Tamarack Valley Energy Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 1, 2024

There are 4 speakers on the call.

Operator

Good morning. Welcome everyone to the Tamarac Valley Energy Limited Conference Call and Webcast on Thursday, August 1, 2024, discussing the recent Q2 2024 results press release. I would like to introduce today's speakers, Mr. Brian Schmidt, President and CEO and Mr. Steve Vitels, Chief Financial Officer.

Operator

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

Speaker 1

Good morning and thank you, John. Welcome to everyone to the call to discuss our Q2 operating and financial results. My name is Brian Schmidt, President and CEO and I'm joined this morning by Steve Beitels, our CFO. The Q2 of 2024 was truly outstanding for Tamarac and was highlighted by outperformance on our production volumes that averaged 64,143 BOE per day. This was driven by success of Tamarac operations team in recovering volumes from the previously announced third party Nipissy outage and ongoing development success in the Charlie Lake.

Speaker 1

Starting with our Hill portfolio, we have seen significant year over year growth from our North Clearwater assets, achieving new record oil production growing to 19,500 BOE per day in Q2, 2024. This compares to 15,400 BOE per day in Q2, 2023 and represents a year on year increase of 26%. This is the result of continued success of Tamarac's drilling and drill development program. This production result was achieved despite operational headwinds at the start of the quarter. Our team responded quickly and was able to implement several solutions to restore the majority of the 6,200 Boe per day of production that had been shut in as a result of the downturn in April 13, 2024.

Speaker 1

The Metsu third party incident well in advance of the plant coming on back online in the end of the quarter. Actions taken by our operating team successfully mitigated downtime impacts reflecting the hard work, focus and creativity of the team. I'm very proud of the group. At Nipissy, we are seeing strong BSAN results from the 121476 8 West Sagpad where 5 B sand wells delivered an average of IP30 rates in excess of 215 BOE per day per well. These wells outperformed our expectations to date owing to higher oil quality.

Speaker 1

This is highly encouraging as Tamarac stepping out development in the south end of the Nipissippi Pool. The Nipissi Sea Sand Program continues to demonstrate success with 2 on the twelvefifteen pad achieving IP rates, IP30 rates in excess of 200 BOE per day. We plan on following up these results with additional CSAN drilling in H2 while leveraging existing infrastructure. At Martin Hills, Tamarac advanced key infrastructure with the pipeline portion of the Northwest Connector project completed on schedule and under budget. The emulsion line was commissioned Q2 2024 and the gas line is expected to start up in August.

Speaker 1

The eight well 430 pad which completed drilling in Q1 2024 saw production increase to over 1400 barrels of oil per day in June. During the quarter, the company rig released 2 fan wells with a total of 6 Clearwater fan wells being drilled in H1 twenty twenty four. Plans for the second half of twenty twenty four includes the drilling of an additional 8 fans for a total of 14 fan wells during the year. Notable results were reserved from the 2 New Brook wells drilled off the 13 of 3062 West 4 pad in 2024, which achieved the highest IP90 rates of all wells in the Southern Clearwater trend to date at over 2 25 barrels of oil per well. In support of the ongoing regional gas conservation of Tamarac's Rochester gas plant was completed during the second quarter, raising throughput capacity to over 3,000,000 standard cubic feet per day.

Speaker 1

The Clearwater waterflood program continues to ramp up with encouraging results to date. The company will ramp Clearwater injection activity in the second half twenty twenty four supporting waterflood development to reduce asset decline rates and sustaining capital requirements in the future. Injection will commence in new zones as well as existing, the new zones being the CSAN, West Martins and Canal where the company has identified high quality targets for waterflood. Total water injection is expected to increase over 110% from 7,000 barrels a day to 15,000 barrels a day of water exiting the year. Moving on to Charlie Lake.

Speaker 1

The program continued to drive production growth having achieved the highest the assets highest quarterly production to date delivering Q2 2024 with an average of 17,900 BOE per day. In total, 7 Tamarac operated charter day wells were brought on stream in the first half of twenty twenty four with average IP rates exceeding 11.80 BOE per day per well. Looking ahead, we remain focused on our core assets. Our strategy looks to include reducing sustaining capital requirements, improving pricing margins and implementing projects with multi payouts. I'll now pass it on to Steve Vitales to run through the financial results as well as our outlook.

