CIBC ReportEQUITY RESEARCH
April 21, 2022 Earnings Update
TAMARACK VALLEY ENERGY LTD.
Accretive Acquisition And Dividend Raise: Rolling Hills
Acquisition Enriches Clearwater Footprint
Our Conclusion
We see the Rolling Hills acquisition as being a logical tuck-in for Tamarack.
With purchase metrics of 1.5x cash flow, this acquisition screens accretive
across key metrics and offers synergies in its existing southern Clearwater
footprint. Concurrent with the acquisition, TVE also announced a 20%
increase to its monthly dividend, which is a sweetener for shareholders, and
we still see room for additional return of capital come Q3/22E as targeted
debt metrics are achieved. We see modest accretion to our 2023 estimates
on the back of this deal; as such, we increase our price target to $7.50 ($7.00 prior) and maintain our Outperformer Rating.
Key Points
Rolling Hills acquisition comes at an attractive purchase price and
screens accretive on a per share basis. The transaction consists of 34,560
net acres and includes 70 gross (54 net) future development drilling
locations. We think the drilling locations are likely to prove conservative, with
management noting only 1/3 of the acreage was assigned future inventory.
At current production of ~2,100 Bbl/d, we estimate the assets could generate
~$60MM in field netbacks in 2023 and we calculate the deal as being
accretive to funds flow per share by ~6% in FY/23 on strip. The acquisition
value of $93MM is being financed by 50/50 cash/equity, including $46.5MM
in cash and the issuance of 9.3MM TVE common shares.
Second Peavine Metis settlement agreement announced, increasing
TVE’s footprint in an emerging Clearwater region. TVE’s second
partnership agreement with the Peavine Metis settlement includes an
additional 9,600 net acres (28,500 acres total) and 15 net sections (44.5 net
sections total) of Clearwater land. We expect development will offer a key
catalyst in H2/22, with TVE’s exploration program in the greater Peavine
Clearwater region beginning in Q3/22.
Dividend increased by 20% and new debt target of $350MM-$400MM
likely achieved by Q3/22 sets up for increased return of capital
initiatives in H2/22. TVE announced a 20% increase to its base dividend,
moving to $0.01/share/month beginning with its June dividend declaration.
The company’s enhanced return of capital framework is predicated on TVE
achieving its long-term debt target of $350MM-$400MM (increased from
$325MM-$375MM prior), which management indicates is approximately 1.0x
funds flow at US$45/Bbl WTI. The company’s intention is to return up to 50%
of the previous quarter’s free funds flow to its shareholders through share
buybacks, base dividends, and/or special dividends. We expect TVE will
remain opportunistic in acquisitions, and will likely balance allocating the
remaining 50% of free funds flow between debt repayment and future
acquisition opportunities.