TAMARACK VALLEY ENERGY LTD.
To Drive A Re-rate In Valuation Over Time
Our Conclusion
We came away from the Tamarack Valley Investor Day with a better
appreciation for the company’s asset duration and inventory quality, margin
enhancement opportunities, and capital allocation. The free cash flow profile
of the company is attractive, and we believe continued execution of the
strategy is likely to drive a re-rate in the shares. With this update, we have
made minor estimate revisions and move our price target calculation to
2025E from 2024E. On our revised estimates, the stock is trading at 2.9x
2025E EV/DACF and a free cash flow yield of 18% on the CIBC price deck
versus the oil-weighted SMID-cap peer group at 3.1x and 14%, respectively.
Key Points
Asset duration is likely to extend beyond 20 years of drilling inventory
and resource quality was highlighted extensively. Tamarack has
identified more than 2,100 locations in the Clearwater, which translates to 21
years of inventory at 2024’s drilling pace of 100 wells per year. This is likely
to stretch further given water flood will lower the base decline rate and
reduce the need for as many wells over time. While Marten Hills is the
premiere acreage in the Clearwater with up to 30 metres of pay in the “C”
sand, the stacked sands at West Marten and Nipisi contain impressive oil in
place and are potentially more amenable to secondary recovery techniques.
Margin enhancements will ultimately lead to lower breakeven oil pricing
and growing free cash flow. The company highlighted its efforts to improve
capital efficiencies and cash margins through a number of initiatives.
Improved drilling efficiencies in the Clearwater have offset inflationary
pressures, while fan wells in South Clearwater have demonstrated a 25%
reduction in F&D costs. Tamarack expects to spend ~$40MM to $50MM per
year on water flood, which over time is expected to reduce its base decline
rate by 3% to 5% by 2029. On current production, we estimate each 1%
decrease in base decline rate translates to approximately $10MM in reduced
sustaining capital. Meanwhile, Tamarack expects another 10% improvement
in Clearwater operating and transportation costs in 2024 versus 2023 while
demonstrating strong realized heavy oil pricing compared to peers, which
helps to increase cash margins. We have maintained more conservative cost
assumptions than guidance, which could provide upside to our estimates
Capital allocation focuses on achieving long-term debt targets, paying
a consistent base dividend, and repurchasing shares, with optionality
for organic growth. Over the next five years, Tamarack expects to reduce
debt by $475MM, pay $420MM in base dividends, and repurchase shares
with any excess free cash flow. On the CIBC price deck, at US$75/Bbl WTI,
we see this as being achievable with shareholder returns of ~$200MM-
$300MM annually while continuing a strong rate of debt paydown