Mr. Jim McFarland reports
VALEURA ANNOUNCES FOURTH QUARTER 2015 FINANCIAL AND OPERATING RESULTS AND YEAR-END 2015 RESERVES
Valeura Energy Inc. has released its unaudited financial and operating results for the three-month period ended Dec. 31, 2015, audited results for the year ended Dec. 31, 2015, year-end 2015 reserves and is providing an update on subsequent developments. The complete quarterly reporting package for the corporation, including the audited annual financial statements and associated management's discussion and analysis, and the 2015 annual information form, have been filed on SEDAR and posted on the corporation's website.
"Valeura recorded solid results in the fourth quarter, realizing strong natural gas sales prices and operating netbacks in Turkey averaging $9.93 per thousand cubic feet and $44.56 per barrel of oil equivalent, respectively, and delivering $1.6-million in funds flow from operations," said Jim McFarland, president and chief executive officer. "These standout operating netbacks in Turkey reflect strong natural gas pricing, a competitive 12.5-per-cent government royalty regime and low operating costs. Net sales in the fourth quarter, all non-operated, were up slightly from the third quarter despite nominal capital expenditures on the joint venture lands in the Thrace basin.
"We are encouraged that the first two exploration wells drilled on our 100-per-cent-owned-and-operated Banarli licences have confirmed overpressure in the Teslimkoy formation below 2,500 metres. Bati Gurgen-1 is expected to be on stream shortly and producing conventional gas from the Osmancik formation. Yayli-1 is undergoing completion and fracking operations in the overpressured tight gas sands in the Teslimkoy formation. Both wells represent important steps in our strategic shift to our operated assets.
"We also successfully replaced 125 per cent of 2015 production with proved reserves additions, increasing proved reserves by 5 per cent to 1.8 million boe at year-end 2015 with a value of 71 cents per share. Proved plus probable reserves at year-end 2015 were down 6 per cent to 5.5 million boe due to production and technical revisions associated with a more conservative development program for the normally pressured tight gas sands on the joint venture lands, partially offset by the Bati Gurgen-1 discovery at Banarli, which added proved plus probable reserves of 4.9 billion cubic feet or 800,000 boe. However, the proved plus probable reserves value was up 8 per cent to $2.02 per share due to a weaker Canadian dollar."
Fourth quarter 2015 results at a glance:
-
Drilled first two Banarli exploration wells (Valeura 100-per-cent working interest):
-
Bati Gurgen-1 (first gas expected imminently);
- Yayli-1 (completion and fracking operations under way);
- Net sales: 809 barrels of oil equivalent per day;
- Funds flow from operations: $1.6-million;
- Working capital surplus: $7.3-million;
- Natural gas price realization: $9.93/thousand cubic feet;
- Operating costs: $6.85/boe;
- Operating netback: $44.56/boe;
- Net capital expenditures: $6.1-million.
Operational highlights:
- Net petroleum and natural gas sales in Turkey in Q4 2015 averaged 809 barrels of oil equivalent per day, which were up 2 per cent from third quarter 2015 and down 31 per cent from Q4 2014. Net sales in Q4 2015 included 4.8 million cubic feet per day of natural gas and eight barrels of oil per day.
- Net corporate petroleum and natural gas sales in 2015 averaged 966 boe/d, which were down 15 per cent from 2014. Lower volumes in 2015 reflect the impact of reduced drilling and fracking operations on the joint venture lands acquired from Thrace Basin Natural Gas (Turkiye) Corp. (TBNG) and Pinnacle Turkey Inc. (PTI) (the TBNG-PTI JV). Valeura shifted approximately 83 per cent of its capital expenditures in 2015 to the 100-per-cent-owned-and-operated Banarli licences in 2015, including $10.9-million for 3-D seismic and drilling.
Thrace basin -- Banarli exploration licences (Valeura 100-per-cent working interest)
Bati Gurgen-1 well:
-
Spudded the first exploration well Bati Gurgen-1 on the Banarli licences on Nov. 10, 2015, and drilled the well to a measured depth of 2,735 metres into the Teslimkoy member of the Mezardere formation. Wireline log analysis indicated 32 metres of aggregate net pay in the Danismen and Osmancik formations, and thinner net pay in tight sands in the Teslimkoy;
- Carried out a diagnostic fracture injection test in a short interval in the Teslimkoy at a depth of 2,560 metres, which confirmed that the formation is overpressured, consistent with Valeura's geological model of a potential basin-centred gas play below 2,500 metres on the Banarli licences;
- Completed a 13-metre interval in the Osmancik formation at a depth of 1,480 metres, which flowed natural gas at an initial restricted rate of 3.4 million cubic feet per day on a 24-hour production test. The shallower Danismen formation is also prospective for conventional gas and may also be completed within one or two months following initial on stream monitoring of the Osmancik formation alone;
- Completed the tie-in of the well through a new eight-inch, 3.2-kilometre pipeline to an existing dehydration facility at the Gurgen-1 well on the adjacent TBNG-PTI JV lands (Valeura 40-per-cent working interest);
- First gas from Bati Gurgen-1 expected in the next few days and an operational update will be provided once on stream operations have stabilized;
- The final cost to drill, complete, test and tie in the Bati Gurgen-1 well was $3.3-million, as budgeted.
