12-Month Target: $0.36 Recommendation: Speculative Buy Implied Return: 44%

Transcription

1 Tamarack Valley Energy Ltd. (TEI: TSX-V) Last Close: $0.25 OIL & GAS RESEARCH 12-Month Target: $0.36 Recommendation: Speculative Buy Implied Return: 44% COMPANY DESCRIPTION: TEI is a recently recapitalized Junior E&P led by an experienced management group and board of directors. Robert Cooper, CFA Oil and Gas Analyst (403) rcooper@acumencapital.com Trevor Reynolds Associate (403) treynolds@acumencapital.com June 9, 2010 Tamarack Valley Energy Ltd. We initiate coverage on Tamarack Valley Energy Ltd. (TEI) with a Speculative Buy rating and $ month price target; Recapitalization of Tango Energy brings in experienced former Apache Canada management team, formerly of Spearpoint Energy; Strategic focus on repeatable, high resource in place plays with the ability to achieve both scale and scope; and We initiate coverage with our thesis explicitly predicated on Management s ability to assemble a prospective land base in a short period of time. Market Information (C$) Market Cap (MM) $30.7 Basic Shares (MM) F.D. Shares (MM) week High/Low $.32-$ day Avg Daily Trading Vol 231,394 Potential Return 44% Financial Data FYE: Dec A 2010E 2011E Oil/Liquids (bbl/d) Gas (mmcf/d) Boe/d (6:1) % Natural Gas 96% 97% 97% Cash Flow (MM) $0.9 $2.3 $3.5 CFPS (FD) $0.01 $0.02 $0.03 Net Debt YE (MM) $1.5 -$4.3 -$4.8 Valuation 2010E 2011E EV/DACF 12.2x 7.8x EV/Production (boe/d) $36,528 $35,711 Price/CF 10.4x 8.7x Net Debt/CF -1.8x -1.4x ACUMEN CAPITAL FINANCE PARTNERS LIMITED SUITE th AVENUE SW CALGARY, AB T2P 0R9 MAIN PHONE: TOLL FREE:

2 Page 2 of 10 Company Overview & History Tamarack Valley Energy Ltd. ( TVE or the Company ) was capitalized in Aug/09 by Brian Schmidt and several former members of the Spearpoint Energy team. Tamarack had little in the way of properties as it was principally a vehicle to be used to recapitalize another entity. The team has since agreed to recapitalize by way of reverse takeover, Tango Energy, a micro cap junior producer that has current production of ~720 boe/d. The transaction contemplates the following: Acquisition by Tango of all the shares of TVE on the basis of 11.5 common shares of Tango for each share of Tamarack (resulting in an issuance of 55.1 MM Tango shares) as well as the concurrent roll-in of privately held Avant Garde Energy Corp; A reconstituted Board of Directors and Management team; Pro forma production of ~720 boe/d and 2P reserves of 2.4 mmboe; An unutilized debt facility of $5 MM; ~5,600 net acres of land at Lochend (Cardium potential), ~15,000 net acres at Wilder/Inga (Montney/Doig) and ~24,000 net acres elsewhere; and, Transaction is expected to close on or about June 17/10. With 38% of Tango shares having entered a lock-up agreement, we believe the transaction will close (100% of Tamarack and Avant Garde shareholders have entered lock-ups in support of the agreement). As such, we will hereinafter refer to the combined entity as Tamarack or TVE which will be the Company s trading ticker post close. Management Overview The senior team is principally derived from Spearpoint Energy and, preceding that, Apache Canada. We provide the key details of the team below. Brian Schmidt, President & CEO Mr. Schmidt was the founder and CEO of Spearpoint Energy. Spearpoint was funded by a large private equity concern located in the U.S.; Signature transaction was a 1,000 section farm-in on BP that required capital commitments of ~$50 MM p.a.; First year drilling commitments were met, ~$13 MM of capital expended prior to major shareholder led sale process to NAL Oil & Gas Trust for $16 MM; Prior to Spearpoint, spent seven years at Apache Canada, the latter three as President; Oversaw division production growth to ~110,000 boe/d from 18,000 boe/d through a combination of acquisitions, large scale land deals and organic growth; and, Prior to Apache, spent 19 years at Shell Canada at positions including M&A Manager and Manager Exploration and Development. Our take is the key strength of Mr. Schmidt is the ability to properly set strategic direction as well as a desire to roll up the sleeves where required. Another key strength is Mr. Schmidt s contacts within larger Industry partners the source in our opinion of large scale land deals that are likely to form the backbone of TVE s asset base going forward. Lew Hayes, VP Operations 30 years of E&P experience in western Canadian sedimentary basin; Mr. Hayes served as President & CEO Hygait Resources (sold to Wild River in Q4/07), a Company involved in the Bakken and Lower Shaunavon plays in Saskatchewan;

