(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 $4.83) has released results from the fourth of four planned tests at the Yamalik-1 well in Thrace Basin, Western Turkey. Results continue to demonstrate pervasive gas and condensate saturation within the well, now spanning over 800 vertical metres. Pervasive gas saturation like this is precisely what you would expect from a BCGA and, well, you know the saying -- if it walks like a duck and it quacks like a duck...
If there was anyone who still doubted that this might not be a BCGA, I think that this should pretty much seal the deal for them. Yamalik-1 has now proven gas and condensate in four separate test intervals, all of which are outside of any kind of structural closure. Log interpretations, pressure data, hydrocarbon saturation, and lack of moveable formation water all continue to demonstrate exactly what one would expect from a BCGA. Rates from any one of the four reported tests would make any tight gas developer salivate. For context, many a Canadian Montney field has been discovered based on a single vertical test rate of 0.2-0.3 mmcf/d and Valeura has now reported four tests in four separate intervals ranging from 0.4 to 0.9 mmcf/d (all at restricted rates and all only partially cleaned up).
This latest test flowed at an average (stabilized) restricted rate of 0.4 mmcf/d with 30-50 barrels per million of condensate over the final 24-hours of a 41-hour test. The continued presence of condensate is a continued massive bonus. Based on the results of the third test, I had wondered if perhaps the condensate yield would taper off in intervals higher in the well, but that doesn't appear to be the case. Yesterday, a friend of mine asked me about the potential value of the condensate in the Thrace BCGA relative to the gas, so I ran some quick numbers and was surprised by what I found. In terms of net cash flow, at a condensate yield of 50 bbls/mmcf, the value of the condensate is roughly equal to the value of the gas, which makes this BCGA even more valuable that I had originally thought. In my prior NPV calculations, I had simply ignored the condensate value, but with condensate in all four tests now, that is likely to be grossly conservative.
In terms of the test rate, being higher (shallower) in the well, the porosity and permeability in the fourth zone are very likely higher than that in any of the previously tested zones and as a result, the frack fluid flowback is likely to be somewhat slower than that seen in the other zones (the frack fluid is able to penetrate deeper into the formation in better rock) so I wouldn't read too much into that. Once the well is tied in for a long-term production test and clean-up, the market will get a handle on what the well is actually capable of producing without the limitations of time and the surface testing equipment. In the meantime, Valeura is going to see about performing an aggregate commingled test of all four zones by drilling out bridge and flow-through plugs in the well with a coil tubing unit that they currently have on site. There are some limitations imposed by the configuration of the testing equipment that may or may not allow for the commingled test, but it's not overly material in either case. As I've said before, anyone that tries to get hung up on any individual test at this stage is sadly missing the point with respect to just what this BCGA represents. I recently read a classic quote from Warren Buffett stating that "the market is incredibly efficient at transferring money from the impatient to the patient", and I've found that to be quite true over the years...
With Yamalik-1 proving the BCGA concept and showing rates that far exceed any pre-drill expectations, the path ahead couldn't be more clear. There are scenarios where vertical and/or horizontal development could yield flow rates that would make any tight gas developer jealous and the pricing, strategic location, and fiscal regime in the Thrace are absolutely first class. You can have the best resource in the world, but if it is too remote, has poor fiscal terms, or is in a market with poor pricing it can be all for not. Valeura and Statoil have quite the opposite on their hands in the Thrace and I think the other supermajors of the world know it. As these energy behemoths scour the globe in search of projects that provide the alignment of scale, fiscal terms, and location the Thrace BCGA must look very, very attractive. With the resource assessment expected in late January and with Valeura marketing to institutions in mid-January, the story is getting set for the "great handoff" whereby Valeura's retail investors start getting replaced by institutional ones who will recognize the sheer magnitude of what's on the table here. The big wildcard that remains is how long Valeura, a tiny junior company that most people have never heard of, will be allowed to play alongside Statoil in the Thrace Basin sandbox where the potential will soon be casually measured in the trillions of cubic feet.
Valeura's story in the Thrace is still only just beginning with the big unveiling to a much broader audience set to happen in January when, for the first time, the world will see the scale of what's on the table here. I suspect it will make headlines from Istanbul, to Oslo, to Calgary and it will be only then that Valeura will have made its transition from obscurity to the mainstream, at which point the next stage of the journey will begin.