(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)
The Dog Days of Summer
"Dog" is typically not a term that I like to associate with names that I follow, but VLE's recent share price performance has surely put the story in many an investor's doghouse. Combine a failed coup attempt with delayed and/or inconclusive shallow well results and add in some extra jitters with an extension of the Statoil deal "target date" (to August 19th) and VLE's 50 cent drop from its recent highs isn't surprising. Having said that, nothing about the fundamentals of Turkey's gas market have changed. Turkey is a very captive (and growing) gas market with premium pricing. Money continues to come into Turkey, lured by higher-than-average yields and a growing economy. NATO has re-affirmed Turkey's importance as a member, and I even saw Putin and Erdogan shaking hands in a recent photo. The fact still remains that a large domestic gas source in Turkey would be a very nice piece of business.
VLE reported its second quarter tonight and it was lacking in detail on two items that the market is keenly interested in: 1) the finalization of Statoil JV paperwork, and 2) the results of the Bati Gurgen-2 and Yayli-1 wells. I don't like delays as much as the next guy, but I can sympathize with the complexities of putting together a JV deal in a foreign jurisdiction in the summer months. I don't much care for the Yayli-1 shallow well discussions as the company seems to be scratching its head a bit there. As for Bati Gurgen-2, I think the market (myself included) really wants to see a good gas well made of the sidetrack but testing is only just now getting underway. The Bati Gurgen-2 well was sidetracked to an up-dip (structurally higher) location and it was cased, which suggests that the company saw something worth testing. I wouldn't think it will be more than 2 weeks before VLE would have an idea of what they have at Bati Gurgen-2. In the meantime, it's also a waiting game as we count down to the next Statoil "target date" of August 19th.
VLE has set 2016 production guidance at a disappointingly low 800-900 boepd and I sincerely hope they are sandbagging there, but at the end of the day I can't get bearish on their shallow gas potential, though I doubt they meet my initial production exit rate targets until 2017 at this rate. I do however get the impression from the language in tonight's press release and certain slides of the new corporate presentation that VLE might actually more resemble a duck than a dog (both are linked below). All seems quiet on the surface, but underneath (i.e., reading between the lines) VLE appears to be working not only just on the Statoil farm-in, but also on other farm-ins and the potential for restarting shallow gas operations on its JV lands.
VLE Q2 2016 results:
VLE Corporate slide deck: