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Good morning. Welcome, everyone, to the Tamarack Valley Energy Ltd. webcast on May 4 discussing the Tamarack Valley Energy Ltd. Q1 2022 calls. I would like to introduce today's speakers: Mr. Brian Schmidt, President and CEO; and Mr. Steve Buytels, Vice President, Finance and CFO. [Operator Instructions]
Mr. Schmidt, you may now begin your conference.
Good morning. I'm joined here today with Steve Buytels, VP, Finance and CFO. We are pleased to announce our first quarter 2022 financial results, along with operational and guidance update. We successfully executed on our first quarter program and integrated the Crestwynd exploration acquisition.
We continue to add to our Clearwater footprint with the execution of strategic agreement with the Peavine Metis settlement and through crown land sales and are extremely proud to have delivered on our return of capital framework with the declaration of our inaugural base dividend in January, and we remain on track to -- with respect to delivering on our enhanced return framework based on current strip prices.
I'll pass it over to Steve to run through the quarterly financial highlights.
Thanks, Brian. The first quarter was marked by strong cash flow of $166.6 million or $0.40 per basic share on the back of strong production volumes averaging 41,335 BOE a day. Free funds flow, excluding acquisitions, was $41.2 million with net income of $26.5 million in the quarter. We invested $106.8 million in E&D capital with an additional $18 million that was directed towards the strategic Clearwater, Peavine agreement as well as other land acquisitions.
We have revised our corporate guidance to reflect the pro forma Rolling Hills acquisition announced on April 21, 2022, as well as reflecting changes in the commodity price environment. Our total E&D capital expenditure guidance has been revised slightly upward to $280 million to $300 million, which includes the future capital associated with Rolling Hills along with capital directed towards our Clearwater appraisal program and is inclusive of inflationary pressures facing the industry at this time. Production has been increased commensurate to a range of 46,200 to 47,200 to reflect the average of approximately 2,000 barrels a day of heavy oil from close of the acquisition of Rolling Hills through year-end.
I'll pass it back to Brian here to run through some operational highlights.
We had a successful first quarter drilling program. Key highlights from the Clearwater include the execution of first 2 strategic agreements with the Peavine Metis settlement. The Southern Clearwater saw significant activity as current -- and currently has 4 rigs running. The well results have averaged over 150 barrels a day with additional optimization upside as production has moved to permanent facilities in the area. The team successfully drilled a step-out well at the West Marten Hills, which proved successful with an IP30 rate of approximately 150 barrels per day derisking approximately 6 sections of land in the B sand.
At West Nipisi, we've focused on the waterflood development moving forward. The company rig released 5 of 6 wells planned on the 15 to 20 pad. All 6 wells will be put on production by the end of May, with 2 of the 6 wells on production exhibiting rates in line with expectations. We plan to initiate our Clearwater appraisal derisk program in the Greater Peavine area and North Nipisi in the second half of the year.
In the Charlie Lake, we brought on 9 of 16 wells planned for the year. Results continue to exceed expectations in the lower Charlie Lake. We drilled our first Upper Charlie Lake well, which exceeded expectations. This represents additional potential inventory for the company moving forward. We continue to direct or allocate approximately 25% of our E&D capital to waterflood portfolio across Veteran, Eyehill Sparky and Nipisi Clearwater areas.
I'll turn it back to Steve to run through our return of capital framework.
Thanks, Brian. As we previously announced, our plan is to increase our base dividend by 20% to $0.01 per share per month effective June declaration in conjunction with the close of the Rolling Hills acquisition. The base dividend increase has been driven by improved sustainable free funds flow in conjunction with our organic capital program, the Crestwynd and Rolling Hills acquisitions.
In terms of the enhanced return, we anticipate the declaration of the enhanced returns through special dividend and/or buyback in Q3 of 2022 for free funds flow from Q2 of 2022. The incremental debt associated with the current 2022 tax payable, which has not yet impacted adjusted funds flow, along with cash considerations for Rolling Hills and the land purchases during the quarter, will be adjusted accordingly when considering the enhanced dividend and the long-term debt target of $350 million to $400 million.
I will turn it back to Brian for some closing remarks.
We'd like to thank our employees, the Board of Directors, shareholders and stakeholders for their continued support. We're extremely pleased with the quarter and beginning to deliver on return of capital framework. Importantly, we further strengthened our asset base to increase debt adjusted free cash flow per share over the next 5 years. The outlook for our industry remains robust, and Tamarack has never looked stronger. We look forward to delivering our enhanced return framework and continue to drive long-term sustainable free funds flow growth moving forward. Thank you.
