TAMARACK VALLEY ENERGY
TVE Q4/22 RESULTS & ANALYSIS
Tamarack has grown by making three expensive and aggressive acquisitions in 2022 spending $1.44B in the Clearwater area. Under our SER Quality Scoring system we have downgraded TVE from an A to a C – a challenged entity due to the high debt load after its acquisitions in 2022. Debt is now up to $1.36B from $287M at the end of Q3/22. The share count has exploded as well rising from 226.2M shares during 2020 to 566.4M shares currently or up 150%. We are concerned that management is size-focused versus being able to grow internally and is betting the company that the Clearwater play area is all high quality land and that commodity prices will stay high. That gamble if it works, would allow them to pay down their large debt load quickly. I am not so convinced this gamble will work. Production in Q4/22 rose to 64,344 boe/d from 40,384 boe/d in Q4/21 and from 43,476 boe/d in Q3/22. Funds flow from operations in Q4/22 came in at $197M or $0.36 per share versus $178M or $0.40 per share in Q3/22. For all of 2022 funds flow was $727M ($1.58 per share) compared to $340M ($0.96 per share) in 2021. TVE is forecasting production to average 68,000 – 72,000 boe/d with capex of between $425 to $475M.
Balance of Evidence
- TVE initiated a monthly dividend of $0.0125 or $0.15 annually. This may be at risk if their view of debt reduction and free funds flow does not occur.
- Insiders are decent shareholders with the CEO, Brian Schmidt, owning 4.2M shares.
ISSUES OF CONCERN
- TVE keeps on making acquisitions every year and seems to focus on how great the new deal is. Deals done in prior years that they raved about at the time don’t get ongoing recognition. We are not fans of their building up heavy oil production (31,328 b/d in Q4/22 up from only 319 b/d in Q4/20). The are focused on the Clearwater play and are selling prior core areas to fund this popular investor play. They sold Viking assets and other assets for $77M last year. We suspect that all the land purchased may not be Tier 1 as they assume.
- TVE has a very low PDP reserve life index (RLI) at 3.2 years thus justifying a lower cash flow multiple versus other oil focused entities with longer RLIs. This puts them on a very tough treadmill to replace production.
- Compare the 2021 and 2022 NAV’s to see the destruction of shareholder wealth with their very dilutive stock issuance.
- The stock trades above our 2022 NAV of $1.37 per share and above 2022 year end book value at $3.82 per share. TVE has traded for many years at 2.0x cash flow or less and traded around or below 1.0x book value in each of the past five years. TVE could decline materially as it has too high a debt load and a high decline rate and low PDP RLI (3.2 years) During market declines such as the fall 2022 into Q1/23 TVE’s stock fell from $5.53 to $3.95 per share or by 29%. We look for the stock to decline to below $2.75 per share before it could be considered reasonably priced. Given its high debt load and high decline rates we would avoid the stock for now. If you haven’t bought this don’t, if you own it you should be aware of the associated risks.