Valeura Energy Inc ( LON:VLU), the upstream natural gas company focused on the Thrace Basin of Turkey, has reported its financial and operating results for the three and six month periods ended June 30, 2020.
Highlights from Q2 2020
· A safe quarter, with no serious incidents and no reported cases of COVID-19 among Valeura personnel or contractors;
· Resumption of normal office work and preparations underway to resume field operations in Q3, as pandemic-related restrictions are eased, but the Company remains vigilant to the COVID-19 situation;
· A strong financial position, with net working capital surplus of US$33.2 million at June 30, 2020 (including US$30.5 million cash), and no debt;
· Average Q2 2020 production of 561 boe/d which increased to at exit rate of 672 boe/d;
· Realised prices unchanged on a Turkish Lira basis, equating to US$6.24/Mcf;
· Revenue of US$1.9 million and average operating netbacks of US$18.33 per boe (excluding one-off costs for testing Devepinar-1 from operating costs);
· Completion of a thorough desktop study of opportunities in the Company’s conventional gas production business, with a development drilling programme expected to commence late 2020/early 2021; and
· Extension of Valeura’s three exploration licences at Banarli and West Thrace until June 27, 2022, and the engagement of Stellar Energy Advisors Limited with a mandate to secure a partner for the deep tight gas play.
Sean Guest, President and CEO commented:
“I am pleased to report a quarter that demonstrates the resilience of our business. We exited Q2 with our conventional gas production business ramping back up to volumes in the range of 672 Mcf/d, a continuing strong financial position, and fresh extensions to our key exploration licenses.
Despite the challenging circumstances the global oil and gas industry has faced during the last several months, our strategy remains intact and poised to deliver value for shareholders. We are resuming activities to improve the efficiency of our conventional gas business and are focused on increasing production to maximise value. We have a unique opportunity to layer inorganic growth into our strategy and are actively pursuing opportunities to build production growth from new sources. We continue to see our deep tight gas play as a key part of our long-term value story and have started our search for a new partner, while preparing in the background to resume appraisal activities, with new well locations selected, and extensions granted for our key exploration licences.”
Financial and Operating Results Summary
| Three Months Ended June 30, 2020 | Three Months Ended March 31, 2020 | Six Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | |
| Financial(thousands of US$ except share amounts) | |||||
| Petroleum and natural gas revenues | 1,918 | 2,808 | 4,726 | 2,440 | 5,358 |
| Adjusted funds flow (1) | 339 | 52 | 391 | 774 | 1,115 |
| Net loss from operations | (1,899) | (192) | (2,901) | (1,603) | (3,913) |
| Exploration and development capital | 1,734 | 1,882 | 3,616 | 3,050 | 7,323 |
| Net working capital surplus | 33,231 | 34,054 | 33,231 | 39,825 | 39,825 |
| Cash | 30,469 | 32,554 | 30,469 | 38,536 | 38,536 |
| Common shares outstandingBasicDiluted | 86,584,98994,988,323 | 86,584,98994,988,323 | 86,584,98994,988,323 | 86,584,98992,406,655 | 86,584,98992,406,655 |
| Share trading (CDN$)HighLowClose | 0.440.230.32 | 0.650.200.23 | 0.650.200.32 | 3.162.092.32 | 3.992.092.32 |
| Operations | |||||
| Production | |||||
| Crude oil (barrels (“bbl“)/d) | 18 | 17 | 17 | – | 10 |
| Natural Gas (one thousand cubic feet (“Mcf“)/d) | 3,260 | 4,200 | 3,730 | 4,202 | 4,344 |
| boe/d | 561 | 716 | 639 | 700 | 734 |
| Average reference priceBrent ($ per bbl)BOTAS Reference ($ per Mcf) (2) | 29.706.37 | 50.447.17 | 40.246.76 | -6.49 | 66.076.79 |
| Average realised priceCrude oil ($ per bbl)Natural gas ($ per Mcf) | 41.656.24 | 65.227.08 | 53.256.71 | -6.38 | 69.566.65 |
| Average Operating Netback($ per boe) (1) | 15.27 | 24.95 | 20.70 | 21.34 | 23.40 |
Notes:
See the Company’s Management’s Discussion and Analysis for the three and six months ended June 30, 2020 and 2019 filed on SEDAR for further discussion.
