Valeura Energy Inc T.VLE

RE:RE:RE:Cormark update

[clear2012]

Garett Ursu, CFA, [phone], [e-mail] Michael Mueller, P.Geo., Associate, [phone], [e-mail]

MORNING MEETING NOTES MARCH 2, 2018

Recommendation: Buy Target Price: $12.00

Valeura Energy Inc. (VLE-TSX)
Reinstating Estimates With $12.00 Target; Equity Raise To Fund Multi-Well BCGA Delineation Program

Current Price
52 Wk High
52 Wk Low
NAV $1.50 P/NAV 4.0x Net Debt - 18E (MM) -$40.7 D/EBITDA - 18E NA DPS NA

Unless otherwise denoted, all figures shown in C$

Investment Thesis:

Valeura offers investors exposure to a potentially massive unconventional resource play in one of the most favorable natural gas regimes in the world.

Highlights: Event

We are reinstating estimates on Valeura Energy following the closing of the previously announced equity offering. As an underwriter on the offering, Cormark has been restricted from publishing research until today.

Details

On February 6th, it was reported that a DeGolyer and MacNaughton (“D&M”) report assigned ~10.1 Tcf of Mean Unrisked prospective recoverable resource to Valeura’s working interest in its Thrace Basin BCGA. D&M assigned a Mean Risked resource estimate of ~5.2 Tcf to the play. Of note, the Mean Unrisked estimate includes 236 MMB of condensate in the gas stream while the Mean Risked includes 165 MMB of liquids. D&M assigned a Low (P90) case estimate of ~3.2 Tcf with a High (P10) case of ~20.1 Tcf. The Mean Risked estimate includes a 70% Chance of Discovery and 74% Chance of Development. Following the resource report, Valeura raised $60 MM in equity to fund a delineation and development program through 2019. Activity will include tie-in of Yamalik-1 in Q2/18, three delineation wells and a pilot production well. Given (now funded) activity near term we expect Valeura to demonstrate material production, contingent resource and reserves growth this year.

Recommendation

We are reinstating our Buy rating on Valeura and have increased our target to $12.00 from $5.00 following the equity raise and D&M resource report.

T arget $12.00 Proj. Return 103% Basic Sh. (O/S) 83.7 FD Sh. (O/S) 90.3 Mngt. & Dir. 3.4

- Pct. of basic 4% Mkt. Cap. (MM) $495 Float (MM) $475 EV (MM) $455

2017E 2018E 2019E

807 A 810 1,150

934 A 760 1,550 1,024 A 875 1,740 977 953 1,850 936 850 1,575

99% 93% 87% -7% -19% 81%

A $0.01 $0.02 A $0.01 $0.03 A $0.02 $0.04

$0.02 $0.04

$0.05 $0.13

NYMEX WTI (US$/Bbl) $306.43
EV/EBITDA
EV/BOE/d $534,881 $304,204

$5.92 $8.27 $0.43

Dividend Yield

Fiscal YE Dec.

Production (BOE/d)

CFPS

NA

Q1
Q2
Q3
Q4
FY
% Gas

Growth
Q1 ($0.04) Q2 $0.01 Q3 $0.02 Q4 $0.02 Diluted $0.01

$345.38 $345.38 106.1x 41.2x

Company Description:

Valeura Energy is a Canadian-based junior International E&P company with operations in Turkey. Led by the previous managers of Verenex Energy, Valeura is building critical mass in high-netback gas resource plays in the Thrace Basin.

Source: BigCharts.com, March 1, 2018

During the past twenty-four months, Cormark Securities Inc., either on its own or as a syndicate member, participated in the underwriting of securities for Valeura Energy Inc.

Our disclosure statements are located on the second last page of this report

Equity Offering:

Garett Ursu, CFA, [phone], [e-mail] Michael Mueller, P.Geo., Associate, [phone], [e-mail]

MORNING MEETING NOTES MARCH 2, 2018

Yesterday Valeura closed its previously announced equity financing. The original offering of ~8.8 MM common shares at $5.70 per share was upsized to ~10.5 MM common shares at $5.70 per share for total gross proceeds of ~$60 MM (~$56.0 MM net to Valeura).

Proceeds from the equity financing will be used to fund Valeura’s participation in the delineation and development of a potential BCGA in the Thrace Basin of Turkey as follows:

o Completion and tie-in of Yamalik-1 for ~$3.1 MM in Q2/18;
o Workover of Hayrabolu-10 for ~$2.1 MM currently in Q4/18;
o Approximately $9.5 MM to drill and test the West Thrace #1 deep well as early as Q4/18; o Drilling and testing the Banarli #3 deep well for ~$15 MM, expected in Q1/19;
o Spending ~$7 MM on facilities and tie-in for four deep wells in Q4/18 to Q1/19;
o A pilot production well at Banarli in 2019 for ~$10.8 MM planned for 2019; and
o Other sundry facility tie-in work, G&G studies and 3D seismic.

