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Tamarack Valley Details Fourth Quarter 2019 Results; 2020 Plans

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   |    Thursday,March 05,2020

Tamarack Valley Energy Ltd. reported its financial and operating results for the three months and year ended December 31, 2019.

2019 Financial and Operating Highlights

• Achieved stable quarterly production volumes of 24,859 boe/d in Q4/19, slightly higher than the Q4/18 average of 24,780 boe/d and 3% higher than the previous quarter, and annual volumes of 24,072 boe/d, while generating free adjusted funds flow (see “Non-IFRS Measures”) of $40.5 million in 2019.
• Generated adjusted funds flow (previously referred to as “adjusted operating field netback”; see “Non-IFRS Measures”) of $219.4 million in 2019 ($0.97 per share basic and diluted), compared to $226.5 million in 2018 ($0.99 per share basic and $0.97 per share diluted). Q4/19 adjusted funds flow was $54.7 million, an increase of $16.4 million, or 43%, over the same period in 2018.
• Invested $179.0 million in capital expenditures, excluding acquisitions, during 2019 which contributed to the drilling of 149 (144.5 net) wells, comprised of 127 (124.1 net) Viking oil wells, 14 (12.5 net) Cardium oil wells, two (2.0 net) Penny Barons oil wells and six (5.9 net) water source and injector wells, as well as bringing wells drilled in Q4/18 onto production in 2019.
• Directed free adjusted funds flow to key projects such as tuck-in acquisitions and the Company’s active share repurchase program which included: $8.3 million to purchase and cancel 4.2 million shares; and, $3.5 million to purchase an additional 1.6 million shares to be held in trust by Tamarack’s trustee for future restricted share units (“RSUs”) settlement, offsetting RSU dilution and supporting debt-adjusted per share metrics.
• Reduced net debt by 11% quarter-over-quarter to $189.5 million, including working capital deficiency but excluding the fair value of financial instruments and lease liabilities, resulting in a 2019 net debt to annualized adjusted funds flow ratio (see “Non-IFRS Measures”) of 0.9 times.
• Held Tamarack’s oil and natural gas liquids (“NGL”) weighting stable at 63% year-over-year, while spending $30.3 million less in capital, after acquisitions and dispositions, with an 8% increase in incremental oil production over Q3 and increasing waterflood production.
• Generated higher operating netbacks (see “Non-IFRS Measures”) in Q4/19 relative to Q4/18 and Q3/19 due in part to Tamarack’s ongoing focus on cost controls, while slightly lower annual operating netbacks in 2019 compared to 2018 reflects the impact of lower natural gas prices, offset by reductions in net production and transportation expenses stemming primarily from increased production from the lower-cost Veteran area.
• Managed key environmental, social and governance goals in the business during 2019 through project specific improvements, including: exclusion of fresh water use in Viking completion and waterflood operations; accelerated abandonment and reclamation programs; lower land usage per well through multi-well pad drilling; and ongoing relationship management with indigenous communities in the Company’s operating areas.

2019 Reserve Highlights

• Recognized meaningful contribution from Tamarack’s Veteran waterflood program in 2019, with changes in the Company’s oil reserves due specifically to waterflood reflecting increases of 5% on a PDP basis, 14% on TP, and 6% on TPP relative to 2018, which are conservative relative to internal estimates.
• Demonstrated success in converting proved undeveloped reserves to PDP reserves, with PDP reserves increasing by 8% to 34.4 million boe (“mmboe”), TP reserves up 4% to 57.9 mmboe and TPP reserves maintained at 101.6 mmboe relative to 2018.
• Realized growth of 10% on PDP, 6% on TP and 2% on TPP on a basic per share basis, demonstrating the combined benefit of adding new reserves coupled with the Company’s ongoing share buybacks to drive enhanced per share metrics.
• Realized waterflood benefits earlier than the Company previously anticipated. Tamarack’s 2019 corporate decline rate was 38%, compared to 41% in 2018, with further expected improvements as a result of ongoing waterflood development to 34% in 2020 and less than 30% in 2021, based on internal forecasts.
• Increased oil rate responses to water injection in Veteran waterflood projects provided the confidence to add limited PDP reserves and substantial TP reserves over previously booked TPP projects. Both PDP and TP categories grew from nil reserves to 0.9 mmbbls and 4.3 mmbbls respectively. New reserves were also added through extensions of waterflood patterns to increase TPP bookings to 8.9 mmbbls.
• Increased the overall crude oil weighting of Tamarack’s reserves to 57% and 59% for TP and TPP, respectively, compared to 55% and 58% for the respective categories in 2018, driving the Company’s combined TP oil and NGL weighting to approximately 65% of total TP reserves in 2019 from 63% in 2018.
• Generated improved capital efficiencies relative to 2018 across a growing PDP and TP reserves base, reporting 37% lower PDP F&D costs of $16.14/boe with a recycle ratio (see “Oil and Gas Metrics”) of 1.8x; and 11% lower TP F&D costs of $18.10/boe with a recycle ratio of 1.6x, based on the 2019 average operating field netback of $28.89/boe excluding hedges. Higher TPP F&D of $20.97/boe with a 1.4x recycle ratio reflects the stable nature of TPP reserves year-over-year as proved undeveloped (“PUD”) conversions into producing categories were the predominant contributor to the reserves changes in 2019.
• Replaced 130% of production on a PDP basis, 125% on a TP basis and 101% on a TPP basis with PDP reserves representing 59% of TP, and TP representing 57% of TPP.
• Achieved net asset values of $1.71, $2.97 and $5.76 per basic share for PDP, TP and TPP reserves respectively, based on before tax net present values (discounted at 10%). The net present value of reserves has been adjusted for net debt of $189.5 million but assumes no value for undeveloped land or infrastructure.
• Achieved a TPP reserve life index (“RLI”) of 11.6 years and a TP RLI of 6.6 years, based on 2019 average production of 24,072 boe/d.