I'll turn it back to the moderator for questions.
Our first question is for Brian Schmidt. Is any of the Clearwater properties suitable for polymer flooding?
So what we've done in our studies so far is doing work with water. And based on what we see in the simulation reserve studies, we think that water is going to be fine. And of course, that's a much lower cost option than polymer. We think that technically, there are some reasons why polymer may not work in this area, but we're going to keep that option open for the future.
Next question, can you give us some color on what we see in Northwest Nipisi potential?
In Northwest Nipisi, we've monitored a lot of competitor activity. You'll notice that those of you who look at the area notice that spur has drilled a very successful well there, and we'll be moving up into that area. I see that as a real good chance for the company to add significant inventory here going forward.
Our next question is for Steve Buytels. Do you expect special dividends in third or fourth quarter?
Yes. Like I talked about there in the call, we see the enhanced dividend framework being triggered really in Q2 in terms of timing as we adjust for the items that I talked about, the Rolling Hills acquisition, the strategic land Peavine deals with the Metis settlement along with the crown sales and adjusting for the timing of the tax payable. All that tax would have been included in our estimates for the year. It's just in terms of the accounting framework when we actually have to record that. So for there, we are going to continue to deliver on the timing that we talked to and have guided to, which would be the special dividend and/or buyback payable in Q3 '22 for the free funds flow from Q2 of 2022.
Our next question is for Brian Schmidt. The Peavine deals were great. Are you in talks with them for a third deal?
Yes. So there was a real window there where you could negotiate with the Peavine, and that window has pretty much closed, and it has to do with the arrangement they have with the crown on land sales and sale prices. So we're not in any talks with Peavine for expansion at this time. We're happy with the lands we've got, and then we'll move into a derisk phase there.
Our next question is for Steve Buytels. Could you provide more detail on investor returns by providing a link between debt target levels with percentage of free cash flow return to shareholders?
Yes. So I think what we're looking at there is we want to obviously walk before we run. We want to get and trigger this enhanced return through Q2 and into Q3 here to deliver on that, which is the debt target we set out between $350 million to $400 million long term, which is really that 1x debt to funds flow at $45 WTI.
As we look at our $200 million of notes that we have outstanding, that really would be the next level that we would see in terms of run rate debt for the company. So I think there, it's an option where we can look to potentially enhance that special dividend and/or buybacks when we get there. But again, we want to deliver on our original guidance here of getting to this $350 million to $400 million debt target and triggering the enhanced return.
Our next question is for Steve Buytels. Where do you see further risk of cost inflation? How much inflation is now baked into guidance?
Yes, and Brian will probably have a little bit to say here, too. What we see is we've added about 10% inflation in our capital program go forward. So Q2 through Q4, when you look at what we have left to spend in our guidance there, we've taken an incremental 10%. We've chosen to be direct with the market here right now and put that out there. I know some haven't really given guidance, and we obviously saw some inflation hit in Q1 as well on our capital program and with what we're seeing on the OpEx and transportation costs as well.
So the same thing can be said on the unit cost. There's definitely obviously an increase that's coming through in trucking with fuel surcharges, supply constraints and so forth. So that is all embedded in the new guidance here. And again, we'll take this. These are forecasts at this time, and we do everything we can, obviously, to minimize that and drive costs down and gain efficiencies. And then on the other side, we look to obviously enhance the value of the barrels that we're selling. So we'll try to drive enhanced netback to offset some of this cost pressure that is plaguing the industry.
Yes, and I could add to that. All the teams in the company right now are looking at ways to reduce scope. I'm not sure we can get unit cost down with the service companies, but what we can do is reduce the scope that we've got or enhance it. For example, drilling longer legs in the Southern Clearwater has been a great performance enhancement in terms of dollars per production. So there are some things that we're looking at internally to reduce our cost structure and scope reduction.
Our next question is for Steve Buytels. Which price benchmark WTI or WCS best represents the selling price for TVE's products?
Yes. You know what, it really is a mixture of both for us because we do have all the light oil that would be coming out of our Viking waterfloods and then -- and our Charlie Lake and Cardium programs and then we have the heavy out of the Clearwater.
So when you look at the way we're growing, the heavy Clearwater barrels, that's going to obviously become a more meaningful impact over time. But it really is right now, I'd say, a good mix between the 2. And we give guidance in terms of what our realized wellhead differentials would be because, obviously, not all oil is created equal here in terms of pricing. But again, that's probably -- it's probably a good mix, 50-50, between the 2.
