(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)
This morning Valeura Energy (VLE.TO, last @ $2.75) reported test results from the second of four planned tests on the Yamalik-1 well in the Thrace Basin, Western Turkey. The well flowed at an average restricted rate of 0.8 mmcf/d over the final 24-hours of a 39-hour test period, despite a downhole equipment failure that restricted the flow in the well (before the equipment failure initial productivity was even higher than the initial rate seen in the first zone). Condensate yields were estimated to be 30-40 bbls/mmcf, which confirms the presence of condensate over a thickness of 350 metres vertically in the well. The company will move uphole and begin the third flow test in a zone at ~3,550 metres shortly. Today's test result continues to confirm that pay as interpreted from wireline log interpretations is in fact, pay, which adds further credence to the idea that the gas saturation is pervasive (as you would expect from a BCGA). Given that Cormark analyst Garret Ursu had previously pegged an aggregate rate of 0.5 mmcf/d as the “technical success” hurdle for the whole well, to see another zone match/exceed that rate from a single zone is impressive indeed. I believe this bodes very well for the potential productivity of not just the greater Yamalik area, but for the Thrace BCGA play as a whole. To see back-to-back test results exceed pre-drill expectations in a primary evaluation well is very, very encouraging. I believe this test makes it highly likely that Yamalik-1 will be tied in for a long-term in-line production test regardless of the results from the remaining two zones.
Valeura and Statoil continue to show that not only are they very likely to be dealing with a BCGA, but that they are dealing with a BCGA that has good condensate yields within the ~3,800 to 4,150 metre level (at least). Initially, I had always assumed dry gas in my evaluation of the potential in the Thrace, but with condensate recovered on test from two zones now, over some 350 vertical metres, the data strongly suggests there is significant condensate potential here that will likely be reflected in the resource assessment that’s expected early in the New Year. The continued recovery of condensate in tests is indicative of source rocks that are capable of generating liquids as well as gas, which likely has implications for the play as a whole. Even if no other tests were to recover condensate, the potential incremental value of the associated condensate is already material in my view.
Valeura and Statoil continue to show that the Thrace BCGA has major resource potential in a highly strategic region. The licenses on which they are drilling are literally surrounded by large gas trunk lines, so the infrastructure situation could hardly be better. With tie-ins to regional trunk lines involving laying pipe across only tens of kilometres of rolling farmland, I can’t imagine a better place to find a BCGA resource. Most large discoveries that I see these days are located in areas with limited access or infrastructure. Quite the opposite is true in this case, which is a major advantage in terms of its future development potential.
I know I said I wouldn’t jump up and down about individual test results, and I’m not doing that here… I’m just seeing confirmation of what I think the future holds for Statoil and Valeura in the Thrace. I’m already convinced of what the path ahead is – I’m just looking for the signposts along the way now. In the next little while, I’ll try to post a little more detail on how this could all play out. It’s still early days (read speculative), but exploring what an initial development program might look like seems like a decent way to pass the time… and I’m pretty sure I’m not the only one doing it.
In closing, I’d like to summarize what I was trying to say on Friday a little more succinctly, so forgive the “pared down” summary nature of the following paragraph:
Given that all signs point to the Thrace Basin being a legitimate BCGA, it appears to be full of gas below about 2500-2700 metres. That means that every pore, every pore throat, every fracture, and every micro-fracture is full of gas down there. The prospective area is huge and Valeura owns the vast majority of its thickest parts. The resource potential is therefore huge as well. Valeura is partnered with one of the largest energy companies in the world on the project. The location of the basin is highly strategic, with multiple evacuation options and export markets. The fiscal terms, pricing, and access are excellent. Naturally, some areas within the BCGA will be more productive than others, but the whole thing looks to be full of gas, with at least some intervals already showing very good productivity potential and condensate yields. Any future development will be guided by the 3D seismic coverage that now blankets the whole Banarli block. In my view, it’s the rare combination of all of these factors that make Valeura’s Banarli project so attractive and it gives me a great deal of confidence as a shareholder. In light of the fact that the data continues to support the BCGA interpretation, there appears to be a lot of runway here. Rarely have I seen a project of this scale in the hands of a junior. In this situation, I think that time may be a patient investor’s best friend. I just hope that Valeura is given enough time to let it play out before someone much larger decides they would like to own it...