Tenaz Energy Corp. (TNZ:CA) M&A Call Prepared Remarks Transcript

2025-10-08 00:45:19 ET

Tenaz Energy Corp. (TNZ:CA) M&A Call October 6, 2025 8:00 PM EDT

Company Participants

Anthony Marino - President, CEO & Non-Independent Director

Presentation

Anthony Marino
President, CEO & Non-Independent Director ...

Hello. I'm Tony Marino, President and CEO of Tenaz Energy. I'll cover a PowerPoint describing our GEMS acquisition. I ask you to please first note the advisories we have at the beginning and the end of the presentation. We'll start with a brief corporate overview that will incorporate a couple of the aspects of GEMS.

First of all, the strategic model of the company remains the same, focused on acquisitions in the overseas market. Current asset base is a significant production foothold in Netherlands, making us today, we believe, the largest producer in Netherlands, except for the state company, EBN, and we continue to have our Canadian oil growth project. Two major transactions closed this year, NAM Offshore or NOBV, now called TEN within Tenaz , which we closed at the beginning of May. And the acquisition we announced today, the nonoperated interest in the GEMS project, which was a signed and closed transaction executed earlier today.

Market cap before the transaction, about CAD 575 million. After the transaction, we'll have a little bit over $400 million in debt. That's up from $100 million prior to the deal with that $100 million, including the estimate that we have made for the earn-out on the NOBV transaction. Pro forma production and by that, we mean had we owned both the GEMS and the NOBV assets for an entire year of 2025 would be 16,200 BOE/D. We'll show you our new guidance number at the end of the presentation. And our drilling and development CapEx estimated for the year, CAD 100 million to CAD 110 million. This only counts CapEx after the dates of closing of the -- each of these transactions and little change -- no change in the insider ownership of the company.

On Slide 5, we have the same 4 panels that we have typically shown to illustrate the progress of the company since we executed the recap in 2021. And again, in this, we will show the production for GEMS added on to the previous assets in the company, so we had owned them for the entire 2025, which we're calling our pro forma presentation. FFO, again, added from GEMS in the lower left panel. Significant increase in NPV as well with the addition of GEMS shown at the 2P reserve level for this plot on the upper right and the share price prior to today on the lower right panel.

We just illustrate the capital structure of the company. First of all, showing net debt progression in the upper left. The addition from the investment in GEMS and the issuance of additional senior secured notes to cover a portion of that brings us to our roughly CAD 400 million level as of today. On the lower left, we illustrate the addition to the notes issue. So left column, we originally placed CAD 140 million of 5-year notes, 2.5-year non-call at November '24. Those had a coupon of 12% for the par bond that we issued.

In this transaction, as an additional private placement, really an add-on to that offering, we placed an additional principal amount of CAD 165 million. The coupon rate on that is still 12%, really all the terms and condition rate, the maturity dates, the call dates remain the same for the new influenter, the new tranche of notes. They were, however, issued at an 8.4% premium to par value. And with that, you generate a 9.5% effective interest rate or yield to maturity. Call date remains May 2027. Maturity date, if never called, remains November 2029. So for purposes of the increment, it's about a 4.2-year bond with a 1.7-year non-call would be a way to think of that. If you look at the middle part of the lower half of the slide, we also point out that we have placed a revolving credit facility. This is a secured reserve-backed loan. It's a -- from a syndicate of Canadian banks led by National Bank and CIBC. Goldman Sachs is also a participant. This $115 million facility is undrawn. It will have a 2-year term, and it will have semiannual redeterminations of the borrowing base.

Interest rate is at a spread to Canadian or U.S. benchmark, depending on which currency is drawn, and it will work off a pricing grid based on our total net debt to EBITDA at the current ratio that we have versus the Canadian for benchmark, we would have an initial rate of 7.13% if it was drawn, but this issue -- this RBL is not drawn as of now. Upper right is the share count as last reported at the end of the second quarter, no changes to that. There is a small amount of share issuance in this deal that we'll cover later, but those shares are not included here. And actually, the number of shares will depend on the market price for the next 20 trading sessions.

