(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)
VLE Provides Q1 2016 Report and Operational Update
Last night, Valeura reported its Q1 2016 results (full release linked here) and many investors are likely asking themselves "Where's the beef?" with respect to the Yayli-1 test data given that no flow rates were provided to investors. All that investors know at this point is that the company has "completed two fracs in the over-pressured tight gas sands in the Teslimkoy formation at a depth of 2,700 to 2,900 metres as a first step prior to completing indicated conventional natural gas pay in the Osmancik formation and that they are "encouraged that the evaluation program has confirmed over-pressure below 2,500 metres and both frac intervals produced natural gas."
However, Valeura did go on further to say:
"We have carried out an extensive fracture stimulation and evaluation program in the Yayli-1 well at Banarli in over- pressured, tight gas sands in the Teslimkoy formation to provide important calibration data aimed at facilitating the deep farm-in process. We completed two fracs with encouraging results that have been shared with potential farm-in partners. We plan to move up hole to complete indicated conventional gas pay in the shallower Osmancik formation. Efforts are continuing to seek a joint venture partner to farm-in on the deeper horizons at Banarli. Active discussions have been underway with a number of parties that have accessed the data room under confidentiality agreements. We are pleased that our Banarli well results have sparked additional interest and accelerated the pace of these discussions."
Rather than being left to read between the lines, I would have much preferred if Valeura's Yayli-1 update more closely resembled a ray of light that parted the clouds and lowered a tablet onto the ground in front of me with "the answer" that would make everything clear. However, given that VLE is in the early stages of proving up a basin-scale resource play, it would appear that this test is more of a step along the path towards unlocking the tight gas potential. Instead of knowing the answer from Yayli-1, I am left with a few hard facts.
1) Two tests were carried out within the overpressured zone and both tests produced natural gas;
2) The fact that natural gas was produced from both tests suggests that the previously reported 128 metre-thick pay interval is indeed gas charged;
3) The test results have been shared with potential JV partners under confidentiality agreements and that the test results have apparently piqued additional interest; and
4) Additional shallow Banarli targets have been identified as per Figure 1 below. There is good development and exploration running room here in just two of five identified play types.
Figure 1: Updated Banarli Prospect Map from Valeura's Updated Presentation
In my eyes, VLE has put themselves well within the BCGA ballpark with the Yayli-1 test program and has enough shallow gas development wells to keep production and cash flow growth going in the meantime while they work on bringing in a big-ticket JV partner. A lot of management teams would be far more promotional than VLE on the back of the Yayli-1 results, but that's just not VLE's style. For them, the proof will be in the signing on a farm-in agreement with one of the interested parties.
VLE has proven that there is an overpressured tight gas resource play in the Banarli block that responds to fracture stimulation techniques. The next step in my mind is to drill a horizontal well in the Banarli block offsetting the Yayli-1 well, which is undoubtedly what VLE will look for from a farm-in partner. In the meantime, VLE investors will have to take comfort in the 1P NPV10BT of $0.71/share and the 2P NPV10BT of $2.02/share. On a cash flow basis, VLE trades at about 3x trailing EV/CF and about 2x exit 2016 EV/CF, which is a fraction of the valuation of their industry peers.
Valeura is hosting its AGM today in Calgary and usually posts the AGM recording on their website shortly afterwards, which is definitely something I want to hear. I'd like to see the company arrange a conference call to discuss the Yayli-1 results further, as investors will get far more from VLE's "tone" than they will from reading between the lines. If people are to take one thing away from the Yayli-1 test data, it would be that this test was not designed to prove commerciality on its own, which makes the exact flow rate less critical. To back that statement up, I don't think I've seen a single vertical tight-gas Montney well that would be deemed to be commercial in Western Canada... which is precisely why tight-gas development is done with horizontal multi-stage fracked wells. The next step for VLE is to go horizontal. They know it, their potential JV partners know it, and now investors should know it too.