Cormark Securities participated in the underwriting of the securities and as such, has been restricted from publishing research on Valeura Energy until today.

Resource Report:

Just prior to the announcement of the equity raise (and Cormark being restricted from publishing) an independent resource report prepared by DeGolyer and MacNaughton (“D&M”) was released by Valeura providing a range of potential values for the undiscovered prospective resource captured by the Company in the Thrace Basin.

The Basin-Centered Gas Accumulation (BCGA) was attributed a Mean Unrisked working interest prospective resource estimate of ~10.1 Tcf that included 236 MMB of condensate within the gas stream and a Mean Risked working interest estimate of ~5.2 Tcf that included 165 MMB of condensate within the raw gas. While sales gas volumes would be lower given shrinkage associated with stripping out the condensate, we are including the condensate on an Mcfe basis to correlate with the D&M report.

The High case estimate (P10) calculated by D&M was ~20.1 Tcf (with 504 MMB of condensate) while the Low case estimate (P90) totaled ~3.2 Tcf (including 45 MMB of condensate). The Best case estimate (P50) was ~7.7 Tcf of recoverable resource.

For reference, the Low, Best and High case estimates reflect recovery factors of ~25%, ~40% and ~50%, respectively, that were derived by D&M based on analog plays around the world.

Figure 1: Valeura Working Interest Prospective Resources

Source: Company Reports, Cormark Securities Inc.

Our disclosure statements are located on the second last page of this report

Garett Ursu, CFA, [phone], [e-mail] Michael Mueller, P.Geo., Associate, [phone], [e-mail]

MORNING MEETING NOTES MARCH 2, 2018

The risk factor that differentiates the Mean Unrisked and Risked estimates of 10.1 Tcf and 5.2 Tcf incorporates a ~70% Chance of Discovery with a ~74% Chance of Development. The relatively high Chance of Discovery is a result of the hundreds of legacy wells in the Thrace Basin backing up the geological model for the Teslimkoy/Kesan formations, the over-pressured gas found and tested at Yamalik-1 as well as seven deeper legacy wells on the fringe of the Thrace Basin which also encountered over-pressured gas below ~2,500 m (Figure 2).

The high Chance of Development has been attributed to the application of existing fracture technology, reasonable well depths and costs, sales pipeline infrastructure being present in the area and the existence of domestic markets for gas and condensate in Turkey.

The combined Chance of Discovery and Chance of Discovery result in an overall Chance of Commerciality of 51.1%, resulting in a Risked Mean resource estimate that is just over half the size of the Mean Unrisked resource.

Due to the play’s development being immature, having only one well (Yamalik-1) with extensive fracture stimulation in the BCGA prospect and a lack of long-term production history from the Teslimkoy/Kesan formations, reserves or contingent resources have yet to be assigned to the play.

Resources were assigned to Valeura’s 50% interest in the Banarli license (assuming full earn-in by Statoil), the Company’s 31.5% interest in the West Thrace JV and an 81.5% interest in South Thrace acreage. We note that the working interest resource estimates (reasonably) assume full earn-in by Statoil.

Figure 2: Banarli BCGA Play

Source: Company Reports

Operational/Activity Update:

The Yamalik-1 discovery well is expected to be tied-in to Valeura’s existing sales gathering system in Q2/18 (June) for US$3.1 MM. As Yamalik-1 begins producing, the additional data will (we anticipate) provide Valeura and D&M with a better understanding of the play to apply to type curves and well economics, allowing for the maturation of prospective resources into contingent resource categories or even PDP, proved and/or proved plus probable reserves by the end of this year.

Our disclosure statements are located on the second last page of this report

Garett Ursu, CFA, [phone], [e-mail] Michael Mueller, P.Geo., Associate, [phone], [e-mail]

MORNING MEETING NOTES MARCH 2, 2018

A three well delineation drilling program is planned with Statoil beginning in Q4/18 with Banarli #2 this summer followed by one well in the West Thrace block and a third well at Banarli. The first well (named Banarli #2 here for convenience) will be the second (and final) fully carried well as part of the Banarli farm-in agreement (to be drilled and tested for a minimum cost of ~US$10 MM). That well is currently budgeted at ~US$15 MM, in line with future delineation wells not drilled from pads or as a larger program.

We expect Banarli #2 to be drilled down to ~5,000 m TVD due to the favourable chance of extending the column of hydrocarbon-bearing sands deeper into the BCGA. Note that the Yamalik-1 well was drilled to 4,196 m TVD and the total depth was limited by rig capability and well completion. The base of the Yamalik-1 well was still within gas-bearing sands that were successfully flowed during testing.

