Tamarack Valley Energy Ltd.

Good morning. Welcome everyone to the Tamarack Valley Energy Limited conference call and webcast on Thursday, August 1, 2024, discussing the recent Q2 2024 results press release. I would like to introduce today's speakers, Mr. Brian Schmidt, President and CEO, and Mr. Steve Vitels, Chief Financial Officer. If you would like to ask a question, please press star, then the number one in your telephone keypad to join the queue. If you would like to withdraw your question, please press star two. Thank you. Mr. Schmidt, you may begin your conference.

Good morning, and thank you, John. Welcome to everyone to the call to discuss our second quarter operating and financial results. My name is Brian Schmidt, President and CEO, and I'm joined this morning by Steve Baitels, our CFO. The second quarter of 2024 was truly outstanding for Tamarac and was highlighted by outperformance on our production volumes that averaged 64,143 BOE per day. This was driven by success of Tamarac operations team in recovering volumes from the previously announced third-party Nipissi outage and ongoing development success in the Charter Lake. Starting with our heavier oil portfolio, we have seen significant year-over-year growth from our North Clearwater assets, achieving new record oil production, growing to 19,500 BUE per day in Q2-24. This compares to 15,400 BUE per day in Q2-23 and represents a year-on-year increase of 26%. This is the result of continued success of Tamarac's drilling and development programs. This production result was achieved despite operational headwinds at the start of the quarter. Our team responded quickly and was able to implement several solutions to restore the majority of the 6,200 VOE per day of production that had been shut in as a result of the downturn in April 13, 2024. The Metsu third-party incident, well in advance of the plant, coming on back online in the end of the quarter. Actions taken by our operating team successfully mitigated downtime impacts, reflecting the hard work, focus, and creativity of the team. I'm very proud of the group. At Nipissi, we are seeing strong BSAN results from the 12-14-76-8 West 5 pad, where five BSAN wells delivered an average of IP30 rates in excess of 215 BOE per well. These wells outperformed our expectations to date owing to higher oil quality. This is highly encouraging as Tamarac is stepping up development in the south end of the Nipissi pool. The Nipissi CSAN program continues to demonstrate success with two on the 12-15 pad, achieving IP rates, IP 30 rates in excess of 200 BME per day. We plan on following up these results with additional CSAN drilling in H2 while leveraging existing infrastructure. At Martin Hills, Tamarack Advanced Key Infrastructure was the pipeline portion of the Northwest Connector project, completed on schedule and under budget. The emulsion line was commissioned Q2 24, and the gas line is expected to start up in August. The eight well 430 patch, which completed drilling in Q1 24, saw production increase to over 1400 barrels of oil per day in June. During the quarter, the company re-released two fan wells with a total of six clear water fan wells being drilled in H-124. Plans for the second half of 24 include the drilling of an additional eight fans for a total of 14 fan wells during the year. Notable results were reserved from the two New Brook wells drilled off the 13-30-62 West 4 pad in 2024 which achieved the highest IP90 rates of all wells in the southern Clearwater Trent to date at over 225 barrels of oil per well. In support of the ongoing regional gas conservation of Tamarack's Rochester gas plant was completed during the second quarter, raising throughput capacity to over 3 million standard feet per day. The Clearwater Water Flip program continues to ramp up with encouraging results to date. The company will ramp clear water injection activity in the second half, 24, supporting water flood development to reduce asset decline rates and sustaining capital requirements in the future. Injection will commence in new zones, as well as existing, the new zones being the CSAN, Westmark, and Canal, where the company has identified high quality targets for water flood. Total water injection is expected to increase over 110% from 7,000 barrels a day to 15,000 barrels a day of water exiting the year. Moving on to Charley Lake. The program continued to drive production growth, having achieved the highest, the asset's highest quarterly production to date, delivering Q2 24 with an average of 17,900 BOE per day. In total, Seven Tamarac-operated Charter Lake wells were brought on stream in the first half of 24, with average IP rates exceeding 1,180 BOE per day per well. Looking ahead, we remain focused on our core assets. Our strategy looks to include reducing sustained capital requirements, improving pricing margins, and implementing projects with multi-payouts. I'll now pass it on to Steve Baitels to run through the financial results, as well as our outlook. Thanks, Brian.

