Company Spotlights / Market Commentary

Tenaz Energy: The Small-Cap Energy Titan

  • Declan O’Flaherty

    Declan holds a Bachelor of Commerce from the University of Alberta and has over 4 years of experience investing in financial markets. As a fundamental investor, Declan embraces the investment principles of Warren Buffett and his disciples. This puts a focus on finding businesses with healthy financials, competent and accountable leader, enduring competitive advantages, and those that are selling at discount to what they are worth.

    View all posts

Tenaz Energy (TNZ.TO) is not your typical small-cap oil and gas company.

When we first discovered it last year, it was clear that Tenaz possessed qualities well beyond its years.

For one, the business was producing millions of dollars in free cash flow at a $50 million market cap.

Second, Tenaz was debt free and had a proven track record for acquiring high-quality assets.

Third, Tenaz Energy’s executive team owned more than 20% of the company.

While we could never predict how the stock would perform, it seemed like a no-brainer that it would do well given that the business was fundamentally sound and on the right track to long-term success.

Much to our surprise, Tenaz shares rocketed over 96.69% this past year, proving its potential much quicker than we expected.

Now, one question remains…

Has Tenaz reached its full potential, or is there more room to grow?

Prepare to be amazed by one of the most impressive small-cap stocks we have ever discovered to date.

The Curious Case of Tenaz Energy

It’s been quite some time since we last discussed Tenaz Energy so here is a quick reintroduction.

Tenaz Energy is an explorer, acquirer, and developer of international oil and gas assets.

The company currently operates in Canada and the Netherlands but is seeking opportunities in Europe, South America, the Middle East, and North Africa, as well.

Tenaz uses a “wide funnel” geographic approach that enables its team to uncover hidden gems in less competitive markets, resulting in higher returns on capital from cash-flow-producing assets.

So far, this has resulted in the acquisition of the Leduc-Woodbend project in central Alberta, Canada, and a series of offshore assets in the Netherlands, including a 21.43% ownership in Noordgastransport, one of the largest gas gathering and processing networks in the Dutch North Sea.

Combined, these projects produced an average of 2,337 boe/d and achieved net profits of $2.9 million in the first quarter of 2023, representing a whopping 54% and 288% quarterly jump, respectively.

Talk about a quality compounder!

The Tenacious Tenaz Team

Tenaz Team Global Experience--Regions of Focus (Dark Blue), Additional Experience (Light Blue) | Tenaz Energy
Tenaz Team Global Experience–Regions of Focus (Dark Blue), Additional Experience (Light Blue) | Tenaz Energy

When we evaluate a potential investment, one of the key factors we look for is a management team that closely aligns its interests with shareholders.

To do so, we seek out managers that own large stakes in the business, focus on business productivity over share appreciation, and possess uncommon capital allocation skills.

All of these characteristics are fundamental to the long-term success of a business, demonstrating that the management team is in it for the long haul and not just a quick buck.

When it comes to Tenaz Energy, it is clear that its management team possesses these qualities, and more, making it an exceptional investment option in the small-cap energy market.

Adjusted Working Capital & Unused Bank Line | Tenaz Energy Q1 2023
Adjusted Working Capital & Unused Bank Line | Tenaz Energy Q1 2023

To begin, Tenaz operates with an incredible edge—zero debt on its balance sheet.

This financial structure speaks volumes about the business as it demonstrates the company’s ability to sustain itself without the need for external capital.

Moreover, Tenaz cannot go bankrupt since it does not owe anything to anyone.

Sure, there are instances where leverage can help accelerate a company’s growth, but it can also lead to the quick death of a business if the management team fails to foresee a shift in the economy.

Therefore, if one can avoid using debt, it is a vote of confidence in both the short and long-term prospects of the business.

To put this in perspective, take this quote from Warren Buffett who outlines how debt can influence both investors’ and management’s behavior…

“There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.”
Market Capitalization | Tenaz Energy Q1 2023
Market Capitalization | Tenaz Energy Q1 2023

Want one more reason to believe in Tenaz’s management team?

It’s the fact that they own 21.9% of the company’s fully diluted shares.

