TNZ Tenaz Energy Corp

CALGARY, AB, November 7, 2024 /CNW/ - Tenaz Energy Corp. ("Tenaz", "We", "Our", "Us" or the "Company") (TSX: TNZ) is pleased to announce its financial and operating results for the three and nine months ended September 30, 2024 and senior unsecured notes issue. 

The unaudited interim condensed consolidated financial statements and related management's discussion and analysis ("MD&A") are available on SEDAR+ at www.sedarplus.ca and on Tenaz's website at www.tenazenergy.com. Select financial and operating information for the three and nine months ended September 30, 2024 appear below and should be read in conjunction with the related financial statements and MD&A.

HIGHLIGHTS

Corporate Update

• We are pleased to announce a $140 million private placement offering (the "Offering") of Senior Unsecured Notes due 2029 (the "Notes"). The Offering has been placed with institutional investors and is expected to close on November 14, 2024. The Notes are non-callable for the first two-and-one-half years, bear interest at 12% per annum, and are priced at par. The Notes will replace the previously- announced $90 million delayed-draw term loan provided by National Bank of Canada ("NBC") to facilitate the acquisition of NAM Offshore B.V. ("NOBV"). This long-term debt financing provides significant liquidity to pursue our international M&A strategy, as well as funding the closing of the NOBV acquisition.  
• On July 18, 2024, we announced the execution of a definitive agreement to purchase NOBV. On August 5, the Netherlands Authority for Consumers and Markets ("ACM") completed its review of the transaction and cleared it to proceed as planned. We are now conducting transition activities with a target of a mid-2025 closing and assumption of operations. Free cash flow occurring between the effective date of January 1, 2024 and the closing date will be reflected as a reduction of the purchase price. 

Third Quarter Operating and Financial Results

• Production volumes averaged 2,535 boe/d⁽¹⁾ in Q3 2024, up approximately 1% from Q2 2024. Higher Netherlands production after completing annual offshore maintenance was largely offset by lower Canadian production.  Production increased 7% over Q3 2023, driven by an increase in Canadian production from Leduc-Woodbend wells brought on late in 2023.   
• During Q3, we drilled an unstimulated multi-lateral well in the Ellerslie formation on recently-acquired land near the Watelet gas plant. During its initial 45 days of production, this well has averaged approximately 355 boe/d gross (310 boe/d net to Tenaz), with oil constituting 93% of this production. Based on these strong results, we are drilling a follow-up multi-lateral well to further develop this Ellerslie pool. 
• Our 2024 capital plan in Canada has been revised to include the two (1.75 net) horizontal multi-lateral wells targeting the Ellerslie formation. These two Ellerslie wells replace the four gross (3.5 net) Rex program in our original plan. The revised capital program is even more capital efficient than the original Rex-oriented plan.    
• Funds flow from operations ("FFO")⁽²⁾ for the third quarter was $3.4 million, down 42% from Q2 2024 and 30% from Q3 2023. Lower FFO resulted in part from higher G&A and transaction costs for M&A activity, including the NOBV acquisition. In the quarter-over-quarter comparison, FFO was further impacted by a prior-period income tax recovery recorded in Q2 2024.
• We recorded a net loss of $2.5 million in Q3 2024, as compared to net income of $1.3 million in Q2 2024 and $20.9 million in Q3 2023. The shift to a net loss was driven in part by transaction expenses in Q3 2024, the positive impact of a prior-period income tax recovery in Q2 2024, and a gain on acquisition of non-operated Netherlands assets which was recorded in Q3 2023.
• We ended Q3 2024 with positive adjusted working capital ⁽²⁾ of $9.0 million, down from $44.3 million at Q2 2024 and $49.4 million at Q4 2023. The decrease in positive adjusted working capital reflects the payment of the deposit for the NOBV acquisition, transaction costs associated with the NOBV acquisition and continuing M&A efforts, and the payment for the acquisition of the Watelet gas plant. Tenaz paid a €23 million ($34 million) deposit for the acquisition of NOBV and has incurred $2.8 million of transaction costs for the first three quarters of 2024.

Budget and Outlook

• Annual guidance for drilling and development ("D&D") capital expenditures ("CAPEX") is being reduced to a new range of $16 to $18 million from the previous range of $23 to $25 million. Lower D&D CAPEX reflects a change to Canadian drilling plans from a four gross (3.5 net) well Rex program to a two gross (1.75 net) well Ellerslie program.
• Despite lower CAPEX, annual production is expected to be within our present guidance range of 2,700 to 2,900 boe/d. Because the Ellerslie wells were drilled late in 2024 on recently-acquired lands, annual production is expected to be near the lower end of the guidance range. The redirection of the Canadian drilling program was effected to further improve capital efficiencies while still achieving greater than 10% annual corporate production growth. The undrilled Rex wells remain in our project inventory with robust economics at current oil prices.

