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Valeura hit by market turbulence

The Turkish shale gas developer sees its appraisal programme results cause ripples amid nervous oil and gas investor sentiment

Turkey-focused Canadian independent Valeura Energy has had a busy second half of 2019, announcing the results of no less than five production tests on its unconventional gas assets in the Thrace basin. Unsurprisingly, investors have closely scrutinised the results.

A majority of the tests—four at the Inali-1 well and a fifth at Devepinar-1—were positive. The exception was the fourth Inanli-1 result, which was more disappointing. Yet it was this latter set of findings that had a substantial impact on the share price.

This begs the question of whether, in an environment where ESG and energy transition issues are racing up the investment agenda, oil and gas investors’ antennae are more sensitive to bad news than good— which would be particularly ironic in Valeura’s case as its success offers the opportunity to significantly lower Turkey’s carbon footprint. Petroleum Economist spoke to the firm’s CEO Sean Guest to find out more.

The share price has been on something of a rollercoaster ride, yes?
Guest: You can see the response to the announcement of each test in our share price, it closely mimics the results. The first few tests we did in the deep [intervals] really over-performed what the petrophysics suggested we’d see, and the share price ramped up. Then we had one less encouraging test [at Inanli-1], coupled in the same week with [the US’s] Turkey sanctions, and it really hammered the price.

$7.30/mn Btu Realised Turkish gas price equivalent

It has been frustrating because we have tried to say to people, ‘this is a campaign of testing, this is two wells a long way apart, this is very different rock quality and this is about learning’. What we would have liked to have done was to hide away on our own, acquire all of the tests and come to market with all of the data, to avoid the high volatility in response to each zone. But, unfortunately, it does not work like that, and we want to be transparent to our shareholders anyway.

Do you think that attitude comes from the increasing ESG scrutiny to which investors are subjecting oil and gas firms?
Guest: Yes, to some degree. We have moved over to London, which is a market that is definitely better than Toronto at understanding the role the industry will continue to play as the world focuses more on ESG. But it still would be very difficult to raise money in the current environment. We really hope that shareholders, institutions and the public as a whole will get into the data and start to see that bringing gas on and backing out coal is a very positive development. There is obviously a significant debate on how and when you can move to net zero carbon emissions, but we believe gas is an important transition fuel towards that objective.

What we see in Turkey is, because of the significant volume of gas imports, the government is trying to limit gas demand growth and is instead mining more lignite and burning more coal. We are sympathetic to that because energy and gas imports create a huge trade imbalance, so the government is trying to prioritise any energy they can produce domestically. It is just unfortunate that it comes with a carbon intensity penalty, as the carbon emissions from lignite are twice what you get from gas for the same generation output. So, developing domestic gas in Turkey is a big step forward from an environmental perspective.

You mentioned your London listing. How has that gone?
Guest: When we came over to London, we knew we were not going to immediately have liquidity. Compared to some other oil and gas companies, we are very liquid in Toronto. And we knew that without having done an equity raise to create new shares for the London market, very few people would take their shares out of our highly liquid market in Toronto and put them into a relatively illiquid one. That said, we are well-placed for London trading to take off, if and when we raise money in the future.

What we were hoping in the nearer term was for our London listing to help smaller UK-based institutions meet their compliance req u i rement s—by being admitted to an FCA-regulated market— so that they could buy our shares wherever they are traded. We have seen some of that buying, but maybe not as much as we would have liked. Again, I think probably a lot of it is down to those headwinds against the whole oil and gas industry. I also think people are always looking for positive news flow.

“We had one less encouraging test and it really hammered the price”

And we did get a bit of that before we got hammered by the less encouraging Inanli-1 test results. But we are now trading at a steep discount, just above our cash position. We also have cash in the bank, we have positive cash flow from our current production, and we are still appraising this big discovery that could potentially be a game changer. So, there is lots of upside to offer. 

Are your major shareholders keeping the faith?
Guest: On the one hand they are disappointed with the share price. But, on the other hand, our larger shareholders are inclined to step back and look at the company for what it is—a business with about $40mn in cash, positive cash flow, reserves on the books that can be converted into production, and a new play that, every time we stimulate and test a well, it flows gas.

That is really exciting. Looking around at a lot of oil and gas companies, we are in quite a good state. Speaking of good news, your realised Turkish gas price is the equivalent of $7.30/mn Btu. How are you achieving that in the current global gas market? Guest: What we are seeing is that the Turkish government resets our price every month. We believe that reflects what it costs them to buy gas internationally and import it. They are not trying to subsidise domestic production, so that is, in effect, a ‘true’ price.

The question is therefore how European prices can be at $3-4/ mn Btu and Turkey’s be that high. We do not know for sure, but it could be related to their [European’s] take-or-pay contracts with Russia. They backed out a lot of Russian gas as they brought on gas from Azerbaijan last year. So, they could be really at the limit of their flexibility on their Russian contracts and exposed to having to bring in this more expensive oillinked gas.

Our current price is obviously high but, from our point of view, it is more important that we do not see the volatility that you get in European prices. If we were sitting here 12 months ago, people might say, ‘well, the UK is paying $10-11/mn Btu for gas, how come you are only getting around $6.50/mn Btu’. Now we are on the right side of this. So, while there may be geopolitical volatility associated with Turkey, in terms of a gas price, it does not have

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