Tenaz Energy Q1 2024 Earnings Call Transcript

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May 7, 2024

There are 1 speakers on the call.

Operator

Hello. I'm Tony Marino, CEO of Tanaz Energy. Thank you for joining us for our Q1 twenty twenty four update. Please note on Slide two, our advisory on forward looking statements. So turning to Slide four, our operating and financial highlights.

Operator

Production volumes were approximately 2,900 boed in the first quarter. That's down modestly from Q4 'twenty three. The decline driven by natural declines in production in our Canadian older wells and the newer wells that we drilled in the second half of last year in Canada coming off their initial higher rates. Netherlands production was also down modestly, that driven by a combination of planned and unplanned downtime. We registered FFO, funds flow from operations, of $7,000,000 in the first quarter.

Operator

After deducting CapEx of $3,800,000 we had $3,200,000 of free cash flow. That FFO number, again down from what we recorded in Q4 with the aforementioned lower production level, we had a little bit lower benchmark prices. That was significantly offset by the hedging that we had done for TTF gas in The Netherlands. And the net of those factors, again, mainly lower FFO. We ended Q1 twenty twenty four with positive adjusted working capital or negative net debt of approximately $49,000,000 that's about the same level that we had at the end of the year.

Operator

And that includes the impact of our buyback program. The NCIB retired another 200,000 shares approximately at an average cost of $3.67 per share in Q1 twenty twenty four. We feel that that's been a very successful program, having hired a total now of 2,000,000 shares at an average cost of $2.77 since we began the NCIB program. And as I'll cover more in detail in just a minute, we executed a definitive agreement to acquire a gas processing plant and the surrounding oil and gas leasehold from a private company, the net cost to us $2,800,000 based on an effective date of 01/01/2024. So turning to the gas plant acquisition at Leduc Wood Bend covered on Slide six of the PowerPoint.

Operator

First, I'll talk about the deal terms. Again, after assigning oneeight of the purchase to our non operating partner in the Leduc Wood Bend field, we acquired seveneight, 87.5% of the surrounding leasehold and for Tanaaz one hundred percent of the gas plant known as the Wadelit Gas Plant. Net cost estimated at closing of $2,800,000 to us for these assets based on the effective date of 01/01/2024. If you look on the map on the right side of the slide, you can see our Leduc Wood Bend Field with our REX member leasehold shaded in gray. We have our REX horizontal wells shown in blue and then the acquired assets in the orange color with the gas plant just to the southwest of our field roughly 2.5 miles away from our southernmost wells.

Operator

A variety of pipelines that go with this to connect the leasehold wells to the plant and our existing Leduc Wood Bend REX wells to the plant and then a couple of other smaller batteries, which we label here as active batteries in the leasehold position. The transaction is subject to approval by the Alberta Energy Regulator. We expect to get that approval in Q2 twenty twenty four. The purpose of the acquisition is to control our processing destiny at Leduc Woodband. All of our produced gas from Leduc Woodband that we're solution gas that we're making while we ramp up oil production in that field goes through this plant.

Operator

We do pay a fee stream on the plant that we will now be paying to ourselves and we'll so there's a profit stream associated with it already. And we will have the opportunity now, the control of the plant to cut costs there, to increase the uptime, which we have a strong incentive to maintain it at the highest uptime possible because when the gas plant is down, so is our oil production. So there's a whole host of advantages just in our proprietary gas production that go with this plant. In addition, the plant does take in some third party volumes and I'll run through that in just a second when we talk about the capacity in the plant. And that's a part of the business that we believe can be quite profitable as well and we would seek to expand over time.

Operator

There are a variety of producers in the area with gas production that we think would like to send it through the plant. Some of them were shut in wells because they don't have adequate processing capacity. So in the bottom half of the slide, I want to focus in a little bit more on the capabilities and characteristics and the metrics of this set of assets. So the plant currently has a capacity of about 7,500,000 cubic feet a day. About three quarters of that gas plant capacity, today's capacity is currently being used with the flows through the plant.

