Practical competition's usually very limited and that's key to making good returns in M&A: Tenaz CEO

Key Concepts

• Tanaz Energy: A Calgary-based company focused on acquiring and developing oil and gas assets in Canada and the Netherlands.
• Production Mix: Primarily natural gas (99%) from offshore Netherlands, with a small component of condensate.
• Asset Operations: Tanaz operates the majority of its assets, preferring control, but has acquired a non-operated interest in a new offshore Netherlands asset.
• Acquisition Methodology: A technically based methodology for asset evaluation, backed by independent reserve firm assessments, and consideration of practical competition and seller confidence.
• Environmental Liabilities: Decommissioning responsibilities are factored into evaluations and are managed through efficient execution, potential reuse (e.g., CCS), and extending asset producing lives.
• Financials: Market capitalization of approximately CAD 730 million, with a projected year-end debt level of CAD 360 million (proforma for recent acquisition), resulting in an Enterprise Value (EV) of around CAD 1.1 billion.
• Stock Performance: The stock has seen significant growth, up 82% year-to-date.

Tanaz Energy Third Quarter Earnings and Operations

Tanaz Energy, a Calgary-based company specializing in the acquisition and development of oil and gas assets in Canada and the Netherlands, recently reported its third-quarter earnings. The company's stock has experienced a notable climb, even amidst weak oil prices.

Production and Geographic Focus

• Dominant Production Source: The vast majority of Tanaz Energy's production, approximately 85%, originates from its offshore assets in the Netherlands.
• Canadian Assets: While Tanaz possesses a Canadian asset, it is relatively small in comparison to its international holdings.
• Growth Strategy: Future growth is anticipated to be driven primarily by international ventures, particularly in the Netherlands and potentially other global locations.
• Commodity Focus: The production in the Netherlands is overwhelmingly natural gas, accounting for 99% of the output. This natural gas is TTF priced, currently around 15 Canadian dollars per MMBTU. A minor portion of the production includes condensate.

Asset Operations and Acquisition Strategy

• Operational Preference: Tanaz Energy generally prefers to operate its assets, as this provides greater control over operations. All of its Canadian assets and the majority of its Dutch assets are operated by the company.
• Recent Acquisition: In early October, Tanaz announced the acquisition of a non-operated interest in a new offshore asset located at the Netherlands-Germany maritime border.
  • Asset Quality: This new asset is described as having a high-quality production base, with numerous discovered fields ready for development and promising exploration prospects.
  • Operator Confidence: Tanaz is comfortable with this non-operated acquisition because the operator, Juan Dios, shares a similar operational philosophy, instilling confidence in their ability to develop these fields effectively.
• Acquisition Value and Competition:
  • Methodology: Tanaz employs a rigorous, technically based methodology for evaluating potential asset acquisitions. This involves projecting the performance of every well and project internally.
  • Independent Verification: These internal projections are corroborated by an independent evaluation from their reserve firm, McDaniel and Associates, providing two qualified assessments.
  • Risk Mitigation: The company aims to mitigate controllable risks through this thorough evaluation process, acknowledging that price risk remains.
  • Limited Practical Competition: In international markets, Tanaz often faces limited practical or qualified competitors. This can be due to competitors lacking financing, operational experience, or sustainability credentials, which makes large company sellers hesitant to divest assets to them. This limited competition is a key factor in achieving good M&A returns.
  • Seller Confidence: In some instances, Tanaz may not be the highest bidder. However, sellers may opt for Tanaz due to the company's qualifications, its demonstrated ability to close deals, and its capacity to secure necessary government approvals. This confidence from sellers is crucial, even when other bids are higher.

Environmental Liabilities and Decommissioning

• Inclusion in Evaluations: Environmental liabilities, specifically decommissioning responsibilities at the end of an asset's life, are factored into Tanaz's asset valuations and influence the price they are willing to pay and how transactions are structured.
• Commitment to Responsibility: Tanaz is committed to taking responsibility for all decommissioning obligations associated with its assets.
• Reputation and Capability: The company's capability and reputation for managing these responsibilities are highlighted as key factors in securing deals.
• Strategies for Decommissioning:
  • Asset Reuse: Tanaz actively seeks opportunities to reuse existing platforms, with Carbon Capture and Storage (CCS) being a potential application.
  • Extending Producing Lives: A significant strategy is to extend the producing lives of offshore assets. This approach generates substantially more cash flow and net present value from the assets.
  • Discounted Liability: Extending the asset life also reduces the net present value of the decommissioning responsibility by deferring it further into the future.
  • Efficiency and Creativity: Tanaz aims to manage decommissioning costs through economies of scale and creative solutions.
• Discharging Liabilities: The company unequivocally intends to fully discharge all abandonment and decommissioning liabilities. This commitment is integral to their business model.

Financial Performance and Outlook

• Stock Performance: Tanaz Energy's stock has performed exceptionally well, with an 82% increase year-to-date, indicating shareholder satisfaction.
• Market Capitalization: The company's market capitalization is approximately 730 million Canadian dollars.
• Debt Levels: Proforma for the recent acquisition of new assets in the Netherlands, Tanaz's projected debt level at year-end is 360 million Canadian dollars.
• Enterprise Value (EV): Based on the quoted market cap and projected debt, the company's Enterprise Value is estimated to be around 1.1 billion Canadian dollars.

Notable Quote:

Tony Marino, President and CEO of Tanaz Energy, stated, "We do have a a very set uh tried andrue technically based methodology for evaluating the assets that we're looking to buy." He also emphasized, "Our assessment of the value of the properties and uh the price we would pay and how we would structure the u uh the transaction. Uh all of the assets do have uh decommissioning uh responsibilities that go with them."

Conclusion

Tanaz Energy is demonstrating strong performance driven by its strategic focus on offshore natural gas production in the Netherlands. The company's disciplined approach to asset acquisition, characterized by thorough technical evaluation and a preference for operational control, coupled with a proactive strategy for managing environmental liabilities, positions it for continued success. The recent stock performance and projected financial metrics suggest a positive outlook for the company.