Yayli-1 well:
-
Spudded the second Banarli exploration well Yayli-1 on Dec. 1, 2015, and drilled the well to a measured depth of 2,914 metres in the Teslimkoy. Wireline log analysis indicated 14 metres of net pay in the Osmancik and 128 metres of net pay in tight sands in the Teslimkoy;
- Carried out a diagnostic fracture injection test in a 13-metre interval in the Teslimkoy at a depth of 2,865 metres, which confirmed the formation is overpressured to the same extent as measured at the Bati Gurgen-1;
- Commenced a multistage Teslimkoy frac program to be carried out and evaluated on a sequential basis working upward from the bottom of the well. A small frac was carried out at 2,865 m to stimulate a relatively thin 13-metre net pay interval as an initial calibration point, which yielded producible gas with small amounts of condensate. However, only 55 per cent of the frack fluids has been recovered to date due to equipment limitations in unloading fluid from the well, which could be limiting gas flow rates. Therefore, further frac operations are on hold until late March when a larger coiled tubing unit is expected to be available to facilitate faster and more complete frac fluid recovery. A more comprehensive operational update will follow once the fracking and testing program is completed;
- The final estimated total cost to drill, frac, complete, test and tie in the Yayli-1 well is $4.5-million to $5.0-million, depending on the final extent of the frac operations.
Other:
- Applied for two new exploration licences contiguous with the Banarli licences. The bids remain under review by the General Directorate of Petroleum Affairs of the Republic of Turkey (GDPA);
- Continued the process to seek a joint venture partner to participate in financing an exploration drilling program in the deeper horizons at Banarli, targeting a potential basin-centred gas play.
Thrace basin -- TBNG-PTI JV (Valeura 40-per-cent working interest)
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The GDPA has approved a TBNG-PTI JV application for two production leases G18-b1-1 and G18-b2-1 which were carved out from expired exploration licence 3931 in the Tekirdag area. The new leases cover an area of 42,077 acres (gross). Two other production lease applications (F19-d3-1 and F19-c3-1) have been submitted to the GDPA in the Tekirdag area as carve-outs from expired exploration licences 3934 and 4126.
- The TBNG-PTI JV has continued its parallel process to seek a farm-in partner to explore the deeper horizons on certain TBNG-PTI JV lands. All discussions with currently interested parties are at the preliminary stage. There is no certainty that a deep farm-in transaction will be completed with respect to the TBNG-PTI JV lands or at Banarli, or the timing of final terms thereof.
Financial highlights:
-
The average natural gas price realization in Turkey of $9.93 per thousand cubic feet in Q4 2015 was up marginally from Q3 2015 and down 6 per cent from Q4 2014 due to fluctuations in the Turkish lira exchange rate. The average natural gas price realization of $10.20 per thousand cubic feet in 2015 was up marginally from 2014 due to a 9-per-cent increase in the reference price for domestic sales in Turkey, effective Oct. 1, 2014, partially offset by a weaker Turkish lira.
- The average operating netback of $44.56 per boe in Q4 2015 was essentially unchanged from Q3 2015 and down 4 per cent from Q4 2014 due to lower natural gas price realizations, partially offset by lower unit operating costs, and up marginally from Q3 2014 due to higher natural gas price realizations, partially offset by higher unit operating costs. The average operating netback of $46.48 in 2015 was marginally higher than 2014 due to higher natural gas price realizations and lower unit operating costs.
- Working capital surplus at Dec. 31, 2015, was $7.3-million, including cash of $7.0-million.
- Funds flow from operations of $1.6-million in Q4 2015 was down 18 per cent and 56 per cent from Q3 2015 and Q4 2014, respectively, reflecting lower sales volumes, higher business development expenses and higher realized foreign exchange losses. Funds flow from operations in 2015 of $10.2-million was 25 per cent lower than 2014 due to lower sales volumes, higher business development expenses and higher realized foreign exchange losses.
