Tamarack Valley Energy - April 2017

Suite 600, Fifth Ave Place – East Tower
425-1st SW. SW Calgary, AB T2P 3L8
Phone 403.263.4440 •  Website: www.tamarackvalley.ca
Content updated periodically  • Dated April 24, 2017

Ticker Symbol: TVE-T

View All Posts Tagged TVE-T

FINANCIAL HIGHLIGHTS

Shares Outstanding

227.7M

Market Capitalization

$610M

Q1/17 Production Estimate

17,500 boe/d

Enterprise Value

$655M

Intermediate Cap Company

Current Price (04/21/17)

$2.68

Attractive Purchase

Under $2.15

Table-Pounding BUY

Under $1.90

12 Month Target

$4.25/share

Bull Market Peak

$8.00/share

BACKGROUND

Tamarack was founded in March 2002 as a “capital pool company” and turned into Tamarack in June 2010 when the company restructured and a new management team was appointed. Tamarack is a Calgary-based Oil and Gas Exploration and Development Company focused on resource plays where they can bring their strong technical skills to bear and have repeatability, large reserves and long production life potential. In early 2017 the production mix was 56% liquids and 44% natural gas. The company has been very acquisitive taking advantage of opportunities to make transformative purchases over the last 6 months. Production in Q1/17 should be up to 18,000 boe/d as recent acquisitions are integrated. The Company operates in five areas in Alberta and Saskatchewan.

INVESTMENT PARAMETERS: PEOPLE

The team is headed up by Brian Schmidt, formerly President of Apache Canada.  As of February 2017, TVE had 28 head office employees and 27 people in the field. Major Institutional Shareholders include GMT Capital Funds, at 16.1M shares.

TitleManagementShares Owned
President & CEOBrian Schmidt398K
CFORon Hozjan142K
VP ProductionKevin Screen105K

Source: www.sedi.ca April 2017

INVESTMENT PARAMETERS: PROJECTS

Tamarack is currently involved in five areas: Wilson Creek (Cardium oil – Alberta) is their largest area with 7,380 boe of production during Dec/16 – and have over 200 locations in inventory.  Their cost per well is $2.6-2.8M with IP 30 rates of 390-645 boe/d. The other core areas are the recently acquired Spur Viking areas in Saskatchewan, with 6,600 boe/d of production and nearly 700 locations in inventory. Their cost per well here is $700K, with IP 30 rates of 70-116 boe/d, at Redwater (1,150 boe/d in Dec/16 – Alberta), Penny (light sweet Barons oil 1,160 boe/d in Dec/16 – well cost of $3.2M and IP 30 rates of nearly 400 boe/d in Alberta) and Saskatchewan (heavy oil).

Key AreasProductionInventoryCost per WellIP 30 Rates*
Wilson Creek (Cardium Oil)7,380 boe as at Dec/16Over 200 locations$2.6 – 2.8M390 – 645 boe/d
Spur Viking6,600 boe/dNearly 700 locations$700K70 – 116 boe/d
Redwater1,150 boe/d Dec/16$3.2 M
Penny (Light Sweet Barons Oil)1,160 boe/d Dec/16Nearly 400 boe/d
Saskatchewan (Heavy Oil)

* Initial rates first 30 days of production

The overall corporate decline rate is at a high 33-34% which necessitates a more active program each year to replace declines and show growth. TVE has the infrastructure to grow the company to over 30,000 boe/d with minimal facility upgrade expenditures.

For development activity in 2017, TVE plans on drilling 100-110 wells on its Viking lands, lifting production to 10,000 boe/d by the end of the year from 6,600 at the end of 2016. At Wilson Creek and Alder Flats they plan on drilling 15-17 wells; at Redwater 10-15 wells and at Penny 4-6 wells to double production to 2,000 boe/d. In Q1/17 they had three rigs running; two at Pembina for the Cardium, and one in Saskatchewan focused on the Viking. In Q1 they should have drilled and completes 34 wells in the Viking.

Operating Areas of TVE-T

Tamarack Valley Energy - April 2017

Source: www.tamarackvalley.ca

INVESTMENT PARAMETERS: FINANCIAL CAPACITY

  • TVE’s Q4/16 production beat our forecast of 10,900 boe/d, with production of 11,453 boe/d (55% liquids) as acquisitions completed during the quarter helped out.
  • Cash flow per share (CFPS) came in at $0.15/share versus our $0.13 estimate. Field netbacks were $22.03/boe, up materially from the netback of $15.23 in Q4/15. Operating costs per boe were $12.17, continuing their excellent cost controls. Capex in the quarter was $12.4M net on their base assets and they spent $86.4M on acquisitions in Q4/16.
  • On January 11 2017, TVE completed its largest transformational deal so far with the acquisition of Spur Resources Ltd. for $407.5M including debt. They used TVE shares valued at $3.44/share or an additional 90.1M TVE shares plus cash, to close the deal. The Spur assets added 6,600 boe/d, at a cost of approximately $62K/boe. In an environment of >US$50/b this was a reasonable deal but may look expensive if we are right on a lower crude price going forward in 2017. Pro-forma this deal, TVE’s production should have reached 17,250 boe/d.
  • Our 12 Month Target of $4.25 is based on 6.6x our Q4/17 annualized cash flow estimate of $0.64/share. TVE is using more optimistic commodity price assumptions than we are. Their crude oil price assumption is US$55/b and AECO (Natural Gas) is at $2.65/gj (gigajoule). The stock would be a very Attractive Purchase at less than $2.10/share, and a Table Pounding BUY under $1.90/share. Book Value at year end 2016 was $2.06 a share.
  • Our 3-5 year Bull Market Peak scenario is for TVE to be producing more than 25,000 boe/d, have CFPS of over $1.50/share and trade at a price in excess of $8.00/share.

Balance of Evidence

POSITIVES

  • TVE has been very successful driving down operating and capital costs.
  • When commodity prices improve, TVE has a quick and cheap way to increase volumes at Alder Flats. For $4M they can add a compressor that would raise production from 6Mmcf/d to 10Mmcf/d and with 50% liquids, adding up to 1,500 boe/d fairly quickly.
  • TVE has taken advantage of the packages on the market and added to their core areas as well as adding new core areas at Penny and the Saskatchewan Viking play. We would like to see them add materially to production via the drill bit as the acquisition mode will be less likely once commodity prices improve on a sustainable basis.
  • We would like to see TVE move towards a lower decline rate. The water flooding potential and new recovery technologies may help them to produce more of the original oil in-place.

ISSUES OF CONCERN

  • The new royalty regime, TCPL curtailments, and government approval delays have impacted growth timelines of the company in the past.
  • Getting access to fracking units is becoming more difficult due to the manpower shortage for smaller operators in the service sector.
  • Access to capital for growth has been tough for small cap companies. TVE has so far not been impacted.
  • TVE will need to add water flood technical skills to their organization if they are to reach their upside recovery goals.
  • The company will need to show the investment community  that they can show growth via the drill bit versus just via acquisitions.
  • There is justified concern that the stock may be held back as the Spur shareholders do not have a hold period and may sell their 90.1M shares at their convenience. Until this overhang is removed, upside may be limited. However, current investors are buying the stock at a much cheaper price than the $3.44 per share that the deal was done at.

TAMARACK VALLEY ENERGY LTD. (TVE-T)

Tamarack Valley Energy - April 2017

Source: stockcharts.com

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