(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 Energy (VLE.TO, last at $0.59) reported its quarterly results last night and the long-awaited completion and testing program of the Yamalik-1 well has begun. Yamalik-1 is targeting what Valeura believes is a large basin centred gas accumulation (BCGA) in the Thrace Basin of Western Turkey which my estimates peg in the multi-TCF potential range. Valeura's joint-venture partner, Statoil, is paying the entire costs of the completion and testing program up to 110% of the US$10.3 million budget and the operation is expected to take 60 days. This is the JV's first substantive test of the BCGA concept in the Thrace and the results are expected to be ready in time for inclusion with the first ever independent resource assessment on the play. Should the stars align, early 2018 could be a very interesting time for VLE shareholders. The potential of the opportunity verges on ridiculous given VLE's tight share count and Statoil's basically infinite financial resources. I don't worry about Statoil's potential to outspend VLE once Statoil has completed its earn-in, because if the company gets to that point, it's likely that there's something there worth pursuing. Any number of global companies and/or investment funds will be happy to write cheques for a resource play like this in a success case.
The testing program is designed to evaluate four separate intervals with a fracture stimulation program that screened as having favourable gas saturations and porosities on logs. Valeura says that the testing program will evaluate "less than half" of the interpreted net pay in the well, which implies to me that "close to half" of the pay will be tested. That's a lot more than I had initially thought. My own estimate assumes that 25% of the 1,200 metre-thick overpressured section may be "net pay", which means that this testing program could be evaluating something close to 150 metres of interpreted reservoir rock. Everyone wants to know what a "good" test rate would be, but I'm hesitant to put a number on it as I just don't have enough information about the rock, size of the fracs, or the reservoir engineering behind the program. It's clear to me that Statoil very much likes what they see or they would not be spending over US$10 million on such a comprehensive and extensive testing program. The current plan is to tie the Yamalik-1 well into VLE's existing infrastructure should suitable gas flow be established, which will allow for gas sales to be made during an inline extended test.
In order for Statoil to earn its 50% interest in the JV, Statoil must drill, complete, and test one additional well in the BCGA play, so investors can rest assured that Valeura doesn't need to come up with significant funds for the play any time soon. If the company is fortunate enough to have a good test out of its first well, the per share leverage verges on ridiculous. With roughly 73 million shares out, Valeura could easily be looking at an eventual $500 million to $1 billion valuation if it can demonstrate the likely presence of an economic multi-TCF gas play in Turkey, one of the most captive gas markets in the world (and on the doorstep of Western Europe).
It's all pie-in-the-sky right now, but things are about to get real. Early in 2018 (likely mid-to-late January) the initial (aggregated) test data should be available and at that point all bets are off. This is not a story for the faint of heart and remains highly speculative, but this is the kind of situation where even just following the story can put you at a huge advantage when the news finally hits. With current production of 1,000-1,100 boepd and a stock that trades at a substantial discount to its 2016 year-end net asset value, I'd argue that the risk-reward is as asymmetric as one could hope for at current levels. That doesn't mean that it's a risk-less trade -- far from it -- but I think the speculative appeal of the story is as good as anything I've seen in a looooong time and it's not even on the radar of most people yet.