Our view: Tamarack sold non-core Cardium assets for cash proceeds of $123 million along with $119 million in gross ARO removed from the balance sheet. We believe the deal has strong strategic merit despite discounted multiples given it concentrates production to core plays, improves corporate netbacks/breakevens, and accelerates RoC. We now expect the company to reach its first net debt threshold of $1.1B at deal close, triggering a 25% free cash return program.
Key points:
Discounted Cardium metrics reflect asset maturity, limited inventory.
Tamarack disposed of 7,000 boe/d (40% oil/liquids) of Cardium production for $123 million in cash. Proceeds from the transaction map to roughly 2.5x 2024E cash flow and ~$18,000/boe/d (TVE pre-deal 2024E: 2.8x, $40k/boe/d). The assets held regional infrastructure including select non-/ operated gas plants and batteries in Alder Flats, Wilson Creek, and Greater Westerose.
Streamlining the portfolio. The disposition included $38.4/$80.6 million of gross operated inactive/active ARO, mapping to roughly 38% of corporate undiscounted and uninflated ARO ($313 million as at Q2/23). We believe the sale streamlines the portfolio, which is now primarily focused on key oil- weighted plays including the Charlie Lake and Clearwater. Combined these now account for 88% of corporate exit volumes at year-end 2023.
Updated guidance to come with Q3/23 results. Tamarack will provide a formal update on 2023 capital and production with Q3/23 results, though we note that the disposition is expected to reduce Q3/23 volumes by 4,500 boe/d, with the annual 2023/2024 impact mapping to 1,200/6,000 boe/ d and reflected in our updated estimates (Exhibit 2). Tamarack will report Q3/23 earnings on October 26, before market open.
Debt reduction remains in focus. We expect Tamarack to reach its $1.1B net debt threshold in Q4/23 at close, triggering its enhanced RoC program with 25% of excess funds flow being returned to shareholders. Management remains committed to its debt reduction strategy with key milestones of $1.1B/$900/$500 million in net debt triggering incremental increases in capital returns (Exhibit 3). We model a 25% dividend increase and return to NCIB utilization in Q1/24; our updated net debt estimates for 2023E/24E/25E now sit at $1.0B/$704/$591 million.
Recommendation unchanged. We reiterate our Outperform recommendation and increase our target price to $5.50/share on the disposition. We believe Tamarack shares should trade at a premium to peers over time (Exhibit 6) given high-quality Clearwater/Charlie Lake development inventory and well-defined RoC strategy, though we believe operational execution and continued debt reduction remain key focal points for investors.