(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 $1.07) surprised the market this morning by announcing results from the first of four planned test intervals in its Yamalik-1 exploration well ahead of schedule, where JV partner Statoil is paying the full drilling and completion costs. Readers are encouraged to read the press release linked above for full details. Perhaps this quote from the press release sums up the situation best:
"Although the Corporation had previously advised that aggregate test results would be disclosed at the end of the test program after all four planned production tests were completed, these interim production test results have exceeded expectations and are viewed as material to the Corporation."
The headline result is that the Yamalik-1 well was flowed at a restricted rate of 0.8 mmcf/d with a condensate yield of 70-80 barrels per million cubic feet. The test was conducted over a 44 hour period and the well was still cleaning up at the end of the testing period, but Valeura and Statoil view the result as sufficient for primary evaluation purposes. The zone that was tested represents only 15 metres of the total pay in the well and also represents the deepest and lowest porosity interval that will be tested. When one considers that the total net pay in the well is likely in the 250-300 metre range, it's easy to see why the market reaction is so strong this morning with the stock up some 35% as I write this.
First and foremost, this test, in my mind, definitively confirms the presence of a liquids-rich basin centred gas accumulation (BCGA) in the Thrace Basin. This is the holy grail that VLE has been searching for over all these years and I expect long-term investors will settle in for what could be quite a ride. Those on the sidelines will likely be motivated to jump in as VLE awaits further well test results and the first prospective resource assessment on the project expected in January. It's very important to note that the Yamalik-1 well was drilled outside of any structural closure and still encountered gas-saturated reservoir with condensate. The wonderful thing about BCGAs is that when you have one, the gas saturation is pervasive regardless of any structural closure... i.e., the gas saturation will persist over the entire area of the BCGA cell. The reservoir appears to be 85-95% overpressured (that's significantly overpressured), which means that there's a lot of energy in the reservoir to push that gas out. That overpressure also means that original gas in place (OGIP) per section numbers could be very impressive as more gas molecules can be shoved into the same volume at higher pressures. The condensate yield of 70-80 million barrels per million is a very, very nice bonus and I'll frame that up a little later below. Even though it may not sound impressive to a layman, 0.8 mmcf/d is a very good rate at this stage from just one 15-metre interval... in full development, one would expect to see much longer completed intervals and bigger fracks.
I've said before that if I assume half of Valeura's 200,000 acre (~300 sections) holdings in the Thrace is "good", that puts about 150 sections in play. If I assume OGIP of 300 BCF/section, I get a very large OGIP number. I'm too superstitious to even write it here. In full development tight gas recoveries can easily be in the 10-20% range, so you'll see that the prize is very material if the first multiplication doesn't break your calculator. Now if you add 70-80 barrels per million cubic feet of gas (it's a bit of a stretch to extrapolate that over the entire thickness of the BCGA, but still a worthwhile exercise) you are going to end up with a prospective recoverable condensate resource in the hundreds of of millions of barrels. It should be clicking right around now why Statoil cares about this play. It has the potential to be a hugely strategic resource in a very captive energy market with geography that allows for export to any number of end users if desired. I should point out that all of my musings here are pie-in-the-sky, but I feel that it's always good to frame what's on the table, especially when a data point like today's well test comes into the picture.
As the first true test of the BCGA, the Yamalik-1 well was intentionally drilled in an area with little faulting or structural complexity. That's important because flow rates in plays like this can be greatly enhanced by the presence of natural fractures that are commonly observed in close proximity to faults or areas of structural complexity. With analog wells in comparable plays flowing anywhere from 3 to 30 million cubic feet per day in full development, VLE is very much "in the wheelhouse" of where it should be in terms of preliminary results, which is why I think they elected to make an earlier-than-expected press release today. There are three more intervals to be fracked and tested, with aggregated results expected to be available in mid-January. Given that VLE has already tested 0.8 mmcf/d from a 15-metre interval in a well that may have something in the neighbourhood of 250-300 metres of total gas pay (my guesstimate), it's easy to see why there may be something to be excited about.
More information is needed and I'm sure that VLE and Statoil are already talking about where to drill the second well, but I truly believe that the biggest risk to VLE holders now is that the company is bought out too soon. Anyone, and I mean anyone, in the energy industry (remember that a lot of majors went through VLE's data room before the farm-out to Statoil happened) will recognize that VLE is "on the curve" to proving out a massive BCGA play in the Thrace Basin and could pre-emptively make a move on the company at just about any time. If you're Exxon or Chevron, you wouldn't even blink at paying $200 million for an option like this with a partner like Statoil at your side.
So what's it worth? Well, it's early days, but Falcon Oil and Gas, FO.V (last at $0.32), is probably the only market comparable to Valeura at this point with its Beetaloo Basin play in Australia where Origin Energy is in the midst of a A$200 million farm-in on the project (link to Falcon's corporate slide deck here). With 930 million shares out, Falcon has a market cap pushing C$300 million. That valuation appears to be based largely on well test from its Amungee NW-1H well and subsequent prospective resource assessment. Recall that VLE has 73 million shares outstanding at this point... the potential leverage should be fairly clear.
Don't let my enthusiasm make you think that there's no risk left in the story, but today's news is a BIG step in the right direction and I'm obviously quite encouraged. I've added to my position on the news and very much look forward to additional test information and the prospective resource assessment in January. I've been waiting for this for years and today feels a bit like an early Christmas present.
Time will tell. In the meantime, here's a picture of the flare to keep you feeling warm and fuzzy...