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

Hello. I'm Tony Marino, President and CEO of Tenaz Energy. Thank you for joining us for a brief presentation about our 2026 budget. I ask you to note the investment advisories we have at the beginning and end of this presentation. Our budget guidance for 2026 is a capital investment level of CAD 250 million to CAD 275 million. This program is up substantially from around $100 million in 2025. This, of course, is driven by our ownership and operation for a full year of Tenaz Energy Netherlands, what we used to call NOBV and our non-operated ownership in the GEMS project as well as our previous non-operated interest in Netherlands. With this substantially higher capital investment, we do expect to generate quite significant organic production growth. We're showing a production range of 19,500 to 22,500 boe/d for next year, average for 2026, midpoint of guidance of 21,000 boe/d, and that's more than double our calendar year average for 2025. Of course, in 2025, we closed both acquisitions, and we don't count the production levels until after closing. But even compared to our pro forma production rate of 16,000 boe/d after those acquisitions in 2025, it's still quite substantial growth. What we average for the year and what our exit rate will be, of course, is dependent on the timing of our project execution and how successful they are. But in our base forecast, we think that production rates at the end of 2026, what we call our exit rate could be as high as 27,000 boe/d. And of course, given that the production rate builds in 2026, we think we're set up for an even stronger production level on average in 2027 as a result of this capital program. And presumably, we'd have a strong capital investment level in 2027 as well, which would continue to build production growth. In terms of comparison to our FFO or cash flow generation, we think that this capital program will roughly balance or be just inside under current prices of our FFO levels. And in that sense, it would be self-funded. Of course, a feature of our capital program and of our net cash generation for next year is that we do have the earn-out on the TEN assets or on the NOBV acquisition, and that is an incentive for us to have investment into the TEN assets. So if we look at the operated program, we already have the Shelf Drilling Winner in place, making a hole on our first well in the Netherlands. Including that well, we would envision a 3 gross, 1.6 net well program on the TEN assets. We would also continue our barge workover campaign that is currently in place, and we may well use the drilling rig for certain workover activity too. Workover has a very high rate of return, and there are certain workovers that are better suited to the drilling rig. With respect both to drilling and some of the more complicated workovers, this is certainly a step change in activity from what had previously been conducted by [ NOM ] on the TEN assets. There's also a significant level of non-operated activity. In fact, in Netherlands, the capital program is roughly equally split between operated and non-operated investment. So first of all, at GEM -- GEMS is the bulk of the non-operated investment. Operator ONE-Dyas envisions a 4 gross well program. That would be 1.4 net wells to Tenaz interest, starting with the finishing of a well in the N05 A pool that was started and suspended prior to this current drilling program. So a combination of development and potential exploration wells in the GEMS program. In the Eni operated L10 block, the Malachite well will be drilled and finished in 2026. We have a 21.4% working interest in that well. So including our operated drilling and these two non-operated programs, there are actually three rigs running now offshore Netherlands. That's most activity that we've had in that province for a long period of time. And Tenaz is involved in all three of these, and that is what is driving the bulk of this production growth. Again, this is 99% TTF gas, maybe 1% condensate. TTF strong product. We'll touch on that market in just a minute. But we would point out that the current TTF price -- the spot price is about CAD 13 per MMBtu. So again, strong pricing generates good cash flow in this market. Canada is certainly a much smaller part of our program, roughly 10% of the production base in the company, maybe slightly higher than that. We're going to continue some growth in Canada, not quite at the pace that we've had for the last number of years ever since we affected the recap back in 2021, but still on the order of 10% growth in Canada. We'll be doing that with a 3-well program, 2.6 net wells. Two of these will be multilaterals in the Ellerslie formation. We've had a great deal of success with these low-cost unfracked multilaterals in the last couple of years. We'll continue that program. The third well, we would plan to have in the Sparky formation. This is a single lateral that will be fracked, similar really in a lot of ways to the Rex formation, where we have a great deal of project inventory that we'll be pursuing over the next number of years. Sparky is probably a little more permeable, a little higher water saturation, that will be offsetting successful drilling by another company. And to touch on the economics of this, we still see quite high rates of return. We realize that there's been a big drop in WTI prices over the recent period. But we point out with Dyas of USD 13 per barrel prompt for