(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 Reports 2016 Results and Updates 2017 Plans
Last night Valeura Energy (VLE.TO) reported its year-end 2016 results and reserves alongside some commentary regarding the forward plans for 2017. There's a lot of information in the press release which is linked here and I encourage anyone interested in the company to take the time to read it. I'll take a stab at summarizing the key points here... there were positives and negatives, but on balance nothing really changed my overall outlook.
1. The falling Turkish Lira relative to the Canadian dollar impacted VLE's realized prices in Canadian dollars, as VLE's gas is priced in Lira. The company states that it is looking into options that would allow it to mitigate Lira exposure and I would think that a currency hedging program might be a good place to start.
2. BOTAS gas pricing levels were lower in Q4 2016 due to a combination of previously announced lowering of the reference price and the weak Lira. Realized gas prices were $7.96/mcf in Q4 2016. Netbacks fell to $33.43/boe. I'll put both of those items in the positives category as well, because $7.96/mcf and $33.43/boe netbacks represent the best gas pricing and netbacks I see anywhere in the universe of stocks that I follow.
3. The decrease in BOTAS pricing and weak Lira appears to have decreased the value per boe of VLE's reserves by 45-50%, though this was essentially offset by the highly accretive TBNG acquisition.
4. The shallow drilling program is slightly delayed relative to initial guidance and the company is guiding towards a 2017 exit rate of 1,500 boepd. The company may be sandbagging, but I'd rather see the bar set low at this stage and be pleasantly surprised if the numbers end up coming in better than expected.
1. VLE was able to fund the acquisition of the 40% TBNG JV interest with proceeds from the subsequent deep rights sale to Statoil and the reimbursement of back-costs from Banarli. That was a very creative and non dilutive way for VLE to double its interest in the JV lands... and don't forget that VLE also picked up an extra 40% interest in the associated infrastructure, facilities, and direct sales channels to local consumers.
2. Even with the headwinds, VLE still realized $7.96/mcf for its gas and a $33.43/boe netback. Those are some of the best unit metrics in any energy company that I follow these days.
3. A shallow discovery was announced at Dogu Atakoy-3, which has been onstream for a week and is flowing at a restricted rate of 1 mmcf/d. Better than a kick in the pants with a frozen boot.
4. A rig has been identified for the deep (BCGA) drilling with Statoil and contracts are being finalized. The well is expected to start drilling in Q2 2017.
5. A shallow drilling program of seven wells is envisioned on the TBNG JV and Banarli lands and is expected to start in Q2 2017.
6. The company has no debt and it appears that it will have around $15 million in working capital net of the TBNG acquisition transactions and the Statoil deep rights purchase on the JV lands.
Putting It All Together
With so many moving parts, VLE may seem somewhat confusing to a lot of people right now, so I'll try to summarize my outlook as coherently as possible. Fluctuations in the Turkish Lira and BOTAS pricing are out of Valeura's control, so I won't focus on them other than to say that there are currency hedging instruments that VLE can look into in order to mitigate their impact in the future. Given that gas prices are still so high, I'm not going to get bent out of shape about BOTAS pricing either, but this is definitely something to keep an eye on. Valeura has 73 million shares out (78 million fully diluted) which gives it a market cap of C$52.5 million and an enterprise value of C$37.5 million net of my extrapolated ~$15 million working capital balance. That means that Valeura trades at roughly the value of its proven (1P) reserves of $35.2 million and at about one-third of its proven plus probable reserves value of $109.7 million. That ascribes no value to Valeura's infrastructure and it totally ignores that fact that Statoil is going to spend (or pay) another US$30 million on the deep program at Banarli no matter what happens. Assuming VLE hits its exit rate of 1,500 boepd, gross cash flow from operations using a $33/boe netback would be on the order of $18 million annualized... G&A probably eats $5-6 million of that, so VLE looks to be trading around 3x EV/CF (exit 2017) which is reasonable for a junior in a foreign jurisdiction in this market.
Based on my quick review above, I can't say that I see anything that should scare anyone off at this stage. Valeura has done exactly what it has said it has wanted to do for years... roll-up the TBNG JV interest in a non-dilutive way and attract a major to farm-in on the BCGA (basin centered gas accumulation) play. The TBNG acquisition was probably one of the best deals I've seen a company pull off in a long time and I can't complain one bit about VLE's ability to bring Statoil to the table. The Statoil spend alone is roughly equal to VLE's current market cap. There's no doubt that it's going to be an interesting year for Valeura in 2017 and I'm going to stick around to let it play out.
You can link to Valeura's most recent slide deck here.