Banque NationaleTamarack Valley Energy Ltd. Investing in Compounding Returns TVE (TSX) STOCK RATING TARGET EST. TOTAL RETURN C$4.69 Outperform (Unchanged) C$8.00 (Unchanged) 73.8% Corporate Update 2023
Budget Outlook TVE provided its 2023 budget outlook, with a continued emphasis on a disciplined approach to sustainable free cash flow growth resulting from return-oriented capital allocation across its high-quality portfolio. Its capital program sits at a mid-point of $450 mln to generate average production of 70 mboe/d (82% liquids) within a 50-60% payout ($80/bbl & $4/mcf, generally in-line with strip) to imply a ~15% free cash yield (generally in line with the street).
Free Cash Expansion & Shareholder Returns Distribution of its capital priorities will again target fast payback in support of free cash expansion, with 30% of capital allocated to the Clearwater (69 wells), 20-25% towards its Charlie Lake project area (19 wells), 20-25% to waterflood (incl. Clearwater) and ~5% to exploration (in support of asset duration).
Fundamental value outcomes of this program, which remains weighted to liquids (with flexibility predicated on WCS diffs), serve to frame its economic discipline, and include; a) fast paybacks & recirculation of capital (break-even noted at $37/bbl), b) decline mitigation through waterflood, expected to reduce its base decline by 2% in support of $25 mln in sustainable FCF growth (i.e. investment made at a +25% FCF yield), c) infrastructure initiatives (oil terminal & gas processing), expected to deliver netback support of $3/boe in support of ~$12 mln in sustainable FCF growth (i.e. investment made at a 60% FCF yield).
Prioritization of its FCF will remain allocated towards its base dividend (3% yield on a ~10% payout), until debt repayment meets the inflection points detailed within its enhanced return strategy (H2/23; enhanced dividends & tactical buy-back); a) <$0.9 bln debt triggers 50% payout (i.e. 7-8% yield), b) < $0.5 bln debt triggers 75% payout (i.e. ~12% yield).
Maintain Outperform Rating & $8/sh Target Price A stout budget outlook continues to emphasize the discipline & returns embedded within its high-quality portfolio approach, which should continue to yield sustainable FCF expansion in support of enhanced returns and shareholder value; TVE is poised for a 54% return profile (vs. peers 30%) on leverage of 0.7x (vs. peers 0.2x), while trading at 3.2x 2023e EV/DACF (vs. peers 2.8x)