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

Ladies and gentlemen, thank you for joining us for this Valeura Energy webcast where we'll provide a little more color on the acquisition we announced today. I'm Robin Martin, Investor Relations Manager. And with me here in our Calgary headquarters is Heather Campbell, our CFO. Sean Guest, our President and CEO, is also on the call joining from Bangkok, Thailand. You'll hear from him in just a minute. This event is being streamed live and is being recorded today, December 6, 2022. A replay will be made available through our website later today. [Operator Instructions] Today, we're going to provide some prepared remarks on the deal, and we'll reference slides that will be shown on screen if you're joining through MS Teams or they're available on our website if you're joining by dial-in. After that, we'll take any questions you might have. [Operator Instructions] So just jumping into the slides. I'm just going to draw your attention to Slide 2, which is our disclaimers. And in particular, I'll suggest that you review this at your convenience, noting the cautionary language around forward-looking information that we may use in the course of the discussion. I'll also note that throughout the presentation, unless otherwise indicated, the numbers that we're showing are net to the Valeura-controlled special purpose vehicle subsidiary in which Valeura has an 85% interest. So with that, I am going to hand over to Sean. And Sean, I'll ask that you press the unmute button on your machine.

Thanks, Robin. Before starting the presentation, I'd like to thank you all for joining this call wherever you are in the world today. But also importantly, I wanted to thank the Valeura shareholders for their patience over the last 18 months since we sold our Turkish gas production. I know there have been questions recently about why have we not been out actively marketing our new Thailand story, but what I can finally now say is that we've been fully focused on bringing this deal to a conclusion. The Mubadala deal we're announcing today, along with the KrisEnergy deal that we announced about 6 months ago, is exactly what we set out to do when we embarked on our strategy to grow through M&A in Southeast Asia. We believed at that time that the strategic shift that major energy companies are undergoing was going to create opportunities for us to acquire material assets at very good metrics. Today has proven that thesis valid. What I can tell you is the whole team is extremely excited about this deal and how transformative it will be for Valeura and our shareholders. Our goal is to build materiality and size with a portfolio that generates immediate cash and provides opportunities to reinvest this cash into further growth. Given the synergies between these 2 acquisitions we have announced in 2022, this is what we have delivered. So just to touch on some of the highlights. We are purchasing the Gulf of Thailand oil-producing portfolio from Mubadala Energy. The deal includes 3 licenses, all of them operated with high working interest, and the current net oil production is over 21,000 barrels a day. This will make Valeura the largest independent oil producer in Thailand and second only to PTTEP, the state company. Our internal evaluation of reserves is 24.1 million barrels on a 2P basis as of December 31, 2021. However, we have engaged Netherlands and Sewell International for an external reserves audit, and that should be available after the deal is closed. So the average OpEx of the 3 assets we're acquiring is relatively low at about $22 a barrel. And while the 3 fields are best categorized as mature or late midlife, I'm going to show you that there is significant future development opportunities, meaning there remains an organic growth component in the acquired portfolio. Now given the published production data for these assets and the oil price over the past 12 months, one can calculate that the total net revenue for the past 12 months is on the order of $800 million, extremely significant. Using the current oil price, we estimated pretax cash generation stream of about $30 million per month from these assets. And as you probably guess, having expanded our portfolio in the Gulf of Thailand, where we're already an operator, this means we expect strong synergies with our existing business. So just to note, the purchase price is $10.4 million, plus there's $50 million more in consideration that's contingent upon a very high benchmark oil price from 2022 through 2024. Thanks, Robin. Can you do the next slide? Thank you. So I want to summarize the journey we've all been through over the past 2 years and what it means -- and why it means a transformative deal. This really underscores how the pivot in our strategy has changed the value proposition for shareholders. In 2020, we decided to sell our Turkish gas-producing business with less than 1,000 boes a day and limited reserves because we did not see the opportunity for material growth. We wanted to pivot to an opportunity suite with high growth potential and importantly, cash flow. The close of the gas sale in mid-2021 left us with just over $40 million in cash but no production and no reserves. So fast forward to today where we've completed the Mubadala Energy and the KrisEnergy deals in Thailand, our near-term targets over the next several quarters can see production increasing to 25,000 barrels a day on reserves of about 30 million barrels. Importantly, this production yields very significant cash flow. On top of that, this transformation has taken place without issuing a single new share and minimal debt, hence, no dilution to the shareholders. We have had 86.6 million shares outstanding for several years now, and that's not changing with this deal. And next slide, Robin? Thanks. Slide 5 provides an overview of our combined portfolio, and I'll point out right off the bat that our Thrace Basin tight gas play in Turkey remains a core part of Valeura, and we continue to see potential for value add in the longer term. Having our own strong cash flow only helps with our commercial options for this asset. But looking at the business as a true portfolio, the Turkish asset fills a longer-term appraisal component and creates some balance with the Thai assets which are either production now, restarting soon or near-term growth through development. Now there's an obvious oil-gas balance with the near-term assets being oil-weighted and still looking at that longer-term play in Turkey of being gas and a move towards more gas in the future. Commonalities across the business so that we continue to focus on places where we see good fiscal terms and stable operating environments, which our teams know well. So now I'm just going to briefly take you through the 3 assets we've acquired. Nong Yao. Slide 6 goes into some detail on the Nong Yao oil field where we are acquiring a 90% operated working interest. It's a shallow water field that's been on production since 2015 and to date has only been partially developed. 2P reserves are 12.4 million barrels, and production is 8,100 barrels a day of light, sweet crude. And as I'll show in a moment, we expect to grow this in the near term. Now as we talked about with our investors at the time of our KrisEnergy acquisition, one of the most important characteristics of fields in the Gulf of Thailand is the concept of reserves renewal. The geology of the basin is such that oil accumulates in multiple stacked reservoir sands, which creates opportunities to keep using the same infrastructure to develop more and more reservoir intervals, bypass pay within existing wells, deeper pay with deep [ and/or new ] wells or step outs to further accumulations. The result is reserves additions and the ability to keep production flat or grow production in time. And the Nong Yao field is a poster child for this concept. To make the point even more clear, this field was sanctioned with an FID reserves of about 3 million barrels. To date, it has already produced 20 million barrels. And as of our reserves evaluation, we see another 13 million barrels more to produce. Reserves have been added every year to the field since it's been on production, averaging about 4.3 million barrels a year. So what's next for Nong Yao? An extension of the field will be developed in 2023 with the addition of a new MOPU that is currently under construction. The extension will comprise drilling an additional 12 wells and is expected to grow the production to a target of 11,000 barrels a day net. This is very much a growth asset for us, and we expect to set a new peak record rate for the asset in 2024. So moving to the next field. So Slide 8 provides some detail on the Jasmine and Ban Yen fields, which we're acquiring a 100% interest. Current production from these fields is approximately 10,000 barrels a day, and reserves are just under 10 million barrels. As you can see in the schematic at the upper right, there's much more infrastructure here with 6 fixed installations and currently about 132 wells. That provides a lot of opportunity to pursue the concept of reserves renewal, just like we're going to do in Nong Yao. The FID reserves for the Jasmine were 7 million barrels and to date, it's produced 85 million barrels. And as of our evaluation, we still see more reserves now than was believed to exist on day 1. So through redevelopment in the asset, largely a continual program of infill drilling, the field has averaged