Mr. Anthony Marino reports

TENAZ ENERGY CORP. ANNOUNCES Q3 2023 RESULTS

Tenaz Energy Corp. has released its financial and operating results for the three and nine months ended Sept. 30, 2023.

The unaudited interim condensed consolidated financial statements and related management's discussion and analysis are available on SEDAR+ and on Tenaz's website. Select financial and operating information for the three and nine months ended Sept. 30, 2023, appear herein, and should be read in conjunction with the related financial statements and MD&A.

A webcast presentation to accompany this release is available on Tenaz's website.

Highlights

Third quarter operating and financial results:

• Tenaz closed the acquisition of XTO Netherlands Ltd. early in Q3 2023. The XTO acquisition increases its position in the Dutch North Sea, nearly doubling its working interest in the primary producing fields in which it already had ownership. The acquisition also increases its ownership in the NGT mid-stream assets to 21.4 per cent, making Tenaz the second-largest shareholder in NGT. It views NGT infrastructure as a valuable mid-stream asset that is important for the Netherlands' economic security and the European energy transition.
• Production volumes averaged a record level of 2,372 barrels of oil equivalent per day in Q3 2023. Production in Canada during the quarter of 1,275 boe/d was down 4 per cent from second quarter 2023 due to the shut-in of certain wells during its completion activity on its 2023 drilling campaign and downtime at a third party gas plant. Production in the Dutch North Sea was 1,097 boe/d, up 89 per cent from Q2 2023, driven by the absence of planned turnaround activity and the XTO acquisition.
• Production volumes averaged 2,204 boe/d in the nine months ended Sept. 30, 2023, 97 per cent higher than the first nine months of 2022. Production was higher due to the acquisition of the Dutch assets in two separate transactions and its continuing development program at Leduc-Woodbend in Canada. Production from Leduc-Woodbend was 24 per cent higher for the nine-month 2023 period, with only minimal contributions from 2023 drilling.
• Completion and tie-in activities were completed on its four gross well (3.35 net) development program at the end of Q3 2023. All of the wells have been put on production, and gross production rates from the four wells are currently averaging 230 boe/d (87 per cent oil) per well, with the wells continuing to increase in production. For the first six weeks of fourth quarter 2023, the net production rate from the Leduc-Woodbend field has averaged approximately 2,000 boe/d.
• Total horizontal metreage in the four-well program was 14,900 metres, an average horizontal length of 2.3 miles, a record in Leduc-Woodbend drilling campaigns. The company generated high drilling efficiency with 100-per-cent placement of the horizontal section within the reservoir. An average of 130 fracks were placed per well at a placement efficiency of 97 per cent.
• Funds flow from operations for the third quarter was $4.8-million, 44 per cent higher than Q2 2023 and 112 per cent higher than Q3 2022. Higher quarter-over-quarter FFO resulted from higher production and lower expenses due to absence of facility turnarounds, coupled with higher prices for TTF natural gas. FFO included recognition of approximately $1.8-million of transaction and general and administrative costs, including legal and other services for potential future acquisitions.
• FFO for the nine months ended Sept. 30, 2023, was $15.5-million, 188 per cent higher than in the comparable 2022 period. Higher 2023 FFO primarily resulted from contributions from the new Dutch assets.
• Net income for Q3 2023 was $20.9-million, as compared with a loss of $800,000 in Q2 2023 and profit of $200,000 in Q3 2022. Higher net income resulted from the estimated gain on the acquisition of XTO, which is subject to adjustment pending final accounting for the transaction in a future period. Net income for the nine months ended Sept. 30, 2023, of $23.0-million was higher than net income of $4.5-million in the comparable period of 2022, primarily due to the gain on acquisition booked in the third quarter.
• The company ended Q3 2023 with positive adjusted working capital of $44.9-million, an increase of $27.8-million over the prior quarter, attributable to the acquired balances in the XTO acquisition. It acquired positive adjusted working capital of $43.1-million with XTO. Uses of cash in Q3 2023 included $13.2-million for Canadian development activities, $2.0-million for the Dutch capital investment including CCS design and $800,000 for its normal course issuer bid program. During Q3 2023, it repurchased and retired 233,000 shares at an average price of $3.51 per share. Since the beginning of the NCIB program in Q2 2022, it has retired 1.53 million common shares (5.4 per cent of basic common shares) at an average cost of $2.41 per share.
• Subsequent to the end of the third quarter, the company initiated a hedging program for European gas. As of now, it has hedged approximately 40 per cent of its expected European gas production for first quarter 2024 through a physical swap at 55.75 euros per megawatt-hour (approximately $24.12 per thousand cubic feet).

Budget and outlook:

• Capital expenditures during Q3 2023 were approximately $15.2-million. For year-to-date 2023, capital expenditures total $21.9-million. This total includes both drilling and development capital expenditures and exploration and evaluation capital expenditures.
• Its planned 2023 Canadian development program has been finished, with four gross (3.35 net) wells drilled, completed, equipped and tied in. Combining its Canadian investment program with modest Dutch workover and facility investment, year-to-date D&D capex is $20.7-million. It expects its D&D capex for 2023 to be at approximately the midpoint of its 2023 guidance range of $20-million to $24-million.
• During Q3 2023, it elected to participate in FEED (front-end engineering design) activities through the end of 2023 for the potential L10 CCS project in the Netherlands, which is classified as E&E capex due to the project's unsanctioned status. Year-to-date E&E capex is $1.2-million, with a projected total of $2.9-million for full-year 2023.
• Production for fourth quarter 2023 is expected to increase significantly from Q3 2023 levels, driven primarily by contributions from the new wells at Leduc-Woodbend. Annual production guidance, as updated following the XTO acquisition, is unchanged at 2,300 to 2,500 boe/d.

Corporate update:

• As at Nov. 13, 2023, Tenaz common shares have recorded capital appreciation of 109 per cent during 2023. This places Tenaz in the top 1 per cent of Toronto Stock Exchange-listed issues in total return for 2023. Trading liquidity has also increased, with the average number of shares traded on North American exchanges up 211 per cent, based on year-to date volume through October, 2023, as compared with the same period in 2022.
• The company is pleased to announce the appointment of Varinia Radu as an independent director of Tenaz. Ms. Radu is a partner and deputy head for energy and climate change in central and eastern Europe for the international law firm CMS, and an accomplished energy adviser in the European oil and gas, power, and renewable sectors. It expects her to add significantly to its board expertise in legal and regulatory matters, mergers and acquisitions, and European Union energy, and environmental, social and governance policy.

President's message

It is pleased to provide this quarterly update along with its financial and operating results. During the quarter, it further advanced its overseas acquisition strategy with the closing of the XTO transaction and, in parallel, executed its 2023 development program in Canada. Along with the transition activities for the newly added Dutch assets, it has continued to advance its M&A strategy on both continuing acquisition projects and new prospect evaluations in its geographic areas of focus. It views the current M&A market as constructive for value-adding transactions, which is a sharp contrast with the challenging M&A conditions of 2022.

Macro conditions are also supportive for the energy sector, with a dawning realization of the importance of energy security, including hydrocarbon supply as a desirable source during the energy transition. The Russian invasion of Ukraine has removed a large amount of pipeline gas to Europe, necessitating a substantial draw on existing liquefied natural gas capacity. New LNG projects are being sanctioned and are planned to be brought on-line during the rest of this decade, but the demand for secure supply of low carbon fuel is also rapidly growing. European governments have made a high priority of achieving natural gas security for this winter's heating season, and as a result, European natural gas storage is essentially full as of now, which is the traditional start of the withdrawal season.

Despite full inventory, spot TTF is trading at 48 euros per megawatt-hour (approximately $20.75 per thousand cubic feet), suggesting to the company underlying strength in this essential commodity. Moreover, this price strength is occurring against a backdrop of unusually warm November weather in most of Europe and North America. The winter supply position remains uncomfortably precarious, with continuing LNG flows required to balance demand and still significant supply coming from Russia to Europe through both LNG and pipelines. Further concerns are the impact of the Gaza war on Mediterranean supplies and the unfortunate possibility of wider Mideast conflict. Finally, each winter is a new ball game, with inventories usually starting at a high percentage of storage capacity, but ending inventories always dependent on the severity of the winter, as Europe has relatively limited storage as compared with North America. If these inventories are burned down during the withdrawal season more significantly than market expectations, prices will likely be supported in the subsequent injection season.

Following the end of Q3 2023, it executed fixed price arrangements for approximately 40 per cent of its expected European gas production for first quarter 2024 with a physical swap at 55.75 euros per megawatt-hour (approximately $24.12 per Mcf). It may add to fixed price positions over the coming months to ensure cash flow for 2024. Other hedging positions in Alberta Energy Company and Western Canadian Select differential have largely rolled off during 2023, but it continues to monitor both commodities for fixed price or downside protection opportunities.

Dutch operations

As announced prior to the end of Q2 2023, it acquired additional non-operated Dutch assets from XTO with an effective date of Jan. 1, 2023, closing this acquisition in early Q3 2023. In combination with its earlier acquisition of a private company in December, 2022, its total production rate in the Netherlands was approximately 1,100 boe/d during Q3 2023, an 89-per-cent increase from Q2 2023. In the XTO purchase, it also increased its shareholding in the NGT mid-stream system by 10.1 per cent, bringing its ownership in this high-reliability and valuable gathering business to 21.4 per cent. Year-to-date earnings from NGT are approximately $4.3-million (inclusive of both ownership stakes). NGT's earnings have typically been distributable, with dividend payments occurring in the first half of the subsequent year.

Increased production from its Dutch upstream assets in Q3 2023 was due to the closing of the XTO acquisition and the completion of scheduled annual turnaround activities, which were carried out in Q2 2023. Drilling and development capital expenditures of $1.8-million for the quarter were associated with well workovers (including installation of downhole sand screens), subsurface safety valve replacement and testing, seismic reprocessing, and facility enhancement and debottlenecking.

Tenaz has an 11.35-per-cent participation right in the L10 CCS project, which is intended to store carbon dioxide sourced from industrial emitters in a depleted offshore gas pool on the L10 licence. This project has entered the initial phase of front-end engineering design, which is scheduled to continue until the end of 2023. The final phase of FEED has a separate decision point for participation and is projected to last until first quarter 2025. The FEED phases are required for comprehensive project planning before making the final investment decision, with the FID currently slated for Q2 or Q3 2025. In the event of a positive FID, project start-up is estimated to occur in 2028, with injection of up to five million tonnes per annum of CO2 from the Port of Rotterdam to the storage location. The L10 gas field, located approximately 50 kilometres offshore in the Dutch North Sea, has a storage capacity of 96 million tonnes. The combined storage capacity of the L10 and other pools potentially amenable in the Tenaz licence areas is approximately 150 million tonnes.

Canadian operations

Production from the Leduc-Woodbend field averaged 1,275 boe/d in Q3 2023, a decrease of 4 per cent compared with Q2 2023, driven primarily by downtime on existing pads to allow for completion of new wells and downtime at a third party gas plant. Q3 2023 production was 4 per cent higher than Q3 2022 as a result of incremental volumes from two (1.75 net) wells drilled and brought on-line in Q4 2022.

Drilling, completion, equipping and tie-in operations for its four well (3.35 net) summer program finished in Q3, with the new wells brought on production in mid-September. These wells did not provide a meaningful contribution to Q3 2023 volumes due to the cleanup time required to recover completion fluids. These wells are the longest wells to date in the field, with total measured depths ranging from 5,000 to 5,700 metres. In addition to being the longest wells drilled to date, they also have the longest completed horizontal sections at Leduc-Woodbend, with completion intervals ranging from 3,600 to 4,200 metres. In aggregate, the wells were completed with a total of 524 fracks achieving 97-per-cent placement efficiency, with the number of frack stages ranging from 118 fracks in the shortest well to 150 fracks in the longest well. In one of the wells, it stuck completion tools on one of the final frack stages. Repair operations were partially successful, resulting in having 40 per cent of the horizontal interval fully open to production. Even this well has proved to be a fairly strong oil producer despite its suboptimal mechanical condition.

A number of geologic and engineering advancements have been made at Leduc-Woodbend since the recapitalization of Altura Energy in Q3 2021. Improved geologic description has allowed optimized positioning of horizontal laterals within the Rex sandstone, resulting in nearly 100-per-cent in-zone placement. Frack design and execution continue to be very effective, with 97 per cent of the attempted stages being placed. The use of longer horizontal wells from existing pads increases capital efficiency by reducing ultimate field development costs for well pad construction, drilling and completion, pumping equipment, and pipeline infrastructure. It also minimizes its surface footprint and reduces carbon emissions in both the capital investment and operating phases of field life.