3 Page 3 of 10 Prior thereto, Mr. Hayes served as VP Operations at Petrovera Resources (joined the team when production was 18,000 boe/d and left as production reached 42,000 boe/d); and, Prior to Petrovera, Mr. Hayes was an early employee of CS Resources where he was the Drilling & Completions Manager. CS grew from a start-up to ~18,000 boe/d. Ron Hozjan, VP Finance & CFO Mr. Hozjan was most recently CFO of Vaquero Resources; Prior to Vaquero Resources, he served as CFO at Vaquero Energy, a highly successful early entrant into the Pembina Nisku play that was ultimately sold to Highpine Resources in 2005 for an IRR of 163%; and, Prior thereto, Mr. Hozjan held a number of financial roles at companies such as Renaissance Energy, Beau Canada and Storm Energy Acumen was heavily involved with Vaquero Energy and in turn, Mr. Hozjan. Our collective institutional experience was positive. Importantly, Mr. Hozjan adds capital markets experience to the management team. The remainder of the team (Niels Gundesen Chief Reservoir Engineer, Dave Washenfelder and Scott Reimond Senior Geologists) all worked previously at Apache and Spearpoint as well as various junior E&P s. Board of Directors The Board of TVE has both links to the Management group s past as well as industry, several of whom will be well known to E&P investors. Anthony Lambert President & CEO Daylight Energy Ltd Dean Setoguchi VP & CFO Keyera Facilities Trust John Gunn Tango Energy Floyd Price Retired Executive VP and Corporate Exploration Officer Apache Energy David Mackenzie Independent Businessman, Past Director of TUSK Energy Corp Inside ownership is reasonable with Management and Directors owning ~24% of the shares outstanding fully diluted pro forma. Full details are in Figure 1. Figure 1: Management & Directors Ownership # of Tango Shares (000's) % of Tango Shares fd Brian Schmidt 7, % Ron Hozjan 4, % Anthony Lambert 1, % David R. MacKenzie 7, % Floyd Price 1, % Dean Setoguchi 1, % John M. Gunn 6, % Lew Hayes 4, % ralee Bradley % Total 34, % Source: Acumen Capital, SEDAR

4 Page 4 of 10 We admit that we generally prefer junior E&P s senior management to have come from a smaller, hands-on environment. The junior E&P business model is characterized by limited capital flexibility and a small technical team, each wearing several different hats at various times and one that demands hands-on involvement from senior staff. Larger companies, in contrast, typically have far greater financial resources, ample support staff and senior management is typically more focused on strategy rather than tactical execution. As a result of this contrast, there has been several big company CEO s that have entered the junior realm with much fanfare but with ultimately disastrous consequences for shareholders. Our caution is mitigated, in this instance, as we have comfort in the following: This is the second junior start-up for CEO Schmidt who has the proven ability to negotiate and close large scale transactions. Furthermore, the entire TVE team ex-schmidt have all spent a material component of their careers at junior companies; Our due diligence suggests the team is well thought of with an appropriate business plan that suits the skills of the management group; Due diligence also suggests that Apache s culture is very detail oriented starting at the highest levels and focused on economic returns. Key management personnel are a product of this rigour; and, Strong Board of Directors covering the relevant technical skill sets as well as broad E&P business and financial experience. TVE Strategic Overview We admit that to initiate coverage on a company that is essentially, in most aspects, a blind pool is somewhat unusual. We are making an explicit bet on the competence of the TVE Management and experienced board of directors and the efficacy of the Company s stated strategy and the likelihood of it being successful. Clearly, without a meaningful and scalable asset base we are betting on Management success in implementing the business plan. We spent significant time with Management in an attempt to understand corporate strategy and business plan. The Company s stated goal is not dissimilar from other recent oil patch recapitalizations and start-ups. Essentially, it is as follows: Identify and capture land positions with scalable resource play potential (high resource in place per section that can be exploited via emerging technologies, including principally multi-stage fracturing); Capture resource plays with repeatable drilling results; Commodity flexibility to ensure production and reserve diversity (in the current environment, this would likely translate to a focus on oil opportunities with gas potential inventoried for a more robust price environment); Risk managed growth such that failure in individual properties can be carried by success in others. This also includes allowing larger competitors or offsetting activity to prove up Company properties; and, Build scope such that individual well results do not make or break the Company (we believe this likely translates to minimum corporate production size in the 4,000-5,000 boe/d range). Based on the above strategy, we believe that TVE s interest would lie in several areas, including: Deep Basin stacked sands; Cardium and heavy oil; and, Montney gas. It is our suspicion that, similar to other recapitalized junior E&P s, TVE management has several transactions up its sleeve that are slated to be announced over the coming months.