- Net capital expenditures of $6.1-million in Q4 2015 were up 723 per cent and 116 per cent from Q3 2015 and Q4 2014, respectively, due to higher drilling and completion expenditures on the Banarli licences, partially offset by lower drilling expenditures on the TBNG-PTI JV lands. Net capital expenditures of $13.2-million in 2015 were up 22 per cent from 2014 due to higher seismic, drilling and completion expenditures on the Banarli licences, partially offset by lower drilling and fracking expenditures on the TBNG-PTI JV lands.
- Additional financial and operating results are summarized in the table.
FINANCIAL AND OPERATING RESULTS SUMMARY
(In thousands, except per share)
Three months Year ended Three months Year ended
ended Dec. 31, Dec. 31, ended Dec. 31, Dec. 31,
2015 2015 2014 2014
Petroleum and natural gas revenues $4,425 $21,543 $6,921 $24,998
Funds flow from continuing operations 1,600 10,185 3,654 13,586
Net income (loss) from continuing
operations 287 (562) 697 1,090
Capital expenditures (net of asset
dispositions) 6,100 13,192 2,822 10,846
Net working capital surplus 7,253 7,253 10,044 10,044
Cash and cash equivalents 6,973 6,973 5,928 5,928
Operations
Production
Crude oil (bbl/d) 8 8 10 8
Natural gas (Mcf/d) 4,805 5,745 7,022 6,812
boe/d (@ 6:1) 809 966 1,180 1,143
Average reference price
Brent ($/bbl) 58.16 66.88 86.83 109.29
BOTAS reference ($/Mcf) 10.07 10.32 11.02 10.39
Average realized price
Crude oil ($ per bbl) 44.51 50.35 62.66 78.64
Natural gas -- Turkey ($/Mcf) 9.93 10.20 10.62 9.96
Average operating netback
($ per boe @ 6:1) 44.56 46.48 46.22 45.01
(1) The table includes figures from continuing operations in Turkey. Prior-period figures have been
reclassified to remove discontinued operations in Canada, see the MD&A for further discussion on
discontinued operations.Outlook
The corporation is continuing to execute its strategy to shift emphasis from its non-operated 40-per-cent working interest in the TBNG-PTI JV to its 100-per-cent-owned-and-operated Banarli licences in the Thrace basin.
The corporation expects to provide further guidance on anticipated capital expenditures and production volumes in 2016 once the fracking program is completed on the Yayli-1 well, and production performance is available from the Bati Gurgen-1 and Yayli-1 wells at Banarli.
The corporation will continue to seek farm-in partner(s) to accelerate delineation of the potential basin-centred gas play on the Banarli licences and certain TBNG-PTI JV lands.
Year-end 2015 corporate reserves report
The corporation has completed its independent reserves evaluation as at Dec. 31, 2015. This evaluation was conducted by DeGolyer and MacNaughton (D&M) of Dallas, Tex., for the corporation's properties in Turkey in its report dated March 8, 2016. This evaluation was prepared using guidelines outlined in the Canadian Oil and Gas Evaluation Handbook (COGE Handbook) and is in accordance with National Instrument 51-101. Additional reserves information as required under NI 51-101 is included in the 2015 annual information form filed on SEDAR. All of the corporation's reserves are located in Turkey.
Highlights:
-
Replaced 125 per cent of production with 1P (proved) reserves additions (including revisions);
- 1P reserves up 5 per cent to 1.8 million boe and 2P (proved plus probable) reserves down 6 per cent to 5.5 million boe (company gross);
- 1P reserves value of $41-million (71 cents per share) and 2P reserves value of $117-million ($2.02 per share) (net present value at a 10-per-cent discount (NPV10) before tax);
- 2P reserves life index (RLI) of 18.5 years (based on annualized Q4 2015 production) requiring future development capital of $95-million.
Company reserves summary
The table summarizes company reserves in Turkey and associated NPV10 before tax at Dec. 31, 2015, and Dec. 31, 2014, using forecast prices.
COMPANY GROSS RESERVES VOLUMES AND VALUES
Reserves (Mboe) NPV10 before tax
($ millions)
2015 2014 2015 2014
Proved
Developed producing 509 639 $17.3 $22.2
Developed non-producing 513 448 13.4 9.9
Undeveloped 805 651 10.4 7.5
Total proved (1P) 1,827 1,738 41.1 39.6
Probable 3,634 4,066 75.9 68.1
Total proved plus probable (2P) 5,461 5,804 117.0 107.7
Possible 3,121 4,564 71.6 84.7
Total proved plus probable plus possible (3P) 8,582 10,368 188.6 192.4
(1) D&M's valuations for reserves in Turkey are prepared in U.S. dollars and
have been converted for purposes of this illustration to Canadian dollars,
assuming a Canadian-dollar/U.S.-dollar exchange rate of 0.72 for the year-end
2015 values and 0.86 for the year-end 2014 values.
