Good morning. Welcome everyone to the Tamarack Valley Energy Ltd. Conference Call and Webcast on Thursday, May 11th, 2023, discussing the recent Q1 2023 results press release. I would like to introduce today's speakers, Mr. Brian Schmidt, President and CEO, and Mr. Steve Buytels, Vice President, Finance and CFO. If you'd like to ask a question, please press star followed by one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. Thank you. Mr. Schmidt, you may begin your conference.
Good morning, thank you, Paul. I welcome everyone to the call to discuss our first quarter operating and financial results. I'm joined here this morning with Steve Buytels, VP Finance and CFO. Q1 was an extremely active quarter at Tamarack. At our peak, we had nine active drilling rigs during the quarter. The success of our field program was highlighted by our exploration successes at Seal, Nipisi, and West Martin Hills. The first quarter of 2023 represented a first full quarter of Tamarack having Deltastream assets under our control, with the assets now fully integrated. Operational and capital synergies are beginning to be realized as Tamarack executes our expanded Clearwater development program. These Clearwater assets continue to deliver at or above forecast at the time of the acquisition, with additional upside and potential capital efficiency improvements being identified.
Today, I'm excited to share the results of our Clearwater Seal asset delineation activity, highlighted by three stack sands, with all three brought on production through March, exhibiting IP30 rates of 380 barrels of oil per day combined. Two of the three wells drilled with six legs, consistent with our drilling program, while one was drilled with three legs to test the productivity of that specific sand. The C sand produced over 206 barrels of oil per day, IP30, with the B sand greater than 130 barrels of oil per day, and the D sand, a three-legged well, had IP30 rates of 43 barrels per day. What does this mean to Tamarack? We have 17 sections in the area with three sands that present an incremental seven sections with two sands of development potential.
At this time, which adds 16% to our overall Clearwater resource in place. Putting this a different way, we see the opportunity to produce 2,200 to 3,000 barrels of oil per day with a one and a half mile development, where three sands are present with a total full cycle capital cost per section of between $35 million and $40 million, driving significant infrastructure and pad savings and capital efficiencies of approximately $13,000-$15,000 per flowing barrel or less. West Martin Hills continues to exceed the company's expectations, where production has grown organically from 400 barrels per day in Q4 2022 to over 3,400 barrels per day currently. At Nipisi, we're deploying multilateral injectors with two of the 14 injectors as part of our waterflood in expansion.
The application of multilateral injection in this area is expected to significantly lower overall project cost while achieving similar recoveries relative to single leg schemes. The original waterflood pilot producer at Nipisi has produced cumulatively 180,000 barrels to date, and the water cut remains stable at approximately 20%. After more than 500 days of production, this well is still producing 400 barrels per day. At West Nipisi, the second well of our joint venture exploration program exhibited peak IP30 rates of 175 barrels of oil per day, with the first well showing low decline, delivering an IP90 rate of 160 barrels of oil per day. Together, these results push the fairway of the two Clearwater sands further west.
Tamarack expects future drilling on these lands, given the success of the program. Corporately, production for this first quarter averaged 67,938 barrels BOE per day, which represents a 64% increase year-over-year and a 6% increase of the fourth quarter of 2022. The success of our drilling and exploration program, however, was somewhat muted by an unplanned TC Energy pipeline outage in March, which reduced total quarterly production 1,000 barrels of oil per day. Adjusting for this unplanned third-party event, production for Q1 was on track to exceed budget expectations. I'll now pass it over to Steve to run through the financial results as well as our outlook for the remainder of the year.
Thanks, Brian. Our first quarter adjusted funds flow came in at CAD 157 million, which was slightly impacted by the lower commodity prices, and the wider heavy oil differentials that we saw through Q1. Further to this, we did deal with the Keystone Pipeline apportionment, which impacted our wellhead differentials or realized heavy prices by about CAD 1.70 per barrel relative to what we would see more on a normal run rate basis. When we look ahead, the WCS differential has narrowed significantly from Q1, and we see very little to no apportionment. As such, you know, we'd expect wellhead price realization to narrow moving forward here through Q2 and then onward through the back half of the year.