(1) The above table includes non-GAAP measures, which may not be comparable to other companies. Adjusted funds flow is calculated as net income (loss) for the period adjusted for non-cash items in the statement of cash flows. Operating netback is calculated as petroleum and natural gas sales less royalties, production expenses and transportation.
(2) BOTAS regularly posts prices and its Level-2 Wholesale Tariff benchmark is shown herein as a reference price. See the Company’s Annual Information Form for the year ended December 31, 2019 (the “AIF”) filed on SEDAR for further discussion.
Net petroleum and natural gas sales in Q2 2020 averaged 561 boe/d, approximately 7% higher than the preliminary production figure disclosed in the Company’s July 13, 2020 trading update announcement. Q2 production was 20% lower than Q2 2019, and 22% lower than Q1 2020 as a result of reduced customer demand for natural gas due to lower industrial activity caused by the COVID-19 pandemic and Turkish national holidays during the period. Production volumes have since recovered as industrial activity in Turkey normalises, resulting in an exit rate for Q2 of 672 boe/d.
Price realisations in Q2 2020 were effectively unchanged from Q1 2020 on a Turkish Lira basis. When expressed in US dollars this equates to US$6.24/Mcf, which is 2% lower than in Q2 2019, and 12% lower than the first quarter of 2020. Subsequent to the end of the quarter, BOTAS lowered Turkey’s natural gas reference price (Turkish lira basis) by 10%, effective July 1, 2020.
Production revenue in Q2 2020 was US$1.9 million, a decrease of 21% relative to Q2 2019, and a decrease of 32% from Q1 2020. The decrease reflects the combined impact of lower production during the quarter and reduced gas price realisations, when expressed in US dollars.
Exploration and development capital spending was US$1.7 million in Q2 2020 comprised primarily of costs associated with drilling two shallow exploration commitment wells, Kuzey Atakoy-4 and Bati Sariyer-1 resulting in spending which was 8% less than the prior quarter.
Valeura’s reported average operating netback in Q2 2020 was US$15.27/boe, which reflects the inclusion of one-off costs for production testing of the Devepinar-1 well as an operating expense (a requirement due to the well having associated proved plus probable (2P) reserves). If the one-off costs for testing Devepinar-1 were removed from operating costs, the Q2 2020 average operating netback would have been US$18.33/boe, which is 14% lower than Q2 of 2019, and 27% lower than Q1 2020, largely driven by the reduction in the realised price.
As of June 30, 2020, the Company had a net working capital surplus of US$33.2 million compared to US$34.1 million at March 31, 2020 primarily due to capital expenditure incurred in connection with drilling two shallow exploration commitment wells.
Strategy Update
Valeura is pursuing a three-pronged strategy intended to leverage the Company’s assets, financial strength, and differentiated capabilities, toward delivering shareholder value. This strategy is crafted to provide immediate stability through the conventional gas production business, near- and mid-term growth through inorganic opportunities, and exposure to substantial long-term upside through the Company’s tight gas play.
Conventional gas production business
Valeura intends to maximise the efficiency and near-term value of its producing conventional gas business through operations focused at converting reserves into production.
The Company’s efforts to maintain gas production over the last two years has been both technically and commercially successful. Prior to the impact of COVID-19 related restrictions, Valeura’s programme of well workovers and reperforations more than offset natural declines and generated an increase in production. Individual investments have generally delivered payback in the order of a few weeks or months. With most personnel now returning to normal work, the Company will resume this programme starting in Q3 2020 and will also conduct production testing to confirm the commerciality of its two recently drilled exploration wells.
The Company sees potential for further activity as it continues to commercialise its 7.9 million boe of 2P reserves, the majority of which relate to its conventional gas production business, and which were valued at US$66.1 million (net present value of future net revenue discounted at 10% after deducted taxes) as of December 31, 2019 by its external, independent reserves evaluator. During Q2 2020, Valeura completed a thorough desktop study of existing opportunities in its conventional gas business, which confirmed an inventory of 12 higher priority drilling locations that could be drilled in the near term. Several of these near-term locations will be submitted shortly to regulators for permitting, and the Company anticipates resuming an active development drilling programme around the end of 2020 or early 2021, subject to permits and procurement of requisite equipment and services.
