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

Everyone. Thanks for joining for the Valeura Energy webcast, where we'll discuss our reserves and resources as announced yesterday. My name is Robin Martin. I'm Valeura's Vice President, Communications and Investor Relations. And joining me on this call are our President and CEO, Sean Guest, who's joining from Singapore as well as Yacine Ben-Meriem, our CFO, who's joining me here in Bangkok. The call is being recorded today, March -- pardon me, February 21. We'll make a recording available on our website later today. Running order for today's session in a minute, I'm going to hand over to Sean, who will walk us through some slides and some prepared remarks. Thereafter, we'll go into the Q&A session. [Operator Instructions] To submit a question, you can either use the Q&A feature in MS Teams or you can e-mail us using [email protected]. So with that, I will unmute Sean's line and we'll just test to make sure that this works. Actually, Sean, if you could just unmute your online and then go ahead. Sorry, just bear with us a moment, we've got technical issue here.

Hi, Robin, can you hear me now?

All good, Sean. Go ahead.

Okay. Apologies, everyone. Apparently, our IT didn't want to work here after 10:00 p.m. at night. So thank you very much for joining us here today on this call. If I just step forward to a couple of slides. Yes. So look, it was very exciting for us to get this reserve and resource report out yesterday. It really goes to proving a lot of the thesis that we've been saying that we believe the assets that we acquired have significantly more life, and that's your own production, cash flow and further reserves that can be added that is really shown in the initial reserves when we acquired these assets. And if we step back to late '22, when we announced the deal to buy the production from [ a barrel ] of about 21,000 barrels a day, one of the challenges that we really faced in explaining the deal to the market and even as we've gone through the past year, it's been trying to say to people that, look, you've got great production and cash flow right now. But the challenge for us if people say, well, your reserves are relatively low, and therefore, you have a short reserve life index. We've seen historically that the reserves on these fields have been replaced. And now that we're operating have demonstrated these numbers, we're even seeing that we're able to increase these reserves. So last April, just after we closed the deal, we put out the reserves for the year-end 2022 and showed that in 2022, that the reserves were almost -- the production that occurred is almost fully replaced in the reserve addition. And that's when we had the previous operator, managing the assets and really what they were only interested in looking at was maintaining these assets ready for sale. Now we've been able to announce our year-end 2023 reserves, and we believe we're really exceeding what we promised to the market here. And we've not only replaced the production from 2023, but we've actually been able to more than replace it by 200% and have moved the end of field life for all of the fields that by more than a year, except for Wassana, which has actually moved at more than 5 years. And this is because even though we've only been operating in the field for about 9 months, the team has been fully focused on working these assets, and we've had an active drilling campaign focused on delivering the upside that we knew was there. So more importantly, it's not just through the volume and the reserves, what we seen -- you see in the reserve report the increased cash flows and hence it increased net present value of these proved reserves. So at the year-end 2022, we had 2P reserves valued about $260 million. Now during 2023, we paid off our $50 million in debt [Audio Gap] cash. And while that's a good year. In addition to that, we've grown the reserve base value on a 2P basis that in '23 were about $430 million after tax. And this is the story we've been trying to tell the market about but the future of these assets. We can continue to push out abandonments into the future. And meanwhile, creating the high cash flow that is coming from production each year in the interim period. So turning back to the slide and really summarizing. The 2P reserve value we have of just under $38 million. The production in 2023 was 7.5 million barrels. And then on both the 1P and 2P basis, we added more than 16 million barrels to that. So that gives you your 219% increase in the reserve. Now the NPV, as I mentioned, increased to $430 million. And when you put that with our cash value of $151 million at the end of the year, it comes out with a NAV per share on just over [ CAD 7.50 ]. And as a final point, while the focus has been on reserves and value, there was also an increase in the contingent resources that we have associated with the assets. So stepping forward to the next slide. Look, it just showing the 2P reserves by field at year-end. What you can note on the right is that Manora, and while it's still small, Manora and Jasmine are both larger than actually when we acquired the assets. And once you take Manora, you're really looking at a pre-even split between Jasmine, Nong Yao and Wassana for our reserves. The only other point I wanted to make here is that when you look at the proved reserves, you can still see a significant portion of Nong Yao and Wassana are in the undeveloped phase. Now that's what we talk about with the rig currently on Wassana, drilling 5 horizontal wells and then will move immediately to Nong Yao to the new -- to the Nong Yao C development. So those are the growth assets. And what drilling is about in the first half of the year is taking that proven undeveloped and moving it into producing at that point in time. Okay. Moving to the next slide. I'm just emphasizing that again, the NPV of the 2P and the 1P, 2P and 3P and the point we want to make here is we've talked to people, but we're going through a process here of doing a corporate restructuring so that in Wassana, Nong Yao and Manora will all be able to share the tax losses that are currently isolated to the Wassana field. We still see that completing in the first half of this year. So that then what you're going to get is actually Nong Yao and Manora, significantly increasing value is the very high cash flow that they have. Now you'll be able to offset some of the losses from Wassana and increase the value you've got in the Nong Yao and Manora at that time. Currently, all of the work done by the reserve auditor assumes that those losses are only associated with Wassana, and therefore, you'd be utilizing the [indiscernible] into the future in that way. We're looking at really trying to accelerate those. And it's not just the value we're looking to increase. Obviously, that gives us a lot more cash flow in the near-term period. Looking to the next slide. And this is really just on a field basis to look at the comparison of the 2P reserves end of field life 4 of the different fields. So the first column is the reserves that existed at the year-end 2022. And then as you move along, you see actually the reserves across all the fields have increased at that time period, even Manora and Nong Yao that while small, has gone from 1.8 up to 2.2. And we're seeing more than 100% reserve replacement ratio across all of the fields. Now obviously, with Wassana, will be producing a small amount last year, the number, there is really not a meaningful number on reserve replacement ratio. More important there is actually seeing that you actually had a significant add in the reserves and we took that up to $12.9 million. End of field life increased across all the fields. And one of the key ones to point of there is Manora, and we'd like to point out to people that when we were bidding for these assets in 2021, Manora's end of field life was the middle of '22. Now 2 years later, we see that, that end of field life has moved out 5 years in time. Again, we see more of this as still possible across all of these fields. Okay. And then pointing to that -- sorry, going back -- pointing it to the reserve value that you see there, and that increase. And a lot of this is due to -- well, it might seem that the increase in reserves is relatively small. With the way you've got OpEx fixed, the facility is in place, those extra reserves you're producing come at a very high value. And this is before we also start to look at other elements of really trying to bring cost savings into the assets and reducing OpEx. One example being, you would have seen the news a couple of weeks ago, we've made the decision to exercise an option we have to acquire the floating storage vessel at Nong Yao field. Now while this has an acquisition cost this year of about $19 million, that will save us going forward, about $9 million a year in OpEx. Now that will pay back in about 2 years. So if you look at Nong Yao, which is a field that we see has at least 5 and probably up to 10 years of life, that's obviously a very good investment that's going to pay back quickly. It also reduces OpEx, increases cash flow and the lower OpEx allows us to also push it at the end of field life. That type of analysis, that type of work, that type of deal is not currently included in the 2P reserve value. We see adding to that as we go through 2024. So next slide, Robin. So really bringing it back to the slide that we've kind of demonstrated to people and time is looking back at the reserve numbers that Valeura had at the end of 2018, which you can find on the DMF, the regulator in Thailand on their website, it was just over 30 million barrels. And we look as we move through the 4 years to '22, that you were largely replacing all of that production. Now we see going into '23, that we're actually adding additional reserves in there. And importantly, the reserve life index at the end of 2018 was just over 3 years. These fields should have all been done producing in 2021. Now we're looking at having increased that reserve life index. 5 years later, still with more reserves in that reserve life index is pushed out to about 4.5 years or towards 5 years at this point in time, again, really demonstrating the thesis that we've had here. Next slide. Yes. And just another slide that we've shown from our corporate pack, but this is really trying to emphasize 2 things that we see with this press release and getting this information out is operational excellence, really delivering organic growth. So yes, we got these deals, and we really gave a lot of value to the company in that inorganic growth. But now we're still starting to demonstrate to the market that there is further organic growth with these assets by operating them correctly. Thanks. Next slide, Robin. So look, we've talked a lot about how we're trading now, how we still see upside. But if you've been involved with the Valeura for the past couple of years, we've seen almost a 10x growth in share value relative to 2 years ago, and we really continue to be one of the top-performing oil and gas stocks globally, not even just within Canada. But looking at that, when you look at the metrics here, and we kind of presented the NAV we have there, whether it's on a 1P basis or on a 2P basis, we see on the 2P NAV with the cash we have and the value of our assets, and we're still trading at about a 50% discount to that NAV. The other point I'd like to make is that if you go and compare us to our peers or another trading multiple such as cash flow or production, we're at a very significant discount to them. And what we're really trying to emphasize here is that there is still much more growth in the share price. We've got the bump when we did the Mubadala deal, where we continue to add to that as we go forward. And as I look at 2024, we see we're going to have increased production. We're going to have in Wassana on production for the full year. We'll complete the Nong Yao C development to increase production from that field almost 50%, and we expect to take FID on the redevelopment of Wassana this year, which has the potential. We have increased reserves here now, but has the potential, depending on the concept we select to move even more of the contingent resource associated with Wassana, actually, into the reserves with Wassana. On the business front, completing the corporate restructuring will continue to add on to the value we have on our NAV. And then this is ignoring any fact that we may be looking at further M&A. So just before we go on to the question period, and again, thank you for your time here today. I wanted to just make one last point, and I'd like to reiterate to everyone, which is at Valeura, we do believe in growth and that this is how we've delivered the significant value to our shareholders over the past couple of years, and we will continue to look for ways to deliver that growth, both organically and inorganically. However, we had a good year in '23. We paid off all of our debt and built up $151 million in cash. And as we go into '24, we will be looking at other assets we could be acquiring. But if we get to midyear and are still building that cash pool and we're not seeing good deals out there that can be highly accretive to our shareholders then I expect us to sit down with the board and have a discussion as to whether a return of cash to shareholders. But I know there's been a call for that since probably about a week after we did the Mubadala deal a year ago, both that we stick to the strategy we've have, which is we're focused on growth and protecting that cash pool, but we will look at midyear if we're not seeing those deals ways that we could actually be turning some of that cash back to shareholders. So again, thank you very much for your time today. And at that point, I think Robin will just be taking questions.

