Tamarack Valley Energy Ltd
TSX:TVE
Earnings Call Analysis
Q4-2023 Analysis
Tamarack Valley Energy Ltd
Tamarack Valley Energy Limited displayed significant value generation following its strategic transformation in 2023, which included integrating three corporate Clearwater transactions and divesting noncore assets. This strategic move resulted in a 29% increase in production, $230 million of free net operating income (NOI), and a rise in asset value to over $1.8 billion. Tamarack also boasted a debt reduction of $373 million, improving the balance sheet and net debt standing at $984 million. With a 16% reduction in operating costs per BOE and enhanced wellhead realizations, Tamarack demonstrated robust fiscal management and commitment to efficiency.
Tamarack's focus on oil has led to an oil and liquid weighting of 85% in total production, a significant increase from previous years. This is supported by the recent Clearwater Infrastructure Limited (CIP) partnership, which brought in $146 million in gross proceeds and strengthened long-term relationships with indigenous communities. With a $475 million development capital aligned with guidance and a total spending of $516 million, Tamarack's operations continue to thrive, particularly with the Charlie Lake assets and increased oil production from North Clearwater assets by 40%.
Tamarack's successful capital program led to a 15% growth in proven developed producing (PDP) reserves, replacing 137% of 2023 produced volumes. Total proved reserves and total proved plus probable reserves grew by 18% and 13% respectively, with each category surpassing production replacement rates of the prior year. The Clearwater assets notably contributed to a 43% growth in total proved reserves and a 28% growth in total proved plus probable reserves, resulting in a 279% replacement of Clearwater's production. The enhanced waterflood program further signifies the sustainability of these assets.
With approximately $20 million of 2024's budget accelerated into Q4 of 2023 due to favorable weather conditions, Tamarack has revised its 2024 capital budget to $390 million to $440 million. Additionally, a reduction in carbon tax expenses and continued investment in gas conservation projects are anticipated to enhance the free funds flow by $30 million to $35 million. This increases the potential for enhanced shareholder returns through 2024. Tamarack remains committed to driving enhanced business margins and delivering on the core portfolio’s high-quality economics.
Tamarack's Clearwater heavy oil assets have noteworthy resource estimates, with best estimates of 89.5 million barrels of contingent resources and 118.4 million barrels of prospective resources. This is substantially in excess of the company's 381 net total proved plus probable (2P) locations. Tamarack's inventory exceeds 2,100 locations, which speaks to the depth and sustainability of its asset base.
Tamarack has allocated around $13 million for abandonment and reclamation obligation (ARO) projects in 2024, representing a 50% increase over the required regulatory spend. This proactive approach towards environmental responsibilities highlights the company's sustainable practices and future reduction in ARO expenses. Furthermore, Tamarack expects to bring into production approximately 23 net wells in Marten Hills and 69 net wells in Nipisi, indicating a clear roadmap for ongoing development in the Clearwater and Charlie Lake regions.
Tamarack's management team is confident in their long-term development capabilities with sufficient resources for continued growth. The operational achievements and strategic focus on core asset enhancement have set the stage to deliver substantial value for years to come. This reinforces Tamarack's ability to continually bolster shareholder confidence while maintaining full control over operations and ensuring complete access to its existing midstream capacity.
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Good morning. Welcome, everyone, to Tamarack Valley Energy Limited Conference Call and Webcast on Thursday, February 28, 2024, discussing the recent Q4 2023 results press release. I would like to introduce today's speakers, Mr. Steve Buytels, CFO; Mr. Kevin Screen, COO; and Mr. Ben Stoodley, Vice President, Engineering. [Operator Instructions] thank you. Mr. Buytels, you may begin your conference.