This significant stake in the business shows their alignment with us, the shareholders, given that their net worth is directly tied to the company’s success.

For example, if they lead selflessly, behave intelligently, and invest effectively, then over the long run, the team, and its shareholders will benefit greatly from the organic growth of the business.

However, if they spend recklessly, overpromise and underdeliver, and lack integrity, then the business will struggle and eventually harm both their and shareholders’ returns.

In other words, a management team whose reputation and wealth are closely linked to the success of a business is one that will act in the best interests of all its stakeholders no matter the circumstances.

With Tenaz, that is precisely the case.

There is no doubt that its managers are in it for the right reasons and are committed to the long-term success of the company, making it easier for you to trust them with your hard-earned money.

Tenaz’s Money-Making Machine

Production and Funds Flow from Operations | Tenaz Energy Q1 2023
Production and Funds Flow from Operations | Tenaz Energy Q1 2023

Undeniably, Tenaz’s growth-and-income business model stands as a paramount factor, if not the primary force, driving its success.

The company’s astute investments in undervalued yet high-quality international assets exemplify a strategy that not only maximizes project potential but also safeguards capital and mitigates excessive risk.

The result? A fully automated cash flow-producing machine that ensures sustainable growth for many years ahead.

Presently, Tenaz owns an 87.5% working interest in the esteemed Leduc-Woodbend project in central Alberta, Canada, in addition to multiple offshore non-operated gas fields in the Dutch North Sea and five non-producing licenses in the Netherlands.

What’s more, the company recently acquired XTO Netherlands, an ExxonMobil subsidiary, entailing a valuable 21.43% stake in Noordgastransport, a considerable increase in working capital amounting to $46.5 million, and substantial 2P reserves totaling 0.7 million boe.

Year-End 2022 Reserves | Tenaz Energy Q1 2023
Year-End 2022 Reserves | Tenaz Energy Q1 2023

These commendable assets combine to produce an impressive total proven and probable oil & gas reserve of 13.6 million boe, carrying an after-tax net present value of $141.1 million.

Plus, with a staggering threefold increase in production and a projected nine-fold rise in FFO, Tenaz undoubtedly proves the efficacy of its international acquisition strategy, promising an even brighter future.

In all, the productivity of Tenaz’s management team and its assets leaves an indelible impression that is hard to overlook.

Final Thoughts

While Tenaz has grown its market cap significantly since our last discussion, you can be confident that the business is more productive than ever and still has a long runway ahead

Through a carefully curated business model and a strongly aligned management team, Tenaz Energy offers investors huge upside potential as long as they maintain their current growth path.

As investors, pay attention to how Tenaz’s leaders respond to the current market conditions as well as any future developments.

Ultimately, you want to be certain that a company of this size operates in the best interest of shareholders and never sacrifices its business principles for short-term gains.

Fortunately, with Tenaz, it appears that the current management team is determined to build an enduring business that compounds capital for many years to come.

We look forward to checking back a year from now to see what strides this fascinating small-cap company has made.

 

Disclosure/Disclaimer:

We are not brokers, investment or financial advisers, and you should not rely on the information herein as investment advice. If you are seeking personalized investment advice, please contact a qualified and registered broker, investment adviser or financial adviser. You should not make any investment decisions based on our communications. Our stock profiles are intended to highlight certain companies for YOUR further investigation; they are NOT recommendations. The securities issued by the companies we profile should be considered high risk and, if you do invest, you may lose your entire investment. Please do your own research before investing, including reading the companies’ public filings, press releases, and risk disclosures. Information contained in this profile was provided by the company, and extracted from public filings, company websites, and other publicly available sources. We believe the sources and information are accurate and reliable but we cannot guarantee it. The commentary and opinions in this article are our own, so please do your own research.

Copyright © 2023 Edge Investments, All rights reserved.

  • Declan O’Flaherty

    Declan holds a Bachelor of Commerce from the University of Alberta and has over 4 years of experience investing in financial markets. As a fundamental investor, Declan embraces the investment principles of Warren Buffett and his disciples. This puts a focus on finding businesses with healthy financials, competent and accountable leader, enduring competitive advantages, and those that are selling at discount to what they are worth.

    View all posts

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