Mr. Jim McFarland reports
VALEURA ANNOUNCES FOURTH QUARTER 2016 FINANCIAL AND OPERATING RESULTS AND YEAR-END 2016 RESERVES
Valeura Energy Inc. has provided highlights of its unaudited financial and operating results for the three-month period ended Dec. 31, 2016, audited results for the year ended Dec. 31, 2016, year-end 2016 reserves and an update on subsequent developments. The complete quarterly reporting package for the corporation, including the audited financial statements, associated management's discussion and analysis, and the 2016 annual information form, has been filed on SEDAR and posted on the corporation's website.
Business reset complete
In the fourth quarter of 2016, the corporation focused its efforts on transactional activity to reset the business and was successful in subsequently closing four interlinked transactions in early 2017. These transactions have transformed the corporation in terms of scaling up the business, providing operational control and boosting financial capacity, which are expected to enable the corporation to ramp up drilling and increase production. The corporation anticipates that these benefits will be evident through the course of 2017.
As a measure of this transformation, through the acquisition of the corporation's joint venture partner Thrace Basin Natural Gas (Turkiye) Corp. (TBNG), effective Feb. 24, 2017, the corporation doubled its participating interest in the TBNG JV lands, a core shallow-gas-producing asset, and took over operatorship of the TBNG JV. The corporation's patience in pursuing this long-standing acquisition target was rewarded by the successful negotiation of a series of concurrent transactions with Statoil Banarli Turkey BV, which provided cash to effectively finance the TBNG acquisition in a non-dilutive way.
The pro forma accretion metrics include the impact of an increase of 25 per cent in the shares outstanding associated with the completion of the offering, which provided gross proceeds of approximately $11-million, concurrent with the close of the TBNG acquisition. These funds from the offering and Statoil have boosted working capital to support a ramp-up of drilling in 2017.
"As our attention now turns from this complex transactional work to a focus on safe, efficient and effective operations in 2017, we have brought on board a capable TBNG operating organization of more than 50 people and have hired a select number of new employees in Turkey as part of a comprehensive transition management plan, including the handover of support functions previously provided by TransAtlantic," said Jim McFarland, president and chief executive officer. "This business reset puts us in the best position in our history in terms of operational control. We had a good start to the year with a drilling success at the Dogu Atakoy-3 well and are excited about the catalysts in front of us. We are ready to move forward in the second quarter with an operated multiwell shallow gas drilling program and to spud the first deep 4,000-metre exploration well at Banarli, funded by Statoil, and also operated by Valeura," Mr. McFarland added.
Fourth quarter 2016 results at a glance:
-
Net sales of 795 barrels of oil equivalent per day;
- Funds flow from operations of $900,000;
- Working capital surplus of $3.8-million;
- Natural gas price realization of $7.96 per thousand cubic feet;
- Operating netback of $33.43 per boe;
- Net capital expenditures of $500,000;
- Executed definitive agreements for three transformational transactions;
- TBNG acquisition, West Thrace deep rights sale and offering;
- Subsequently closed the above transactions and the earlier Banarli farm-in in January and February, 2017, following Turkish government approvals.
Transactional highlights
TBNG acquisition:
-
As announced on Feb. 24, 2017, an affiliate of Valeura closed a transaction with an affiliate of TransAtlantic Petroleum to acquire 100 per cent of the shares of Thrace Basin Natural Gas (Turkiye) for $22-million (U.S.), effective March 31, 2016, which, after closing adjustments, was reduced to a cash payment of $20.9-million (U.S.) (which includes $3.1-million (U.S.) held in escrow pending a final reconciliation of the closing statement of adjustments).
- TBNG holds a 41.5-per-cent participating interest in the TBNG JV, and its acquisition increases Valeura's participating interest in the TBNG JV to 81.5 per cent (subject to the West Thrace deep rights sale) and establishes Valeura as the operator.
