Valeura Energy Inc. (VLU), the upstream natural gas company focused on the Thrace Basin of Turkey, provides a trading update for the three-month period ended June 30, 2020. This is in advance of the Company’s full financial and operating results which will be announced on August 12, 2020.
Value Proposition
As of June 30, 2020, the Company was in a strong financial position, with no debt and a cash balance of US$30.7 million. Spending during the second quarter related to drilling two shallow exploration commitment wells and conducting testing operations on the Devepinar-1 well in the deep gas play. The Company continues to manage its capital and operating costs aggressively to protect Valeura’s strong net cash position.
The Company’s cash value is over 50% higher than its current market capitalisation, which is approximately US$20.0 million1. As a result, management believes Valeura shares offer compelling value based on:
Cash of US$30.7 million at June 30, 2020;
A producing conventional shallow gas business in a strong gas price market with externally evaluated NPV10 of US$23.8 million at December 31, 2019, based on after-tax value of 1P reserves;
Upside value attributable to its unconventional deep gas play; and
The expectation that inorganic opportunities such as mergers and acquisitions will play a role in the Company’s growth, as the Company seeks to leverage its strong financial position.
Ongoing production operations
Second quarter 2020 production averaged 521 boe/d, comprised primarily of gas produced from the Company’s ongoing conventional shallow gas programme. This is a decrease of 27% over the prior quarter, reflecting lower natural gas demand from its customer base due to the combined impact of a reduction in local industrial activity in light of the COVID-19 pandemic and national holidays in Turkey. Toward the end of the quarter, economic activity and gas demand had begun to ramp up as Turkey’s lockdown restrictions reduced, resulting in production increasing by 40% in June, compared to the lower rates experienced in May.
Price realisations in the second quarter were effectively unchanged from the first quarter on a Turkish Lira basis and averaged US$6.24 per thousand cubic feet (“Mcf”), reduced from the prior quarter by 12%, reflecting a strengthening US dollar in relation to the Lira. Effective July 1, 2020 the Government of Turkey lowered the natural gas reference price in Turkish Lira by 10%.
Operations in Turkey are returning to normal with COVID-19-related restrictions being eased. Valeura personnel have resumed both office and field work arrangements and the Company is preparing to resume production enhancement work, including workovers and production testing of its two recently drilled shallow exploration commitment wells. Wireline logs indicate that both wells encountered gas zones.
Continuing deep gas appraisal
The Company is pleased that on July 1, 2020, the Government of Turkey announced the extension of Valeura’s three exploration licenses at Banarli and West Thrace until June 27, 2022. This is the first of up to three possible two-year extensions providing a period of up to six additional years to explore and appraise the deep play before the requirement to convert the licences to production leases. This first licence extension period carries an obligation to drill a well on each license. These commitments can be fulfilled by either deep appraisal wells or shallow exploration or production wells.
During the second quarter Valeura resumed production testing of the Devepinar-1 well in which the Kesan Formation had been previously stimulated at three depths between 4,640 and 4,765 metres. This zone flowed gas to surface over a cumulative total of 41 days, producing an aggregate 28.6 MMcf of natural gas, of which approximately 75% was produced into the Company’s infrastructure and sold to customers. The well’s average initial production rate over 30 days (IP-30) was 890 Mcf/d, and over the course of the test period, declined to approximately 170 Mcf/d for the final 7 days of flow. Testing and evaluation of this section in the well has now been completed and the well has since been shut in. Pressure build up data will now be acquired to assist in interpretation.
Based on the new Devepinar-1 flow test data which was tested deep with the Kesan Formation, the Company is continuing studies to identify sweet spots for the play where higher porosity reservoir, which is normally encountered in the top approximately 300m of the Kesan Formation, is coupled with enhanced natural fracturing to yield a higher sustained gas flow rate. Refined 3D seismic interpretation, petrophysical analysis and reservoir modelling work will be used to build an inventory of potential locations for future vertical and horizontal appraisal drilling.
Valeura will seek a new partner to participate in the play, for a programme which will target additional deep appraisal wells, stimulation, and testing.
Growth Strategy
The Company is evaluating several potential inorganic growth transactions, including mergers and acquisitions, and has engaged RBC Capital Markets to support certain of these opportunities. Management believes the conditions are favourable for inorganic growth to play a significant role in the forward strategy as the current market environment is generating a flow of new deal opportunities which the Company is well-positioned to pursue given its enviable financial position.