Good morning, and thank you, Ludy. Welcome, everyone, to the call to discuss our year-end operating and financial results. Brian Schmidt is currently presenting at an industry conference. So today, I'm joined this morning by Kevin Screen, Chief Operating Officer; and Mr. Ben Stoodley, Vice President, Engineering. Tamarack completed its strategic transformation in 2023, integrating the 3 corporate Clearwater transactions that closed in 2022 and divesting our noncore West Central Alberta Cardium assets. The success of our transformation is highlighted by the significant value generation we continue to see from the assets acquired for suite to the $1.4 billion acquisition of Deltastream Energy Corp. that closed in October of '22. Tamarack has grown production on these assets by 29%, delivered approximately $230 million of free NOI in 2023 of the assets and incremental to that, the 23 year-end 2PV-10 of the assets has increased to over $1.8 billion. Overall, this transaction continues to exceed our expectations, while providing long-term development visibility for the company. Most importantly, in 2023, we delivered on key commitments to our shareholders. We improved our balance sheet, whereby we paid down $373 million of debt equal to approximately $0.67 per share. We exited the year with net debt of $984 million. We improved our overall cost structure and focused on margin enhancement. This includes a 16% savings in operating cost per BOE year-over-year. In addition to that, we continue to drive better wellhead realizations through our marketing efforts on our heavy oil. We've added reserves to the drill bit at a highly competitive cost with PDP F&D costs of approximately $16.49 of BOE, driving a recycle ratio of 2.6x. We achieved our goal to get to enhance return on capital threshold for shareholders. We delivered on our commitment with buybacks that commenced in January. As of February 2023 -- sorry, as of February 23, 2024, Tamarack has repurchased approximately 3.9 million shares for $12.3 million to date. Our plan will be to continue to use our NCIB here with respect to our return on capital threshold. And as we highlighted in our corporate presentation this morning, the enhanced return that is available for shareholders here, which will be done through buyback equated to approximately $28 million in Q4. I will now turn it over to Kevin for an update on operations and some key accomplishments in the field with regards to our indigenous engagement. Kevin?
Thanks, Steve. Our oil weighting continues to increase relative to total production, reflecting the focus and high quality nature of our asset base, including NGLs, Tamarack Q4 2023 and Oil and liquid weighting was 85%. This highlights a significant increase in recent years and compares to Q4 [indiscernible] when liquids represented 69% of total production. A few of the specific drivers on our operating cost improvements include our sale operations and geographic concentration, our field efficiency gain through ongoing multi-well pad developments and increased volumes flowing through company-owned infrastructure. On February 22, Tamarack held the celebration amendment and to commemorate the success of our recent Clearwater Infrastructure Limited partnership. In 2023, we entered into a series of agreements with 12 First Nation and native communities to establish CIP, enhancing both the long-term relationships with indigenous communities. As a result of this transaction, Tamarack received gross proceeds of $146 million and a 15% working interest in the CIP assets while retaining full operator ship and access to 100% of Tamarack's existing midstream capacity. As part of this, Tamarack's 2023 capital included $21 million of gas conservation projects sanctioned with the CIP, which was incremental to our development program. Overall, when we look at Tamarack's 2023 capital program, we were also able to take advantage of both favorable field conditions and service pricing to accelerate approximately $20 million of planned 2024 spending in the Q4 2023. Overall, our development capital of $475 million was in line with guidance and total spending of $516 million reflected the CIP gas conservation project and the accelerated 2024 capital. I'd like to touch on a few operational highlights at this point. We continue to see success through development of our Charlie Lake assets where our recent [ 1,111 ]pad delivered IP30 rates of approximately 1,400 BOE a day per well. We continue to build our footprint in this play, adding both reserves and our ongoing development efficiencies. In the Clearwater, development of our assets is advancing across the play with success at Marten Hills and Nipisi through both the B and C sands. Oil production from North Clearwater assets averaged approximately 19,000 BOE a day exiting in 2023, representing a year-on-year increase of approximately 40%. Tamarack continues to leverage our waterflood experience with water injection volumes expected to more than triple at Marten Hills and Nipisi during 2024. At this point, I'd like to hand on to Ben's Stoodley to comment on our reserves.