Yes. Sounds good, Sean. We've got a bunch of questions come in through the online system. And just a reminder, if there's anything you'd like to know if you're free to e-mail us using [email protected], maybe that's showing on your screen there or clicking on the Q&A link in Team. First couple of questions are about Wassana. First question reads, is all the potential from the proposed Wassana new development hubs now captured in the proved undeveloped reserves? Or is there more on top of what's shown in these numbers?

Yes, it's a good question because you see a significant jump in the reserves from Wassana. But what I can say, the way this was managed with the reserve auditor because we're in what we say, a concept selecting, are we going to just replace the [indiscernible] that we have there with another one and extend the life? How are we going to put in multiple platforms, wellhead platforms? So a number of these concepts have been worked up. But what we went with the reserve [ order ] was the actual minimal concept, which was really simply a replacement of the current [indiscernible] and no, that does not yield the optimal recovery or the optimal time for production. So we see as we go through these decisions this year the amount of CapEx, OpEx we wanted spending on this asset, that in actual fact, the decision as to what the reserves are for the field will be dependent on the FID that we take during the year. So we still see much more upside that can come from Wassana.

Okay. Next question is also on Wassana. And specifically, are you able to share any detail and timing now for what Wassana redevelopment would look like?

Look, at this point in time, I would say, no, we're looking at and trying to get to the concept select here probably in the next couple of months, which could lead to an FID after tendering that sometime around the end of the year. But it will also depend on the size and scope of the redevelopment that we go forward with. But at this time, no, we expect that to be a decision this year. But what we can see is that actually, our first priority has been the field is back online. We've been drilling wells there and had very good results, which we see an increase in the production now with 5 horizontal wells, we should get it over 5,000 barrels a day. And that's obviously delivering back a good cash flow to us as we kind of then -- and keep the field at that sort of level and keep that strong cash flow before we look at the -- how we then go forward with another development.

Okay. Moving on to Nong Yao, similar question to the first one on Wassana. Do the Nong Yao proved undeveloped numbers now include both the C and B accumulations?

All right. C, it includes the base plan for the C development, which as we've kind of said, the facility is really being installed there now, and we'd like to see that we're actually starting drilling on that development next month, right, to try and bring on all of that production by the end of Q2. Yes, so that C is in there. What's not in there is anything on D. So there's nothing on that D we'd like to go ahead. It really is an exploration well. We have to drill it, prove the oil there. And then obviously, based on a successful well, we'd likely do a few sidetracks to prove up pretty quickly enough volumes to say that we do have another development there. And that's really one of our targets for this year. But right now, you don't see any volumes associated with D in there. The only other comment I'll make is that as we go into the development of C, I would obviously expect it to once we get it developed and producing, then we will learn in that phase and then hope can actually add some additional reserves there based on actual production that we're getting.

