Tenaz Energy Corp. ("Tenaz", "our", "we", or the "Company") has entered into an agreement with Nederlandse Aardolie Maatschappij B.V. ("NAM"), a 50/50 joint venture between Shell PLC and ExxonMobil Corporation, to acquire all of the issued and outstanding shares of NAM Offshore B.V. ("NOBV", or the "Acquisition") for base consideration of €165 million ($246 million), prior to closing adjustments and contingent payments. The transaction has an effective date of January 1, 2024 (the "Effective Date") and is expected to close mid-2025 following statutory merger clearances and operational transition activities.
NOBV is expected to produce nearly 11,000 boe/d1 (99% TTF2 natural gas) and generate approximately €90 million ($134 million) of free cash flow based on current strip prices in 2024. NOBV's cash flow profile is underpinned by a combination of physical fixed-price and collar hedges for 2024 through 2026.
Closing of the Acquisition will be funded through a combination of interim free cash flow between the Effective Date and closing, a €23 million ($34 million) deposit paid to NAM, cash on hand, and available capacity under a new credit and delayed draw term loan facility with National Bank of Canada ("NBC"). Our current estimate of required cash-to-close is approximately €30 million ($45 million) assuming a mid-year closing date.
Transaction Attributes
Delivers on M&A Strategy: We acquire a high margin, low-decline asset base with high-capacity infrastructure, low risk development opportunities and future exploration upside. The Acquisition's financing structure avoids dilution and maximizes value for existing shareholders.
Transformational Scale: On a pro forma basis3, the transaction adds approximately 11,000 boe/d1 (99% gas) of production and 53.6 million boe of Total Proved + Probable ("2P") reserves. The Acquisition results in a 3.9x increase in corporate production, a 3.7x increase in 2P reserves, and 6.2x increase in 2P reserve value.
Significant North Sea Operating Position: Upon closing, Tenaz will become the second largest operator in the Dutch North Sea ("DNS"). NOBV production accounts for approximately 20% of gas production in the DNS and is 87% operated by NOBV.
Robust Free Funds Flow Profile: The acquired assets are expected to generate over €90 million of free cash flow in 2024. Cash flows are significantly protected by fixed price hedging contracts on 46% of production from 2024 through 2026 at an average fixed price of €38.79/MWh ($16.94/MMbtu). The cash flow profile creates significant go-forward capital allocation flexibility with respect to return of capital, low-risk development opportunities, and high-impact exploration prospects.
Appropriate Transaction Structure and Financing: The combination of high interim period cash flow and contingent payment structure drives down cash consideration at close and reduces risk to Tenaz. The transaction structure aligns potential contingent payments with realization of further value for Tenaz shareholders. Tenaz expects to fund the cash purchase price from existing liquidity and new non-dilutive capital to maximize value for existing shareholders. The Acquisition is expected to generate significant accretion in all key metrics, including production, reserves, cash flow, free cash flow and net asset value per share.
1 The term barrels of oil equivalent ("boe") may be misleading, particularly if used in isolation. Per boe amounts have been calculated by using the conversion ratio of six thousand cubic feet (6 Mcf) of natural gas to one barrel (1 bbl) of crude oil. The boe conversion ratio of 6 Mcf to 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalent of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.
2 TTF refers to Dutch Title Transfer Facility.
3 Pro forma production is calculated using the mid-point of guidance for Tenaz's existing business plus the 2024 production from the McDaniel & Associates Independent Reserve Report as at January 1, 2024 effective date.
Anthony Marino, President & CEO of Tenaz, stated "This acquisition is an important step in our strategy of securing value-enhancing acquisitions that have substantial organic investment opportunities. We welcome NOBV's workforce of highly skilled and experienced professionals who will be critical to the continued success of Tenaz. We are delighted to invest in the revitalization and sustainability of the Netherlands energy industry, and we look forward to establishing our Dutch headquarters near the existing NOBV office in the Netherlands."
Overview of the Acquisition
The acquired assets include substantially all of NAM's offshore exploration and production business, including associated pipeline infrastructure and onshore processing in the Netherlands. The Acquisition does not include NAM's assets in the Ameland area.
Upstream
The upstream assets consist of a portfolio of production and exploration licenses in the DNS comprising 2,415 net square kilometers (approximately 600,000 net acres). The licenses are located in shallow water at an average water depth of 34 meters, approximately 60 km offshore.
Current production is approximately 11,000 boe/d (99% gas and 87% operated) from six hubs and two main production areas, the Joint Development Area ("JDA") and the L02/L09 fields. Production is predominantly from the Permian-aged Rotliegend Sandstone at an average depth of 3,500 meters. Base production decline rate is approximately 10%.
In addition to existing low-decline production, the acquired asset base is replete with identified workover and optimization projects, infill drilling opportunities and exploration prospects. Capital reinvestment into the assets has been at a low level for more than a decade. As examples of limited reinvestment, only 0.5 net wells have been drilled on NOBV license interests over the past five years, and no capital investment is planned for 2024.
As a result of this historic undercapitalization of the asset base, Tenaz believes there is significant opportunity for reinvestment. Our evaluation of NOBV has determined that there are several years of workover and optimization projects, at least thirty potential development drilling locations, and more than eighty exploration leads and prospects on this extensive offshore license base. Exploration and development potential is enhanced by the presence of 3D seismic surveys over substantially all of the asset base, including a high-effort Ocean Bottom Node survey acquired on the JDA in 2022 which is still undergoing processing.