Operator

And of that three quarters of $7,500,000 about 75% of what is flowing through is our proprietary gas from Leduc Woodband. The plant does have, we think, good capability to be expanded and you can think of this in a couple of different ways. First of all, there is equipment at the plant, idle compression, probably require a few other modifications to the process flow there. But with that idle equipment, we think we can if we put it back in service at fairly minimal cost, we can get the capacity of the plant up to about 12,000,000 cubic feet a day. Now today, we don't need that capacity, but we would be using more of it as we expand the oil production at Leduc Woodband with its associated solution gas.

Operator

And furthermore, we do have the concept of bringing in additional third party volumes, some of which are already shut in the area, some of which would allow more development by third party operators if they had a place to send the gas and sending that additional gas through Leduc Woodband for a profitable fee. Ultimately, the licensing of the plant, which is pretty important, allows it to have a capacity of 20,000,000 cubic feet a day. And it is licensed for sour service, we think, which is quite an advantage considering that the plant is in the area of Leduc Reef and there's a lot of sour production in the area. Our production from the Rex formation is all sweet production, no H2S in it, but a number of the other third party producers in the area do have sour gas and it's certainly an advantage in this area to be able to process that. As the plant stands today without expansion, a third party report by McDaniel using our reserve report showing the growth and the future growth in our Leduc Woodband Rex production shows a value for the plant and the associated leasehold of

Operator

So that includes the quite minimal production from the associated lands, which exist today and the plant with our current forecast under the reserve report of Leduc Woodband associated gas coming with the oil product that we're developing there. That number does not include any additional third party volumes and it doesn't include the value in the upstream and the leasehold acquired of any further development, any further drilling on those new yellow lands that are shown on the map. We do think that there are some interesting possibilities in the leasehold. There are several different ideas. We have REX, potentially glauconitic on a small pool, but particularly regarding the Ellerslie formation.

Operator

Now this is part of the Mannville Group that includes the Rex, Glock, Lloyd, the other horizons that we are producing from and are perspective for us in the area. Ellerslie is a good producer in the Mannville and a variety of places in Alberta. There's actually a pretty big original oil in place Ellerslie pool that is included in the acquired lands. It's at a fairly low recovery factor today all on primary development. And we do think that there is a target for horizontal drilling.

Operator

It's a permeable zone that would use multilateral wells without hydro fracturing. That is not included in the value that we see today, but it is a possibility for us to add to our development slate. I don't really want to commit to a certain timing on that. And it's going to require additional study before we do any drilling in the Ellerslie on these new lands. However, I guess in the fastest scenario, could even involve drilling an Ellerslie well in this year's program.

Operator

So we'll keep you posted on that. But we think we've got a great plant asset that is valuable in and of itself. It's got some upsides to it certainly in this area. And we think that we've got some potential value in the leasehold that comes along with the gas plant. Next, let's just briefly take a look at Slide eight and put Q1 twenty twenty four in the context of the TENAS record dating back to our recapitalization about two point five years ago.

Operator

So comparing to NASS today for 2024 to the time of the recap in Q4 twenty twenty one, we find that production is up about 3x. FFO actually is as of 2023 up about 8x from the time of the recapitalization. And even while that production and cash flow has been going up, we've had a substantial improvement in the balance sheet in our positive adjusted working capital balance, what we also refer to as negative net debt, standing at about roughly $49,000,000 at Q1 twenty twenty four, again up substantially from the time of the recap. At the same time that production and cash flow have been going up along with our adjusted working capital position, we have reduced the share count by 7% through the NCIB. Let's take a look at our activity that we have planned for 2024 and just review our guidance.

Operator

So during 2024, we're going to continue development at Leduc Woodband. That development could also include some activity on the new leasehold as we evaluate the various opportunities that we have, look at capital efficiencies and decide which new concepts we might want to bring in to allow even more inventory for future development. But we will be planning to drill in Canada in the second half of the year. This budget plan that we have is designed to maintain investment flexibility and continue to deliver free cash flow while we grow. We could go up or down in the size of the program depending on commodity prices and a variety of other factors, including our alternative investment opportunities, but that's what we have planned presently for activity.

