Brian Schmidt, President and CEO of Tamarack commented: “We closed and successfully integrated the Rolling Hills Energy Clearwater oil acquisition during the quarter. In addition, our base dividend was increased by 20%, which was underpinned by our strategy and commitment to long-term sustainable free funds flow(1) per share growth, and we initiated our enhanced return framework in Q2 through the purchase of 1.2 million common shares under our Normal Course Issuer Bid (NCIB)”
Q2 2022 Financial and Operating Highlights
- Achieved quarterly production volumes of 43,777 boe/d(3) in Q2/22, representing a 35% increase compared to the same period in 2021.
- Generated Q2/22 adjusted funds flow(1) of $203.6 million ($0.47/share basic; $0.46/share diluted).
- Generated free funds flow(1), excluding acquisition expenditures, of $94.1 million.
- Generated net income of $143.5 million ($0.33/share basic and diluted) during the quarter.
- Increased the monthly cash dividends on common shares by 20%, from $0.0083/share in April and May to $0.0100/share in June, and initiated the enhanced return of capital framework with the purchase of 1.2 million common shares under our NCIB.
- Invested $80.3 million in exploration and development (E&D) capital expenditures and $29.0 million on undeveloped land in the Clearwater and Charlie Lake areas during Q2/22. This contributed to the drilling of 19 (19.0 net) Clearwater oil wells and three (2.8 net) Charlie Lake oil wells. The undeveloped purchases were partially funded through the disposition of a gross overriding royalty (GORR) on certain lands for net proceeds of $14.9 million.
- Exited the quarter with $470.6 million of net debt(1), inclusive of assets held for sale with respect to the Non-Core Viking Disposition, and net debt to Q2/22 annualized adjusted funds flow(1) of 0.6x.
- Closed the acquisition of Rolling Hills Energy Ltd. during the quarter, completing the consolidation of the Company’s position in the Southern Clearwater fairway for consideration of 9.3 million common shares of Tamarack and $49.3 million in cash.
- Subsequent to the quarter, completed the disposition of certain assets in the Viking for gross proceeds of $70 million(2). This is consistent with our portfolio rationalization strategy and focus on long-term sustainable free funds flow(1) growth.
Financial & Operating Results
Three months ended |
Six months ended |
|||||
June 30, |
June 30, |
|||||
2022 |
2021 |
% change |
2022 |
2021 |
% change |
|
($ thousands, except per share) |
||||||
Total oil, natural gas and processing revenue |
407,195 |
152,168 |
168 |
706,090 |
245,602 |
187 |
Cash flow from operating activities |
214,708 |
40,253 |
433 |
347,561 |
78,689 |
342 |
Per share – basic |
$ 0.49 |
$ 0.12 |
308 |
$ 0.81 |
$ 0.26 |
212 |
Per share – diluted |
$ 0.49 |
$ 0.12 |
308 |
$ 0.81 |
$ 0.26 |
212 |
Adjusted funds flow (1) |
203,622 |
71,741 |
184 |
352,481 |
113,693 |
210 |
Per share – basic (1) |
$ 0.47 |
$ 0.21 |
124 |
$ 0.83 |
$ 0.38 |
118 |
Per share – diluted (1) |
$ 0.46 |
$ 0.21 |
119 |
$ 0.82 |
$ 0.37 |
122 |
Net income |
143,507 |
230,194 |
(38) |
169,964 |
230,028 |
(26) |
Per share – basic |
$ 0.33 |
$ 0.69 |
(52) |
$ 0.40 |
$ 0.77 |
(48) |
Per share – diluted |
$ 0.33 |
$ 0.67 |
(51) |
$ 0.39 |
$ 0.75 |
(48) |
Net debt (1) |
(470,563) |
(505,992) |
(7) |
(470,563) |
(505,992) |
(7) |
Capital expenditures(4) |
109,483 |
30,805 |
255 |
234,850 |
79,509 |
195 |
Weighted average shares outstanding (thousands) |
||||||
Basic |
434,924 |
333,908 |
30 |
427,175 |
300,013 |
42 |
Diluted |
438,206 |
341,935 |
28 |
430,406 |
307,608 |
40 |
Share Trading (thousands, except share price) |
||||||
High |
$ 6.48 |
$ 2.90 |
123 |
$ 6.48 |
$ 2.90 |
123 |
Low |
$ 4.12 |
$ 2.16 |
91 |
$ 3.90 |
$ 1.25 |
212 |
Trading volume (thousands) |
261,745 |
155,905 |
68 |
495,434 |
337,037 |
47 |
Average daily production |
||||||
Light oil (bbls/d) |
18,233 |
14,535 |
25 |
18,052 |
12,340 |
46 |
Heavy oil (bbls/d) |
10,805 |
4,701 |
130 |
9,172 |
3,683 |
149 |
NGL (bbls/d) |
3,540 |
3,032 |
17 |
3,825 |
2,728 |
40 |
Natural gas (mcf/d) |
67,195 |
60,887 |
10 |
69,082 |