FINANCIAL AND OPERATIONAL SUMMARY

PRESIDENT'S MESSAGE

During the third quarter of 2024, we achieved a significant step in the execution of our corporate strategy with the signing of a definitive agreement to acquire NOBV from Nederlandse Aardolie Maatschappij B.V. ("NAM"). Our team is in the midst of transition activities to close this transaction and effect the cutover of operations. The transition process is on track for closing on or before mid-year 2025. We have received great support and cooperation in these efforts from our future NOBV workforce and our counterparty in the transaction. As we review the NOBV assets with the NAM staff, we are now even more encouraged by the reinvestment opportunities than we were at the time we announced the acquisition.

We are today announcing another important step in the realization of our business plan with the $140 million Offering of Senior Unsecured Notes due 2029, which has been placed with institutional investors. The Notes are non-callable for the first two-and-one-half years, bear interest at 12% per annum, and are priced at par. Closing of the Offering is expected to occur on November 14, 2024. The Offering replaces a $90 million delayed draw term loan entered into in July 2024 with NBC to support our previously announced acquisition of NOBV.

The Offering is important for several reasons. It replaces short-term bridge finance with long-term unsecured debt, is aligned with our target capital structure, and provides liquidity in excess of what we expect to use in the NOBV transaction. We believe increased liquidity provides a competitive advantage by enhancing Tenaz's credibility as a counterparty in M&A markets. Finally, the Offering represents a desirable entry into the long-term debt markets, positioning us for future public high-yield debt offerings as Tenaz grows. Importantly, the private placement was placed in advance of closing the NOBV transaction and with terms that are typical for public issues in the Canadian high yield market. We see this as a vote of confidence in our business model and the NOBV acquisition.

Upon closing of the Offering, we will have a strong liquidity position underpinned by our existing working capital, proceeds from the Notes, our revolving credit line with NBC, and continued free cash flow generation from our existing producing assets. In aggregate, we expect to be in a strong financial position both before and after the closing of the NOBV acquisition, with increased flexibility for additional acquisitions as a result of the Offering.

The Offering is being led by National Bank Financial Markets Inc. ("NBF"), as sole bookrunner and placement agent. NBF is also acting as sole financial advisor for Tenaz in respect of the NOBV acquisition.

In Canada, we have recast our 2024 development activity to drill on lands acquired in June along with the Watelet gas plant. On these lands, we are redeveloping an Ellerslie oil pool that was originally drilled with vertical wells. Our revised CAPEX program replaces our originally-planned four gross (3.5 net) well drilling program in the Rex with two (1.75 net) multilateral wells in the Ellerslie. 

During Q3, we drilled the first of these two Ellerslie wells. This unstimulated well has three horizontal laterals at a true vertical depth of 1,477 meters, a total measured depth of 4,177 meters, and an open hole length in the Ellerslie reservoir of 2,493 meters. During its first 45 days of production, this well produced at an average rate of 355 boe/d, with oil constituting 93% of oil-equivalent production rate. Water cut is stable at about 25%. Oil gravity is 26 °API. Tenaz has an 87.5% working interest in the Ellerslie project.

The second of the two Ellerslie wells is currently being drilled, with production expected to begin during Q4. The Ellerslie wells have relatively low capital requirements because the horizontal laterals are unlined and unstimulated, use existing surface pads, and require only minor battery upgrades to put on production. The average gross cost of the wells is expected to be $2.9 million.

During Q3, we also conducted a significant turnaround at the newly acquired Watelet gas plant, as well as minor facility and battery upgrades to prepare for increased production. D&D CAPEX for the turnaround and upgrades is expected to be approximately $2.0 million net to Tenaz in 2024.

In the Netherlands, our non-operated assets continue to produce at expected levels. The operator of the L10 complex, Eni Energy Netherlands B.V., is focused on potential in discovered but as-yet undeveloped fields near existing infrastructure. One of the undeveloped fields is being appraised for development with a new well from an existing platform during 2025. In addition to development drilling, the joint venture group continues to evaluate and design the L10 CCS project, potentially leading to an FID decision in the second half of 2025.

Including both our Canadian operations and our non-operated Netherlands properties, we expect D&D CAPEX to be approximately $7 million lower than our original budget, bringing our 2024 guidance range down to $16 to $18 million. We believe the two-well Ellerslie program will generate nearly as much oil deliverability as the originally-planned four-well Rex program, albeit with substantially less gas production than the Rex wells. Because the Ellerslie drilling occurred later in 2024 than we had planned for the Rex locations, its annual production impact for calendar-year 2024 is lower than in the original Rex plan. While we maintain our original production guidance range of 2,700 to 2,900 boe/d, we expect annual production to be near the lower end of the range due to the later drilling of the Ellerslie wells. 