On the lower right, we just briefly show the metrics for the GEMS acquisition, a little bit over 2x cash flow or FFO and a projected payout of less than 3 years on an a tax basis in our internal projections. For the corporation as a whole, after the GEMS acquisition, we'd have a net debt-to-EBITDA ratio of 0.9x. That's well inside the targets of the company, but we would seek to delever that over time as we build free cash out of our assets in the company today. And as of the announcement of the deal, our ratio of the new net debt number to enterprise value, again, at the start of trading -- at the end of trading last Friday would be 41% debt-to-EV.

This Slide 7 illustrates a reserve summary for the company as a whole. So this shows reserves at the PDP, 1P and 2P levels based on independent report by McDaniel using the McDaniel 3 consultant average price deck. It includes both the Tenaz assets and the GEMS assets. Total reserve number, if you put that together with Tenaz's reserves at the beginning of this year, totals 92 million barrels equivalent. And on the lower right side, we show a production profile generated by McDaniel at the 2P level, and this would not include any production out of contingent or prospective resources that shows pretty strong growth for the company, approaching the 25,000 BOE/D level within the next 4 years.

So let's move off of the corporate tools and talk specifically about GEMS asset that we are buying. And this was an enterprise deal. We bought a private company that has a nonoperated interest in this gateway to the MS project offshore in both the Dutch and German maritime sectors. So first of all, to note on the map, the licenses that are in blue are ones that were already -- in which Tenaz has already had an interest. The ones shown in the orange color are the new licenses that come with the GEMS acquisition. You can see that they are right at the Maritime border between the Netherlands and Germany.

We do think that this is a great asset base. We do expect very strong production growth out of it. We think that will -- given the quality of the wells and the low-cost nature of the development, we think that it will be a pretty high rate of return development project and acquisition. And it really just builds on what we've attempted to establish in the Netherlands initially with the non-op deals a few years ago and now with a very key addition of the NOBV cornerstone asset, we're adding to that and adding scale in the Netherlands and improving our growth rate. So really building, I think, a very significant business here in Europe and particularly at this point, concentrated in the Netherlands jurisdiction.

As we're going to talk about later, these are very, very high rate production tests and current well production. It's got -- the asset has considerable unused infrastructure at this time, and we think that the wells with development are capable of significantly utilizing that infrastructure, allowing more production and cash flow out of the asset at a pretty good growth rate. It's very high-margin production, low OpEx projected in the range of EUR 5 per BOE, including transport costs, very low royalties, really no royalty on gas on the Netherlands side and a 5% royalty on the German side after deduction of operating expense. It's a pretty new asset, only the one platform now, very limited number of wells and as a result, very low decommissioning cost.

So high rate, high margin and low decline, all desirable characteristics. Very unique feature of this project is that the power source to operate the platform and the things that will ultimately go with it compression drilling rig are going to be powered by a wind farm that is just on the German side of the maritime border, maybe one of the very lowest emission projects, I think, that you could find anywhere in the world for hydrocarbon production, very desirable characteristic, something we're proud to be associated with.

So if you put all this together, the quality of the wells, the nature of the infrastructure and it's capacity today, state-of-the-art platform, ability to develop at low risk and explore at relatively low risk. We think it's really one of the very highest quality assets, if not the highest quality asset in the North Sea in this premium TTF market. So moving on to a little more specific asset description on Slide 10. A little more detailed map.

First of all, the wider area map showing the distribution of gas fields, including the onshore fields. This is located relatively close to shore, about 30 kilometers on average from shore, pretty shallow water, 25 to 30 meters. Pretty good operating environment, I would say, from a standpoint of weather and proximity and availability of services. So all there, again, very desirable characteristics. There are 5 licenses included on the German side of the Maritime border, 3 on the Netherlands side. Our interest vary from 22.5% to 45% in these licenses.

In the initial producing pool was N05-A due to unitization of 2 of the licenses, we have a 33.3% interest, including in this first well at 77 million cubic feet a day of current production. And again, this 33.3% interest. The existing N05 platform is tied into the NGT gas gathering and transportation system. In this system, we already own a 21.4% interest. So I think that the project is quite a boon to the midstream asset as well, and we're happy to have that ownership in NGT as well as the upstream position that we've gained in this area with GEMS.

