(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 followed Valeura Energy (VLE.TO) for years. As of their Q3 2014 financials, VLE was producing ~1,000 boepd of natural gas from the Thrace Basin in northwestern Turkey. It's worth noting that natural gas in Turkey currently fetches over $10/mcf, which I think would raise the brow of even the most jaded energy investor. As a result, VLE generated cash flow from operations of roughly $3 million in Q3 2014 and in light of recent successes with the drill bit, I'd argue that's likely to grow further over the next 12 months. My view of the story is pretty simple from a valuation standpoint... At its current price of $0.40, VLE has a market cap of $23.5 million (based on 57.9 million shares outstanding), versus cash of ~$5-6 million, and annualized cash flow of $12 million. That means the company is trading at roughly 1.5x EV/CF. Note that VLE has no debt. That's cheap by any measure.
Most companies with EV/CF multiples that low would have very short RLI's, but that's not the case with VLE, which has 2P reserves of 30.9 BCF as of the end of 2013. That translates into a 14 year RLI. Furthermore, the 1P after-tax NPV10 of VLE's reserves is $40 million, or about $0.69/share, while the 2P after-tax NPV10 of VLE's reserves is $100 million, or about $1.72/share. Both of those figures ignore the 652 BCF of net 2C contingent resources that were assessed only on VLE's 40%-owned TBNG (Thrace Basin) JV property. Yes, you read that right, 652 BCF net. If even 10% of those prospective resources were converted to reserves, that would be more than 200% of the current reserve base.
Some indicative economics for VLE's well types are shown in the chart below. For additional detail, please see the presentation on the company's website (http://www.valeuraenergy.com).
Now, sometimes when assets appear to be on sale, it's because things have changed for the worse. In VLE's case, I just don't see that. They know more now in terms of drilling, completions, reservoir characterization, and stratigraphy than they ever have. In October, on one of worst trading days in the broader markets this year, the company announced in a new discovery (Gurgen-1) that appears to set up a new trap / play type which may be not only repeatable, but repeatable on their 100%-owned Banarli block to the north. Gurgen-1 tested at 4 mmcf/d, was most recently reported to have produced 3.1 mmcf/d over the first 6 days of production on a 1/4" choke at a flowing tubing pressure of 1,560 psi. The total drill, case, complete and tie-in costs for the Gurgen well was $1.2 million (gross). Those are the kinds of wells that can build production quickly; payout on a well like that would be measured in months.
I think the following map is fairly key to explaining the future of VLE. It shows the outline of the company's 100%-owned Banarli license in relation to the existing production on the TBNG JV lands where VLE holds a 40% working interest (Transatlantic Petroleum (TNP.TO) is the 60% partner and operator).
Now, some of the real leverage in VLE comes from the potential for a basin-centred-gas-accumulation (BCGA) on the Banarli block. If you are familiar with the Montney in Western Canada, that is a prime example of a BCGA play. This has been the holy grail for European gas explorers for as long as I can remember, probably starting with Falcon Oil and Gas many years ago. BCGA's are cherished for their potential to host massive, repeatable, gas resource plays and VLE believes that Banarli has the potential to host such a resource. Proving up a BCGA in Turkey would be huge for not only VLE, but also for Europe, where domestic gas supplies are scarce. VLE's current strategy consists of drilling for Gurgen-type traps on a 100% basis, while looking for a partner to farm into the BCGA play. In the event that no partner can be found on acceptable terms, I would expect VLE to eventually go it alone with respect to the BCGA if the company has additional Gurgen-like success with the drill bit.
It's hard to quantify the potential value of a BCGA to VLE given that there are so many unknowns, but I would peg the resource potential at at least an order of magnitude greater than the company's current 2P reserves of 30.9 BCF (indeed, the potential could probably be measured in TCF, not BCF). With VLE's tight share structure the leverage would be jaw-dropping.
For me, Valeura is a good example of a nearly free option with "multi-bagger" upside. Gurgen could not have come at a better time for them and I think the next 12 months will be pivotal for the company. In the meantime, I could see VLE trade up to 3-4x EV/CF given what's on the table. I've seen far worse assets trade at far higher valuations. Time will tell.