Tamarack Valley Energy Ltd T.TVE

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Tamarack Valley Energy Ltd. Chris MacCulloch, CFA • [phone] • [e-mail] Tyler Axani, CFA, Associate • [phone] • [e-mail] Taylor Kent, Associate • [phone] • [e-mail]

Heavy is the head that wears the Clearwater crown—it’s called exploration for a reason

The Desjardins Takeaway

We are reiterating our Buy thesis on Tamarack Valley following its 4Q22 financial results. Asset integration remains the primary focus, with the company continuing to advance exploration and waterfloods within the expanded portfolio. While exploration often comes with heartache, as reflected by the recent unsuccessful well at Peavine, we expect investors to look through near-term setbacks and retain focus on the broader Clearwater asset base, which should support future acceleration of capital returns.

Highlights

Heavy is the head that wears the Clearwater crown. Looking back on 2022, no other producer within our coverage universe had nearly as transformative a year as TVE after it completed a trio of acquisitions in the Clearwater play, culminating in the Deltastream Energy transaction, the crown jewel of the expanded asset base. Portfolio optimization was by no means complete, however, with TVE subsequently disposing of non-core Viking assets while revealing plans to continue pursuing asset sales. In aggregate, the company completed C$1.7b of net acquisitions last year which added ~24,500 boe/d of production in one of the most economic oil plays in North America, where it has emerged as both the largest player and the natural public market consolidator.

While debt repayment remains the primary near-term outlet of FCF, enhanced capital returns are poised to begin lining shareholder pockets in 1Q24 after the first C$1.1b corporate net debt target is likely achieved, based on current strip prices. Once triggered, we see the company returning ~C$230m of incremental capital through enhanced dividends and/or share buybacks in 2024.

Meanwhile, the stock has largely missed out on the Canadian heavy oil reflation story, falling 3.1% ytd, most of which occurred on the heels of the 4Q22 report on March 2. Either way, the stock has significantly lagged most of its peers with material heavy oil exposure following the continued narrowing of WCS differentials in recent weeks. Given the expanded heavy oil portfolio, which now accounts for ~50–55% of corporate volumes and revenue, we believe the stock warrants renewed attention.

Valuation

Our C$7.25 target implies an EV/DACF (2024E) multiple of 3.4x, which is slightly above the stock’s historical consensus multiple of 3.1x. Recommendation We maintain our Buy rating