National BankTamarack Valley Energy Ltd.
Embedded Upside Underappreciated; Returns & Value to Compound!
TVE (TSX) STOCK RATING TARGET EST. TOTAL RETURN C$3.81 Outperform (Unchanged) C$7.25 (Unchanged) 94.2%
Corporate Update Value of a Wholistic Portfolio Approach
As a baseline, the company’s priorities continue to target outsized longterm debt-adjusted free cash flow per share (DAFCFPS) growth from its deep portfolio of high-quality, diversified opportunities. • Its 2023 program is set to deliver 5-10% production growth within a 50% payout ratio at strip that implies a 20% FCF yield (i.e., +25% total return). • From that, the company maintains a 4% base cash yield (<10% payout; ~20% FCF payout), and excess free cash should support an inflection point to return of capital as deleveraging towards debt targets occur through yearend (next target <$900 mln), with expectations upon attaining that target to inflect returns to <50% of FCF (from <25%).
Operating Leverage Offers Catalysts to Returns
Augmenting that outlook, and indicative of the embedded operating leverage resulting from the significance of its recent consolidation of high-quality assets, a multitude of key initiatives exist as incremental catalysts to returns. Through various initiatives/exposures (WCS diff. sens., Clearwater Integration, Charlie Lake Infrastructure & Expanding Waterflood) we distill $150 - 175 mln per annum in incremental return potential, or 30-40% upside to its free cash generation & return of capital capabilities, which in sum, give visibility to a discounted multiple (i.e., ~2.0x 2024e) and materially higher yield proposition (i.e., 25-30% free cash yield) that should positively resonate to equity value.
Maintain Outperform & $7.25 Target
Through its quarter and a recent management update, we note the continued value of the wholistic approach of its business, which after recent significance of consolidation, we believe is poised to capitalize on a multitude of organic initiatives to support inflection points to its returns and catalysts to shareholder value. Notably, the significance of its operating leverage could magnify its free cash yield at strip to 25-30% (from 20%), from which to accelerate deleveraging & return of capital in support of value (i.e., +10-15% cash yield potential; +2-3x to equity value).
At strip, TVE is poised for a 45% return profile (vs. peers 22%) on leverage of 1.1x (vs. peers 0.4x), while trading at 3.2x 2023e EV/DACF (vs. peers 3.2x).