmidt. Are you seeing the potential for further consolidation across either of your place?

Yes. Like Steve said, most of this consolidation we're going to do is kind of where you get a 1 plus 1 equal 3. And I think the way investors would have to look at Tamarack is that we have so much inventory, drilling inventory and waterflood inventory that the priority for us is, as Steve said, buying back shares and executing -- doing your business such that you can accelerate that inventory and make -- create value for shareholders.