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

Hello. I'm Tony Marino, President and CEO of Tenaz. Thank you for joining our Q2 '26 update. At the outset, I'd like you to note our advisories that we have at the beginning and the end of this presentation. Let's start with our operating and financial results. Production was up again in Q2, 6% higher than in Q1, reaching over 17,000 boe/d. And I will point out that our preliminary production that we have for July is approximately 23,000 boe/d. So continued organic growth in Tenaz as a result of the development activities that we and our operating partners are conducting on our assets, primarily in Netherlands. Funds flow from operations, $74 million. That's a 15% increase from Q1 on higher pricing and higher production. The better pricing, in particular, is reflected in our operating netback, which has reached over CAD 69 per BOE. That's a 20% increase from Q1 '26 operating netback. CapEx was significantly lower than in Q1. The total for the half year period is about $150 million. We had a heavier investment program in Q1 for a couple of different reasons. First of all, we had our Canadian program going, which is now completed. Secondly, we had more non-op activity in the non-GEMS assets in Netherlands. And another factor was that we were running our original Seafox barge doing some light workovers at the beginning of the year, and we didn't have that going in Q2. I would point out, and I think we mentioned it later in this presentation, but I'll point out that we are bringing in the Triton-10 barge to do heavier workovers beginning this quarter. Debt down about 3% from the Q1 ending level to $378 million. This is really driven by free cash flow, among other factors. That number is less than 1x our forecasted FFO for '26 at the strip. So we think in terms of debt levels and liquidity, the company is in very strong condition. We would point out with respect to operations that we did complete the operated K17-FA-103 well and a non-operated well at GEMS, the N05-A-02X, and we'll talk about those results in just a minute. In addition to this drilling activity, we had a great deal of turnaround activity in Q2, both on our operated platforms and plant and on non-operated platforms. This is customary for Q2. It's typically a pretty good weather period to do facility work with all the manning that's required and all the additional equipment that can avoid some of the rough weather delays that we would get in other parts of the year and that have an impact on Q2 production. One of the reasons that the July number is so far above the Q2 level are these turnarounds in Q2 plus the fact that we did bring additional wells on production that began to hit during July. A little bit more on the operations. All of this activity annotated on the map on the right side of the slide. So on the -- a little more detail on the operated K17-FA-103 well, 60% working interest. That is a well that we completed drilling in the second quarter. Subsequent to the end of the quarter, we did the bulk of our completion activity, which was a 3-stage frac that was pumped and perforating a number of the unfracked intervals in the Rotliegend. Well is flowing at a rate, after a 2-day cleanup test, of 15.7 million cubic feet a day at that 60% versus 9.4 million cubic feet a day back to Tenaz. And the well is being tied into our monopod platform at K-17. In addition, I mentioned earlier, we conducted turnarounds on L2 and L9 along with work at the Den Helder plant during that time. This, of course, had an impact on the Q2 production, as I mentioned previously. And again, we took delivery on the Triton-10 barge is a very versatile piece of equipment that I think is going to allow us to do a lot of high rate of return workovers, heavier workovers typically than we would do with our Kasteelborg walk-to-work vessel. And also the Triton-10 is versatile in the sense that it can do -- we can do platform integrity work at the same time that we're doing this production-enhancing work on existing wells. And that will be a long-term contract for the Triton-10. We've got a long line of sight on, I think, valuable workovers in the existing well stock. On the non-op side in Q2, the third well in the N05-A pool was drilled by operator ONE-Dyas, brought on production subsequent to the end of the quarter. This is one of the things positively impacting the July rate. Very, very strong well, 74 million cubic feet a day. We have a 1/3 interest in this well. Along with the original well in the N05-A pool, these are the 2 highest rate producing wells in Netherlands. We also had the successful N05-A-03 well the numbering sequence there a little bit out of order with the drilling. The 01 well went first, the 03 well went second, and now we have this 02X well that has been drilled and on production. Again, all 3 of them successful in the N05-A pool. Very high rate result on this third well. It had very similar reservoir characteristics to what we had originally in the N05-A-01. And therefore, it's no surprise that the production rate is almost the same. Also, during the quarter, ONE-Dyas conducted a 2-week turnaround on the N05 platform. Again, this is part of the lower rates that you see in Q2 versus the July rate that we have identified preliminarily based on the accounting to date. Again, it was a strong result in Q2, up 6% from Q1, but affected by those turnarounds and we got this additional impact of what has occurred already in