Our next question is for Steve Buytels. Is your preference for dividends or share buybacks?
Yes. We -- as we get through this enhanced return, I know Brian, the Board and myself really do believe in buybacks, especially where we see the company trading relative to where we would see our NAV. When you look at what we do and what we're generating for NOI out of the Charlie Lake relative to our Clearwater land position and the growth in the Clearwater, we do see ourselves there as being undervalued relative to how we would measure that intrinsically. So we do have a preference for buybacks, but we want to manage that and balance that in the short term with also delivering on special dividends for shareholders to reward them in the short term as well.
Our next question is for Brian Schmidt. How should we think about additional M&A potential in the South Clearwater and Peavine regions?
So let's talk South Clearwater first. I really don't see any further consolidation activity in Southern Clearwater. With the acquisitions that we've done, the last 3 larger ones in that area. That pretty much takes care of that area, and we do almost 100% of that Jarvie area.
With respect to Peavine, I think the -- it looks to me like the crown sales are pretty much finished. And there might be a little bit of land left on Peavine yet, but I don't think that's going to move here in the near term. So in those 2 areas, I really don't see any M&A activity coming up.
Our next question is for Steve Buytels. Do you think it makes sense to give shareholders more specific information on your return of capital framework? There are many other undervalued Canadian oil companies to choose from, and this needs to be addressed.
Yes. This obviously is a common question that we're getting here today. Again, what we'll say right now is we are committed to the enhanced return framework that we've outlined with that long-term $350 million to $400 million debt target. We are going to deliver that based on current commodity forecast here in Q3 for the Q2 free funds flow.
So again, we'll deliver on that target. And as we move forward and move through that $350 million to $400 million range, like I mentioned earlier, there are options that we will look at on the table to enhance that return to shareholders over and above the 50% that we have allocated currently. But let's get to delivering on this first, and then we'll move on with some further guidance on that as, again, as we move through that $350 million to $400 million target.
Our next question is for Brian Schmidt. Are there any issues with egress from the Clearwater or other plays with this increased production?
Yes. So in terms of egress, there are no limitations or restrictions on egress. You can always fall back to trucking on the area, and we do truck crude out of there to fetch a higher netback. We'll be looking at some longer-term options with pipe out of the Nipisi area here coming up that could potentially drop our costs, but I don't see any restriction on flow.
Our last question is for Brian Schmidt. Can you talk about the light oil volumes in the quarter and some of the decline mitigation efforts underway, stabilized production around the range we saw in Q1?
Yes. So a few things exciting are going on there. Of course, the Eyehill, we invested a fair bit of capital last year in the waterflood. We took injection rates from about 3,000 barrels a day up to 12,000 barrels a day injection, and we're starting to see some positive impacts there on the waterflood. So I'm quite excited about that project, and there's minimal capital needs to go into Eyehill to get that increase in production there.
In Veteran, we'll be doing some optimization and some pattern additions in minor patterns additions in Veteran, but we're about 9,000 barrels a day in the Veteran area there right now.
In terms of the other minor pools like Penny and so forth, as Steve mentioned and I mentioned earlier, about $0.25 on the dollar should be spent in waterflood to mitigate declines in out years. And that -- we seem to be doing a very good job here in controlling decline on our 5-year plan. We're in around the 31%, 32% decline rate.
One more question for Steve Buytels. Tamarack has underperformed pretty well every other oil company for the past year now. When do you see Tamarack at least performing at the same level as others?
Yes. I think, again, there, what we've seen is with the significant increase in commodity prices, a lot of the companies that would have had higher debt levels or where the more leveraged companies have seen some pretty big moves in their share prices. So I think you got to look at that and isolate that. I think when you look at what we went through here today, we've repositioned the company over the last year into the Clearwater and into the Charlie Lake and are becoming a much more profitable company in doing so.
So I think we have to deliver on what we've said we're going to do here and the numbers that we're showing you all with these acquisitions, and we are doing that. It's evident in obviously what you've seen in Q1 cash flow that's come through in the production. And again, we'll build on that through the subsequent quarters. And furthermore, really is then delivering on this enhanced return framework. So I think the proof is going to be in the pudding, and we've got to deliver on what we say we're going to do. And once we start to do that, the recognition is going to come through.
Thank you very much. There are no more questions.
This concludes today's call. Thank you for your participation. You may now disconnect.