Offering:
- As announced on Feb. 24, 2017, Valeura issued 14,629,000 common shares of the corporation, coincident with closing the TBNG acquisition, pursuant to 14,629,000 subscription receipts previously issued by the corporation at 75 cents per subscription receipt in connection with the underwritten private placement offering of subscription receipts.
- Valeura received $11.0-million in gross proceeds, which were released from escrow on Feb. 24, 2017.
Statoil transactions
Banarli farm-in:
-
As announced on Jan. 6, 2017, an affiliate of Valeura closed a transaction with Statoil Banarli Turkey, a wholly owned affiliate of Statoil ASA, for a farm-in agreement for the exploration of the deeper formations below approximately 2,500 metres on the Banarli licences targeting a potential basin-centred gas play, following receipt of Turkish government approvals.
- Statoil has the option to earn a 50-per-cent participating interest in the deep formations on the Banarli licences by investing in an exploration program that includes payments and carried costs of at least $36-million (U.S.), including two deep exploration wells and 3-D seismic.
- At closing of the Banarli farm-in, Statoil paid Valeura $6.0-million (U.S.) as a contribution to back costs incurred on the Banarli licences.
West Thrace deep rights sale:
-
As announced on Jan. 6, 2017, an affiliate of Valeura closed a second transaction with Statoil, to initially sell Valeura's current 40-per-cent participating interest in deep formations below approximately 2,500 metres on certain TBNG JV lands for cash consideration of $12-million (U.S.), following receipt of Turkish government approvals.
- At closing of the West Thrace deep rights sale, Statoil paid Valeura $12.0-million (U.S.).
- The West Thrace deep rights sale provided a crucial source of non-dilutive financing for the TBNG acquisition and further validates the potential for a deep-basin-centred gas play on Valeura's lands.
Subsequent West Thrace deep rights sale:
-
An affiliate of Valeura executed a sale and purchase agreement with Statoil on March 10, 2017, to sell an additional 10-per-cent participating interest in the deep rights on the West Thrace lands for $3-million (U.S.), as contemplated under terms of the West Thrace deep rights sale agreement and contingent on closing the TBNG acquisition.
- Closing of the subsequent West Thrace deep rights sale is subject to the Turkish government approvals for the associated transfer of the licence interests.
- Upon the closing of the West Thrace deep rights sale, Valeura will retain a 31.5-per-cent participating interest, and Statoil acquires a 50-per-cent participating interest in the deep formations on the West Thrace lands. Valeura will retain an 81.5-per-cent participating interest in the shallow formations on the West Thrace lands and an 81.5-per-cent participating interest in all formations on other TBNG JV lands. Pinnacle Turkey Inc. (PTI) will continue to hold an 18.5-per-cent interest in all of the TBNG JV lands and all formations.
Operational highlights:
-
Net petroleum and natural gas sales in Turkey in fourth quarter 2016 averaged 795 barrels of oil equivalent per day, which were up 17 per cent from third quarter 2016 and down marginally from fourth quarter 2015. Net sales in fourth quarter 2016 included 4.7 million cubic feet per day of natural gas and 12 barrels of oil per day.
- Higher sales in fourth quarter 2016 reflect a full quarter of production from the Bati Gurgen-2 well at Banarli and several workovers on the TBNG JV lands, partially offset by natural declines.
- Current net sales in Turkey are approximately 1,150 boe per day reflecting the acquisition of TBNG.
TBNG JV and Banarli shallow gas program:
-
The Dogu Atakoy-3 well on the TBNG JV lands (Valeura has a 81.5-per-cent working interest) was spudded on Jan. 24, 2017, and was drilled and cased to a depth of 1,303 metres. Based on the log interpretation, the well penetrated 40 metres of stacked Osmancik sands at an average porosity of 21 per cent. The well has been on stream for seven days and is currently producing at a restricted rate of approximately 1.0 million cubic feet per day (gross). The Dogu Atakoy-3 well satisfies the first of up to four commitment wells in 2017 under the licence terms on the West Thrace lands.
- Valeura is finalizing negotiations of a multiwell drilling rig contract for the planned 2017 shallow gas drilling program on the TBNG JV lands and Banarli licences, which is expected to commence in second quarter 2017. A new slim-hole well design has been adopted for this program to reduce drilling times and costs.
