Valeura Energy Inc

TSX:VLE

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Valeura First Quarter 2020 Results Conference Call.[Operator Instructions] This call is being recorded on May 12, 2020. I'd now like to turn the conference over to Sean Guest. Please, go ahead.

[W. Sean Guest, President, CEO & Director]

Thank you, Colin. Welcome to Valeura Energy's First Quarter Results Conference Call. My name is Sean Guest, I'm Valeura's President and Chief Executive Officer. Joining me here in Calgary are Heather Campbell, our CFO; Peter Sider, our COO; and Robin Martin, our IR manager. As of this morning, we filed our financial and operating results for Q1 2020. Everything is available on SEDAR and on our website. Before getting started, I'd like to draw your attention to our general disclaimer, which is provided on our corporate website and the advisories on Slide 2 of our updated corporate presentation, which is also on our website and available by link for those of you who are joining through the webcast. In particular, please take note of the advisories regarding forward-looking statements and non-GAAP measures used in this discussion. I'd also like to note that our AGM has been delayed until August 12 at 9:00 a.m. Our goal is to have a normal AGM with shareholders, all welcome to attend, but we will review the situation in early July to determine if this is possible in light of COVID-19 crisis and the restrictive measures on gatherings. Our information circular will be mailed in early July.By way of an agenda, after some introductory comments, I'll hand the call over to Heather, who will take us through a financial review. After Heather, I'll come back to provide more detail on the operations, and we'll then, with the help of the operator, take any questions you might have. So the first quarter was a period of unprecedented turmoil in the global markets, particularly when looking at the energy markets and commodity prices. Everyone will recognize that there is a lot of uncertainty in how the world's economy will be managed going forward. However, while Valeura had to adapt our operations in light of COVID-19, the effects have been relatively minor, and the first quarter was also a period where much of the uncertainty for us was clarified. Our business strategy and objectives going forward are very clear. First, our shallow gas production business. The effects of COVID-19 on this business have been relatively minor, and we still realized gas prices above $7 in Q1 and netbacks of approximately $25. We were able to maintain most of our gas production. Technical studies and field operations in Q4 2019 and Q1 2020 have yielded quarter-on-quarter production growth. When these studies conclude in Q2, they will underpin more drilling around year-end to convert reserves into production. Second, the company remains focused on the potential of the deep unconventional gas opportunity. Equinor officially exited the joint venture at the beginning of Q2, resulting in a doubling of Valeura's working interest at no cost and leaving us in full control of the play. Moving forward, we will engage an external adviser to drive our process to secure a new partner to participate in the play. In Q1, we also completed operations on Devepinar-1, that have set up the well for an extended well test. We expect to recommence gas production from that well in early July.Third, Valeura is financially very strong with no debt and $34 million in working capital. We are in an enviable position as our own business is stable and cash flowing. However, the crash in oil and gas prices has created new opportunities and the potential for mergers and acquisitions. We are reviewing regional opportunities to understand how these rank against our own internal portfolio prior to making decisions on the investment of our capital.And finally, but most importantly, we continue to see the safety and wellbeing of our people and our contractors as paramount to the success of our business. We have implemented several new measures in response to the COVID-19 pandemic, including the scaling back of nonessential fieldwork and implementing work-from-home arrangements wherever possible. Our production operations are continuing smoothly, but we are ready to adapt further as required, depending on how this crisis continues to develop in Q2. I'm going to speak more on operations in a moment, but at this point, I'll hand the call over to Heather to take you through the financials.

[Heather Campbell, Chief Financial Officer]

Thanks, Sean, and hi, everyone. As Sean mentioned, from a financial standpoint, we are in a very strong position. We have no debt and working capital is sitting at $34.1 million, of which about -- of which $32.6 million is cash. While we still had positive cash flow from our operations in the first quarter, our cash position reduced by $3.5 million from what we reported at the end of 2019. $1.4 million of this difference relates to foreign exchange effects of the strengthening U.S. dollar in the last part of Q1 on our foreign currency cash balances, a lot of which is Canadian dollars. Our cash position was also affected by our capital spending of $1.9 million during the quarter, approximately half of that related to the deep well program, particularly with the last part of the Devepinar short-term production test and equipping the well to prepare it to be brought back on production for more testing. The other half relates to spending on studies and operations to increase production and the commencement of our 2 shallow obligation wells.In addition, we saw some one-off spending in Q1 that's not expected in subsequent quarters, mainly related to severance payments. Going forward, we are working on reducing our gross G&A outlook as the business evolved. So we're managing the business well, and we continue to focus on driving more efficiency into how we operate. Our Q1 production came in at 716 BOE per day, which was an increase of 11% over the fourth quarter and a direct outcome of the work we've done on well workovers and reperforations last year and into the first part of the first quarter. Price realizations have remained strong in Q1, and they were unchanged on a Turkish lira basis. However, like the cash position, a strengthening of the U.S. dollar against other currencies affects our reported price realizations. We are reporting $7.08 an Mcf of a realized price, which is a reduction of 5% from Q4. With the continuing global economic crisis due to COVID-19, we are monitoring the pressure on the Turkish lira and whether the government will respond with gas price increases as they have in the past. The offsetting effect of production being up by 11% and prices down 5% means our revenue came in about 6% higher than the prior quarter at $2.8 million. With that, I'll hand the call back over to Sean.

