Here's What Happened…
Valeura provided an operational update after market close today. A link to the release is provided here. In the interest of keeping the commentary on the news brief, I will summarize what I think are the key points and what I'll be looking for as the testing program continues. In a sentence, today's operational update confirms my two-pronged thesis on VLE. For one, the test results from Bati Gurgen-1 confirm Valeura's interpretation that it has discovered gas in the shallow (conventional) sands and should be able to drive meaningful production growth from their development. Second, the combination of pressure data, mud logs, and wireline log interpretation from the deeper sections of the Bati Gurgen-1 and Yayli-1 well has shown the strongest evidence to date for the presence of a basin centred gas accumulation (BCGA) on VLE's 100% owned Banarli license.
Bati Gurgen-1 (100% VLE) Tests 3.4 mmcf/d + 15 bcpd (581 boepd)
The Bati Gurgen-1 well found 32 metres (105 feet) of net gas pay in two formations, the Osmancik and the Danismen. Initial testing of 13 metres (43 feet) of sands in the Osmancik yielded a 24-hour restricted flow rate of 3.4 million cubic feet of gas per day plus 15 barrels per day of condensate (581 boepd total). The Danismen sands will be completed in a month or two, but for now the company will be content to produce from the Osmancik. The impact of this discovery on VLE's production should be fairly material, as it adds around 500 boepd of production capacity to VLE's current production base of around 800 boepd. It's not hard to imagine how even a couple of similar development wells on the structure could see VLE's production push through 2,000 boepd this year, ignoring Yayli-1 entirely.
Additional data was also gathered from the deeper section of Bati Gurgen-1. Injectivity testing showed that the pressure gradient in the sub-2500 metre section was 0.69 psi/ft, versus the normal gas gradient of 0.43 psi/ft. This overpressure more or less confirms VLE's theory that there is a basin-wide pressure seal below 2500 metres, which is one of the components necessary for the presence of a BCGA. Canadian investors will know the Montney as a prime example of a BCGA, where the formation of interest is "tight" from a porosity/permeability perspective, gas saturated, overpressured, and requires fracture stimulation in order to produce at commercial rates. Once fracture stimulated, the overpressure does two things: 1) it helps to force the gas trapped in the rock out into the wellbore, and 2) it means that more gas in crammed into the pore spaces of the rock (the more compressed a gas is, the more it expands when you bring it to surface), which leads to higher resource potential on a per well or per section basis. It is safe to say that the pressure information gathered in the Bati Gurgen-1 well is directly applicable to the Yayli-1 well (detailed below) and it may indicate that the VLE "dream case" scenario is on the table.
Yayli-1 (100% VLE) Finds Overpressured Coalesced Basin Floor Fan Sands
Based on the results from Bati Gurgen-1, Valeura drilled Yayli-1 as deep as it could without risking the integrity of the wellbore. As a result, over 400 metres of overpressured section was drilled in the well with strong gas shows during drilling. Now, gas shows during drilling are not that uncommon, but pervasive gas shows in an overpressured section that is described as coalesced basin floor fans is something worthy of a little bit of extra attention. You see, Valeura has been experimenting with the Mezardere formation on its JV lands to the south over the last few years, and in that time they have proven the ability to image slope channels and basin floor fans. And why is that important? Because 1) basin floor fans in particular can cover extensive areas and 2) they are typically composed of layers that include very fine, but very well-sorted sand grains… perfect little marbles between which to pack gas that can be produced if given a little nudge from a fracture stimulation.
In addition to encountering 14 metres (46 feet) of gas pay in stacked sands in the conventional Osmancik formation, the Yayli-1 well encountered a sand interval somewhere between 2850-2875 metres that appears to be, and I quote, "rubblized/fractured". This natural fracturing may be a product of the well's proximity to a fairly large transpressional fault and could result in enhanced natural permeability (i.e., enhanced flow potential). That very same interval also yielded "strong" gas shows during drilling. The plan is to fracture stimulate the well after topside equipment is installed later this month that can handle the anticipated high pressures. You always work from the bottom up, so for now the focus will be on the completion of the overpressured section of the well. They'll get to the Osmancik conventional gas eventually, but right now the Mezardere/Teslimkoy is on deck. If a test rate comparable to what one might see from a vertical well in the Montney can be demonstrated, it will be a whole new ballgame for VLE. The next step would likely be a multi-stage fracture stimulated horizontal.
So to summarize… VLE has encountered a series of stacked, likely areally extensive, sands that showed strong gas shows during drilling, are overpressured, and one of the sands appears to be naturally fractured. And now they are getting ready to fracture stimulate and flow test a formation (the Mezardere/Teslimkoy) in the overpressured section of well over the next month or so… a formation in which they have proven exploration and production experience from their work in the JV lands to the south. You see, Valeura didn't just stumble upon the situation that they are in… they've been working towards it for years, partially through their JV activities to the south. Now, my crystal ball isn't any better than the next guy's, but I have to say that this is just a textbook example of what you want to see if you are out looking for what could turn into a huge gas play… and this one is in a market with incredible fundamentals.
Recall that Turkish gas prices are around $10/mcf, the country imports 99% of its gas, is heavily dependent on gas, and is currently in a political/diplomatic "dispute" with its largest gas supplier, Russia. On top of it all, Turkey's 12.5% royalty rate and 20% flat tax rate put it in the top decile of tax-royalty regimes globally. Turkey is a key NATO member and has a history of trade and commerce spanning thousands of years. What's not to like?
Putting it All Together
As I said, I don't have a crystal ball here. All I can say is that based on what I'm seeing, I think that VLE is presenting a very interesting situation. I feel like there is a backstop of around 2,000 boepd based on the shallow intervals at Bati Gurgen alone… probably 2,500 boepd if I throw in a well or two from the Osmancik interval at Yayli. For reference, at a $40/boe netback, 2,500 boepd would generate something around $36 million in annualized cash flow, which is about $0.62/share. So even at 2x cash flow, that would put VLE around $1.25/share. However, a story like this with as much growth potential from not only the shallow targets, but also the game-changer BCGA prize, could easily trade at much higher cash flow multiples. I have pointed out before that Falcon Oil and Gas (2006, Hungary) and BNK Petroleum (2011, Poland) attained market caps of $1-1.5 billion at their prime and I would say that VLE at this point looks every bit as good, if not better. VLE's well costs are lower (they drilled these wells in just 11 days apiece), VLE's rock has proven production in its neighbouring license, VLE has a cash flow backstop, VLE's understanding of the geology and rock mechanics are arguably better, and it's in a country with a very strong gas market. I'm always hesitant to make share price predictions, but I think the upside is something that should be discussed in terms of dollars, not dimes or quarters.
Valeura is a prime example of a Canadian company applying home-grown technical knowledge and tight-gas experience towards unlocking unconventional gas abroad. The prize for success can be very material, and in Valeura's case it would likely be measured in the "TCF" (trillion cubic foot) range. The company has been sleepy and off the radar of most investors for a few years now, but that could change quickly. There's more work to do yet, but at this point I couldn't ask for the data to look any better and I think the value proposition is excellent. Valeura can fund its operations internally for the foreseeable future and surely has an even stronger case for attracting a major farm-in partner for the BCGA play. And who knows… if VLE gets to the 2,000-2,500 boepd that I think they can from the shallow zones, and gets a decent test out of the overpressured Mezardere/Teslimkoy section in Yayli-1, they might not even need a partner for the BCGA play at all...