Speaker 2

Thanks, Brian. Tamarac delivered adjusted funds flow in the quarter of $226,000,000 which was a 43% year over year improvement and we're able to generate free funds flow of $137,000,000 Key highlights included, as Brian mentioned, strong production performance due to quick recovery from the 3rd party Nipissi outage and ongoing development success in the Clearwater and Charlie Lake. Higher realized price margins where we were able to leverage improved market access and lower wellhead deductions, which contribute directly to the bottom line. Improved operating costs, which were lower on a per barrel basis by 9% year over year and we expect that to continue to improve as we move through the second half of the year. Reflecting on our emphasis on returning capital to shareholders, during the quarter the company repurchased 2,100,000 common shares.

Speaker 2

In total, in the first half, the company bought 9,700,000 shares, representing 1.7% of the 2023 year end shares outstanding for a total repurchase value of approximately $34,000,000 Total shareholder return for the first half of the year inclusive of the base dividends of $41,000,000 and enhanced returns was $75,000,000 or approximately $0.14 per share. Exit net debt of $883,000,000 marks a significant milestone arising within the $500,000,000 to $900,000,000 net debt range and advances the company to the next phase of the return of capital framework. This enables us to direct up to 60% of free funds flow to base dividends and enhanced returns, which is up from 40% previously, with the remaining free funds flow directed to ongoing net debt reduction and strategic growth capital allocation. We remain focused on capital discipline and execution of the business plan. Our full year annual production and capital guidance remains unchanged.

Speaker 2

The company expects to average 61,000 to 63,000 BOE a day in 2024 with spending in the $390,000,000 to $440,000,000 range. When we announced our budget in December, we had included a potential increment associated firm capacity Tamarac has committed to at the new CSB Albright Sour Gas Plant Expansion. We continue to monitor the CSV plant's progress and commodity prices prior to allocating any incremental drilling capital for volumes associated with that project. The status of this decision will be updated in the fall. With that, I'm going to pass it back over to Brian to wrap up our call.

Speaker 2

Thank you, Steve.

Speaker 1

We've transformed the company and are in the demonstration of execution transition plan. Tamarac has been steadfast in our commitment to reducing debt, demonstrating operational excellence and delivering our return of capital framework for shareholders. On a year on year basis, net debt has been reduced about $491,000,000 or 36%. This reflects delivery execution and delivery results driven by successful transformation of the company that has enabled growth within our Clearwater and Chardee Lane core areas where both plays delivered record quarterly production in Q2 2024. Leveraging our high quality heavy and light oil assets, Tamarac remains focused on our execution of our strategic plan, which underpins delivery of long term value to shareholders.

Speaker 1

I'd like to thank our employees, Board of Directors and shareholders and stakeholders for all your continued support. I'll pass it back to the moderator for questions. Thank you.

Speaker 3

Thank you, Brian.

Operator

Thank you. Ladies and gentlemen, we will now conduct a question and answer Please go ahead.

Speaker 3

Thank you, John. Our first question online is from Mr. Steve Faitel. Now that you have reached 60% return of free cash flow to stockholders, can we expect to see share buybacks accelerate?

Speaker 2

Yes. I think when we look at that, obviously, triggering this next phase, that results in incremental free funds will available to go back and with respect to the enhanced return through the buybacks. So when we look at it on budget pricing for the remainder of the year, which is at $75 WTI, we would see somewhere in that $50,000,000 to $65,000,000 available for buybacks through the back half of the year. So obviously, I walked through the numbers there in the first half of the year. We see potentially almost the ability to double that number of buybacks in the back half.

Speaker 3

Thank you, Steve. Our next question is for Mr. Steve Vittells again. Can you discuss the cadence of free cash flow and prospective buyback through the remainder of the year? And how do you anticipate executing the buyback, either tactically or mechanistically?

Speaker 2

Yes. So again, sort of similar line. On that budget, dollars 75 WTI deck, we'd be between $140,000,000 $150,000,000 of free funds for forecasted. Again, when we walk through the base dividend would be about $40,000,000 of that with respect to the 60% shareholder return threshold and you'd be in that sort of $50,000,000 mark with respect to the buyback. So again, what we'll look to do is the way the mechanism for us works is as you go through every month and we close our accounting month, we'll see what's there in terms of actual free funds formed and then we work and allocate our buybacks on the back of that to make sure that we're keeping that balance between the buybacks and debt repayment.

Speaker 2

But again, the cadence from H1 into H2 is pretty significant in terms of the increase with what we will be able to do for shareholders through buybacks here.

Speaker 3

Thank you. Our next question is from Mr. Brian Schmidt. Production from Q2 was materially higher than Q1 and outside of the high end of your guidance range. Can you speak to how the new Charlie Lake wells are performing currently?