about 5.2 million barrels of additions a year, but note that this average has been decreasing more recently or over the past decade. So next slide. So slightly different to Nong Yao, which is still growing in production, Jasmine has reached a stage of maturity where it is now achieving a more stable production rate. This is supported by the ongoing infill drilling program, which has included 9 wells drilled to date this year alone, and there is still another 19 or so wells planned over the next 3-year period. Thanks. Going on to the Manora field, the third asset. So the third asset is the smaller Manora field where we will acquire a 70% interest in operatorship. What is most interesting here is that when we commenced negotiating the deal on these assets almost a year ago, the plan at that time was Manora will cease production and be abandoned in 2022, this year. That was always in our economics. Now 1 year later, abandonment plans have been pushed out 3 years, and the field is producing more than it was at the beginning of the year. In addition, 2 unplanned development wells were added to the business plan this year and recently drilled. We understand both have encountered oil, and we expect them to be brought on stream in the near future, adding to the production. So even with the smaller, more mature fields like Manora, the concept of reserves renewal rings true. And it is not just about higher oil pricing extending the life. It is compounded by technical additions of reserves, which we expect to be included in our updated reserves evaluation. At the moment, we still see potential for possibly another 2 wells in the field. Next slide, please. So Slide 11 underscores the recent stability in production from these assets over the past number of years. What's plotted here is production and proven reserves, not probable reserves or 2P. The data are all derived entirely from public sources, the Thailand regulator's Department of Mineral Fuels website. The red bars show the actual production from the field -- from the 3 fields since 2017. The production has remained largely stable. And in fact, current production is actually higher than the average production back in 2019. The proven reserves at the end of each year are shown in blue and have remained essentially unchanged. In fact, as you note, the ups and downs in the blue bars, it's largely related to year-end oil price, which of course affects the reported reserves, for example, the lowest reserves for year-end 2020. So in conclusion, what this demonstrates is that each year, the fields have produced almost half of the proved reserves at the start of the year. And yet at the end of each year, the proven reserves have remained largely unchanged. This suggests that you're getting an average reserve replacement ratio of almost 100% on these fields. So this stable aggregate production profile yields a continual cash flow stream. We need to also consider Valeura's expanded portfolio with our existing assets gives rise to economies of scale and cost efficiencies across the business. Plus, we are a smaller, nimbler operator with a lower overall cost base. We estimated cash flow in the $30 million a month range. A portion, but not all of that, needs to be reinvested into the assets to continue replacing the produced reserves and eventually, to fund the decommissioning obligation. But that leaves still a significant portion available for other uses. So with this portfolio, we're expecting to generate cash that can also be redeployed into growth projects elsewhere in the business into possible acquisitions and potentially, future direct returns to shareholders. To be clear, Valeura does not currently have a policy of dividends, but that's something that I would expect the Board to revisit once we have closed this deal and are realizing the expected cash flows from these assets. Next slide. So it's important that we address the fact that these assets come with decommissioning obligations. And under Thailand's rules, based on reserve criteria or remaining license tenure, the operator needs to provide a financial guarantee for the ultimate abandonment of the wells and the facilities. At this stage, Nong Yao is still a growth opportunity, Jasmine is midlife but stable and Manora is more mature and getting closer to the end of life. In fact, the decommissioning plan has already been put in place for Manora, and a preliminary security placement has already been made to the regulator. That said, the plans for Manora were based on pre-2021 outlook for the asset, and recent successes have caused us to rethink when the asset will actually come to the end of life. And at present, as I noted earlier, we see Manora production continuing out through 2025. So when we look at the decommissioning, our first strategy is continuing of finding ways to extend field life through adding volumes, and this is what I was illustrating in the previous slide and what is actually being done annually by the team in Thailand. However, abandonment will come and we take our commitment seriously. So we've provided a view of potential decommissioning CapEx on this slide, but I wanted to point out that decommissioning in the Gulf of Thailand is becoming a business unto itself and with it, creating opportunities for more efficiency and cost savings. We are already seeing a big uptick in abandonment operations, and we expect this to continue over the next 10 years. As a result, we anticipate more competition among service providers and innovations that can drive cost down. We have seen recent articles in the press about rig-to-reef programs in the Gulf of Thailand for disposing of offshore jackets. And I recently attended a presentation here in Bangkok where one of the leading operators described how they abandoned approximately 1,500 offshore wells in 2021 alone. So while all of this activity points to a reduction in future costs, our key objective, again, remains to extend field life and add additional reserves. This is a benefit to Valeura, to Thailand and to all stakeholders. And one final notice. It's important to note that the abandonment costs have all been included in our economic modeling to support the investment decision. Next slide. The next slide is a reminder of our sustainability priorities, which we have not changed even though the makeup of our portfolio has. On the environmental side, we have always been focused on minimizing flaring and managing produced water and water use. For these assets, we intend to ramp up monitoring and recording of air emissions, including greenhouse gases, to establish an early baseline so that we can be transparent about our activities, which will then support establishing improvement targets. With becoming a significant operator, we will now start to formally report on sustainability. When it comes to managing water, I'm pleased to say that none of these assets do any overboard discharge, and all facilities are equipped with water injection or water disposal wells. That's not the case for every jurisdiction in the region. But it is here, and we feel it makes it another good reason that the Gulf of Thailand fits well with our priorities. On the social side, we firmly believe people are the most critical part of our successful international operations. We utilize a local workforce wherever possible and focus on knowledge transfer and training based on international standards and particularly so with regards to health and safety. Thailand has a well-developed oil and gas industry with top quality staff drawing from a well-educated workforce. We're also keen to continue the positive community work done by the seller. And while we traditionally have been focused on education and sanitation, we will listen and adapt to the local needs. We intend to continue supporting the well-being of local communities both through the economic spinoffs of our investment and through direct community investing. So looking at the business we're acquiring, I'm really pleased with what I've seen so far in the seller's organization and believe that these priorities are strongly compatible with our new team in Thailand. They have an excellent safety record, a great reputation for ensuring sustainability within the community and already ascribed to very high international standards across all the operations. I'm really looking forward to integrating our businesses together. And to delve into the organization just in a bit more detail, Slide 14 gives you a little color. Basically, the seller's entire Thailand workforce will join Valeura. That means about 800 new joiners. The organization is weighted towards the key technical disciplines needed to support the ongoing operations, and it functions very much as an autonomous business unit. And I want to reemphasize that point that this is actually a completely functioning full business unit that we're acquiring. Many of the key leaders within the business have direct and long-standing history with the assets, many of them dating back to the field's original discovery and development. And the makeup of the team is over 95% local Thai nationals. We intend to retain this talent and to keep the organization functioning in much the same way it has been, that is, day-to-day operations, HSSE, procurement, finance, human capital is managed locally, while our head office provides governance and oversight. So with that, I'm going to hand over to Heather to talk us through some of the fiscal and financial details. Heather?