(2) The forecast prices used in the calculations of the present value of future
net revenue for year-end 2015 are based on the D&M Dec. 31, 2015, forecast
prices, which are included in the 2015 AIF filed on SEDAR. The natural gas
forecast prices (in U.S. dollars/thousand cubic feet) are lower than 2014,
reflecting a weaker exchange rate for the TL, the pricing basis for Turkish
natural gas sales.
(3) Due to rounding, summations in the table may not add.
The tables and commentary summarize information contained in the D&M reserves report for Turkey.
D&M evaluated reserves as at Dec. 31, 2015, on the company's Banarli licence (100-per-cent working interest) and on the TBNG-PTI JV lands (40-per-cent working interest), the Edirne lands in the Thrace basin (35-per-cent working interest), and the Gaziantep lands in the Anatolian basin (26-per-cent working interest). The reserves are primarily natural gas but small oil volumes are assigned to a number of wells with the majority of the oil reserves attributed to the Alibey area (26-per-cent working interest) in the Anatolian basin.
The 2015 year-end reserves by principal product type are summarized in the table.
2015 YEAR-END COMPANY GROSS RESERVES VOLUMES BY PRINCIPAL PRODUCT TYPE
Reserves category Light and medium crude oil Conventional natural gas Total oil equivalent
(Mbbl) (Bcf) (Mboe)
Proved 79 10.5 1,827
Probable 51 21.5 3,634
Total proved plus probable 130 32.0 5,461
Possible 78 18.2 3,121
Total proved plus
probable plus possible 208 50.2 8,582
The forecast oil and natural gas prices and cost escalation rates used in the D&M reserves report are shown in the table.
FORECAST PRICES AND COST ESCALATION RATES
Cost
Conventional natural gas Light and medium crude oil escalation
Year Banarli TBNG Edirne Banarli Alibey TBNG %/year
(US$/Mcf) (US$/Mcf) (US$/Mcf) (US$/bbl) (US$/bbl) (US$/bbl)
2016 7.18 8.00 7.96 39.00 45.76 39.00 0.0
2017 7.32 8.16 8.12 45.08 52.89 45.08 2.0
2018 7.47 8.32 8.28 47.51 55.74 47.51 2.0
2019 7.62 8.49 8.45 52.40 61.48 52.40 2.0
2020 7.77 8.66 8.62 56.69 66.51 56.69 2.0
2021 7.93 8.83 8.79 60.31 70.76 60.31 2.0
2022 8.09 9.01 8.96 65.74 77.13 65.74 2.0
2023 8.25 9.19 9.14 67.05 78.67 67.05 2.0
2024 8.41 9.37 9.33 68.39 80.25 68.39 2.0
2025 8.58 9.56 9.51 69.76 81.85 69.76 2.0
2026 8.75 9.75 9.70 71.15 83.49 71.15 2.0
2027 8.93 9.95 9.90 72.58 85.16 72.58 2.0
2028+ +2.0%/year +2.0%/year +2.0%/year +2.0%/year +2.0%/year +2.0%/year +2.0%/year
thereafter thereafter thereafter thereafter thereafter thereafter Thereafter
(1) The forecast prices used in the calculation of the present value of future net revenue are
based on the D&M Dec. 31, 2015, forecast prices, which are included in the 2015 AIF filed on
SEDAR.
2015 YEAR-END COMPANY GROSS RESERVES RECONCILIATION
Changes 1P 2P
(Mboe) (Mboe)
At Dec. 31, 2014 1,738 5,804
Technical revisions 183 -849(1)
Discoveries 259 859
Economic factors 0 0
Production -353 -353
At Dec. 31, 2015 1,827 5,461
(1) This negative technical revision reflects a
more conservative development plan for the normally
pressured tight gas sands on the TBNG-PTI JV lands.The table sets forth the RLI for total proved and proved plus probable reserves based on the annualized Q4 production rates of 1,149 boe/d, 1,180 boe/d and 809 boe/d for the years 2013, 2014 and 2015, respectively.
RESERVE LIFE INDEX
RLI (years) 2015 2014 2013
Total proved 6.2 4.0 3.9
Total proved plus probable 18.5 13.5 12.7
(1) Valeura assessment.We seek Safe Harbor.
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