Published on October 8th, 2024 by Aristofanis Papadatos
Tamarack Valley Energy (TNEYF) has two appealing investment characteristics:
#1: It is offering an above average dividend yield of 3.6%, which is three times the average 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.
Business Overview
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 produces liquids and gases at an approximate ratio of 85/15 and is extremely sensitive to the cycles of the price of oil. It 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.
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.
Fortunately for Tamarack Valley Energy, whose production is about 85% liquids and 15% gas, the price of oil has deflated but has remained above average thanks to the sustained production cuts implemented by OPEC and Russia. As a result, the company remained profitable last year, posting earnings per share of $0.13.
Tamarack Valley Energy has posted earnings per share of $0.08 in the first half of this year. Given the above average price of oil that prevailed during that period, the earnings of the company are somewhat disappointing. Nevertheless, the oil and gas producer has promising growth prospects ahead.
Growth Prospects
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.
Moreover, the company has a promising 5-year growth plan:
Source: Investor Presentation
It expects to grow its production at an average annual rate of 3%-5% and approximately double its free funds flow per share over the next five years, partly thanks to material share repurchases. None of the well-known oil majors has such an ambitious growth plan.
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 in 2022, Tamarack Valley Energy posted earnings per share of $0.55 in 2022. However, the price of oil has slumped nearly 50% off its highs in 2022 while the price of natural gas has collapsed. As a result, the company is likely to post much lower earnings per share this year.
Given the promising growth plan of Tamarack Valley Energy but also the highly cyclical nature of the oil and gas industry, we expect the earnings per share of Tamarack Valley Energy to grow by about 2.0% per year on average over the next five years, from an estimate of $0.16 in 2024 to $0.18 in 2029.
Dividend & Valuation Analysis
Tamarack Valley Energy is currently offering an above average dividend yield of 3.6%, which is three times as much as the 1.2% yield of the S&P 500. The stock is an interesting candidate for income 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 reasonable payout ratio of 46%. In addition, the company has a decent balance sheet, with net debt of $1.2 billion. As this amount is 75% of the market capitalization of the stock, it is manageable, though it is likely to burden the company whenever the next downturn of the energy sector shows up.
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 of the company is far from safe.
In reference to the valuation, Tamarack Valley Energy is currently trading for 19.3 times its expected earnings per share this year. Given the high cyclicality of the company, we assume a fair price-to-earnings ratio of 12.5, which is a typical mid-cycle valuation level for oil and gas producers.
Therefore, the current earnings multiple is much higher than our assumed fair price-to-earnings ratio. If the stock trades at its fair valuation level in five years, it will incur an -8.3% annualized drag in its returns.
Taking into account the 2.0% annual growth of earnings per share, the 3.6% current dividend yield and an -8.3% annualized contraction of valuation level, Tamarack Valley Energy could offer a -1.8% 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 passed the peak of the cycle of the oil and gas industry. Therefore, investors should wait for a much lower entry point.
Final Thoughts
Tamarack Valley Energy has been thriving since early 2022 thanks to an ideal environment of above average oil prices. The stock is offering an above average dividend yield of 3.6%, with a decent payout ratio of 46%. As a result, it is likely to entice some income-oriented investors.
However, the company has proved highly vulnerable to the cycles of the price of oil. As this price seems to have passed its peak for good, 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.
Additional Reading
Don’t miss the resources below for more monthly dividend stock investing research:
- 20 Highest Yielding Monthly Dividend Stocks
- 10 Cheapest Monthly Dividend Stocks
- 10 Safest Monthly Dividend Stocks
- 3 Top ‘Hold Forever’ Monthly Dividend Stocks
And see the resources below for more compelling investment ideas for dividend growth stocks and/or high-yield investment securities:
- Dividend Kings: 50+ years of rising dividends
- Dividend Champions: 25+ years of rising dividends
- Dividend Aristocrats: 25+ years of rising dividends and in the S&P 500
- Dividend Achievers: 10+ years of rising dividends and in the NASDAQ
- High Dividend Stocks: 5%+ dividend yields
- Blue Chip Stock: Kings, Aristocrats, and Achievers
- MLPs: List of MLPs and more
- REITs: List of REITs and more
- BDCs: List of BDCs and more