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

Good afternoon, and welcome to the Valeura Energy annual general meeting. My name is Robin, I'm the Investor Relations Manager. This event is being broadcast live and is being recorded today, June 23, 2022, and that recording will be available online later today. We're going to get started in just a minute, but first, a few housekeeping matters. For those of us here in the room, we've confirmed with the building management, there's no alarms scheduled for today, no fire alarms scheduled for today. So we do hear a bell, it's the real deal, and we should evacuate out the conference center entrance, down the escalators across the street. I'd also like to note for the online audience, all lines will be in listen-only mode. And if you'd like to participate in the Q&A session at the end, please use the Q&A button in MS teams. So with that, I'll turn it over to Dr. Tim Marchant, Chairman of Valeura. Tim?

Thank you, Robin. Good afternoon, everybody. It's just shortly after 4:00 p.m. Calgary time. And I'd like to ask that this meeting come to order. My name is Tim Marchant, I'm the Chairman of the Board of Directors of Valeura Energy. I will act as Chair for today's meeting. On behalf of Valeura, I'd like to welcome you all to today's meeting. I'd also like to welcome those shareholders and others who are listening via live audio webcast. Before we proceed with the formal business of today's meeting, I'd like to introduce the directors and officers of Valeura who are present today, and I'd ask that each director and officer stand momentarily when I call their name. Sean Guest, Director, President and CEO, who's now standing. Jim McFarland, Director of the Corporation; Ron Royal, Director; Heather Campbell, Chief Financial Officer; Gordon Begg, Vice President, Commercial; and Robin Martin, who you've already met, our Investor Relations Manager. In accordance with the bylaws of Valeura Energy, Jon McDonald of Torys LLP, will act as the 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 former proxy and a mailing request form were mailed to all registered shareholders on May 18, 2022. 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. Regarding the quorum, I have been advised by the scrutineers that quorum has been met for this 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. So 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 Chief Executive Officer, on the operations of Valeura, which will be followed by questions from registered shareholders and proxy holders. 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. Votes will be conducted by way of ballot, except for the appointment of auditors, which will be voted on by way of a show of hands. So the first item of business is the presentation of the 2021 audited financial statements of Valeura Energy 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 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 and sets remuneration as may be determined by the Board.

Is there a seconder?

Mr. Chairman, I second the motion.

Any discussion? All those in favor of the resolution, please signify by raising your hand. Are there any contrary votes? [Voting]

I declare the motion is carried. The last 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.

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, 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 the Valeura to hold office until the close of the next annual meeting or until their successors are elected or appointed.

Is there a seconder for the motion?

Mr. Chair, I second the motion.

In accordance with Valeura's majority voting policy, the directors will be elected individually by way of ballot. For a nominee to be elected as a director, he or she must receive a majority of the votes cast in favor of his or her election. If you have not received a ballot, please identify yourself to the scrutineers. I'm 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 that the motion is carried and that each nominee has been elected as a director. This now concludes the formal business of the meeting. I declare the formal part of the meeting terminated, and thank you all for attending. Now that the formalities are completed, Sean Guest, our President and Chief Executive Officer, will provide an update on Valeura's operations. If you have any questions at the end of the presentation, we ask that you raise your hand, wait to be acknowledged and to be handed a microphone and then begin your question by identifying yourself and indicating whether you are a registered shareholder or a proxy holder. Over to you, Sean.

