CIBC ReportEQUITY RESEARCH
October 31, 2024 Earnings Update
TAMARACK VALLEY ENERGY LTD.
Q3/24 Recap: Operating Momentum Starting To Show
Our Conclusion
We have fine-tuned our model assumptions following a solid Q3 update from
Tamarack. Changes include a slight increase to our heavy oil production
assumptions following the outperformance demonstrated in the Clearwater
and potential impact of growing water injections. We have also moderated
our cost assumptions on the back of updated guidance, though the quarter
did include some non-recurring benefits on costs that we are not carrying
forward. The net impact to our cash flow assumptions is favourable for
2025E. We commensurately increase our price target from $5.50/sh prior to
$5.75/sh, based on 4.2x 2025E EV/DACF. The stock is currently trading at
3.1x 2025E EV/DACF on our revised estimates.
Key Points
Some key beats in quarterly metrics versus expectation. Heavy oil
volumes grew considerably this quarter, although Q2 volumes were held
back by outages at Nipisi. Based on the operational success being
demonstrated, we have slightly increased our outlook for heavy crude
volumes moving forward. While production was higher during the quarter, the
company’s funds flow netback was ~$1.50/Boe higher than we were
modelling. Realized pricing was notably better than we were expecting,
particularly on heavy oil volumes. Our model updates have not carried
through the pricing beat, which may offer upside to cash flow in future
quarters if repeated.
Oil weighting guided higher, driven by strong performance in the
Clearwater and increased Charlie Lake drilling. Production guidance was
increased to a midpoint of 63.5 MBoe/d from 62.0 MBoe/d prior. We have
adjusted our Q4/24 production expectation towards 64.0 MBoe/d, which is
above Street estimates of 62.5 MBoe/d prior to this update. Capital spending
guidance was set at $440MM for the year (excluding ARO and Clearwater
Infrastructure Partnership capital), implying a Q4/24 budget of $130MM,
which is ahead of our prior estimate of $90MM and Street at $93MM. We
would note that the annual spend expectation is slightly higher than our prior
estimates, given the company underspent expectations in Q3/24 by
~$25MM.
Lower cost guidance is incrementally positive for cash flow, but some
one-time items in Q3 are not likely to be carried forward. Tamarack
lowered its transportation, carbon tax (operating), and interest expense
guidance for the year, while increasing its cash tax assumption.
Transportation costs were partially abetted through royalty credits this
quarter, so we have not carried these benefits forward into our future
estimates. Our updated assumptions drive a 3% and 2% increase in cash
flow per share in 2024E and 2025E, respectively.