We do expect production to increase. It's all dependent on timing and well productivity, and I'll talk about the development slate here a little bit more in a minute. But we would estimate currently that on a net basis over the course of the year, production should build such that it can average around 7,000 BOE/D or 42 million cubic feet a day net to Tenaz next year. That will be after 2 development wells, 1 extension well and probably 1 exploration well to be drilled over the next year. There -- in addition to the existing producing N05-A pool, again, this is the line making 77 million cubic feet a day from a single well, highest rate well in the Netherlands. There are 2 other pools on the N04 license, N04-A and N04-C that have been discovered and tested both at pretty high rates, 50 million cubic feet a day and 20 million cubic feet a day, respectively, that are classified as proved and developed within the 2P category. And there's a platform plan to be set that will allow those fields to be developed probably with production commencing in about 2028.

So just 3 pools in the 2P report, the N05-A, the N04-A and N04-C, totaling about 19 million barrels equivalent to Tenaz and under McDaniel's independent analysis, a pretax value of approaching CAD 600 million. And again, we'll detail the further development activities. Producing zone is the Basal Rotliegend. The Rotliegend sandstone, of course, is kind of the mainstay of gas production in Northwest Europe. We find that it's quite consistent across the prospective fairway here, really consistent for 40 or 50 kilometers using well control. It's further been mapped with a combination of 2D and 3D to identify this large number of prospects.

So well correlated and consistent in the prospective areas. Basically, those areas off the very structural highs that have proved to be [ bolt ] structures in the past. So gas in the trapped areas in the lower part of these structures. Speaking to the platform, we really do have a state-of-the-art installation here, brand-new platform as of August 2024. It is an automated platform under typical conditions unless there's special activity going on. It is not a manned installation. Our team at Tenaz visited this platform prior to the closing, and we were very impressed with what we saw.

First of all, a very motivated staff on the part of operator ONE-Dyas. ONE-Dyas is the largest private gas and oil company in Netherlands. They have done a great job on design, installation. It was interesting. We actually had a chance to see this platform when it was being built as well in the dock and now to see it in operation was really quite a great experience for us to see how all this design concept with automation and really a degree of artificial intelligence had been installed on the platform. So really, our hats are off to ONE-Dyas for what they have achieved here.

And on the inset map, we just show a little bit more detail of the development fields, the location of the wind farm that is going to supply power to the platform and also a couple of the exploration prospects. With respect to development on Slide 13, again, we have the one producing field, N05-A with a single well, in which 77 million a day at a 33.3% interest. That well had been discovered by an earlier test at 54 million. This well has been -- the actual production well has been ramped up to still a choke rate of 76 million cubic feet a day producing into NGT, heat content of 809 btu/scf. We think that, that is probably pretty consistent throughout the area based on a number of wells that have been tested as far as heat content, a desirable gas into the Netherlands local system.

The development of the N05-A pool is going to continue. We think probably with drilling prior to the end of the year, 2 development wells that are required to completely develop that pool, drilling an extension prospect called the N05-A Noord and potentially also an exploration well to Diamant or perhaps to another prospect in the area with a final well really to be determined as we progress that drilling program. The -- and with the assigned volumes from McDaniel shown in the table at the bottom of the slide.

The next phase of development and actually, let me just mention the capacity of the N05-A platform, 225 million cubic feet a day on a gross basis before any further debottlenecking, we currently using about 1/3 of that capacity. Second phase of development will be the N04 satellite development to the north of the original N05-A. You can see the platform location a little bit better here. N05-A in the blue dot and the yellow dot representing the future N04 satellite platform.

The N04 satellite will be tied into the N05. We intend here to reuse a topside from a decommission block in the North Sea. That platform already identified. We expect to have the project sanctioned in 2026 with the platform probably put in place in '27 and production from development drilling of the N04-A and N04-C pools beginning in 2028. There are also exploration prospects offsetting the N04 platform with Opal likely to be the first one drilled there. And at the bottom of the slide, we show McDaniel's assessment of the volumes associated with these 2 development pools, the N04-A and N04-C that are in the 2P report.