- The General Directorate of Petroleum Affairs (GDPA) has awarded two new production leases to the TBNG JV, F19-d3-1 and F19-c3-1 (Valeura has an 81.5-per-cent working interest). These leases comprise a gross area of 51,111 acres (41,655 net acres) and are part of the South Thrace lands.
- The TBNG JV has also relinquished two non-producing exploration licences, N39-a1,a4 and N39-d1,d2 (Valeura has a 26-per-cent working interest), in the Gaziantep area of southeast Turkey due to limited prospectivity and a drilling commitment to hold the licences, and is a step consistent with the corporation's strategy to focus on the Thrace basin. These licences comprised a gross area of 152,111 acres (39,549 net acres). The corporation does not hold any other licences or leases in southeast Turkey.
- Valeura currently holds interests in 528,504 gross acres in the Thrace basin of northwest Turkey. Giving effect to the sale of a 50-per-cent participating interest to Statoil in the deep rights on the West Thrace lands, the corporation would hold 432,295 net acres of shallow rights and 345,272 net acres of deep rights in the Thrace basin.
Banarli deep exploration program:
- The Valeura/Statoil Banarli deep project team has selected, after a thorough bid process, a deep capacity rig to drill the first 4,000-metre exploration well under the phase 1 commitment of the Banarli farm-in. Negotiation of the drilling rig contract is nearing completion. The selected drilling rig is currently located in Europe and will be transported to Turkey for a planned spud of the Yamalik-1 well in second quarter 2017. A final AFE for the drilling and evaluation stages is being prepared, which will set Statoil's financing level for this particular stage of the well program. Under the Banarli farm-in, Statoil will pay no less than $10-million (U.S.) as a phase 1 commitment to drill, evaluate, complete, frack and test the well. The actual amount financed for the well may be higher based on the actual agreed work program for the various stages.
- Bids are under review for the planned 3-D seismic program under the phase 2 commitment of the Banarli farm-in. The acquisition stage is expected to commence in third quarter 2017 and be completed before the end of 2017. Under the Banarli farm-in, Statoil will pay no less than $10-million (U.S.) for the acquisition and processing of the seismic.
- Valeura is the operator of the deep exploration program during the earning phase of the Banarli farm-in.
Financial highlights:
- The Turkish lira has continued to weaken in 2016, declining by 24 per cent compared with the Canadian dollar over the course of 2016. This decline has negatively impacted Valeura's natural gas revenues, which are priced in Turkish lira, with some offset in reduced operating costs denominated in Turkish lira. The corporation is in the process of specifically assessing its exposure to the Turkish lira and possibilities that may exist to mitigate this exposure.
- The average natural gas price realization in Turkey of $7.96 per thousand cubic feet in fourth quarter 2016 was down 15 per cent and 20 per cent from third quarter 2016 and fourth quarter 2015, respectively, due to a 10-per-cent reduction in the Botas reference price (in Turkish lira), effective Oct. 1, 2016 (as previously disclosed on Nov. 10, 2016), and a further decline in the value of the Turkish lira.
The average operating netback of $33.43 per boe in fourth quarter 2016 was down 14 per cent from third quarter 2016 due to lower natural gas price realizations, partially offset by lower unit operating costs, and down 25 per cent from fourth quarter 2015 due to lower natural gas price realizations and higher unit operating costs.
- The working capital surplus at Dec. 31, 2016, was $3.8-million, including cash of $2.0-million.
- Funds flow from operations of $900,000 in fourth quarter 2016 was down 14 per cent from third quarter 2016 due to lower natural gas price realizations and higher general and administrative expenses, partially offset by higher sales volumes, lower unit operating costs, and lower realized foreign exchange losses, and was down 43 per cent from fourth quarter 2015 due to lower sales volumes, lower natural gas price realizations and higher unit operating costs, partially offset by lower general and administrative expenses and lower realized foreign exchange losses.