Tamra delivered adjusted funds flow in the quarter of $226 million, which was a 43% year-over-year improvement, and were able to generate free funds flow of $137 million. Key highlights included, as Brian mentioned, strong production performance due to quick recovery from the third-party Nipissi outage and ongoing development success in the Clearwater and Charter Lake. Higher realized price margins. where we were able to leverage improved market access and lower wellhead deductions, which contribute directly to the bottom line. Improved operating costs, which were lower on a per barrel basis by 9% year over year, and we expect that to continue to improve as we move through the second half of the year. Reflecting on our emphasis on returning capital to shareholders, during the quarter, the company repurchased 2.1 million common shares. In total, in the first half, the company bought 9.7 million shares representing 1.7% of the 2023 year end shares outstanding for a total repurchase value of approximately $34 million. Total shareholder return for the first half of the year, inclusive of the base dividends of 41 million and enhanced returns was 75 million or approximately 14 cents per share. Exit net debt of $883 million marks a significant milestone arriving within the $500 million to $900 million net debt range and advances the company to the next phase of the return on capital framework. This enables us to direct up to 60% of free funds flow to base dividends and enhance returns, which is up from 40% previously, with the remaining free funds flow directed to ongoing net debt reduction and strategic growth capital allocation. We remain focused on capital discipline and execution of the business plan. Our full year annual production and capital guidance remains unchanged. The company expects to average 61 to 63,000 BUE a day in 2024 with spending in the 390 to $440 million range. When we announced our budget in December, we had included a potential increment associated with firm capacity Tamarac has committed to at the new CSB Albright sour gas gas plant expansion. We continue to monitor the CSV plan's progress and commodity prices prior to allocating any incremental joint capital for volumes associated with that project. The status of this decision will be updated in the fall. With that, I'm going to pass it back over to Brian to wrap up our call.

Thank you, Steve. We've transformed the company and are in the demonstration of execution transition plan. Tamarack has been steadfast in our commitment to reducing debt, demonstrating operational excellence, and delivering our return of capital framework for shareholders. On a year-on-year basis, net debt has been reduced about $491 million, or 36%. This reflects delivery, execution, and delivery results driven by successful transformation of the company that has enabled growth within our Clearwater and Charlie Lane core areas, where both plays delivered record quarterly production in Q2-24. Leveraging our high-quality, heavy, and light oil assets, SAMRAC remains focused on our execution of our strategic plan, which underpins delivery of long-term value to shareholders. I'd like to thank our employees, board of directors, and shareholders and stakeholders for all your continued support. I'll pass it back to the moderator for questions. Thank you.

Thank you, Brian.

Thank you. Ladies and gentlemen, we will now conduct the question and answer session. If you have a question, please press star followed by the number one on your touchtone phone. You will hear a three-tone prop acknowledging your request. If you would like to cancel your request, please press star two. One moment, please, for your first question. Tamarack will answer Q&A that has been submitted online. Please go ahead.

Thank you, John. Our first question online is for Mr. C. Faitel. Now that you have reached 60% return of free cash flow to stockholders, can we expect to see share buybacks accelerate?

Yeah, I think when we look at that, obviously triggering this next phase, that results in incremental free funds available to go back and with respect to the enhanced return. through the buybacks. So when we look at it on budget pricing for the remainder of the year, which is at $75 WTI, we would see somewhere in that $50 to $65 million available for buybacks through the back half of the year. So obviously, I walked through the numbers there in the first half of the year. We see potentially almost the ability to double that number of buybacks in the back half.

Thank you, Steve. Our next question is for Mr. Steve Vitels again. Can you discuss the cadence of free cash flow and prospective buyback through the remainder of the year, and how do you anticipate executing the buyback, either tactically or mechanistically?

