Cannacord On VLE
Valeura provided an operational update including a solid test rate from the company's first exploration well on its 100% operated Banarli licence. The Bati Gurgen-1 exploration well tested 3.4 MMcf/d from 13 metres of perforated pay in the Osmancik formation (fm.). Valeura has identified an equivalent sized zone uphole in the Danismen fm. The company intends to tie back the initial zone by mid-Q1/16 and complete the uphole opportunity once the Osmancik begins to decline. Material impact on production To place this success into perspective, the company's net production averaged 4.8 MMcfe/d in Q4/15. Valeura realized an average gas price of $9.90/Mcf which should result in very attractive netbacks. Assuming the company ties in only its two recent exploration wells, we estimate a base 2016E NAV of C$1.80/sh. Accounting for a balanced 2016 drilling program, we estimate a risked 2016E NAV of C$3.55/sh. We have updated our valuation to account for the new discoveries and maintain our BUY recommendation. Banarli basin-centered gas play potential game changer Valeura was awarded the Banarli licence in April 2013, and in our view, investors are now being rewarded for the strategic acquisition. Management has long held the view that Banarli could be significant for the company's growth; the first two exploration locations appear to support this view while also validating management's technical expertise. Yayli-1 is now expected to test a separate geological concept known as a basin-centered gas play (BCGP). While Yayli-1 has the same conventional opportunity as Bati Gurgen-1 it also has an opportunity to test the deeper Teslimkoy fm (BCGP). The company is currently conducting an injectivity test to better design a frack program. Once completed, a positive frack result from the Teslimkoy fm could be a game changer for the company. Capital requirements would be significant but so could the prize. The company has indicated that once it gathers sufficient technical data to verify the BCGP opportunity, it will look to farm out its interest to accelerate commercialization. In the interim, we expect the company has sufficient inventory in the conventional formations for a multi-year drilling program at Banarli. Valuation With no direct exposure to volatile global commodity prices, Valeura stands out in our view as a highly undervalued international energy investment. The company benefits from a low-cost service environment but still realizes significantly higher gas prices than North American producers. Using a DCF model we estimate a 2016E 2P NAV of C$1.80/share and a risked NAV of C$3.55/share, which is well above the current share price of C$0.72. As the company trades below $1.00/share and has a market cap below $100 million we currently do not estimate a target but maintain our BUY recommendation.