Thanks, Sean. Slide 15 provides an overview of Thailand's fiscal regime. The licenses we are acquiring fall into either the Thailand I regime, in the case of Jasmine; or the Thailand III regime, in the case of Manora and Nong Yao. Thai I terms are essentially a royalty and tax system and include a fixed 12.5% royalty, which is creditable for petroleum income tax purposes. For Jasmine, there's also some legacy private commercial arrangements, which amount to an additional royalty of about 4.4%. It's a relatively straightforward fiscal calculation for this one. The Thai III terms, which apply to Nong Yao and Manora, entail a sliding scale royalty of between 5% and 15% tied to production. For both the Nong Yao and the Manora fields, we're expecting royalty rates of around 8%, which are deductible against taxable income for petroleum income tax. There's also a special remuneration benefit, or SRB, under Thai III terms, which applies to windfall profits and is tied to various factors, including drilling activity and complexity, among others. For Nong Yao, we are expecting SRB in the order of 20% under current conditions; and for Manora, approximately 8%. Now SRB rates are applied to a separate calculation of SMB taxable income called annual petroleum profit, which includes deductions for full capital expenditures in the year along with other standard deductions for royalties and OpEx, plus an additional special reduction, which is an uplift on certain capital expenditures mostly related to tangible asset expenditures. SRB taxable income losses can be carried forward indefinitely. SRB paid is deductible for petroleum income tax purposes as well. Petroleum income taxes are 50% on net taxable income with pretty standard deductions of royalties, OpEx, depreciation; and tax losses can be carried forward for up to 10 years. We'll provide additional color on the fiscal and operating synergies between these assets and the assets that we already have in due course. On Slide 16, we have a few details on our company's overall capital structure and funding for the deal. Our capital structure, as you know, is pretty clean. We have 86.6 million common shares outstanding and a relatively small amount of stock options of 6.7 million. We have no warrants and no convertible instruments. And as Sean has mentioned, this deal does not involve an equity raise. So it's 86.6 million shares basic and 93.3 million fully diluted. As of the end of Q3, we had $23.1 million in cash. And as we announced with our Q3 results, we have a facility with Trafigura which provides for additional liquidity available in discrete tranches of up to $30 million. With this acquisition, we have the potential to expand that facility to include the newly acquired assets with an additional tranche of $50 million tied to the close of the acquisition. The purchase price for the acquisition is $10.4 million, which will be paid, first, by way of a $6 million deposit that we'll be paying now with the balance to be paid at closing, which we anticipate in Q1 2023. Given the relatively recent effective date of August 31, 2022, and taking into account the cash in the acquired company plus other assets as offset by near-term liabilities, including upcoming tax payments and other payables as of the effective date, the working capital is about 0. The deal also involves a contingent consideration component which is based on an upside price outcome in 2022, 2023 or 2024. And the total maximum amount for that, for all years combined, is $50 million. Beyond that, we expect any capital commitments arising from this business, including things like the Nong Yao extension development, infill drilling on Jasmine, funding of decommissioning liabilities and so on, are expected to be satisfied mainly through cash flow generated by the assets. So with that, I'm going to hand it back over to Sean.