Operator

Netherlands capital investment on the existing E and P hydrocarbon properties will continue in our non operated position that we have in offshore Netherlands gas. We will also continue with evaluation of The Netherlands CCS project where the operator of that project plans about $3,000,000 of capital investment that would be net to our account as they advance through the front end engineering design phase en route to a FID decision probably in the first half of twenty twenty five. The production volumes that we will be producing are hedged to a meaningful degree for the gas product. We have one fifth of our production hedged for TTF for Q2 and Q3 of this year at an equivalent Canadian price fixed price of $14.0057 per Mcf. In the winter twenty fourtwenty five, that would be Q4 twenty twenty four and Q1 twenty twenty five.

Operator

We have hedged 40% of our TTF exposure at quite strong prices, a swap price and a portion of it at about CAD 14 per Mcf and a collar between a floor of CAD 13.74 with a ceiling of CAD 17.49. All of these reflecting the very strong market that we have for natural gas in Europe. We have hedged also about a quarter of our winter AECO exposure, so that would be approximately Q4 twenty twenty four and Q1 twenty twenty five at a price of $3.28 per Mcf. A good price, we feel by Canadian standards that hedge is a little bit in the black right now, but you can see the big disparity between the price for natural gas that we get in Canada for our associated gas from Leduc Woodband as compared to the gas production that we have offshore Netherlands. And of course, something I'll touch on in closing, we're continuing our M and A efforts in our targeted regions of focus, primarily Europe, also Latin America and potentially MENA.

Operator

On the lower left, we show our production mix for 2024, about 43% Canadian oil and liquids, about 38% high value TTF gas in The Netherlands and the remaining 19%, the lower priced AECO gas production. 2024 guidance remains unchanged. Production of 2,700 to 2,900 boed, we produced just below the upper end of that guidance in Q1 twenty twenty four. That was before any drilling in Canada in 2024. And we maintain our current D and D CapEx or drilling and development CapEx guidance of CAD 23,000,000 to 25,000,000.

Operator

Finally, on Slide 11, I just want to reiterate our international strategy. We have made this what we think is a quite valuable but small acquisition of infrastructure and leasehold in Canada. But I want to be very clear that even though we try to add to the value of the Canadian asset, well, we can. We've got a great asset here in Canada and we'll make small deals around that existing field to further increase its value. But the main focus of the company remains making acquisitions in the international market, in the regions I mentioned, Europe, Latin America, MENA.

Operator

We go there because there is for these larger assets that we're talking about in the international arena, there's a lot less competition we feel than in Canada. They come off at higher rates of return that can be expressed as lower multiples on the initial acquisition and we find a greater opportunity in those assets for operational improvements than you'd find I think on similarly sized assets in North America. And the combination of those two things better value at entry and a great opportunity for international for operational improvement in the international assets gives you a higher rate of return on invested capital in this international M and A market compared to North America. And as always, we'll be emphasizing our leadership in ESG practices and I encourage you to look at our sustainability reports that are on our website. So with that, I will close and thank all of our listeners for your interest in FNAZ.

Operator

We will look forward to speaking to you again when we release our Q2 results this summer. Thank you.

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Key Takeaways

  • Q1 production and cash flow: Tanaz reported Q1 2024 production of approximately 2,900 boed, funds flow from operations of $7 million, free cash flow of $3.2 million, and ended the quarter with negative net debt of $49 million after NCIB share retirements.
  • Leduc Woodbend plant acquisition: The company agreed to acquire 87.5% of the leasehold and 100% ownership of the Wadelit Gas Plant for $2.8 million (effective 1/1/24), aiming to control processing destiny, reduce costs, and capture fee income from third-party volumes.
  • Plant capacity and growth upside: The Wadelit Plant currently processes 7.5 MMcf/d (75% utilized) and can be expanded to 12 MMcf/d at minimal cost (licensed to 20 MMcf/d, sour-service), offering value from rising proprietary gas flows and profitable third-party throughput.
  • Strong operational track record: Since the Q4 2021 recapitalization, Tanaz’s production has tripled, FFO is up 8×, adjusted working capital has improved to a $49 million net cash position, and share count is down 7% via the NCIB program.
  • 2024 guidance and strategic focus: The company maintains production guidance of 2,700–2,900 boed and CAD 23–25 million of D&D CapEx, with hedges in place for TTF and AECO gas, ongoing development in Canada and the Netherlands (including a CCS project), and a priority on higher-return international M&A in Europe, Latin America, and MENA.
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Earnings Conference Call
Tenaz Energy Q1 2024
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