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

Good morning. Welcome, everyone, to the Tamarack Valley Energy Limited Conference Call and Webcast on Tuesday, February 25, 2025, discussing the recent Q4 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] Thank you. Mr. Schmidt, you may begin your conference.

Good morning, and thank you to the moderator, and welcome, everyone, to the call to discuss our 2024 operating and financial results. My name is Brian Schmidt, CEO, and I'm joined this morning by Steve Buytels, CFO. This morning, we are pleased to release our 2024 year-end results, where the company achieved annual production of 64,331 BOE per day, and delivered $851 million of adjusted funds flow, which was a record year for Tamarack. The rate of change is attractive to shareholders. The superior quality of these assets allows us to grow production while paying down debt, while buying back shares, while reducing sustaining capital in future years. The compounding effect is profound and demonstrates consistent year-on-year improving debt adjusted free cash flow per share. Through the course of the year, we achieved multiple deliverables, which I will flag as key takeaways when assessing our 2024 accomplishments. And then I'll turn it over to Steve for 2025. The first, margin enhancements. This is reflected in our netbacks where we are seeing higher realized pricing for our oil and lower overall costs. This flows through to the bottom line and also drives up our top-tier recycle ratios in the context of our reserve additions. Secondly, capital efficiencies enhancements. We deployed a disciplined capital program in '24 with CapEx spend of $439 million, in line with our prior guidance. The efficiencies of our program, however, enabled us to drill 4 additional Charlie Lake Wells which were brought onstream Q1 '25 without an increase to our 2024 annual capital plan. These efficiencies are also recognized in our reserves, where Tamarack was able to grow 2P reserves by 8%, while associated future development costs remained essentially flat. This speaks to the significant cost reduction we are seeing in the business due to the scale of the assets and the benefits of accessing stack pay with large pad development. The third point is production growth. Significant growth in our core areas was demonstrated in Q4 '24 versus Q4 '23 production. Our Clearwater volumes grew 10%, while our Charlie Lake was up 9%. Fourthly, the waterflood progression. This is driving down decline rates in the Clearwater, which supports long-term savings capital -- sustaining capital and drives further efficiencies into our business model. And the fifth, shareholder return delivery. In 2024, Tamarack bought back 6% of the shares that were outstanding at the end of '23. We increased our base dividend by 2%. And when combined with the production growth last year and debt repayment, we achieved a total shareholder return of 21% last year. Sixth, the long-term value creation identified through increased volume and value of our year-end reserves and recognition of the scale of our overall resource, which is reflected in over 2,000 identified Clearwater locations, supporting over 20 years of development at our current pace and our Charlie Lake resource, where we see the ability to maintain 16,000 BOEs per day for at least 10 years. Tamarack previously released our 2024 reserves along with our reserve report, which outlined the updated contingent and prospective resource for our Clearwater play. Tamarack saw an increases in all categories. Prior to the dispositions, our PDP reserves increased by 9%, and we replaced 130% of our production, while our TPP reserves increased by 8% and replaced 180% of production. The benefits of margin enhancement, as noted earlier, resulted in a field operating netback of $46.41 per BOE in '24. When combined with our low corporate finding and development cost, we delivered a PDP recycle ratio of 3.1x and a TPP recycle ratio of 4.2x, representing top-tier performance amongst our peers and the strongest in the company's history. I'll now pass it back to Steve Buytels to speak about what's coming up in '25.

