Updates on Tenaz Energy
"The big money is not in the buying and the selling but in the waiting" - Charlie Munger
Today’s article is a quick update on Tenaz Energy, a Canadian oil and gas company I wrote about in July 2024 after its transformative acquisition. I attempt to explain why the company remains attractive despite a rising stock price. Please click below if you would like a refresher on the investment thesis.
Before I move on, this is a friendly reminder to do your own research as this is not investment advice.
What Happened Since The Last Article?
NOBV acquisition approved by the Dutch government
Dutch TTF (European natural gas price benchmark for NOBV’s natural gas) increased from around EUR32/MWh to EUR47/MWh, driven by lower EU natural gas storage levels, increased geopolitical tensions, colder weather, and slower wind speeds (resulting in less electricity generation from wind energy)
Management identified more organic reinvestment opportunities at the NOBV asset
Long-term bond issuance, replacing the delayed-draw term loan
Here are my thoughts:
Dutch government approval: shows no regulatory risk for this deal, which was minimal in the first place given the government encourages domestic gas production to enhance energy security, despite the perception that all EU countries oppose fossil fuel at all costs. The Shell and Exxon JV have not invested much in NOBV for years, incentivizing the government to give Tenaz the green light to take over the asset and produce more
Dutch TTF prices: I don’t claim the ability to predict natural gas prices. Therefore, I preface my comments by saying I do not know what prices will do in the future. In the meantime, high natural gas prices are clearly beneficial to Tenaz as a natural gas seller. Remember the acquisition is partially funded by NOBV’s FCF. The more FCF NOBV generates between the effective date (January 1, 2024) and the closing date (expected July 2025), the less debt Tenaz needs to borrow to fund the remaining unpaid acquisition consideration. Current spot TTF prices are above Tenaz’s EUR39/MWh hedges. They hedged 46% of production from 2024-2026, meaning substantial remaining unhedged production benefits from these robust prices. I am curious to see what will happen next
Reinvestment opportunities: Tenaz said the NOBV asset has more reinvestment opportunities than they originally expected, partly driven by current natural gas price levels making more projects economical. This could mean the 30 development locations and 80 exploration prospects that they identified are understated. Let’s see if the year-end reserve report provides any clues regarding reserve quantity and valuation
Long-term bond issuance: this to me is the biggest pleasant surprise so far. Tenaz previously arranged a CAD90m delayed-draw term loan facility from the National Bank of Canada “with secured lending arrangements” to fund the unpaid acquisition consideration at closing. This implies the term loan would have been secured against the NOBV assets in the event of default (if Tenaz defaults on the loan, the company hands over the NOBV asset to the bank). Instead, Tenaz announced an unsecured bond (no security against NOBV assets) private placement sold to various institutional investors which closed on November 14, 2024. Here are the details:
Size: CAD140m
Maturity date: due 2029
Issue price: par
Interest rate: 12%
Non-callable for 2.5 years, Tenaz cannot repay the bond before the maturity date for a minimum of 2.5 years without penalties
Use of proceeds: funding to close NOBV acquisition, liquidity to further pursue international M&A strategy
Here are some reasons why the bond offering is interesting:
Size: upsized to CAD140m from the CAD90m delayed-draw term loan (the CAD20m revolver is still in place) despite strong natural gas prices. If they are borrowing solely for closing the NOBV acquisition, they should borrow less and not more since strong natural gas prices = higher FCF = more of the acquisition price can be paid from the NOBV asset = less debt needed for closing
Interest rate: during the earnings call, Tenaz CEO Mr. Marino said the all-in cost of the bond issuance is lower than the delayed-draw term loan, despite 1. having a much later maturity date, 2. being unsecured rather than secured, and 3. borrowing more than initially planned. This demonstrates their financial skills in negotiating better lending terms and could serve shareholders well for future deals. My only slight concern is the 12% interest rate which is still quite high and could be costly if they don’t have good use of the cash for a long time. On the positive side, this can also mean something is just around the corner because otherwise why would Tenaz want to borrow CAD50m more at 12% with no use of the money
Use of proceeds: this explains why they need to borrow more and not less. Unlike the delayed-draw term loan, not the entire facility is used to fund the NOBV closing. The more additional liquidity they have, the better their reputation as an M&A counterparty and the greater their ability to fund the next acquisition
Risk Factors
Although the developments so far have been positive and the stock price responded accordingly, I will keep an eye out to see if the Tenaz team can manage the NOBV asset well post-closing, if/when the next acquisition happens, and whether the deal is accretive. Given their track record so far, I am very comfortable keeping Tenaz as a concentrated top holding with over 50% portfolio allocation. I hope I do not have to sell anytime soon
Patience, Looking at Investments from a Fresh Angle
The reason why I included Munger’s quote at the beginning of the article is that it is often tempting to take quick profits once an investment generates decent returns, especially for stocks that comprise a large portion of the portfolio. However, it is important to remind ourselves to stay the course. If the company continues to perform well and the valuation is not out of line, we should not interrupt the compounding process unnecessarily. In my opinion, selling a stock should only be done if the original thesis doesn’t play out, the valuation is too high, or there are better investment opportunities. Selling a stock in anticipation of a price decline and buying it back at a lower price is easier said than done
Another lesson is that just because a stock has gone up a lot within a short time frame does not mean it is overvalued (TNZ stock went up 80% in a week before I invested post-deal announcement). The same can also be said for falling stocks (a stock that dropped 80% in a week does not mean it is undervalued). It is not a good idea to be instructed by stock prices. Instead, compare the current stock price to a conservative estimate of the value of the business and make investment decisions accordingly
I was not the first person who discovered Tenaz but because I looked at Tenaz from a fresh angle (at $7, is it worth buying given the NOBV acquisition? As opposed to since it has gone up to $7 very quickly, I must have missed out). The stock was cheap to me and I was able to buy aggressively from willing sellers, whatever their reasons to sell. I should continue to look at Tenaz (or any other stocks) using the same mindset. Constantly reevaluating current holdings with an objective, unemotional perspective is a must for long-term investment success
Closing thoughts
I have recently been investing in nuclear-related companies because energy seems to become less of a commodity. Big Tech companies building out AI data centers are paying a significant price premium for 24/7, carbon-free, and cheap electricity and nuclear seems to be the only choice. Talen Energy is one of my holdings along with the newly added Vistra Energy at $128 per share. I also have a starter position in Velan Inc. which makes valves for nuclear power plants and have presence in a majority of the world’s nuclear power plants
Thank you for reading!
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Tenaz has run up a lot in the last 3 months. Don't think that 20 will happen soon