Good morning. Welcome, everyone, to the Tamarack Valley Energy Ltd. webcast on December 15th, 2021 , discussing yesterday's press release. I would like to introduce today's speakers, Mr. Brian Schmidt, President and CEO, and Mr. Steve Buytels, Vice President of Finance and CFO. If you have any questions, please type them in the Q&A field provided. Mr. Schmidt, you may begin your conference.
Good morning, everyone. I'm joined here today with Steve Buytels, Vice President Finance and CFO. We're pleased to announce the acquisition of Crestwynd Exploration, a privately held Clearwater oil producer, for consideration of CAD 184.7 million. This acquisition consists of 4,500 barrels a day of oil in Southern Clearwater Fairway and 250 net future development drilling locations across only 50% of the 99,360 net acres. It provides significant exploration potential upside. In addition to the highly economic drilling inventory, the assets have an attractive environmental and ESG profile with minimal ARO of less than CAD 8 million and limited freshwater requirements.
Pro forma, the acquisition will control 445 net sections of Clearwater land across Nipisi, West Martin Hills, and Southern Clearwater areas with over 650 future drilling locations. Our Clearwater oil production is expected to average approximately 12,000 BOE per day in 2022. I'll pass it over to Steve to walk through the transaction metrics and the financial accretion numbers and our new sustainability-linked lending facility.
Thanks, Brian. The Crestwynd transaction is highly accretive to Tamarack shareholders. The CAD 184.7 million purchase price implies a 2.1x annualized operating netback multiple with a free funds flow yield in excess of 25%. The transaction is accretive on a per share basis to forecast 2022 adjusted funds flow by 7% and free funds flow by 9% at strip prices, while maintaining our resilient sustaining funds flow break even, including the base dividend of approximately $35 per barrel WTI.
The transaction is leverage neutral on a pro forma 2022 basis, with forecasted year-end net debt to adjusted funds flow of less than 0.6x on strip and increases our debt adjusted free funds flow per share by more than 5% throughout Tamarack's five-year plan at $55 per barrel WTI, and enhances our long-term return of capital framework given the debt adjusted free cash flow accretion. We are pleased to announce our lending syndicate has provided an extension of the company's existing CAD 600 million revolving credit facility to December 2023 and transitioned this facility to a sustainability linked lending facility. In conjunction with the acquisition, National Bank as lead lender, has provided commitments for a separate CAD 100 million credit facility in association with the Crestwynd acquisition. The sustainability linked facility incorporated incentive pricing terms.
Through the SLL facility, three of Tamarack's long-term goals have been identified as key performance indicators and structured into the performance targets that will decrease Tamarack's cost of borrowing by up to 5 basis points if the targets are achieved or increase the cost in the event they are missed. The three targets include GHG emission intensity, decommissioning management, and Indigenous workforce participation. We are extremely proud and excited to launch the sustainability link loan with our lending syndicate partners and continue to be a leader in ESG amongst our peers. I will turn it back over to Brian for some closing remarks.
In closing, the Crestwynd acquisition further delivers on our commitment to growing free funds flow per share for shareholders and providing long-term accretive return for capital growth. This, coupled with the sustainability link loan facility, drives home the commitment Tamarack has to being responsible corporate citizen and is aligned to our core values. I'd like to thank all of our employees, board of directors, and shareholders for their support, and I wish everyone a happy holidays and a new year. I'll pass it back to the moderator for questions.
Our first question is for Steve Buytels. What will be the split in drilling and capital between the southern and northern Clearwater lands in 2022?
Yeah, no, that's a great question. We'll run, you know, between that CAD 30 million-CAD 35 million down in the southern Clearwater. We had working interest in some of the Crestwynd land, so that includes some of the capital we already had baked in there for our 50% interest that was existing. Then we still see upwards of, let's call it anywhere from CAD 50 million-CAD 70 million in the northern Clearwater. We give the range there because we are kicking off our water flood on the west side of Nipisi. That incremental, you know, CAD 20 million to get us to 70 would be moving and allocating some more dollars into that water flood to kick that off here early in the new year.
All right. Our next question is for Brian Schmidt. Is the expectation to hold this asset flat at 4,500 BOE per day, or is there some room for growth in 2023?
