Tamarack Valley reports March 1, 2023
Will the big acquisition pay off in the results?
Tamarack Valley (TVE.TO) surprised investors last September by announcing the $1.4 billion acquisition of Deltastream, firmly establishing Tamarack as the largest player in the prolific Clearwater area, Canada’s most profitable oil basin. It was a bold move and many investors fled Tamarack for safer waters. In announcing the acquisition, Tamarack also announced a 25% rise in its annual dividend rate, and expression of confidence that the company could integrate and manage the Deltastream purchase and immediately benefit. Many were skeptical.
To help think through the impact of the massive change in size and scale of Tamarack, I build a simple model of the company’s operations. I don’t pretend it is particulary sophisticated or precise, but it is useful for assessing what variables will help or hurt the company’s expanded presence and whether the debt will be a burden too big to bear. Here is that model.
Since Clearwater produces heavy oil and the price of Western Canadian Select (WCS) is typically at a discount to light grades and to West Texas Intermediate (WTI) I used a flat Canadian $75 per barrel in my model. I am not clairvoyant and the price of oil is volatile, but the analysis remains useful. Prior to the Deltastream acquisition Tamarack had a mix of light and heavy oil and natural gas and related liquids but the expanded portfolio has a much higher weighting of WCS and the lighter grades will tend to push up the effective realized price so I am comfortable using CAD$75.00 Assuming a 22% royalty rate, CAD$3.00 per barrel transportation costs, and operating costs in the CAD$10 per barrel range, netbacks in the CAD$50 range seem possible. Actual netbacks in Q3 2022 were somewhat higher and CAD$50 is a sensible assumption. There is some question whether a 30% decline rate is high enough or whether Tamarack can achieve a capital efficiency of CAD$13,000 per flowing barrel, but it is not much of a burden for readers to plug in their own assumptions and see how they affect the projected results. I think the numbers are representative.
If they are in fact close to reality, Tamarack will repay its acquisition debt quite quickly and become debt free by mid to late 2024. The share count was some 556 million at October 31, 2022 (and will average about 520 million for the full year 2022) and I have made no assumptions about new issues or buybacks.
Adding it all up, and with the usual caveats about the frailty of commodity price projections or operating costs in an inflationary environment, the prospects for Tamarack look robust and the shares appear undervalued in the low CAD$4.00 a share range. Next week’s 2022 release will provide better data and I will update both my model and my view on value with those in hand. As it stands, I think the company is very likely undervalued (particularly given the Baytex numbers for its Clearwater production) and own 10,000 shares. If the data impresses, I will buy more.
I dont currently have a position but noticed on BNN Friday Eric N listed TVE as his nbr 1 pick, 2 was ATH and 3 CVE. He didnt say but IMO he might have picked up ARC energy fund 7's sale of 28.7 million shares Feb 10th.