Thanks, Heather. So just a couple of summary points to close out before we go on to questions. First, I want to underscore how much of a transformation this really is for our business. As of the effective date, the economic benefits from these assets become Valeura's. Meaning, as of September 1, we will basically have net production of 21,200 barrels a day, up from 0. And looking forward into the near term, we have the Wassana field coming on stream early in the new year at a target rate of 3,000 barrels a day net to us, and that will grow with the infill drilling program we've announced already and which we plan to start up in Q2 next year. And we see further growth with the sanction and start-up of Rossukon field in Q4, still in 2023. The organic growth continues thereafter with Nong Yao extension coming on stream in 2024 and further growth [ planned ] from the full developing of Rossukon also in 2024. It's not very often that a company can show those kind of numbers, from 0 to 21,000 to 25,000 barrels and potentially beyond in under 2 years, inorganically, too. We believe there are still more opportunities out there, and I expect that in the near term, we'll be looking at things like equity consolidation, if not more M&A opportunities driven by local operators pivoting out of the sector or other large players exiting the region, which appears to be the ongoing trend. Beyond that, for the longer term, Turkey remains part of our portfolio, too. So final thoughts on the transaction. This is an acquisition of some sizable assets at an attractive headline price. The deal builds immediate materiality for Valeura and in fact, as noted, makes us the largest independent oil operator in Thailand. We will start to see cash flow stream from these assets of about $30 million a month, which obviously means an almost immediate payback and creates potential for cash build to be deployed throughout the portfolio and elsewhere. At the same time, our strategy remains growth-oriented, and we tend to keep pursuing both organic and inorganic growth opportunities, always focused on growth, always focused on value. So with that, we'll move on to the Q&A session. Over to you, Robin. Thank you.