Yeah, we'd be looking at keeping this asset flat, pretty much flat for next year. That's consistent with how we're looking at the business and returning, you know, how it affects our dividend and returning capital back to shareholders.
Our next question is for Steve Buytels. With this deal, we think of capital going up CAD 30 million-CAD 35 million next year, or will there be some reallocation from other assets?
Yeah, no, that's probably a fair estimate. I think, you know, when we rolled out the five-year plan, we gave, you know, the market a range for standalone Tamarack of 41,000-43,000 BOE a day, you know, with a capital budget of CAD 200-250. You know, the way we look at it, we would probably be, you know, closer to the midpoint on a standalone basis as we look at 2022. You know, by adding this 30-35, it probably brings you to the high end of that original range. You know, obviously we're gonna add that 4,500 BOE a day moving forward on the production side.
We will be providing our formal 2022 guidance inclusive of the Crestwynd acquisition in early January. We'll be able to come back to you guys with some more detail then.
Our next question is for Brian Schmidt. Does Crestwynd have land anywhere other than Southern Clearwater, and is it included in the deal?
This acquisition includes the lands right around the greater Jarvie assets and does not include some of the other acreage that Crestwynd had.
Our next question is for Steve Buytels. How does this acquisition change your capital projections with the five-year plan? Should we think about it as additive or a shift between assets?
Yeah. Again, this one would be, in our view, additive here. You know, you may see a little bit of shifting of capital as we roll out the budget, as I mentioned before. For the most part, you know, we do plan, as Brian said, to hold this production flat at 4,500 barrels a day on the acquired assets here. If you recall, we also, you know, bought the Jarvie asset from Spur back in September, which fits this whole southern core fairway. You know, we do have some committed capital in that region as well. Again, you know, as we look at it, we would see this as being additive right now.
When you look at the free cash flow associated with this, as we mentioned in the press release, you know, we plan to spend on the Crestwynd acquisition about CAD 30-CAD 35 million annually to keep that flat. At strip pricing, you know, we would see somewhere around 45-50 million of free cash flow after we take into account the taxes, and the incremental interest that comes with this acquisition.
Our next question is for Steve Buytels. Are there any tax pools that come with the transaction, and what would the impact be to your tax horizon?
Yeah. There are tax pools, however, it's all resource pools. There are no NCLs here. The company did a good job of becoming profitable here quite early, hence why, you know, we saw this asset attractive from a free cash flow standpoint. You know, when we look at our forecast for next year on strip, this would add approximately, I think it was about CAD 7 million in tax that we'd have to pay. Again, we'll formalize, you know, updated tax pools for everybody through year-end here as we do the budget. We will see a little bit of tax on this.
That's why when we look at and I quoted you the free cash flow associated with the funds flow here, there is a little bit of a tax grind on that off that NOI.
Another question for Steve Buytels. Are there any material hedges included with the acquired production?
They have some small hedges. They actually have a couple really good WCS hedges that are in the money here that run through until June of this year. Then there's a couple WTI swaps that also run through to April and June that we'll provide some information here for the analyst today with an updated hedging chart. We also pro forma or Tamarack standalone, we did do some risk management adjustments here with the run in oil a few weeks ago. We did restrike our full Q1 put program from CAD 55 puts up to CAD70 puts.
We'll again provide an update here for you guys in the presentation, just to lock in a minimum for a cash flow, which, you know, from a risk management standpoint for Q1, when we spend, you know, the highest percentage of capital, I think will look very good and provide, you know, a significant amount of free cash to continue to pay down debt.
Our next question is for Brian Schmidt. How do these Crestwynd undrilled locations likely compare to Nipisi and Jarvie?
Yeah. You're gonna be in Nipisi. There's quite a range of production rates, initial production rates. We've got wells in the first month who are as high as 300 barrels a day. We've also got some areas in Nipisi that average about 185. What we're seeing here on the IPs is you know the Prairie Vale area. We just did a test well there that proved up a new area, and it looks like it's gonna be about 235 barrels a day IP30. If you get over into other areas, you're probably talking around that 180.
I'd say the 180-230 is a pretty good range to be thinking about for most of the areas here, that we bought from Crestwynd.
