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

Good afternoon, ladies and gentlemen, and welcome to the Valeura Energy Inc. Annual & Special Meeting of Shareholders. [Operator Instructions] This call is being recorded on May 13, 2021. I would now like to turn the conference over to Tim Marchant, please go ahead.

Thank you, and good afternoon, everyone. It's now 3:00 p.m. Mountain Daylight Time, and I will ask that this meeting come to order. My name is Tim Marchant, and I am the Chairman of the Board of Directors of Valeura. I will act as the chair for today's meeting. So on behalf of Valeura, I would like to welcome those shareholders and others listening via the live audio webcast. To follow the legal requirements of Canadian federal and provincial health authorities with respect to COVID-19, we've made the decision to hold this meeting virtually. Although we are unable to physically meet, we've attempted to replicate as best we can our regular meeting environment in a virtual format and plan on returning to our regular meeting format next year. Registered shareholders and duly appointed proxy holders who have registered with us prior to today's meeting were given the opportunity to participate in the meeting. Others who have logged into this webcast will be able to listen to the meeting. We do look forward to returning to our regular meeting format next year and appreciate your understanding. Before we proceed with the formal business of today's meeting, I would like to introduce the limited number of Directors and officers of Valeura, who are participating in this webcast: Sean Guest, who is a Director, President and CEO of the company; Heather Campbell, who is the Chief Financial Officer of the company; and Robin Martin, the Investor Relations Manager. In the light of COVID-19, other members of our Board and management team will participate through today's live audio webcast. So in accordance with the bylaws of Valeura, Stephanie Stimpson, our Corporate Secretary and a partner of Torys LLP, will act as a secretary for today's meeting. And I appoint the representatives of Computershare Trust Company of Canada to act as the scrutineers. The notice calling this meeting, the information circular, a form of proxy and a mailing request form were mailed to all registered shareholders on April 7, 2021. The declaration of mailing is available for inspection by any shareholder, and I would ask that the secretary file a copy of such with the minutes. I have been advised by the scrutineers that a quorum has been met for the meeting. The scrutineers' report is available for inspection by any shareholder, and I would ask that the secretary file a copy of such with the minutes. With that said, I declare that this meeting is regularly called and properly constituted for the transaction of business. For convenience, we have divided today's meeting into 2 parts. The first part will deal with the formal business of the meeting, the second part will consist of a presentation by Sean Guest, our President and CEO, on the operations of Valeura, which will be followed by questions from the dial-in audience. To facilitate the timely completion of the formal business, arrangements have been made with certain shareholders to move and second the resolutions to be considered. All votes have been conducted by way of ballot. So the first item of business is the presentation of the 2020 audited financial statements of Valeura and the auditor's report thereon. The financial statements are available on SEDAR and have been sent to those shareholders who have requested copies. The next item of business is the appointment of the auditors. May I please have a motion for such business?

Mr. Chair, I move that KPMG LLP be appointed as the auditors of Valeura to hold office until the close of the next annual meeting or until their successors are appointed at such remuneration as may be determined by the Board.

Is there a seconder?

Mr. Chair, I second the motion.

Any discussion? I'm advised by the scrutineers that the motion has been carried by the necessary majority. Accordingly, I declare the motion carried. The next item of business is the election of the Directors. Valeura has nominated 7 Directors for election, and did not receive any nominations from shareholders in accordance with our bylaws. Accordingly, I will now receive the corporation's Director nominations.

Mr. Chair, I nominate the following for election as Directors of Valeura: William Sean Guest; Timothy R. Marchant; James D. McFarland; Ronald W. Royal; Russell J. Hiscock; Kimberley K. Wood; and Timothy Chapman.

May I now have a motion for such business?

Mr. Chair, I move that the corporation's Director nominees be elected as Directors of Valeura to hold office until the close of the next annual meeting or until their successors are elected or appointed.

Is there a seconder?

Mr. Chair, I second the motion.

Any discussion? I am advised by the scrutineers that each director nominee has received greater than 50% of the votes cast in favor of his or her election as required by our majority voting policy. Accordingly, I declare the motion carried, and that each nominee has been elected as a Director. The next item of business is the approval of the shareholder rights plan of Valeura. May I please have a motion for such business?

Mr. Chair, I move that the resolution on Page 18 of the information circular to approve the shareholders' rights plan be approved.

Is there a seconder?

Mr. Chair, I second the motion.

Any discussion? I'm advised by the scrutineers that the motion has been carried by the necessary majority. Accordingly, I declare the motion carried. The last item of business is the confirmation of the amended and restated bylaws of Valeura. May I please have a motion for such business?

Mr. Chair, I move that the resolution on Page 20 of the information circular to confirm the amended and restated bylaws be approved.

Is there a seconder?

Mr. Chair, I second the motion.

Any discussion? I'm advised by the scrutineers that the motion has been carried by the necessary majority. Accordingly, I declare the motion carried. That now concludes the formal business of this meeting. I know that we all look forward to talking to you next year when we intend to return to holding our annual meeting in person. I declare the formal part of the meeting terminated, and thank you all for attending. Now the formalities are completed, Sean Guest, our President and Chief Executive Officer, will provide an update on Valeura's operations. At the end of the presentation and with the help of the operator, we will take any questions that you may have. Over to you, Sean.

