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Tamarack Valley Energy First Quarter 2020 Results

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   |    Tuesday,May 12,2020

Tamarack Valley Energy Ltd. reported its Q1 2020 results.

In response to the unprecedented volatility in crude oil prices caused by demand destruction related to the impacts of COVID-19 coupled with a price war between OPEC and non-OPEC members, Tamarack is taking bold and proactive steps designed to preserve and protect shareholder value. The Company has pragmatically elected to shut-in corporate volumes of approximately 1,350 boe/d based on a multi-pronged cash flow analysis, and incorporates an NPV-based value preservation sensitivity that is specific to the Company’s new, higher decline wells and our waterflood. In concert with the shut-ins, Tamarack is also updating previously provided guidance for 2020 as outlined within our March 18, 2020 press release. The measures taken by Tamarack to date in 2020 to limit capital spending, streamline costs and further enhance our balance sheet set the stage for ongoing success in 2021 when the operating environment and commodity price forecasts are expected to improve.

Q1 2020 Highlights

Tamarack achieved average production of 23,531 boe/d in Q1/20, a 2% increase over 23,149 boe/d in Q1/19, and 5% lower than the previous quarter, while investing $73.9 million in capital expenditures. This contributed to the drilling of 59 (57.1 net) wells, comprised of 49 (47.8 net) Viking oil wells, four (3.3 net) Cardium oil wells, two (2.0 net) Penny Banff oil wells and four (4.0 net) water source and injector wells. We directed approximately 33% of our total Q1 capital expenditures to the Veteran waterflood, adding new injection patterns, extending pipeline infrastructure and increasing available source water capacity. This is expected to provide over 1,000 bbl/d of production through 2021 when peak waterflood response is achieved, which is in line with our previous expectations. Tamarack’s current budget projections forecast capital invested in the Veteran waterflood to improve 2021 base production decline rates by 2 to 4%. Our continued focus on cost controls resulted in a 2% reduction of net production and transportation expenses year-over-year to $9.98/boe in Q1/20 compared to $10.20/boe in Q1/19, primarily due to increased production in the lower-cost Veteran area. Costs were kept effectively flat quarter-over-quarter.

The Company’s first quarter operating netback of $22.11/boe generated adjusted funds flow (previously referred to as “adjusted operating field netback”; see “Non-IFRS Measures”) of $42.0 million ($0.19 per share basic and diluted), compared to $57.5 million in Q1/19 ($0.25 per share basic and diluted) and $54.7 million ($0.25 per share basic and diluted) in Q4/19. Net income, however, was negatively impacted for the first quarter by the significant benchmark oil price deterioration which resulted in Tamarack taking a non-cash impairment charge of $381.0 million to our net book value. Revisions to forecasted crude oil prices could result in reversals or additional impairment charges which can impact net income.

The Company entered the first quarter with a strong balance sheet and ample liquidity and exited the quarter with net debt totaling $227.2 million, including working capital deficiency but excluding the fair value of financial instruments and lease liabilities. This resulted in a period end net debt to annualized adjusted funds flow ratio (see “Non-IFRS Measures”) of 1.4 times. Tamarack’s semi-annual borrowing base review is currently underway. The Company anticipates a reduction in available liquidity given the extreme decline in commodity prices; however, we do not expect that a borrowing base update will impact our ability to support the current and forecast debt levels for the year.

Tamarack continues to be committed to our environmental, social and governance (“ESG”) principles during the quarter, reflected in our response to the COVID-19 crisis, which featured immediate mobilization, constant assessment of risk management and the development of plans to provide support to certain communities where need is particularly high, while implementing solid operational processes that balance business continuity with strong health and safety protocols.

Outlook/Updated Guidance

On March 18^th, 2020, in response to current market conditions and a significant erosion in global commodity prices, Tamarack acted decisively and reduced our 2020 capital program to approximately $95 to $105 million from the previous $170 to $180 million (representing a reduction of approximately 46%). Given the continued volatility and weakness in crude oil benchmark prices for 2020, we have elected to further reduce our capital expenditures to approximately $95 million, representing a total reduction of $80 million from the midpoint of our original 2020 guidance. With the strength in natural gas price benchmark futures, Tamarack plans to add higher gas weighted production in the second half of 2020 through drilling wells that meet our total capital cost payout target of less than 1.5 years, while also locking-in the stronger future prices through our robust hedging program.

Currently, Tamarack has elected to shut in approximately 1,350 boe/d of production based on a multi-pronged evaluation approach that encompasses both well-by-well and field level cash flow analysis, and incorporates an NPV-based value preservation sensitivity that is specific to the Company’s new, higher decline wells and our waterflood program. Tamarack will continue to monitor field-specific pricing and we are prepared to adjust additional production volumes as necessary. In addition to shutting-in volumes, we have secured an incremental 45,000 bbls of oil tank storage in the Veteran area, bringing our total corporate tankage capacity to 215,000 bbls. This tankage enables Tamarack to defer selling volumes into a weak commodity price environment and preserve value for shareholders by forward selling these volumes to lock-in incremental price capture. To reflect these shut-ins and tankage considerations along with the reduction in capital expenditure plans, we are revising our production guidance to a range of 19,000 to 20,000 boe/d with a focus on maintaining a strong balance sheet and financial flexibility through these turbulent times.

Cost control remains a core value of Tamarack and as such, the Company undertook a bottom-up analysis of our operating and G&A expenses. This has resulted in a reduction to estimated operating expenses for 2020 of approximately 18% comprised of fee renegotiations, workforce optimizations, activity deferral and production curtailments, along with a reduction of approximately 15% in G&A expenses compared to our original 2020 guidance.

We have continued to be opportunistic and have taken steps to enhance our hedge position. We have secured hedges on approximately 51% of oil volumes and approximately 68% of our MSW-WTI differential volumes for the period from April 1 to December 31, 2020. This, in addition to the incremental capital expenditure rollback and the highlighted cost savings, continues to ensure Tamarack maintains our strong financial position.

⁽¹⁾ See Non-IFRS Measures
⁽²⁾ Based on December 2020 to December 2021 estimates

This guidance is based on average 2020 commodity price assumptions of WTI US$30.94/bbl, MSW/WTI differential of US$7.10/bbl and AECO at $2.10/GJ as well as a Canadian/US dollar exchange rate of $0.72.

COVID-19 Rapid Response

The health and safety of Tamarack’s employees, partners, stakeholders and communities in which we operate continues to be our top priority as we weather this pandemic. In response to COVID-19, Tamarack acted quickly and took measures the week of March 16^th to close the office and implement work-from-home protocols designed to ensure the health and safety of all employees and stakeholders. Specifically, we are following both federal and provincial health authorities’ guidelines on physical distancing and have implemented enhanced cleaning and sanitation measures across all field and corporate offices. To ensure efficient and productive working conditions for employees, we quickly rolled-out new technologies across the organization which allowed Tamarack to become fully virtual within a few days and has also led to meaningful efficiency improvements which are expected to remain beyond the crisis.

Further, in true Tamarack form, we are seeking to go above and beyond to support our community. Through this crisis, we are continuing to work with our partners within the Blood First Nations community to ensure they are provided with critical support during this challenging time.

Thank you to our employees, consultants and contract operators who are taking extraordinary measures to ensure Tamarack remains resilient, competitive, and protective of shareholder value during these trying times.