Valeura’s existing infrastructure and market is capable of handling sales volumes of at least 35 MMcf/d (potentially 50 MMcf/d based on nameplate capacity) with less than 10 MMcf/d currently moving through the system, providing capacity for early production coming from future delineation wells.

Valeura will also now recomplete the Hayrabolu-10 well west/northwest of Yamalik-1 at an expected cost of $2.1 MM (net to VLE). Hayrabolu-10 was drilled in early 2013 to a TVD of 4,054 m and is expected to be recompleted in Q4/18. Given gas production from Yamalik-1 in the 3,400-4,200 m TVD range, Hayrabolu-10 will not have to be deepened to access the expected gas column.

Of note, with three new deep exploration wells (and one recompletion) expected to prove up the existence of a BCGA, Valeura is now expecting to drill a pilot production well off an existing pad at some point in 2019 to prove (1) development “type curve” IP rates, (2) well costs more representative of a larger development pad program and (3) representative economics for the play go forward. With the location not yet chosen, we would note that the pilot well could complete an entire column of rock to maximize rates or could even be a horizontal well if deemed appropriate.

Again, current drilling / tie-in plans (and therefore major catalysts for investors) over the next 24 months include:

o Tie-in of Yamalik-1 - Q2/18;
o Banarli-2 deep well – Q3/18;
o Workover of Hayrabolu-10 – Q4/18 or Q1/19; o West Thrace #1 deep well - Q4/18;
o Banarli-3 deep well - Q1/19; and
o Pilot production well at Banarli in 2019

Resource Impact:

With just one well into the BCGA to date and limited test results from that well, prospective resources were assigned to the play without economics (expected later with established type curves, contingent resources, cost estimates, a firm development plan and further delineation). As such, we have attempted to assign a range of values for Valeura shareholders based on several assumptions that may or may not ultimately prove true (either optimistic or conservative).

We have modeled individual Banarli BCGA well type curves, costs, declines, and EURs based on the Pinedale play in the US given that play’s similar depth, pressure regime, CGRs, aerial extent, gas saturation, vertical column and vertical development plan. We have also made assumptions about potential IP rates at Banarli based on published test results and the impact of downhole issues while testing Yamalik-1.

Our disclosure statements are located on the second last page of this report

Our current well model assumes an IP-30 rate of 7.0 MMcf/d with a CGR of 25 B/MMcf, resulting in an EUR of 7.4 Bcf and 8.5 Bcfe (including liquids). We have also assumed a development well cost of US$8.0 MM (at the top end of our ultimate expected range) with an additional $2.0 MM (gross) per well for tie-in and related infrastructure. While pad-based development wells could ultimately cost just US$6.0 MM, infrastructure costs could be higher than we expect based on material peak volumes.

Using operating/transportation costs of $11.00/BOE, current Turkish gas and oil pricing and a 12.5% royalty rate, we calculate an individual well NPV (BT-10%) of US$9.4 MM with a 20 month payout and 37% IRR.

Beginning with the various resource estimates in the D&M evaluation, we then applied our individual well production and cash flow profiles to determine a realistic development plan over a 30-year resource life that then estimated aggregate absolute and discounted cash flows for the play.

These potential values range from just over US$1.1 billion to more than US$6.0 billion on a discounted basis (~US$6.4-38.5 billion absolute aggregate cash flow). The Low (P90) and Mean Risked cases result in an estimated attributable value to Valeura of US$1.1-1.7 billion or ~$14.58- 22.67 per share outstanding (assuming the exercise of all dilutives).

Figure 3: Valeura BCGA Value Scenarios

Source: Company Reports, Cormark Securities Inc.

Other:

Garett Ursu, CFA, [phone], [e-mail] Michael Mueller, P.Geo., Associate, [phone], [e-mail]

Prospective Resource Case

MORNING MEETING NOTES MARCH 2, 2018

Prospective Resource (Bcf) 30-Year Cumulative Cash Flow (US$ MM) NPV ($US 10% BT)

Low Best High Mean

Risked Mean

3,229 $6,380 $1,115

7,652 $14,624 $2,466

20,077 $38,477 $6,295

10,137 $19,535 $3,255

5,182 $10,063 $1,735

Valeura Share Value (C$ FD)

$14.58 $32.22 $82.22 $43.24

An independent evaluation of reserves conducted by D&M will be released this month though these reserves will not include Yamalik-1. Valeura provided internal estimates of proved plus probable gross reserves of 7.8 MMBOE attributed to its Thrace Basin properties.

The Company is anticipating the 2P NPV of future net revenue before tax for 2017YE to be roughly in line with 2016YE numbers due to the increase in reserves being offset by reduced forecast gas prices.

