Tamarack Valley Energy Q1 2024 Earnings Call Transcript

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May 8, 2024

There are 6 speakers on the call.

Operator

Good morning. Welcome everyone to the Tamarac Valley Energy Limited Conference Call and Webcast on Wednesday, May 8, 2024. Discussing the recent Q1 2024 results press release, I'd like to introduce today's speaker, Mr. Brian Schmidt, President and CEO Mr. Steve Beitels, Vice President, Finance and CFO Scott Schimich, Vice President of Production and Operations.

Operator

Thank you. Mr. Schmidt, you may begin the conference.

Speaker 1

Good morning and thank you, Lester. Welcome everyone to the call to discuss our outstanding Q1 operating and financial results. I'm joined today by Steve Vittells, CFO and Scott Schimich, Vice President of Operations. The Q1 of 2024 was highly successful for Tamarac. It was our 1st full quarter of operating with the transformed asset base with over 90% of our production coming from our core Clearwater and Charlie Lake assets.

Speaker 1

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 Charley Lake light oil assets with average 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 Charti 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, twenty twenty four volumes of 18,600 barrels of oil per day represented a 41% increase over Q1, twenty twenty three. This result was currently delivered through the drill bit.

Speaker 1

The success is highlighted by our recent wells of West Martin Hills where the Area C sand production has increased over 1800 barrels of oil per day and the B sand wells are demonstrated better than forecasted rates with a flatter production profile. Our Martin Hills development program realized cost savings of 10% on the latest eight well pad drilled in Q1. This pad is currently cleaning up and had initial production of over 1100 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 accesses more reservoir.

Speaker 1

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 2.45 barrels of oil per day range with another 3 wells currently in the process of cleaning up or finished drilling. The Clearwater and Hass recovery continues to progress with our aligned with our expectations. At Nipissy, where injection is currently stable at 3,000 barrels per day, we are seeing good initial response and have 18 injectors supporting 12 wells of further injection growth forecasted in the second half of the year. At Martin Hills, the company plans to initiate its 1st C SPAN waterflood pilot in the second half of twenty twenty four to begin development of a stacked waterflood potential in the area exhibiting excellent primary production results to date.

Speaker 1

Finally, Tamarac's most prolific producer in Martin Hills, the 102-fifteentwenty fivetwenty five West 4 has now produced over 470,000 barrels of oil per day and has seen an increase in oil rate from 1 110 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.

Speaker 2

Having delivered adjusted funds flow of 100 and $82,000,000 during the quarter, which was a 15% year over year improvement, we were able to generate free funds flow of $53,000,000 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 $46,000,000 in the form of cash dividends and $25,600,000 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 2nd tranche of our enhanced return framework in the second half of this year, where we would direct 50% of the quarterly excess funds flow to enhance returns through buybacks. Our strong financial performance was driven by our increased oil weighting.

Speaker 2

We were at 86% in Q1 twenty twenty four 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 had been utilized to fund the Delta Stream acquisition in 2022.

Speaker 2

Subsequent to the quarter, we extended our bank line at $875,000,000 And at the same time, we were able to add an uncommitted accordion feature providing the ability to access an incremental $125,000,000 of secured debt. This ensures we maintain financial flexibility without incurring additional standby fees for capacity. I'm going to toss it over to Scott Schimich for an update on our Nipissige production. Thank you, Steve.

Speaker 3

The team at Tamarac has worked diligently over the recent weeks to recover volumes at Nipissi that had been shut in as a result of the April 13 Mitsu third party incident. Our success in rebounding from this unplanned outage is reflection of the commitment to people in the field and in our head office. To date, we have restored all but 1050 to 12.50 BOEs a day. Of these volumes, approximately 60% is natural gas, resulting in only 400 to 500 barrels of oil currently being offline. The production recovered to date is the result of the hard work, focus and creativity of our team and the utilization of various temporary mitigation strategies.

Speaker 3

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.

Speaker 1

With respect

Speaker 3

to the Mitsub 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. Amarac estimates that Q2, twenty twenty four 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 BOEs to 675 BOEs a day. Reflecting the strong performance of our Q1 2024 program and existing base, Tamarac'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 over to Brian to wrap up for Cole.

Speaker 1

2024 is off to a solid start for Tamarac 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 of note as well, I want to note Scott's team and getting the Nipissippi 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.

Speaker 1

I'll pass it back to the moderator for questions. Thank you.

Operator

Thank you. Ladies and gentlemen, we will now conduct the question and answer Your first question comes from Jamie Kubik from CIBC. Your line is now open.

Speaker 4

Yes, good morning and thanks for taking my question. Just wondering if you can talk a bit about the water availability in the Grand Prairie region and how that might impact your Charlie Lake program for the balance of the year? Thanks.

Speaker 1

Yes. So in just one thing to comment here is the frac sand 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 bracks just to get past a little more damage, 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 the volumes that we require for FRX.

Speaker 4

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? Thanks.

Speaker 1

Yes. Good question there. And let me comment on the program and all. I think that some of the statements we're saying here that we're overcoming asset dispositions, we're overcoming some downtime and that's largely due to outperformance not only in Chardy 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 Chardy Lake, that a lot of people probably aren't aware, but there's a number of different layers in Chardy Lake.