2020 Guidance

Tamarack maintains a disciplined capital allocation strategy that is designed to achieve sustainability through environments of weak and volatile oil prices, while continuing to direct free adjusted funds flow to purchase its common shares for cancellation under the NCIB program and for future RSU settlement. The Company is committed to maintaining flexibility in order to respond to the volatile price environment and will continue to monitor the 2020 capital program in light of the changing environment. The 2020 plan remains fully funded by adjusted funds flow at current commodity prices. As a result, our 2020 guidance remains unchanged from previously provided details, with plans to invest between $170 and $180 million. This capital program is anticipated to result in average production of 23,500 – 24,500 boe/d (64-66% oil and NGL). Supported by the Company’s exceptional operational execution, Tamarack remains committed to investing in longer-term projects, including the Veteran waterflood, which is expected to further improve oil recoveries, reduce corporate decline rates, increase production rates and further augment Tamarack’s sustainability.

In 2020, the Company has earmarked approximately $50 to $58 million of its 2020 capital budget to the continued development of the Veteran waterflood project.

Tamarack is also committed to understanding and managing the risks associated with environmental, social and governance (“ESG”) factors in its business. As part of the Company’s 2020 plan, Tamarack will deliver ESG related results through improved transparency and disclosure, as well as the development of clear, measurable targets tied to executive compensation and focused on key issues that are relevant to the business including: carbon intensity; fresh water management; land use; and engagement of valued community partners.

The Company’s 2020 guidance and assumptions are outlined below:

• Capital budget is between $170 and $180 million which is forecast to maintain volumes consistent with the Company’s 2019 annual average production of 23,500 to 24,500 boe/d (64% to 66% oil and NGL), with further increases in the oil and NGL weightings by the end of the year.
• Oil weighting to increase by 7% -12% in 2020. Anticipated increases in waterflood response at Veteran are expected to partially offset Tamarack’s corporate oil decline rate, resulting in the Company exiting Q4/20 with an oil weighting ranging between 59% and 62%, an increase from 57% in Q4/19, while its total liquids weighting at exit 2020 is expected to range between 65% and 68%, increasing from 63% in Q4/19.

2019 Year in Review

Tamarack continued to demonstrate the strength of its differentiated strategy during 2019, generating free adjusted funds flow while maintaining a disciplined approach to allocating capital, reducing corporate declines and above all, enhancing per share metrics. The Company successfully executed each of these objectives in 2019, while effectively managing safe and efficient operations despite ongoing industry challenges.

Annual production volumes remained stable in 2019 at 24,072 boe/d (63% oil and NGL), despite continued uncertain market egress conditions and were in-line with the mid-point of the annual guidance range of 23,500 to 24,500 boe/d. In Q4/19, Tamarack invested $23.0 million in capital expenditures and achieved production of 24,859 boe/d (63% oil and NGL), 3% higher than the previous quarter, reflecting the impact of 11 net Viking oil wells coming on-stream that were drilled and awaiting completion at the end of Q3/19, plus 15 gross (14.6 net) Viking oil wells that were drilled and brought on-stream in Q4/19.

Tamarack’s prudent 2019 capital expenditures reflected the broader commodity price and operating environment, as the Company invested 20% less capital relative to 2018. Tamarack has remained committed to drilling wells which are expected to payout in 1.5 years or less and estimates it has more than ten years of development within its current inventory. Annual capital of $179.0 million ($188.9 million, including acquisitions and dispositions) was fully funded by the Company’s $219.4 million of adjusted funds flow generated during the period, and directed to the continued development of its high-quality, light oil-weighted asset base, accretive tuck-in acquisitions and ongoing advancement of the waterflood program. Tamarack drilled 149 (144.5 net) wells, comprised of 127 (124.1 net) Viking oil wells, 14 (12.5 net) Cardium oil wells, two (2.0 net) Penny oil wells and six (5.9 net) water source and injector wells.