It continues to drill wells in diverse parts of the Leduc-Woodbend Rex pool to reduce concentration risk while expanding the developed area and to gather data that will assist long-term exploitation of the field. Two of the wells in this year's campaign were drilled in the north part of the field, and one in the middle and one in the southern part. All four wells were successful, producing relatively consistent results despite being drilled in different areas.

Gross production rate for the new wells averages 230 boe/d per well (87 per cent oil), with production continuing to increase as the wells clean up. It does not attempt to max out initial production rates from the Rex wells, preferring to use a less capital-intensive rod pump lift system rather than higher-volume lift alternatives. The rod pump lift systems for new wells are sized for longer-term production performance, typically resulting in a production plateau or shallow decline for approximately six months after cleanup. At the field level, Leduc-Woodbend production rates have continued to increase since the start-up of the new wells. For the first six weeks of Q4 2023, the field has been producing approximately 2,000 boe/d net to Tenaz. It expects full-year 2023 Leduc-Woodbend production to be between 1,500 and 1,550 boe/d in the upper half of its guidance range.

Capital expenditures for the 2023 Canadian drilling program was $16-million, 7 per cent higher than its forecast. Approximately one-half of the overrun was for the partially successful fishing job to recover stuck completion tools. The other half resulted from wet-weather-driven downtime, modifications to frack design and an unplanned cleanout operation during the completion of one well.

Corporate discussion

With respect to corporate liquidity, positive adjusted working capital was $44.9-million at the end of Q3 2023, an increase of $27.8-million over the prior quarter, with the increase due to the XTO acquisition. Uses of cash in Q3 2023 included $13.2-million for Canadian development activities, $2.0-million for the Dutch capital investment including CCS design and $800,000 for its normal course issuer bid program. As an additional liquidity source, it remains undrawn on its $10-million bank facility.

Its NCIB program was renewed on Aug. 23, 2023, for an additional year. During Q3 2023, it retired 233,000 common shares at an average cost of $3.51 per share. As of the end of October, 2023, it has retired 1.53 million common shares (5.4 per cent of basic common shares) at an average cost of $2.41 per share.

On behalf of the board of directors, the company is pleased to welcome Ms. Radu as an independent director of Tenaz. Ms. Radu is an experienced international lawyer and business leader in the European energy industry. She has extensive experience in the oil and gas, power, and renewables industries, and has advised numerous companies in negotiation and financing of M&A transactions. Ms. Radu also has significant experience in the adoption of leading ESG practices in both traditional and renewable energy businesses in Europe. It expects her to add significantly to its board expertise in legal and regulatory matters, M&A, and EU energy, and ESG policy.

Ms. Radu is a partner and deputy head for energy and climate change in central and eastern Europe for the international law firm CMS, and an accomplished energy adviser in the European oil and gas, power, and renewables sectors. She is also the founder and proprietor of Energynomics, the leading publication and information platform for the energy sector in central and eastern Europe. Ms. Radu holds a BA in law from Babes-Bolyai University, an MA in international relations from the National School of Political and Administrative Studies, and an MA in petroleum management from the University of Oil and Gas Ploesti in Romania. In addition, she received an MBA from the University of Chicago Booth School of Business and a postgraduate diploma in board practice and directorship from the Henly Business School in Reading, United Kingdom.

In closing, the company views its previous acquisitions as demonstration of its approach to finding real value in the overseas M&A market for producing properties. These transactions reflect its philosophy of issuing as little equity as possible, while maintaining or even improving its conservative balance sheet and liquidity. Its team of technical and finance professionals is dedicated to securing additional value-adding acquisitions and is fully aligned with its broader shareholder group in pursuit of its shared success. As it has previously stated, it can make no guarantees regarding the certainty or timing of the next transaction, but it is optimistic about bringing quality assets into its asset portfolio in the future. When it does so, it is confident that its acquisition investment will be consistent with its stated financial and strategic goals. It appreciates the support of its shareholders as it pursues realization of its vision for Tenaz.

Anthony Marino,

President and chief executive officer,

Nov. 13, 2023

About Tenaz Energy Corp.

Tenaz is an energy company focused on the acquisition and sustainable development of international oil and gas assets capable of returning free cash flow to shareholders. Tenaz has domestic operations in Canada along with offshore natural gas assets in the Netherlands. The domestic operations consist of a semi-conventional oil project in the Rex member of the Upper Mannville group at Leduc-Woodbend in central Alberta. The Dutch natural gas assets are located in the Dutch sector of the North Sea.

We seek Safe Harbor.