Valeura Energy Inc. (VLE) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Valeura Energy Management Briefing. [Operator Instructions] I would now like to turn the conference over to Sean Guest. Please go ahead.

Thank you very much, Colin. I'd like to welcome everyone, and say good morning to those of you joining us in Canada, and good afternoon to those of you joining us from over in the U.K. I'm speaking to you from Ankara, Turkey today. And on the line from Calgary, we have our CFO, Heather Campbell; and our IR manager, Robin Martin. For this call, we don't have a formal presentation. And instead, we'll just provide some commentary on the news we announced earlier today. And then with the help of the operator, we'll take any questions that you might have. This morning, we announced the sale of our shallow conventional gas-producing business in Turkey. For clarity, this includes all of our production, infrastructure and substantially all of our reserves, but does not affect our interest in the deep, tight gas play. And in fact, through commercial arrangements with the buyer, we're retaining the ability to access the gas infrastructure for use in production testing deep appraisal wells in the future. It's a strong deal. Headline cash consideration at closing is $15.5 million. In addition, there is a quarterly royalty payments linked to local gas prices. This royalty payment will pay to Valeura a minimum of USD 1 million and is capped at a total of USD 2.5 million over the next 5 years. On a unit production basis, the price is approximately $25,000 per flowing barrel equivalent or more than $7 per boe of 1P Reserves. In addition, we expect to save more than $1 million per year in G&A going forward. The key condition to close the deal is government approval in Turkey. We do not see this as an issue, and are hoping to have this finalized in the next few months, which will result in closing sometime in Q1 2021. This deal is positive for Turkey as Valeura is bringing another international energy investor into the country, like we've done successfully in past. The buyer is a new corporate entity, TBNG Limited, is a key partner who is well-known in the U.K. investment banking space for backing international resource sector and too has experience in Turkey. The management team of TBNG Limited has worked in the region. And when they're combined with Valeura's Turkish staff, who will remain with the operations, we believe we're placing these assets in capable hands. With this sale, Valeura will become a very lean company with a transparent cash value. We have no debt. And as a starting point, at the end of Q3, we had approximately USD 31 million of cash on hand. To put that into context, that's effectively CAD 0.47 per share before this deal. The headline cash for the sale of $15.5 million adds effectively CAD 0.24 per share. So by cash and sale proceeds, Valeura's were $0.71 per share without attributing any value to royalty payments or to the deep gas play. We have been very clear in recent public announcements and in our AGM presentations about our 3-pronged growth strategies. First, generating cash from our conventional production. We achieved that today. Second, production and cash flow growth by near-term M&A activities; and third, significant upside potential in our deep unconventional gas pipe. Our cash and sale proceeds will leave us very well-funded with effectively $46 million to support the M&A component of our forward strategies. We believe that with the current state of our industry, there is significant scope for consolidation, and we feel it is critical to build size and materiality. This deal is the first step to help us broaden the scope of the assets and companies that we can be looking for. To flush out the M&A part of our strategy a bit more, we are looking at production and development opportunities that add near-term cash flow to the portfolio, but that also have further scope to invest our capital into projects that we can yield a material uptick in mid-term cash generation. Significant and sustainable annual cash flows will allow the company the flexibility to continue to grow, while at the same time, offering sustainable return of capital to shareholders via such mechanisms as dividends. We are now raising our sites to more material opportunities in the Greater Mediterranean region, including Eastern Europe, North Africa and the Middle East. This is an area where our team has a lot of experience, and the current environment has resulted in some interesting assets coming to market. Unfortunately, we can't go into detail on what we are currently looking at, but suffice to say, we're keeping our advisers busy screening potential deals. We won't be rushed to make a deal though, and will stick to our strict criteria. I'm optimistic that we'll get there. At the same time, our deep, tight gas play in Turkey with potentially 20 Tcfe with prospective resource remains an important part of the portfolio and this presents longer-term potentially very high-value -- a very high-value opportunity. We've built strong relationships in Turkey, and we intend to continue pursuing the next phase of appraisal once we've identified a new partner. We've made some recent strides in understanding the play, and are planning the next appraisal well. So summing up, I believe we're presenting really strong value for shareholders by way of this sale. We had set out to maximize the value of the conventional producing business, and this deal accomplishes that goal by adding approximately $0.24 a share based on the closing cash. Adding that to our current cash position represents approximately CAD 0.70 per share in value. And importantly, with this sale done, we are now laser-focused on executing our forward strategy and looking at bigger and more material opportunities going forward. So I want to thank you all for your time today, and we'll now pass the call back to the operator to help us take any questions you might have. Colin?