Inorganic growth
Valeura is actively seeking opportunities to grow its business through the mergers and acquisitions market.
With an enviable financial position including US$33.2 million in working capital and no debt, the Company has capacity to layer in inorganic growth as part of its forward strategy. Valeura has engaged RBC Capital Markets to support certain deal opportunities and continues to believe conditions are favourable for the current environment to continue generating a flow of potential M&A targets.
In keeping with the management team’s international expertise, the Company is focusing on the greater Mediterranean region, and has a strong preference for assets that generate near-term cash flow and provide opportunities for further development to ensure follow-on organic growth.
Deep gas upside
Valeura is continuing to pursue appraisal of its very large deep tight gas play.
Management regards the tight gas play as a core constituent of the Company’s portfolio, and a material upside value proposition for shareholders. The government has recently approved extensions to its key exploration licences through to June 27, 2022, which offers ample time for the next phase of appraisal that in turn could position additional licence extensions of four years.
Valeura has a clear vision for how to execute the next phase of appraisal after having now integrated the significant learnings from the drilling and testing of the Inanli-1 and Devepinar-1 wells. The Company has observed that the best reservoir quality in all wells is encountered in the upper few hundred metres of the Kesan Formation. However, the best gas flow results have been achieved deeper in the wells, where the gas is very dry and flows without condensate and minimal water – as seen in the first production test in Inanli-1 at approximately 4,275 metres. The next appraisal wells will target sweet spots which have both of these characteristics; in particular, locations that are closer to the centre of the basin where the high quality reservoir at the top of the Kesan Formation is deeper, and therefore within the dry gas maturity window. Final well locations within this broader area will then focus on regions of more intense natural fracturing, as interpreted on 3D seismic data.
Well locations are currently being prepared for submission to the government for environmental approval to allow for drilling in the first half of 2021, along with joint venture partners.
Valeura intends to farm out a portion of its interest in the deep gas play, and has engaged Stellar Energy Advisors Limited, with a mandate to secure a partner with technical and commercial expertise suited to a tight gas appraisal play of this magnitude. The Company anticipates this process will run from late Q3 through at least Q4 2020. With the addition of a new partner, Valeura will be poised to resume appraisal activities rapidly.
Organisation Structure and COO Retirement
Valuera has adjusted its corporate organisation and reporting structure to enhance the efficiency of its production operations by delegating more autonomy to the in-country team. These changes are intended to free up senior management resources and reduce costs at the corporate centre, while equipping the local team to be nimble and decisive in executing day-to-day operations. This adjustment also creates a distributed organisational model which can be replicated for other potential assets in the future.
In connection with these changes, the Company has appointed a new Turkey Country Manager, and Valeura’s Chief Operating Officer (“COO”) Peter Sider, has opted to retire. Mr. Sider assumed the role of COO in Q4 2019 in order to ensure smooth ongoing operations during a busy phase of operations, after having previously held other senior roles with the Company. His contribution has led to a safe and reliable performance on both conventional production enhancement activities as well as the technically challenging deep unconventional testing programme. The directors and management team are all greatly appreciative for Mr. Sider’s tireless efforts.
Annual Meeting
Valeura will hold an annual and special meeting of shareholders today, August 12, 2020 at 09:00 (Calgary time) in the Calgary Petroleum Club, 319-5th Ave. S.W., Calgary, Alberta, Canada. The meeting will include a business update presentation by Sean Guest, President and Chief Executive Officer.
Valeura Energy will be following all public health recommendations, including social distancing requirements at the Meeting due to the ongoing COVID-19 pandemic. Physical access will be restricted to registered shareholders and formally appointed proxyholders and any others will not be permitted to attend (including beneficial shareholders that hold their common shares through a broker or other intermediary).
Rather than attending in person, shareholders are strongly encouraged to listen to the Meeting proceedings via live webcast using the following link:
https://produceredition.webcasts.com/starthere.jsp?ei=1341355&tp_key=64b800beb7
