Disclosure: The following represents my opinions only. I am long TNZ.
When I started writing this, I was going to talk about all kinds of stocks, but my overall tune hasn’t really changed since May, aside from the fact that I sold my Hercules Silver (BIG.V, last at $0.59) and Troilus Gold (TLG.TO, last at $0.39) in a “nothing personal, just needed funds for other things and they weren’t working” decision, but I still watch them closely. As a result, there’s no point in me rehashing everything… as I still think the same about things, but am maybe liking gold a little more and am wary of copper, but expecting it to “hold up” based on market fundamentals, especially if recent U.S. dollar weakness becomes a trend over the coming months.
But today, it’s allllll about Tenaz Energy (TNZ.TO, last at $5.74 — not a typo 😉) and I’d be remiss in not being part of the Friday morning chorus. Look, things are going to get interesting here. TNZ has made a significant acquisition in the Dutch North Sea (offshore) and the market loves it… and for good reason. Production just went from ~2,800 boepd to 13,800 boepd (up ~390%). Corporate 2P reserves just went from 14.6 million boe to 68.2 million boe (up ~370%). Proforma run rate free cash flow is ~$150 million annually — remember there are only about 27 million shares out here — so that’s more than $5 per share of run rate free cash flow (I’ll get into a little more detail on that below, where I talk about how all this gets paid for). This is the definition of transformational… and how many shares were issued? Zero. You read that right. Tony Marino and his team have pulled this off with zero equity dilution, due in part to their friends at National Bank who have provided a $100 million debt facility should Tenaz decide to draw on it for the balance of the $246 million purchase price when the deal closes in mid-2025. As a result, the per share leverage is nothing short of epic.
Now here’s the beautiful thing… Tenaz is using a beautiful deal structure where the NOBV acquisition has an effective date of January 1, 2024, but the closing date is in mid-2025. That means that the free cash flow that NOBV (the entity that is TNZ buying) is generating accumulates to TNZ’s account and will be transferred to the NOBV sellers (NAM, Exxon and Shell) on closing as payment for the assets, covering the majority of the price (~$200 million) of the deal. Significant hedges have been entered into for 46% of 2024 thru 2026 production at an average gas price of about $17/mcf. Mr. Marino and his team have not been idle while they’ve been quiet. This is a wonderfully structured deal and that’s why the stock responded the way that it did on Thursday, and why I think that’s likely to continue.