November 28, 2022
Canadian E&P Perspectives
Clearwater Monthly: Jockeying for Pole Position
Our view: Clearwater oil volumes increased 4% m/m to roughly 104 kbbl/d in October, with play volumes growing at a monthly clip of ~5% over the last year. The play continues to attract capital, now screening as the most active in the WCSB (note here) with producers delineating areas beyond the core Marten Hills/Nipisi region, pushing both south (Jarvie, Ukalta, Figure Lake) and west (Utikuma, Peavine). We expect strong activity through the balance of 2022 (well over 50% y/y growth in overall volumes) with key producers set to drive play volumes of more than 130 kbbl/d through 2023E.
Clearwater production roughly 104 kbbl/d. 2022 Clearwater spuds have outpaced 2021 levels with volumes reaching ~104 kbbl/d in October 2022; TVE, BTE, and HWX drove the sequential increase at a combined ~4,100 bbl/d. Public producers now account for 70% of oil volumes and 69% of YTD spuds. Sub-C$40/bbl supply costs (15% Btax IRR) in key regions are driven by simple open hole completions limiting inflationary impacts (all-in costs of $1.2–1.7 million) and continue to drive significant producer activity. Over the last year, total play volumes have grown at a monthly clip of roughly 5%, and while we expect this to slow given a large stabilized production base, we believe a low single digit monthly growth rate for the balance of the year and into 2023 is achievable.
Marten Hills – Onward, upward, and westward. Marten Hills production is largely consolidated to four players: Headwater, Canadian Natural, Tamarack Valley (Deltastream acquisition), and Spur (private). Initial development took off early 2017 with current volumes at 51,000 bbl/d (49% of play volumes). We expect the growth trajectory to continue, with producers focused on supplementing core block development with West Marten Hills delineation programs. Headwater, Tamarack Valley, and Spur have highlighted encouraging step-outs, confirming productivity across the region. Additionally, Canadian Natural's volumes surpassed 12,000 bbl/d in October.
Nipisi – Discoveries extending regional boundaries. Nipisi production is concentrated to Tamarack (including Deltastream) and Spur, with regional activity starting roughly a year after Marten Hills and now at roughly 27,000 bbl/d (26% of play volumes). 2022 wells continue to showcase productivity increases with average peak rates at just over 170 bbl/d, ahead of historical levels of around 160 bbl/d. We expect activity to remain strong as producers' delineation programs continue; Spur at Utikuma and step-out drilling from both Tamarack and Headwater.
South Clearwater – Largely consolidated. Tamarack Valley has consolidated the region with its Crestwynd and Rolling Hills Energy acquisitions. Regional volumes now sit at roughly 11,400 bbl/d (11% of play volumes), more than doubling over the last year. Tamarack holds 214/141 net un/booked locations and has development plans focused on Jarvie and Perryvale. Rubellite Energy notes 35.0/94.2 net sections across Ukalta and Figure Lake.
West Clearwater – Peavine setting the standard. Baytex’s Peavine development (Clearwater analog) continues to exhibit the best rates in the play, including two new wells brought on production in October from the 13-25 pad (see Exhibits 1, 4, and 5). Regional volumes are weighted towards Baytex (~10,400 bbl/d on 25 producing wells) and Woodcote (~3,300 bbl/d on 33 producing wells) in October 2022. Rubellite Energy, Tamarack Valley, and Headwater have all acquired acreage in the greater Peavine area in 2022. Volumes in West Clearwater are just under 14,000 bbl/d (13% of play volumes).
Key names with exposure to the play. Producers with direct Clearwater exposure include Headwater Exploration (TSX: HWX), Tamarack Valley Energy (TSX: TVE), Baytex Energy (TSX: BTE), and Canadian Natural Resources (TSX: CNQ).
Consolidation and Exploration
Since we began tracking Clearwater trends (note here), we have seen a wave of M&A that has largely consolidated the play. Tamarack has been the most active with three notable deals (Crestwynd, Rolling Hills, and Deltastream) that have repositioned the company as the largest Clearwater producer by volumes. Smaller companies (i.e. Woodcote, Rubellite, Summerland) continue to move forward with exploration around core regions, but we expect the top names will continue to drive regional growth and likely continue to consolidate their positions to enhance scale and capture efficiencies. The play is now concentrated to five key producers, accounting for 92% of total volumes (Exhibit 6).
Tamarack provided preliminary 2023 guidance with its Deltastream acquisition of 38,000- 40,300 bbl/d of heavy oil production; the team plans to provide detailed guidance in early December. Canadian Natural has not provided specific Clearwater guidance, though the company holds an extensive land base (940,000 net acres) across the fairway, providing long- term development optionality. Headwater anticipates production growth to increase from Q4/22 guidance of 16,500 boe/d to 25,000 boe/d by 2027 through its 5-year development strategy. While Baytex has not provided formal 2023 guidance, the company has outlined 15,000 bbl/d of long-term potential at Peavine, supported by down-spacing to 5 wells per section.