And we detail some of the additional resources that have been identified, estimated on the 5 licenses that come with the GEMS acquisition. Now recall that in the 2P report, there are 3 pools included already, the producing N05-A pool and the tested but not as yet developed N04-A and N04-C pools. These are the ones shown in the red color on this map. Additionally, we have McDaniel perform a resource analysis. These are recoverable -- estimated to be recoverable volumes in the contingent and the prospective categories.

Really, the resource category that's less important to us here is a contingent resource category. Normally, it's listed first, and we follow that convention on this slide. But it's ultimately the prospective pools that are going to be, I think, more important for the longer term. But to address the contingent resource, we'll point out that there are 4 pools included. The bigger of these 2 pool -- the bigger of these 4 pools, the L1 and L2 pools in the Northeastern part of the license area are really too distant to be tied into the N05 or N04 satellite platforms. And along with that, there's 2 smaller pools in the south on the blocks that are included in the continuum category as well discovered, but not of sufficient confidence at this time for development to be included in a reserve category.

In the prospective category, as I mentioned earlier, we -- there were 3 relatively close prospects, N05 Noord, Diamant and Opal that we commissioned McDaniel to do an entire economic evaluation. And those prospects, I discussed earlier in the development phases for GEMS with their combined net value estimated to be around $300 million in the respective category. There are another 11 identified exploration prospects, and these are the ones shown in the light orange color on the map, for which McDaniel conducted evaluations of the potentially recoverable volumes.

And in these 11, they did not take it all the way to an economic evaluation. These prospects are if drilled, are going to be drilled later in time, we believe, than the initial 3. And in a number of cases, they're more distant from the existing and planned platforms and therefore, would require new platforms and infrastructure to bring into production. Nonetheless, those volumes totaling a company net risk mean of around 100 Bcf are shown in this table as well. Again, no guarantees that any of the contingent or prospective resources will be developed. But nonetheless, it's likely, I think, over time that some of this will be drilled. And it's our hope that some of these would eventually get discovered to be able to be converted into a reserve category, underscores the very large long-term potential, we think that exists on this asset base.

We talk about the acquisition price. It's detailed here on Slide 16. It is denominated in USD. These amounts already paid earlier today, October 6. The cash consideration, USD 232 million corresponding at current exchange rates to about CAD 322 million and an additional equity component valued at USD 12 million or CAD 17 million. This is -- will be priced in the -- based on the 20-day VWAP beginning October 6. That amount of shares around 830,000 at Friday's closing price and the actual number of shares to be determined based on this post-announcement and closing average price.

The effective date of the acquisition, December 31, 2024, in lockbox form. Reserves have already been discussed on the lower left, 19 million barrels equivalent at the 2P level with a value of a little bit under CAD 600 million per McDaniel. On the upper right, we point out that there is a contingent component to the consideration. This is based on exploration success. There is an opportunity for the seller to earn up to USD 60 million in -- if 3 discoveries of significant size, 50 Bcf gross or more occur within the next 10 years. There's a small variation on this for one of the prospects, N05 Noord. If it's substantial in size, 50 Bcf, but connected to the existing N05-A pool, then that payment will only be $10 million, in which case the maximum exploration contingent consideration could be $50 million.

This combination of stock and cash consideration yields an estimated flowing production multiple of about CAD 48,000 based on our expected 2026 production. As we discussed earlier, a multiple of about 2x using strip prices on cash flow or FFO and a payout of a little bit less than 3 years on an a-tax basis. The next Slide 17 is really just a breakout of the GEMS reserves, PDP through 2P level and the production profile associated with specifically these pools, these reserve qualifying pools in the McDaniel evaluation.