56,699 |
22 |
Total (boe/d) |
43,777 |
32,416 |
35 |
42,563 |
28,201 |
51 |
Average sale prices |
||||||
Light oil ($/bbl) |
135.66 |
75.30 |
80 |
123.07 |
70.69 |
74 |
Heavy oil ($/bbl) |
115.51 |
61.20 |
89 |
106.91 |
56.47 |
89 |
NGL ($/bbl) |
63.61 |
39.57 |
61 |
59.65 |
38.51 |
55 |
Natural gas ($/mcf) |
7.81 |
2.77 |
182 |
6.73 |
2.94 |
129 |
Total ($/boe) |
102.16 |
51.55 |
98 |
91.54 |
47.95 |
91 |
Operating netback ($/Boe) |
||||||
Average realized sales |
102.16 |
51.55 |
98 |
91.54 |
47.95 |
91 |
Royalty expenses |
(19.64) |
(7.20) |
173 |
(17.75) |
(6.43) |
176 |
Net production and transportation expenses |
(13.00) |
(10.74) |
21 |
(12.55) |
(10.91) |
15 |
Operating field netback ($/Boe) (1) |
69.52 |
33.61 |
107 |
61.24 |
30.61 |
100 |
Realized commodity hedging loss |
(9.40) |
(6.20) |
52 |
(6.79) |
(5.19) |
31 |
Operating netback ($/Boe) (1) |
60.12 |
27.41 |
119 |
54.45 |
25.42 |
114 |
Adjusted funds flow ($/Boe) (1) |
51.11 |
24.32 |
110 |
45.75 |
22.27 |
105 |
Operations Update
Clearwater
Peavine/Seal – Tamarack continued to be active with its Clearwater land expansion strategy to drive long-term sustainable free funds flow(1) growth. The Company accumulated an additional 15 net sections through crown land sales and a strategic farm-in executed during the quarter, bringing our total greater Peavine/Seal land holdings to 77.5 net sections in proximity to competitor activity with strong well results. The Company sees the potential of up to three separate Clearwater sands on the new lands and plans to begin its expanded appraisal program in Q4/22 which will consist of 4-5 wells along with road and drilling pad infrastructure.
West Marten Hills Exploration – Based on the successful West Marten Hills 02/8-33 appraisal well, which exhibited IP30 rates of approximately 150 bopd(5), Tamarack is in the process of building an all-season road into the area with plans to drill an additional seven wells at West Marten Hills in 2022, including an Upper Clearwater A appraisal well.
West Nipisi – Tamarack’s strategy at West Nipisi is focused on waterflood development moving forward. The Company has rig released nine of 17 wells planned from 3 different pad sites, all of which are being developed under Tamarack’s Nipisi Clearwater waterflood configuration. Seven wells are currently on production and exhibiting rates within expectations of approximately 200 bopd(6). Injection commenced on 3 wells at Tamarack’s waterflood pilot in early May. Initial results have been very encouraging, and Tamarack plans to drill an additional 5 injectors in H2/22. Tamarack is currently drilling an appraisal well to test the northwest Nipisi Clearwater sands based on encouraging offsetting competitor well results.
Southern Clearwater – Tamarack continues to actively develop its Clearwater assets in the Jarvie, Perryvale and Meanook areas with two rigs currently operating. Development has been highlighted at West Perryvale, where production results have outperformed the area type curve and further inventory has been added through continued pool delineation. Thirty-two wells have been rig released to date in 2022, with 25 wells currently onstream. The wells currently producing have averaged peak oil rates of greater than 150 bopd(7). The Company plans to drill 48 gross (48.0 net) wells in the area in 2022 and execute on operational synergies on recently acquired production.
Charlie Lake
In the Charlie Lake, Tamarack has brought nine of 17 planned wells onstream in 2022. Results continue to exceed expectations. Most notably, the 100/02-16-071-08W6 well achieved an IP30 of 1,155 bopd (1,685 boe/d(8)) .
During the quarter, the Company experienced significant third-party infrastructure downtime which resulted in a production impact of approximately 2,500 boe/d(9). Current production from the area has averaged approximately 13,500 boe/d(10) month to date in July. The second quarter production impact along with updated third quarter turnaround timing at the Tidewater Midstream Pipestone plant and CNRL TeePee Creek plant is reflected in our guidance for the second half of 2022 below.
