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.
The production being acquired is 99% gas, and this deal makes TNZ the second-largest operator in the Dutch North Sea. Most of the assets are operated, which is always nice — and has always been a stated corporate goal — as it will allow TNZ to employ best practices when it comes to field optimization, development, and exploration. There is a contingent earn-out consideration of a maximum of $180 million that will be paid from free cash flows after closing, but with the inventory and running room on these assets, that’s not going to be material in the eyes of the market — TNZ’s growth trajectory is undeniable now and its eventual re-rate into the double digits is highly likely in my opinion. Today was just day 1 of that re-rate… and it’s happening in a stock with a beautiful share structure and a sticky shareholder base that believes in what management is doing. Nothing happens overnight. People need to hear the story, Tony needs to talk about the deal, do interviews, present at conferences. Everywhere he goes, jaws will drop. This is a Masterclass in deal-making.
Price target upgrades are a certainty. If I was still an analyst, I’d be giddy to come in Friday morning and talk to the sales desk about this deal that TNZ just put together. It’s that good. To repeat, Tenaz is buying 11,000 boepd of production (99% gas) in the offshore Dutch North Sea, the majority of which is operated, with abundant low-hanging optimization/recompletion inventory, infill drilling inventory, and exploration prospect inventory, all covered by 3D seismic that is in the final stages of processing (think: “running room”). It comes with onshore infrastructure, pipeline interests, existing staff, everything. It’s the full meal deal — and they are doing it with zero equity dilution. This is what execution looks like and is exactly what you get when you have A+ management that knows how to engage with, negotiate with, and navigate deals with majors who are rationalizing their asset portfolios in foreign jurisdictions. You can read about the full details of the deal at your leisure. It has clearly taken some time to put this deal together and boy is it a doozy.
Forget about what you knew about TNZ’s asset base before this deal, because this is the definition of transformative. On a proforma corporate basis, after-tax 1P (proven) NPV10 is about $22.50 per share ($609 million) and after-tax 2P (proven plus probable) NPV10 is about $34/share ($930 million). Heck, PDP (proven developed producing) after-tax NPV10 is around $16/share (~$450 million). Those are also not typos… and they do not account for an exploration inventory of some 80 leads and prospects and an asset-wide 3D seismic survey that hasn’t even been processed yet.
For those who remember Valerua Energy’s (VLE.TO, last at $4.16) deal in December of 2022, this one is just as transformative… and have a look at how VLE performed after day 1 of its deal announcement. Translation: I think it’s still early days here. Remember that TNZ has just 27 million shares out, which is why the per share leverage is so impressive — even after Thursday’s 56% move in the stock, TNZ’s market cap is still just $155 million at its closing price of $5.74. That’s a $155 million market cap for a fully-funded ~14,000 boepd producer, with a ~10% base decline rate on the new assets. That’s barely over $10,000 per flowing boe… which is very, very, cheap. Like I said. This is like an IPO… forget what you knew on Wednesday about TNZ — except the fact that the company has an A+ board and management team with a corporate goal of growing to 50,000+ boepd through targeted, thoughtful, accretive acquisitions designed to increase reserves and cash flow per share… and I think they’ll do just that if given time.
Without a doubt, this deal shows the path that TNZ is on. Stepping back and looking at the forest for a minute, I’d wager that a 50,000 boepd producer would be worth $1.5-2 billion in the market some day in the future (you pick the share count, as your guess is as good as mine). Of course, I can’t tell you when that’ll happen, but TNZ just went from 3,000 boepd to 14,000 boepd in one deal so place your bets. What I will say though is that when you’re rolling a snowball, it starts small, but as it gains size, it grows even faster. I don’t think that’s an unreasonable expectation here, but time will tell. One thing I’ve learned here is that my patience with TNZ was/is well-deserved — and this deal only increases my resolve to see this team continue to execute on their business plan. M&A is a wonderful strategy when it is carried out in an arena where management has a distinct competitive advantage driven by their experience and expertise — with a laser-sharp focus on things like return on capital, return of capital, and value per share — and there’s nothing that precludes TNZ from doing additional M&A deals between now and closing.
There will be a lot more story to be written here when it comes to TNZ’s inevitable growth, but for today I think this note captures my first thoughts on this deal. The TNZ team has put together a beautiful deal here and it won’t be their last. Congrats to all shareholders and to the Tenaz management team/staff on a job well done. And, as always, thanks to all of those who take the time to read these notes and learn about the companies that I follow. It’s always more fun winning alongside of others who share your views, especially when the value creation is undeniable. This is what “alpha” investing is all about. Giddy up.
Happy Hunting.
******UPDATE (July 22, 2024)******
I had a chance to seek clarification on one of the deal aspects with respect to the contingent earn-out consideration and was pleasantly surprised. As the NOBV deal was structured so as to encourage investment, any capex that TNZ spends after closing through to 2027 goes towards offsetting the contingent earn-out liability in those years. In other words, for every dollar of capex that TNZ spends in those early years, they will offset a dollar that they would have to pay in contingent earn-out payments. The net effect is that TNZ gets to invest with 50-cent dollars after closing in 2025, and 50-cent dollars in 2026, and 75-cent dollars in 2027… and after 2027, 100% of the incremental cash flow derived from any investments in those prior years will be net to TNZ. It’s a beautiful thing. Most companies want to reinvest in their assets to grow value anyways. TNZ gets to do that while building incremental cash flows with 50-cent dollars. Great teams make great deals.