Q3. On the next slide, we want to give you a characterization of the drilling inventory that we have in Netherlands, including both our operated and non-operated properties. There's quite a bit of information that's presented here. So I'm going to take just a minute to describe each element of the info that we have here. The plot on the upper right is the gross success case size of each of the 111 resource projects that we have in our portfolio. So a combination of 15 contingent and 96 prospective resource category projects on a success case basis, meaning we drill a well, it hits at the forecasted pool size and numbers here that are not met to the Tenaz working interest, but for the project as a whole, what we would call an 8/8 interest. So the reason we're presenting it in this manner is that we're trying to give you an idea of how large are the projects and prospects that are in the resource category. The way the project sizes are organized here is really what I would call a cumulative distribution or kind of a cumulative histogram. So we put the smallest prospects on the left side of the plot, and we just sort them to the larger prospects on the right side of the plot. We have put certain statistical indicators on here to give you a little better characterization of the typical size in the portfolio. For example, the median prospect, what we call the P50 is 28 Bcf. Again, success case, this is on an 8/8 basis, not just the Tenaz working interest, pretty good sized prospect at 28 Bcf. It's a log normal distribution of size. So the actual mean or average prospect is significantly larger than the median, 50 Bcf, because it has to take into account the right end of this curve where we have some very large prospects. We'd have a P90, meaning that 90% of the time, we would expect the prospects to be larger than 13 Bcf in this statistical group. And the P10 means that 10% of the time, they'd be larger than 119 Bcf, again, success case, 100% interest. So again, we would say these are pretty good-sized prospects that we have to drill, again, includes a contingent resource category, typically already discovered fields. Majority of them are undiscovered or extensional in the prospective category. But again, we think a strong set of fairly large prospects. And then as we feed this gross success data into volumes that are net to Tenaz, I didn't point it out, but I'd like to remind everybody that this is based on an independent assessment by McDaniel. We end up with the results in the table at the bottom. And in this table, we've got both unrisked and risked volumes. At the very top, we speak to our PUD or undeveloped reserve category. This is distinct from the resource category. We've got about 32 million BOE equivalent of PUDs net to Tenaz interest. The total 2P reserve number for Tenaz is about 92 million and the 2P undeveloped reserve is 32 million. A second ago, I referred to it as PUD, but it includes the proved plus probable undeveloped volumes of 32 million. Again, that is distinct from the resource plot up above. As we summarize down the net volumes to Tenaz, we get the unrisked totals at each of the 1C, 2C and 3C for contingent, the low, medium, high and mean for prospective. There's 2 different sets of nomenclature there for characterizing the range of resource sizes, quite large volumes, especially when you would compare it to our total booked 2P reserve of 92 million at the unrisked level net to Tenaz. And then on the very right of that table, the bottom 2 cells there, we show a risked contingent volume net to Tenaz of 24 million barrels equivalent and a mean volume of 101 million barrels equivalent net to Tenaz, again, on a risked basis. All of this comparing back to our 2P book volume of 92 million barrels equivalent, which includes 32 million of 2P undeveloped reserves. So this takes that upper set of data and puts it in net terms, both unrisked and risked to Tenaz. In the bullets that we have on the left of the slide, we just speak to the number of prospects that are included. The first one reflects reserves, which is not included in the plot on the upper right, 15 contingent fields discovered but not in the reserve report and 96 prospective resource potentially fields that are at the resource level. Final point on the bottom left of this slide is that we've got what we think is a very high-quality ocean bottom node seismic survey over really our main producing area. And really the interpretation of that OBN seismic, which can improve certain prospects and may become bigger as a result of having the OBN generally an improvement in the data quality and our ability to, we think, define these prospects prior to drilling. That interpretation not included in the results that you see in the table. And as we work it going forward, work the OBN going forward, we hope to get that included in the resource totals that we would present in the future. So again, it's a great deal of information that is presented here in a variety of forms, but we think it gives a reasonable interpretation, a reasonable estimate based on this third-party report of what we have in the portfolio beyond the 2P reserve level. So let's move over to another topic, and that is just European gas pricing. We just wanted to give you an update of where prices are as of the end of the day today, August 5. Here, we've presented in USD per MMBtu terms instead of euros per megawatt hour or Canadian dollars per MMBtu. 