CALGARY, AB – Tamarack Valley Energy Ltd. (“Tamarack” or the “Company“) (TSX: TVE) is pleased to announce that it has entered into a definitive agreement (the “Agreement“) to acquire Deltastream Energy Corporation (“Deltastream“), a privately held pure-play Clearwater oil producer, for total net consideration of $1.425 billion, consisting of $825 million in cash, $300 million in the form of a deferred acquisition payment (“DAP”) and $300 million of equity comprised of approximately 80 million common shares of Tamarack (“Tamarack Shares“) at a deemed price of $3.75 per share (the “Acquisition“).
The cash portion of the Acquisition is expected to be funded, in part, through a structurally transformed expansion of our sustainability-linked revolving credit facility, from a revolving $650 million reserve-based credit facility to a fully-underwritten $700 million, three year senior secured covenant- based, sustainability-linked revolving credit facility (“SLL Facility”). The remaining cash portion will be funded via a fully-underwritten $275 million senior secured amortizing two year term loan (“Term Loan“), a $125 million equity offering, and a proposed additional $75 million aggregate principal amount of Tamarack’s 7.25% senior unsecured sustainability-linked notes due May 10, 2027 (“Notes”) on a private placement basis. The DAP will be unsecured and payable in cash over the 18-month period subsequent to close in six installments ($50 million quarterly) plus 5.75% interest.
Bill Slavin, Managing Director, ARC Financial said: “The Deltastream business is concentrated in the heart of the Clearwater. With this transaction, Tamarack will become the leading public Clearwater business, with an exceptional combined asset base. ARC Financial is excited to be a shareholder in Tamarack and participate in value creation from the Company’s Clearwater, Charlie Lake and enhanced oil recovery operations. Tamarack has a demonstrated track record of prudent balance sheet management and capital discipline and is led by a highly respected management team with extensive operational and capital markets experience. Tamarack’s proactive approach to the environment, Indigenous partnerships and ethical governance is aligned with ARC’s values.”
Brian Schmidt, President & CEO of Tamarack, said: “The acquisition of Deltastream solidifies Tamarack as the largest producer in the Clearwater oil fairway. This transaction builds on the Company’s core position in the Clearwater, which is recognized as North America’s most economic play. Deltastream brings scale and a leading economic development drilling inventory, comprised of high quality, long life assets with low sustaining capital requirements that enhance capital allocation flexibility. This strategic transaction delivers significant accretion to our existing business model and drives increased long-term value creation for our shareholders.”
- Enhances Clearwater Asset Quality and Scale
-
- Average Clearwater production of ~23,000 boe/d(4) (94% oil and natural gas liquids) for 2023
- Delivering an estimated ~$500 million of EBITDA(1,2) for 2023, including the impact of the newly created 5% gross overriding royalty on Deltastream’s oil production
- Over 500 net future development locations(3), across 184 net sections of land adjacent to Tamarack’s core Nipisi and Marten Hills operations
- Positions Tamarack as the largest producer in the Clearwater with considerable scale and upside across Nipisi, Canal, Marten Hills, Greater Peavine, Perryvale and Jarvie
- Resilient Asset Base
- The Clearwater ranks as the most economic play in North America, with wells that payout in less than six months at current prices
- Industry leading returns and superior payouts drive asset level free funds flow breakeven(2) of less than US$32/bbl WTI
- Operational Synergies
- Increased scale affords improved netbacks through egress and marketing efficiencies
- Optimized capital deployment: continuous operations and improved access to rigs and field services
- Consolidates road access requirements, reducing costs and resulting in more efficient long term play development
- Provides for economies of scale regarding gas conservation infrastructure at Nipisi
- Top Tier Assets Acquired at Attractive Valuation with Immediate Accretion
- Attractive purchase price of ~2.9x 2023E EBITDA(1,2)
- Drives 2023 free funds flow (FFF)(2) per share accretion of 25% and represents a pro forma FFF yield(2) of 27%
- 16% accretive to adjusted funds flow (AFF)(1,2) per share in 2023
- Pro forma 2023 FFF(2), prior to dividends, expected to exceed $600 million
- Long term annual FFF(2) expected to exceed $500 million on strip prices
- 5 Year Plan Accretion at Tamarack’s long-term base pricing at US$55/bbl WTI
- 5-year average FFF(2) per share accretion of 28%, drilling 60 – 65 wells per year
- 5-year average debt adjusted funds flow per share (DAFFPS)(2) accretion of 35%, highlighting the increased resiliency of the asset base at lower commodity prices
- Increases Returns to Shareholders
- Upon the closing of the Acquisition, Tamarack expects to increase the annual base dividend by 25% from $0.12/share to $0.15/share
- Positions Tamarack for significant enhanced return of capital in H2 2023
- Updated enhanced return framework provides a more resilient free funds flow(2) profile across the commodity prices spectrum with significant accretion to long term return of capital for shareholders
- Maintains Balance Sheet Strength and Increases Financial Flexibility
- Moves Tamarack to a three-year, covenant-based credit facility; provides stability, flexibility and a lower cost of capital, which is not subject to semi-annual reviews
- Prudent hedging profile protects substantial free funds flow(2); underpins dividends and debt repayment to rapidly de-lever the balance sheet
- Hedging portfolio structure designed to provide downside protection while retaining significant upside pricing exposure
- Deltastream expected to be debt free at close of the transaction
- Leveraging Experience and ESG Leadership
- Combined technical expertise related to enhanced recovery across a large original oil in place and active waterflood projects to deliver stable long-term cash flow and low decline production
- Track record of prudent balance sheet management and capital discipline, with a clear plan to reduce pro-forma leverage and to manage risk, including an active commodity price hedging program
- Focus on environment, indigenous partnerships and ethical governance that includes sustainability-linked lending, emission reductions, proactive asset decommissioning, stakeholder engagement and indigenous partnership
Acquisition Metrics
Purchase Price ($MM) |
$1,425 |
2023E Production (boe/d)(4) |
23,000 |
Oil and NGL Weighting |
~94% |
Drilling Locations(3) |
>500 |
2023E EBITDA(2) ($MM) |
~$500 |
Reserves (MMboe)(5) |
|
Proved Developed Producing (PDP) |
13.4 (93% liquids) |
Total Proved Plus Probable (TPP)(5) |
51.0 (93% liquids) |
Pro Forma 2023 Guidance
Including the contribution of the Acquisition, Tamarack is providing initial preliminary guidance for 2023.
Preliminary 2023 Guidance(1) |
Tamarack |
|
Average Production(6) (boe/d) |
68,000 – 72,000 |
|
% Oil and NGL |
82% – 84% |
|
EBITDA(2) ($MM) |
$1,200 – $1,400 |
|
Capital Budget ($MM) |
$400 – $450 |
|
2023E Year-end Net Debt / EBITDA(2) |
~0.7x |
Base Dividend Increase
In conjunction with the Acquisition, Tamarack’s Board of Directors has approved a 25% increase to the monthly dividend to $0.0125 per share, from $0.01 per share previously, which equates to $0.15 per share on an annual basis, for the November dividend, payable in December. The increase in Tamarack’s monthly cash dividend reflects the improvement in sustainable FFF(2) per share the Company has generated since implementation of its dividend policy in October 2021. The Company’s improved FFF(2) per share profile is a cumulative result of enhanced sustainable FFF(2) along with the Acquisition, delivers accretion at flat pricing of US$55/bbl WTI and $2.50/GJ AECO.
Enhanced Return of Capital Update
Following completion of the Acquisition, Tamarack’s balance sheet will remain a priority with the first net debt milestone of $900 – $1,100 million to trigger the enhanced return of capital. Once achieved, the Company will allocate up to 25% of excess funds flow(2) to enhanced returns through share buybacks and/or special dividends. As leverage is reduced, achieving a debt level of $500 – $900 million Tamarack expects to increase the enhanced return to up to 50% of the prior quarter excess funds flow(2). Long term, Tamarack targets net debt(2) of less than $500 million, representing approximately 1.0x net debt to quarterly annualized AFF(2) at US$45/bbl WTI and $2.50/GJ AECO, which would trigger returning up to 75% of excess funds flow to investors through either share buybacks or enhanced dividends.
Concurrent with the execution of the Agreement, shareholders of Deltastream representing over 90% of the outstanding common shares of Deltastream executed letters of transmittal accepting Tamarack’s offer and tendering their shares in connection with the Acquisition. The Agreement provides for, among other things, a non-solicitation covenant on the part of Deltastream and a termination fee in favor of Deltastream. A copy of the Agreement will be filed on Tamarack’s SEDAR profile at www.sedar.com.
The Acquisition is expected to close prior to the end of October, subject to certain customary conditions and regulatory and other approvals, including the approval of the Toronto Stock Exchange (the “TSX”) and the Commissioner of Competition pursuant to the Competition Act (Canada).