Thank you very much, Tim. I'd like to welcome everyone and say good afternoon to those of you joining in Canada, and good evening to those who are here with me in the U.K. For the presentation today, I'm not going to speak directly to our corporate presentation, but will instead just provide my thoughts on the current state of our company, and what we think the future holds for us. Nevertheless, we have made an updated corporate presentation available on our website and on the player screen for those of you who are joining to the webcast. Before beginning, I'll draw your attention to one of those slides. Slide 2 covers our disclaimer and advisory, which I would suggest you read at your leisure, thank you. This morning, we announced our Q1 operating and financial results. However, for those of you who have been following the company, you'll recognize that the real story is not about the operations, but about the sale of our conventional gas-producing business in Turkey. Last week, we received Turkish government consent for this sale, which was the last outstanding condition to complete the deal. We are now able to work with the buyer to finalize closing adjustments and proceed to closing, which we expect to happen in the next couple of weeks. Bringing this deal to a close will boost Valeura's cash position by more than 50% to approximately USD 44 million. Additionally, we will receive royalty payments which will ultimately total between USD 1 million and USD 2.5 million over the next 5 years. So first, I'd like to comment on value. USD 44 million in cash equates to about CAD 53 million or CAD 0.64 a share. We are currently at about a 25% discount to that cash position. I'll also remind you at this time that we have no debt, and with the sale, we expect our G&A will drop even further. So our war chest is stocked, and we're ready to tackle something new. Having sold the shallow assets, our priority now shifts to growth and M&A. And I can tell you that Valeura has been very active working on and bidding on a number of deals in 2020 and into 2021. However, I hope you can appreciate that it has been a struggle in the past 7-month period while we're waiting for approval of the sale of our shallow assets. While this deal solidifies our cash value, it also means that the assets of the company become very clear going forward. Deals require certainty, and with this clarity, it makes it far easier to negotiate relative values between Valeura and other companies. I've taken a number of questions from shareholders recently who feel that we missed the opportunity in 2020 given the very low commodity prices. And while it would have been great to be able to complete a deal at low $20 per barrel in oil, the reality was that there's been very little deal activity internationally during the COVID pandemic. 2020 was a record low year for global M&A deals. Fortunately, we see that changing now, and we're starting to see the beginnings of a more normal transaction environment, with a couple of equity fundraises in the market and for the right opportunity, even seeing companies access the debt market. I will note for those of you in Canada that Canada has been leading the way in consolidation in the oil and gas industry, and this is something that we firmly believe is coming to the international energy sector as well. So Valeura has been very active in the M&A space, and we are currently evaluating several high-graded opportunities. We're upbeat about this opportunity set. We believe that closing the shallow sale will facilitate moving these deals forward, and it allows our management team to fully focus on M&A. We're being aggressive, but we will not compromise our screening and evaluation criteria in the name of getting a deal done prematurely. The objective is to grow the business by adding near-term production and more importantly, cash flow. We want to create an opportunity for the company to have cash flows that allow us to create a balance between a return of that cash to shareholders and further reinvestment for growth in the company. We continue pursuing our deeper tight gas appraisal play in Turkey, and we remain committed to this play and to Turkey, and nothing to date has shaken our view in the size of the price of approximately 20 Tcf of potential gas resource. Our priority is to secure a suitable farm-in partner to participate in the play. Similar to the record low in the M&A environment of 2020, our farm-out process has not surprisingly been even more challenging. Any company looking to do a deal over the past year has been seeking stable production, not appraisal opportunities for this significant upside. But this is changing too with increasing commodity prices and a return of energy to our oil and gas market. Our deep tight gas play has the added advantage of being a low-carbon energy source, which is on Western Europe's doorstep, and with the potential to add material scale. The deep play remains a core part of our portfolio and a source of potential value in the longer term. When we have a partner in place, we'll be ready to move forward quickly. We have permitted several well locations, chasing what we believe to be the best sweet spots in the play, that is moving towards the center of the basin where we believe the highest quality reservoir coincides with the dry gas window, which we've seen produces more optimally in the wells. In the meantime, holding costs for our licenses that hold these deep assets are very low, meaning that we're not at risk of expiries or relinquishments. So in conclusion, I'll just wrap up by saying, first, we accomplished our objective to maximize the value of our conventional gas-producing business. With the final government consent now in hand, we are closing that deal which will take our cash position to USD 44 million. Second, the closing of the shallow sale frees up our management team to fully focus on the M&A portfolio and more importantly, solidifies Valeura's cash and asset base, which will facilitate negotiations with counterparties. We have been very active in this space, and as the world claws its way out of the COVID pandemic, we see a better transaction climate emerging as companies start to look to the future. We are in a strong position to make something happen on this front that will yield near-term production and cash flow and opportunities for material value creation thereafter. And third, we continue to pursue the farm-out of the deep tight gas play in Turkey. All of the ingredients are there to make this a very large source of potential value in the longer term. I'd like to thank everyone for joining today. And with the help of the operator, we'll now take any questions you might have.

[Operator Instructions] We have no questions on the phone line at this time. Please proceed.

If we don't have any questions, then again, I'd just like to thank everyone for joining us today, and I hope -- very much hope, that we're able to meet in person with the meeting next year.

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