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Tenaz Energy Corp. Management Reports 2025
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2024
MANAGEMENT'S DISCUSSION AND ANALYSIS
Proven Principles, New Opportunities
TENAZ ENERGY
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following management's discussion and analysis ("MD&A") of financial condition and results of operations for Tenaz Energy Corp. (the "Company" or "Tenaz") is dated March 12, 2025 and should be read in conjunction with the Company's audited consolidated financial statements and related notes for the years ended December 31, 2024 and 2023, as well as the Company's Annual Information Form ("AIF"), both available on SEDAR+ at www.sedarplus.ca. The financial statements have been prepared in accordance with IFRS® Accounting Standards as issued by the International Accounting Standards Board ("IASB"), which are sometimes referred to in this MD&A as Generally Accepted Accounting Principles ("GAAP").
This MD&A includes references to certain financial and performance measures which do not have standardized meanings prescribed by IFRS Accounting Standards ("Non-GAAP"). In addition, this MD&A includes references to certain Non-GAAP financial measures, Non-GAAP financial ratios, capital management measures and supplementary financial measures which are not specified, defined, or determined under IFRS Accounting Standards and are therefore considered Non-GAAP and other financial measures. These Non-GAAP and other financial measures might not be comparable to similar financial measures presented by other issuers. For a full description of these Non-GAAP and other financial measures and a reconciliation of these measures to their most directly comparable GAAP measures, please refer to "Non-GAAP and Other Financial Measures" included in the "Advisories" section in this MD&A.
Readers are cautioned that the MD&A also contains forward-looking statements and should be read in conjunction with Tenaz's disclosure under "Forward-looking Information" included in this MD&A.
All figures are in thousands of Canadian dollars unless otherwise noted.
DESCRIPTION OF BUSINESS
Tenaz is an energy company focused on the acquisition and sustainable development of international oil and gas assets. Tenaz has domestic operations in Canada along with offshore natural gas and midstream assets in the Netherlands. Tenaz produces crude oil and natural gas from a number of formations within the Mannville Group at Leduc-Woodbend in central Alberta. The Netherlands natural gas assets are located in the Dutch sector of the North Sea. Additional information regarding Tenaz is available on SEDAR+ and its website at www.tenazenergy.com. Tenaz's Common Shares are listed for trading on the Toronto Stock Exchange under the symbol "TNZ".
Agreement to acquire NAM Offshore B.V. ("NOBV")
On July 18, 2024, Tenaz entered into an agreement with Nederlandse Aardolie Maatschappij B.V., a 50/50 joint venture between Shell PLC and ExxonMobil Corporation, to acquire all the issued and outstanding shares of NOBV for base consideration of €165 million ($250 million), prior to closing adjustments and contingent payments of up to €120 million ($180 million) based on a percentage of future free cash flow for 2025, 2026, and 2027. NOBV's assets consist of a portfolio of production and exploration licenses in the Dutch North Sea and ownership interests in two pipeline systems. The transaction has an effective date of January 1, 2024 and is expected to close mid-2025 or earlier following operational transition activities. Tenaz paid a €23 million ($34 million) deposit using cash on hand and a drawing from a revolving facility from National Bank of Canada.
TENAZ ENERGY CORP. | MD&A | 2
PRODUCTION AND CAPITAL GUIDANCE
The following tables summarize our 2024 production and capital guidance. Tenaz's 2024 guidance was initially approved by the Tenaz Board of Directors on December 21, 2023 and was revised on November 7, 2024 following a change in our Canadian drilling program. Actual production was less than 1% below the guidance range while actual capital expenditures were 4% below the guidance range.
| Revised Guidance | 2024 Results | |
|---|---|---|
| 2024 average production volumes (boe/d)(1) | 2,700 to 2,900 | 2,688 |
| Capital expenditures(2) ($MM) | $19 to $21 | $18.2 |
| Wells: | ||
| Drill | 2 (1.75 net) | 2 (1.75 net) |
| Complete | 2 (1.75 net) | 2 (1.75 net) |
The following tables summarize our 2025 production and capital guidance, prior to the closing of the acquisition of NOBV. Tenaz's 2025 guidance was approved by the Tenaz Board of Directors on December 17, 2024. Tenaz will update its 2025 guidance reflecting additional investment and production from NOBV after closing, which is projected to occur at mid-2025 or earlier.
| 2025 Guidance | |
|---|---|
| 2025 average production volumes (boe/d)(1) | 2,900 to 3,100 |
| Capital expenditures(2) ($MM) | $31.7 to $35.7 |
| Drilling and development | $30.0 to $34.0 |
| Exploration and evaluation | $1.7 |
| Wells: | |
| Drill | 4 (2.5 net) |
| Complete | 4 (2.5 net) |
(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. Refer to "Barrels of Oil Equivalent" section included in the "Advisories" section.
(2) This is a non-GAAP measure. Refer to "Non-GAAP and Other Financial Measures" included in the "Advisories" section in the MD&A.
TENAZ ENERGY CORP. | MD&A | 3
RESULTS OF OPERATIONS
| Q4 2024 | Q3 2024 | Q4 2023 | 2024 | 2023 | |
|---|---|---|---|---|---|
| Production | |||||
| Heavy crude oil (bbls/d) | 1,097 | 794 | 1,342 | 988 | 917 |
| Natural gas liquids (bbls/d) | 78 | 54 | 75 | 68 | 64 |
| Natural gas (Mcf/d) | 9,836 | 10,119 | 10,310 | 9,792 | 8,749 |
| Total (boe/d) | 2,814 | 2,535 | 3,135 | 2,688 | 2,439 |
| Net income (loss) | (6,037) | (2,454) | 3,515 | (7,713) | 26,547 |
| Per share – basic | (0.22) | (0.09) | 0.13 | (0.28) | 0.97 |
| Per share – diluted | (0.22) | (0.09) | 0.12 | (0.28) | 0.91 |
| Cash flow from operating activities | 23 | 11,923 | 8,927 | 6,244 | 15,176 |
| Funds flow from operations(1) | 8,299 | 3,360 | 13,401 | 24,524 | 28,862 |
| Per basic share(1) | 0.30 | 0.12 | 0.50 | 0.90 | 1.05 |
| Per basic diluted share(1) | 0.26 | 0.11 | 0.45 | 0.79 | 0.99 |
| Adjusted working capital (net debt)(1) | 9,953 | 8,999 | 49,338 | 9,953 | 49,338 |
| Activity | |||||
| Drilling and development | 4,461 | 6,484 | 2,610 | 16,277 | 23,336 |
| Exploration and evaluation | 501 | 462 | 357 | 1,948 | 1,519 |
| Capital expenditures ($000)(1) | 4,962 | 6,946 | 2,967 | 18,225 | 24,855 |
| Property acquisitions | (243) | - | - | 2,532 | - |
| Deposit on acquisition | - | 34,301 | - | 34,301 | - |
(1) This is a non-GAAP and other financial measure. Refer to "Non-GAAP and Other Financial Measures" included in the "Advisories" section of the Management's Discussion & Analysis for the three months and year ended December 31, 2024 ("MD&A").
Net Income (Loss)
- Net loss for the three months and year ended December 31, 2024 resulted from lower revenues, higher operating expenses, and increased transaction costs associated with transition activities to prepare for the closing of the NOBV acquisition. This compares to net income in the 2023 periods due to the absence of transition activities in the prior year and a $22.8 million gain on acquisition relating to the acquisition of additional Netherlands non-operated working interests in Q3 2023.
Funds Flows from Operations ("FFO") and Cash Flow from Operating Activities
- FFO for Q4 2024 was higher than Q3 2024 due to increased revenues resulting from higher production and a recovery in the current quarter resulting from adjustments to prior period tax returns in the Netherlands. These increases were partially offset by an increase in transaction costs associated with business transition activities to prepare for the close of the NOBV acquisition.
- FFO for Q4 2024 was lower than Q4 2023 due to lower revenues, higher operating expenses, and higher transaction costs in the current period, partially offset by a recovery in the current quarter resulting from adjustments to prior period tax returns.
- FFO for the year ended December 31, 2024 was lower than the prior year due to lower revenues resulting from lower natural gas prices coupled with higher operating expenses due to maintenance activity and higher transaction costs. These decreases were partially offset by a recovery in the current year resulting from adjustments to prior period tax returns.