Thanks, Brian. As we look at '25, we continue to focus on that continual rate of change that Brian just alluded to in the business. From a shareholder return standpoint, we continue to buy back our shares. In January, we bought back just under 5 million shares or approximately 1% of our 2024 year-end shares outstanding. In total, we've now repurchased approximately 45% of the shares and equity associated with the Deltastream acquisition in 2022. With respect to debt reduction, consistent with our return on capital framework, we will continue to put up to 40% of our free funds flow towards the balance sheet and see ourselves exiting 2025 at about 0.5 turn from a debt-to-EBITDA perspective. At Strip, we would see and forecast Tamarack reaching our debt floor in 2026. On the cost improvement side of the business, as illustrated in our '25 guidance, we continue to seek out efficiencies within our operations to drive low cash costs and see that moving lower in '25, while pursuing premium pricing for our products, to enhance the revenue side of our netback. Interest, carbon tax and other costs will be lower year-over-year. So again, we improved -- we expect to see improved cost through '25. On the waterflood, as Brian alluded to, this continues to be a big piece of our investment thesis, pushing our decline rates lower and enhancing our capital efficiencies in the business. This will also continue to drive strong reserve metrics on an F&D basis going forward. And then lastly, on the capital efficiency side of the business, 2025 will see us drilling more wells per pad in the Clearwater than the previous years. So again, realizing additional capital efficiencies and enhancements moving forward. On the operations front, our Clearwater focus will see ongoing waterflood implementation alongside our primary development. We're currently running 4 rigs in the play. And Brian will speak a little bit more on the waterflood here later in the call. With respect to the Charlie Lake, we continue to execute a 1-rig continuous program for the year and remain well positioned to deliver on our production commitments. With respect to CSV, Albright gas plant construction is underway, and we will await firm guidance or an update to guidance from the company here in due course. With that said, we do want to ensure that investors know, we'll leverage our owned and operated infrastructure, including our Wembley plant, to maintain our production outlook as we continue to flow new wells through alternative operated or ownership in different gas plants and shifting where we're drilling those wells in the Charlie Lake through the year. From a macro perspective, as we look into 2025 here, we strongly view heavy oil as fundamentally well positioned. There's low inventories in Canada coupled with the enhanced egress takeaway through the TMX startup positioning heavy oil well. When it comes to the tariffs, we don't obviously know what we don't know here. But what we will say is from an operating leverage perspective, Tamarack has a sustaining breakeven of approximately USD 38 per barrel WTI inclusive of our dividend. So there's lots of margin in our barrel to sustain any potential moves in the differential that may come with the potential for tariffs here. The other element of that really is what happens to FX, and a weaker FX will offset some of that move in the widening of the diff should that come through. So with that, we want to leave you with our guidance for 2025 remains unchanged, production of 65,000 to 67,000 despite the push in timing on the CSV start-up and our capital program of $430 million to $450 million remains intact. I'll pass it back over to Brian here to spend a little bit more time on the waterflood.

Thank you, Steve. As the implementation of waterfloods continues to evolve, we continue to see significant upside to our resource by increasing the application overall and by deploying technology earlier in the life cycle. The delineation projects have increased our original oil in place from 8.7 billion to over 11 billion, providing lots of resource for us to improve recoveries over time. Tamarack uses various waterfloods design across the Clearwater to optimize recoveries. Each design is catered to a specific reservoir characteristic and thickness. There's no one size fits all, and we will pursue different applications to optimize cost and capture resource. In the Clearwater, we've been able to commence water injection earlier after bringing wells on stream, which has materially shortened the response time. Overall, this contributes to lower declines, improved capital efficiencies, and we are seeing ultimate recoveries of up to 3x what we would expect on a primary basis. At Marten Hills, which is our asset with the longest dated Clearwater waterflood history, we've seen expected recoveries increase on key wells consecutively for the past 4 years. These wells are still showing material production inclines in response to ongoing injection. At our Nipisi pilot, we've now experienced 3 years of consecutive increased reserve bookings. Overall, the success of our program is reflected in our reserve report with Clearwater waterflood program achieving F&D costs of $6 per BOE in 2024. When we apply secondary recovery to our wells, we see opportunity to reduce our corporate declines and drive cost reductions through lower sustaining capital, which supports long-term value creation. We also see significant longevity in the model with over 2,000 Clearwater well locations identified within our published resource report and our reserves report affording over 20 years of development at the current pace. The key leading indicator is overall Clearwater water injection rate ramp-up. In early '24, we were 3,000 barrels a day injection, exiting '24 at over 12,000 barrels a day injection, and we will exit over '25 -- exit 2025 at over 20,000 barrels a day of injection. That's a sevenfold increase in 2 years, and you can expect the corresponding oil recovery to follow. Tamarack will continue to focus on development of long-life Clearwater and Charlie Lake assets to drive returns and create value for our shareholders. I would like to thank our employees, our Board of Directors, shareholders and all stakeholders for our continued support. I'll pass it back to the moderator for questions. Thank you.

[Operator Instructions] The first question comes from Jeremy McCrea at BMO.

A couple of questions here. The first one is just on dispositions. Do you -- what's -- as you look at the years here now and look at the success that you're seeing in the Clearwater, what is the plan for dispositions? Do you have a target rated? And the second part is just related to technology, what's the latest and things that you're seeing with technology in terms of drill costs or improvements in recovery, just anything that's going on along that avenue there?

Yes. A couple of good questions there, Jeremy. I'll talk to the drill cost technology, and I'll turn it over to Steve for the other question. On drilling costs, that's probably where we've seen the biggest change. You're probably aware, Jeremy, in the basin like costs have been -- where there's an inflation rate that you got to eat in, and we were seeing that. But when you look at the dollars per meter drilled we dropped that about $7 to $8 per meter last year. That freed up about $10 million of capital that we're able to deploy elsewhere. Where did that technology come from? We have more wells on pads. I think there's one pad that we look like we're designed now with 2 to 3 different layers. We're probably going to have some 40 wells on that. So it really drive down your cost. We've got these movable -- on lease movable rigs that you go from one to the other. And a lot of good project planning upfront has really aided that cost recovery.

