September 27, 2022
Tamarack Valley Energy Ltd. Streamlined and Resilient
Our view: Tamarack's acquisition of Deltastream Energy positions the company as the largest public producer in the Clearwater play, improving sustainability and return of capital potential. Given the transformational nature of the deal, we have revisited the company's value proposition and continue to believe it is among the best positioned in the space; the stock remains on our Energy Best Ideas List and Small Cap Conviction List.
Key points:
Deltastream acquisition punctuates Tamarack as a leading SMID-cap E&P. Following close of the Deltastream acquisition (Ex 1 for transaction details), Tamarack is heavily weighted to the Clearwater/Charlie Lake, both premier oil plays in Canada (Ex 23). We estimate the corporate breakeven maps to ~US$40/boe compared to peers at ~US$45/boe, highlighting resiliency and ability to return capital to shareholders even at low commodity prices. Given the substantial M&A driven shift of the last couple of years, we have provided a deep dive to underline the investment case.
Management - established and aligned. Tamarack's management team is headed by Brian Schmidt, President and CEO, and Steve Buytels, CFO, combining a depth of technical expertise with significant capital markets experience. The company has always maintained strong community relations, particularly with indigenous partners, which we view as an essential operating practice. Insiders own roughly 2% of basic shares outstanding, with $12 million in stock purchases over the last two years.
Operations - high graded. Clearwater volumes map to roughly 32,000 bbl/ d with more than a decade of drilling inventory and 752 net sections. In the Charlie Lake, Tamarack has a longer-term target of 20,000 boe/ d (13,000 boe/d currently) supported by >10 years of drilling inventory. Legacy Cardium and Viking assets are no longer core drivers of operational performance, but provide a foundation for free cash generation. While we are not expecting an imminent disposition, medium-term rationalization would not come as a surprise to us.
Return of capital - a key priority. Management outlined an updated RoC framework (Ex 6) that ramps as leverage is reduced with allocation and timing similar to the pre-deal program (Ex 7). Notably, the larger production base enhances return potential on a per-share basis (Ex 5). We remain confident in Tamarack's ability to delever the balance sheet following the acquisition, with our estimates mapping to $1,155/$131 million in net debt by year-end 2022E/2023E ($1,269/$1,002 million at strip).
Outperform recommendation. We continue to believe Tamarack is among the best positioned in the SMID-cap E&P space with scale in low-breakeven plays, management pedigree, and well-defined return of capital strategy key differentiators. The stock currently trades at 3.0x vs peers at 3.4x on strip, though we believe a premium valuation is warranted.