Thanks, Kevin. Tamarack capital program and successful integration of the Clearwater assets acquired in 2022 delivered a very strong year with respect to reserves. Prior to the consideration of net dispositions completed in 2023, the company realized material reserves growth and strong production replacement metrics in all categories. PDP reserves grew 15%, and the added volumes replaced 137% of 2023 produced volumes. Total proved reserves grew 18%, and the added volumes replaced 189% of 2023 production and total group plus probable reserves grew 13% and replaced 214% of 2023 production. Focused execution and operational efficiency resulted in PDP reserves being added at an attractive finding and development cost of $16.49 per barrel of oil equivalent. Coupled with an annual operating netback of $42.47 per BOE, a PDP recycle ratio of 2.6 was achieved, demonstrating the profitability of our highly economic oil price. In the Charlie Lake, the company continues to expand its inventory and extend well lateral length through optimization in addition to our land position. This contributed to 4% year-over-year reserves growth and 147% production replacement in the asset on a total proved plus probable basis. In the Clearwater, we realized significant reserves growth in 2023, while integrating the Deltastream assets into the company. The company's Clearwater assets delivered reserves growth of 43% and 28% for total proved and total proved plus probable reserves, respectively. The total 2P increase replaced 279% of 2023 Clearwater production, demonstrating the sustainability of the assets. Clearwater reserves growth was driven by excellent results in both the B and C sands and the West Marten Hills area and expansion of the waterflood in both Nipisi and Marten. At year-end 2022, only 3% of the company's total 2P reserves were associated with waterflood. At year-end 2023, this has grown to 12%, which is indicative of the expansion of the waterflood program this year and substantial runway that remains as we continue to invest in secondary recovery. Now I'll provide some information regarding contingent prospective resources. With the integration of the 3 Clearwater consolidating transactions from 2022 completed, the company retained McDaniel Associates to evaluate the contingent prospective resources of the company's Clearwater assets. The resource report indicates Tamarack's Clearwater heavy oil assets have a best estimate of unrisked contingent resources of 89.5 million barrels and unrisk prospective resources of 118.4 million barrels. Inventory attributed to the company's Clearwater assets within the report totaled 592 net contingent and 1,182 net prospective drilling locations. Those locations are over and above the company's 381 net total 2P locations included in the year-end reserves value. The resulting identified Clearwater inventory now exceeds 2,100 locations. The contingent prospective resource evaluation validates our internal view of the depth of inventory, exceptional runway for both primary and secondary recovery and ultimately, the long-term sustainability of the assets. With that, I'll pass it back to Steve to discuss guidance.
Thank you, Ben. As Kevin mentioned, we were able to -- due to favorable weather conditions, accelerated approximately $20 million of our dedicated first half 2024 budget into Q4 of 2023. We want to ensure that we highlight to shareholders here and investors that $20 million will serve as a reduction to our capital spend in '24. And as a result, we've updated our capital -- our base capital budget to $390 million to $440 million. In addition to this, 2024 carbon tax expense guidance has been reduced from $1 to $1.50 per BOE down to $0.50 to $1 per BOE. And that really owes to the investment in the last couple of years that the company has made in gas conservation projects along with the CIP partnership that Kevin talked about earlier. It is important to note that our production guidance range remains unchanged. And we look forward to continuing to drive enhanced margin in the business through 2024. All told, when we look at the 2024 capital reduction in conjunction with the carbon tax reduction, we will see an increase in free funds flow by approximately $30 million to $35 million, which will serve to accelerate additional enhanced return throughout 2024 to shareholders. In conclusion, when we look at our 3-year transition that we embarked on, we look at the significant transactions that we've been able to integrate and build out in the Clearwater. We look at the repositioning of the core portfolio with the disposition in 2023 of our West Central Cardium assets. We're now set to deliver on our core portfolio enhanced play types and economics moving through 2024. With that, we would like to thank our employees, our stakeholders and our shareholders for their continued support. I'm going to turn it back to the operator. Thank you.
[Operator Instructions] While the analysts join the queue with questions, Tamarack will answer the questions answered by stakeholders in the Q&A field.
Thank you, Rudy. Our first question is for Mr. Ben Stoodley. What was the reason for removing the evaluation of Clearwater reserves to McDaniel.
Thanks, Tod. We retained McDaniel to provide some consulting services supporting the Clearwater infrastructure partnership transaction. Following that, we decided to proceed with a contingent prospective resources study. and we want to continue with the reserve book through that process.
Thank you, Ben. Our next question is for Mr. Steve Buytels. If the sale of any more assets being considered to shore up the balance sheet. When does the company see being debt free?
Yes. Thank you. Great question. We're always looking at, obviously, our portfolio and ensuring that what we have here is going to compete for capital and obviously enhances the margin in the business. So the way I'd look at it is our larger key repositioning of the portfolio is complete. There are maybe some small parts of the portfolio that we continue to look to rationalize and guess that would serve to continue to pay down debt. But when we look at the question of being debt-free, we have a plan year, a 5-year plan that would see approximately $2 billion of free funds flow generation over that 5 years. So as we look at that, we could be there in -- within that time frame. However, we do see debt as being a part of our capital structure moving forward to help level of returns. But we would like to get that debt down to what we see as our floor at about $500 million, which really represents about 1x debt to funds flow at a USD 45 WTI price.
Thank you, Steve. Our next question is for Mr. Ben Stoodley, both the contingent resource and prospective resource include waterflood?
Yes, it does.
Our next question is for Mr. Kevin Screen. It looks like the ARO is exported from the latest guidance. What is that figure in 2024 roughly.
So we're budgeting about $13 million to spend on ARO projects in 2024. And with the success of our ARO program to date, over time, we'll be reducing that number. the 100 -- sorry, the -- sorry, the $12 million, $13 million that we're spending in 2024 represents a 50% increase over and above our regulatory required spend.
Our next question is for Mr. Ben Stoodley. How many wells do you expect to bring on production in the Clearwater in Charlie Lake in 2024.
Yes. In the Charlie Lake, we're going to bring on about 10 net wells. We have some part joint venture wells, so 13 close wells. In the Clearwater across the areas, we'll be drilling about 23 net wells in Marten Hills, 69 net wells in Nipisi and West Marten Hills that includes 15 water sectors and 15 wells in the Southern Clearwater.
Our next question is for Mr. Kevin Screen. What is the water situation in Charlie Lake in Clearwater assets? Is there sufficient water availability for fracking operations in the Charlie Lake, and the waterfloods and the Clearwater.
So it was a great question. In the Clearwater, our waterflood is based on non-potable water. So we're using saline source that we have acquired from both the Grand Rapids and Clearwater zones. So no concerns about availability for current or future waterflood expansions in the Clearwater. On the Charlie Lake side, obviously, freshwater is a concern. One of the advantages that Tamarack has is our completion design for our Charlie Lake wells is Crosslink Polymer, which uses substantially less water than folks that are using slickwater typically in the Marten. So our volumes are much smaller. And as Ben mentioned, we've only got about 13 wells planned. So we don't foresee a water availability concern for our 2024 Charlie Lake program.
Our next question is for Mr. Steve Buytels. Should we expect PDA to further contract volumes in the Nipisi pipeline in 2024.
Yes. We don't comment on those specific things publicly, but what we would say is just given the success and growth of the Clearwater, we will look to continue to find ways to enhance margins there. And a lot of that will be through bringing that production to market through pipe. So all of those options are on the table, and I could see us doing more there given there is room on that light. But again, we won't get too specific at this time.
Our next question is for Mr. Kevin Screen. Can you speak to ongoing opportunities in Marten Hills and how costs are evolving there?
So as we discussed, we're continuing to develop our Marten Hills asset. One of the things we're actually in the process of here in Q1 and through Q2 is construction of a large gathering, both emulsion and gas gathering line that will allow us to reduce our transportation expense for many pads that are currently trucked, so that's just one example of our scale of the operation and the opportunities that we can bring to bear.
Our next question is for Mr. Steve Buytels. The plan for asset acquisition basically [indiscernible] to the point management is satisfied with inventory debt.
Yes, that's a very good question. So the way we look at it is, yes, the transformation of the company with respect to moving into the Clearwater and Charlie Lake is complete. We do not see the need for additional acquisitions or major acquisitions in the company. And as Ben highlighted earlier, we've got significant resource and inventory depth in the Clearwater and in the Charlie Lake. So we're -- as a management team here, we are content with what we have for years and years and years of development moving forward.
Thank you, Steve. Our next question is from Steve Buytels again. You have previously spoken to an accelerated CSV budget. Can you provide an update on this?