Thanks, Sean. [Operator Instructions] Just to jump in, the first question we've got comes from our analysts in the U.K., Stephane Foucaud, who's asking do we see similar deals like this one in that we've paid $10 million of purchase price? And his model is going to be telling us, he tells me in the e-mail, $200 million in net cash at the end of year-end 2023. Are there other things out there like that? Or is competition increasing such that these things are no longer on the table?

Yes. It's a good question, Stephane. Look, we have seen more of these opportunities around Asia. A number of deals were closed last year. What this one helps us do though is it establishes us as a major player in the region that's recognized. So a major player in Thailand and also just recognized within the region. The size that we've jumped to just by doing this deal really makes us stand out within the Asian region. So it gives us that level of credibility that allows us to go after things of even larger scale. So yes, we do see that here. We still see the pivot ongoing from the larger companies, and I do believe it will create more opportunities for us as we look forward.

Okay. Stephane is also asking, you talk about potential infill and exploration reserves upside at both Nong Yao and Jasmine. Could you quantify?

Yes. I think the simplest way to quantify it is you look at the reserve replacement ratio that's existed for the past 5 years, and that's why we've shown that slide is to show it really is an ongoing activity that's existed there. The change we've seen this year is the business plan changed significantly from year-end '22 to what the business plan currently is. So the number of wells that are planned in each one of the fields has increased. We've seen in Manora actually new wells being introduced supported by the partnership and being drilled there. So really, yes, it's a continual phase that is ongoing, and the rig has almost been continually working out in this area on these assets. So we expect to see that general trend that averages out and to try to make -- continue that reserve replacement ratio of near 100%.