As we have previously communicated, we are pursuing additional M&A opportunities at the same time we are executing transition activities for the NOBV acquisition. We believe our Notes Offering is an important financing step as it provides long-term debt to fund the NOBV closing and provides liquidity to assist future potential transactions. We remain optimistic about our transaction pipeline, and believe that our business model has the potential to continue to produce value-adding acquisitions for our shareholders. 

We are honoured that Tenaz shares have returned 189% year-to-date during 2024. This year-to-date total shareholder return places Tenaz at the top of the 57 oil and gas companies listed on the TSX and in the top one percent of TSX-listed issues in all sectors. Our Board of Directors and employees remain aligned with shareholders, and we will redouble our efforts to deliver value.

/s/ Anthony Marino
President and Chief Executive Officer
November 7, 2024

About Tenaz Energy Corp.

Tenaz is an energy company focused on the acquisition and sustainable development of international oil and gas assets. Tenaz has domestic operations in Canada along with offshore natural gas and midstream assets in the Netherlands. The domestic operations consist of a semi-conventional oil project in the Rex Member of the Mannville Group at Leduc-Woodbend in central Alberta. The Netherlands natural gas assets are located in the Dutch sector of the North Sea. Additional information regarding Tenaz is available on SEDAR+ and its website at www.tenazenergy.com. Tenaz's Common Shares are listed for trading on the Toronto Stock Exchange under the symbol "TNZ".

ADVISORIES

Notes Offering

The Notes are being offered for sale to qualified buyers in Canada on a private placement basis pursuant to certain prospectus exemptions. The Notes have not been registered under the U.S. Securities Act, or any state securities laws, and may not be offered and sold in the United States or to U.S. persons.

This press release does not constitute an offer to sell, or a solicitation of an offer to buy, any security and shall not constitute an offer, solicitation or sale in any jurisdiction in which such an offer, solicitation, or sale would be unlawful.

Non-GAAP and Other Financial Measures

This press release contains the terms funds flow from operations and capital expenditures which are considered "non-GAAP financial measures" and operating netback which is considered a "non-GAAP financial ratio". These terms do not have a standardized meaning prescribed by GAAP. In addition, this press release contains the term adjusted working capital (net debt), which is considered a "capital management measure". Accordingly, the Company's use of these terms may not be comparable to similarly defined measures presented by other companies. Investors are cautioned that these measures should not be construed as an alternative to net income (loss) determined in accordance with GAAP and these measures should not be considered to be more meaningful than GAAP measures in evaluating the Company's performance.

Non-GAAP Financial Measures

Funds flow from operations ("FFO")

Tenaz considers funds flow from operations to be a key measure of performance as it demonstrates the Company's ability to generate the necessary funds for sustaining capital, future growth through capital investment, and settling liabilities. Funds flow from operations is calculated as cash flow from operating activities plus income from associate and before changes in non-cash operating working capital and decommissioning liabilities settled. Funds flow from operations is not intended to represent cash flows from operating activities calculated in accordance with IFRS. A summary of the reconciliation of cash flow from operating activities to funds flow from operations, is set forth below:

Capital Expenditures

Tenaz considers capital expenditures to be a useful measure of the Company's investment in its existing asset base calculated as the sum of exploration and evaluation asset expenditures and property, plant and equipment expenditures from the consolidated statements of cash flows that is most directly comparable to cash flows used in investing activities. The reconciliation to primary financial statement measures is set forth below:

Free Cash Flow ("FCF")

Tenaz considers free cash flow to be a key measure of performance as it demonstrates the Company's excess funds generated after capital expenditures for potential shareholder returns, acquisitions, or growth in available liquidity. FCF is a non-GAAP financial measure most directly comparable to cash flows used in investing activities and is comprised of funds flow from operations less capital expenditures. A summary of the reconciliation of the measure, is set forth below:

Midstream Income

Tenaz considers midstream income an integral part of determining operating netback. Operating netbacks assists management and investors with evaluating operating performance. Tenaz's midstream income consists of the income from its associate, Noordtgastransport B.V. and excludes the amortization of fair value increment of NGT that is included in the equity investment on the balance sheet. Under IFRS, investments in associates are accounted for using the equity method of accounting. Income from associate is Tenaz's share of the investee's net income and comprehensive income.