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

Sean, congratulations on the deal. Just one detailed question, if you like. Is there going to be any working capital adjustment at the time of the closing of the transaction?

Yes, the effective date for the deal is actually July 1, 2020. So there will be some corrections for the closing, some ups and downs. At this point, we don't see that there will be a significant change. But, again, that's dependent on what happens in the next few months before we get to closing, and then just the final discussions with the buyer on that.

Okay, that's great. And any progress that you can report on the farmout process for the deep gas potential?

Yes, as we said in our press releases, we were -- the farmout process is going to start in September at a time that we hoped the industry was starting to improve and once people were back from the summer. That's kicked off. We're using Stellar Energy Advisors in London. They've contacted a number of companies who can CA-signed, but that process is running. And as we've said in our press release, we're still targeting something by the end of the year. But again, we remain cautious given the current state of our industry.

Your next question comes from Stephane, apologies if I mispronounced this, Foucaud of Auctus.

2 questions for me. The first one is getting out of the shallow business, does that have any impact on your standing and capability to deliver the farmout of [indiscernible] thinking that being a shallow, you are probably seeing [indiscernible]. So I was wondering whether, with regards to the government or attractiveness or so for, it could have any impacts on the process. With regard to the deal, what would be your view of -- what would the good deal be looking like with regards to the farmout? Would there be some sort of tariff for well? Would there be some cash payments? How do you see things? And what do you think would be achievable?

Yes. I think a good deal would be a carry on a well, and potentially then an option for the person farming into then continue to carry subject to success in that first well. But that would obviously be what we're targeting is for a carry on that first well that we're drilling. And then we're looking for then with success, a carry going forward. But we'd be quite pleased with that.

And with regards to the...

I seem -- you also had a question -- go ahead.

Yes, with regards to the [indiscernible], you're not having the deep anymore and whether that impacts your standing as operator and change the sort of [indiscernible] business year-on-year farmout of the deep [indiscernible]?

Yes. So as long as I was hearing your question correctly, it's related to having no longer the shallow production. Does it affect our status as operator or status working in the country? Did I get that correct?

Yes, the impact on the shallow process [indiscernible].

Yes, it's been recognized that the deep and the shallow assets are very different, and appeal to very different parties when you're looking around. So what we can see with the shallow is it's a really good project for someone to start to grow production, but it's not something that larger companies or well-funded companies are going to be looking at because they want to see those big material upsides. So we've always seen a natural break between the deep assets and the shallow assets. So we don't think in any way of looking at farm down is that that we've hindered it by selling the shallow assets. What we do know is just having met actually today with the Ministry is they seem enthusiastic about a new player coming in, looking to invest in the production and seeking to kind of maximize the production and be focused on that. And then recognize also that, that brings our focus very much on the deep and how we're going to progress and further appraise that play ourselves. So we don't really see it's a hindrance. And we do remain operator of the blocks where the deep play is prominent. Did that answer all your questions?

Yes, Sean. I guess, if you look -- when you [indiscernible] farmout [indiscernible] deep parts, you might be also looking at leaving the operatorship as the newcomer. I remember that in the case of Statoil Equinor, so you kept the operatorship for the first wells. And when the plan was to reincrease that to Equinor, in this current environment, particularly without the shallow, you might be not looking at keeping your opertoraship?

Yes. No, that's fine. Obviously, we would look to -- if we have a partner come in, who's very familiar with unconventional plays, who has the capability to drill these deep wells, that can be something that we would be very willing to discuss within the operatorship of the deep components.

