Tamarack Valley Energy Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 26, 2023

There are 4 speakers on the call.

Operator

Morning. Welcome everyone to Tamarac Valley Energy Limited 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 Beitel, CFO.

Operator

Q3 Q. Thank you. Mr. Smith, you may now begin your conference.

Speaker 1

Good morning and thank you, John. Welcome to everyone on the call to discuss our Q3 operating and financial results. I'm joined this morning by Steve Beitels, CFO. The 3rd quarter delivered solid results following on Tamarac's previous commitment To firstly, high grade our assets to the best place in North America. Secondly, to demonstrate disciplined capital deployment.

Speaker 1

3rd, 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 reflected 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 twenty twenty three, the company has increased our ownership and control of strategic facilities in our plays, resulting in enhanced market access, reduced exposure to 3rd party downtime and driving our cost structure lower. Damarack has significantly expanded its Clearwater and Charti Lake footprint to date. Damarack's owned and weighted Wembley gas plant continued to provide consistent and reliable processing capacity within the company's operational control.

Speaker 1

Since commissioning in mid June, approximately 40% of the Chardy Lake production is processed through the facility and Tamarac has materially reduced its exposure 3rd 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 Martin Hills, Tamarac is expanding its capacity at Martin 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 6,000,000 standard cube feet of natural gas per day commencing in Q1 'twenty four. Lastly, Nipissippi Terminal and Pipeline Project, which has been commissioned with line fill delivered in October. On the heels of this startup, Tamarac was able to secure the sale of initial batches of its Clearwater heavy oil barrels in October.

Speaker 1

For November delivery, which attracted premium pricing relative to existing benchmarks the company sells into. Moving on to production. West Martin Hills continue to see strong results as Tamarac has recently brought on 13 new B sand wells from 2 pads on stream with IP30 rates per well of 2.25 to over 2.50 barrels of oil per day. Demonstrating the stack potential in this area, the company also brought 2 CSAN wells on stream from these pads with initial per well average of 2.45 to 3.14 barrels of oil per day. Tamarac plans to waterflood both the B and C sands from these pads, leveraging interconnect infrastructure to improve the economics of both zones.

Speaker 1

At Martin Hills, Tamarac increased water injection at 15:2 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.

Speaker 1

Secondly, single centralized pad can be utilized to develop over 4 sections of land. 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 on stream, Tamarac's Charlie Lake assets achieved a new record production of 16,000 200 barrels of BOE per day during the Q3. 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 11.85 BOE per day.

Speaker 1

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.

Speaker 2

Thanks, Brian. Corporate lead Tamarac achieved record production of 68,005 97 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, Q3 adjusted funds flow came in at $255,000,000 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.

Speaker 2

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 commissioning of the Nipissippi Pipeline and Blending Terminal, which was commissioned at the beginning of October. From a capital perspective, we spent $123,000,000 during the quarter, which included $86,000,000 on development capital and $37,000,000 of facility capital. 3rd quarter activity included 41,040.3 net Clearwater heavy oil wells and 1 Charlie Lake light oil well.

Speaker 2

Net debt was reduced by 17% quarter over quarter to $1,128,000,000 as at September 30, reflecting the benefit of the significant free funds flow generation, non core dispositions and assets held for sale at the end of the quarter. In terms of outlook, Tamarac continues to focus on maximizing free funds flow for debt repayment and enhancing shareholder returns as debt thresholds are met. Q4 'twenty three funds flow is expected to reflect increased oil weighting, driving improved netback realizations through our continued infrastructure initiatives. Tamarac has updated its 2023 production guidance to reflect the West Central non core Cardium asset disposition, which was previously announced on October 19, 'twenty three. Updated full year 2023 production is expected to be in the range of 65,500 Boe to 69,500 Boe a day with 4th quarter volumes of 65,000 to 66,000 BOE a day.

Speaker 2

Production guidance reflects the strong performance of our Clearwater and Charlie Lake drilling programs and the impact of the disposition, which expected approximately 4,500 BOE a day for the Q4 and approximately 1500 BOE a day for the year. Tamarac expects to provide 2024 budget guidance pre market on December 6. I will pass it back to Brian for some closing comments before we open it up questions.

Speaker 1

Thanks, Steve. Our continued focus on strategically enhancing the portfolio culminated with the recently announced non core Cardium disposition. Tamarac provides investors with differentiated yet focused exposure in 2 of North America's most economic place. 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.

Speaker 1

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 relations 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

You will hear a 3 tone prompt acknowledging your request. Star followed by the number 1. There are no further questions at this time. I will now hand the call back to Mr. Brian Schmidt.

Operator

Please go ahead.

Speaker 3

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

Speaker 1

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 Chardy Lake production, but nothing major here in the foreseeable future.

Speaker 3

Thank you. The next question is for Steve Vittell. Tamarac invested heavily in infrastructure in H1 'twenty three, 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?

Speaker 2

Thank you and great question. As Brian talked about in his opening statements, the first half of twenty twenty three, we did embark on some significant projects with the Wembley Gas Plant and then the Nipissi 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 Tamarac 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 is a third party expenditure and we'll just look to flow volumes there and grow our Charlie Lake on the back of that.

Speaker 1

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, 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.

Speaker 3

Thank you. 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?

Speaker 1

Yes. So there's a couple of good questions there, one on capital, the other on M and A rationalization. Let's deal with capital first. Almost we had been focused on the Charty 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 or productions coming from our core areas, it's largely because A lot of capital has been going to Charter Lake and Clearwater at the expense of the other properties.

Speaker 1

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 once 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.

Speaker 3

Thank you. Our next question is for Steve Vittell. With the significant debt reduction from the Central Alberta disposition and positive results 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 So

Speaker 2

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 reached 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 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 peer and look forward, we haven't put our capital guidance and so forth out for 2024. But again on strip, with the way we're We could see ourselves getting close to that within the next 12 months.