On the operating cost side of things, we did have PPAs related to third party non-op charges that hit in the first quarter. If we adjust out for those PPAs, our OpEx was at or below our guidance range. We continue to expect all of our guidance with respect to royalties, OpEx, G&A, and interest to be unchanged for the year and within the ranges that we have provided previously with our budget. From a capital perspective, we spent CAD 148 million in the quarter drilling, completing and equipping 32 Clearwater wells and 7.8 net Charlie Lake oil wells. We spent approximately CAD 30 million on our major facility projects, being the Wembley Gas Plant in the Charlie Lake and on our Nipisi pipeline and blending terminal.
These projects remain on time and on budget and will drive significant OpEx and transportation expense reduction through the back half of the year, along with upside to our Clearwater netbacks at Nipisi through our blending terminal that will be in service. These two initiatives have the potential to reduce the company's free funds flow breakeven by approximately US $1-$1.10 per barrel WTI moving forward and are key to enhancing the free funds flow generation over our five-year plan. We also announced an update and extension to our sustainability-linked bank facility. The facility has been expanded to CAD 875 million from CAD 700 million and extended to 2026, while the term loan has been reduced down to CAD 200 million from CAD 235 million.
Within our debt stack, we have reduced the deferred acquisition payments associated with the Deltastream acquisition by CAD 93 million, as that has been repaid and will continue to be repaid over the next four quarters. We continue to focus on advancing the rationalization of our asset base through the divestment of non-core holdings. This will help to accelerate debt repayment and get to our enhanced return thresholds. Subsequent to the first quarter, we entered in an agreement to sell approximately 400 BOE a day of non-core natural gas assets, which includes approximately CAD 4 million of undiscounted abandonment liabilities. Further to this, we currently have our Redwater Viking assets in market and plan to continue to divest additional assets in an effort to core up our portfolio in the Clearwater and the Charlie Lake Fairways.
With the ability to enhance our focus on these highly economic plays, we can capitalize on the successes we are seeing with our recent wells at West Martin Hills, which demonstrate a more than 30% improvement versus 2021. In addition, we continue to see success in the Charlie Lake, where results are improving with execution over time, and the installation of our first owned and operated gas plant will function to further enhance our economics by lowering our cost structure. In terms of outlook, as mentioned earlier, our guidance remains intact with respect to the expense components for 2023. We have updated our production guidance for the year to reflect the non-core asset sale, along with the third-party impacts in the 1st quarter volumes. We will say we, you know, we're still working through the Alberta forest fire situation.
It does remain fluid here, and we will, you know, provide any material impacts or updates as that, you know, continues to provide more information. Our CapEx guidance remains unchanged at CAD 425 million-CAD 475 million. However, given the volatility in the commodity space, we will remain flexible and continue to target the low to mid end of the range for 2023 to ensure the balance sheet and debt repayment remains in focus. I'm gonna pass it back over to Brian here for some closing comments before we open it up for questions.
Thanks, Steve. While 2022 was the year that defined us as a clearwater consolidator, 2023 is a year that will demonstrate our committed discipline to reshaping the asset base through exploration, rationalization to enhance profit margins, continue to pay down debt, and position ourselves to grow free funds flow and return for shareholders. I want to thank of our employees, board of directors, shareholders and stakeholders for all of your continued support. I'll pass it back to the moderator for questions. Thank you.
Thank you. Ladies and gentlemen, we'll now conduct a question and answer session. As a reminder, if you'd like to ask a question, please press star then one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment for your first question. Okay, it appears there are no questions over the phone. I'll now hand the call over to Mandy, who will be fielding some questions from the online platform. Please go ahead.
Our first question is received by Tel. Do you expect to look at any incremental M&A in the foreseeable future?
Yeah. No, thanks. That's a good question. I think as I just, you know, walked through here, you know, we're gonna focus in the short term here on accelerating the debt repayment. We, you know, we did the Deltastream acquisition in the fall, which really cored up our Clearwater position. Now for us it's gonna be, you know, integrating and digesting that and then further rationalizing the portfolio. I think if anything that's gonna be on, you know, more the disposition side of our portfolio. As I mentioned, you know, we did a small deal here subsequent to the quarter, getting rid of some Southern Alberta shallow gas. You're gonna see us, you know, like I said, we've got another Viking package in the market right now, that's being marketed.
Then, you know, we'll look to move off some other non-core pieces that, you know, just don't compete for capital, you know, with respect to the Clearwater or the Charlie Lake. I think, you know, as we look in through the summer and into the fall, you know, we're hoping to have a few of those bigger assets out the door and, you know, come to investors with, you know, a nice reduction in debt and accelerate that enhanced return profile for the company.
