Disclosure: The following represents my opinions only. I am long TNZ. (image credit to David Clode on Unsplash)
On the back of an impressive move higher in Tenaz Energy (TNZ.TO, last at $13.06), I feel like I’d be remiss in not making some kind of comment about the fact that, last Thursday night, the company announced that it has arranged an offering of $140 million of senior unsecured notes (funded by institutional investors) that is scheduled to close later this week. Longs like me are cheering the move, as it serves to reinforce the M&A narrative — namely the fact that it’s unlikely that TNZ management is taking on $140 million in 12% notes unless they think they have a use of proceeds (i.e., another acquisition) lined up in the relatively near term. Also consider that these notes are unsecured, and serve to replace the $90 million NBF delayed-draw term loan that was to be used for the closing of the acquisition of the NAM/NOBV assets in the Dutch North Sea. Technically, this still leaves the door open to a new secured credit facility — you know, like the one a bank might offer a company like TNZ in conjunction with a new acquisition.
Wishful thinking? Only sort of… I mean, everyone knows that the plan here is to grow through targeted, thoughtful, accretive acquisitions, right? Hence why the stock was up some 15% on Friday, obliterating all analyst price targets in the process. What’s the right multiple for a company with 27.3 million shares out that could announce another accretive deal just about any time? How do you even handicap that? Should it trade at PDP NAV? 1P NAV? 2P NAV? Some kind of average industry multiple on an EV/CF basis? A premium multiple? You tell me. Why a company with that set up would trade at a discount has always mystified me though, so, to me, I saw Friday’s move as a “Finally, the market is starting to get it” moment. Yay.
Look, I had a conversation within the last two weeks with a well-known industry expert who just couldn’t process how it was that TNZ was acquiring assets with definable, real, and tangible value under the terms that they were acquiring them from larger companies. The guy just couldn’t grasp the concept of the fact that majors/supermajors in the energy sector have non-core assets that they are looking to divest of into a very shallow pool of qualified and capable buyers with strong financial backing. But think about it for a minute. If you are one of these larger companies and you want to sell assets, you can’t just sell them to anyone. The buyer needs to have demonstrable experience and expertise in not only engaging with these large companies, but also in operating, managing, understanding, and integrating the assets and staff associated with these transactions… not to mention the job of identifying opportunities for upside (i.e,. additional value creation) in the assets through optimization and further development.
There is a veritable laundry list of core competencies that are required here, and with the industry largely focused on drilling resource plays in North America for the last 15 years, the teams capable of engaging in this activity in the international arena are becoming more rare by the year simply due to the direction that the industry has been heading. None of this changes the fact that these non-core assets still exist and need valid homes as asset portfolios are inevitably rationalized. Some might call these deals “table scraps” from the majors/supermajors and they’d be right in doing so. Everyone knows the saying, “One man’s trash is another man’s treasure”. It applies in both business and the natural world — and while it might seem that business and the natural world would have little in common, I’d argue that they both encourage the evolution of new forms of life/business due to changing conditions in their environments.
It is a well-known fact that this asset rationalization by majors/supermajors is happening out there. It is also a well-known fact that you can’t just sell assets to anyone… otherwise companies would constantly be dumping non-core operations into the hands of fly-by-night companies that had little or no ability to operate/steward the assets through to the end of their lives (note: it would be a sh*t show and would come back to bite the sellers in their a**es). In evolution, this would be called a niche. Any organism that can adapt to and exploit this niche (i.e., eating table scraps from the majors) is well-positioned for success. Why doesn’t everyone do it you ask? Well, why doesn’t everyone play in the NHL? Or in the NBA? Or why don’t dentists perform open heart surgery? Different skill sets folks. Different experience sets. The kinds of skills and experience that can take decades to accumulate and master. Relationships that take careers to build. And all of it executed by teams that can come together, under a coherent and cohesive vision, in order to execute this kind of M&A strategy for the benefit of shareholders; not in the name of doing deals for the sake of doing deals.
All of this is a long-winded way to say that TNZ has a distinct competitive advantage as it executes its acquire-optimize-exploit business model for the benefit of its shareholders. Management alignment is a beautiful thing — and the tight share structure on TNZ offers significant upside to shareholders when accretive deals are captured. Is TNZ about to snag another deal? Well, last week’s debt issuance and the subsequent market reaction would seem to suggest that’s the case… and the business plan, by definition, virtually guarantees that’s the case. It’s just a matter of “when” not “if”… and when I think about that, it certainly doesn’t put me in any kind of hurry to do anything other that sit back and watch this play out. $140 million is no small chunk of change folks, and it is a massive vote of confidence for longs who believe in the TNZ team and their business plan.
I’ll end this note with a link to a short analogy struck by none other than Warren Buffett. I invoke his example here because of the fact that the confluence of factors seen in Tenaz — the people, the competencies, the business environment, the share structure, the shareholders, the vision, and the culture — is a rare thing to behold. In Buffett’s analogy, TNZ is a punch in my punchcard… and with this unsecured note issue there’s clearly a lot more story to be written as TNZ drives towards “intermediate/mid-cap” status. Will it be sooner than later? That’s arguably not important, but in any case, I guess we’ll see…
Happy hunting.
See Buffett’s “punch card” comments here: https://youtu.be/j2em__lppHk
And, for those who haven’t seen it, here’s a link to an interview with TNZ CEO Tony Marino on Friday afternoon: https://www.bnnbloomberg.ca/video/shows/the-close/2024/11/08/what-tenaz-energys-140m-note-offering-could-mean-for-its-future-mas/