Free adjusted funds flow of $40.5 million was used to fund tuck-in acquisitions, lease asset purchases, lease liabilities, abandonments and share repurchases. The Company completed six tuck-in acquisitions during the year totaling $9.9 million, adding 17.9 net sections of undeveloped Viking land adjacent to existing acreage in the Veteran/Consort area, 0.6 net sections in the Wilson Creek/Alder Flats area and approximately 800 boe/d of associated production, which contributed approximately 220 boe/d to Tamarack’s annual average production. Tamarack’s waterflood program at Veteran is designed to improve oil recoveries, reduce corporate decline rates and increase production rates while utilizing the Company’s existing and owned infrastructure. Approximately $27 million was invested in the Veteran waterflood in 2019, which included the conversion of eight (7.7 net) Viking oil wells into water injectors and resulted in meaningful reserves increases as outlined below under “2019 Year-End Reserves Summary: Clear Waterflood Impact”.

Consistent with the Company’s commitment to generating per share value, Tamarack purchased and cancelled 4,181,100 outstanding shares under its normal course issuer bid (“NCIB”) program, for a total investment of $8.3 million. The NCIB program provides management with an instrument that can be employed when there is a perceived misalignment between the Company’s prevailing share price and the underlying current and future potential value of its assets. In addition to supporting the Company’s commitment to generating per share value, the NCIB program also helps to offset the dilutive impact that may be associated with the exercise and settlement of options, RSUs and performance share units (“PSUs”) issued under Tamarack’s stock-based compensation programs. Over and above the NCIB program, in 2019, the Company purchased 1,639,764 common shares in the open market for $3.5 million which are held in trust by Tamarack’s trustee and used to settle RSUs upon future exercises, mitigating dilution and further supporting Tamarack’s per share metrics. At December 31, 2019, the remaining balance of purchased common shares held in trust totaled 469,120.

Tamarack remains focused on increasing its oil and NGL weighting; however, the impact of the production curtailment order imposed by the Government of Alberta, which became effective on January 1, 2019, led to a shift in the timing and nature of the Company’s capital activities in 2019, which resulted in a stable average oil and NGL weighting of 63%. Given the commodity price volatility which prevailed through 2019, Tamarack’s average per boe sales price decreased 4% year-over-year to $43.37/boe from $45.08/boe in 2018. In Q4/19, the Company’s average realized sales price of $42.72/boe was higher than both Q3/19 and Q4/18. Operating netbacks in 2019 averaged $27.47/boe, 2% lower than in 2018, and in Q4/19 averaged $26.33/boe, 38% and 7% higher than in Q4/18 and Q3/19, respectively. Stronger operating netbacks were partially attributable to lower net production and transportation expenses, which improved by 5% in both Q4/19 and full year 2019 as compared to the same periods in 2018, primarily due to increased production from the lower cost Veteran area.

Tamarack’s year end 2019 net debt, including working capital deficiency but excluding the fair value of financial instruments and lease liabilities, totaled $189.5 million, 11% lower than September 30, 2019. Tamarack’s 2019 net debt to annualized adjusted funds flow ratio was 0.9 times.

2019 Year-End Reserves Summary: Clear Waterflood Impact

Tamarack’s strategy to invest in long-term sustainability enhancement projects continued through 2019. The Company continued allocating capital to its Veteran waterflood program through the year, and as a result, has set the stage for ongoing waterflood development given the bulk of the required infrastructure spending was achieved in 2019. In addition to positive waterflood related reserve changes, Tamarack’s waterflood program has improved corporate decline rates – from 41% in 2018 to 38% in 2019, with projected 2020 declines of 34%.

Further success is evidenced in the GLJ Report, which reflects year-end reserves attributable to waterflood projects of 0.9 mmboe for PDP, 4.3 mmboe for TP and 8.9 mmboe for TPP, compared to nil for each of PDP and TP, and 4.9 mmboe for TPP in 2018. These reserve assignments are limited to the Hamilton Lake zone only (approximately 45% of the combined Viking/Hamilton Lake average original oil in place) and include estimated incremental booked recovery factors in various patterns ranging from 6-11% on a TP basis to 12-23% on TPP. Tamarack’s oil reserves across all categories increased meaningfully in 2019, attributable in part to the waterflood, with a 5.7% increase in PDP, 8.4% in TP, and 2.1% in TPP.

The Company maintained a consistent approach to reserves booking, with TP reserves including only 156.9 net Veteran and Consort horizontal Viking oil wells, 94.4 net Redwater and Saskatchewan horizontal Viking oil wells and 40.2 net undeveloped horizontal Cardium oil locations. The total FDC on a TP basis was $398.5 million and on a TPP basis was $702.7 million.

Tamarack recorded improved capital efficiencies relative to 2018 across a growing PDP and TP reserves base. The Company achieved 37% lower F&D costs of $16.14/boe with an F&D recycle ratio of 1.8 times based on the 2019 average operating field netback of $28.89/boe excluding hedges. TP F&D costs were 11% lower at $18.10/boe, achieving a recycle ratio of 1.6 times. Higher F&D of $20.97/boe with a 1.4 times recycle ratio reflects the stable nature of TPP reserves year-over-year as PUD conversions into PDP were the predominant contributor.