Non-GAAP Financial Ratio

Operating Netback

Tenaz calculates operating netback on a dollar or per boe basis, as petroleum and natural gas sales less royalties, operating costs and transportation costs, plus midstream income (income from associate, as described above). Operating netback is a key industry benchmark and a measure of performance for Tenaz that provides investors with information that is commonly used by other crude oil and natural gas producers. The measurement on a per boe basis assists management and investors with evaluating operating performance on a comparable basis. Tenaz's operating netback is disclosed in the "Operating Netback" section of this press release.

Capital Management Measure

Adjusted working capital (net debt)

Management views adjusted working capital (net debt) as a key industry benchmark and measure to assess the Company's financial position and liquidity. Adjusted working capital (net debt) is calculated as current assets less current liabilities, excluding the fair value of derivative instruments. Tenaz's adjusted working capital (net debt) is disclosed in the "Financial and Operation summary" section of this press release.

Supplementary Financial Measures

• "Operating expense per boe" and "Transportation expense per boe" are comprised of the respective line item from the consolidated statements of net income, as determined in accordance with IFRS, divided by the Company's or business units total production.
• "Funds flow from operations per basic share" is comprised of funds flow from operations divided by basic weighted average Common Shares.
• "Funds flow from operations per diluted share" is comprised of funds flow from operations divided by diluted weighted average Common Shares.
• "Realized heavy crude oil price", "Realized natural gas liquids price", "Realized natural gas price", and "Realized petroleum and natural gas sales price" are comprised of commodity sales from the respective commodity, as determined in accordance with IFRS, divided by the Company's production of the respective commodity.
• "Royalties as a percentage of sales" is comprised of royalties, as determined in accordance with IFRS, divided by commodity sales from production as determined in accordance with IFRS.

Barrels of Oil Equivalent

The term barrels of oil equivalent ("boe") may be misleading, particularly if used in isolation. Per boe amounts have been calculated by using the conversion ratio of six thousand cubic feet (6 Mcf) of natural gas to one barrel (1 bbl) of crude oil. The boe conversion ratio of 6 Mcf to 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalent of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.

Forward-looking Information

This press release contains certain forward-looking information and statements within the meaning of applicable securities laws. The use of any of the words "expect", "anticipate", "budget", "forecast", "guidance", "continue", "estimate", "objective", "ongoing", "may", "will", "project", "should", "believe", "plans", "potential", "intends", "strategy" and similar expressions are intended to identify forward-looking information or statements. In particular, but without limiting the foregoing, this press release contains forward-looking information and statements pertaining to: the Offering including, without limitation the expected timing of closing; our beliefs about liquidity; expectations for our base business and our financial position upon closing of the Offering and before and after closing of the NOBV acquisition; potential future debt offerings; Tenaz's capital plans; activities and budget for 2024, and our anticipated operational and financial performance; expected well performance; potential drilling opportunities; our production and capital guidance including forecast average production volumes and capital expenditures for 2024; the ability to grow our assets domestically and internationally; statements relating to a potential CCS project; and the Company's strategy. In addition, this press release contains forward-looking information and statements pertaining to the acquisition of NOBV including, without limitation: the timing of closing; expectations regarding estimated cash to close, and sources of funding thereof.

The forward-looking information and statements contained in this press release reflect several material factors and expectations and assumptions of Tenaz including, without limitation: the continued performance of Tenaz's oil and gas properties in a manner consistent with its past experiences; that Tenaz will continue to conduct its operations in a manner consistent with past operations; expectations regarding future development; the general continuance of current industry conditions; the continuance of existing (and in certain circumstances, the implementation of proposed) tax, royalty and regulatory regimes; expectations regarding future acquisition opportunities; the accuracy of the estimates of Tenaz's reserves and resource volumes; certain commodity price and other cost assumptions; the continued availability of oilfield services; and the continued availability of adequate debt and equity financing and cash flow from operations to fund its planned expenditures.

Tenaz believes the material factors, expectations and assumptions reflected in the forward-looking information and statements are reasonable, but no assurance can be given that these factors, expectations, and assumptions will prove to be correct.

The forward-looking information and statements included in this press release are not guarantees of future performance and should not be unduly relied upon. Such information and statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information or statements including, without limitation: changes in commodity prices; changes in the demand for or supply of Tenaz's products; unanticipated operating results or production declines; changes in tax or environmental laws, royalty rates or other regulatory matters; changes in development plans of Tenaz or by third party operators of Tenaz's properties, increased debt levels or debt service requirements; inaccurate estimation of Tenaz's oil and gas reserve volumes; limited, unfavorable or a lack of access to capital markets; increased costs; a lack of adequate insurance coverage; the impact of competitors; a failure to obtain necessary approvals as proposed or at all and certain other risks detailed from time to time in Tenaz's public documents.

The forward-looking information and statements contained in this press release speak only as of the date of this press release, and Tenaz does not assume any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws.

SOURCE Tenaz Energy Corp.