Thank you very much, Tim. Yes. Thank you very much for joining us at the meeting today. And I'd just like to run you through kind of the status of Valeura, where we're at. It's obviously been an interesting year. Since the last time we had an annual meeting, there's been quite a few changes in the company, and I'll kind of take you through those and where we're at today. Okay. I'll just pass over the advisories, but again, we take these seriously, and add your leisure, please review them on the website. So looking at Valeura and where we're at now. It's obviously been an interesting year. A year ago, we were in the midst of COVID. We just had our asset in Turkey, and we were attempting to do some M&A activities. And really, we've managed to complete M&A and that's a deal that we announced in April in Thailand and then actually that we were able to close that deal in July. And that's really changed the look of Valeura. It's bringing us a chance at near-term production and growth that we can then combine together with the Turkish asset, which is that blue sky upside. So really, what we were looking for at that M&A was the ability. We have that great upside in Turkey, but with some risk there. But it was to look for that production, the cash flow and more importantly, that near-term growth that we could add to that production and cash flow, while we still try and move the Turkey asset forward. And that's what we've been able to achieve with this deal in Thailand. And the other point I'll note, though, is that while we've now concluded that M&A deal, that's not the end of it. And we are looking at taking on more deals as we go forward. So financially, we're still in a strong position. Now the number for the cash, you see up on the slide, there is actually at the end of Q2, having announced our deal, you can imagine that we have had to pay costs associated with that. We've actually paid for almost half the MOPU purchase price of about $4.2 million. So we expect that number to be closer to about $30 million when we come to the end of Q2. The shares remain the same. We have no debt still in the company. And what we see with the share price now is, yesterday, we were at about $0.56. And that's up about 25% from where we were at the beginning of the year, which is quite positive. I can tell you myself, I was a little disappointed with the deals that we've closed, with announcing the reserve update last week that we weren't seeing more motion, but I do recognize we're really pushing ourselves into some strong headwinds in the market right now. So while it's a little bit frustrating, as we look at ourselves and compare ourselves to our peer group, we're #1 in our peer group right now in our performance of 20 companies of a similar size. And what I can tell you is we intend to be doing more of that as we move through the year. As I said, we've got this deal done, but we still have much more activity as we look forward. So the key thing I really want to emphasize again was this point of when we were in Turkey, we had a small gas production there. And while it was good, we had cash flow from that, we did not see any growth potential in that asset. We've had it for quite a while, but we were not seeing ability to grow the production and cash flow. We were able to sell that for just under $20 million in the midst of COVID, and what we've done now is taken that amount of money that we received for it, and we've now bought these assets in Thailand, which has a field that is ready to turn on 3,000 barrels a day of production, and importantly, have growth that we see, not just in that field that's already developed, but in another field, it's ready for developed. So we like that story of moving out of an asset where we didn't see the growth, same amount of money is now taken into something with, high cash flow production and further growth. And that's what we are looking for in the portfolio is that to really offset the asset we have in Turkey with the high upside potential. And for a number of shareholders, it may seem that Thailand is a big step out for us. It's very different except for the fact that both Thailand and Turkey start with T. But for myself, I actually have worked to the majority of my career in Asia as of other members of our management team, and we're quite comfortable in that environment. But when you look at why Thailand, there's a number of factors as to whether you've got a very long oil and gas industry there, a very strong service industry that you can rely on. You've got a strong educated population. It's a tax royalty system, which delivers good returns. But the most important thing I feel as we look at Thailand is it's a basin in a country where small-cap companies have been able to really demonstrate growth and return to shareholders. And that's very important for us. The geology is such that you can actually find these what appear to be relatively small fields, bring them online cheaply and then continue to grow the production. It's not uncommon in Thailand that you get fields that come up -- end up producing 5 to 10x the initial reserves that development plan was based on. So looking specifically in a little more detail at our Gulf of Thailand acquisition. The first thing is the cost we ended up paying was approximately $3 million, which is really what we were doing was covering the costs in the asset from the effective date of January 1. Now there are $7 million in contingent payments, but we really only have to make those we're getting that upside. $2 million if we get an infill drilling program, on the Wassana field and a $5 million contingent payment once we develop the Rossukon field, which again I'll emphasize can come on and have a peak production of about 12,000 barrels a day. So those are really based on success. The other element to the acquisition is we also bought the MOPU, which is a production facility on the field, and that will greatly reduce the cost of operating and really lower our breakeven cost in this asset. So kind of looking at the highlights there. You've got 1 field that is really -- has been already developed. It just needs to be turned back on, and that will come on at about 3,000 barrels a day. it's got about 600 million barrels of reserves from NSAI, and that's got a value from NSAI of about $60 million. We then have the contingent resource there, and some of that is in the Rossukon field, which is a field that's fully appraised and ready for development. And as I noted earlier, can come on at a peak production of about 12,000 barrels a day. So a lot of good upside there. So given the price that we're paying and the actual value you see in these assets and the production, the metrics for this are extremely strong. And the reason for this was that we were able to buy this out of receivership. So I'll just give you a slide on each of the 2 assets there. And the first one is on the Wassana oilfield in the licensed G10. Now this is a field that has been fully developed already and was on production. And what happened was when they had very high lease rates on the MOPU, you can see in the bottom left there, there are very high lease rates on that MOPU and the floating storage vessel that was storing the oil. So that when the price of oil dropped during COVID, the field became uneconomic. And the receiver at