5 Page 5 of 10 Valuation We acknowledge that it is difficult to place a value on a recap whose value is largely predicated on predictions of future asset quality and the ability of management to execute on future opportunities. However, we look to two of the most recent recapitalizations in the Canadian oil patch that occurred in the past several weeks: Spitfire Energy and Antler Creek Energy Corp. Spitfire was recapitalized by Grant Fagerheim while Antler Creek was recapitalized by Wade Becker, both of whom have considerable institutional following in Canada. We found the Spitfire transaction to be most representative due to comparable production, reserves and land base. Antler Creek was essentially a shell company with little in the way of ongoing business operations which has resulted in transaction or current metrics that are not meaningful. We provide the comparison in Figure 2. Figure 2: Comparable Recapitalization Metrics Spitfire Tamarack Valley Pre-Recap Post-Recap Pre-Recap Post-Recap Production boe/d 401 1, % Oil 65% 50% 1% 1% Reserves (Mboe) 2,034 7,032 2,427 2,427 Undeveloped (net acres) 22,765 31,000 24,479 44,600 Shares Outstanding (MM) Net Debt ($MM) Share Price ($/Share) Market Cap ($MM) EV ($MM) EV/BOE/D 35,911 74,192 20,076 36,528 EV/2P Reserves Tamarack data forecast Q2/10 Source: Acumen Capital As is evident, TVE trades at a discount to its closest comparable on relevant metrics. We believe that at least a portion of this discount is warranted given TVE s comparative lack of public track record (despite career success) versus the familiarity investors and the Street has with incoming Spitfire management. Our view is that once TVE rolls out their plan to a wider audience expected post close on June 18 (and begin to realize on that plan) we expect greater valuation visibility. In the near term, however, the valuation discount relative to Spitfire provides an opportunity for investors to bet on valuation convergence and execution of the strategic plan. Main Properties The principal property of Tango is Quaich, located ~200 km southwest of Calgary. Tango holds ~32 gross (~16 net) sections of land. The substantial majority of Tango s production is derived from this property. Production is derived from stacked Cretaceous sands with the Cadomin as the main target. Wells are relatively high impact with two Tango wells producing approximately 5 mmcf/d gross. Several follow-up locations could be drilled pending stronger gas prices. The main TVE property is at Lochend, ~50 km s north of Calgary. The area has been the focus of recent Cardium oil drilling with nearby competitor success. TVE holds 7.5 net sections of land here which would imply roughly 22 locations. We suspect in the near term, TVE will allow competitors to prove the play s validity with de-risked TVE drilling to follow. Well costs are ~$2.3 MM with wells expected to IP at ~135 boe/d and recover ~160 mboe of oil.

6 Page 6 of 10 Reserves Analysis TVE s reserves represent Tango s reserves and were last updated by independent reserve evaluator Paddock Lindstrom & Associates (Paddock) as of year end Based on Tango s year end reserve PV10% before tax 2P value (as evaluated by Paddock) ex-land and after considering the impact of the recapitalization, we calculate a NAV of $0.30/sh. Figure 3: TVE Reserves Reserve Type Gas Oil/NGL BOE % Gas % of 2P Reserves (bcf) (mmbbl) (mmbbl) Proved Producing % 22% Proved n-producing % 30% Total Proved % 52% Probable % 48% Proved + Probable % 100% Source: Acumen Capital, SEDAR Financial Forecast Our forecast is based on the existing property base and financial condition of the Company. We note that we expect both to change materially over the coming months. Figure 4 outlines the financial forecast.

7 Page 7 of 10 Figure 4: TVE Financial Forecast Commodity Assumptions 2008A 2009A 2010F 2011F WTI Crude Oil US$/bbl AECO Natural Gas C$/mcf Canadian Dollar CAD/USD Production Oil & NGL bbl/d Natural Gas mcf/d 2,371 2,687 4,200 4,200 Corporate Production boe/d % Natural Gas % 93% 96% 97% 97% Financial Gross Revenue $mm Operating & Transportation $/boe SG&A $/boe Cash Flow $mm CFPS (fd) $/share Leverage Total Capex $mm Net Debt $mm Net Debt/Cash Flow -0.4x 1.6x -1.8x -1.4x Capex/Cash Flow -1.1x 4.3x 4.6x 0.9x Shares Outstanding Total Shares Outstanding mm Wt Avg. Basic Shares Outstanding mm Wt Avg. FD Shares Outstanding mm Source: Acumen Capital Investment Risks Following are some, but not all risks associated with oil and gas investments investors should be cognizant of. Commodity price risk: There is no guarantee that commodity prices will achieve our forecasted targets. Fluctuations may present material, adverse risk to our estimates and valuation. Business Plan Risk: Our investment thesis is explicitly predicated on the ability of Management to execute their stated business plan. assurances can be provided that this will be done successfully or at all. Financial Risk: Junior E&P s utilize a combination of cash flow, equity and debt to fund growth in operations. Fluctuations in the global economy and equity markets may adversely impact the ability of the Company to fully fund operations.

