Earnings Call: Q2 2021

Jul 28, 2021

Earnings release

Good morning and welcome everyone to the Tamarac Valley Energy Limited webcast on 07/28/2021 discussing quarter two twenty twenty one results. I would like to introduce today's speaker Mr. Brian Schmidt, President and CEO and Mr. Steve Beitels, Vice President, Finance and CFO. If you have any questions, please type them in the Q and A field provided. Mr. Schmidt, you may now begin your conference. Good morning and thank you. I'm joined here today with Steve Bytells, VP Finance and CFO. We are pleased to announce our second quarter results along with an update on our Charley Lake and Clearwater drilling programs, as well as executive changes. The second quarter was another very strong quarter for the company, driven by successful integration of Anagata Oil Corporation, along with our continued execution of ongoing operations. The Anagata acquisition complements our balanced asset portfolio and provides further upside and resiliency to generate consistent, predictable free cash flow and demonstrates our corporate return of capital profile. I will pass it on to Steve to run through the first quarter highlights. Thanks, Brian. As Brian mentioned, this was another really strong quarter with production of 32,416 a day and adjusted funds flow of 71,700,000.0 or approximately $0.21 per share on a basic and fully diluted basis. We invested $30,800,000 in capital expenditures during the quarter, excluding acquisitions, which contributed to the drilling of 20 wells, generating free adjusted funds flow for the quarter of $40,900,000 and net income of $230,000,000 We exited the quarter with $5.00 $6,000,000 of net debt on our syndicated bank credit facility of 600,000,000 with a forecasted year end net debt to Q4 twenty twenty one annualized adjusted funds flow of less than 1.2 times. I will turn it back over to Brian for an operations update and executive change rundown. Operationally, we successfully integrated and executed on the acquisitions the company has undertaken over the course of the last year. In the Charlie Lake, we brought on our first two operated wells, which exhibited IP30 rates of thirteen sixty seven BOE a day and eleven fifty seven BOE barrels per day, and another well added ten forty eight BOE per day or six fifty barrels of oil per day respectively. This compares the internal TBE tier type eight type curve of four eighty two barrels of oil per day. Production for June and July was impacted by third party plant outages due to extreme temperatures in the province. However, we remained on track in our planned production range of 12,000 to 13,000 BOE for the asset, with current production of 13,000 BOE per day. In the Clearwater, we drilled eight wells in Nipissy, with all of those wells having eight laterals per well. Average per well production rates for the second quarter of the program is two ten barrels per day after cleanup versus the 160 barrels per day in the winter program with the six leg average in the core Nipissy development block. The eight leg wells drive significant capital efficiency with incremental well cost of only $105,000 per well. Total Clearwater production for June averaged about 5,000 barrels per day with plans to drill another 13 to 14 net wells in Nipissy for the remainder of the year, with an additional three to four partner wells in the Greater Jarvi area. We continue to work down the path of installing our gas conservation infrastructure in Nipissy and plan to pilot our inaugural waterflood in Nipsey in Q4. We have significantly transformed the company over the last year, and with that we have some executive and board changes to highlight. First, I'd like to congratulate Mr. Floyd Price, Chairman of the Board, on his retirement effective July 27. He will be succeeded by Mr. John Rooney as Chairman of the Board. John brings extensive CEO and board experience with him, and we'd like to thank Floyd for his instrumental leadership and guidance in building Tamarac to what it is today. With respect to the executives, I'd also like to congratulate Dave Christensen on his retirement as VP Engineering. Dave has been instrumental over the last seven years, and we wish to thank him for his contributions. Dave has made the following, Tamarac has made the following executive appointments as a result of Dave's retirement and the growth of the business. Kevin Screen has been promoted to Chief Operating Officer. Kevin has served as VP Operations since 2011. Martin Malik has been appointed to successor of Mr. Christensen as VP Engineering. Martin has served in various roles across the organization since 2014, and was most recently VP Business Development. Mr. Scott Shimick has been appointed as successor to Mr. Screen as VP Operations and Production. Scott brings more than fifteen years of engineering and operations experience. Most recently, he was VP of Reservoir Development at Buena Vista Energy. Ms. Christine Azinga has been appointed to VP Business Development and Corporate Planning. Ms. Zenga brings more than twenty years of experience in finance, investor relations, and business development, including M and A. Most recently, she held the role of VP Strategy and Planning at Black Swan Energy. I would like to congratulate Floyd and Dave on their retirements, as well as Kevin, Martin, Christine, and Scott on their executive appointments. I will finish by thanking our employees, board, and shareholders for the continued support, and I'll turn it back to the moderator for questions. Alright, our first question is for Brian Schmidt. Is Tamarac still looking to buy oil assets? So right now our priority is for debt repayment, and bring that down as we work toward looking at dividend and return of capital to