Okay. A question on the tax reorganization. And I think they probably lodged this question before you got to it, but I'm going to pose it anyway. Can you provide any update on the timing for the tax reorg and regional invoicing as to, I know you've already mentioned that, Sean, is do you expect material increases in your NPV once that's completed? And would you substantiate that with an updated reserve report at that time.

Yacine, do you want to handle that one?

Sure. And just on 1P perspective, obviously, the restructure will allow us to tap into taxes that was within [ as shown today ], which implies an increasing free cash flow ultimately and therefore, NPV. I guess as far as the second part of the question, which is whether we're going to be looking to really engage, I will say, for example, to read through the numbers to kind of quantify that. It's something that we've been discussed internally, and it's something that we might potentially do as well. [indiscernible] with the reorganization and provide an update to the market what's the implication in terms of NPVs. Obviously, that will come once we have successfully get the restructuring.

Okay. Switching to a question on acquisitions here. And I think you've kind of answered this one as well, Sean, but let's just touch it anyway. The reasons [indiscernible] drilling success has identified additional development opportunities in various parts of the portfolio. Does this change your plans and your appetite to secure another transformational acquisition in Southeast Asia?

No, it doesn't change our plans. We still remain very focused on looking for opportunities here. But what I can say is it allows us to be cautious. And it's not something we need to do. We're very cautious and we took our time on getting the deal done with Mubadala. It took a long negotiation to end up there. And we expect we would end up in a similar type negotiation here. But the key thing is we've got production, we've got cash flow. We've shown we can extend that out, not just now. These fields aren't going to be declining in '25, '26. We see them going out on the reserves like '27, '28, and we actually believe they're going to go beyond that. So no, it doesn't change our appetite to still try and look for good accretive opportunities, but it does mean that we really want to assure that we have the right focus on these assets and the delivery of the cash flow.

Okay. Maybe just one last question here. We've had a bunch that are sort of similar, and I think we've covered most of the bases. I'll just remind people if there is anything else that you want to follow up on, feel free to reach out with the e-mail address that's shown on the screen or any of the contacts on our website. But maybe for the last question, do your probable reserve numbers assume any improved recovery from the current well count? Or is probable reserve -- or probable reserves all about additional infill drilling?

So look, there has been quite a bit of work this year and one of the ways that led, I believe, to some of the increase we've had is that there is good interaction between the team that we have in Thailand and our reserve on the Netherlands and [ Sewell ] out of the U.S., where they could really spend time going through the 20 years of production you have on Jasmine and to really look at how you're modeling a number of the behaviors of these wells and bring in as we had to a lot of that speed and then get kind of agreement there. So no, I think when you look at it, most of the -- there is -- some of the 2P is in new drilling, but we still see others that can still come from changes in the production profiles from the different wells as they go forward, and that's obviously something that will be monitored by the team.

Okay. One last question just came across the line. Any plans to hedge oil prices for some of the production going forward?

We certainly keep an eye in terms of like trying to provide some sort of [indiscernible] ahead or at least a downside risk as you've all seen as kind of like shifting [indiscernible] over the past 3 months. I think going from 95 [indiscernible] in the period of 3 months. So we're keeping an eye on that and trying to see what can we [indiscernible] from our side. But I think the concern from our side is that like anything beyond the immediate months is, to be honest, it's quite expensive. It's not simple as we see it's been a cheap trade. So we are keeping an eye and trying to see if there's a correct price there, it make sense to us to kind of go to the market and hedge some of the production [indiscernible]. I mean obviously, we still see that the -- as far as 2024 is concerned, is still going to be -- the expectation is still going to be quite a healthy year in terms of new customers. So we don't see anything that's coming down to a level that will concern us. Just as we need to trying to put some sort of downside risk, you do see potentially we want to try to put some sort of a hedge there. Structurally, what we are looking to do is to enable people to give the -- to take for granted that we are on the upside both from a volume perspective is quite disruptive. We are looking at puts even structurally [indiscernible].

Very good. Thanks, guys, and thanks for everyone tuning in today. As I say, any further questions for us, feel free to reach out by e-mail and we'll stay in touch that way. Sean, over to you to wrap up.

Yes. Again, like Robin said, thank you very much. It's an exciting piece of news. And obviously, as we look forward, we have board meetings in the middle of March, and we expect to put out our year-end and Q4 results, probably 13th or 14th of March that time.

Thanks, everyone. That concludes the call.