Published on March 21st, 2023 by Aristofanis Papadatos
Tamarack Valley Energy (TNEYF) has two appealing investment characteristics:
#1: It is offering an above average dividend yield of 3.5%, which is more than double the 1.6% dividend yield of the S&P 500.
#2: It pays dividends monthly instead of quarterly.
Related: List of monthly dividend stocks
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Tamarack Valley Energy’s combination of an above average dividend yield and a monthly dividend make it appealing to individual investors.
But there’s more to the company than just these factors. Keep reading this article to learn more about Tamarack Valley Energy.
Tamarack Valley Energy engages in the acquisition, exploration, development, and production of oil, natural gas, and natural gas liquids in the Western Canadian Sedimentary Basin. Its oil and natural gas properties are the Cardium, Clearwater, Charlie Lake, and Enhanced Oil Recovery assets located in the province of Alberta, Canada. The company was formerly known as Tango Energy and changed its name to Tamarack Valley Energy in June 2010. Tamarack Valley Energy was formed in 2002 and is headquartered in Calgary, Canada.
As an oil and gas producer, Tamarack Valley Energy is highly cyclical due to the dramatic swings of the prices of oil and gas. The company has reported losses in 6 of the last 10 years and initiated a dividend only in the beginning of 2022.
On the other hand, Tamarack Valley Energy has some advantages when compared to the well-known oil and gas producers. Most oil and gas producers have been struggling to replenish their reserves due to the natural decline of their producing wells. On the contrary, Tamarack Valley Energy has grown its reserves by 24% per year on average over the last four years.
Source: Investor Presentation
The reserve replacement ratio is paramount in the oil and gas industry. Without a solid reserve replacement ratio, a producer cannot grow its earnings in a sustainable manner in the long run.
Just like almost all the oil and gas producers, Tamarack Valley Energy incurred excessive losses in 2020 due to the collapse of the prices of oil and gas caused by the coronavirus crisis. However, thanks to the massive distribution of vaccines worldwide, global demand for oil and gas recovered in 2021 and thus the company posted 10-year high earnings per share of $0.85 in that year.
Even better for Tamarack Valley Energy, the war in Ukraine triggered a rally of the prices of oil and gas to 13-year highs last year. As a result, the company posted earnings per share of $0.55 last year and initiated a dividend, after more than a decade without a dividend payment.
Tamarack Valley Energy has posted one of the highest reserve growth rates in its peer group in recent years. Even better, the company has ample room for future growth. To be sure, Tamarack Valley Energy is the dominant producer in Clearwater, one of the most promising resource plays in North America.
Source: Investor Presentation
The reserves in this area are characterized by exceptionally high returns. It is thus evident that Tamarack Valley Energy has a significant competitive advantage when compared to its peers.
On the other hand, as an oil and gas producer, Tamarack Valley Energy is highly sensitive to the cycles of the prices of oil and gas. This is clearly reflected in the performance record of the company, which has posted material losses in 6 of the last 10 years.
Thanks to the rally of the prices of oil and gas to 13-year highs last year, Tamarack Valley Energy posted earnings per share of $0.55 in 2022. However, the prices of oil and gas have slumped more than 50% off their highs in 2022. As a result, the company is likely to post much lower earnings per share this year.
Given the highly cyclical nature of the oil and gas industry and the high comparison base formed by the abnormally high earnings per share last year, we expect the earnings per share of Tamarack Valley Energy to decline by about 20.0% per year on average over the next five years, from $0.55 in 2022 to $0.18 in 2027.
Dividend & Valuation Analysis
Tamarack Valley Energy is currently offering an above average dividend yield of 3.5%, which is more than double the 1.6% yield of the S&P 500. The stock is thus an interesting candidate for income-oriented investors but the latter should be aware that the dividend is far from safe due to the dramatic cycles of the prices of oil and gas.
Tamarack Valley Energy has a payout ratio of only 16%, but its earnings are likely to decrease significantly in the upcoming years. As a result, the payout ratio will decrease. In addition, the company has a somewhat weak balance sheet, with net debt of $1.6 billion. As this amount is 107% of the market capitalization of the stock, it is high and renders the company somewhat vulnerable to the cycles of its business.
Moreover, it is critical to note that Tamarack Valley Energy initiated a dividend only in 2022, amid multi-year high commodity prices. It failed to offer a dividend in the preceding years, as it incurred material losses in most of those years. Therefore, it is evident that the dividend for the company is far from safe.
In reference to the valuation, Tamarack Valley Energy is currently trading for only 4.9 times its earnings per share in the last 12 months. Given the high cyclicality of the company, we assume a fair price-to-earnings ratio of 10.0 for the stock. Therefore, the current earnings multiple is much lower than our assumed fair price-to-earnings ratio. If the stock trades at its fair valuation level in five years, it will enjoy a 15.3% annualized gain in its returns. However, this gain will be offset by our expected -20% average annual decline of earnings per share over the next five years.
Taking into account the -20% annual decline of earnings per share, the 3.5% current dividend yield and a 15.3% annualized expansion of valuation level, Tamarack Valley Energy could offer a -5.4% average annual total return over the next five years. The negative expected return signals that the stock is highly risky from a long-term perspective, as we have just passed the peak of the cycle of the oil and gas industry. Therefore, investors should wait for a much lower entry point.
Tamarack Valley Energy is thriving right now thanks to the above average prices of oil and gas. The stock is offering an above average dividend yield of 3.5%, with a payout ratio of only 16%. As a result, it is likely to entice some income-oriented investors.
However, the company has proved highly vulnerable to the cycles of the prices of oil and gas. As these prices seem to have entered a downcycle, the stock is highly risky right now. Therefore, investors should wait for a much more attractive entry point.
Moreover, Tamarack Valley Energy is characterized by low trading volume. This means that it is hard to establish or sell a large position in this stock.
Don’t miss the resources below for more monthly dividend stock investing research.
- The Monthly Dividend Stocks List
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And see the resources below for more compelling investment ideas for dividend growth stocks and/or high-yield investment securities.
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