[W. Sean Guest, President, CEO & Director]

Thanks, Heather. I'd now like to give you a little more color on our operations and our commercial outlook. As I mentioned at the beginning, we've managed to keep our production operations going smoothly, despite having to make operational changes in light of COVID-19. We even managed another modest production increase in Q1. Conversely, Q2 production rates are likely to see a little more headwinds as field activity remains on hold due to COVID-19 restrictions. Additionally, we expect that there will be reduced gas demand due to a combination of the COVID-19 effects and Ramadan, which lasts throughout most of May and is followed by a week of holidays in Turkey. On a positive note, we ended all of the equipment we need and a very capable workforce available in country. We can ramp up operations quickly once we have the all-clear. In addition to our list of opportunities for the shallow production, our list of opportunities for the shallow production keeps on growing. We are just now completing an internal technical study that we started in Q3 2019 on shallow exploitation projects. This work has been encouraging as it allowed us to focus our workover operations, and we have increased production in the past 2 quarters. We have also identified additional drilling targets for later this year and beyond, all aimed at converting reserves into production. We will understand the full scope of this drilling campaign once the technical study is complete this quarter, and we are able to verify the concepts with field workover operations. We have also just finished drilling 2 exploration commitment wells, Kuzey Atakoy-4 and Bati Sariyer-1. Kuzey Atakoy-4 was drilled and logged with wireline data showing clear indications of gas. At Bati Sariyer-1, we are currently preparing to run wireline logs over the objective section but have seen positive indications of hydrocarbons while drilling. We will need to production test both of these wells to confirm the flow potential from the prospective zones identified. This work has been deferred until we are able to operate in the field to construct pipelines from the wells to our sales network. For our deep tight gas appraisal play, we've effectively doubled our working interest following Equinor's exit. Valeura continues to see this play as a potential source of significant long-term gas production, and we remain as committed as ever. We accomplished a lot with Equinor as our partner and a very cost-effective manager for Valeura, but we recognize that there is a lot more work still to do. It is still an appraisal play and will require more drilling and production testing. We want to bring an additional partner to do that, and we'll start working shortly with an adviser to secure the right candidate. The idea is to bring in someone who has the financial capability but also importantly, the correct technical background and experience in these unconventional plays. We are ready to go and obviously, want to get started on this process as quickly as possible. However, it will be prudent to wait a couple of months to allow some stability to return to our global industry. In the meantime, our focus is on low-cost data collection. We are planning to go back to Devepinar-1 to do a long-term production test as soon as we can. In Q1, prior to Equinor's departure, we completed operations so that the wellbore is in the correct state for sustained production, and we only require the correct surface equipment to test the well safely. With field operations and travel paused back in March due to COVID-19, this hasn't progressed as quickly as we like. However, we have now adapted our plans and are hoping to have the well back on production in early July. Again, I caution that this will be dependent on our ability to carry out field operations and manage the risk to our people's wellbeing. So as Heather mentioned, we're in a strong financial position that can underpin value growth for Valeura, and there are 3 pillars to that: first, as I noted earlier, we are pursuing options to convert our Thrace Basin shallow reserves to -- into production; second, we are looking for the right partner to continue pressing forward on our deep gas appraisal play, which has vast upside; and third, we are also reviewing inorganic growth opportunities. It is imperative that any use of our strong capital position provides the highest returns to our shareholders. We need to compare the returns from our own organic portfolio against the returns from regional M&A opportunities. The current market turmoil is creating opportunities, and we feel we're positioned to be in -- a potential acquirer. While nothing is ever guaranteed in the M&A market, we owe it to ourselves to keep an open mind to the opportunities in the region that may offer a good strategic fit. So what does Valeura bring to any M&A discussions? Cash and a strong balance sheet that can underpin production and cash flow growth; a cash flowing gas production asset with growth potential that is largely shielded from the current global price volatility; significant upside in a potential massive unconventional project with proven gas flow; and finally, a team with international experience that has demonstrated their ability to deliver complex projects safely and on budget in an international environment. So in summary, I'll remind you, we have a strong and resilient company, one that's positioned to not only continue generating cash through the current market but has exposure to the potential for some significant value upside. We've been largely unaffected by the COVID-19 crisis in turmoil and stress in the global energy markets. This has opened up opportunities for Valeura. With that, I'll hand the call back over to the operator to help us take questions. Colin, thank you.