shareholders. If there were to be oil assets acquired, they would be tuck ins in and around our core areas, and I would classify our core areas as being Clearwater, Charlie Lake, and Waterflood. Thank you. Our second question is for Steve Vitals. Given substantial free cash flow generation, when would you be comfortable moving away from debt repayment and returning capital to shareholders through a dividend and or NCIB? Yes, as Brian just mentioned, we do have a target debt level that we want to get to for the company here and we want to be sub one times before we would put a dividend or look at other return on capital mechanisms for the company. So we do see that given the strong free cash profile that was evident in the quarter likely in through year end here. I think we'll provide some more information and roll out a five year plan and so forth for the Street to really understand the resiliency of that free cash that the business can drive here and the return on capital that really would be an output of that free cash flow as such. Stay tuned on that front, but that is definitely top of mind. Steve, this question is for you. With the second rig coming on in the Clearwater later this year, where do you see production levels moving to for 2022 in the play? Yeah, so, you know, as most of you probably noticed, in June here, you know, we're up around that 5,000 barrel a day mark, which, really is where we expected to be exiting this year in Q4. So things have gone very well in the Clear water. We are looking, as Brian mentioned in his comments, water flood and we have another thirteen, fourteen wells to be drilled for the remainder of the year. So we still are going to leave guidance where it is and we'll see where we get as we move through the back half. But we do see the growth coming from the Clearwater really in the company and that will be next year. So we could see that moving into that 8,000 barrel a day range next year, maybe a little bit higher as we firm up our plants. Brian, this question is for you. Can you discuss any drilling and completion changes with recent wells? Well, I think the biggest change is going to be in the Clearwater, and that's where we went to the eight legs. And you have to find the right balance there of more legs versus the royalty and reduction in the extra cost to putting more on because you to spread out a little bit further and it takes up drilling time. So we think that eight legs is the maximum net present value that we can get off that play, as opposed to going to six or as opposed to going to 10. That seems to be the right balance. In the Charlie Lake, think coming out of the gate, are big wells and we don't want to change completions and drilling too much until we actually get a good established run rate there. Then you'll see us start to work on cost reduction ideas and changes in operations in the field. But I'd say we're probably not going to be doing anything too drastic there until SeptemberOctober timeframe. Okay, Brian, one more question for you. Does the well productivity in Charlie Lake and Clearwater warrant a reallocation of capital or a potential capital budget increase? Yeah, so as I mentioned earlier, the priority for the company is debt repayment, and establishing ourselves as long term, credible, sustainable free cash flow generators. So right now I don't see a significant increase in anything, actually an increase at all in those programs. There may be some expiries or things that we need to allocate some smaller amounts of capital to that could be classified as a minor increase, but by and large, the goals of the company are debt repayment. Alright, the next question is for Steve Vitals. Do you have any change in the 2021 guidance as a result of the strong quarter? No, we didn't put any change in guidance yet. Felt we've only had Anagata in our hands here for two months. And although things have gone really well operationally for us and integrating the asset, we thought it was a little bit too early to start to get ahead of ourselves. You know, talked about the downtime in late June there, early July with the plants, given the extreme temperatures. It is still supposed to be quite hot in the province. So, you know, we just want to make sure we understand, you know, where we are exiting, I think, the summer here before, you know, we do anything with respect to guidance, but you know, it was a very strong quarter, you know, as ahead of most analyst estimates, so you know, sort of stay tuned. We feel pretty good about the setup for the second half here. The next question is for Brian Schmidt. Can you speak to the performance of the veteran waterfloodexpectations for the next couple of years, and how will this impact the corporate decline? Yeah, it's a good question on the waterflood because that is really going to be key to controlling the corporate declines. Vetrin, of course, is the largest of our water floods, but we kind of look at those as an entire group. And so in order to control the decline, if you look at our plan, for every dollar we spend, about $0.25 needs to go into waterflood. And so the veteran waterflood will play a key role here going forward as a larger piece. However, we're very excited about the IEL water flood. We just drilled a water source well there and that was a key requirement is finding a good water source and so we won't be using fresh water for that water flood. We do have a nice clean source. We'll be testing the deliverability of that well here shortly, but that's a key success, is us drilling the Belly River source water well. That the I Hill project itself, yields the highest rate of return in the company of any dollar invested. So we're probably going to be looking at increasing the allocation