Yes. And Jeremy, on your first question there around dispositions. So you would have saw we had in our press release there, we disposed of our Penny Barons Southern Alberta property there. Good property just didn't attract capital with respect to what's going on in the Clearwater and the Charlie Lake anymore. And then we do have a couple of other, what I'd call, more noncore assets there that we could look to move off of here. Again, as we now see the waterflood working as good as it is in the Clearwater, coupled with better results that we're seeing on a continual basis in the Charlie Lake. We'll look at, and we're actively evaluating different development plans and opportunities internally, and would look to potentially further move off some assets here as we move through '25.

[Operator Instructions] The next question comes from Jamie Kubik at CIBC.

I've got a couple of questions. So first one, operating costs in Q4, Tamarack was down to about $7 a BOE on a unit basis. That's the lowest I think the company has ever had. Can you just talk about how sustainable this level might be in 2025? I know you haven't changed your guidance, but maybe can you just talk about what drove it this quarter and maybe areas that you might give back in 2025?

Yes. You bet, Jamie. So there was a couple of onetime items that we noted in there in Q4 just around some lower municipal taxes and a few other things that came through that we were probably over accrued on through the year on some of the dispositions and so forth. But you are seeing a decrease in lease off expense moving forward as we've highlighted in our guidance. And then -- the other element of that, too, would be we did have a production beat again. So you're having more barrels to go around as well that helps to drive those per BOE metrics lower. So I wouldn't call that $7 run rate, Jamie. I do think as we continue to put more of our oil on pipe less trucks, if you look at more waterflood activity, less water disposal. And then as we dispose of assets that are not getting as much capital in our higher OpEx assets, that's a way for us to continue to drive that down. But again, we did highlight there were a few onetime items in that Q4 number.

The other thing I would add, Steve, Jamie, is -- when we start up those batteries, we're going pretty heavy on the chemicals to break emulsion, make sure that we're keeping online. And the guys have done a good job in the field kind of paring back those chemical costs. And that can get -- that can be a fairly significant piece of your operating that the guys have moved down, and we're still operating quite reliably.

Okay. That's good. And can you comment any further on the CSV facility, potential timing for commissioning, where that's at versus your expectation? I believe that was originally a Q1, Q2 sort of start date. But can you also comment just on how Tamarack might mitigate onstream timing through alternate means, which is something that you highlight that you don't expect any guidance change from that? Anything around that would be great.

Yes. Jamie, a couple of things there. Just noting the project. We're keeping close communication with the CEO there. He'll know in 2 to 3 weeks about what the timing and scheduling is going to be as they kind of get into some of those internals on the vessels and determine what they have to do to kind of repair a few things. The other thing that we've asked him to consider is starting one reactor, not starting up with two. And I'm -- and he'll know a little bit more information on that, too. However, we've been successful in grabbing some interruptible service and those wells we've actually put on production. And if you look at the overall guidance, you're right, it hasn't changed because we found other ways to kind of move wells around and work around the situation.

We have no further questions. I will turn the call back over to Brian Schmidt for closing comments.

Yes. So first of all, I want to -- I think all shareholders and people on the call recognize that this is a once-in-a-career asset to run. And we're very confident in its ability to deliver. The ability of these wells to pay out multiple times. We're not looking at 1 or 2x payback. We're looking at 5, 6. And even up to the waterflood, it's 9x payback. Those are very impressive numbers for an asset that flow through the debt adjusted free cash flow per share. So as time goes by, I think the key message I'd like to -- and key message I'd like to leave with you is that it's been a pleasure to run this asset, and we look forward to the future and shareholders will get year-on-year improvement. I want to -- I'm going to pass it to Steve for some further Q&A.

Yes, there's a bit of Q&A that we see online here. So I'll pass it back to our online correspondent there.

We do have some online questions on the Q&A chat. And our first question here is for Mr. Steve Buytels. Is there a way for management to create a yearly increase in return on capital?

