Malcolm Shaw again today I got two notes last night from long time readers who were concerned that my note yesterday represented some kind of lack of confidence in Valeura's upcoming results at Inanli and Devepinar. On the other hand, I also got two notes from people who appreciated the reminder about the concepts of concentration risk and diversification. Aaaaaaand, of course I noticed that the resident message board troll on Stockhouse (yes that's you castlebury) decided to make its own fabricated spin on things (tsk, tsk, anonymous troll). I suppose the message sometimes really is in the eye of the beholder.
Look, my writing on Valeura spans a period of years and I think my outlook has been pretty clear along the way as a blend of cautious optimism mixed with unbridled bullishness. As it stands today, Valeura has confirmed the discovery of a multi-TCF-potential basin centred gas accumulation (BCGA) in the Thrace Basin and is in the process of delineating the extent of the play and establishing the potential for commercial flow rates. Inanli is a big part of that process, as it is the second "real" well into the play and will be the first well that will see zones flowed back and cleaned up properly, as opposed to being flowed for a couple of days (due to equipment constraints) and then left to soak in completion fluid for nine months. Devepinar will be the third well and, to be clear, I have zero doubt that it will find overpressured gas-charged sands (it's been pointed out that Devepinar is drilling between two historical deep wells that were found to be overpressured, but were never tested). The scale, fiscal regime, operating environment, infrastructure, and strategic nature of the Thrace BCGA are all top-tier. There's a reason why Statoil/Equinor farmed in here and has way overspent relative to initial expectations of what the earn-in would entail. This is the big leagues and there'a an absolutely massive prize on the table, full stop.
When I say that no one knows what the future holds, I am talking about flow rates from Inanli (and Devepinar) because, well, no one knows... and that's the whole point. All indications are that Inanli should have superior deliverability relative to Yamalik for reasons that I have laid out in detail before, but until those rates are on the tape, that's the speculation here. Add in the fact that no one really knows what market expectations are, and you've got yourself a pretty wide range of potential outcomes, wouldn't you say? I've said before that even 0.5 mmcf/d of reasonably stable flow from a single-zone vertical completion could translate very nicely into a horizontal well with a 30-40 stage completion, which is exactly the kind of thinking that has unlocked gigantic gas reserves throughout North America. I see no reason why that won't be the case in the Thrace, but when my friend said he had 65% exposure to a single speculative story, that got my radar up. It's one thing for a well-seasoned speculator to do that knowing how risky it is, but this guy is not that experienced and has a real day job. Are others in the same position? If so, why? I could easily name half a dozen stocks that I think could go up 3-5x this year depending on the results they turn up which makes VLE non-unique in its potential upside, so why take such concentrated risk? That was my point yesterday, and my only point.
Do I have any doubt that this is a BCGA? Nope. Am I bullish? You bet. Maybe this will put things in perspective. Below is a pie chart of my holdings in one account of mine showing the relative weights across, well, a lot of names. I'm pasting it here for people who, like my friend, may not fully appreciate the concept of diversification.
Like I said, I like to swing for the fences as much as the next guy, but I don’t swing so hard that if I miss I will cripple my portfolio. I’ve learned that the hard way over the years and even though I think VLE's “eventual” success is inevitable, I'm not willing to risk my year (or years) if something goes off the rails at Inanli... simple as that. Capiche? Should Inanli flow at higher rates than Yamalik? I would certainly think so based on the reported natural fracturing and "sweet spot" descriptions. The concept of natural fractures enhancing permeability/deliverability in oil and gas wells has been demonstrated a thousand times over around the world, but I still don't bet the farm when speculating. Rule #1 of a speculator might be something like "don't get emotional about a stock". Rule #2 might be something along the lines of ensuring that one has a the ability to survive being wrong in order to live to speculate another day. Maybe "hope for the best, plan for the worst" covers it... I think by now my point is probably clear.
So, despite my conviction in VLE, when a friend tells me that they have that kind of concentration in a single stock that is a speculation (albeit a very well founded one in my view), that sets off warning alarms for me. That’s all. Speculating on future outcomes with incomplete data is a big part of what I do every day, but that doesn’t mean that I don’t hold myself responsible for the risk I’m taking on in the process. VLE is one of my largest positions, so I’m putting my money where my mouth is, but my diversification is such that I don’t live and die by the VLE quote, that’s all.
Here are two notes from the past that I could easily write again today and I think large parts of them would be equally relevant. Between now and the Inanli test results there’s little else to say that I haven’t said before.
https://hydracapital.ca/hydra-blog/valeura-sell-off-stacks-the-odds-in-longs-favour
https://hydracapital.ca/hydra-blog/valeura-energy-so-now-what
What's Valeura worth? DCF models seem to come to an unrisked NPV of around $3 billion (Cormark had an unrisked case at around that level, as did a model that I built some time ago), but until commercial flow rates are established, that is just the dream. The reality will be formed by hard data that should start hitting the market some time in late April or May when Devepinar proves continuity 20km west of Inanli and Inanli flow test data starts coming back. In the meantime, the market can place its bets. Personally, I like my odds and relative exposure with VLE. If I was short, I'd be a little nervous about a major or strategic investor coming in and spoiling my fun, because everything that Valeura and Equinor are doing is another step on the path of de-risking the play and 10 T's of gas in a captive market on the doorstep to Europe isn't something that comes along every day.
Time will tell.