-
Net capital expenditures of $500,000 in fourth quarter 2016 were down 83 per cent and 91 per cent from third quarter 2016 and fourth quarter 2015, respectively, due to lower drilling expenditures.
- Additional financial and operating results are summarized in the attached financial and operating results summary table.
FINANCIAL AND OPERATING RESULTS SUMMARY (1)
(thousands of dollars, except per-share amounts and as otherwise stated)
Three months ended Three months ended Year ended Three months ended Year ended
Dec. 31, Sept. 30, Dec. 31, Dec. 31, Dec. 31,
2016 2016 2016 2015 2015
Financial
Petroleum and natural
gas revenues $3,508 $3,510 $16,155 $4,425 $21,543
------ ------ ------ ------ ------
Funds flow from operations (1) 915 1,066 6,048 1,600 10,185
------ ------ ------ ------ ------
Net (loss) from operations (3,189) (1,263) (6,086) 287 (562)
------ ------ ------ ------ ------
Capital expenditures 536 3,080 9,535 6,100 13,192
------ ------ ------ ------ ------
Net working capital surplus 3,786 3,697 3,786 7,253 7,253
------ ------ ------ ------ ------
Cash 1,987 2,336 1,987 6,973 6,973
------ ------ ------ ------ ------
Operations
Production
Crude oil (bbl/d) 12 10 9 8 8
------ ------ ------ ------ ------
Natural gas (Mcf/d) 4,699 4,020 4,742 4,805 5,745
------ ------ ------ ------ ------
Boe/d (at 6:1) 795 680 799 809 966
------ ------ ------ ------ ------
Average reference price
Brent ($ per bbl) $65.17 $59.75 $57.67 $58.16 $66.88
Botas reference ($ per Mcf) (2) 8.09 9.67 9.41 10.07 10.32
------ ------ ------ ------ ------
Average realized price
Crude oil ($ per bbl) 63.67 56.24 55.88 44.51 50.35
Natural gas -- Turkey ($ per Mcf) 7.96 9.35 9.20 9.93 10.20
------ ------ ------ ------ ------
Average operating netback
($ per boe at 6:1) (1) 33.43 38.69 40.41 44.56 46.48
------ ------ ------ ------ ------
Notes:
(1) The table includes non-international financial reporting standard measures, which may not
be comparable with other companies. Funds flow from operations is calculated as net income
(loss) for the period adjusted for non-cash items. Operating netback is calculated as
petroleum and natural gas sales less royalties, production expenses and transportation costs.
See management's discussion and analysis for further discussion.
(2) Boru Hatlari ile Petrol Tasima Anonim Sirketi (Botas) owns and operates the national
crude oil and natural gas pipeline grids in Turkey and purchases the majority of Turkey's
natural gas imports. Botas regularly posts prices, and its Level 2 wholesale tariff is shown
herein as a reference price. See the 2016 annual information form for further discussion.
2017 outlook
The corporation is planning a capital expenditure program of $13-million to 15-million (net) in 2017 focused entirely on the shallow gas business. This level of spending is contingent on closing the subsequent West Thrace deep rights sale and some stabilization of the Turkish lira exchange rate and the Botas reference price (denominated in Turkish lira). The capital program is expected to include drilling of up to seven wells (gross) in the shallow formations on the TBNG JV lands and Banarli licences, targeting 2017 exit rate sales of approximately 1,500 barrels of oil equivalent per day (net). This outlook is lower than earlier preliminary projections due to delays in completing the interlinked transformational transactions, including the Banarli farm-in, the West Thrace deep rights sale, the TBNG acquisition and the offering, reflecting a longer-than-expected Turkish government approval process.
The corporation also expects that the Banarli farm-in program, fully financed by Statoil and operated by Valeura, will commence with the spudding of a deep exploration well in second quarter 2017 under phase 1 of the Banarli farm-in and the start of the 3-D seismic acquisition in third quarter 2017 under phase 2.