- Cash flow from operating activities for Q4 2024 was lower than Q3 2024 due to the impact of receipts received for income tax over-installments in Q3 2024.
TENAZ ENERGY CORP. | MD&A | 4
- Cash flow from operating activities for Q4 2024 was lower than Q4 2023 due to the FFO changes noted above coupled with pre-payments in the current year for software implementations and software licensing for the transition of NOBV.
- Cash flow from operating activities for the year ended December 31, 2024 was lower than the prior year due to the FFO change noted above, pre-payments in the current year for software implementations and software licensing for the transition of NOBV, and tax payments made in the current year for prior period tax returns.
Capital Expenditures
- In Canada, current year spending mainly related to activity on the new Canadian assets acquired during 2024, including the drilling of two gross (1.75 net) Ellerslie wells and a turnaround at the Watelet gas plant. In the Netherlands, current year activity mainly related to the fracturing of the K12-G4 and K12-G9 vertical wells.
- The Company participated in Front End Engineering Design (FEED) activities for the potential L10 Carbon Capture and Storage ("CCS") project in the Netherlands. Full year 2024 exploration and evaluation expenditures totalled $1.7 million, primarily related to L10 CCS.
Property Acquisitions
- In Q2 2024, Tenaz acquired a gas plant and oil and gas leasehold assets from a private company for consideration of $2.5 million, net to Tenaz. The acquisition provides Tenaz with ownership and operating control of the gas plant and pipeline infrastructure that processes the gas production from the Leduc Woodbend field. In addition, the plant generates processing revenue from third-party gas volumes, with significant available capacity to process more gas.
Deposit on Acquisition
- On July 18, 2024, Tenaz entered into an agreement with Nederlandse Aardolie Maatschappij B.V., a 50/50 joint venture between Shell PLC and ExxonMobil Corporation, to acquire all the issued and outstanding shares of NOBV for base consideration of €165 million ($250 million), prior to closing adjustments and contingent payments of up to €120 million ($180 million) based on a percentage of future free cash flow for 2025, 2026, and 2027. Tenaz paid a €23 million ($34 million) deposit using cash on hand and a drawing from a revolving facility from National Bank of Canada.
TENAZ ENERGY CORP. | MD&A | 5
Production
| Q4 2024 | Q3 2024 | Q4 2023 | 2024 | 2023 | |
|---|---|---|---|---|---|
| Canada | |||||
| Heavy crude oil (bbls/d) | 1,097 | 794 | 1,342 | 988 | 917 |
| Natural gas liquids (bbls/d) | 68 | 50 | 61 | 61 | 53 |
| Natural gas (Mcf/d) | 5,106 | 4,155 | 3,755 | 4,516 | 3,463 |
| Total Canada (boe/d) | 2,016 | 1,537 | 2,028 | 1,801 | 1,547 |
| Netherlands | |||||
| Natural gas liquids (bbls/d) | 10 | 4 | 14 | 8 | 11 |
| Natural gas (Mcf/d) | 4,730 | 5,964 | 6,555 | 5,277 | 5,285 |
| Total Netherlands (boe/d) | 798 | 998 | 1,107 | 887 | 892 |
| Total Company | |||||
| Heavy crude oil (bbls/d) | 1,097 | 794 | 1,342 | 988 | 917 |
| Natural gas liquids (bbls/d) | 78 | 54 | 75 | 68 | 64 |
| Natural gas (Mcf/d) | 9,836 | 10,119 | 10,310 | 9,792 | 8,749 |
| Total Company (boe/d) | 2,814 | 2,535 | 3,135 | 2,688 | 2,439 |
Canada
- During 2024, Tenaz drilled two gross (1.75 net) Ellerslie wells with one of the wells brought on production in mid-September and the second well brought on production in mid-November. The wells are performing ahead of expectations, but had a smaller impact on 2024 than originally budgeted due to timing of drilling the wells.
- Production for the fourth quarter was above Q3 2024 rates, reflecting the contribution from the Ellerslie wells drilled in 2024 and the absence of the Watelet gas plant turnaround, which occurred in September 2024.
- Production for Q4 2024 was below Q4 2023 as the prior year quarter included strong initial production from the successful four gross (3.35 net) wells drilled in 2023.
- Production for the year ended December 31, 2024 was above 2023 rates resulting from a full year of production from our successful 2023 drilling program and contributions from the 2024 program executed in the second half of 2024.
Netherlands
- Production for Q4 2024 was lower than Q3 2024 and Q4 2023 due to natural declines and higher planned and unplanned downtime.
- Production for the year ended December 31, 2024 was consistent year-over-year with natural declines and higher downtime in 2024 being offset by a full year contribution from the acquisition that occurred in the second half of 2023.
TENAZ ENERGY CORP. | MD&A | 6
FINANCIAL REVIEW
Petroleum and Natural Gas Sales
| ($000 except per boe) | Q4 2024 | Q4 2023 | 2024 | 2023 |
|---|---|---|---|---|
| Petroleum and natural gas sales | ||||
| Canada | 9,217 | 11,086 | 33,381 | 32,342 |
| Netherlands | 7,068 | 10,175 | 29,619 | 32,510 |
| Total Company | 16,285 | 21,261 | 63,000 | 64,852 |
| Average realized prices | ||||
| Heavy crude oil ($/bbl) | 80.25 | 80.21 | 81.75 | 81.83 |
| Natural gas liquids ($/bbl) | 51.01 | 59.15 | 56.30 | 62.36 |
| Natural gas ($/Mcf) | 8.64 | 11.54 | 8.94 | 11.28 |
| Petroleum and natural gas sales ($/boe) | 62.90 | 73.71 | 64.04 | 72.85 |
| Canada ($/bbl) | 49.70 | 59.41 | 50.64 | 57.28 |
| Netherlands ($/bbl) | 96.24 | 99.89 | 91.24 | 99.88 |
| Company | 62.90 | 73.71 | 64.04 | 72.85 |
| Average benchmark prices | ||||
| WTI crude oil (US$/bbl) | 70.28 | 78.83 | 75.73 | 77.62 |
| WCS differential (US$/bbl) | (12.18) | (21.94) | (14.49) | (17.68) |
| US$/CAD$ exchange rate | 0.71 | 0.74 | 0.73 | 0.74 |
| WCS (CAD$/bbl) | 81.32 | 76.86 | 83.91 | 80.90 |
| AECO daily spot (CAD$/Mcf) | 1.48 | 2.30 | 1.39 | 2.64 |
| TTF (CAD$/Mcf) | 19.00 | 18.52 | 15.06 | 17.72 |
- Lower sales on a dollar and per boe basis in Q4 2024 as compared to Q4 2023 resulted from lower production volumes in the Netherlands and lower AECO prices in the current year. Sales for 2024 were relatively consistent with 2023 as lower natural gas prices were mostly offset by increased production in Canada. On a per boe basis, sales decreased due to lower natural gas prices.
Royalties
| ($000 except per boe) | Q4 2024 | Q4 2023 | 2024 | 2023 |
|---|---|---|---|---|
| Royalties | ||||
| Canada | 1,295 | 1,699 | 5,275 | 4,856 |
| Netherlands | - | - | - | - |
| Total Company | 1,295 | 1,699 | 5,275 | 4,856 |
| As a percentage of sales | ||||
| Canada | 14.1% | 15.3% | 15.8% | 15.0% |
| Netherlands | - | - | - | - |
| Company | 8.0% | 8.0% | 8.4% | 7.5% |
Royalties are payable in Canada under standard terms depending on the underlying mineral rights. Royalties payable are influenced by a number of factors including capital spending and commodity prices realized.
TENAZ ENERGY CORP. | MD&A | 7
Royalty rates in the 2024 periods were relatively consistent with rates in the prior year. Royalty expense overall fluctuated as a result of differences in sales.
Royalty rates for offshore natural gas are typically nil in Netherlands. However, for the annual periods of 2023 and 2024, natural gas production was subject to a 65% royalty above a realized pricing threshold (approximately $21/Mcf). The addition of the temporary royalty for calendar years 2023 and 2024 was in response to the European Union's initiative for member countries to levy a "Solidarity Contribution" or windfall tax on natural gas producers. Netherlands royalties pertaining to 2023 and 2024 were nil as the realized pricing threshold was not reached. No royalties are currently applicable to production for 2025 and onwards.