Yeah, so again, sort of similar line. On that budget $75 WTI deck, we'd be between $140 and $150 million of free funds forecasted. Again, when we walk through, the base dividend would be about $40 million of that with respect to the 60% shareholder return threshold, and you'd be in that $50 million mark with respect to the buyback. Again, what we'll look to do is, the way the mechanism for us works is, As you go through every month and we close our accounting month, we'll see what's there in terms of actual free funds for earned. And then we work and allocate our buybacks on the back of that to make sure that we're keeping that balance between the buybacks and debt repayment. But again, the cadence from H1 into H2 is pretty significant in terms of the increase with what we will be able to do for shareholders through buybacks here.

Thank you. Our next question is for Mr. Brian Schmidt. Production from Q2 was materially higher than Q1 and outside of the high end of your guidance range. Can you speak to how the new Charlie Lake wells are performing currently, what the plans are for the asset in the second half of the year, and if there's any follow-up drilling offsetting the wells noted in your report?

Thank you. So Q2, certainly the production came on much higher than anticipated. Let me talk to the NHTSU downtime first. We had originally scheduled a much longer timeframe to get back up. The guys found very creative ways to deal with the gas and the regulator then allowed us to bring a lot of production back on. So the actual downtime with that was much shorter than we originally anticipated. And you may recall we had about 6,200 BOEs a day down for that event. In Charley Lake, you're absolutely right. I know the first two wells drilled in the first part of this year, they were the highest oil rate wells ever drilled in the Charley Lake, to my understanding. It's just amazing you could take a play that was you know, drilled in the 60s, and you're getting your best wells now. So I'm very pleased at that. And also, there are follow-up locations in that area where we would expect some success as well. When we came back on in Nipissi on the Clearwater, the wells that we had drilled in the first half came on higher than expected. And you may recall we were in cleanup phase when the downturn occurred, so we didn't really know how much, how well they would do, but they came on much stronger. And so it speaks to some of these areas in Nipissi where we're getting some higher quality crude and good process rock, and we're getting much better rates than expected. Thank you.

Thank you, Brian. Our next question is for Mr. Seatbite Health.

you speak to the estimate production breakdown for the balance of 2024 in the context of light and heavy oil production yeah i mean the majority of the growth as we highlighted or brian highlighted earlier comes out of the has been coming out of the clear water um you know with the cherry lake seeing some significant uh growth in the first half to date um but ultimately you know when you look at our breakdown of our oil, you know, we see about 75% of our oil being heavy oil and 25% being light oil, which is driven, you know, primarily by the Charlie Lake. There's a little bit of condensate in there too and other liquids that could, you know, bring that number up a little bit.

Thank you, Steve. Our next question is also for Mr. Steve Vitale. Does Tamarack plan to supplement the share buyback program with any special cash dividends to shareholders?

No, I think it's pretty simple. And, you know, we've been pretty clear. And if you look at our investor, how we look at the business is, you know, long-term buybacks are going to be key to our strategy. And when we look at growth, we look at growth on a per share basis. So, you know, it'll be a combination of that organic or inorganic growth, coupled with the long-term buybacks to drive, you know, material per share growth in the company moving forward. So that's our plan. And, you know, in the short term here, we have no plans for any special dividends.

Thank you. Our next question is for Mr. Brian Schmidt. With water injection wrapping up this year, when will Tamarac be able to speak to the response to this activity?

Yeah, so when you look at the patterns that we've seen in the past, we've been surprised to the upside of how fast those patterns respond. And, you know, things that we thought would take a year to respond responded in three, four months. It doesn't seem to matter if it's Tennessee or Martin Hills. You're seeing similar types of trends. The thing that I'm excited about is we're trying a number of different pattern configurations, and so the response times are likely to be different on any of them. But I would say that optimistically, we're probably looking at gas compression suppression within four to six months.

uh flattening of oil response in that same time frame and then and then it pick up after that thank you our next question is for mr steve vitel with the big reduction in year-over-year debt what is the outlook point board and when do you see the company hitting the next threshold level for the return of capital framework yes and you know obviously that's dependent on capital spend and we haven't come up with our budget yet but again if we tie it back to the investor day

we contemplated annual capital of roughly $450 million in that five-year plan. And with that, we were getting to that next debt threshold in later 2026. And again, really, it's a function of the step up now in the enhanced return going from 40% to 60%. You just have some more of that free funds still being allocated back to shareholders. But one thing we see here is we're really happy as a company where our debt levels are and the significant reduction that's been undertaken over the past year or so. So, you know, we're very comfortable with where we're at. We'll continue to balance that debt repayment with shareholder returns. And again, you know, like I said, you know, we see that 2026 timeframe at $75 TI and that cadence of spend that I spoke to to achieve the next threshold.

Thank you. Our next question is for Mr. Seifaitel-Slaget. Can you help frame the size of the potential capital spend related to the CSB facility that could impact the 2024 budget and a further detail of the potential wells required to meet Tamarac's commitment into that facility?

So maybe what I'll do is I'll talk a little bit about the capital and then I'll let Brian speak to some of the more operational elements of the CSB expansion. You know, we've been pretty clear through our messaging, even you know with it with or at the investor day we got this question. We originally contemplated that that could be up to $40 to $50 million in 2024. We don't see that getting up to that level. If anything, we would see it potentially being about $20 million where we have a little bit of pipeline work to do to tie some pads in to be able to access that CSV plant. And then we would look to drill four ducts. So that would really be the extent that we see of the 2024 budget related to CSV. That being said, again, we'll monitor it with gas prices, where gas prices are. We want to just take our time here, and we also want to make sure that we're not stranding capital and the timing of the expansion is on track. Now, gas doesn't drive the economics of the Charity Lake play. That's the liquids element of it. But again, we just want to be careful here and buy the time that we see that we have. Brian, I don't know if you have any comments with respect to CSB that you want to add.

Yeah, I think there's two things that are triggering our decision to go forward. One is the gas prices that Stephen mentioned. The other is the... Do we really feel that the plant is going to come on on time and at the levels required? And I just don't want to get into a position where we've deployed a lot of capital and then we're waiting for plant reliability. And so I think we would much rather, even at the risk of paying a little bit of taker pay, let that plant come on and get it running, and then we're certain that our capital investment is going to be working for us right off the hop.

And maybe one thing to add around that taker pay, we can redirect a good chunk of our own gas that's on production currently to satisfy the majority of that taker pay. So we don't see that as a short-term risk, even if we decide to delay some of that spend.

Thank you. Our next question is for Mr. Sweetbite Health. What is the percentage goal for operational improvement going forward?

Yeah, we never really come out with a goal per se or that. But if you look within our guidance and you look at the midpoint and you turn up where we were in the first half of the year and then where we would see things in the second half of the year, you know, we would see a four to five percent improvement in operating costs in the back half relative to the first half. And this whole rate of change and margin improvement is a key focus for our team here. And it's really been driven by getting more of our product in pipe, reducing trucking. When Brian talked about the water flood, the nice thing about the water flood is this is all produced water, recycled water. So rather than having to take water for disposal, you're using it for your floods, not only in the clear water, but also we are piloting a flood here that we just started in Charlie Lake, which helps reduce our water disposal costs there as well. So when we look at OPEX and we look at transportation together, it really is a function of the infrastructure spend that we undertook the past couple of years to get to a point where we are now to really drive that margin enhancement moving through the second half and then through that five-year plan that we brought forward at the investor day.

Thank you. We have no more questions on the online Q&A, so I'll pass it back to the moderator for call questions.

Thank you.

As a reminder, if you have a question, please press star 1 in your telephone keypad. There are no further questions at this time. I will now turn the call over to Mr. Brian Schmidt. Please continue.

Well, I think that concludes today's call. I think that most shareholders will appreciate the significant change that the company's gone through over the last three years. This is a very comfortable position to be in. A company now with loss of, in fact, decades of high quality drilling inventory, loss of future in terms of water flood in the Clearwater, and we're hitting our stride, and I think this has just been an amazing quarter, and you can tell by what's causing the performance in the quarter that the company is going to be pretty strong in the following quarters here too. So we're very excited about it. If you have further questions, please put them through our website, and we'd be glad to answer them. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.