There is further growth potential beyond just the 3 pools that are in the 2P report. And again, reserves and contingent and prospective resources are very different categories. if there is success in the exploration prospects that are in the prospective categories for the 3 prospects, N05 Noord, Diamant and Opal that were -- had the economic evaluation performed by McDaniel, there is a potential that rates could end up higher than in the 2P report, and that is what is detailed in the plot on the lower right, still staying actually basically within the existing facility capacity with -- unless there's further expansion of the facility capability. So that's kind of the more extended potential picture for production profile of the GEMS assets as envisioned today.

Just to finish off with a couple of corporate items. Let's talk about the 2025 guidance. We first in the upper left detail our activity. We've already done our Canadian drilling this year, the multilateral program that was pretty successful. There are still plans to drill the -- at least to spud the L10 Malachite non-operated development well from our original Netherlands assets in which we have a 21% working interest. Our planned CapEx for the period after the closing of NOBV, we now call this TEN, CAD 55 million to CAD 61 million mainly for well drilling and workover program and the remainder 2 facilities projects. We have a barge moving in now to begin workover activity, and we intend to begin drilling in about the next month or so on an extended drilling program that will go into 2026.

In the case of GEMS, the CapEx that we see for the remainder of the year, about CAD 15 million for beginning of drilling activity and some other facility-oriented projects. Continue to estimate $1.7 million of evaluation capital for the potential CCS project at L10. And of course, organizationally, we continue to evaluate other M&A opportunities. The guidance for the company revised to include GEMS post closing. We rounded off the production impact that would occur from GEMS in the fourth quarter to the nearest 500 BOE/D and added that to the previous guidance, getting us 9,500 to 10,000 BOE/D for the year and added in the $15 million of D&D CapEx to bring us to a total for the company of $100 million to $110 million.

Again, in our financials and what we report as company production and CapEx that is only counted after the closing date. We discussed this earlier when we closed the NOBV or TEN acquisition. Pie chart on the right illustrates the product exposures of the company. Again, this is on a pro forma basis as though we had owned the assets for the entire year, makes us 87% exposed on that basis to TTF gas with the majority of the remainder coming in, in Canadian oil and NGLs and a small amount of AECO exposure. We do continue to hedge, and we are going to lock down a significant amount of revenue for the added production that we're getting from GEMS by hedging activities that are ongoing. We estimate that on this first increment of hedging that we're doing on GEMS that will generate a price of about EUR 30.75 per megawatt hour. That corresponds to about CAD 14.65 per MMBtu, and that will protect around EUR 100 million of revenue during the hedge period for the last quarter of this year through '26 and '27.

And then we do intend to put additional hedges on as the GEMS production goes up. The resulting total corporate hedge position is shown on the graph at right, significant position on for Q4 '25 and the 4 quarters in '26 after that and starting to build a meaningful position in '27 as well. So in summary, as illustrated on Slide 23, we feel that this is a very good acquisition. We feel it's completely in line with the M&A strategy, building on what we had already done in the Netherlands to really create a cornerstone asset base for Tenaz.

This is certainly a high growth, high rate of return asset base. It's meaningfully accretive to our existing shareholders and certainly gives us greater participation in the high-value TTF market. The assets are very strong with respect to what they can generate in terms of cash flow and the free cash flow, putting capital to work to grow the company at a faster rate and build scale in our Netherlands operation. They are ultra-high rate wells. There is a lot of infrastructure capacity that can already be utilized with further drilling. It's certainly very, very high-margin production given that you've got prices in the range of CAD 15 per MMBtu and low royalties and costs that OpEx that over time will probably settle into the range of about CAD 1.5 per Mcf and a significant amount of that cash flow profile already underpinned by our hedging program, which will continue.

In summary, we believe we've got one of the very highest quality, if not the highest quality asset available in the North Sea. It's a state-of-the-art platform, which is placed to top an area with very prospective geology, already delivering very high rates in the existing producer, highest rate well in the Netherlands, a lot of development opportunities that we've detailed here and additionally, quite strong long-term exploration. And we're very proud that the project has been integrated into the renewable energy system as well being powered by the wind farm on the German side of the border.

So in summary, very happy with this acquisition. We appreciate your interest in it, and we look forward to our next opportunity to discuss the Tenaz at the -- at our Q3 release. Thank you.

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