Transportation Expenses
| ($000 except per boe) | Q4 2024 | Q4 2023 | 2024 | 2023 |
|---|---|---|---|---|
| Transportation expenses | ||||
| Canada | 559 | 505 | 2,072 | 1,553 |
| Netherlands | 214 | 505 | 724 | 1,612 |
| Total Company | 773 | 1,010 | 2,796 | 3,165 |
| Per boe | ||||
| Canada | 3.02 | 2.71 | 3.14 | 2.75 |
| Netherlands | 2.91 | 4.97 | 2.23 | 4.95 |
| Company | 2.99 | 3.50 | 2.84 | 3.56 |
Transportation costs are incurred in both regions to get processed oil and gas to markets. Canadian transportation costs are a function of the cost of trucking clean oil to sales points and offsets to get natural gas to the market. Netherlands transportation costs are a function of pipeline tariffs in which we also have a benefiting interest through our ownership interest in Noordtgastransport BV ("NGT"). Cash flows from the equity income (recorded as income from associate) typically more than offset any transportation costs incurred in the Dutch assets.
Consolidated transportation expenses decreased for the 2024 periods as compared to 2023 due to lower transportation expenses in the Netherlands resulting from increased recoveries from partners utilizing shared infrastructure, partially offset by higher crude oil production volumes coupled with increased fuel surcharges in Canada. On a per boe basis, transportation expense decreased for the 2024 periods as compared to 2023 as lower costs were paired with increased production volumes.
Operating Expenses
| ($000 except per boe) | Q4 2024 | Q4 2023 | 2024 | 2023 |
|---|---|---|---|---|
| Operating expenses | ||||
| Canada | 2,888 | 2,328 | 9,924 | 9,346 |
| Netherlands | 5,755 | 3,258 | 21,816 | 13,113 |
| Total Company | 8,643 | 5,586 | 31,740 | 22,459 |
| Per boe | ||||
| Canada | 15.57 | 12.47 | 15.06 | 16.55 |
| Netherlands | 78.37 | 31.99 | 67.20 | 40.29 |
| Company | 33.38 | 19.36 | 32.26 | 25.23 |
Canada
- Operating expenses in Canada were higher in the 2024 periods as compared to 2023 due to increased activity. On a full year basis, this increase was more than offset by higher production volumes resulting in lower costs on a per unit basis.
Netherlands
- Operating expenses in the Netherlands increased due in large part to the acquisition of additional assets in Q3 2023 and maintenance activity during the current year. This was coupled with lower
TENAZ ENERGY CORP. | MD&A | 8
production volumes resulting from downtime and natural declines, resulting in a year-over-year increase on a per unit basis.
Other (Income) Expenses
| ($000 except per boe) | Q4 2024 | Q4 2023 | 2024 | 2023 |
|---|---|---|---|---|
| Income from associate(1) | (917) | (543) | (4,383) | (3,507) |
| Interest and financing | 1,855 | (930) | 448 | (1,002) |
(1) Tenaz includes the income from its associate, NGT, in midstream income.
Income from associate
Tenaz recognizes its share of the net income of its affiliate NGT in income for its proportionate share of the underlying results. NGT is a company that owns and operates one of the three main pipeline networks servicing the Dutch North Sea ("DNS") for gathering and processing of offshore natural gas. The primary revenue stream for NGT includes tariffs and throughput-based recoveries for its pipeline network from upstream producers of natural gas in its operating area. The combination of the upstream working interest and the equity interest in NGT results in economic benefits from the wellhead to onshore delivery to the European gas market for our share of production. The ultimate realization of earnings to cash is completed through dividend payments (annually in recent periods).
Income from associate increased for Q4 2024 as compared to Q4 2023 due to a decrease in non-cash expenses. Income from associate increased in full year 2024 as compared to the prior year due to an increase in ownership interest in NGT following an acquisition in Q3 2023.
Interest and financing
Fluctuations in interest and financing expenses resulted from changes in Tenaz's cash and restricted cash and long-term debt and differences in associated interest rates. During Q3 2024, Tenaz used cash on hand and drew from its revolving credit facility to fund the €23 million ($34 million) deposit for the acquisition of NOBV. In Q4 2024, Tenaz issued $140 million in Senior Unsecured Notes bearing interest at 12%. The proceeds were used to repay the revolving credit facility and the residual resulted in a positive cash position where the balance earns market interest rates. These changes resulted in net interest expense in Q4 2024 as compared to interest income in Q4 2023 and lower net interest income in 2024 as compared to 2023.
TENAZ ENERGY CORP. | MD&A | 9
General and Administrative Expenses ("G&A") & Transaction Costs
| ($000) | Q4 2024 | Q4 2023 | 2024 | 2023 |
|---|---|---|---|---|
| General and administrative | 2,174 | 1,452 | 9,570 | 7,384 |
| Transaction costs | 1,941 | 2,489 | 4,763 | 3,759 |
General and Administrative
G&A costs were higher in the three months and year ended December 31, 2024 as compared to the same periods in the prior year due to an increased headcount and an increase in expenses related to business development activity and higher expenditures related to the anticipated post-closing of NOBV.
Transaction Costs
Transaction costs stem from professional services, encompassing legal, tax advisory, and business consulting expenses, along with costs associated with technical and financial due diligence. Tenaz classifies these expenses as transaction costs once an opportunity advances beyond the offer stage and continues to classify as such until the transaction has closed. During this period, the Company anticipates that the costs incurred are more likely to be directly linked to the specific opportunity rather than the broad activities of the Company.
The differentiation between general and administrative expenses and transaction costs seeks to present the ongoing operational costs of Tenaz and the execution of its strategy as distinct from the costs tied to specific opportunities that may ultimately result in completed transactions.
Transaction costs during the three months and year ended December 31, 2024 were higher than the prior year largely as a result of the negotiation, signing, and transition activities associated with the agreement to acquire NOBV and expenses relating to the operational transition of NOBV. Certain software implementation and licensing costs incurred during 2024 relating to the operational transition of NOBV have been recognized as prepaid expenses on the balance sheet.
Share-based Compensation; Depletion, Depreciation and Amortization ("DD&A"); and Accretion of Decommissioning Liability
| ($000) | Q4 2024 | Q4 2023 | 2024 | 2023 |
|---|---|---|---|---|
| Share-based compensation expense | 1,053 | 590 | 3,033 | 1,858 |
| Depletion, depreciation and amortization | 5,384 | 6,583 | 20,871 | 19,962 |
| Accretion of decommissioning liability | 1,386 | 1,514 | 5,361 | 5,505 |
The Company has in place a shareholder approved Tenaz Incentive Plan (the "TIP") pursuant to which the Company issues share-based long-term incentives to Directors, officers, employees and independent contractors of the Company and/or its affiliates. The types of awards available under the TIP include options, restricted share units ("RSUs"), performance share units ("PSUs"), deferred share units ("DSUs") and dividend-equivalent rights (collectively, "Awards").
Share-based compensation expense increased for the 2024 periods compared with 2023 due to increased TIP issuances for additional head count year-over-year associated with additional staff in preparation for the closing of NOBV and to support the growth of the Company, increasing the number of awards outstanding for the current period.
DD&A for Q4 2024 was lower than prior year Q4 as a result of a decrease in the DD&A rate driven by an increase in the closing reserves. DD&A for 2024 was relatively consistent with 2023.
Accretion expense represents the increase in the decommissioning liability resulting from the passage of time. Accretion expense decreased for the 2024 periods as compared against 2023 as a result of lower discount rates.
TENAZ ENERGY CORP. | MD&A | 10
Derivative Instruments
The Company has a risk management program in place with the objectives of reducing the volatility of crude oil and natural gas sales, increasing the certainty of funds flow from operations, protecting development economics, complying with its financial covenants and reducing foreign currency risk.
| ($000) | Q4 2024 | Q4 2023 | 2024 | 2023 |
|---|---|---|---|---|
| Unrealized loss (gain) on derivative instruments | (5) | (407) | (372) | 361 |
| Realized gain on derivative instruments | - | (301) | - | (602) |
| Gain on derivative instruments | (5) | (708) | (372) | (241) |
The derivative gain in both Q4 2024 and year ended December 31, 2024 pertains primarily to changes in the mark-to-market of foreign currency swaps outstanding in 2024 arising from the differences in the forward price compared to the contract price of outstanding contracts. Tenaz holds foreign currency swaps to maintain Euro as the primary underlying cash position. Excess Euro cash is swapped to Canadian dollars to maximize the interest yield on short term balances held within its bank accounts.
As at December 31, 2024, Tenaz had the following outstanding foreign currency derivative contract:
| Period | Type | Sell | Buy | Fixed Price | Fair Value at 31-Dec 2024 |
|---|---|---|---|---|---|
| January 25 | Swap | EUR 4,000,000 | CAD 5,962,400 | 1.4906 | 5 |
| Derivative instrument asset | 5 |
Crude Oil and Natural Gas Contracts
The following is a summary of the crude oil and natural gas sales contracts in place as at March 12, 2025:
| TTF | Type of Contract | Volume (Mcf/d) | Price (€/MWh) | Price ($/Mcf)(1) |
|---|---|---|---|---|
| October 2024 to March 2025 | Physical Swap | 1,200 | €32.50 | $15.04 |
| October 2024 to March 2025 | Physical Collar | 1,200 | €32.00-€40.75 | $14.80 - $18.85 |
| April 2025 to September 2025 | Physical Swap | 2,400 | €38.48 | $17.83 |
| October 2025 to March 2026 | Physical Swap | 1,300 | €42.50 | $19.66 |
| October 2025 to March 2026 | Physical Collar | 1,400 | €36.00-€45.30 | $16.65 - $20.96 |
| AECO | Type of Contract | Volume (GJ/d) | Price ($/GJ) | Price ($/Mcf) |
| November 2024 to March 2025 | Physical Swap | 1,000 | $3.11 | $3.28 |
| April 2025 to October 2025 | Physical Swap | 1,100 | $2.22 | $2.34 |
| November 2025 to March 2026 | Physical Swap | 500 | $3.32 | $3.50 |
| January 2026 to December 2027 | Financial Swap | 2,500 | $3.00 | $3.17 |
(1) Euro denominated amounts converted at March 11 ending rate of 1.579
TENAZ ENERGY CORP. | MD&A | 11
Income Taxes
The Company's income taxes are detailed below:
| ($000) | Q4 2024 | Q4 2023 | 2024 | 2023 |
|---|---|---|---|---|
| Income Taxes | ||||
| Current | (7,644) | (1,741) | (10,907) | 338 |
| Deferred | 6,300 | (2,310) | 1,577 | (5,887) |
| Total income tax recovery | (1,344) | (4,051) | (9,330) | (5,549) |
| Current Income Taxes | ||||
| Canada | - | - | - | - |
| Netherlands | (7,644) | (1,741) | (10,907) | 338 |
| Total Company | (7,644) | (1,741) | (10,907) | 338 |
Current taxes
In the Netherlands, a 50% effective income tax rate is applied to taxable profit from upstream oil and gas activity. In calculating taxable profit, an additional 10% uplift deduction is applied to decrease taxable profit from certain deductions, including operating, general and administrative, depletion and decommissioning costs.
The current tax recovery for the year ended December 31, 2024 relates to re-filed prior period tax returns in the Netherlands.
Deferred taxes
The deferred tax expense in the 2024 periods is primarily associated with the decrease in tax value as compared to the accounting value for property, plant and equipment and an increase to the decommissioning liability compared to the accounting value in the Netherlands. The decrease in the tax value is partially offset with an increase in available non-capital loss pools..
DECOMMISSIONING LIABILITY
At December 31, 2024, Tenaz's decommissioning liability was $64.2 million (December 31, 2023 - $45.3 million) for the future abandonment and reclamation of Tenaz's properties. The estimated decommissioning liability includes cost assumptions for costs to abandon wells or reclaim property and the time frame in which such costs will be incurred, as well as annual inflation factors used to calculate the undiscounted total future liability. The change in the decommissioning liability resulted from the addition of the Watelet gas plant in Canada, revised timing for certain decommissioning activities, and lower discount rates, partially offset by decommissioning activities performed in the Netherlands during the year.
The calculation of decommissioning liability applied the following rates:
| December 31, 2024 | December 31, 2023 | |
|---|---|---|
| Credit spread | 7.4% | 9.2% |
| Risk-free rates | ||
| Canada | 3.3% | 3.0% |
| Netherlands | 2.6% | 2.3% |
| Inflation rates | ||
| Canada | 2.0% | 1.6% |
| Netherlands | 2.0% | 2.0% |
Abandonment cost estimates are derived from both industry and government sources and operational knowledge of the properties.
Accretion expense is the increase in the decommissioning liability resulting from the passage of time.
TENAZ ENERGY CORP. | MD&A | 12
TENAZ ENERGY CORP. | MD&A | 13
CAPITAL RESOURCES AND LIQUIDITY
| ($000) | December 31
2024 | December 31
2023 |
| --- | --- | --- |
| Current assets | 188,537 | 92,488 |
| Current liabilities | (40,304) | (43,988) |
| Net current assets | 148,233 | 48,500 |
| Fair value of derivative instruments | (5) | 838 |
| Long-term debt | (138,275) | - |
| Adjusted working capital (net debt)(1) | 9,953 | 49,338 |
(1) Non-GAAP and other financial measure. Refer to "Non-GAAP and Other Financial Measures" included in the "Advisories" section in the MD&A.
The Company's policy is to maintain a strong capital base to enhance investor, creditor and market confidence and to sustain the future development of the business.
Adjusted working capital decreased as at December 31, 2024 due largely to the €23 million ($34 million) deposit for the acquisition of NOBV using cash on hand and a drawing under a revolving facility from National Bank of Canada.
Restricted Cash
Current assets includes restricted cash. Restricted cash primarily consists of moneys deposited as decommissioning security for Tenaz's interest in Netherlands assets, pursuant to decommissioning security agreements ("DSA") in place for the offshore licenses. During 2024, Tenaz deposited an additional €4.3 million ($6.3 million) pursuant to an increase in the required security amount under the DSAs.
Under the DSAs, decommissioning security is calculated and posted annually.
The decommissioning security, currently held in restricted cash, can be provided in various acceptable forms, such as letters of credit and decommissioning surety bonds. The calculation of required security is determined through agreed-upon calculations within the DSAs.
Long-term Debt
National Bank Financial Revolving Facility
In Q3 2024, Tenaz discharged its credit facilities with ATB Financial and entered into a new credit and delayed draw term loan facility agreement with National Bank of Canada. The credit facility with National Bank of Canada initially consisted of a revolving facility (the "Revolving Facility") in the principal amount of up to $20 million and $90 million of debt capacity under a new delayed draw term loan (the "Term Loan") (together, the "Credit Facilities"). The Term Loan was discharged following the issuance of the senior unsecured notes described below.
The Revolving Facility is a committed facility available on a revolving basis until July 16, 2025 at which time it may be extended at the lenders' option. If the revolving period is not extended, the undrawn portion of the facility will be cancelled and any amounts outstanding would be repayable at the end of the non-revolving term, which is one year following the end of the revolving term. The Revolving Facility is subject to a semi-annual borrowing base review, occurring by May 31st and November 30th of each year. The borrowing base is determined based on the lenders' evaluation of the Company's petroleum and natural gas reserves and their commodity price outlook at the time of each renewal.
Advances under the Revolving Facility can be made in Canadian or US dollars and letters of credit and/or letters of guarantee can be issued not exceeding an aggregate of $5.0 million. Advances under the Revolving Facility bear interest at a rate applicable to revolving loans plus applicable margins.
The Credit Facilities are secured by a general security agreement providing a security interest over all present and after acquired property, a floating charge on all lands, and a $300.0 million debenture with a first floating charge over all assets of the Company.
Tenaz is subject to certain reporting and financial covenants including:
- the Company is required to maintain a working capital ratio of at least 1.00:1, but for the purposes of the covenant, the Credit Facilities drawn and the fair value of any risk management contracts are excluded and the unused portion of the Credit Facilities is added to current assets; and
- the Company will maintain a liability management rating ("LMR") in Alberta, Saskatchewan and British Columbia, in each case, of no less than 2.0.
At December 31, 2024, the Company was in compliance with all debt covenants.
Senior unsecured notes
In Q4 2024, Tenaz issued $140 million of senior unsecured notes by way of private placement with institutional investors. The notes bear interest at a rate of 12%, to be paid semi-annually on May 14 and November 14. The notes were placed at par and mature on November 14, 2029.
The senior unsecured notes were recognized at amortized cost and include the transaction costs directly related to the issuance.
Tenaz may, at its option, redeem the notes prior to maturity at the redemption prices set forth below, together with accrued and unpaid interest:
| Period | Redemption price |
|---|---|
| May 14, 2027 to May 13, 2028 | 106% |
| May 14, 2028 to May 13, 2029 | 103% |
| May 14, 2029 and thereafter | 100% |
Prior to May 14, 2027, early redemption is permitted at 106% of principal plus the present value of future interest payments. This redemption feature is an embedded derivative that has been separately accounted for, however a fair value of zero has been determined given it is out of the money.
Liquidity Risk
Liquidity risk is the risk that Tenaz will encounter difficulty in meeting obligations associated with financial liabilities. The Company manages liquidity risk through its capital management (and an actively managed operating and capital expenditure budgeting process).
Accounts payable and accrued liabilities are due in less than one year. Amounts outstanding on the Credit Facilities are due in July 2026, unless extended. The senior unsecured notes are due in November 2029.
Management believes that funds available from cash on hand ($139.9 million as at December 31, 2024) and its credit and working capital facilities are adequate to settle the Company's financial liabilities and obligations as they come due.
Shareholders' Equity
Tenaz had the following outstanding securities as at the years ended:
| (000s) | December 31 2024 | December 31 2023 |
|---|---|---|
| Common shares | 27,610 | 26,793 |
| Warrants | 2,539 | 2,778 |
| Options | 1,245 | 1,525 |
| TIP Awards | ||
| PSUs | 1,595 | 1,008 |
| RSUs | 120 | 65 |
| DSUs | 97 | 43 |
TENAZ ENERGY CORP. | MD&A | 14
A summary of the Company's change in common shares during the period is presented below:
| (000s) | Number of Common Shares |
|---|---|
| Balance, December 31, 2023 | 26,793 |
| PSUs and RSUs vested | 721 |
| Options exercised | 187 |
| Warrants exercised | 239 |
| Normal course issuer bid | (330) |
| Balance, December 31, 2024 | 27,610 |
As of the date of this MD&A, the following securities were outstanding:
| (000s) | March 12 2025 |
|---|---|
| Common shares | 27,574 |
| Warrants | 2,539 |
| Options | 1,245 |
| TIP Awards | |
| PSUs | 1,131 |
| RSUs | 110 |
| DSUs | 97 |
Share Repurchases
On August 21, 2023, the Toronto Stock Exchange approved the Company's application to commence a normal course issuer bid ("NCIB"). The NCIB allowed Tenaz to purchase up to 2.5 million common shares (approximately 9.1% of the outstanding common shares) over a twelve-month period beginning August 23, 2023 with a daily maximum purchase of 18,926 common shares. The NCIB ended on August 22, 2024.
On February 11, 2025, the Toronto Stock Exchange approved the Company's application to commence an NCIB. The NCIB allowed Tenaz to purchase up to 2.5 million Common Shares (approximately 9.0% of the outstanding common shares) over a twelve-month period beginning February 14, 2025 with a daily maximum purchase of 15,896 common shares. A summary of the Company's NCIB activities is presented below:
| ($000, except as noted) | Q4 2024 | Q4 2023 | 2024 | 2023 |
|---|---|---|---|---|
| Share repurchase activities | ||||
| Common shares repurchased (000's) | - | (352) | (330) | (1,300) |
| Amounts charged to: | ||||
| Share capital | - | (794) | (746) | (2,956) |
| Retained earnings | - | (646) | (484) | (910) |
| Share repurchase cost | - | (1,440) | (1,230) | (3,866) |
| Average cost per share ($) | - | 4.09 | 3.73 | 2.97 |
TENAZ ENERGY CORP. | MD&A | 15
SUMMARY OF QUARTERLY RESULTS
| Quarters Ended | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 |
|---|---|---|---|---|---|---|---|---|
| ($000, except per share and per boe amounts) | 2024 | 2024 | 2024 | 2024 | 2023 | 2023 | 2023 | 2023 |
| Financial | ||||||||
| Petroleum and natural gas revenue | 14,990 | 13,785 | 12,591 | 16,359 | 19,562 | 14,047 | 9,783 | 16,604 |
| Cash flow from operating activities | 23 | 11,923 | (11,920) | 6,218 | 8,927 | 175 | 957 | 5,117 |
| Funds flow from operations(1) | 8,299 | 3,360 | 5,822 | 7,043 | 13,401 | 4,826 | 3,361 | 7,274 |
| Per share – basic(1) | 0.30 | 0.12 | 0.22 | 0.26 | 0.50 | 0.18 | 0.12 | 0.26 |
| Per share – diluted(1) | 0.26 | 0.11 | 0.19 | 0.24 | 0.45 | 0.16 | 0.12 | 0.25 |
| Net income (loss) | (6,037) | (2,454) | 1,335 | (557) | 3,515 | 20,907 | (757) | 2,882 |
| Per share – basic | (0.22) | (0.09) | 0.05 | (0.02) | 0.13 | 0.77 | (0.03) | 0.10 |
| Per share – diluted | (0.22) | (0.09) | 0.04 | (0.02) | 0.12 | 0.71 | (0.03) | 0.10 |
| Capital expenditures(1) | 4,962 | 6,946 | 2,501 | 3,816 | 2,967 | 15,238 | 5,967 | 683 |
| Adjusted working capital (net debt)(1) | 9,953 | 8,999 | 44,343 | 48,740 | 49,338 | 44,937 | 17,094 | 18,763 |
| Common shares outstanding (000) | ||||||||
| End of period – basic | 27,610 | 27,426 | 27,345 | 26,703 | 26,793 | 27,145 | 27,378 | 27,733 |
| Weighted average for period – basic | 27,542 | 27,360 | 26,734 | 26,779 | 26,963 | 27,292 | 27,555 | 27,917 |
| Weighted average for period – diluted | 32,279 | 31,368 | 29,992 | 29,494 | 29,970 | 29,555 | 28,308 | 28,545 |
| Operating | ||||||||
| Average daily production | ||||||||
| Heavy crude oil (bbls/d) | 1,097 | 794 | 911 | 1,149 | 1,342 | 675 | 711 | 937 |
| Natural gas liquids (bbls/d) | 78 | 54 | 71 | 70 | 75 | 60 | 57 | 63 |
| Natural gas (Mcf/d) | 9,836 | 10,119 | 9,206 | 10,005 | 10,310 | 9,823 | 6,802 | 8,022 |
| Total (boe/d)(2) | 2,814 | 2,535 | 2,517 | 2,887 | 3,135 | 2,372 | 1,903 | 2,337 |
| Netbacks ($/boe) | ||||||||
| Petroleum and natural gas sales | 62.90 | 63.57 | 61.17 | 68.08 | 73.71 | 68.97 | 61.31 | 85.23 |
| Royalties | (5.00) | (4.45) | (6.18) | (5.81) | (5.89) | (4.60) | (4.80) | (6.28) |
| Transportation expenses | (2.99) | (1.97) | (3.40) | (2.99) | (3.50) | (3.68) | (3.66) | (3.41) |
| Operating expenses | (33.38) | (33.89) | (36.47) | (26.05) | (19.36) | (31.11) | (28.25) | (24.69) |
| Midstream income | 4.24 | 7.13 | 6.12 | 4.29 | 4.86 | 5.25 | 5.21 | 4 |
| Operating netback(1) | 25.77 | 30.39 | 21.24 | 37.52 | 49.82 | 34.83 | 29.81 | 55.21 |
(1) This is a non-GAAP and other financial measure. Refer to "Non-GAAP and Other Financial Measures" included in the "Advisories" section of the Management's Discussion & Analysis for the three months and year ended December 31, 2024 ("MD&A").
(2) 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. Refer to "Barrels of Oil Equivalent" section included in the "Advisories" section.
TENAZ ENERGY CORP. | MD&A | 16
SELECTED ANNUAL INFORMATION
| ($000, except per share and per boe amounts) | 2024 | 2023 | 2022 |
|---|---|---|---|
| Financial | |||
| Petroleum and natural gas revenue | 57,725 | 59,996 | 28,140 |
| Cash flow from operating activities | 6,244 | 15,176 | 9,347 |
| Funds flow from operations(1) | 24,524 | 28,862 | 8,612 |
| Per share – basic(1) | 0.90 | 1.05 | 0.30 |
| Per share – diluted(1) | 0.79 | 0.99 | 0.30 |
| Net income (loss) | (7,713) | 26,547 | 5,237 |
| Per share – basic | (0.28) | 0.97 | 0.18 |
| Per share – diluted | (0.28) | 0.91 | 0.18 |
| Capital expenditures(1) | 18,225 | 24,855 | 17,101 |
| Total assets | 390,827 | 238,715 | 194,740 |
| Total liabilities | 298,702 | 142,362 | 123,369 |
| Adjusted working capital (net debt)(1) | 9,953 | 49,338 | 14,149 |
| Common shares outstanding (000) | |||
| End of period – basic | 27,610 | 26,793 | 28,093 |
| Weighted average for period – basic | 27,105 | 27,429 | 28,424 |
| Weighted average for period – diluted | 31,067 | 29,053 | 28,878 |
| Operating | |||
| Average daily production | |||
| Heavy crude oil (bbls/d) | 988 | 917 | 667 |
| Natural gas liquids (bbls/d) | 68 | 64 | 56 |
| Natural gas (Mcf/d) | 9,792 | 8,749 | 2,972 |
| Total (boe/d)(2) | 2,688 | 2,439 | 1,218 |
| Netbacks ($/boe) | |||
| Petroleum and natural gas sales | 64.04 | 72.85 | 76.67 |
| Royalties | (5.36) | (5.46) | (13.38) |
| Transportation expenses | (2.84) | (3.56) | (2.29) |
| Operating expenses | (32.26) | (25.23) | (18.69) |
| Midstream income | 5.38 | 4.90 | - |
| Operating netback(1) | 28.96 | 43.50 | 42.31 |
(1) This is a non-GAAP and other financial measure. Refer to "Non-GAAP and Other Financial Measures" included in the "Advisories" section of the Management's Discussion & Analysis for the three months and year ended December 31, 2024 ("MD&A").
(2) 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. Refer to "Barrels of Oil Equivalent" section included in the "Advisories" section.
TENAZ ENERGY CORP. | MD&A | 17
Tenaz's petroleum and natural gas sales over the past three years fluctuated due to volatility in benchmark commodity prices and realized pricing and changes in production. Tenaz's production has fluctuated due to acquisitions in the Netherlands, changes in capital expenditures, voluntary shut-ins and subsequent reactivations, and natural declines.
Net income (loss) has fluctuated over the past three years mainly due to changes in impairment and impairment reversals, changes in operating netback, derivative instrument gains and losses (which fluctuate with changes in future market prices), acquisitions and related gains on acquisitions, transaction costs incurred, share-based compensation, general and administrative expenses and income taxes recognized.
Funds flow from operations has fluctuated over the past three years, primarily due to additional production from capital programs and acquisitions, fluctuations in operating netback, general and administrative expenses, transaction costs incurred, realized derivative instrument gains and losses, and current income taxes recognized.
Capital expenditures have also fluctuated throughout the above periods due to changes in the Company's capital spending levels which vary based on a number of factors, including the prevailing commodity price environment, capital resources, availability of alternative investment opportunities and the timing of acquisitions.
OPERATING NETBACK SUMMARY
| ($/boe) | Q4 2024 | Q4 2023 | 2024 | 2023 |
|---|---|---|---|---|
| Canada | ||||
| Petroleum and natural gas sales | 49.70 | 59.41 | 50.64 | 57.28 |
| Royalties | (6.98) | (9.10) | (8.00) | (8.60) |
| Transportation expenses | (3.02) | (2.71) | (3.14) | (2.75) |
| Operating expenses | (15.57) | (12.47) | (15.06) | (16.55) |
| Canada operating netback(1) | 24.13 | 35.13 | 24.44 | 29.38 |
| Netherlands | ||||
| Petroleum and natural gas sales | 96.24 | 99.89 | 91.24 | 99.88 |
| Transportation expenses | (2.91) | (4.97) | (2.23) | (4.95) |
| Operating expenses | (78.37) | (31.99) | (67.20) | (40.29) |
| Midstream income(1) | 14.94 | 13.75 | 16.29 | 13.41 |
| Netherlands operating netback(1) | 29.90 | 76.68 | 38.10 | 68.05 |
| Total Company | ||||
| Petroleum and natural gas sales | 62.90 | 73.71 | 64.04 | 72.85 |
| Royalties | (5.00) | (5.89) | (5.36) | (5.46) |
| Transportation expenses | (2.99) | (3.50) | (2.84) | (3.56) |
| Operating expenses | (33.38) | (19.36) | (32.26) | (25.23) |
| Midstream income(1) | 4.24 | 4.86 | 5.38 | 4.90 |
| Total Company operating netback(1) | 25.77 | 49.82 | 28.96 | 43.50 |
(1) This is a non-GAAP and other financial measure. Refer to "Non-GAAP and Other Financial Measures" included in the "Advisories" section of the Management's Discussion & Analysis for the three months and year ended December 31, 2024 ("MD&A").
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
On July 18, 2024, Tenaz entered into an agreement with Nederlandse Aardolie Maatschappij B.V., a 50/50 joint venture between Shell PLC and ExxonMobil Corporation, to acquire all the issued and outstanding shares of NOBV for base consideration of €165 million ($250 million), prior to closing adjustments and contingent payments of up to €120 million ($180 million) based on a percentage of future free cash flow for 2025, 2026, and 2027. NOBV's assets consist of a portfolio of production and exploration licenses in the Dutch North Sea and ownership interests in two pipelines. The transaction has an effective date of January 1, 2024 and is expected to close mid-2025, or earlier, following operational transition activities. Tenaz paid a €23 million ($34 million) deposit using cash on hand and a drawing from a revolving facility from National Bank of Canada.
In addition, Tenaz has contractual obligations in the normal course of operations including operating agreements, transportation commitments, royalty obligations, lease rental obligations, physical commodity
TENAZ ENERGY CORP. | MD&A | 18
sales contracts and employee agreements. These obligations are of a recurring, consistent nature and impact Tenaz's cash flows in an ongoing manner.
As at December 31, 2024, the Company had the following contractual obligations and commitments:
| Less than 1 year | 1-3 years | 3-5 years | Total | |
|---|---|---|---|---|
| Long-term debt and associated interest payments | 16,800 | 50,400 | 156,800 | 224,000 |
| Lease obligations | 334 | 653 | - | 987 |
| Software subscriptions | 3,160 | 6,655 | 2,163 | 11,977 |
| Total contractual obligations and commitments | 20,294 | 57,708 | 158,963 | 236,964 |
The Company operates in a regulatory and commercial environment that exposes it to regulatory, contractual and litigation risks. As a result, the Company may be involved in certain disputes and legal proceedings from time to time, including litigation, arbitration and regulatory investigations. Such matters are subject to uncertainties, and the outcomes are often difficult to predict, including the impact on operations or on the financial statements, particularly in the earlier stages of a matter. The Company makes provisions for matters brought against it when, in the opinion of management after seeking legal advice, it is probable that a liability exists, and the amount can be reliably estimated. As at March 12, 2025, the probability of a material outflow due to any legal action is considered by management to be remote.
OFF BALANCE SHEET ARRANGEMENTS
Tenaz does not have any off-balance sheet arrangements that would result in a material change to its financial position, performance or funds flow from operations during the reporting periods.
RELATED PARTY TRANSACTIONS
Key Management Personnel Compensation
The compensation of directors and management is reviewed annually by the independent Governance and Human Resources Committee against industry practices for oil and gas companies of similar size and scope.
The following table summarized the compensation of directors and other members of key management personnel during the years ended December 31, 2024 and 2023
| (000s) | December 31
2024 | December 31
2023 |
| --- | --- | --- |
| Short-term benefits | 3,007 | 2,865 |
| Share-based compensation | 1,757 | 1,542 |
| Total | 4,764 | 4,407 |
ACCOUNTING STANDARDS, CHANGE IN ACCOUNTING POLICIES AND PRONOUNCEMENTS
Tenaz's audited consolidated financial statements have been prepared in accordance with IFRS Accounting Standards as issued by the IASB.
New and Amended Accounting Standards and Interpretations
The Company adopted amendments to IAS 1 Presentation of Financial Statements on January 1, 2024. IAS 1 was amended to specify the requirements for classifying liabilities as current or non-current. The amendments clarify:
- What is meant by a right to defer settlement;
- That the right to defer settlement must exist at the end of the reporting period; and
- That classification is unaffected by the likelihood that an entity will exercise its deferral right
TENAZ ENERGY CORP. | MD&A | 19
In addition, a requirement has been introduced whereby an entity must disclose when a liability arising from a loan agreement is classified as non-current and the entity's right to defer settlement is contingent on compliance with future covenants within twelve months.
The amendments had no impact on the Company's financial statements.
Future Accounting Pronouncements
IFRS 18 Presentation and Disclosure in Financial Statements
IFRS 18 Presentation and Disclosure in Financial Statements was issued in April 2024 by the International Accounting Standards Board and replaces IAS 1 Presentation of Financial Statements. The Standard introduces a defined structure to the statements of comprehensive income and specific disclosure requirements related to the same. The Standard is required to be adopted retrospectively and is effective for fiscal years beginning on or after January 1, 2027, with early adoption permitted. The Company is evaluating the impact that this standard will have on the consolidated financial statements.
IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures
IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures were amended in May 2024 to clarify the date of recognition and derecognition of financial assets and liabilities. The amendments are effective for fiscal years beginning on or after January 1, 2026, with early adoption permitted. The Company is evaluating the impact that this amendment will have on the consolidated financial statements.
A summary of material accounting policies can be found in Note 3 to the annual consolidated financial statements for the year ended December 31, 2024.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with IFRS Accounting Standards requires management to make certain judgments, accounting estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, revenues and expenses.
A summary of Tenaz's critical judgments, estimates and assumptions can be found in Note 5 to the annual consolidated financial statements for the year ended December 31, 2024, which includes:
- Crude oil, condensate, natural gas, and natural gas liquids reserve estimation;
- Recoverability of asset carrying amounts;
- Nature and classification of crude oil and natural gas investments;
- Determination of exploration and evaluation assets;
- Determination of provisions and contingent liabilities;
- Determination of decommissioning liabilities;
- Determination of share-based compensation;
- Determination of income taxes;
- Determination of fair value estimates in business combinations.
RISK FACTORS, RISK MANAGEMENT AND UNCERTAINTIES
Tenaz monitors and complies with current government regulations that affect its activities, although operations may be adversely affected by changes in government policy, regulations or taxation, or government tariffs. In addition, Tenaz maintains a level of liability, and property insurance, which is believed to be adequate for the Company's size and activities but is unable to obtain insurance to cover all risks within the business or in amounts to cover all possible claims.
Natural disasters, wars, terrorist attacks, riots or civil unrest, could materially and negatively impact the Company's business, its revenues and ultimately its profitability. Such events or occurrences may have a materially negative effect on one or more factors upon which the Company's business relies, including without limitation the demand for, and therefore the price of, the natural resource products produced by the Company; supply chains the Company uses to operate its business; and the availability of capital required by the Company to fund its operations.
TENAZ ENERGY CORP. | MD&A | 20
See "Forward-Looking Information" in this MD&A and "Risk Factors" in Tenaz's most recently filed AIF information, available on SEDAR+ at www.sedarplus.ca, for additional information.
CONTROL ENVIRONMENT
Disclosure Controls and Procedures ("DC&P")
As of December 31, 2024, Tenaz conducted evaluation of the effectiveness of Tenaz's DC&P as defined in Canada by National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings ("NI 52-109"). Based on that evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures are effective, as of December 31, 2024, to ensure that the information required to be disclosed in the reports that Tenaz files or submits under securities legislation is recorded, processed, summarized, and reported, within the time periods specified in the rules and forms therein. DC&P include, without limitation, controls and procedures designed to ensure that the information required to be disclosed by Tenaz in the reports that it files or submits under securities legislation is accumulated and communicated to Tenaz's management as appropriate to allow timely decisions regarding the required disclosure.
Internal Control over Financial Reporting ("ICFR")
ICFR generally is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS Accounting Standards, and includes policies and procedures pertaining to the maintenance of records and that are designed to provide reasonable assurance (i) that transactions are recorded to permit the preparation of financial statements and receipts and expenditures are made within corporate authorizations, and (ii) regarding the prevention or timely detection of unauthorized acquisition, use or disposition of corporate assets that could have a material effect on the financial statements. Because of its inherent limitations, ICFR may not prevent or detect misstatements. The Internal Control - Integrated Framework (2013) was used to design Tenaz's ICFR. The Company's certifying officers evaluated, or caused to be evaluated under their supervision, the effectiveness of Tenaz's ICFR at December 31, 2024 and concluded that Tenaz's ICFR was effective as of December 31, 2024.
ADVISORIES
Non-GAAP and Other Financial Measures
This MD&A and report contains the terms funds flow from operations and capital expenditures which are considered "non-GAAP financial measures" and operating netback which is considered a "non-GAAP financial ratio". These terms do not have a standardized meaning prescribed by GAAP. In addition, this MD&A contains the term adjusted working capital (net debt), which is considered a "capital management measure". Accordingly, the Company's use of these terms may not be comparable to similarly defined measures presented by other companies. Investors are cautioned that these measures should not be construed as an alternative to net income (loss) determined in accordance with GAAP and these measures should not be considered to be more meaningful than GAAP measures in evaluating the Company's performance.
TENAZ ENERGY CORP. | MD&A | 21
Non-GAAP Financial Measures
Funds Flow from Operations ("FFO")
Tenaz considers funds flow from operations to be a key measure of performance as it demonstrates the Company's ability to generate the necessary funds for sustaining capital, future growth through capital investment, and settling liabilities. Funds flow from operations is calculated as cash flow from operating activities plus income from associate and before changes in non-cash operating working capital and decommissioning liabilities settled. Funds flow from operations is not intended to represent cash flows from operating activities calculated in accordance with IFRS Accounting Standards. A summary of the reconciliation of cash flow from operating activities to funds flow from operations, is set forth below:
| ($000) | Q4 2024 | Q3 2024 | Q4 2023 | 2024 | 2023 |
|---|---|---|---|---|---|
| Cash flow from operating activities | 23 | 11,923 | 8,927 | 6,244 | 15,176 |
| Change in non-cash operating working capital | 6,114 | (10,469) | (3,113) | 7,641 | 274 |
| Decommissioning liabilities settled | 1,065 | 243 | 6,187 | 5,350 | 9,048 |
| Midstream income | 1,097 | 1,663 | 1,400 | 5,289 | 4,364 |
| Funds flow from operations(1) | 8,299 | 3,360 | 13,401 | 24,524 | 28,862 |
(1)FFO per share (basic) is calculated as FFO divided by the weighted average common shares outstanding. Diluted FFO per share adjusts for the impact of potentially dilutive securities using the treasury stock method. For the periods presented, FFO per share was as follows: Q4 2024: $0.30 basic, $0.26 diluted; Q3 2024: $0.12 basic, $0.11 diluted; Q4 2023: $0.50 basic, $0.45 diluted; Year ended December 31, 2024: $0.90 basic, $0.79 diluted; Year ended December 31, 2023: $1.05 basic, $0.99 diluted.