of capital into I Hill. But we will also be doing some additional patterns in veteran here as well. Thank you. Our next question is for Steve Vitals. With respect to potential five year plans, is a 5% production growth rate the right range for investors to think about or could it be something higher? When we look at what we model in our five year plan internally, we would model somewhere between three to 5% growth. I think optimally the Clearwater obviously is at a stage of growth and that's what will drive the majority of it. Early years in the five year plan, it's probably 5%. And then as we move through to the later years of the five year plan, that probably falls off about three. Right now that's where we see sort of the optimal level of growth for the company, balancing return of capital as part of the total return strategy. The next question is also for Steve. What are you seeing in terms of pricing pressure on services? You know what, so far I would say the biggest thing and most management teams have talked about it has been the price of steel. So that's definitely something we've seen come through. The next piece you're starting to see is definitely the cost of labor. I think the pumpers have all talked about that. Just trying to secure labor and they've had trouble doing it. That normally means you're going to have to pay more to get these people back into those seats. So we expect that we're going to see some pressure really with labor. The CAODC already increased the day rates earlier in June there, so I think we see pricing pressure for sure. We model it internally, some inflation, but I think it's too early to really I think in the fall, we'll get a better sense of where things really will go. The next question is for Brian Schmidt. Brian, why do you feel the share price is so sluggish? Do you see improvement moving forward? Yeah, well, I think there's probably a couple of reasons for that. I think people are really wanting to, these days they want to see demonstrated performance with new assets. So I think we established ourselves in the Clearwater in Q1 quite easily. In fact, those well results that we got in particular on the second wave in the second acquisition we did here in February are outstanding and they're almost a factor of two times multiplier what we expected. So I think the market has given ourselves credit for that. Anagata, that's a large acquisition, and I think people want to see demonstrated the integration of those assets and quarter by quarter performance before they step in and realize where we're at. I think what you're seeing in this last quarter is that a lot of analysts, we had a huge beat on the quarter results, and a lot of analysts are painting a relatively conservative picture to what the demonstrated performance of the assets are until they get comfortable with it. I think I'm not too worried about it because I think over time results speak for themselves, and you're see going numbers move up on analysts here as they look at results. Thank you. The next question is also for Brian. You mentioned tuck ins in core areas. Would you look at adding exposure to other zones in Northwest Alberta beyond the Charlie Lake, like the Montney? Yeah, I don't see, right now we see enough runway in the Charlie Lake that we'll sticking to that. And I think when you look at the results of the Charlie Lake, we just brought in some employees that worked at Montney, they're looking at it, they're saying, well, geez, it looks like the rates are about the same and the costs are down almost a third. I think the way we're looking at the business is we can generate more free cash flow if we stick to the Charlie Lake. There may be some synergies down the road with facilities and such, but Charlie Lake will be the focus on the tuck ins. Thank you. The next question is for Steve Vitals. What is the approximate expected debt owing at the end of the fourth quarter? Yeah, we would be forecasting right now on our budget pricing in and around $4.20 to $425,000,000 leaving, obviously ample capacity on our credit facility of 600 and that we see really in through next year again just on planned budget pricing moving, that'd be around 180,000,000 at the December. Thank you. The next question is for Brian. How does Penny fit into longer term plans with strengthening oil prices? Penny is a great asset, nice shallow decline, good solid cash flow and reliable. So that penny asset, we fit in the waterflood core assets in general, along with Slade Point Waterflood, along with I Hill, along with Veteran, and soon to be Clearwater. So I think just by some minor tweaks and managing waterfloods, we've really changed the performance of that asset. So I still see that remaining as key. Thank you. The next question is for Steve. If there are plans for share buyback, would it not make more sense to buy now while share price is low? Yeah, that's a great point and it's something we and the board talk about all of the time and would be obviously a pressing issue. The thing for us here is, we took on debt to do Diana Gauda acquisition that closed in June. We want to see that debt profile come down before we commit capital to buybacks or a potential dividend. So stay tuned. I think for us really, means getting through the third quarter here, another quarter really understanding where operations are at you know, for us corporately, but more importantly, you know, another good quarter of, you know, what looks to be big free cash that can pay pay down debt and leave us in a position where we feel, you know, comfortable from that debt target range going forward of about one times. Thank you. I guess we'll turn it back to the moderator, please. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.