(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 C$0.58) released an update this afternoon on the progress of its BCGA (basin-centred gas accumulation) play in Western Turkey. The program is being funded by Statoil to the tune of US$36 million, which would earn Statoil a 50% interest in Valeura's 100%-owned Banarli license. For those who need a reminder, the prize here is likely in the multi-TCF range (Valeura has commissioned a resource study for later this year to quantify the potential for the first time). And not only is the prize large, it is also in one of the premier gas markets in the world (Turkey imports 99% of its ever-growing gas requirements) and is on the doorstep of Europe.
Valeura expects to commence a $10 million well completion operation in November with the aim of evaluating multiple zones within the overpressured section of the wellbore. Four production tests with two frack stages per test will be carried out with the goal of establishing reservoir properties and quantifying flow capability. The company has previously called gas shows in the objective interval "encouraging" and the gas saturation "pervasive" (see press release from July 24, 2017). To be sure, I've seen a lot of plays with descriptors like these turn out to be nothing in the end, but that doesn't stop me from defining just what the optionality looks like in the event of success...
Valuera mentioned that 200,000 acres of its 500,000 acre holdings in the Thrace Basin may be prospective for this BCGA play, which is roughly 300 sections of land for those used to North American stories. For perspective, a good rule of thumb for domestic Montney OGIP (original gas in place) estimates is 1 BCF/section per metre of pay. Valeura drilled 1,200 metres of overpressured section in the Yamalik-1 well and if I assume a net-to-gross of 25% through the overpressured interval, that would leave me with 300 metres of "net pay" (those are big quotation marks as this is a very, very hypothetical discussion), or about 300 BCF OGIP per section. If you start doing the 'sections times OGIP per section' math (and use something like a 20% recovery factor), you will start losing track of the zeros and begin to see why a company as big as Statoil is interested in this project. I'm not going to even type the number as it verges on ludicrous, but it is a very material prize if it's there.
So what is that option worth? What is the market valuing it at? With just over 73 million shares out, Valeura has a market cap of around C$40 million. The company has no debt and I'm going to guess it has around $5-7 million in cash today. That leaves me with a $35 million EV. The company's current gas production is about 1,000 boepd, which should spin off something like $7 million a year in gross cash flow (1,000 boepd with $22/boe netbacks). If I stick a 3x multiple on that, the shallow gas "as is" is worth $20 million (but who knows what the new 3D will turn up in terms of new shallow targets). I'll value the future spending commitments of Statoil at zero in this discussion. Boil it all down and it looks to me like the market is pricing this BCGA option at about $15 million.
Now, I've seen a lot of early stage exploration stories over the years, but I'm pretty sure that every time I've seen an oil and gas Supermajor spending this kind of money on a junior company's behalf (to earn into a project with company-maker potential) the market typically values these options far in excess of $15 million. I've referenced cases here before where similar European Big Gas stories have attained market caps in the $500 million to $1 billion range in the past. By no means am I saying that VLE is going to get there before results, but Valeura does look to be a very cheap option on a very large prize with a known and somewhat predictable timeline for results. Assuming the testing program starts at the end of November and runs for 60 days, VLE investors should see results in late January or perhaps mid-February of next year.
I have no idea how far and wide the speculative appeal of Valeura's situation will spread ahead of test results from the Yamalik-1 well, but it should be an easy hold for anyone long stock at this point and wondering why they didn't sell it before at $1.25. For people new to the story, I would think that the risk-reward looks pretty attractive at this level so I would expect that Valeura has already made its lows for the year unless someone gets very motivated to do some tax-loss selling. It's been years getting to this point and if you're reading this, you are one of a very small group of people who are aware of Valeura and what they're chasing in the Thrace. Sometimes being early is the hardest (and riskiest) part, but the reward is big enough that I don't mind the wait, or the risk.