that time, released the FSO to save costs. Then when the oil price goes up, they had no ability to restart the field. And that's really what we're doing. We bought the MOPU, which is a production facility to get rid of that lease cost and now we bought the assets, and we'll go out there and restart that field, which we said is in Q4. Now the risk on that we see is quite low. The field was producing approximately 3,000 barrels a day net to us when it was shut in. It was not shutting for any geological reasons or anything. It was shut in due to oil price. The MOPU, the wells have been maintained. And we do expect that once we get the floating storage vessel out there, we'll be able to bring this back on and get that production back going at approximately the same rate. So that's really the step for this year. We're going to recertify the MOPU, which is all the contracts are in place to start that work in July. We'll get the FSO out there. And then depending on when that arrives, we'll really restart that production in Q4. So that's step #1 on this at about 3,000 barrels a day. Then in next year, we have infill drilling plant because we've got the additional reserves that have been identified already, and we can access these with about 5 wells first to try and increase that production to about 5,000 barrels a day. And currently, that's planned for about Q2. So again, what we see is we've got about 3,000 barrels a day of production we can bring on, infill drilling next year to take this up to about 5,000 barrels a day. Looking at the other block, which is G6 and the Rossukon oil field, we have about 43% interest in this, and that's an operated interest as well. Again, the block expiry is way out there in '36. Now this field has been fully appraised by 6 wells, and there's actually an approved development plan by a government. So it really is ready to go forward and it's stalled development because the Energy assets were in receivership. So we've come on with this. We've reviewed the development plan. I've actually been over working with the team for the past 4 weeks looking at this, and we're just doing a revision to that plan because we can believe it can be done at a much lower CapEx, which would really come on next year with an initial drilling program where you're about 5,000 barrels a day and then to follow that up pretty quickly after that was another program to take it to 12,000 barrels a day. So again, those plans are in place and the plans for this year is to really make that final investment decision to get that work going and then we'll have first oil from this, it's planned for Q4 next year. So moving back and just summarizing again, our asset back in Turkey, which are people who have been with the company for a while, be familiar with. We drilled 3 wells into this deep target with Equinor as our partner here. We discovered a significant amount of gas and can really demonstrate that tens of TCS gas in this basin. But really, the key we're looking for us to demonstrate sustainable flow. Now we've done a lot of work on the assets since drilling -- since we drilled those wells and we've identified the location as to where we should move to next. One issue we faced was where we drilled the wells and tested them was a very rich, high condensate gas and that was inhibiting a lot of the gas flow. We believe by moving the best reservoir slightly deeper into what's a dry gas window, we can actually get a better flow from this system. So that's really our target here. The key thing we're trying to do now is to look to bring in a partner on the asset. Now the 1 thing we can look at from a year ago is that a year ago, gas in Europe was just over Henry Hub, so maybe about $3. Right now gas in Europe is trading at about $30 and gas security and gas supply is one of the key issues that is being discussed in Europe right now. You probably aren't surprised to hear then that this has created much more interest in this asset. We do have a data open at this time, and we have companies in there. So we hope to really get an offer on that and to bring this to get someone to farm in and to look to progress that as we move through the rest of this year. So maybe with drilling next year for that asset. So finally, just looking at the milestones that we have and what you're looking at coming ahead is. So we announced in April that we've done this deal, and we told you we closed that in Q2, and we've done that and we've closed that deal now. So right now, we are going through a retendering to try and identify that floating storage vessel. We have a number of opportunities. We're just narrowing down now, and we expect to really get that contract in place shortly, so we can start to mobilize that vessel to the field. The work on the recertification of the MOPU, and I'll just comment, this is just a normal -- it's done periodically, this recertification. The contracts are in place and the work has started on that already out on the MOPU. And then we'll get the FSO there, and then we'll look at starting production in Q4 this year. The exact timing of whether it's early or late will really depend on the timing of when we get that float storage vessel there. So that will come on at 3,000 barrels a day. And then as I noted before, Q2 infill drilling, and that should take it up to 4,500 to 5,000 barrels a day. So almost doubling the production. We then look down to the Rossukon development. We anticipate making a final investment decision on that sometime in the next 3 to 6 months and then taking that development forward for first oil in Q4 next year. And then finally, on the bottom, I noted our upside project. So we've got the Turkey asset where we really hope to get a farm in off there so we can start to progress that. So looking to put that in the scope of value as to where we're currently trading with the market cap that we have there of about $37 million. We've got the 2P value that's been certified by NSAI of coming out at about $60 million. We have significant value in that Rossukon field development that we'll be looking to progress forward, which really can take us up to a tangible value of about $137 million and currently trading at about $37 million. We see significant upside in the stock just with these assets that we're looking to develop here. And that market cap is also about the cash flow that we expect from just the Wassana field without the infill drilling, so we can deliver about $9 million a quarter. So we believe we're undervalued and there's significant upside potential. So just in summary, so we have the high-value type production, which we're looking to bring on, and we're very pleased to see the reserves increase last week on that when we announced it. We are looking at further growth in the region as well, further M&A activities. We expect to move on those. And then the tight gas play, which really brings us that large potential upside in the future to try and progress that further. So with that, that kind of brings the end of this part of the presentation. At this point, we'd welcome any questions. So for anyone in the room, please feel free to just put up your hand, and we can ask the question. For those who are in MS teams, you have to use the question app within there, and then Robin will read out the question for you. Thank you very much.