WCS and about $12 per barrel in the forward curve. We still generate about a $60 per barrel price for our crude here, which trades WCS without having to introduce any condensate to sell the crude. And at that price, again, we have quite strong returns. So at present, we intend to implement this Canadian program. Actually, when this rig is picked up, we think in Q1 in Canada, we'll have four rigs working, three in Netherlands and one in Canada on Tenaz assets. Next, let's briefly discuss the TTF gas market in Europe. Everybody is aware, there's been increases in LNG supply. We think that's going to continue. A number of projects are going to be built in the U.S., and we'll have increased supply from Qatar as well. The fact is that Europe will continue to have to compete for LNG supplies with Asia. There is very likely to be a cutoff of Russian gas into Europe, currently about 12% of the supply into the EU. And almost certainly, that's going to be replaced not by any pipeline supply into Europe, but by LNG. If you take a look at LNG netbacks, they actually had gone negative in -- when supplied from the U.S. Gulf Coast over the past number of weeks. Now with the drop in Henry Hub just in the last couple of days, I think they've shifted back into positive territory, but certainly not the very high netbacks that we had previously. If you look at the forward curve and the LNG netbacks are actually back into negative territory. So again, this may have an impact on how many of these proposed U.S. projects actually end up being built. But again, we do expect an increase of supply into Europe. We do think that the full cost to supply LNG into Europe is a pretty good indicator of where TTF prices may have a floor and that full cycle cost is actually very close to where TTF trades today, somewhere around EUR 27 per megawatt hour. And as I mentioned previously, this will translate at current exchange rates to around CAD 13 per MMBtu. In the near term, for the remainder of this winter, storage is actually at fairly low levels in Europe in comparison to previous years, as you can see on this plot in the bold red line. Again, whether or not that has a big impact on winter pricing will depend on the weather in Europe. But the fact is that storage is not as full at this point as it typically has been. So I'd say that specific aspect of it, not a negative. We are aware, of course, that a lot of this supply into Europe is now just in time via LNG rather than relying probably to the same degree on storage that we -- that the market has in the past. We do very actively hedge this product. In fact, for the remainder of this year, Q4 '25, we're a majority hedged, and we're maintaining a hedge position primarily driven by TTF, but also by hedging AECO that ensures about half of our revenue level for 2026. So we'll continue to add to that position as we go forward in time. We've got a pretty healthy hedge position on in '27 as well. At present, really unhedged for oil as we look ahead to '26 and '27, not a huge product in our portfolio. And at present, we are largely unhedged both for the commodity and for the WCS differential. So in conclusion for this brief presentation that we have made, we think that this year's budget and the guidance that comes out of it for increased production is indicative of our very strong organic growth opportunity that we have present in the company. This was set up by the transactions that we've made over the past couple of years, particularly those that we closed in 2025. By no means are we out of the M&A business. It's still a very, very important part of our activities. We feel we have a very good transaction pipeline in place, probably the best it's ever been. We don't make any guarantees it will come to fruition. It is certainly going to be our objective that any deals that we make add value for the existing shareholder set. But again, it's much more of a combination message than we've given in the past. We have very strong organic growth and I think a great M&A upside in the company. The management team is experienced in both parts of this business. Certainly, we've had success in the M&A historically, and the M&A is designed as it's doing in Tenaz today to set up this organic growth, and we continue with both elements of our strategy to attempt to add value for the existing owners. Final point is that the team remains fully aligned with our shareholders. We were there at the original recap transaction 4 years ago. We as a director and officer group, we have pretty significant ownership, around 16% of the basic shares, nearly 20% on a fully diluted basis. We did note this month that the directors and officers fully converted their stock option and warrant position. We have extinguished all of those and have converted 70% of that position into share ownership, adding to that percentage on a -- from where it was before on a basic basis. And I'll point out that beyond just the director and owner -- director and officer group, every employee in the company is incentivized as a shareholder of Tenaz. So every employee is incentivized to deliver for the full shareholder base, and we think that's very key to the company's historic success, and it's going to be equally important to our success going forward. So that concludes my presentation. Again, note the advisory at the end of the presentation. We appreciate your interest in Tenaz, and we look forward to our next opportunity to report to shareholders. Thank you.