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We took TCF on the road for an in-person marketing tour, and this is what we learned:
1) Investors are largely keen to see an acceleration of growth: TCF was able to demonstrate the optionality that comes with the free cash flow generation from its current portfolio of reserves and resources that can be put towards on-block and off- block exploration (Figures 1 & 2).
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Unto this, TCF generates US$12 million and US$71 million of FCF in 2023 and 2024 that we believe can be put towards developing this exploration upside.
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Acceleration can be achieved by: 1) adding a second rig to the drilling program to accelerate the reserve and resource development plus on-block exploration, which can take 6 - 9 months to secure and start drilling and 2) putting cash towards obtaining off-block licenses and shooting/interpreting seismic to delineate future prospects. We estimate this optionality opens up when the company reaches eight wells on production with Q4/23 as the cash inflection point with an estimated balance of US$18 million.
2) TCF's current 24 well drilling program is targeting 64 Bcf of reserves and prospective resources with line-of-sight to another 29 Bcf of recoverable resources with on-block exploration (Figures 3 & 4).
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On our EC price deck, we estimate an un-risked NAV12.5 of almost C$490 million with the 24 well development program. We see this increasing to roughly C$680 million when factoring in the upside from the 29 Bcf of on-block exploration.
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The on-block exploration can be targeted with existing infrastructure. This is key, as all capex goes to the drill bit.
3) Off-block exploration offers an "elephant hunting" opportunity for TCF: Discoveries in the western Black Sea imply that there is enough gas charged rock for big opportunities. TCF believes there are 100 - 300 Bcf sized opportunities in the shallow water regions.
4) The SASB has stacked pay: Once a well has declined to a certain production level, TCF can re-perforate a shallower zone, which kicks production back up at a flush rate similar to a new well. TCF management believes this will only cost US$500,000 and keeps production flat for longer (Figure 6).
5) Not only did Guluc-2 prove there is reserves upside, but it also validates TCF's development program with the use of long reach horizontals (Figure 7).
6) The SASB had US$600 million of infrastructure constructed on it, and TCF purchased the asset for US$2.5 million through a bankruptcy procedure. We think this is a company making deal and point to the success that SDE (BUY; C$27.00 PT; Analyst: Phil Skolnick) was able to achieve through buying a distressed company (Bellatrix) with already built-out infrastructure (Figures 8 & 9).
7) Overall sentiment is that TCF is caught up in natural gas bearishness while at 1.8 MBOE/d, it is generating the same amount of cash as an 11 MBOE/d producer using the average cash netback of C$19.25/BOE within North American gas weighted E&Ps (Figures 10 & 11).
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