Our next question is for Steve Buytels. How do you see this impacting the return of the capital model that you rolled out this fall?
Yeah, that's a great question. Again, given it's leverage neutral here and the amount of free cash that comes off the Crestwynd acquisition, we don't see it impacting the enhanced return rollout very much. When we look on strip, we still see a second half rollout of the enhanced return portion. With respect to the base dividend, you know, as we stated when we came out with return on capital program, we want this to be something that's sustainable, that we grow, you know, annually or maybe twice a year that we'll come out with. Again, it'll be small increases that's balanced at, you know, 25% of free cash flow at CAD 55 WTI.
You know, most of the analysts are gonna go through the math and say, "Hey, you guys got some room, you know, to potentially add to that." You know, yes, the math would tell you that, but we want some time here. We haven't even paid, you know, our first dividend payment. You know, what we wanna make sure, you know, our shareholders and stakeholders understand is, you know, this is accretive to our return on capital framework over time. You know, we'll be sure to continue to be prudent with that and, you know, and prescriptive with that as we move forward. Again, you know, on close of this deal, we'll look to provide some more commentary there.
Another question for Steve Buytels. Can you walk through how the SLL components work and why you chose these three KPIs?
Yeah, that's a great question. Again, I can't, you know, tell you how proud we are as a company to really be the first E&P with this tied to our revolving facility here in Canada, with some, you know, very rigorous targets. Obviously, when it comes to GHG, that's top of mind for all oil producers in North America. You know, our scope one and two emissions reduction of 39% is a very aggressive target. Again, it's something, you know, that's gonna keep and hold our feet to the fire.
We're comfortable we can get there specifically with some of the gas conservation projects that we have in the likes of the Clearwater, and we can have Brian talk about, you know, our plans on gas conservation here on these new assets in a second. Decommissioning management is another, you know, top of mind commitment here for us with respect to, you know, taking care of business. You know, as we drill, you know, new wells and we continue to grow this company, you know, you gotta clean up what you leave behind.
This target is, you know, 150% of the Alberta Energy Regulator Voluntary Closure Program targets, which, again, puts us in you know, the camp of doing more than what we have to and more than what our peers you know, would do. We track that regularly, and again, just make sure that we invest in cleaning up after ourselves. Lastly, you know, I think this is the most unique and the most important one and speaks to the culture of what, you know, Brian specifically here has done as CEO in partnering and working with First Nations is having this Indigenous workforce participation.
You know, we've done a good job continuing to bring Indigenous employees and contractors into the company, and we, you know, want to make sure that we grow that given, you know, we operate on various First Nations within the Treaty 8 up in the Clearwater and then traditional lands over in the Charlie Lake. You know, again, this is a target that's in line with federal government initiatives for the public service sector to get to 6% by 2025. You know, these again, these are aggressive targets and are gonna take a commitment and investment on our part to reach them. You know, as mentioned, from a cost of borrow standpoint, you know, if we hit these, we can, you know, reduce our cost of borrowing by up to 5 basis points.
In the event that they're missed, obviously that'll impact us by increasing our cost there as well. I think it's a very good balanced approach and some very good hard measured targets to achieve here. Brian, did you wanna talk a little bit about the gas conservation that we're gonna take on here?
Yeah. Similar to one of the things that we did with our ESG program is really take a look at the weighting on and impact on ESG when you bring new assets into the company. Either we select assets that have very low GHG intensity numbers, or we have a plan to execute and bring them into range. Just like we did in Nipisi, we put in a large gas gathering system. We spent about CAD 8 million there and took the GHG intensity from somewhere around 80 when we bought it down to around 20 kg per barrel.
With this particular asset, as we develop it, we will be extending lines, gas lines into the area and collecting gas that's currently being vented right now, and all the new gas that we bring on here with the new drills. We will seek some of the funding that the government provides on GHG, just like we did in Nipisi, so this won't come out of all of it. We're anticipating about 75% will come out of the funds on the GHG program that the federal government has out. We built that in, and we have plans to execute that over thee next couple years.
Thank you very much. That is the end of our questions.
Ladies and gentlemen, this concludes your conference call for today. We thank you very much for participating and ask that you please disconnect your lines.