Sean, there's no questions from the room. We have had a couple of questions coming in from the online audience. I'll just voice them here. First question is on the Rossukon development and the viewers asking when can we expect to hear about Rossukon FID? And also, will it be developed under the existing development plan or whether you go with a scaled-down version, as you mentioned in your acquisition announcement.

Yes. So we're still working exactly the plan with our partners, and we'll work that also with the regulator. I'm sorry, you're going to bring it back to me. Yes. Okay. Yes, with our partners and with the regulators. So the plan that was submitted was for a full production platform. That CapEx on that was looking at about $180 million to $200 million gross, right, where we have a 43% interest. We believe by going down with a scaled-down MOPU development like we have in the Wassana field already, that we can reduce that CapEx number down to something in the order of maybe $60 million, which is obviously significantly less. It can still yield the same amount of production with a phased drilling. So as a small company, we think that's a better way to go. That work is still being done technically, but we expect to kind of have that done, as a said in the presentation to be able to make that decision in 3 to 6 months.

Okay. We've got another question here. Are you still evaluating additional acquisitions in Southeast Asia? And what type of financing would be necessary in that regard?

Yes. So yes, we are still looking at other activities. Obviously, we announced this 1 deal, but we weren't just looking at 1 deal. So there are other deals that are going on in parallel. We do have an advantage of having completed this deal now as a corporate acquisition, it came with a number of tax losses. And as we look at other assets, that does give us a bit of a leg up as we value other assets in the region. What we liked about this deal was that there was no debt required and there is no dilution to shareholders in this case. We believe we're going to be able to do other deals without having to dilute shareholders. We see the debt is available in the market, and we're obviously looking at that as we look at other opportunities.

Next question is on Turkey. Can you provide a time as on closing the data room in Turkey and receiving final bids?

Yes. I think I noted that a bit that we really hope we would have something kind of in the summer. I think we're going to be a little delayed on that. One of the reasons for that is actually the companies that come in really depend on the amount of time they take. And if you do get large major companies in there, they tend to do very fulsome reviews and want to really go through all the data in a lot of detail. So we're finding that the reviews are taking a little longer, but we really want to make sure we give people the ability to have a look at that asset and make decisions on coming in. So I think probably it will be kind of as we go into end of Q3 or towards Q4, that we'd be able to get something done there, assuming that we've got an offer.

Sean, there's no more question from the online audience, unless anyone in the room has further.

Okay. Then thank you very much, and thank you everyone for their time. And with that, we'll bring the meeting to a close.