Okay. Also, Stephane and several others are asking about contingent payments that we've been asked for this deal. I'll paraphrase some of the questions because they're quite similar. Is there a formula for how this works? When could the $50 million become due? And what sort of oil prices trigger payments under this arrangement?

So first answer, yes, there is a formula as to how it's done. The second component is that it really kicks in for Dubai pricing above $100 a barrel. So we -- at this point in time, we don't see for 2022 that there would be a contingent payment due for that year, but it does kind of depend on what the oil price is going forward, and it's pretty well a linear increase in the contingent payment ahead of that. But we can see we're going to need very high oil prices at the peak levels we've kind of seen recently to end up paying out that full contingent payment.

Okay. Very good. We've had a couple of investors ask and again, I'll paraphrase here. When we did the KrisEnergy acquisition, we talked about tax loss carryforwards. And presumably, there's a good synergy between those and the assets that we've acquired now. Can we give any quantification as to what those tax loss carryforwards look like or let us know when additional color will be provided on that?

Yes. The tax loss carryforwards with KrisEnergy are there. They do remain there with that company. As we look at bringing Wassana on and then even with the development of Rossukon, you can see that those can add value to those opportunities that really accelerate those developments. But really, what we'd have to look at is whether there's a restructuring within the company, and we'll look at that once we close the deals and we get into 2023. And I think probably at that time, we can start to be a little more explicit on that and what value might come from a restructuring.

Okay. A couple of questions sort of to the effect the deal seems very good. What was the rationale from the seller's perspective? Can we share any thoughts on why they might be solved?

It's an answer that was very clearly defined in first week of September when we announced their name. They were Mubadala Petroleum for many years, and they changed to Mubadala Energy. And their focus is shifting towards gas and to renewables. It's a common theme across the world, but that's our understanding of why they were looking to exit these. It's a strategic shift towards transition fuels and then to renewables.

Okay. Also a couple of questions asking why was competition so low such that the purchase price consideration is just $10 million?

Actually, there is quite a bit of competition, but there's been -- it's been a long time getting this deal closed. Bids were over a year ago on this asset, and then it's been complicated by the volatility that's existed in the price, which has kind of moved it forward. And then what you've had is the shift in the effective date of the final deal given the length of time to close that deal. So you could argue that the final headline price that you see now was not in line with what the bid that was originally made, but just movements in the deal and that have created the situation where it looks like you've now got a very low price.

Okay. Question from a U.K.-based shareholder, I assume. Question is given the size of this transaction and the fact that you'll now have a very strong cash flow stream and be a more material business, does it make sense to consider relisting in the U.K.?

Heather, did you want to address that one? Or Robin?

Sure. Yes. It's certainly something that we keep in mind. And certainly, we think that the U.K. market and having a listing in the U.K. makes a lot of sense as an international oil and gas company. However, we also think that there needs to be an event that triggers that, such as an equity raise, which, as we mentioned a couple of times in the presentation, you don't need for this acquisition. But we will look at it in the future as we look at other M&A or development opportunities with what we have.

And just to add to that, Sean, I know earlier in the call you mentioned that you've heard from people that have said why aren't you more active marketing. I think we'll see that change now, looking at both North American and European U.K. investors. And obviously, the sort of feedback that we get from those meetings are very helpful in shaping our perspective on this as well.

Most definitely.

Sean, one more question. Turkey remains part of your portfolio. With more cash flow in the business, does this change your plans for the next steps of appraisal with Turkey?

At this stage, no, we don't see it does. I would just believe it does give us, as we're in discussions with parties, a little more commercial flexibility as to how we might proceed on the asset. But at this time, we have no firm offers in Turkey, but we do still have several parties still in discussions.

Very good. Well, Sean, with that, there's no further questions from the e-mail or socials. I'll remind the audience that if you do have follow-up questions, you're welcome to send them to us via e-mail using [email protected]. And a recording of this call will be made available through our website later today.

Thank you very much.