Yes. Thanks. Another great question. So we talked about the potential with our budget in December of spending $40 million to $50 million in the second half of 2024 with respect to the CSB gas plant being commissioned later this year. The way we're looking at that right now is that is -- that capital spend is going to be really flexible on our side. A few things will go into play there. One, commodity price, gas prices obviously are in a very tough spot right now. Two, we'll use discretion in terms of how much it could be nothing, and it could be -- but there could be something we gave a range there, depending on, again, commodity what we want to do internally with respect to the allocation of capital. But I think it is also worth noting the UDCs with that gas plant for us around the take-or-pays are very small. And we do have other production that we would be swinging into that plant as it is as part of our development plan. So we don't see any need to rush there and we'll really manage and monitor commodity price and then the capital outlook for the company to ensure we're balancing obviously, the growth of the company long term from that standpoint, but also ensuring that we're delivering on our commitment to shareholders for enhanced returns here in 2024.
Thank you. Our next question is from Mr. Ben Stoodley, Tamarack noted a new contingent resource study showing significant Clearwater resource. How should investors think about the pace of learning resource to fund flows.
I think all the contingent prospective resources will follow behind what we've got identified as reserves from a pace. Our current 5-year plan has us providing modest growth within the 5 years. That's largely in some of our active assets such as the Clearwater. But I would say the contingent perspective resources provides long-life runway at that growth rate. And in the interim, it will be largely focused on the reserves booked.
Our next question will be from Ben Stoodley again. When does the reserve life now?
Based on our 2023 exit rates, our current reserve life index on a 2P basis is about 10 years.
Our next question will be for Steve Buytels. So lower the capital spending outlook to reflect some acceleration into 2023. Given the volatility in commodity prices, can you speak to your ability to respond to price signals?
Yes, thanks. We alluded a little bit to this on the CSV capital too. Again, commodity price will dictate a lot of our decisions there, and we do retain a significant amount of flexibility in our budget guidance for '24 specific to our capital. So again, we see opportunity where we have the ability probably to take out if need be another $20 million to $25 million that would have no real impact to that production guidance that we've set out. However, that would impact some longer-term initiatives around some derisk and delineation on some of our assets or certain infrastructure build-out that supports future development.
So again, we'll look to balance those through the year. I think it is important to highlight differentials here as we move into Q2 will come in significantly, both on the heavy oil side, but also the light oil side, we'll see some significant tailwinds. So as we look out there on the price of our barrels that we're going to be selling in the market, you are going to see a pretty good step change moving forward. So I think that's something to keep in mind. But again, we'll monitor our capital spend with respect to our funds flow outlook for the year, and again, balancing shareholder returns.
Our last question for Steve Buytels. What are management's views on hedging into the future?
That's a great question. I think if you look in our corporate presentation or in our press release, we do highlight that we have a significant amount of our volume hedged proximately 50% corporately here through 2024. And and that really doesn't change for us. The way we look at risk management would be we have a commitment with our base dividend of about $80 million a year, and we have a commitment to sustain our business and we've talked about that sustaining capital number of about $330 million. So what we look to do there is really solve for price and for that amount of capital or committed outflow that we need to ensure that we can sustain our business with and deliver on our commitments to our shareholders. So that will always continue to be near and dear to management source, if you will. And that risk management or hedging process will continue to move forward. And again, as debt levels come down, maybe the view on how much you have to protect could come down with it. But for now, that is the strategy that we are on here year-on-year.
Thank you, Steve. We have another question for Mr. Kevin Screen. Can you please comment on the ways in which you are presently achieving efficiencies at Charlie Lake.
Good question. I would say there's a few key ways that we're managing our efficiencies there. One is with our expansion of egress capacity that allows us to drill more multi-well pad wells, which, of course, drilling multiple wells on a pad, both drilling and completions allows us to realizing capital efficiencies. And then the addition of well length, and we addressed that in our press release, noting that we got 46% of our PDP locations exceed 2.5 miles. And so longer wells results in the fewer well count ultimately and increase efficiencies. So those are some of the key things that we've done.
Thank you, Kevin. We will now turn the call back to the moderator to read the analyst questions.
Thank you. And there are no questions at this time. And this concludes today's conference call and webcast. Thank you for participating. You may now disconnect.