Speaker 3

What the plans are for the asset in the second half of the year? And if there is any follow-up drilling offsetting the wells noted in your report?

Speaker 1

Thank you. So Q2, certainly the production came on much higher than anticipated. Let me talk to the Nitsu downtime first. We had originally scheduled a much longer timeframe, which was to get back up. The guys found very creative ways to deal with the gas and the regulator then allowed us to bring a lot of production back on.

Speaker 1

So the actual downtime with that was much shorter than we originally anticipated. And you may recall we had about 6,200 BOEs a day down for that event. In Charley Lake, you're absolutely right. Some of the I know the first two wells drilled in the 1st part of this year, they were the highest oil rate wells ever drilled in the Charlie Lake to my understanding. That is a it's just amazing you can take a play that was drilled in the 60s and you're getting your best wells now.

Speaker 1

So very pleased

Operator

at that.

Speaker 1

And also there are follow-up locations in that area where we would expect some success as well. When we came back on in Nipissippi on the Clearwater, the wells that we had drilled in the first half came on higher than expected. And you may recall we were in cleanup phase when the downturn occurred. So we didn't really know how much how well they would do, but they came on much stronger. And so it speaks to some of these areas in Nipissing where we're getting some higher quality crude in good process rock and we're getting much better rates than expected.

Speaker 1

Thank you.

Speaker 3

Thank you, Brian. Our next question is for Mr. Steve Vitthal. Can you speak to the estimate production breakdown for the balance of 2024 in the context of light and heavy oil production?

Speaker 2

Yes. I mean the majority of the growth as we highlighted or Brian highlighted earlier comes out of the has been coming out of the Clearwater. With the Cherry Lake seeing some significant growth in the first half to date. But ultimately, when you look at our breakdown of our oil, we see about 75% of our oil being heavy oil and 25% being light oil, which is driven primarily by the Charlie Lake. There's a little bit of condensate in there too and other liquids.

Speaker 2

That could bring that number up a little bit.

Speaker 3

Thank you, Steve. Our next question is also for Mr. Steve Vittell. Does Tamara plan to supplement the share buyback program with any special cash dividends to shareholders?

Speaker 2

No, I think it's pretty simple. We've been pretty clear. And if you look at our Investor Day, how we look at the business is long term buybacks are going to be key to our strategy. And when we look at growth, we look at growth on a per share basis. So it will be a combination of that organic or inorganic growth, coupled with the long term buybacks to drive material per share growth in the company moving forward.

Speaker 2

So that's our plan. And in the short term here, we have no plans for any special dividends.

Speaker 3

Thank you. Our next question is for Mr. Brian Schmidt. With water injection ramping up this year, when will Tamarac be able to speak to the response to this activity?

Speaker 1

Yes. So when you look at the patterns that we've seen in the past, we've been surprised to the upside of how fast those patterns respond. And it doesn't matter seem to matter if it's Embassy or Barn Hills, you're seeing similar types of trends. The thing that I'm excited about is we're trying a number of different patterns configurations. And so the response times are likely to be different on any of them.

Speaker 1

But I would say that optimistically, we're probably looking at gas compression, suppression within 4 to 6 months, flattening of oil response in that same time frame and then a pickup after that.

Speaker 3

Thank you. Our next question is for Mr. Steve Vittells. With the big reduction in year over year debt, what is the outlook going forward? And when do you see the company hitting the next threshold level for their turn of capital framework?

Speaker 2

Yes. And obviously, that's dependent on capital spend and we haven't come up with our budget yet. But again, if we tie it back to the Investor Day, we contemplated annual capital of roughly $450,000,000 in that 5 year plan. And with that, we were getting to that next step threshold in later 2026. And again, really it's a function of the step up now in the enhanced return going from 40% to 60%.

Speaker 2

You just have some more of that free funds will being allocated back to shareholders. But one thing we see here is we're really happy as a company where our debt levels are and the significant reduction that's been undertaken over the past year or so. So we're very comfortable with where we're at. We'll continue to balance that debt repayment with shareholder returns. And again, like I said, we see that 2026 timeframe at $75 TI and that cadence of spend that I spoke to achieve the next threshold.

Speaker 3

Thank you. Our next question is from Mr. Steve Vitols again. Can you help frame the size of the potential capital spend related to the CSV facility that could impact the 2024 budget and a further detail of the potential wells required to meet Tamarac's commitment into that facility.