Spur remains the largest landholder in the play (>1,500 net sections) including the latest acquisition of 150 sections at McMullen from Cenovus (see Exhibit 1) for $50 million cash and a 4%-6% sliding scale royalty. Spur noted the company is targeting a distinct pool overlaying McLeod Lake; the company plans to drill a multilateral well over the winter. Management notes that the reservoir appears economically strong for primary recovery and a great secondary recovery candidate given sizeable OOIP and high quality, homogenous heavy oil. Spur currently guides for 36,000-38,000 boe/d of H1/23 production on a $130 million capital program. Comparatively, the company has outlined the ability to achieve a 60,000 boe/d production rate across Marten Hills, Nipisi, Utikuma, and McLeod Lake by 2025 predicated on annual expenditures of $225 million. This excludes further exploration success from McMullen, Muskwa, McLeod Lake extensions, or other new plays
Marten Hills
Marten Hills production increased to roughly 51,000 bbl/d in October 2022 and remains concentrated to Headwater Exploration, Canadian Natural, and Tamarack Valley (including Deltastream), and Spur Petroleum (private). West Marten Hills exploration programs continue to de-risk the broader region, with Headwater seeing an IP30 rate of 330 bbl/d at its southern extension test well; management is planning for a waterflood pilot in this shoreface trend in Q1/23 and notes 35% of its core block (3.5 sections) are now under waterflood. Tamarack holds 135.3 net sections across West/Core Marten Hills with an oil battery to support near- term growth; Tamarack planned for 30 wells in H2/22 and a 40 well/year development plan going forward with waterflood implementation post-2022. Spur holds 110 sections in Marten Hills (management estimate: 1.9 billion bbl of OOIP) with 20% of volumes under waterflood; management expects volumes to grow to 20,000-25,000 boe/d and stay flat for another 6-8 years. Canadian Natural volumes at Smith now exceed 12,000 bbl/d.
Greater Nipisi
Tamarack and Spur continue to drive regional growth, with Nipisi volumes at roughly 27,000 bbl/d in October. Tamarack now holds 215 net sections at Nipisi and noted a strong H1/22 Deltastream drilling program, ramping from 240 bbl/d in exit 2021 to over 5,000 bbl/d in early Q3/22. Tamarack’s pre-deal Nipisi drilling program included the 15-20 pad (IP30: 250-300 bbl/d) and 13-23 pad (IP30: 250-325 bbl/d) further delineating the western boundary, and a waterflood pilot with volumes increasing to 400 bbl/d. Tamarack expects to drill 20-25 wells per year on the acquired Deltastream assets at Nipisi. Spur plans to drill 10 wells at Utikuma in winter 2022/23; Spur holds 137 sections of land and 64 sections of stacked sands in Nipisi/Cabin Creek (management estimate: 1.8 billion bbl of OOIP). Combined with Utikuma, Spur estimates 25,000-30,000 boe/d of long-term production potential. Headwater holds 7 sections at Utikuma with 3 prospective zones (note here) and expects results in January 2023. Cardinal plans to develop follow up Nipisi pads in 2023/24 and is testing additional prospects.
South Clearwater
South Clearwater production continues to display steady growth via public (Tamarack Valley, Rubellite) and private operators (Clear North, Spur, Summerland); regional volumes are at 11,400 bbl/d. Tamarack’s M&A program (Crestwynd, Rolling Hills) has largely consolidated the region with the company amassing 355 net sections. Management has highlighted IP30 rates approaching 200 bbl/d at Jarvie and exceeding this at Perryvale, well ahead of the regional type curve (Exhibit 14). Rubellite highlights 35.0/94.2 net sections across Ukalta/Figure Lake; the company notes 24 wells on stream at Ukalta as at Q3/22 with 2 additional wells recovering oil-based load fluid and 24 additional primary zone hz development locations in inventory. At Figure Lake, Rubellite has 16 wells on production as at Q3/22, with 72 additional development/step-out locations in inventory. The company’s average 6-leg multi-lateral Figure Lake type curve features an IP30 of 115 bbl/d on DC&T of $1.2 million. Spur’s 2022 Ukalta program has also outperformed regional results with wells averaging ~150 bbl/d.
West Clearwater
West Clearwater has exhibited rapid growth led by Baytex’s Peavine (Clearwater analog) development, with regional volumes of 13,900 bbl/d in October 2022. Baytex’s Peavine volumes now exceed 10,000 bbl/d driven by many of the play’s top wells (Exhibits 1 and 5). Management plans to down-space to 5-wells per section, supporting 250 development locations on the company’s 50 net sections at Peavine; management now sees long-term production potential of 15,000 bbl/d. Many producers now hold sizeable positions in West Clearwater: Baytex (80 sections at Peavine), Tamarack Valley (77.5 net sections at Peavine/Seal), Rubellite Energy (61.1 net sections at Peavine/Dawson), and Headwater Exploration (49.75 sections at Peavine/Seal). Tamarack licensed its first 8-leg multi-lateral well at Peavine with an estimated spud in mid-November and a 3-well pad at Seal, testing three separate Clearwater sands. Headwater has abandoned its plans at Shadow, and now plans for one test well in Peavine in Q4/22 and two test wells in Seal in Q1/23.
Royalty Company Exposure
Each of the three public Canadian royalty companies (Freehold Royalties, PrairieSky Royalty, Topaz Energy) has exposure to the Clearwater as outlined in Exhibits 17/18. While difficult to compare given limited disclosure, differing royalty agreements and rates, and variable productivity across the play, we have noted relative positioning on the basis of EV/current production and EV/acre. By those metrics, Topaz and PrairieSky currently have the most leverage to the play, though we acknowledge this is likely overly simplistic.