Tamarack Valley Can Sustain Depressed Canadian Oil Prices

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About: Tamarack Valley Energy, Ltd. (TNEYF), Includes: BNEFF, IPOOF
by: Hervé Blandin
Summary

Tamarack Valley benefited from improved liquids prices during Q3.

With the recent drop of the Canadian oil prices, management will have to update the preliminary 2019 budget.

But thanks to the low debt, the hedges, and the gas production exposed to improved U.S. prices, the company can sustain this challenging environment.

The flowing barrel valuation is becoming attractive.

Tamarack Valley (OTC:TNEYF) generated positive total netbacks during Q3 thanks to improved oil prices.

But the focus is now on the impact of recent depressed Canadian oil prices. Management released a preliminary budget corresponding to a production growth. But because of the oil prices below management assumptions for 2019, the company will adapt.

Tamarack can sustain depressed Canadian oil prices for several quarters, though. The net debt is low, the production is hedged, and the gas production is exposed to improved U.S. gas prices.

As the company has the capacity to adapt to the challenging environment, the flowing barrel valuation, below C$30,000/boe/d, is now attractive.

Oil rig Image source: jp26jp via Pixabay

Note: All the numbers in the article are in Canadian dollars unless otherwise noted.

Q3 earnings

With organic growth due to the capital program, the production increased by 4% QoQ to reach 24,765 boe/d.

Tamarack Valley Q3 2018 production

Source: Q3 2018 MD&A

Compared to last year, the production grew by 21%.

Liquids represented 66% of the production. Considering the higher liquids prices in Q3, liquids revenue represented 94% of the total revenue.

Tamarack Valley Q3 2018 realized prices

Source: Q3 2018 MD&A

The liquids production is exposed to the Edmonton Par prices. And management is trying to avoid the AECO gas prices by selling gas to the U.S. markets.

Tamarack Valley Q3 2018 natural gas markets

Source: Q3 2018 MD&A

Management is planning to further diversify the gas marketing.

"Through the third quarter of 2018, more than 50% of Tamarack’s total natural gas production was priced in alternate US markets, including Malin, Chicago, Michigan Consolidated, Dawn and NYMEX daily index pricing less transportation tolls or fixed basis fees. In addition to the diversification in place during the third quarter, effective November 1, 2018 through 2030, an additional 10% of the Company’s current gas production will be exposed to an alternate US market. Tamarack will continue to explore alternatives to minimize exposure to Alberta gas market volatility." - Source: Q3 2018 MD&A

With increased realized prices and a higher production, total adjusted operating field netbacks increased by 97% YoY to reach C$68.6 million.

To support the growth, the capex amounted to C$78.1 million during Q3. As a result, the net debt increased to about C$192.2 million.

Tamarack Valley Q3 2018 net debt

Source: Q3 2018 MD&A

But the level of net debt is still low. The net debt to annualized adjusted operating field netback ratio is stable compared with the previous quarter, at 0.7x.

Navigating through depressed Canadian oil prices

Management maintained the FY 2018 production target in the range 24,000 boe/d to 24,500 boe/d. And the company announced the following preliminary budget.

Tamarack Valley preliminary guidance

Source: Q3 2018 MD&A

I won't comment on this budget as, considering the evolution of the Canadian oil prices, it is likely to change at the beginning of 2019. Management stated:

"Should the current pricing environment continue through the balance of 2018 and into first quarter 2019, adjusted operating field netbacks will be negatively impacted. Tamarack has historically demonstrated prudence in capital allocation decisions during volatile commodity price environments and will continue to closely monitor current and future commodity prices and price differentials. The Company’s 2019 preliminary $250 million capital expenditure budget contemplated spending approximately 95% of its anticipated adjusted operating field netback assuming commodities average US$60/bbl WTI, C$68.50/bbl Edmonton Par price, C$1.65/GJ AECO and a $0.78 Canadian dollar. Given the current lack of visibility on timing for differentials to improve, Tamarack anticipates formalizing its 2019 capital expenditure budget in early 2019 and in order to preserve value, may elect to defer some Q1/19 projects."

Management expressed the goal of spending capex within the cash flows. And since the publication of this statement at the beginning of November, Edmonton Par prices stayed well below the price assumption of C$68.50/bbl (US$51.52/bbl).

Oilprice.com WTI and sweet crude prices

Source: oilprice.com (prices in US$)

But a prolonged depressed Canadian oil prices environment doesn't threaten the company. Half of the light oil production is hedged at a WTI price of US$59.91 for Q4.

Tamarack Valley Q3 2018 oil hedges

Source: Q3 2018 MD&A

Also, over the last few months, gas prices improved at U.S. hubs.

Chart Henry Hub Natural Gas Spot Price data by YCharts

And considering the low AECO gas prices, the company will take advantage of its AECO/Henry Hub differential hedges in Q4.

Tamarack Valley Q3 2018 differential hedges

Source: Q3 2018 MD&A

The table above also shows the company hedged the differential WTI/Edmonton at US$5.50/bbl for 1,500 boe/d during Q4. With the differential currently at US$25/bbl, these hedges will also provide some extra cash.

The valuation becomes attractive

For the valuation, I compare Tamarack with Bonterra (OTCPK:BNEFF) and InPlay (OTCQX:IPOOF). These two other companies produce a similar mix of oil, NGL, and gas.

Tamarack Valley Q3 2018 production compared with Bonterra and InPlay

Source: author

The table below shows Tamarack's total costs and netbacks were comparable with Bonterra's during Q3.

Tamarack Valley Q3 2018 costs and netbacks

Source: author

As it was the case during Q2, InPlay operated at higher costs compared with Tamarack and Bonterra.

Yet, the market values Tamarack with a discount compared with Bonterra and InPlay from a flowing barrel perspective.Tamarack Valley Q3 2018 flowing barrel valuation

Source: author

With the recent and sudden drop of Canadian oil prices, management will have to change the preliminary capital budget. But with the low debt, the hedges, and the improved gas prices in the U.S., the company can sustain the depressed oil prices for several quarters. Also, the company operates at reasonable costs compared with similar producers.

With this context, the flowing barrel valuation, now below C$30,000/boe/d, is becoming interesting. I don't understand the higher flowing barrel valuation for InPlay. Tamarack realizes higher netbacks with a lower risk profile.

Conclusion

The company took advantage of Q3 oil prices to generate total netbacks at about C$10/boe after hedges.

Management announced a preliminary 2019 budget. But the current Canadian oil prices stay well below management's assumptions. Thus, the budget will be revised at the beginning of 2019. In any case, the company can sustain these low oil prices for several quarters. The net debt is low, some production is hedged, and U.S. natural gas prices improved.

With this challenging environment, the flowing barrel valuation, which dropped below C$30,000/boe/d, is becoming attractive.

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Disclosure: I am/we are long PEYUF, BNEFF, BTE, CPG, YGRAF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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