3 curves represented here. TTF in red at the top. And of course, for all of them, we're going to have the historic pricing back to the beginning of '24 in the solid line and then the forward curve shown in the dashed red line. Heavily backwardated, but all very strong pricing. Again, the big increase in pricing early in '26 and in the forward curve for the -- at least for the first portion of the forwards represented here driven by the Middle Eastern war. The bottom 2 curves show North American pricing. In the green color, Henry Hub prices, historical and forward and the same thing for AECO. So very strong market in Europe. And reflective, we think, over the very long term in the forward curve of full cost pricing at LNG into Europe and in the medium term, the market's expectation of relative scarcity over the next couple of years. We move on to the storage situation. We have simplified the historic data down to just present the '21 to '26 storage cycles for each of these years. And what we see currently is that storage is at a pretty low level for EU as a whole. As of the end of July, it was 56% full, and it is building at a little bit slower pace than we have seen in previous years. This 56% full level based on a number of market analyses would bring us to a 70% to 75% level at the end of the injection season. That is quite a bit below a typical year. In fact, it's even below what we had in 2021. And so really -- based on this, we would expect Europe to come in kind of low in storage before we start the withdrawal year, does leave some exposure to cold winter weather. And really with pipeline supply not into Europe, not really being -- having any extra capacity, any makeup in supplies that might be required is going to have to come in from LNG. And to get that LNG, Europe is going to have to compete with Asia with JKM pricing to make sure that these supplies can get into the European market to meet whatever demand does materialize in the winter. So we present this data just to show the European situation as it stands today and probably does leave the potential, especially in a cold winter, for pretty strong pricing over the next 6 to 9 months. This final slide that I'm going to discuss today shows Tenaz's hedging position for Q2 '26 through the end of 2028. We don't have any hedges on beyond that. We roughly have hedged about 56% of our European gas exposure for this year, 41% for '27 and a small level, 8% for 2028. Hedge prices at historic levels are actually pretty strong in the range of EUR 30 to EUR 34 per megawatt hour, reflecting both swaps and the collars that we have in place. Most of these hedges were for the next -- for '26 and for '27 were put on at the time we made the NOBV and GEMS acquisitions to ensure strong returns on those transactions. And we have added some to them during the period since then, particularly during the period since the Middle East war broke out. That has actually led us to improve our hedges a little bit to the pricing levels that are reflected in the data in the bullets on the left part of this slide. We have also hedged most of our AECO exposure for this year and nearly half of it for '27 at a pretty strong price in comparison to current AECO levels. AECO is a pretty minor product for us, but we do still attempt to manage our price exposure there. WTI is our second most important product, although it's well behind European gas in our portfolio. And we have hedged about 1/3 of it for this year at USD 67.50 per barrel and a little bit for 2027 at an average price of USD 65 per barrel. We do this hedging program to ensure a suitable level of cash flow. It locks in returns on our capital program. So there's a variety of reasons to do it. It is a hedge book that is below current market pricing. And so we do have some realized hedging losses in both quarters this year. Nonetheless, by historical standards, relatively strong pricing, it fulfills an objective to stabilize our cash flows. And where we see opportunities, we'll continue to add to the hedge book. Typically, we're going to want to be 30% to 50% hedged roughly over a 2-year period, and we will go higher than that when we see strong opportunities in the market. Again, please note the advisories in our presentation. And in closing, I would like to say thank you to -- really to all the stakeholders in Tenaz, but particularly to the employees and consultants and service personnel that we have working for the company. It was my honor over the past month to visit our L2 and L9 production platforms and our Shelf Winner drilling rig. There's a large number of people working on the drilling activity. We're picking up the Triton-10 workover barge. There's a huge amount of technical work that is done in our Netherlands office to design and to manage and implement these wells and a huge amount of work done by our production operations team tying these wells in and doing such a great job of keeping all of the base production optimized within our producing assets. And it's really as a result of all of this very strong operating and technical work that we're able to report the growth profile that we did in Q2, the production levels that we've seen in July '26 so far in Q3 and this expectation that we have for continued strong growth in the future. So again, thank you to all of our staff, and thank you to our investors for their support to Tenaz and to all our listeners for your interest in our Q2 report. We're looking forward to talking to you again when we report Q3 later this year.