Thank you. Our next question is for Brian Schmidt. Could you give us an idea of the timeline regarding development at Seal?
Yeah. It's pretty early on in the development. I, we'll be watching the well results that we see on a little bit longer term. In the meantime, we're gonna be looking at some different kinds of well configuration. You know, there's one zone there that's actually 12 meters thick. You know, we may be drilling two layers of wells, for example, in there. Once we get the development plan consolidated, then we'll get our permits and get issued up there. I don't expect a lot of seal development to happen here. Maybe some in the late Q4, most of it'll be probably in the Q1 of 2024.
Thank you. Our next question is for Steve Buytels. At current strip prices, when do you expect to hit your debt thresholds and shift focus to return of cash flow?
Yeah. Obviously with the, you know, commodity, with the WTI price coming off here over the last month or so, you know, that pushes things out a bit likely, you know, to, you know, Q1, I'd say, of next year, probably at the earliest, if you're, you know, looking at this sort of low CAD 70 environment. That being said, the differential has come in a lot, which, you know, provides quite a bit of sensitivity to cash flow for Tamarack here, given, you know, we're over 50% of our production's heavy oil. You know, I think continued strength in that is gonna help.
You know, more importantly, like I just got finished talking about, we are going to find ways, and we're committed to find ways to accelerate that debt repayment and get to those enhanced return thresholds as soon as we can. Again, it's gotta be the right business decision, a smart business decision. You know, again, we're still targeting to hopefully get there, you know, at some point in the back half of this year, as we look at finding ways to bring additional proceeds in the door here.
Thank you. Our next question is for Brian Schmidt. Are there any plans to revisit Peavine with a different approach? Headwater is going back to their Peavine with fishbone drilling.
Yeah, that's a good question. With the Peavine result that we had there, for those listeners that may not have been aware of the results, we ended up with a well with 40 barrels a day, hitting a zone where we had API gravities that are quite heavy. That happens every once in a while in the Clearwater. It changes quite rapidly from section to section. For example, just to the south, there's a nice Baytex well that's got relatively lighter oil. We think that moving east, we'll be doing some delineation drilling starting the end of Q4 and then into Q1. That will just be a pilot hole and testing for zone thickness.
We'll probably get an idea on viscosity as well. It's a low cost way to delineate the resource, and that's what we'll be deploying in Peavine. We still see some good upside in Peavine. There's lots of areas where we've got nice thick pay. Look for more of that to continue here into 2024.
Our next question is for Brian Schmidt. Can you talk about the methods you're using to advance decarbonization, and are there other methods you're currently exploring?
Yeah. In terms of decarbonization, the best thing and most cost-effective system that we know right now. You know, the first year we were doing things like changing transmitters in the field, the easy stuff. Getting a little harder now. Now it's gas collection and making sure that you're not venting or flaring gas. When you have oil systems like that, you know, these can be fairly costly to collect and put together. So the guys have put together a number of development plans that minimize our flaring in the field. Those low-cost methods will be put into place here late this year into next year.
Our next question is for Steve Buytels. Can you provide some details on your Viking package that's up for sale?
Yes. The one that's in the market right now, is our Redwater Viking assets. That would have been one of the first assets that Tamarack brought into the company, you know, over 10 years ago now. Again, it's in the market. We're not gonna say much more than that. You know, we'll see. I think, you know, we should have bids in by the end of May there. You know, the one thing I will say on that asset, there is quite a bit of abandonment liability that comes with it. That's an old field. Again, part of what we're doing in rationalizing our asset base is cleaning up some of those old fields too.
When you look at the way we look at our free cash long term, if you can get rid of a lot of that liability, you know, that's millions of dollars a year that you're not having to spend on abandonment reclamation that can go back to shareholders and pay down debt and so forth. That's the one that's out there now. As I mentioned before, we'll have some other bigger pieces, you know, I think coming, you know, which will, you know, likely move the needle more from, you know, pro-proceeds coming in the door and accelerating that debt repayment.
Thank you. Our next question is for Brian Schmidt. Could you talk a bit about the type curve on the new Delta wells?
Yeah. The former Deltastream assets, Martin Hills and West Martin Hills are the two areas where we've been doing some drilling on that acquisition. In Martin Hills, the curves are meeting type curve. You might see something like in the first 30 days a little choppy. That's because the previous operator was not connecting those to pipe before putting them on production. We start trucking out of those right off day one. You'll see some choppy production, you know, in the first month. After that, we're finding that those wells are meeting or exceeding, slightly exceeding type curve. West Martin Hills is another story.
