(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)
I see and hear a lot of questions wondering just how much Valeura Energy’s (VLE.TO, last at $4.05) BCGA find in the Thrace Basin might be worth. Analysts and TV commentators are circling around as the chorus starts to grow, and the market is starting to realize that something is about to happen for little Valeura… but many aren’t exactly sure what that means exactly. What’s it worth? It’s one thing to throw a number out there, but I think it’s a lot more useful to consider the whole picture first in order to put things in context. If I said I thought Valeura could be worth $1-2 billion in the eyes of an acquirer, it wouldn’t mean much without being able to appreciate why a buyer might actually be willing to pay that much for this project. Lots of assets have big NPVs, but not all assets are created equal when it comes to their attractiveness as takeout targets. Before anyone can make that leap, I think there are a number of factors that need to be understood. The details really matter here.
First off, in the market’s mind, trying to find a large, scalable, tight gas resource with any kind of proximity to Europe has been the impossible dream for a long time, but based on Valeura’s results at the Yamalik-1 well, it looks like that dream has been realized. The well exhibits all of the characteristics that you would expect in a BCGA. Gas saturation appears to be pervasive throughout the well with no formation water interpreted (on logs or in any of the four flow tests) over the >1200 metre (3,900 feet) interval of interest. The reservoir is significantly overpressured, and the transition zone from normally pressured reservoirs to overpressured ones is consistent throughout a number of historical wells in the basin, suggesting a regional pressure seal at a depth of around 2700 metres (8,850 feet). The geothermal gradient in the basin is elevated, which in this case has pushed source rocks into the gas-condensate window as an extra bonus. The reservoirs are thick, good quality tight sandstones both massive and interbedded character with significant net sand thicknesses. Flow tests have confirmed a gas and condensate column over more than 800 vertical metres (2,600 feet) – with another 800 prospective metres yet to be evaluated at depth. Lastly, the BCGA cell is downdip of the water legs of normally pressured overlying gas fields that exhibit the typical gas-over-water relationship. Much can be found online for those wanting more information of what a BCGA is, but for the purpose of this note, it is enough to say that is that it is a large, continuous gas accumulation, trapped at depth by the laws of physics and petroleum geology. Once you are within a BCGA cell, anywhere you drill the rocks will be gas saturated. As I’ve said before, BCGAs take the question of “Will I hit gas when drilling my well?” right off the table. Let that sink in a little.
Second, you have to appreciate the scale of this BCGA. It covers some 1,600 square kilometres (600 square miles) and Valerua is the dominant land holder in the basin, including licenses covering its deepest and thickest parts. When you look at the map below, which shows Valeura’s blocks in yellow overlain on top of a map of the basin, you have to realize that that’s a lot of area you’re looking at, and every square inch of it is charged with gas and condensate below around 2700-2900 metres (8850-9500 feet) depth. The basin itself is believed to be prospective down to 5000 metres (16,400 feet) with Yamalik-1 proving gas and condensate down to 4200 metres… and the map shows little Valeura’s land position there covering most of it. This is an asset that is big enough to support a massive energy project, where international expertise is on the cusp of unlocking a whole new chapter for the region.
Well, while we’re at it, here’s another thing you have to understand before you can value Valeura. Fiscal terms. In a nutshell, this project has fiscal terms that would look good to any Texas oilman. It’s a tax-royalty structure with 20% corporate tax and 12.5% royalties. If you don’t know how that stacks up to pretty much any other fiscal regime in the world, I’ll just say that it’s not a stretch to call that “top-tier”. Not at stretch at all.
So, just to recap, this looks to be a multi-TCF gas resource, in a highly strategic region, surrounded by major pipelines, with top-tier fiscal terms, that you can drive to in a Toyota Corolla. Wow, right?
As they say, “But wait, there’s more…”
Turkish BOTAS gas prices are currently around US$6/mcf (C$7.50), which is some of the best pricing in the world. Imagine how much money U.S. gas companies would print at US$6/mcf gas! And if I use a $60/bbl price for condensate, the condensate is worth another $3/mcf at 50 bbls/mmcf. So, to frame it in relative terms, where a U.S. gas company might struggle to make $1/mcf at $3/mcf NYMEX, Valeura would have margins that were around four times that thanks to regional pricing. Adding in the condensate and the project could net ~$6 for every mcf of gas. Thanks largely to the superior pricing in the region, I get a multi-billion dollar NPV for this project. Some of my first back-of-the-envelope assumptions are well laid out in a prior note or those who are interested. I am currently working on a much more detailed model of the project, but I’m going to wait until I can incorporate the resource assessment volumes before finishing it.