Capital Expenditures
Tenaz considers capital expenditures to be a useful measure of the Company's investment in its existing asset base calculated as the sum of exploration and evaluation asset expenditures and property, plant and equipment expenditures from the consolidated statements of cash flows that is most directly comparable to cash flows used in investing activities. The reconciliation to primary financial statement measures is set forth below:
| ($000) | Q4 2024 | Q3 2024 | Q4 2023 | 2024 | 2023 |
|---|---|---|---|---|---|
| Exploration and evaluation | 501 | 462 | 357 | 1,948 | 1,519 |
| Property, plant and equipment | 4,461 | 6,484 | 2,610 | 16,277 | 23,336 |
| Capital expenditures | 4,962 | 6,946 | 2,967 | 18,225 | 24,855 |
TENAZ ENERGY CORP. | MD&A | 22
Free Cash Flow ("FCF")
Tenaz considers free cash flow to be a key measure of performance as it demonstrates the Company's excess funds generated after capital expenditures for potential shareholder returns, acquisitions, or growth in available liquidity. FCF is a non-GAAP financial measure and is comprised of funds flow from operations less capital expenditures. A summary of the reconciliation of the measure, is set forth below:
| ($000) | Q4 2024 | Q3 2024 | Q4 2023 | 2024 | 2023 |
|---|---|---|---|---|---|
| Funds flow from operations | 8,299 | 3,360 | 13,401 | 24,524 | 28,862 |
| Less: Capital expenditures | (4,962) | (6,946) | (2,967) | (18,225) | (24,855) |
| Free cash flow | 3,337 | (3,586) | 10,434 | 6,299 | 4,007 |
Midstream Income
Tenaz considers midstream income an integral part of determining operating netback. Operating netback assists management and investors with evaluating operating performance. Tenaz's midstream income consists of the income from its associate, Noordtgastransport B.V. and excludes the amortization of fair value increment of NGT that is included in the equity investment on the balance sheet. Under IFRS Accounting Standards, investments in associates are accounted for using the equity method of accounting. Income from associate is Tenaz's share of the investee's net income and comprehensive income.
| ($000) | Q4 2024 | Q3 2024 | Q4 2023 | 2024 | 2023 |
|---|---|---|---|---|---|
| Income from associate | 917 | 1,418 | 543 | 4,383 | 3,507 |
| Plus: Amortization of fair value increment of NGT | 180 | 245 | 857 | 906 | 857 |
| Midstream income | 1,097 | 1,663 | 1,400 | 5,289 | 4,364 |
Non-GAAP Financial Ratio
Operating Netback
Tenaz calculates operating netback on a dollar or per boe basis, as petroleum and natural gas sales less royalties, operating costs and transportation costs, plus midstream income. Operating netback is a key industry benchmark and a measure of performance for Tenaz that provides investors with information that is commonly used by other crude oil and natural gas producers. The measurement on a per boe basis assists management and investors with evaluating operating performance on a comparable basis. Tenaz's operating netback is disclosed in the "Operating Netback" section of this MD&A.
Capital Management Measure
Adjusted Working Capital (Net Debt)
Management views adjusted working capital (net debt) as a key industry benchmark and measure to assess the Company's financial position and liquidity. Adjusted working capital (net debt) is calculated as current assets less current liabilities and long-term debt, excluding the fair value of derivative instruments. Tenaz's adjusted working capital (net debt) is disclosed in the "Capital Resources and Liquidity" section of this MD&A.
Supplementary Financial Measures
- "Operating expense per boe" and "Transportation expense per boe" are comprised of the respective line item from the consolidated statements of net income, as determined in accordance with IFRS Accounting Standards, divided by the Company's or business units total production.
- "Realized heavy crude oil price", "Realized natural gas liquids price", "Realized natural gas price", and "Realized petroleum and natural gas sales price" are comprised of commodity sales from the respective commodity, as determined in accordance with IFRS Accounting Standards, divided by the Company's production of the respective commodity.
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- "Royalties as a percentage of sales" is comprised of royalties, as determined in accordance with IFRS Accounting Standards, divided by commodity sales from production as determined in accordance with IFRS Accounting Standards.
Non-GAAP Financial Ratios
- "Funds flow from operations per basic share" is comprised of funds flow from operations divided by basic weighted average common shares.
- "Funds flow from operations per diluted share" is comprised of funds flow from operations divided by diluted weighted average common shares.
Barrels of Oil Equivalent
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.
Forward-looking Information
This MD&A and annual report contains certain forward-looking information and statements within the meaning of applicable securities laws. The use of any of the words "expect", "anticipate", "budget", "forecast", "guidance", "continue", "estimate", "objective", "ongoing", "may", "will", "project", "should", "believe", "plans", "potential", "intends", "strategy" and similar expressions are intended to identify forward-looking information or statements. In particular, but without limiting the foregoing, this MD&A and report contains forward-looking information and statements pertaining to our beliefs about liquidity; matters relating to NOBV including expectations for our base business and our financial position before and after closing of the NOBV acquisition; Tenaz's capital plans; activities and budget for 2025, and our anticipated operational and financial performance; expected well performance; potential drilling opportunities; our production and capital guidance including forecast average production volumes and capital expenditures for 2025; the ability to grow our assets domestically and internationally; statements relating to a potential CCS project; and the Company's strategy.
The forward-looking information and statements contained in this MD&A and report reflect several material factors and expectations and assumptions of Tenaz including, without limitation: the continued performance of Tenaz's oil and gas properties in a manner consistent with its past experiences; that Tenaz will continue to conduct its operations in a manner consistent with past operations; expectations regarding future development; the general continuance of current industry conditions; the continuance of existing (and in certain circumstances, the implementation of proposed) tax, royalty, tariff and regulatory regimes; expectations regarding future acquisition opportunities; the accuracy of the estimates of Tenaz's reserves and resource volumes; certain commodity price and other cost assumptions; the continued availability of oilfield services; and the continued availability of adequate debt and equity financing and cash flow from operations to fund its planned expenditures.
Tenaz believes the material factors, expectations and assumptions reflected in the forward-looking information and statements are reasonable, but no assurance can be given that these factors, expectations, and assumptions will prove to be correct.
The forward-looking information and statements included in this MD&A and report are not guarantees of future performance and should not be unduly relied upon. Such information and statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information or statements including, without limitation: changes in commodity prices; changes in the demand for or supply of Tenaz's products; unanticipated operating results or production declines; changes in tax or environmental laws, royalty rates or other regulatory matters; changes in development plans of Tenaz or by third party operators of Tenaz's properties, increased debt levels or debt service requirements; inaccurate estimation of Tenaz's oil and gas reserve volumes; limited, unfavorable or a
TENAZ ENERGY CORP. | MD&A | 24
lack of access to capital markets; increased costs; a lack of adequate insurance coverage; the impact of competitors; a failure to obtain necessary approvals as proposed or at all and certain other risks detailed from time to time in Tenaz's public documents.
The forward-looking information and statements contained in this MD&A and report speak only as of the date of this MD&A and report, and Tenaz does not assume any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws.
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Management's Responsibility for the Financial Statements
The annual consolidated financial statements of Tenaz Energy Corp. as at and for the years ended December 31, 2024 and 2023 were prepared by management within acceptable limits of materiality and are in accordance with IFRS Accounting Standards as issued by the IASB. Management is responsible for the integrity, consistency, objectivity and reliability of the consolidated financial statements.
The consolidated financial statements have been prepared by management in accordance with the accounting policies as described in the notes to the consolidated financial statements. Timely release of financial information sometimes necessitates the use of estimates when transactions affecting the current accounting period cannot be finalized until future periods. When necessary, such estimates are based on informed judgments made by management. Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance that all assets are safeguarded, transactions are appropriately authorized, and to facilitate the preparation of relevant, reliable, and timely information. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Deloitte LLP, an independent firm of Chartered Professional Accountants appointed by the shareholders, have conducted an audit of the Consolidated Financial Statements in accordance with Canadian general accepted auditing standards and their report follows. The Audit Committee, consisting of non-management directors, has met with representatives of Deloitte LLP and management to determine if management has fulfilled its responsibilities in the preparation of the consolidated financial statements. The Board of Directors has approved the consolidated financial statements on the recommendation of the Audit Committee.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance that all assets are safeguarded, transactions are appropriately authorized, and to facilitate the preparation of relevant, reliable, and timely information. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management has assessed the effectiveness of the internal control over financial reporting for Tenaz Energy Corp. The assessment was based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management concluded that the Company's internal control over financial reporting was effective as of December 31, 2024.
/s/ Anthony Marino
President and Chief Executive Officer
/s/ Bradley Bennett
Chief Financial Officer
March 12, 2025
Calgary, Albert
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