(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long VLE.TO)
Valeura Arranges Deals to Consolidate Shallow Gas Interests with Minimal Dilution
Late this afternoon, trading in Valeura Energy (VLE.TO) was halted pending news. The transaction that was subsequently announced appears to be highly accretive to VLE on a per share basis. Getting straight to the point, on a per share basis, the deal is expected to be 62% accretive to cash flow, 35% accretive to production, and 58% accretive to 2P reserves. Any way you slice it, that's a great deal in my books.
So just what is the deal? The press release with all of the details is long and it is linked here, but in a nutshell, Valeura is buying out its JV interest partner (Transatlantic Petroleum, TNP.TO) from its 41.5% interest in the TBNG JV. Those are the lands directly adjacent to the Banarli concessions that Statoil announced they were farming into earlier this year (still waiting on GDPA approval). The structure of the deal is a 3 in 1... 1) VLE buys TNP's 41.5% interest for US$22mm, which is expected to be US$18.5 after closing adjustments, 2) VLE concurrently sells a 50% interest in the deep rights of those same lands to Statoil for two payments totalling US$15mm, and 3) VLE is raising C$7.5 million in equity at 75c (i.e., 10 million shares) at the same time. The equity is in the form of subscription receipts that only turn into shares if the deal is completed.
The net effect is that VLE's shallow interest in the TBNG JV lands goes from 40% to 81.5% and its interest in the deep rights decreases slightly from 40% to 31.5%, which is still a meaningful position. It means that Statoil will now own 50% of the deep rights over a very large area, thus further confirming Statoil's commitment to giving the Thrace Basin a true evaluation of its tight gas potential. Oh, and VLE becomes the operator of the TBNG JV, which means that it is now the master of its own destiny with respect to the forward drilling program. As an aside, for those wanting to know a little more about the "contingent resource potential" of the TBNG JV lands, I would suggest reviewing this press release from VLE in 2013, where an independent resource estimate was commissioned as of December 31, 2012. That estimate is now technically out of date, but anyone that looks will see some big numbers and I would hope that VLE will update that assessment soon. Who said shallow gas was boring? (hint: the continent resource was measured in the 100's of BCF)
Not only do the lands that VLE is buying have production, reserves, and development drilling locations on them (not to mention the continent resource potential), but they also come with the additional 41.5% infrastructure interest as well, which gives VLE immediate cost savings on existing and future Banarli gas volumes that are shipped through the TBNG pipelines and facilities.
Net of the concurrent sale of 50% of the deep rights to Statoil, VLE appears to be paying just US$3.5 for the 41.5% TBNG interest. This is what you get from a management team with experience and a big brother like Statoil. Statoil has clearly chosen VLE as its horse to back in the Thrace and VLE appears to be striding well. Coming out of the deal, VLE now plans to drill 12 to 14 shallow wells between the TBNG JV lands and the Banarli licences in 2017. This is expected to generate average 2017 sales volumes of 2,000-2,200 boepd, which may turn out to be conservative if even a couple of those wells are 3+ mmcf/d producers.
There's a lot of information to read through, so I would highly encourage people to read the full press release linked again here.
Bottom line, I wish all of my companies could do deals like this on a regular basis, but alas, deals like this don't come around that often. There are still regulatory approvals and closing conditions, but VLE looks to have made a great deal for both them and Statoil as the companies prepare to spud the first deep well at Banarli by early 2017. I would expect VLE will get a good reception in the market with a deal like this given how accretive it is... Now bring on the deep!