2016 year-end corporate reserves report
The corporation has completed its independent reserves evaluation as at Dec. 31, 2016. This evaluation was conducted by DeGolyer and MacNaughton of Dallas, Tex., for the corporation's properties in Turkey in its report dated March 14, 2017. This evaluation was prepared using guidelines outlined in the Canadian oil and gas evaluation handbook and is in accordance with National Instrument 51-101 (standards of disclosure for oil and gas activities). Additional reserves information as required under National Instrument 51-101 is included in the 2016 annual information form filed on SEDAR. All of the corporation's reserves are located in Turkey.
The D&M reserves report does not give effect to the TBNG acquisition.
TBNG acquisition pro forma
On Feb. 24, 2017, the corporation announced the successful completion of the TBNG acquisition. TBNG holds a 41.5-per-cent participating interest in the TBNG JV. The attached gross reserves volume table 2 sets out pro forma combined reserves information for Valeura and TBNG as at Dec. 31, 2016.
PRO FORMA COMPANY GROSS RESERVES VOLUMES AND VALUES POST-TBNG ACQUISITION (1) (2) (3)
Pro forma reserves and net present value at 10% before tax
Year ended Dec. 31, 2016
Valeura (4) TBNG (5) Pro forma
Reserves volumes (Mboe)
Proven reserves 1,567 1,318 2,885
Proven plus probable reserves 4,704 4,198 8,902
Proven plus probable plus possible reserves 7,230 6,315 13,545
Reserves value -- NPV10 before tax ($MM)
Proven reserves $21.0 $14.2 $35.2
Proven plus probable reserves 61.8 47.9 109.7
Proven plus probable plus possible reserves 103.8 80.5 184.3
Notes:
(1) Valeura's reasonable expectation of how the TBNG acquisition, had it occurred on
or before the effective date of the information set out in Valeura's statement of
reserves data and other oil and gas information contained in the 2016 AIF, would
have affected such information.
(2) D&M's valuations for reserves in Turkey are prepared in U.S. dollars and have
been converted for purposes of this illustration to Canadian dollars assuming a
Canadian-dollar/U.S.-dollar exchange rate of 0.74 for the year-end 2016 values.
(3) The forecast prices used in the calculations of the present value of future net
revenue for year-end 2016 are based on the D&M Dec. 31, 2016, forecast prices, which
are contained in the 2016 AIF for the year ended Dec. 31, 2016.
(4) D&M evaluated reserves as at Dec. 31, 2016, on the company's Banarli lands (100-
per-cent working interest) and on the TBNG JV lands (40-per-cent working interest).
(5) TBNG's working interest in the TBNG JV lands is 41.5 per cent. TBNG's reserves
as of Dec. 31, 2016, as presented were prepared internally (non-independent) by
Valeura by making a mathematical adjustment of the company's TBNG JV lands reserves
that represents a 40-per-cent working interest to reflect TBNG's 41.5-per-cent
working interest.
Year-end 2016 company reserves summary
The attached gross reserves volumes table summarizes company reserves in Turkey and associated net present value discounted at 10 per cent before tax at Dec. 31, 2016, and Dec. 31, 2015, using forecast prices.
COMPANY GROSS RESERVES VOLUMES AND VALUES (1) (2) (3) (4)
Reserves (Mboe) Net present value at
10% before tax
($ millions -- $MM)
2016 2015 2016 2015
Proven developed producing 470 509 $9.4 $17.3
Developed non-producing 405 513 6.9 13.4
Undeveloped 692 805 4.7 10.4
Total proven (1P) 1,567 1,827 21.0 41.1
Probable 3,137 3,634 40.8 75.9
Total proven plus probable (2P) 4,704 5,461 61.8 117.0
Possible 2,526 3,121 42.0 71.6
Total proven plus probable plus possible (3P) 7,230 8,582 103.8 188.6
Notes:
(1) Note the oil and gas advisories and reserve and resource definitions.
(2) 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 0.74 for the
year-end 2016 values and 0.72 for the year-end 2015 values.