With details of the BCGA delineation program in flux as 3D seismic is further refined, the actual locations and timing of wells may change significantly. As well, while we currently expect 1-2 shallow gas wells to be drilled each year to maintain production and cash flow, the timing and targets of those wells have not been released. We currently expect shallow gas volumes to decline through the next several years as focus remains on delineation and development of the BCGA.

We expect formal 2018 guidance and budget later this year once seismic has been examined and discussions with Statoil progress. We wold note that our current estimates reflect Cormark assumptions about drill/completion/tie-in times for all deep wells as well as our decline rate and IP rate assumptions for the first wells into a new basin. We therefore expect our estimates to change materially throughout the year.

Finally, we would note the material increase in liquids volumes in our 2018 and 2019 forecasts represent our estimates of CGRs over time.

Our disclosure statements are located on the second last page of this report

$22.67

Figure 4: Cormark Estimates

Garett Ursu, CFA, [phone], [e-mail] Michael Mueller, P.Geo., Associate, [phone], [e-mail]

MORNING MEETING NOTES MARCH 2, 2018

Q4/17 2017E 2018E 2019E
New Old % New Old % New Old % New Old %

Production

Liquids (B/d)
Natural gas (MMcf/d) Production (BOE/d)

10 10 0% 5.8 6.2 -6% 977 1,038 -6%

8 8 0% 5.6 5.7 -2% 936 952 -2%

62 9 549% 4.7 6.9 -31% 850 1,160 -27%

210 5 4107% 8.2 8.3 -1% 1,575 1,380 14%

Financial

Cash flow ($MM) CFPS ($/sh)
Net Capex ($MM) Net Debt ($MM)

1.2 1.4 -9% $0.02 $0.02 -8% 2.1 1.6 32% (4.6) (5.3) nm

0.5 0.6 -20% $0.01 $0.01 -19% 13.8 13.3 4% (4.6) (5.3) nm

4.0 7.9 -50% $0.05 $0.10 -55% 24.0 12.5 92% (40.7) (0.7) nm

11.6 10.0 17% $0.13 $0.13 3% 36.1 13.0 177% (16.3) 2.3 nm

Source: Company Reports, Cormark Securities Inc.

Valuation/Conclusion:

With a three well delineation drill program, one workover and a pilot production well now planned, we expect material prospective resource to convert to contingent resource by year-end 2018 (and especially year-end 2019). A longer term test of Yamalik-1 following tie-in should also drive initial PDP, proved and proved plus probable reserves this year.

The initial D&M report illustrates the potentially massive upside inherent in Valeura’s working interest in what we expect to be one of the largest gas finds in the world in recent memory (especially onshore). We believe industry will begin to more closely examine the potential captured resource in the Thrace Basin and begin to model economics based on long term price decks. In this, we have attempted to put a value on the captured resource (again, with numerous caveats and assumptions) in an attempt to provide investors with similar information

With a range of more than $14.50 per share up to more than $82.00 a share of potential value net to Valeura, we have taken a relatively conservative approach to our target price. We have taken our estimate of ultimate DCF value of the Risked Mean resource identified by D&M (~5.2 Tcfe) and discounted that by 50% to incorporate risks to the project associated with market volatility, perceived geopolitical risk in Turkey, etc. as a proxy for what we believe super-majors or other parties would be reasonably willing to pay to enter a potentially world class play absent reserves or contingent resource. This results in our new target price of $12.00 per share, up from $5.00 before releases of the D&M report.

Again, given current information and many and varied assumptions, we believe our target price represents a value that industry would ultimately be willing to pay to capture the superior economics in Turkey with a repeatable, scalable play.

We are reinstating our Buy rating on Valeura and have increased our target to $12.00 from $5.00.

We, Garett Ursu and Michael Mueller, hereby certify that the views expressed in this research report accurately reflect our personal views about the subject company(ies) and its (their) securities. We also certify that we have not been, and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendation(s) in this report.

Our disclosure statements are located on the second last page of this report

Garett Ursu, CFA, [phone], [e-mail] Michael Mueller, P.Geo., Associate, [phone], [e-mail]

MORNING MEETING NOTES MARCH 2, 2018

RECOMMENDATION TERMINOLOGY

Cormark’s recommendation terminology is as follows:

Top Pick
Buy
Market Perform Reduce

our best investment ideas, the greatest potential value appreciation expected to outperform its peer group expected to perform with its peer group expected to underperform its peer group

Our ratings may be followed by "(S)" which denotes that the investment is speculative and has a higher degree of risk associated with it. Additionally, our target prices are set based on a 12-month investment horizon.

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MORNING MEETING NOTES MARCH 2, 2018