Upon closing, Tenaz plans to initiate a high-return workover program on the existing well stock. Over time, we intend to phase-in a development drilling program, and also expect to drill the most prospective of the identified exploration prospects. Tenaz expects that this capital plan will offset base production decline and generate moderate production growth. High-integrity infrastructure is largely already in place to accommodate this growth. In the current commodity environment, our capital and production plan should also generate significant free cash flow.
Midstream
Gas produced from the JDA and L02/L09 areas is transported to and processed at the Den Helder Gas Plant ("Den Helder"). Den Helder processes roughly 50% of all gas produced in the DNS, which is then delivered into the national gas grid, while condensate is transported to customers via inland vessels.
JDA high calorific content ("HiCal") gas is transported via the West Gas Transport ("WGT") system, and low calorific content ("LoCal") gas is transferred via the LoCal pipeline. The L02/L09 area production is transported via the Northern Offshore Gas Transport ("NOGAT") pipeline with some of the non-operated assets produced through the Noordgastransport ("NGT") system. At close, Tenaz will become the operator of all three gas processing trains at Den Helder as well as the LoCal pipeline feeding into it.
Tenaz's ownership in the midstream assets will be 45.6% in the JDA LoCal system as well as 31.1% and 23.0% in the K13 and K13 Extension portions of the WGT HiCal system respectively. Tenaz will also become contract operator of the NOGAT portion of Den Helder, but will not have an ownership position in or operate the pipeline feeding it. Tenaz will not be acquiring additional interest in the NGT system as a result of the Acquisition, maintaining its current 21.3% equity interest in NGT.
Consideration
Consideration consists of a base payment at closing and three forms of potential contingent payments triggered by future financial performance, exploration discoveries and realized gas pricing:
Base Purchase Price - Base consideration of €165 million ($246 million) payable at close will be reduced by the interim free cash flows generated from the Effective Date to closing of the Acquisition, estimated to be €125 million ($186 million) assuming a July 1, 2025 closing date and reflecting existing hedge positions and current commodity strip prices for unhedged production. Cash-to-close will further be offset by the €23 million ($34 million) deposit provided to NAM at signing. Our current estimate of required cash-to-close is approximately €30 million ($45 million). Cash-to-close may differ from this estimate due to variations in a number of factors during the interim period, including, but not limited to, realized gas prices on unhedged volumes, production levels, costs, working capital balances, and other closing adjustments under the Acquisition agreement.
Contingent Earn-Out – For the period from January 1, 2025 through December 31, 2027, NAM will be entitled to contingent payments equal to i) 50% of 2025 free cash flow from the NOBV assets ("NOBV FCF"), ii) 50% of 2026 NOBV FCF, and iii) 25% of 2027 NOBV FCF, up to a maximum of €120 million in aggregate payments. If the aggregate earn-out payments do not reach €120 million, no further payments related to the earn-out are required.
Exploration Volume Contingent Consideration - In the event that a future new field exploration discovery on the current NOBV licenses exceeds certain cumulative production thresholds, NAM is entitled to receive volume contingent royalty payments.
Price Contingent Consideration – If the average realized TTF price for a given calendar year between January 1, 2028 and December 31, 2031 exceeds €50/MWh, NAM is entitled to receive a gas price contingent payment based on incremental after-tax cash flow.
Price contingent payments will be calculated based on actual realized prices whereby volumes sold under the fixed price offtake arrangements, detailed below, are included at the fixed offtake price. Tenaz may hedge future volumes throughout the contingent payment periods, with such hedges to be included in the realized price calculation. Price contingent payments do not apply to large exploration discoveries that are subject to contingent royalties.
Gas Offtake Arrangements
NOBV is a counterparty to physical commodity offtake and sales arrangements, including the hedging provisions.
Acquisition Funding
Tenaz has entered into a new lending relationship with NBC to replace and upsize its existing $10 million revolving credit facility and add $100 million of debt capacity under a new delayed draw term loan, which can be drawn to fund the closing of the Acquisition. If drawn, the term loan will be repayable within twelve months of draw down. Both financing arrangements are subject to customary conditions associated with secured lending arrangements. In time, Tenaz intends to replace the delayed draw term loan with other debt financing sources aligned with its long-term target capital structure.
Reserves Volumes and Net Present Value
McDaniel and Associates ("McDaniel") has completed an independent assessment of the reserves associated with the assets and have assigned 53.6 million boe (99% natural gas) of Total Proved + Probable "2P" reserves as at January 1, 2024. McDaniel's Total Proved ("1P") and 2P reserves assessments respectively include 1.7 and 3.6 net development wells with risked production profiles, and no exploration wells. McDaniel's evaluation projects that the existing upstream assets will have a remaining economic production life of 22 years.
McDaniel's assessment of 2P reserves and after-tax net present value discounted at 10 percent ("NPV10") of the 2P reserves using the July 1, 2024 Consultant Average Price Forecast4, after taking into account estimated decommissioning costs, are shown in the table below. The after-tax NPV10 includes decommissioning costs associated with the acquired assets, which are estimated to have a NPV10 of approximately €144 million ($216 million).
Advisor
National Bank Financial Inc. acted as exclusive financial advisor to Tenaz with respect to the Acquisition.
4 Consultant Average Pricing assumed TTF gas pricing of €31.85/MWh for 2024, €34.72/MWh for 2025, and €34.08/MWh for 2026.