(3) The forecast prices used in the calculations of the present value of
future net revenue for year-end 2016 are based on the D&M Dec. 31, 2016,
forecast prices, which are included in the 2016 AIF filed on SEDAR. The
natural gas forecast prices (in U.S. dollars per thousand cubic feet) are
lower than 2015 reflecting a weaker Turkish lira, reduced costs of imported
gas and resulting lower Botas reference prices.
(4) Due to rounding, summations in the table may not add.
The attached tables on reserves and commentary summarize information contained in the D&M reserves report for Turkey. The D&M reserves report does not give effect to the TBNG acquisition.
D&M evaluated reserves as at Dec. 31, 2016, on the company's Banarli licences (100-per-cent working interest) and TBNG JV lands (40-per-cent working interest). The reserves are primarily natural gas, but small oil volumes are assigned to a number of wells.
The year-end 2016 reserves by principal product type are summarized in the attached by principal product table.
2016 YEAR-END COMPANY GROSS RESERVES VOLUMES BY PRINCIPAL PRODUCT TYPE (1)
Reserves category Light and medium crude oil Conventional natural gas Total oil equivalent
(Mbbl) (Bcf) (Mboe)
Proven 6 9.4 1,567
Probable 3 18.8 3,137
Total proven plus probable 9 28.2 4,704
Possible 5 15.1 2,526
Total proven plus probable plus possible 14 43.3 7,230
Note:
(1) Note the oil and gas advisories and reserve definitions.
The forecast oil and natural gas prices and cost escalation rates used in the D&M reserves report are shown in the attached forecast prices table.
FORECAST PRICES AND COST ESCALATION RATES (1)
Year Conventional natural gas Light and medium crude oil Cost escalation
Banarli (U.S.$/Mcf) TBNG (U.S.$/Mcf) Banarli (U.S.$/bbl) TBNG (U.S.$/bbl) %/year
2017 $5.99 $6.11 $42.15 $42.15 0.0
2018 6.20 6.33 45.27 45.27 2.0
2019 6.43 6.57 48.50 48.50 2.0
2020 6.69 6.83 52.64 52.64 2.0
2021 6.96 7.11 55.31 55.31 2.0
2022 7.28 7.43 56.42 56.42 2.0
2023 7.61 7.77 58.39 58.39 2.0
2024 8.07 8.24 61.28 61.28 2.0
2025 8.55 8.73 64.26 64.26 2.0
2026 8.72 8.90 65.55 65.55 2.0
2027 8.89 9.08 66.86 66.86 2.0
2028 9.07 9.26 68.20 68.20 2.0
2029+ +2.0%/year +2.0%/year +2.0%/year +2.0%/year +2.0%/year
thereafter thereafter thereafter thereafter thereafter
Note:
(1) The forecast prices used in the calculation of the present value of future net
revenue are based on the D&M Dec. 31, 2016, forecast prices, which are included in
the 2016 AIF filed on SEDAR.
The attached reserves reconciliation table sets forth a reconciliation of reserves changes in 2016.
YEAR-END 2016 COMPANY GROSS
RESERVES RECONCILIATION
Changes 1P (Mboe) 2P (Mboe)
At Dec. 31, 2015 1,827 5,461
Technical revisions 32 -465
Discoveries 0 0
Economic factors 0 0
Production -292 -292
At Dec. 31, 2016 1,567 4,704
The attached reserve life index table sets forth the RLI for total proven and proven plus probable reserves based on the annualized fourth quarter production rates of 1,180 barrels of oil equivalent per day, 809 boe per day and 795 boe per day for the years 2014, 2015 and 2016, respectively.
RESERVE LIFE INDEX (RLI) (1) (2)
RLI (years) 2016 2015 2014
Total proven 5.4 6.2 4.0
Total proven plus probable 16.2 18.5 13.5
Notes:
(1) Note the oil and gas advisories.
(2) Based on Valeura's assessment.
About Valeura Energy Inc.
Valeura Energy is a Canada-based public company currently engaged in the exploration, development and production of petroleum and natural gas in Turkey.
We seek Safe Harbor.
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