Brian Schmidt has a plan. He believes the way to run an oil and gas company is to spend less and produce more. 


Brian Schmidt, CEO, Tamarack Valley Energy

Schmidt, the company’s president and CEO, presented Tamarack Valley Energy’s (ticker: TVE; strategy in Denver at EnerCom’s The Oil & Gas Conference® 20 in 2015, and again at EnerCom San Francisco in March 2016, and he stuck to his theme in Toronto last week.  Over the previous six months the stock is up 24%, or 5200 basis points better than the 52 Canadian E&P companies in EnerCom’s database.

Schmidt said his strategy is very straight-forward, but not always followed by industry peers.  “We believe the best way to manage through a trough like the one we are experiencing now, is to buy assets that have low operating costs and reservoir upside, while augmenting our returns with operated infrastructure,” Schmidt told Oil & Gas 360®.

“We allocate our capital to projects with payouts of 1.5 years or less.  This kind of investment discipline isn’t unique.  But it is hard to stay the course when your peers are paying up for properties that need higher commodity prices.  We will generate as much as C$8 million of free cash flow in 2016 using a $40 U.S. WTI price.”

Using a WTI price of $38.50 barrel, Schmidt believes the company has five years of drilling inventory without purchasing any additional lands.  At that price, the company’s total inventory is 117 locations, 61% focused on the resource-rich Cardium play in central Alberta.  The company entered the Cardium back in 2013, owning 42 net sections and 16 locations.

Fast forward to the end of 2015, Tamarack controls 200 sections, operates two gas plants, four oil batteries and more than 400 kilometers of pipeline infrastructure. Despite forecasting an 18-32% decrease in WTI prices to between $33 and $40 per barrel, Tamarack forecasted cash flow per BOE to range between C$12.90 and C$17.60 per BOE. On a drill-bit basis, estimated full cycle economics for Tamarack in 2016, assuming the cash flow estimate of C$17.60 per barrel at $40 per barrel WTI and a drilling cost of C$2.6MM for a 186 MBOE well in Wilson Creek, is 127%.  At the low end cash flow estimate and no continued savings in service costs, the company would nearly breakeven on new drilling projects.


Tamarack Valley Energy

EnerCom’s calculated cash margins per BOE in 2015 were C$19.10, or 56.4% better than the group’s average of C$8.32.  Schmidt attributes the company’s operating success on the experience of his team.  “We have a staff of 20 professionals.  When you’re our size, each member of the team plays a critical role in our total success.  They come up with great ideas that we can quickly implement in the field.  Beyond service costs reductions, we have reduced or eliminated components from our drilling processes.  For example, we no longer use nitrogen as part of our drilling program.  We shifted to a sliding sleeve system from using a ball drop. By owning our own infrastructure we can pump frac water in and out, reducing trucking costs.”

Wilson Creek

As the company built out its infrastructure and expanded its footprint with its $54 million Wilson Creek tuck-in acquisition in June 2015, it outspent cash flows from operations.  In 2015, Tamarack spent 117% of its cash flow.

What did Wilson Creek add in 2015?  The company purchased a contiguous position of 81,920 acres gross (56,320 net acres) with reserves, production and infrastructure.  Daily production at the time of the acquisition was approximately 1,450 BOE/d (45% light oil and NGLs).  The purchase price was per flowing BOE was C$37,241.  At the time of the acquisition, TVE traded at an enterprise value to TTM production of $80,802.  Stripping out the associated facilities (a 6 MMcf/d gas plant, 1,000 barrels per day central oil battery and more than 220 kilometers of emulsion and pipeline infrastructure), valued by TVE at C$60 million, it could be argued that Tamarack paid less than new build value for the existing infrastructure and essentially bought production and reserves for C$0.  An upside with the acquisition is the potential for natural gas from the Mannville formation.


The company estimates gas in place of 12 Bcf per section, and based on internal estimates, has the potential for an additional 108 Bcf of future unrisked reserves, more than double the company’s 2015 proved reserve gas base.  Costs to drill the 18 Mannville gas wells in TVE’s current inventory, 100% to TVE, would be C$50.4 million, or C$0.47/Mcf.

Tamarack Valley’s 2016 Plan

2016 spending is forecast to be C$40MM to C$57MM, which is approximately what it spent in 2013, a year were production increased by 51%.  The 2016 program is supported with oil hedges – 56% of TVE’s oil production is hedged in the first half of the year and 40% is hedged in the second half.

As of April 15, 2106, on a per-share basis, the stock trades at an 8.4 times an estimated 2016 P/CFPS.  Using EnerCom’s proprietary analysis, the stock, based on key metrics, could trade at 11.3 times, or 25.7% higher.  Hampering the upside potential are Canadian natural gas prices and stock dilution.  Approximately 39.5% of the company’s daily production base is natural gas.  AECO is trading at about a C$1 discount to the U.S. Henry Hub.  To counter the weakness in AECO prices, TVE has a variety of fixed price AECO derivative and physical gas contracts:

Derivative 5,000 GJ/day January 1—March 31, 2016 C$3.06
Derivative 3,000 GJ/day April 1, 2016 – October 31, 2016 C$2.53
Derivative 6,000 GJ/day January 1, 2017 – March 31, 2017 C$2.61
Physical 2,000 GJ/day January 1, 2016 – March 31, 2016 C$3.02
Physical 2,000 GJ/day April 1, 2016 – June 30, 2016 C$2.40
Physical 2,000 GJ/day July 1, 2016 – September 30, 2016 C$2.44

During 2015, to meet its capital spending program, TVE’s common shares outstanding expanded by 44%.  On March 18, 2016, 14.96 million shares were issued at C$2.92 in a bought deal.  The market reacted positively to the share issuance, pushing the stock up 25.7% since the offering.

[email_signup label=”Sign Up for Closing Bell – Our Free, End-of-Day Oil & Gas News Report”]

Is there additional valuation opportunity?  Commodity prices being what they are, it depends.  However, TVE has a balance sheet, capital liquidity, and capital allocation discipline to work through the trough.  Debt to market capitalization ratio is 20%, well below the average of 251% for the 51 companies in EnerCom’s Canadian E&P database.  As of April 15, 2016, TVE trades at a 2016 P/CFPS multiple of 8.4 times.  A year ago, the stock traded at 4.9 2015 P/CFPS with a market capitalization of $355 million.

Legal Notice