Tenaz Energy Corp. (TNZ) Earnings Call Transcript & Summary

Hello. I'm Tony Marino, CEO of Tenaz Energy. Thank you for joining us for our Q1 2024 update. Please note on Slide 2, our advisory on forward-looking statements. So turning to Slide 4, our operating and financial highlights. Production volumes were approximately 2,900 boe/d in the first quarter. That's down modestly from Q4 '23, a decline driven by natural declines in production in our Canadian older wells and the newer wells that we drilled in the second half of last year in Canada coming off their initial higher rates. Netherlands production was also down modestly, that driven by a combination of planned and unplanned downtime. We registered FFO, funds flow from operations, of $7 million first quarter. After deducting CapEx of $3.8 million, we had $3.2 million of free cash flow. Net FFO number, again, down from what we recorded in Q4. We had the aforementioned lower production level. We had a little bit lower benchmark prices. That was significantly offset by the hedging that we had done for TTF gas in the Netherlands. And the net of those factors again would be lower FFO. We ended Q1 '24 with positive adjusted working capital or negative net debt of approximately $49 million. That's about the same level that we had at the end of the year. And that includes the impact of our buyback program. The NCIB retired another 200,000 shares approximately at an average cost of $3.67 per share in Q1 '24. We feel that, that's been a very successful program, having retired a total now of 2 million shares at an average cost of $2.77 since we began the NCIB. And as I'll cover more in detail in just a minute, we executed a definitive agreement to acquire a gas processing plant and the surrounding oil gas leasehold from a private company. The net cost to us, $2.8 million based on an effective date of January 1, '24. So turning to the gas plant acquisition at Leduc-Woodbend covered on Slide 6 of the PowerPoint. First, I'll talk about the deal terms. Again, after assigning 1/8 of the purchase to our nonoperating partner in the Leduc-Woodbend field, we acquired 7/8, 87.5% of the surrounding leasehold. And for Tenaz, 100% of the gas plant known as the Watelet gas plant. Net cost estimated at closing of $2.8 million, to us, for these assets based on the effective date of January 1, '24. If you look on the map on the right side of the slide, you can see our Leduc-Woodbend field with our Rex member leasehold shaded in green. We have our Rex horizontal wells shown in blue, and then the acquired assets in the orange color with the gas plant just to the southwest of our field, roughly 2.5 miles away from our southernmost wells, a variety of pipelines that go with this to connect the leasehold wells to the plant and our existing Leduc-Woodbend Rex wells to the plant, and then a couple of other smaller batteries, which we will hear as active batteries in the leasehold position. The transaction is subject to approval by the Alberta Energy Regulator, and we expect to get that approval in Q2 '24. The purpose of the acquisition is to control our processing destiny at Leduc-Woodbend. All of our produced gas from Leduc-Woodbend that were solution gas that we're making while we ramp up oil production in that field goes to plant. We do pay a fee stream on the plant that we will now be paying to ourselves, and we'll have -- so there's a profit stream associated with it already. And we will have the opportunity now, the control of the plant, to cut costs there; to increase the uptime, which we have a strong incentive to maintain it at the highest uptime possible because when the gas plant is down, so is our oil production. So there's a whole host of advantages just in our proprietary gas production that go with this plant. In addition, the plant does take in some third-party volumes, and I'll run through that in just a second when we talk about the capacity in the plant. And that's a part of the business that we believe can be quite profitable as well, and we would seek to expand over time. There are a variety of producers in the area with gas production that, we think, would like to send it through the plants, some of them with shut-in wells because they don't have adequate processing capacity. So on the bottom half of the slide, I want to focus in a little bit more on the capabilities and the characteristics and the metrics of this set of assets. So the plant currently has a capacity of about 7.5 million cubic feet a day. About 3/4 of that gas plant capacity, today's capacity, is currently being used with the flows through the plant. And of that 3/4 of 7.5 million, about 75% of what is flowing through, is our proprietary gas from Leduc-Woodbend. The plant does have, we think, good capability to be expanded, and you can think of this in a couple of different ways. First of all, there is equipment at the plant idle compression probably require a few other modifications to the process flow there. But with that idle equipment, we think we can -- if we put it back in service at a fairly minimal cost, we can get the capacity of the plant up to about 12 million cubic feet a day. Now today, we don't need that capacity, but we would be using more of it as we expand the oil production at Leduc-Woodbend with its associated solution gas. And furthermore, we do have the concept of bringing in additional third-party volumes, some of which are already shut in the area, some of which would allow more development by third-party operators if they had a place to send the gas and sending that additional gas to Leduc-Woodbend for a profitable fee. Ultimately, the licensing of the plant, which is pretty important, allows it to have a capacity of 20 million cubic feet a day, and it is licensed for sour service, we think, which is quite an advantage considering that the plant is in the area of Leduc reef and there's a lot of sour production in the area. Our production from the Rex formation is all sweet production, no H2S in it, but a number of the other third-party producers in the area do have sour gas, and it's certainly an advantage in this area to be able to process that. As the plant stands today without expansion, a third-party report by McDaniel using our reserve report showing the growth and the future growth in our Leduc-Woodbend-Rex production shows a value for the plant and the associated leasehold of about $9 million discounted to 10% on an a-tax basis. So that includes the quite minimal production from the associated lands, which exists today and the plant with our current forecast under the reserve report of Leduc-Woodbend-associated gas coming with the oil product that we're developing there. That number does not include any additional third-party volumes, and it doesn't include the value in the upstream and the leasehold acquired of any further development -- any further drilling on those new yellow lands that are shown on the map. We do think that there are some interesting possibilities in the leasehold. There are several different ideas we have. Rex, potentially a glauconitic on a small pool, but particularly regarding the Ellerslie Formation. Now this is part of the Mannville Group. That includes the Rex block, Lloyd, the other horizons that we are producing from and our perspective for us in the area. Ellerslie is a good producer in the Mannville and in a variety of places in Alberta. There's actually a pretty big original oil in place Ellerslie pool that is included in the acquired lands. It's at a fairly low recovery factor today, all on primary development. And we do think that there is a target for horizontal drilling. It's a permeable zone. It would use multilateral wells without hydraulic fracturing. That is not included in the value that we see today, but it is a possibility for us to add to our development slate. I don't really want to commit to a certain timing on that, and it's going to require additional study before we do any drilling in the Ellerslie on these new lands. However, I guess, in the fastest scenario, it could even involve drilling Ellerslie well in this year's program. So we'll keep you posted on that. But we think we've got a great plant asset that is valuable in and of itself. It's got some upsides to it, certainly in this area. And we think that we've got some potential value in the leasehold that comes along with the gas plant. Next, let's just briefly take a look at Slide 8 and put Q1 '24 in the context of the Tenaz record dating back to our recapitalization about 2.5 years ago. So comparing Tenaz today for -- 2024 to the time of the recap in Q4 '21, we find that production is up about 3x. FFO actually, as at 2023, up about 8x from the time of the recapitalization. And even while that production and cash flow has been going up, we've had a substantial improvement in the balance sheet and our positive adjusted working capital balance, what we also refer to as negative net debt, standing at about roughly $49 million at Q1 '24, again, up substantially from the time of the recap. At the same time that production and cash flow have been going up, along with our adjusted working capital position, we have reduced the share count by 7% through the NCIB. Let's take a look at our activity that we have planned for 2024 and just review our guidance. So during 2024, we're going to continue development at Leduc-Woodbend. That development could also include some activity on the new leasehold as we evaluate the various opportunities that we have, look at capital efficiencies and decide which new concepts we might want to bring in to allow even more inventory for future development. But we will be planning to drill in Canada in the second half of the year. This budget plan that we have is designed to maintain investment flexibility and continue to deliver free cash flow while we grow. We could go up or down in the size of the program, depending on commodity prices and a variety of other factors, including our alternative investment opportunities, but that's what we have planned presently for activity. Netherlands capital investment on the existing E&P hydrocarbon properties will continue in our non-operated position that we have in offshore Netherlands gas. We will also continue with the valuation of the Netherlands CCS project. We're the operator of that project plans. About $3 million of capital investment that would be net to our account as they advance through the front-end engineering design phase in route to an FID decision probably in the first half of 2025. The production volumes that we will be producing are hedged to a meaningful degree for the gas product. We have 1/5 of our production hedged for TTF for Q2 and Q3 of this year at an equivalent Canadian price -- fixed price of $14.57 per Mcf. In the winter, '24-'25, that would be Q4 '24 and Q1 '25, we have hedged 40% of our TTF exposure at quite strong prices. A swap price and a portion of it at about CAD 1 per Mcf, and a collar between a floor of CAD 13.74 with a ceiling of CAD 17.49, all of these reflecting the very strong market that we have for natural gas in Europe. We have hedged also about 1/4 of our winter AECO exposure, so that would be approximately Q4 '24 and Q1 '25, at a price of $3.28 per Mcf. A good price, we feel, by Canadian standards that hedges a little bit in the black right now, but you can see the big disparity between the price for natural gas that we get in Canada for our associated gas from Leduc-Woodbend as compared to the gas production that we have offshore Netherlands. And of course, something I'll touch on in closing. We're continuing our M&A efforts in our targeted regions of focus, primarily Europe, but also Latin America and potentially MENA. On the lower left, we show our production mix for 2024, about 43% Canadian oil and liquids; about 38% high-value TTF gas in the Netherlands; and the remaining 19%, the lower-priced AECO gas production. 2024 guidance remains unchanged, production of 2,700 to 2,900 boe/d. We produced just below the upper end of that guidance in Q1 '24. That was before any drilling in Canada in '24. And we maintain our current D&D CapEx, or drilling and development CapEx, guidance of CAD 23 million to CAD 25 million. Finally, on Slide 11, I just want to reiterate our international strategy. We have made this, what we think is, quite valuable but small acquisition of infrastructure and leasehold in Canada. But I want to be very clear that even though we try to add to the value of the Canadian asset while we can, we've got a great asset here in Canada, and we'll make small deals around that existing field to further increase its value. But the main focus of the company remains making acquisitions in the international market, in the regions I mentioned, Europe, Latin America, MENA. We go there because there is -- for these larger assets that we're talking about in the international arena, there is a lot less competition, we feel, than in Canada. They come off at higher rates of return that can be expressed as lower multiples on the initial acquisition, and we find a greater opportunity in those assets for operational improvements. And you'd find, I think, on similarly sized assets in North America. And the combination of those 2 things, better value at entry and a greater opportunity for international -- for operational improvement in the international assets, gives you a higher rate of return on invested capital in this international M&A market compared to North America. And as always, we'll be emphasizing our leadership in ESG practices, and I encourage you to look at our sustainability reports that are on our website. So with that, I will close. And I thank all of our listeners for your interest in Tenaz. We will look forward to speaking to you again when we release our Q2 results this summer. Thank you.