West Martin Hills were actually up 33% on our type curve from what we thought we were gonna do when we bought that asset. In fact, in that whole West Martin Hills area, we've taken production from 400 barrels a day up to 3,300 barrels a day. That and I know some of my competitors see that as a real, as a very good area that's gonna be exploited by both of us.
Thank you. Our next question is for Steve Buytels. Are you seeing any shut-ins at this time due to the fires?
Yeah, and that's a good question and, you know, I'm gonna caveat that with, you know, this situation still remains fluid, and for us, the safety of our, you know, people, our staff, our operations is, you know, of utmost importance here. You know, that's been our focus. We have about, you know, from a direct basis, 300 BOE a day shut in. That is strictly to make sure that we keep our staff safe and our infrastructure safe. That's the number one piece.
When you look at the indirect component of the fires here, we have seen, you know, either pipes shut down or we've seen pipes backing up as, you know, companies are trying to do different things with flowing volumes to try to get around some of the issues here. You know, all told, you know, we've probably got about 1,000 BOE a day that's impacted, but that can change, you know, minute by minute, day by day. Like I said on, you know, earlier in the call, if anything changes materially that, you know, we have to get back to the market on, we will. We're just monitoring it closely. Again, the safety of our people is the number one priority.
Just let me add a little bit there. There's some of the indigenous communities that we work there have been significantly impacted by fire. We are offering assistance to those communities. We've offered some services in the Slave Lake area to house people who are displaced from their homes. We also are aware of one community where they're isolated because a bridge burned down getting to their community, and we're gonna be reaching out and for assistance there as well. It's one thing to have your operations impacted, but, you know, people's lives are significantly impacted by some of these fires, and we'll be helping out where we can.
Thank you. Our next question is for Steve Buytels. Could you talk a bit about current and forecasted free cash flow?
Yeah, you bet. I think for, you know, a lot of you, like Q1 and the way we operate and with the Clearwater being really a winter drilling program, Q1's gonna be our heaviest capital quarter spending, you know, CAD 148 million. That's gonna then be more balanced through Q2 and Q3, where, you know, we're probably in and around that, you know, CAD 110 million-CAD 120 million, you know, for Q2 and Q3 each quarter. Q4, you know, would round out to get you to that, you know, that midpoint of that capital guidance range. I think what you're really gonna start to see here is Q2 and Q3 and Q4, really see that debt pay down start to come in.
Again, it's a little bit of a function of just the timing of being in the Clearwater in that winter program. You know, we still see the better part of, you know, CAD 300 million of free cash flow. You know, CAD 80 million of that goes to the dividend, obviously annually, and then we're paying down debt and paying down the deferred acquisition payments here with respect to the Deltastream acquisition. Again, we feel pretty comfortable with the assets. You can see the amount of free cash that they spin off, even when you had, you know, differentials in the mid to high 20s and, you know, WTI come off into the mid 70s. You know, you can see the robustness of the assets.
Our free cash will break even, including our base dividend of, you know, US $37 WTI a barrel is sector leading, and, you know, we will lean on the resiliency of that. A little bit of patience here, obviously, with commodity prices in the short term, but, you know, where the diffs come in terms of the tightening we've seen through Q2, Q3 in the back half of the year, we've got TMX coming on, early next year. You look at, you know, the incremental refinery capacity coming on, that's gonna compete for heavy barrels at the Gulf Coast. I think this heavy oil, this WCS story is gonna be a pretty good story and have a lot of tailwinds here moving forward, and that's only gonna help the free cash profile of this company moving forward.
Thank you. Our next question is for Brian Schmidt. Could you tell us about peer and industry collaboration regarding waterflood?
Yeah, it's a good question on something that we're all very excited about. I think in total there's about nine different water floods going on in the Clearwater. Of course, we have two different designs in Martin Hills that we're deploying, and we have one design in Nipisi that we're deploying. All of us are watching each other's water floods. You know, we're competitors where we need to be, when it comes to water flooding, there's pretty good collaboration between operators on how to do this. You may find that we're all trying different kinds of designs in order to maximize the returns. I expect that collaboration will probably get even greater here as we go forward and, you know, all the land's tied up.
We know our primary results, so, there's a good reason for us to collaborate on that.
Thank you. We have no more questions. We'll turn the call back to the moderator.
Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line.