(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’ve seen and heard a lot of chatter regarding Valeura Energy lately (VLE.TO, last at $2.79). Some of the discussion revolves around what plays here in North America might be comparable to Turkey’s Thrace Basin. Others focus on the pending gas-in-place or resource estimates, or try to predict flow rates from the intervals yet to be tested in the Yamalik-1 well. Interest in the play is clearly building, and rightly so. Even at this early stage, the Thrace BCGA appears to be a gas accumulation with the potential to have a significant impact on the energy balance within the region. Given what’s at stake (and with flow tests pending) chatter around a play like this can really build, which is a great thing, but I thought it might be a good time to step back and take a look at the big picture that’s already beginning to come into focus, even at this early stage. There are three more tests to go at Yamalik-1, but that’s really only the first chapter in what’s to come...
To be clear, there’s absolutely no doubt in my mind that Statoil and Valeura have discovered a BCGA in the Thrace. None whatsoever. The Yamalik-1 well was intentionally drilled outside of any structural closure (to prove that the gas charge is pervasive and independent of structural closure) and away from any faults that could have caused drilling issues (when drilling your first deep well in an area, it’s best to avoid potentially faulted or fractured areas so as to minimize operational risk). After all, as the first true test of the BCGA concept, there were a lot of unknowns going into this well and Valeura and Statoil picked a “boring” drilling location to start from (a simple monoclinal ramp with no structural closure or nearby faulting). When it comes to exploration wells like this, you first want to prove the exploration concept with minimal operational risk. Once that is done, you can start the process of delineation and targeting specific sub-areas based on productivity potential. What’s so exciting about the early results from Yamalik-1 is fact that Valeura and Statoil are already seeing gas test rates that may be commercially interesting, with a healthy condensate kicker to boot. Not bad for their first time out.
With the market likely to be hyper-focused on the results from individual well tests, I want to make a point that I think is critical to understanding the big picture here. When I met with incoming CEO Sean Guest in November, our discussion came around to what he thought was a good analogue play in North America, and he suggested that the Granite Wash play in the Anadarko Basin was a good model for what he sees in the Thrace. In the Granite Wash, he mentioned that wells can produce at rates from anywhere from 3 to 30 mmcf/d, which is obviously a huge range, and that led to the natural question of what makes the difference between a 3 mmcf/d well and a 30 mmcf/d well. The answer apparently lies in the prevalence of natural fracturing in the area being targeted and/or the drilling and completion method. As one might expect, areas with high degrees of natural fracturing have enhanced permeability and deliverability relative to less or non-fractured areas. Other areas may also exhibit facies changes that lead to higher inherent porosity and/or permeability. All of this is to say that, as in any resource play, some areas will have higher productivity potential… hence the term “sweet spot” that you often hear when discussing the development of any given resource. The key with a BCGA is that there is a huge volume of trapped gas with regional extent, and that gas wants out. It’s up to the companies to target the areas with the best economic potential. Defining those areas will be part of the delineation program that Valeura and Statoil will begin in 2018 as they move towards development.
My long-winded point is that the real key with Yamalik-1 is that it has already proven the BCGA concept, and future wells will build on that foundation. The gas saturation appears to be pervasive and the next job will be to delineate the play further with wells in new areas and potentially to even deeper depths. The fact that Yamalik-1 is already showing producible gas and condensate from limited completions in just a portion of the thick interpreted pay intervals is what has Valeura’s share price running. That’s not to say that flow rates aren’t important, but the flow rates that come out of the Yamalik-1 well should be seen as a starting point, not an end point.
This is the first inning of a game that will play out over a multi-year period and the main question in my mind is whether or not Valeura will get to stick around to ride it out. My suspicion is that Valeura is already in the sights of a few majors that wouldn’t mind going down the road with Statoil as their partner in this project and at least some of those majors have probably already been through the data room once before. As long as the interpreted pay intervals are confirmed to contain moveable gas and/or condensate, Valeura will have done its job in this well. With three more test results pending, followed by a prospective resource estimate, it’s sure to be an interesting couple of months for VLE holders, and this is just the start of what’s sure to be quite a journey. I won’t be the guy jumping up and down about results from individual zones as they come out, but each test that produces moveable gas and/or condensate will further confirm my view that Valeura and Statoil may have found the holy grail of a large tight gas resource play in a very, very strategic region. When you step back and look at the big picture, it already looks pretty darn good. Now it's just a matter of letting it play out.