Tamarack is advancing plans to construct a new owned and operated gas plant in the Grand Prairie area, with engineering, planning and design work currently underway. Phase 1 of the plant will add approximately 15-20 mmcf/d of gas processing capacity and is forecasted to be commissioned in the first half of 2023. This plant will serve to provide further egress enhancement and cost savings in the Charlie Lake moving forward and could be expanded as part of a Phase 2 development to support future development and processing capacity requirements.
Veteran/Eyehill Waterfloods
Tamarack drilled 13 wells in the H1/2022 capital program targeting the Viking (6.0 net) and Sparky (7.0 net) at its Veteran and Eyehill properties. Through Q2, Tamarack continued to add injection to its Veteran waterflood, completing 6 injector conversions. The waterflood response in Eyehill is meeting expectations, reaffirming the value of the Sparky asset.
Non-Core Viking Disposition
Subsequent to the quarter, Tamarack closed the disposition of approximately 2,000 boe/d(11) (~44 % liquids) of non-core Viking production for total gross proceeds of $70 million(2). This disposition is consistent with the Company’s portfolio rationalization strategy and driving long-term sustainable free funds flow(1) growth. The proceeds from the disposition will be directed towards both debt repayment and capital activity, including Tamarack’s increased Clearwater appraisal expenditures in the greater Peavine and Seal area and West Nipisi waterflood programs.
2022 Second Half Capital Budget and Guidance
To reflect the disposition of non-core Viking assets on July 21, 2022, as well as changes in the commodity price environment and inflationary pressures facing the industry, Tamarack is providing H2/22 corporate guidance. The Company remains focused on capital discipline and growing sustainable free funds flow(1) and will proactively adapt our spending plans within the context of the market and inflationary pressures to maximize returns.
A 2022 capital reconciliation table is provided below to highlight the re-distribution of the Viking asset and GORR disposition proceeds into expanded Clearwater appraisal, Clearwater waterflood development and strategic Peavine/Seal land capture to manage overall capital outlay for the year. The Company continues to execute on its strategy of repositioning and growing its footprint in the top tier economic oil plays in North America.
Capital Budget
Exploration and development capital expenditures for the second half of 2022 have been updated to a range of $160–$170 million, totalling $340–$360 million for the year. This capital guidance is inclusive of the future E&D capital associated with the Company’s expanded Clearwater appraisal at Peavine/Seal and the West Nipisi waterflood program. It is also inclusive of forecasted inflationary pressures with respect to the higher service and material costs, as well as supply chain constraints facing the industry at this time
Production
Second half production guidance has been updated to a range of 44,500 to 46,500 boe/d(12) to reflect the sale of the non-core Viking assets along with forecasted turnaround activity in the Charlie Lake operating area in the third quarter. The Clearwater appraisal program is expected to have minimal impact to the 2022 production, given the timing of the drill program, with appraisal success setting up development programs for 2023.
H2 2022 Guidance(13) |
|
E&D Capital Budget(14) ($mm) |
$160–$170 |
Annual Average Production(12) (boe/d) |
44,500–46,500 |
Expenses: |
|
Royalty Rate (%) |
20–22% |
Operating ($/boe) |
$10.00–$10.25 |
Transportation ($/boe) |
$3.00–$3.10 |
General and Administrative ($/boe) |
$1.45–$1.55 |
Taxes ($/boe)(15) |
$4.50–$5.00 |
Leasing Expenditures ($mm) |
$1.8 |
Asset Retirement Obligations ($mm) |
$5.0 |
Revenue: |
|
Average Oil & Natural Gas Liquids Weighting |
76 % |
Light Oil Wellhead Differential |
$3.00-$3.50 |
Heavy Oil Wellhead Differential |
$5.50-$6.00 |
Price Assumptions: |
|
WTI (US$/bbl) |
$85.00 |
AECO (CAD$/GJ) |
$4.00 |
2022 Annual Capital Expenditure Reconciliation
($mm) |
|
2022 E&D Capital Budget(4) – May 2022 Guidance |
$300 |
+ Strategic Land Acquisitions (Clearwater/Charlie Lake) |
$55 |
+ H2/22 Clearwater Capital Additions: |
|
Peavine/Seal Appraisal |
$25 |
West Nipisi Waterflood Expansion |
$15 |
+ H2/22 Capital Inflation Adjustment |
$20 |
– GORR Disposition |
($15) |
– Viking Non-Core Disposition Total Proceeds |
($70) |
Adjusted 2022 Net Capital Expenditure Outlay |
$330 |
Return of Capital Framework
The Company remains committed to balancing long-term sustainable free funds flow(1) growth with returning capital to shareholders and has further defined its return of capital framework to balance debt repayment, future potential acquisitions to bolster our long-term inventory resiliency and increased clarity around delivering enhanced return to shareholders through opportunistic share buybacks and/or enhanced dividends.