Speaker 2

So maybe what I'll do is I'll talk a little bit about the capital and then I'll let Brian speak to some of the more operational elements of the CSV expansion. But we've been pretty clear through our messaging even with or at the Investor Day we got this question. We originally contemplated that that could be up to $40,000,000 to $50,000,000 in 2024. We don't see that getting up to that level. If anything, we would see it potentially being about $20,000,000 where we have a little bit of pipeline work to do to tie some pads and to be able to access that CSV plant.

Speaker 2

And then we would look to drill 4 DUCs. So that would really be the extent that we see of the 2024 budget related to CSV. That being said, again, we'll not monitor it with gas prices, where gas prices are, it just we want to just take our time here and we also want to make sure that we're not stranding capital and the timing of the expansion is on track. Now gas doesn't drive the economics of the Charny Lake play. That's the liquids element of it.

Speaker 2

But again, we just want to be careful here and by the time that we see that we have. Brian, I don't know if you have any comments with respect to CSV that you want to add.

Speaker 1

Yes. I think the there's 2 things that are triggering our decision to go forward. One is the gas prices, as Stephen mentioned. The other is the do we really feel that the plant is going to come on at on time and at the levels required. And I just don't want to get into a position where we've deployed a lot of capital and then we're waiting for plant reliability.

Speaker 1

And so I think we would much rather even at the risk of paying a little bit of take or pay, let that plan come on and get it running and then we're certain that our capital investment is going to be working for us right off the hop.

Speaker 2

And maybe one thing to add around that take or pay. We can redirect a good chunk of our own gas that's on production currently to satisfy the majority of that take or pay. So we don't see that as a short term risk even if we decide to delay some of that spend.

Speaker 3

Thank you. Our next question is from Mr. Steve Mitchel. What is the percentage goal for operational improvement going forward?

Speaker 2

Yes, we've never really come out with a goal per se or that. But if you look within our guidance and you look at the midpoint and you true up where we were in the first half of the year and then where we would see things in the second half of the year, we would see a 4% to 5% improvement in operating costs in the back half relative to the first half. And this is this whole rate of change in margin improvement is a key focus for our team here. And it's really been driven by getting more of our product in pipe, reducing trucking. When Brian talked about the water flood, the nice thing about the water flood is this is all produced water, recycled water.

Speaker 2

So rather than having to take water for disposal, you're using it for your floods, not only in the clear water, but also we are piloting a flood here that we just started in Charlie Lake, which helps reduce our water disposal costs there as well. So when we look at OpEx and we look to really drive that margin enhancement moving through the second half and then through that 5 year plan that we brought forward at the Investor Day.

Speaker 3

Thank you. We have no more questions on the online Q and A. So I'll pass it back to the moderator for call questions.

Operator

Thank you. There are no further questions at this time. I will now turn the call over to Mr. Brian Schmidt. Please continue.

Speaker 1

Well, I think that concludes today's call. I think that most shareholders will appreciate the significant change that the company has gone through over the last 3 years. This is a very comfortable position to be in a company now with loss of in fact decades of high quality drilling inventory, lots of future in terms of waterflood in the Clearwater and we're hitting our stride. And I think this has just been an amazing quarter and you can tell by what's causing the performance in the quarter that the company is going to be pretty strong in the following quarter share too. So we're very excited about it.

Speaker 1

If you have further questions, please put them through our website and we'd be glad to answer them. Thank you very much.

Operator

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

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Key Takeaways

  • Q2 production averaged 64,143 BOE/d, exceeding guidance thanks to quick recovery from a Nipissy third-party shutdown and Charlie Lake drilling success.
  • North Clearwater oil output hit a record 19,500 BOE/d, up 26% YoY, with swift solutions restoring 6,200 BOE/d of outage losses ahead of plant restart.
  • Nipissy SAG program wells delivered IP30 rates above 200 BOE/d, outpacing expectations and prompting additional CSAN drilling in H2.
  • Infrastructure & waterflood projects were completed on time and under budget—including new pipelines, August gas line start-up and a 110% increase in water injection capacity to 15,000 bbl/d.
  • Financial results & capital returns featured $226 M of adjusted funds flow (+43% YoY), $137 M of free cash flow, 9% lower OpEx/BOE, $34 M of share buybacks, net debt down 36% to $883 M, unchanged 2024 guidance (61–63k BOE/d, $390–440 M capex) and up to 60% of FCF directed to shareholder returns.
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Earnings Conference Call
Tamarack Valley Energy Q2 2024
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