Speaker 3

Thank you. Our next question is for Brian Schmidt. Given the success of the fan wells in the South Clearwater that you mentioned, do you anticipate continuing to utilize fan designs in South Clearwater? And would you extend it to other parts of your Clearwater program?

Speaker 1

So, the way we're looking at the fan is We're taking our Tier 3 wells and making them into Tier 2 wells. And we're doing that through reduced infrastructure costs, we don't spend a lot of money with build sections and we don't waste a lot of Of a full section. So they are they really do enhance the economics of Clearwater in that 3 to 5 meter range, where you don't intend to do waterfloods. Waterflood design will and the Tier 1 stuff, I don't think I see us moving to fans on there. It's the areas where you don't do waterflood where we'd be focusing on fans.

Speaker 3

Thank you. Our next question is for Steve Vittells. You have seen a material reduction in the wellhead differential on your heavy barrels this quarter. Do you expect those improvements to continue in the future?

Speaker 2

Yes. So when we look at The wellhead differentials, obviously, there's on the heavy side going to be some seasonality into the diluent That you're going to need to flow in the winter and the colder months and in the summer months, obviously, there is no need for that or a much less need for that on the blending side. That being said, we talk about and highlight the infrastructure investments, specifically the Nipissippi pipeline terminal and blending facility. And building out our marketing team here and having the scale and the scope of a larger being the largest Clearwater producer, It's going to afford us some other opportunity that otherwise wouldn't be there. So when we take all of those things really together, they culminate in us forecasting tighter wellhead realizations moving forward and further improvement moving forward.

Speaker 2

But again, I would stress there's going to be seasonality in that. And Q3 was an absolutely exceptional quarter, A lot of kudos to our marketing team. But again, I think it's just going to reflect that overall margin enhancement in the business that Brian talked about start, the other thing I would add there too is we did sell our first batches of Clearwater Heavy, declared water heavy benchmark here in November, that is that's new to us. That's new as a result of our new pipeline terminal, that's in Mipassie, that's going to allow us to do it. That will ramp up over time.

Speaker 2

It's going to be a bit of a situation where the refiners need to get comfort with what that feedstock looks like and how they can obviously I use that in a manner that works for them. So again, we do see that continuing to, 1, give us a bit better pricing as we move forward and continue down that path and 2, obviously increase The amount of production that's going to be sold in batches to the refiners under that new Clearwater Heavy benchmark.

Speaker 3

Thank you. Our next question is for Steve Beitel again, where could operating costs go to in 2024?

Speaker 2

So we'll be careful here. Again, we'll give more detail on December 6 with respect to our 2024 budget, but as we highlighted in our Cardium disposition press release, we do see A 3% to 5% increase in corporate netbacks on a price neutral basis with the disposition, and that's a function of lower OpEx and then some higher realizations given the higher liquids percentage pro form a that we see as a company. But when we look at it for Q4 relative to Q3, I think we've always given guidance of $9,000,000 to $9,000,000 We hadn't changed that for the year. I'd say we're still going to be within that guidance here. And moving forward, we're probably in that low end of that range pro form a the Cardium disposition.

Speaker 1

And I'll add there, the 2 projects that we did in the first half We'll give long term permanent lower operating costs than what we've had. So they were pretty important projects from a cost perspective.

Speaker 3

Thank you. Our next question is for Brian Schmidt. Do you see any attractive consolidationM and A opportunities in Clearwater?

Speaker 1

Yes. You know what, Just to be clear, we've been focused on getting ourselves to the enhanced return and paying down debt. So it There may be some stuff come up next year. There's nothing active that we're working on, mainly because the focus has been on improving balance sheet.

Speaker 3

Thank you. Our next question is for Steve Fintels. What drives your decision to buy back shares versus a dividend increase? You mentioned that the priority is likely buybacks near term. When would that shift to dividend increase?

Speaker 2

Yes. So again, As we look at reaching that enhanced return threshold, just given the we look at the intrinsic value obviously of our business, to our peers, there just is a large value gap. There's no question. Tamarac from a share price perspective has underperformed on the year and comes back to this tale of 2 halves and this inflection point that we see today. So again, we see a lot of value in the underlying share price And that's the direction that we're going to be leaning and that's obviously monitored before we make those decisions based on many factors here internally.

Speaker 2

With respect to a base dividend increase, we've always predicated that that base dividend is something we're going to be really disciplined around and It's predicated on 25 percent of our free funds full at $55 WTI. So as we reduced costs in our business and the enhanced margin in your business, in turn that should afford us the ability over time to increase that, But we will not use the base dividend as the lever, if you will, for enhancing return. That will come through buybacks like we've talked about in the press release and or special dividends.

Speaker 3

Thank you. We have no more questions on the line, so I'll pass it back to the moderator.

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Key Takeaways

  • Record production of 68,005 BOE/d in Q3 (up 58% YoY) delivered adjusted funds flow of $255 M (up 44% YoY) while net production expense dropped 17% to $8.47/BOE.
  • Commissioning of the Wembley gas plant reduced third-party downtime from 12% to 1.2%, boosting processing reliability and lowering costs.
  • The Nipissippi Terminal and Pipeline project began operations in October, enabling Clearwater heavy oil sales at premium pricing.
  • Net debt was cut 17% quarter-over-quarter to $1.128 B through strong free funds flow and asset dispositions, with Q4 debt thresholds expected to be met to support share buybacks.
  • Updated 2023 production guidance now ranges from 65,500 to 69,500 BOE/d (65,000–66,000 BOE/d in Q4), reflecting the Cardium asset disposition.
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Earnings Conference Call
Tamarack Valley Energy Q3 2023
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