Rubellite Energy Inc T.RBY

RBC

[retiredcf]

April 12, 2022

Canadian E&P Perspectives 
Clearwater Monthly: Jockeying for Pole Position

Our view: Clearwater oil volumes reached 70,000 bbl/d in February, with oil volumes growing at a monthly clip of roughly 5% over the last year. The play continues to attract material capital and screens as the third most active in the WCSB behind the Montney and Viking (see here). Producers continue to delineate areas outside the core Marten Hills/Nipisi region, pushing both south (Jarvie, Ukalta, Figure Lake) and west (Peavine). We expect increased activity in 2022 with more than 50% growth in overall play volumes, as the Clearwater has become a priority for producers on both the public and private sides of the aisle.

• Clearwater oil production now exceeds 70,000 bbl/d. 2022 Clearwater spuds are tracking in-line with 2021 with regional volumes exceeding 70,000 bbl/d in February 2022 (latest publicly available data). Private producers account for just over 60% of current production volumes and 40% of YTD spuds. Sub-C$40/bbl supply costs (15% Btax IRR) in key regions are driven by simple open hole completions (well costs of $1.0–1.4 million) and continue to drive significant producer activity. Over the last year, total play volumes have grown at a monthly clip of roughly 5%, and while we expect this to slow given a large stabilized production base, we think 3-5% per month for the balance of the year is achievable, on average. Based on our survey of Clearwater producers, we expect play volumes to exceed 90,000 bbl/d by year-end.

• Marten Hills – Onward, upward, and westward. Marten Hills remains concentrated to Spur Petroleum and Deltastream Energy (private), and Headwater Exploration (public) following initial development in early 2017. Marten Hills remains the most active area with current oil volumes exceeding 38,000 bbl/ d (55% of play volumes). We expect the upward growth trajectory to continue, with the three primary MH producers each expected to grow volumes by 30%+ this year. Notably, Headwater, Tamarack Valley, and Spur have all recently drilled encouraging West Marten Hills step-outs (notes here and here), confirming productivity across the region.

• Nipisi – Discoveries extending regional boundaries. Nipisi has exhibited material growth driven by Spur, Deltastream, and Tamarack, with early activity starting roughly a year after Marten Hills and now just over 17,000 bbl/d (25% of play volumes), compared to roughly 9,000 bbl/d a year ago. Well results are fairly consistent, with peak rates coming in around 160 bbl/d. We expect activity to remain strong; several active producers have recently been pushing the boundaries of the region, with the latest from Spur's exploration program suggesting further potential in West Nipisi and Utikuma to the Northwest.

• South Clearwater – Strong start to 2022. The South Clearwater has ramped significantly since early 2020, with activity spearheaded by Tamarack and Rubellite on the public side, and Spur, Summerland and Rolling Hills on the private side. In February 2022, the broader region produced roughly 9,300 bbl/d (13% of play volumes), more than doubling volumes over the last year. Activity remains robust, with Rubellite and Rolling Hills recently acquiring tracts of land in the region, though Tamarack has the largest foothold with 268 net sections of land and plans to drill 47 regional wells in 2022.

• West Clearwater – Peavine continues to shine. Baytex’s Peavine development (Clearwater analog) continues to show some of the best rates in the Clearwater (see Exhibits 1/5), with the team planning to bring 18 wells onstream in 2022. We hosted a One-on-One with Baytex in late March to discuss the play where the team reiterated the value potential in great detail (note here). Other producers have recently acquired acreage in the Peavine area, including Rubellite Energy and Tamarack Valley. Volumes in West Clearwater now exceed 4,200 bbl/d (6% of play volumes).

• Key names with exposure to the Clearwater play. Producers in our coverage universe with direct Clearwater exposure include Headwater Exploration (TSX: HWX), Tamarack Valley Energy (TSX: TVE), and Baytex Energy (TSX: BTE). Each Canadian royalty company has indirect exposure with land positions noted on page 10 of this report.