What I will include here today though is a type well curve that I’m using. My initial assumptions are run on a 12 mmcf/d IP30 rate with 50 bbls/mmcf of condensate, which happens to achieve payout in about 15 months at US$6 gas and US$60 condensate using an US$8 million all-in well cost. Tight gas wells exhibit steep declines in the first year of production, after which declines moderate for a couple of years, followed by a long flat-ish tail for the remaining life of the well. My recovery per well from my type curve is 7.2 Bcf equivalent, comprised of ~5.5 Bcf of gas and ~275,000 barrels of condensate. Those are just some numbers to think about while the market waits for the prospective resource assessment, after which I will scale-up my model to the appropriate size. My modeled type curve is based on type curves from known U.S. tight gas plays and it appears that the wells could be highly profitable if my assumptions are even close to correct. That's a good sign, because I could make a case that my assumptions may be conservative. Currently I model an NPV/well of around US$6.5 million (100% basis). When you consider the 200,000 acre area (gross) that Valeura deems as being “within” the BCGA, it’s not hard to see that even 500 wells could make for a material piece of business – and that would only cover 20,000 acres at spacing of 16 wells per section (40-acre spacing). Forty-acre spacing may also be viewed to be conservative when compared with a tight gas play like the Pinedale Anticline.
I can assure you that the rocks in the Thrace Basin have no idea where they are in the world. They are, for the most part, interbedded sands and shales with porosities and permeabilties that are entirely comparable to a number of proven gas resource plays in North America. While they may actually be thicker and of better quality than some of their North American comparables, they are in no way “different” because they happen to be in Turkey. In terms of completions, what works in the North American rocks appears to work well in the Thrace rocks (four zones were tested after being stimulated with slickwater fracs, each with highly encouraging productivities and good sand placement). If you can think of an analogue U.S. tight gas/BCGA play, you can pretty much take those production/recovery/reserve profiles, maybe tweak them a little, and use them to make a ballpark estimate on the Thrace Basin potential, which is what I’ve done above. Development/production wells may be horizontal or vertical depending on the specifics of any given location, but I am confident that they will be just as exciting as their North American cousins.
In my mind, it’s not about whether or not development of this BCGA will be profitable; it’s about whether or not it will be very profitable or insanely profitable. If you look at the factors I’ve been pulling together here, I seriously wonder what else anyone could reasonably hope for in a newly discovered multi-TCF gas resource play. It is nothing short of awesome in every sense of the word and 50% of it is in the hands of a tiny company that almost no one has ever heard of and that even fewer believe in.
I really can’t frame it any clearer than what I’ve done here. I get the impression that some people will ignore the story because “It’s Turkey”, which is somewhat baffling to me given that there’s a population of 80 millon people there with OECD-leading GDP growth, a business friendly environment, and thousands of years of history as a trading/commerce hub. That same country imports 99% of its gas from abroad. 99%!! Could there be a more captive market? But alas, not everyone likes this jurisdiction, but that’s just fine, because there’s honestly not enough to go around if everyone wants a piece.
In summary, I think the Thrace BCGA is a game changer for Valeura, I think it’s a game changer for Turkey, and I think it might even be a game changer for the energy balance in the region. Heck, it might even move the needle for Statoil, an $80 billion juggernaut of the energy industry. When you put it all together, I just don’t see how little Valeura will be able to remain independent through this year. I think that there are multiple parties that would love to take on this piece of business and I think it won’t be very long before the market sees one of them make a move because the Thrace Basin BCGA project is just too good-looking from too many angles already. More time (i.e., drilling) will only make it more expensive and there is already enough data for the supermajors take a shot at it. For them, spending a billion dollars on an acquisition like this would be like you or me buying nice steak dinner and some really nice wine for small a group of friends. It’s not going to dent your pocketbook too badly no matter what happens, and at the end of the day, it’s a heck of a good way to spend your time and money.