Your next question comes from Jamie Somerville of HOOT Research.

Sean, apologies if you've addressed this before. I'm just wondering, you mentioned M&A being a big focus than at the end of what you said about that, you said you'd consider dividends. Just with the share price where it's at, what is your and the Board's attitude towards share buyback? It seems like an obvious consideration here.

Yes. At this time, we're not looking at a share buyback, per se. We still believe that the money would be better place towards identifying assets where you can grow the value of the company. What we do believe, though, is that it's been -- become more and more important for companies recently to be able to demonstrate, once you've got that cash flow and that sustainable cash flow that there is a level of return of capital to the shareholders, and that's just been an increasing trend in recent years, which is quite logical. However, having a good, strong balance sheet, and that cash flow from production then offers the company the flexibility to kind of play off that growth with the dividends back to shareholders.

Fair enough. And maybe just a detailed question. What has to happen exactly for you to make it to the $2.5 million on the royalty? Is it all pricing and revenue -- is it revenue or pricing dependent?

Yes. It's pricing dependent. So essentially, it's negotiated that if the gas price is above $6 as an approximate amount that the buyer has realized, and we would take the revenue above that amount. Currently, the gas price in Turkey is below that amount, but it has had time to it increased above that amount. So it's really based on being above a gas price.

[Operator Instructions] So your next question comes from Colin Smith of Panmure Gordon.

Congratulations on the deal, Sean. Just a quick one to confirm that there's not any tax implications expected with respect to the disposal proceeds.

No, it's a good question, Colin. But no, we do not expect any tax issues. That's kind of been investigated by Heather. And in fact, Heather, did you have any comments on that? Did you want to make any comments on that?

No, you covered it. There's basically -- there's no cap tax consequences.

Okay. It was a pretty simple answer, Colin.

There are no further questions at this time. Please proceed.

Actually, Colin, we've got a question or actually 2 questions that have come in through Twitter. I'll just voice them for Sean and Heather to answer, if you don't mind. First one is on M&A., and the question is from Westpine Capital asking, what countries are you evaluating for M&A targets? Anything in North America?

So as we kind of -- as I mentioned in the talk, you can actually look on our presentation on our site, where it kind of shows the region that we're looking at. And we call it greater Mediterranean but kind of more emerging market countries. So that's kind of the area that we've been limited to. Eastern European included, a bit of the stand, a bit on the Middle East and then across North Africa in that area. So -- it's areas where myself have lived and worked quite extensively, so we have that experience in that area. We are not looking at North America.

Okay. And an additional question on M&A, also from Twitter. Is there a deadline for M&A? And if you're not successful in, say, 6 months, will you change your mind on returning cash to shareholders?

Yes. It's a good question. Currently, there, we are seeing a lot of opportunities. It's been a very challenging time to be looking at M&A over the past 6 months, obviously, given the drastic change in our markets, the pricing change. So people have been really quite -- it's been difficult to get people engaged and challenging to actually meet and work with people given the COVID situation. But we are seeing a lot of opportunities out there. And as the price comes back, the hydrocarbon price comes back, I think this is going to make it easier for people to start to do deals. Obviously, from our point of view, too, we are a bit challenged, having this pending sale out there and having our share price trading where it was, it's extremely difficult to actually come to a landing on value when you have those, both the cash and bank and the deal out there. So we do see a lot of opportunities, and we think we will be able to get there on something over the next little while. However, that said, it's a consideration that the Board always has to look at. And I can say, as we go into forward meetings, there is that situation where the Board has to look at the opportunities and judge them against with that ability to return cash to shareholders. So at this point, we don't have a deadline, but there will be discussions with the Board as we go forward. And they see the suite of opportunities out there and the options available for getting growth for our shareholders.

We don't have any further questions from Twitter.

Okay. If there are no more questions, and again, I'd like to thank everyone for joining us here today. And please feel free to reach out to either Robin or myself or Heather, if you do have any further questions, we're always available to take them online. And apologies if the call to prayer was kind of heard during that and coming through.

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