[Operator]

[Operator Instructions] So your first question comes from Charlie Sharp of Canaccord.

[Charlie Sharp, Analyst]

I wonder if I could just focus for a moment on the shallow production and the reserves. The reserves life you have there at present, considering your current production is quite long and that would suggest that there is obviously significant room for production growth from your reserve base. And it may be a little bit too soon to be talking in detail about it, given that you have this technical study that is completing this quarter, but perhaps, would it be possible to sort of sketch out, if you like, the potential for shallow production growth, especially in light of the local demand that you see there? And also the infrastructure capacity you have for delivering that increased gas flow?

[W. Sean Guest, President, CEO & Director]

Yes, Charlie, thank you very much for the question. First of all, just to touch on the infrastructure capacity in that is that we're really in that end, unconstrained. Our infrastructure does have full capability to take any growth that we can deliver from the shallow production and into our customer base that we have there. So we're fine on that end. The other you're saying is, okay, there is a -- we have a very large reserve life index. Really, the work that's gone on in the past 6 months is we have trying to refine where we would go with drilling is to take this from a concept of the reserves are in the ground and we have faith in them is to actually where would you put the wells to try and target that growth. So what we're seeing already is, there are a number of well locations that we've identified that we would go out and drill, but there is also a lot that are dependent. So we see that we have wells that exist in an area, so we want to go back and do some more testing in those existing wells that will then firm up more well locations, that would then allow us to drill. So we see the capability there to quite easily double the production, assuming that we can get back to an extended drilling campaign with a reasonable chance of success.

[Charlie Sharp, Analyst]

I see. That's great. And naturally, there is the demand there for any additional gas that you can supply.

[W. Sean Guest, President, CEO & Director]

That's correct. Yes, that's what I touched on the beginning is, we believe the demand is there and the infrastructure is definitely there to be able to handle that.

[Operator]

[Operator Instructions] So there are no further questions at this time. Please proceed. Actually, we do have a question that just came in. This is from [ Dwayne Kohut ]. He's a private investor.

[Unknown Attendee]

I was just wondering if the price for your natural gas is looking to remain fairly stable, given the price of oil and gas has been plummeting all around the world.

[W. Sean Guest, President, CEO & Director]

Yes. It's one thing we watch very closely to understand really what drives pricing within Turkey relative to what's going on in Europe or even in a broader content, in the market. And the key thing that we see is, the European -- sorry, the Turkish gas prices really does not see the volatility, the big highs and the big lows that you see in the -- particularly the European gas market. However, we do expect it in long-term trends, Turkey will be similar to that European gas price. So we're seeing kind of low changes in the price. So we're not expecting big drops, but the important thing is, in Turkish lira, our price is remaining very stable. The other element we have to watch is the actual exchange rate. So the Turkish lira, given the COVID crisis, has seen a significant drop in value, which, therefore, will affect our price. Over the past few years, we've seen the government respond to this by increasing the price in Turkish lira to offset that. But again, given the ongoing crisis, we're in a bit of unprecedented times, so we continue to watch to see is the government going to increase the price, given the fall in the Turkish lira that's occurred in the past month or so, and what we'll see there. But again, we just need to see how we come out of this current crisis in the situation. In 2018, we saw significant drops in the value of the Turkish lira. However, it came back very quickly as we came out of the crisis at that time. So we'll continue to see whether we see a similar response as we progress through 2020 here.

[Operator]

So there are no further questions at this time. You may proceed.

[W. Sean Guest, President, CEO & Director]

Okay. Well, thank you for those who listened in today. And again, as we noted, please feel free to reach out to either ourselves or Robin, if you have any further questions. We're always available online. Thank you.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.