8 Page 8 of 10 RECOMMENDATION AND INVESTMENT CONCLUSION Our due diligence suggests that Tamarack Valley is a company with an experienced management group that at the current time lacks Street profile. This has resulted in a discounted valuation relative to recent recapitalizations and presents an opportunity for investors to invest at a reasonable price. It appears that the business plan has a good chance of being executed successfully on a timely basis which provides the near and medium term valuation catalysts for the stock. Consequently, the risk reward profile is reasonable, in our opinion. We initiate coverage with a Speculative Buy and a $0.36 price target ($55,000 boe/d and 1.2x pro forma NAV).

9 Page 9 of 10 Company: Tamarack Valley Energy Ltd. Disclosure Requirements Is this an issuer related or industry related publication? Issuer Industry Does the Analyst/Associate have a financial interest in securities of the subject issuer? If yes, nature of interest: Is Acumen Capital Partners a market maker in the issuer s securities at the date of this report? Does Acumen Capital Partners beneficially own more than 1% of any class of common equity of the issuer? Does Acumen Capital Partners or the Analyst/Associate have any actual material conflicts of interest with the issuer? Explanation: Does the Analyst or Household member serve as a Director, Officer, or Advisory Board Member of the issuer? Has the Analyst/Associate received any direct compensation from the subject Company in the past 12 months?* Has Acumen Capital Partners managed or co-managed an offering of securities by the issuer in the past 12 months? Has Acumen Capital Partners received compensation for investment banking and related services from the issuer in the past 12 months? Other disclosures: * Acumen has a pool for compensation purposes, which includes research analysts, investment banking personnel and institutional traders. Revenue in the pool includes trading commissions, advisory fees, new issue commissions and broker warrant proceeds. Acumen Recommendation Structure: Buy Speculative Buy Hold-positive bias Hold-neutral bias Hold-negative bias Sell Under Review Tender Full Recommendation Structure explanation can be found at the Acumen Capital Partners website: The information transmitted is privileged, confidential, may be subject to copyright and is intended solely for the use of the individual or entity to which the transmission is addressed. This transmission is provided for informational purposes only, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such would be prohibited, nor in any jurisdiction where Acumen is not registered to do so. Views expressed are those of the sender and not necessarily those of Acumen Capital Finance Partners Limited or its subsidiaries. Any unauthorized use, distribution, review or disclosure is prohibited. If you received this in error, please notify the sender and delete or destroy this message and any copies. Acumen does or seeks to do business with companies covered in our research comments and reports. As a result, investors should be aware that the firm may be in a conflict of interest. Investors should consider this report as only a single factor in making their investment decision 2010.

10 Page 10 of 10 ACUMEN CAPITAL STAFF LIST RESEARCH Brian D. Pow, MBA Vice President Research, Equity Analyst (403) Robert Cooper, CFA Oil and Gas Analyst (403) Trevor Reynolds Research Associate (403) Nikolaus Kiefer Research Associate (403) INSTITUTIONAL SALES Brian Parker President & CEO, Institutional Sales (403) Douglas S. Gowland, C.A., CFA Vice President, Institutional Sales (403) Fred Kerr Institutional Sales (403) Tate Pinder Head Trader (403) Crystal Bellefountaine Associate (403) INVESTMENT BANKING Alfred Sailer, MBA Vice-President, Investment Banking (403) W. Scott McGregor, MBA Vice President, Investment Banking (403) Kelly Hughes Associate, Investment Banking (403) RETAIL SALES Amber Southward Investment Representative (403) Chad Larson Investment Advisor (403) Craig Madill Investment Advisor (403) Curtis L. Mayert Vice President, Sr. Investment Advisor (403) David Yost Investment Advisor (403) Donny Woo Investment Advisor (403) Karyn L. Silenzi Investment Advisor (403) Leanne Bectold Investment Advisor (403) Luisa M. Smith Investment Representative (403) Raji Powar Registered Representative (403) Robert Laidlaw Vice President, Sr. Investment Advisor (403) Sheldon LeLievre Vice President, Sr. Investment Advisor (403) TREASURY AND OPERATIONS Cindy Marthaller Operations Manager (403) Myja Miller CFO, COO, CCO (403) Kara Anderson Client Services (403) Acumen Capital Finance Partners Limited Suite 700, Avenue SW Calgary, AB T2P 0R9 Main Phone: