Co-owned by Tokyo Gas Co. Ltd. and Castleton Commodities International LLC, TG Natural Resources LLC holds more than 300,000 net acres of Haynesville gas resource with premier proximity to Gulf Coast export plants. Learn of its success in surfacing its rich resource.

Joe Markman, Senior Editor, Hart Energy

Craig Jarchow, President & CEO, TG Natural Resources LLC

Joe Markman (00:54): TG Natural Resources began assembling its portfolio in the Haynesville in 2014. Since then, the company has made significant acquisitions from Anadarko, Shell and Range Resources and now holds more than 300,000 net acres of natural gas resource in the area. Craig will detail his company's success story and outline its strategy for us.

Craig Jarchow (1:23): Thank very much. What I'd like to do today is talk a bit about my company, but to make the talk interesting to you… What I want to talk about are really four things, and we call these the four M'S. One is management and management, broadly defined, by that we mean the team who our investors are the status of the company at the present time, where we operate and so forth. The second M is macro, and that is our macro view of the current upstream environment, where we see opportunity, where we see arbitrage and how we're seizing on that arbitrage. The third M is micro, and that is what are we doing? How do we go about operating and what do we think we're reasonably good at? And then the final M is model, and that is what is our strategic model?

(2:29): What is our vision? Where do we see the opportunity and why do we think this is a good business in the midst of the energy transition and the reality of climate change? So I'll try to cover all of these in a short period of time. The first lie is just simply the management team. We have a full team here at TG Natural Resources. We've been with our investors for quite some time now. Many of us have worked together for 20 years or more. So this team, as we say, is the full meal deal. This is the sort of team that you'd expect to see in a large independent company. Our owners are Tokyo Gas, who own 79% of our equity, and CCI, Castleton Commodities International, who owns the other 21%. And CCI is the old Louis Dreyfus. You might be more familiar with that name.

(3:21): And the history there is CCI was taken private in 2012 by a group of 25 family offices. So we're owned by two companies, not funds, and none of our owners own us through a fund with some time limit. They're just looking for capital appreciation. So we behave just like a large independent, and there is no need to sell, no impetus to sell at any point in time. We operate in the Haynesville play as it's called, really East Texas, North Louisiana. We've assembled the company through a series of acquisitions for our strategy is a little bit different than our neighbors and is tailored to what our investors want to accomplish. But we are a multi-billion dollar company. We have 180,000 acres. We produce about a third of a Bcf/d. And we are a company of size, and we're looking to grow even more in our sandbox.

(4:16): And if you look at the acquisitions that we've done, and again, we've grown by acquisitions, we haven't done a lot because we're very careful and methodical about what we look at and what we purchase. Our first acquisition to size is we bought EDF out of East Texas in 2015, quite some time ago. The marquee deal company making deal for us is we acquired Anadarko out of East Texas; their Carthage assets, that was a billion dollar deal. We bought Shell out of the Haynesville, their JV [joint venture] partnership with Exco. And then more recently we bought range out of the Terryville field in northern Louisiana. And of course all of these deals have been great deals for us, and – thank you very much – commodity prices, if you look at our production profile, and this is key to who we are our production decline is very, very low.

(5:10): It's very gradual, and that's key to our strategy. If you look at one of our acquisitions, large acquisitions, the five year CAGR decline is about 11%. We did another Haynesville deal there. The decline is closer to 21% on a five-year basis. We did another Cotton Valley acquisition, that's acquisition No. 3. There again, the five-year decline is only 10%, and we're very focused on decline rates. And why is that? It leads to durability and EBITDA, as we call it. And it allows us to hang around the hoop, hang out in the weeds for years literally and do nothing other than just operational things, waiting for the right acquisition to come along. So that's key to who we are, the low decline rate. So that's management as we call it – the team, the investors and the company as it now stands. Let's talk about the second M, that being the macro.

(6:09): And originally when we founded the company, we recognized a very interesting arbitrage in our business. And of course we're owned by a trader, CCI. So we talk about arbitrage and we discovered this really by accident in that we were drilling away ourselves and also participating in a lot of non-op wells. We consent to about a hundred outside operated AFEs [authorization for expenditure] in the Haynesville every year. So we have a good bird's eye view as to what the finding costs are in the Haynesville. And when we originally looked at it on average the finding cost was about a dollar cost a dollar to find an MMcfe. And at the same time, we were looking at acquisitions and we were penciling out those acquisitions and they were penciling out to a much lower acquisition cost. We could acquire an MMcfe for closer to 35 cents. And since we're private and since we have very low decline, we said, well, why are we drilling?

(7:08): Let's just drop rigs and let's acquire. And that's what we did. And indeed, if you look at our acquisitions, that was the number that is the acquisition price about 35 cents/MMcfe. Now, fast forward to today, prices have gone up and that arbitrage has disappeared. No surprise when it comes to just about any arbitrage on the planet: capital flows to that opportunity and the arbitrage disappears. And that's what's happened in our business. If you look at the cost of acquiring and the cost of finding, they're about the same now. And as Gordon mentioned in his talk just now, because of inflation, the average cost of finding an MMcfe is closer to $1.30 as opposed to a dollar. So we're indifferent to acquiring versus drilling. And indeed we will do both. And of course, both acquisitions and drilling are very effective ways to deploy material capital in this business, which this chart shows in a schematic way.

(8:09): So where are we now? Where are the arbitrage opportunities? Where do we sit? And we're in a very unusual circumstance now, as we all know in that our business is now starved of capital. And this was never the case, certainly not my career. We are, as we all know, among the most capital consumptive businesses in the world, if not the most. And here we find ourselves in a circumstance where upstream bond issuances are way down. The high yield markets are pretty well-closed to our business. You can get a deal done, but you're not going to like the interest rate. If you look at upstream equity issuances, to Gordon's point, that's uninteresting. We haven't had a lot of IPOs. And if you look at the amount of private equity capital raised in recent years, there's been some, but that is way off. So what does this all mean here?

(9:03): We are the most capital-consumptive business in the world. Demand is there. Where's the capital going to come from? And the answer is going to come from cash flow, of course. And what does that mean? Well, to get that cash flow, prices have to go up, and they have to stay up. And the capital now in our business doesn't exist necessarily in the high yield markets. It doesn't exist in the public markets. It is less so coming from private equity. Where's that capital? It's sitting on company balance sheets right now. And that's the interesting arbitrage. That's an interesting play and it's something that we're currently pursuing. So that's the macro. What are we doing? What do we think we're particularly good at? We are an acquirer and we have to make the most of what we acquire. So we think we're pretty good at operations.

(9:59): If you look at the number of wells that we have per lease operator, it's a key metric for us. That's 125. In our recent acquisitions, that number was 20 for the companies that we acquired from. And to Gordon's point, we are wired, we have a central control room. We monitor all of our operations and we're organized to get that metric. That is lease operator productivity up as high as we can. We also are very focused on full well stream operations. This is something that we discovered in acquiring the ANCO assets and Anadarko. They have centralized facilities and that saves a lot of money because the lease operators have to spend less time at each well site. And there are lots of well sites. We operate about 4,000 wells. And what we do is we simply take all the storage tanks and the separators and all the compression from the well sites and move them to central locations and then flow all of the water in the oil and gas.

(11:02): So on blood, guts and feathers, as we say to a central facility and process it there. The interesting thing about that is it also has ESG implications in that when you retire all of these tanks, all those leaky thief hatches go away. They don't have to be repaired, they're not there. They disappear. The pneumatic valves, all of that is gone. So in our recent acquisition, we've actually retired 432 tanks of the size you see there in the picture, 98 separators, 70 EBUs, and that makes a huge difference when it comes to our cost of operating and our ESG footprint. When it comes to ESG, like others, we're heavily focused on that. And like others, we think we go the extra mile. Well we know we do. If you look at our safety record, our TRIR and DART metrics have been zero for years on end, and we're very proud of that. When it comes to LDAR, which is leak detection in our business that is looking for methane leaks.

(12:02): Of course we do the standard floor camera work, which is required by regulation, but we actually have two drones in an FAA licensed drone pilot who is full-time just flying that drone looking for spills and leaks, that sort of thing. We flew an aerial methane survey and with a helicopter, we've also armed each one of our EH and S people personnel with something called a laser methane mini. And they are empowered to go and detect whatever they want to detect on well sites and report that. So just in the past year or so, we've done 3,500 LDAR surveys on 730 different sites. So our emissions are way down, just like Aethon’s. And then we're also focused on diversity and inclusion. We have a high proportion of women in our leadership, which is not as common as it needs to be in our business. This is just a couple pictures that show number one, the drones that we deploy.

(13:03): And then number two, on the right hand side, you see a picture of a laser methane mini. And these things are not inexpensive, they're about $11,000 a piece, but we have lots of them because we think it's a good investment and our EH and s people are armed with that equipment. So that's the micro, that's what we think we're good at. You may disagree, but what about the model? What is our strategic model? What is our strategic vision in these unusual times? Of course one thing we're going to do is recognize and capitalize on the arbitrage, the opportunities that we see. As I mentioned, capital constraint preferred access to capital is something that we're focused on. Another is just connecting the dots. My strategy professor when I did my MBA said that commodities only exist in the minds of the inept. And that has really bothered me ever since I heard that.

(13:59): And ultimately, if we can get more customer bonding that is linked portions of the value chain, then we become less of a commodity business. And the certified natural gas is a way to do that. That's something that we're focused on. But what about this business going forward? Is it a sunset business? And we can all read the press and books about that and I would say, Well no, it's not. But you really don't care about my opinion. What I would suggest you look at is, well, let's just follow the money and certainly leading indicators for this being a sunset business or twofold in my mind. One is, are any investors investing in long term projects? Big capital projects like deep water platforms, LNG facilities require a ton of money. They have to be project financed. And these projects, the project finance needs to be undergirded by long term contracts with credit worthy counterparties.

(14:58): So leading indicator of this business, sun is none of that stuff is getting done. Another leading indicator would be, well, we value companies. When we value assets, are the terminal values going to zero? And the answer is they're not. So if we look at just the LNG business and the Gulf Coast and track the number of long term contracts that have been signed just in the last year and a half, there have been 50, about 50 binding contracts sign. And these are on facilities, most of which won't be up and running until 2026 or 2027. And to get the financeability, you need to have long-term contracts. 10 years won't do it. You're not financeable with a contract that short, more like 20 years. And if you look at the contracts then, well most of them are at least 20 years in length. There's some that are 25. So these investors, the providers of the project finance, the signers of those contracts are betting that this will be a good business out through 2045, 2050. So don't believe me, just follow the money. And that seems to be what's going on. And we plan to be a constructive participant in this business by producing natural gas in a responsible way.

JM (16:25): Sure. Thank you Craig. We have time for just one question and let's see what it will be. That's a good question. Which certified guest body are you subscribing to?

CJ (16:48): We have gone with Project Canary initially, and we've looked at their competitors. We are gold certified we'd like to do better, we'd like to be platinum and we're working on that. But it's been a very interesting process and it's a necessary process. And that business is a little bit like the Wild West. It's going to evolve and we'll see how it shakes out. Cause ultimately what's going on there is we're being certified by a third party when it comes to our ESG metrics and we're certified by others as well. In our business. One is, well, our financials are certified relative to GAP by SST and KPMG and so forth. And our reserves are certified by third party auditors, the likes of net and so forth. But the way those businesses are structured is a little bit different than what we're seeing now in that the entities that do the certification don't make the rules. They're separate. And that's not what's going on in ESG certification. So it may be the case that we see a bifurcation of those two similar to what we see in finance and reserves. I would think. So that just makes sense. Otherwise, if not, we as companies could shop among the different providers and say, Well Canary, I like your metric, but MiQ, I don't like yours, therefore I'll go with Canary. And that's just not the right dynamic.