(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 Lands a Whale of a JV Partner at Banarli
Generally when I see news on a company on a Sunday, it's almost always good... and this Sunday was no exception. Earlier this evening a friend of mine texted me: "Raps win & JV with station". He seemed happy about both events... though I wasn't exactly sure what "JV with station" meant. "JV with station", I said to myself, "Does he mean Statoil...? Has Valeura announced a JV with Statoil on a Sunday evening?".
Yep. Valeura has announced just that. The full press release is linked here.
To quote the press release, Valeura and Statoil "have an exclusive arrangement until July 29, 2016 to negotiate and enter into definitive agreements, including the farm-out agreement and joint operating agreement. Both parties have received necessary executive and board approvals. There is no certainty that the parties will be able to reach definitive agreements or that the GDPA will approve the licence transfers" so it's a little early to break out the champagne, but I may get some on ice...
In a nutshell, Valeura has reached a binding letter agreement with Norway's Statoil (yes, Statoil, the eleventh largest oil company in the world) regarding its intention to farm-in for a 50% interest of Valeura's deep rights (>2,500m) on its 100%-owned Banarli licences, contingent upon approval from the relevant Turkish regulatory body. Statoil is one of the most highly regarded energy companies in the world and their entrance into the Thrace Basin should be seen as a complete validation of VLE's theories regarding its world-class tight-gas resource potential.
The farm-in deal comes as a phased deal, but Statoil's minimum spend once the agreement is finalized is US$26 million, which is nearly Valeura's entire market cap as of Friday's close. If all three phases are completed, the minimum spend is US$36 million. Importantly, on finalization of the deal, VLE will see back-cost reimbursement of US$6 million, which will be a welcome cash injection into the company as it restarts its shallow drilling program in late June.
Of particular interest is the fact that Phase 1 requires Statoil to drill a well to 4,000 metres depth or 450 metres into the top of the Teslimkoy Formation, whichever is greater. What's such a big deal about that? Well, it can be summed up with one picture (Figure 1) below:
Figure 1: Cross Section Showing that Yayli-1 was just on the Edge of the Basin
I had said as recently as last week that I thought this would be a play developed with horizontal wells. Well, as it turns out, Valeura and Statoil might not have to rely so much on horizontal wells after all. If you can drill through a mile of overpressured section with a vertical well, there's little need to drill horizontally. You complete the vertical well much the same as you would a horizontal and you're off to the races. This would be similar in character to the Piceance Basin in the U.S. The sedimentary section is so thick that vertical wells are treated like horizontal wells on their sides, with dozens of fracks within the vertical wellbores.
It's late and it's Sunday, so I'm keeping this brief-ish. The key takeaway for me is that this is undeniable validation of what VLE has been saying all along -- this is a tight gas play with world class potential capable of bringing in the best companies in the industry. If Statoil is taking a kick at the can here, that means they think it can move the needle for them, and if it could be material to Statoil you can sure as heck bet that it would be material to VLE shareholders. With only about 59 million shares outstanding, VLE's leverage here is huge. Add on top of this the fact that VLE is expected to restart drilling on shallow targets in late June, and I think VLE has a bit of a tailwind developing.
To put it in perspective, the Statoil deal is valued close to, or more than, VLE's entire market cap, and very people even know anything about this company. If you are reading this, you are one of only a relative handful of people globally who are actually following Valeura. In my mind, Valeura's nascent involvement with Statoil will only bring more interest to the Thrace Basin and to Valeura, so it definitely adds a dimension to the VLE story that was previously only theoretical. Also, the structure of the deal means that VLE isn't likely going to experience a lot of dilution going forward (assuming their shallow gas program keeps building drilling inventory), which should keep per share leverage to the project quite high.
People sometimes wonder what multi-baggers look like before they happen. How do you recognize them and hold on for the big win (whatever that is)? Everyone has to answer that question for themselves, but for me, this just got a little more real. There is work to do before the finish line, but as of Monday's open, I'm guessing that VLE will be off and running... and I expect that broader interest in Valeura is in its early days. If and when VLE's market capitalization eventually gets through $100 million, it will hit the radar of a much wider institutional investment community who will be able to recognize the size of the potential prize on the table here. Valeura's Banarli licences cover some 540 square kilometres and when the gas potential is this thick, the gas volumes in play can stack up very, very quickly.