(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)
Given that Valeura Energy's (VLE.TO, last at $2.14) chart looks like a blockchain-weed stock on steroids, I've had a lot of inbound calls and emails wanting to understand the story further. Look, I get it, it seems crazy that little Valeura may have found the holy grail of a basin centred gas accumulation (BCGA) in one of the most strategic regions of the world, but all you can do is look at the facts and work from there. In light of that, I thought I'd put together a few thoughts to frame the potential scale and significance of what Valeura and Statoil are drilling in the Thrace Basin right now as a bit of a hand-hold for those getting dizzy at these heights. In one of the best research notes I've read on the name thus far, yesterday Cormark Securities analyst Garett Ursu perhaps summed it up best with this comment "... we believe the market continues to underestimate the potential ultimate impact on Valeura despite yesterday's stock price move" (November 28th, 2017). Mr. Ursu goes on to walk through the details regarding the Thrace Basin potential, additional market data points, and some of the technical details surrounding the play. The note was a pleasure to read and I would highly encourage anyone looking at the story to contact Garett for his views.
Now, while it's still relatively early days and some risks remain, I believe the strength of the move in Valeura's share price is being driven by the realization of just how significant this project could be for the region and for VLE. We are talking about a potential resource that very likely tallies in the multi-TCF range... truly something of world-class scale. Importantly, Turkey is located at a veritable crossroads of gas infrastructure located at the junction between Asia, Europe and Africa. A major gas resource in this area would not only be a boon to Turkey, but also to any energy player in the region. To that end, it's maybe best to first consider the fundamentals of Turkey as a country. Valeura sums it up well in their slide deck, so I've copied and pasted it here below.
Below are two slides showing the pipeline infrastructure in the project area and the country. It's important to point out that Valeura secured a 100% interest in all of the infield pipes and infrastructure with the Transatlantic deal earlier this year and has direct access to industrial consumers in the area who can take gas volumes far in excess of what VLE currently produces. Meanwhile, major gas trunk lines are all in close proximity for when and if a much larger development is warranted. This is a very clean set up and has taken years for VLE to assemble. None of what is happening is by accident. I have to remind people that Valeura has been working towards this for years. What looks like luck is, as Richard Branson might say, the residue of design. The whole way along, VLE has been laying the groundwork for a real project with real development and sales/export options and shareholders are now set to reap the rewards.
I've suggested that the OGIP numbers here could be huge and recent press releases from VLE have confirmed some of my prior assumptions. VLE said that its first test was over a 15 metre interval that represented "approximately 10% of the planned total net pay to be tested in the well". VLE also previously said that its testing program would be testing "less than half" of the total net pay in the well. Putting those two data points together, it means that the total net pay would be close to 300 metres or even a little more. That makes for huge potential OGIP numbers if extrapolated over the total 200,000 gross acre (~300 section) land base. Even if you cut the prospective sections in half, you have 150 sections in play, which my math says could equate to multi-tens of TCF of gas in place and that's without even discussing the newly identified condensate potential (70-80 barrels per million cubic feet). Assuming even a 10-15% recovery factor, this is a massive prize and VLE has tied as much of it up as one could ever hope for... and the first test suggests that the prize is very much in play.
Yes, there's work to do. Yes, the stock is up on a stick. Yes, it's the first well... BUT the point of this note is to frame the big picture in terms of what's on the table here while remembering that Statoil is VLE's partner here. VLE ran an extensive data room before Statoil came in as its partner and I have to think that some of the industry players that weren't able to match Statoil's terms on the initial farm-in are sharpening their pencils now -- that's certainly something to keep in mind. Valeura has the super-duper trifecta of world-class scale, top-tier pricing, strong regional demand, multiple export/sales options, and an amazing fiscal structure to boot. That's an excellent confluence of elements critical to a project's potential economic success. In light of that, I think there's a very real chance that Valeura, if it gets to stick around before being bought out, would be able to farm down another portion of its JV interest in exchange for a big cash payment and/or a significant carried work program to avoid further significant dilution.
Exciting times indeed. It's going to be a wild couple of months as more data comes available. I've only added stock since the news and will happily wait for the remaining test data and prospective resource estimate in January. If you're reading this, you need to try to remember that you are in the tiny minority of people that are even aware of the fact that VLE exists. If this plays out the way this looks like it's going to play out, we're only in the first inning. With that "earliness" comes some risk, but based on the data available, that's a risk I'm still very happy to take.
There's more work to do yet and anything can happen between now and then, but I expect that Valeura will hit the radar of a much wider audience once the prospective resource assessment is released. At that point, I think VLE will have made the all-important shift from obscurity to the mainstream and a whole new set of institutional players will discover Valeura for the first time...