Speaker 1

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 banks some oil towards these wells. So we'll see what happens with that. And for Jake, you may not be aware, we are going to start a second another water flood in Chardy Lake here, our first, but water flood here in this quarter.

Speaker 1

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.

Speaker 4

Great. Thanks. 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? Thanks.

Speaker 2

Yes. Steve will take that question. Yes. You bet. Thanks, Jamie.

Speaker 2

So we left our capital guidance unchanged as you would have seen for the year there. So we did under spend 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 $120,000,000 to $125,000,000 now for Q2. Q3 will be around again $120,000,000 to $130,000,000 And then Q4 is lighter by design because we will make a decision pending commodity price and the timing of the CSD plant startup.

Speaker 2

But in the base budget, that would be looking around $40,000,000 to $60,000,000 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?

Speaker 4

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? Thanks.

Speaker 2

Yes, you bet. I think the big thing there is at year end, you would have all saw us come out with that contingent perspective 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 the Clearwater is unique and that we can not only develop it on a primary basis, but 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.

Speaker 2

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.

Speaker 4

Okay. That's it for me. Thank you.

Speaker 2

Thank you.

Operator

There are no further questions at this time. Mr. Brian Schmidt, please go ahead.

Speaker 5

I have some questions on the Q and A line. Our first question will be for Mr. Scott Schimmitt. Do you have any info on the transfer of wells and infrastructure of Manpower?

Speaker 3

Yes. The license transfer application was processed by the AER for that. And so that deal was closed prior to that and with the remaining step being the license transfer applications, which has now been processed.

Speaker 5

Thank you. Our next question is from Mr. Steve Vittell. Why haven't we paid down our debt this quarter? Net debt is flat since last quarter.

Speaker 2

Yes. So we talked about we generated just over $53,000,000 of free funds flow in the quarter. And really, what that free funds flow was used for was the $25,500,000 or $26,000,000 that I talked about for share buybacks and then we also had the base dividend for the quarter of about $20,000,000 So the net debt was flat Q1 over Q4 2023. As we look forward though, we see a significant debt repayment through Q2 through Q4 in conjunction with what we forecast for enhanced return and further buybacks. So again, we still see ourselves paying down a significant amount of debt through the year.

Speaker 2

Q1 was always modeled just given the magnitude of the Q4 and half return, which is paid out in Q1 to be larger and therefore, the debt was always modeled to be flat.

Speaker 5

Thank you. Our next question is for Mr. Brian Schmidt. Given the likelihood of water restrictions due to Alberta's ongoing drought conditions, is there any production that could be at risk as we enter the drier months this summer?

Speaker 1

Yes. So basically all of our waterflood operations and our we use basically water saline water. That's same for the veterinarian, all the Clearwater and down in I Hill. We do use a little bit of freshwater in any pool that's about 1,000 barrels a day. That won't be shut off.

Speaker 1

We'll just shut down the water injection if we get curtailed. There'll be a slight impact on the production, but nothing meaningful.

Speaker 5

Thank you. Our next question is from Mr. Steve Vittell. Given the free funds flow the company is delivering, when does Tamarac estimate that it will hit the next threshold in the return of capital framework of 50% enhanced returns?

Speaker 2

Yes. As I mentioned in the call there, at strip pricing currently, we would forecast hitting that next threshold sometime in the second half of the year here.

Speaker 5

Thank you. Our next question is for Mr. Brian Schmidt. You mentioned Tamarac recently drilled the strongest Charlie Lake oil wells ever drilled in the place. Was there anything different in the way the wells were drilled?

Speaker 5

And secondly, has it changed how the company views the type curves in the area?

Speaker 1

Yes. So in that specific area, we'll be moving type curves up, of course, based on these offsets. I would say that we have been adjusting the frac design on these wells. But I think the overarching result is the geology that we're putting into it right now and picking certain areas there that are high impact.

Speaker 5

Thank you. Our next question is for Mr. Brian Schmidt again. As Tamarac's debt continues to material decline, will the company look to any more acquisitions or stay focused on its current core assets?

Speaker 1

Yes, that's a really good question and one we get very often. I want to emphasize that this is the end of we've coming to an end of a specific strategy of portfolio management and enhancement. And this being the Q1 of our assets, we're happy with what we've assembled. There's a lot of use for cash. I would say that M and A is probably the furthest down the road for that use.

Speaker 1

We have way more inventory than what we have capital. We have water flooded inventory. And but the near term priorities for the company and you can see the way we're behaving today is to pay down debt, so we can buy back increase the buybacks of our shares. These shares are great value. We're trading well low and that's the best M and A we can give is our own stock.

Speaker 5

Thank you. There are no more questions on the Q and A. I'll pass it back to the moderator.

Operator

Thank you. There are no further questions also at this time. Mr. Brian Schmidt, please proceed with your closing remarks.

Speaker 1

Well, thanks. I want to thank everybody. Thanks to the shareholders for all the support they've given to us. And I think patience over the last 3 years as we've adjusted our strategy. I've been in the business a long time.

Speaker 1

This group of assets and this team is the best it's ever been. And I think you're going to see quarter on quarter these assets deliver as we go through. This is the first one where we've been clear and I think we've got a great path going forward. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect.

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Earnings Conference Call
Tamarack Valley Energy Q1 2024
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