For sure. So there's the return on capital and then the return on capital element, that's a part of that. The return on capital, I think everything we highlighted around the efficiency improvement that we continue to see in the business on the drilling side as we are drilling -- we're seeing some of those drilling savings that Brian mentioned. More wells on pads coming through. I think when we look at the waterflood working, the way the waterflood is working and driving sustaining capital lower and declines lower, you're going to be able to generate more return on capital, which then translates into the return of capital part of the equation. And when you look at that -- when you look at our total return last year, we were able to buy back 6% of our float. We were able to grow at 4% and then pay down another 7% on an equivalent basis of debt for 21% total return. So as we look at that and we look forward, we think we can continue to do even more as that sustaining capital goes down with the declines moving lower in the Clearwater as a result of that flood. So we've talked about this a few times, for every 1% reduction in corporate declines, about $15 million of less sustaining capital. And if you look through our 5-year plan, we get to about -- 3% to 5% reduction in corporate decline. And I'd say we're outpacing that as we speak or sit right now. So -- all in all, again, we see that we can increase return on capital and return of capital year-on-year just with the things that we highlighted there.

Next question is for Mr. Steve Buytels again. What would make you oppose the idea of holding production flat and using that capital for the 4% forecasted growth to accelerate the buybacks? Has it start to move the needle with 6% buyback?

Well, that's a fair question. We would argue that we -- 6% buyback moved the needle pretty significantly last year. When you look at the performance of Tamarack on a relative basis, I think we were one of, if not the highest performing energy stock in the TSX. I think what's unique to our business is specifically in the Clearwater, you can generate a lot of free cash and grow while investing less than 50% of the asset level cash flow. And when you look at the economics of the growth, it vastly outweighs buying back stock. We feel where our stock trades, that's still very attractive to buy back stock. So we like the combination of the growth plus the long-term buybacks, which deliver, in our view, outsized compounded per share returns to shareholders. So we do like the mix and -- it's interesting, we do have folks that like the buybacks and want to just see more of that. However, again, we do get a lot of questions just given the economics of the Clearwater, why we're not actually growing that harder. So we feel like we have the right mix. And as we continue to pay down debt, we'll have more optionality to either do more buybacks and/or a combination of more buybacks and more growth, which I think is pretty unique to our business.

Our next question is for Mr. Brian Schmidt. Given the success of the waterflood, does that change Tamarack's perspective on capital allocation?

Yes. So the waterflood, as I mentioned earlier, gets you anywhere from about 7 to 9x payback. And that's our strongest investment for sure. A couple of points to consider there. You do -- when you put the money in it, you don't get a return until the following year when you start to get response. So you have to balance how much you put in that. However, I would say, over time, as we pull our debt down, we'll be allocating more of waterflood going forward. And with 11 billion barrels of oil in place, there's certainly lots of opportunity for us to expand those floods in. So I would say, as I mentioned in my comments earlier, the best thing is to watch your injection rate. If you want to monitor how -- what to expect the following year, monitor the injection rate of a company the year prior, and it will give you an idea of where they're going with the waterflood.

Our next question is for Mr. Brian Schmidt, again. In the news release, you referenced 4,700 barrels a day of oil production, under waterflood and Clearwater. What sort of declines are you seeing on those wells?

Yes. So that's a good question. On the 4,700 barrels a day that's under waterflood, we actually think that it should increase over time, and that's without the need to drill any wells. So we've got a good chart in our slide deck that shows the drilling of that area over time. And then flat production with increasing water, you're actually going to see that area increase again. Also, if you look at the reserve bookings, as I mentioned on our waterflood patterns every year, they've been going up. And we haven't had our reserve report out too long and yet the water -- the W pattern for the waterflood has gone from 100 barrels a day up to 300 barrels a day since the reserve report was written. So we'll get a nice boost in reserves there as well. So I think shareholders are going to see increased production from those waterflood areas, not just flat, but increased production, and they're going to see increased reserves added with our capital.

Our next question is for Mr. Steve Buytels. What would pipe nearing capacity mean for Nipisi area development?

Yes. I guess we don't see the Nipisi pipe nearing capacity. You have 2 main pipelines coming out of there. You've got a Pembina system and a plane system. We have contracted space on both systems that aligns with our growth in our plans here. And both those companies are looking at regional expansion potential and so forth. So we don't see that the capacity issue being a thing. And again, we've taken the stance earlier on in development here to make sure we have secured enough barrels and room to get to Edmonton to align with our growth plan.

Our next question is for Mr. Brian Schmidt. What plans do we have for Canal? Does it include waterflood?

Yes. So Canal it's a smaller field just south of Marten Hills. It probably has our highest quality oil. And when we acquired the asset, there was not a waterflood scheme in place. We did start waterflood injection in 2024 in that area. And we'll be doing some drilling in the area as well. So we're pretty excited about Canal. And it's one thing that I want to leave the shareholders with is that we're not just stopping at waterflood at Nipisi and Marten Hills. We are testing out new areas as we go forward.

We have no more online questions for the Q&A chat. So I'll pass it back to the moderator to end the call.

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.