At closing, Tamarack will enter into a hold period agreement with ARC Financial, who owns approximately 85% of the issued and outstanding common shares of Deltastream (on a non-diluted basis).
Of the Tamarack shares issued to ARC Financial, 50% will be subject to a six month escrow period and 50% of the shares will be subject to a twelve month escrow period.
Tamarack intends to undertake, subject to market conditions, a proposed offering of at least $75 million of aggregate principal amount of 7.25% Senior Unsecured Sustainability-linked Notes due May 10, 2027 (the “Notes“), on an exempt private placement basis (the “Private Placement“).
The Notes will be issued under the indenture pursuant to which Tamarack previously issued $200 million aggregate principal amount of 7.25% Senior Unsecured Sustainability-linked Notes due 2027, as supplemented by a supplemental indenture dated as of the Private Placement close, and will form a single series with such previously issued notes. Upon closing of the Notes, a total of $275 million aggregate principal amount of the 7.25% senior unsecured notes will be outstanding.
Subject to completion of the Private Placement, Tamarack intends to use the net proceeds to fund a portion of the purchase price for the Acquisition.
The Notes are being issued in accordance with Tamarack’s Sustainability-Linked Bond Framework (the “SLB Framework”), which sets out certain sustainability performance targets (“SPTs”) that are aligned with Tamarack’s overall corporate sustainability strategy, including: i) Scope 1 and 2 emissions intensity reductions of 39% by 2025 over the 2020 baseline, and; ii) Indigenous workforce participation of 6% or greater by 2025. Details of the SLB Framework are available on the Company’s website. Failure to meet the SPTs will result in a step-up in the interest rate payable of 75 basis points for the emissions reduction SPT and 25 basis points for the Indigenous workforce participation SPT from and including May 10, 2026.
RBC Capital Markets and National Bank Financial Markets are acting as Joint-Bookrunners and Sustainability-Linked Bond Structuring Advisors for the Private Placement. S&P Global Markets has previously provided a second party opinion of the SLB Framework, confirming alignment with the International Capital Market Association’s Sustainability-Linked Bond Principles.
The Notes will not be qualified for distribution to the public or registered under the securities laws of any province or territory of Canada or in the United States and will only be offered in the provinces of Canada and in the United States pursuant to applicable private placement exemptions to qualified institutional investors.
Closing of the Private Placement is not conditional upon completion of the Acquisition. In the event the Acquisition is not completed, Tamarack may use the net proceeds of the Private Placement to reduce indebtedness, fund future acquisitions and for general corporate purposes. Prior to the closing of the Acquisition, the net proceeds may, from time to time, be invested in interest bearing deposits or in short-term interest bearing or discount debt obligations or other short-term investments (in each case, either Canadian or U.S. dollars).
The Company has entered into a binding commitment letter for the SLL Facility and the Term Loan with the Royal Bank of Canada and National Bank of Canada, pursuant to which such lenders have agreed to fully underwrite and commit to, with a syndicate of lenders, availability of the SLL Facility and Term Loan in connection with the closing of the Acquisition. The SLL Facility and the Term Loan will each be secured by all of the assets of the Company (including those of Deltastream), bear interest at market rates that fluctuate plus a margin based on the senior debt to EBTIDA ratio of the Company and include customary debt covenants for lending arrangements of this nature. The SLL Facility will mature on the date that is 3 years following the closing of the Acquisition and the Term Loan will mature on the date that is 2 years following the closing of the Acquisition. A portion of the proceeds from the SLL Facility and the full amount of the Term Loan will be used to fund: (a) a portion of the purchase price for the Acquisition and related transaction costs; (b) the replacement of the Company’s current credit facility; and (c) for general corporate purposes.
RBC Capital Markets is acting as exclusive financial advisor to Tamarack with respect to the Acquisition.
CIBC Capital Markets and Peters & Co. Limited are acting as strategic advisors to Tamarack with respect to the Acquisition.
Tudor Pickering Holt & Co. and National Bank Financial Inc. are acting as co-financial advisors to Deltastream with respect to the Acquisition.
Stikeman Elliott LLP is acting as legal counsel to Tamarack with respect to the Acquisition, the Private Placement, the SLL Facility and the Term Loan.
Norton Rose Fulbright Canada LLP is acting as legal counsel to Deltastream.
RBC Capital Markets and National Bank Financial Markets are acting as Joint Bookrunners with respect to the SLL Facility and the Term Loan.