The return of capital framework includes the base dividend, which is a structural component of the financial framework and is set at a level approximated to 25% of corporate free funds flow(1) at our long-term 5-year plan price deck of US$55/bbl WTI and $2.50/GJ AECO, and can be sustainably covered at bottom cycle pricing of less than US$40/bbl WTI. In addition to the base dividend, the Company continues to allocate 50% of its free funds flow(1) to enhanced return of capital, inclusive of base dividends, when net debt(1) is less than $400 million with the remaining 50% allocated to further debt repayment and future acquisition opportunities.
Tamarack executed on its enhanced return during the quarter with the purchase of 1.2 million shares under the Company’s NCIB. The incremental net debt(1) associated with the current H1 2022 tax expense, along with the cash considerations for the Rolling Hills Acquisition and the H1 2022 land purchases, were adjusted accordingly when considering the enhanced return debt target.
Base Dividend
As previously announced, the Company increased the base dividend by 20% during the quarter in conjunction with the close of the Rolling Hills acquisition to $0.01/share per month, payable in July. The base dividend increase was driven by the enhanced sustainable free funds flow(1) in conjunction with the base business and H1 2022 Clearwater acquisitions which were accretive to our five year plan at flat pricing of US$55/bbl WTI and $2.50/GJ AECO.
Updated Enhanced Return Framework
Based on the existing return of capital framework outlined above, Tamarack plans to deliver incremental shareholder return as follows:
- Net debt(1) >$200 million and <$400 million: the Company continues to target to deliver 50% of discretionary free funds flow(1), inclusive of base dividends, from the prior quarter through tactical share buybacks and/or enhanced dividends.
- Net debt reaches the $200 million floor: the Company will target delivering 75% of discretionary free funds flow(1), inclusive of base dividends, from the prior quarter through tactical share buybacks and/or enhanced dividends.
Any enhanced dividend will be paid to shareholders on a quarterly basis, one month following the declaration date. Tamarack looks forward to continuing to deliver on enhanced shareholder returns in 2022 based on the current commodity price outlook.
Executive Changes
The Company announces the resignation of Mr. Martin Malek as VP Engineering of the Company. As a result of this change, Tamarack is also pleased to announce the promotion of Mr. Ben Stoodley, Director, Clearwater Development, to the role of VP Engineering. Mr. Stoodley has been with Tamarack since August 2021. He brings more than 17 years of industry experience in production engineering, business development and field development, most recently serving as Manager, Development at West Lake Energy (formerly Twin Butte Energy), where he led their development group, focused on conventional heavy and medium oil assets in East Central Alberta.
“On behalf of the Board of Directors, executive management team and all of our staff, I would like to extend sincere appreciation to Martin for his many contributions during the transformation of the Company. His hard work and dedication have been instrumental during the many acquisitions across Tamarack’s history” said Brian Schmidt, President and Chief Executive Officer. “We wish him luck in all his future endeavours. I would also like to congratulate Ben on his new role. We are excited to have Ben’s contributions and talent as part of our senior leadership team”.
Risk Management
The Company manages commodity price risk and volatility through a prudent hedging management program, with approximately 54%, on average, of gross oil production hedged against WTI for the remainder of 2022, through instruments including puts and enhanced collars. Tamarack also has WTI-MSW and WCS differential hedges in place on approximately 42% of our production in 2022. For 2023, the Company has entered into WTI put floors and enhanced collars as it systematically rolls the risk management program forward on approximately 25% of first half production. Tamarack’s strategy provides protection to the sustainability of the business and dividend while maximizing upside. Additional details of the current hedges in place can be found in the corporate presentation on the Company website (www.tamarackvalley.ca).
Investor Webcast
Tamarack will host a webcast at 9:00 AM MDT (11:00 AM EDT) on July 29, 2022 to discuss the second quarter results and operations update. Participants can access the live webcast via this link or through links provided on the Company’s website. A recorded archive of the webcast will be available on the Company’s website following the live webcast.
About Tamarack Valley Energy Ltd.
Tamarack is an oil and gas exploration and production company committed to creating long-term value for its shareholders through sustainable free funds flow generation, financial stability and the return of capital. The Company has an extensive inventory of low-risk, oil development drilling locations focused primarily on Charlie Lake, Clearwater and EOR plays in Alberta. Operating as a responsible corporate citizen is a key focus to ensure we deliver on our environmental, social and governance (ESG) commitments and goals. For more information, please visit the Company’s website at www.tamarackvalley.ca.