Valeura Energy: Relentless Climb To Fair Value

There is oil in Thai waters.

As a natural dip buyer, it’s tough to buy into stocks that have already moved up a lot. There is a thought that the stock has already exhausted most of its upside if it’s already up 10x like Valeura was when I got in. But when I got this thought I had to remind myself that this thought was idiotic, because thinking like that is putting the cart before the horse. Buying the dip is usually a good strategy if you do it with the right stocks because that means you can get the stock at a lower valuation. But a stock can be at all-time highs and still have a very low valuation. And valuation is what matters at the end of the day.

Source: AlmostMongolian, X

This is when I got involved. This is where the stock was irresistible. Almost too good to be true I was thinking. Extremely cheap even for an oil producer.

Source: Google

After that, the stock has gone up a decent amount and the valuation is higher so it must be less attractive. Right? Not necessarily. And I will talk about why later. First a quick overview and valuation.

Valeura owns oil production in Thailand and a natural gas project in Turkey. All the focus of this article and all my interest in this stock is because of the oil production in Thailand. They acquired these Thai fields in 2022-2023 and it has been only success after that.

Valuation

All of the following numbers are in USD

Market Cap= 406,7M

Debt=0

Cash=193,6m

EV=213,1m

2023 results

Source: Valeura full year results presentation

2024 estimate

2024 production guidance 21.5 - 24.5 B/D

A quick calculation about potential 2024 financials. It will be flawed. But it will be in the ballpark.

I’ll use 23k oil production because according to a recent press release the company has already achieved this level.

“Highlights for Q1 2024

Oil production averaged 21.9 mbbls/d, quarter exit rate of approximately 23.0 mbbls/d”

Revenue at 85$ Brent(Brent currently at 90$+Valeura receives a slight premium to it, but I’m being conservative here so I will ignore that) = 713 575 000

Royalties roughly 100mil (could be off a couple tens of millions)

Opex guidance 205 - 235 million

Capex guidance 135 - 155 million(about 1/3 growth capex)

SG&A roughly 30mil

713-100-235-155-30=223 pretax profit(using higher end cost estimates and conservative production and oil price estimates)

The tax rate is 50% but one of their fields that produces about 5k per day has a tax loss shield so 21.7% of profit escapes the 50% tax

48,4m(profit from the field that doesn’t pay tax)+92,1m(Rest with 50% tax taken out)=140,5m after-tax profit after everything

But they also own a royalty that will make them roughly 10m per year. I don’t know if that is taxed differently nor do I care.

I have seen many models and many estimates about this company they are always a little different. The thing about my approach is that I want my stocks to be so clearly cheap that I do not need very accurate models. If I need to go on Excel and count every cent to determine whether it’s cheap the stock is already not cheap enough.

If Valeura makes 100-200m of profit after all the costs at 80-90$ Brent the stock is cheap. The enterprise value is 213m.

We are looking at 1-2 EV/E or EV/FCF without making any bullish assumptions about oil production or oil prices.

Why is it cheap?

The usual reason given as to why the stock is cheap is that they have low reserve life and high decommissioning obligations(+200m), but every year they find more oil and replace the reserves, and as long as you find more oil you don’t have to decommission the field and paying off the decommissioning obligations is moved further into the future.

Even before Valeura took these fields over in 2022-2023 the reserves were consistently replaced, but after Valeura took them over and injected some cash they were able to show that the rumors about the death of these fields were greatly exaggerated. This news hit in February.

Source: Valeura 20.2.2024 PR, ceo.ca

219% reserve replacement is very good. This news was the reason why I said earlier the stock is not necessarily less attractive now even after it went up about 50% from where I got in in January, because this news was so important as it addressed the biggest worry of the market. People knew the stock was cheap based on near-term cash flow, but how long would these fields be able to produce was questioned.

With this news, the company proved there is still a lot left. If they can continue a similar pace of reserve replacement I think the stock would trade at a much higher multiple.

What else? Catalysts?

Catalysts

Tax restructuring

I mentioned earlier that one of their fields doesn’t pay taxes because of past Tax losses. Valeura acquired that field from a company called Kris Energy in 2023 and they had 275m of tax losses attached to that field. What if you could apply those tax losses to all the fields Valeura has? Valeura management believes they can do this by mid-2024. This would mean Valeura would not pay any tax for about a year starting from mid-2024.

This would mean more than 100m of savings. I’m being conservative because I don’t know how much the field that is currently enjoying Tax-free status has used them by that point, but I would imagine there would be at least 200m left by mid-2024.

With around 211m EV. This would be a big deal. The EV/FCF for 2024 would most likely drop below 1.

If the management can’t pull this off with the Thai government then the tax losses will just be used more slowly with the field producing about 5k B/D.

Drilling

Source: Valeura 2024 Full-year presentation

With drilling they can replace and grow reserves and grow production. Valeura’s 2024 production guidance is 21,5-24,5k P/D as an average production for the year, but the exit rate for 2024 could be significantly higher. Here are the fields and the company’s plans for them.

Source: Valeura 2024 Full-year presentation

Wassana is the field that doesn’t pay taxes currently.

Source: Valeura 2024 Full-year presentation

They will of course try to optimize every field, but based on what they say here and earnings calls we can assume Growth in Wassana(but not confident enough to give a number), growth in Nong Yao(to 11k B/D in q2 now at around 8k B/D) and relatively stable/small decline in the rest.

So if we assume they can do what they say in Nong Yao and they can at least keep the rest stable we get 26k B/D for the second half and I would be happy with that. Add the potential tax restructuring 26k B/D with no taxes for a year at let’s say the current oil price at 90$ Brent. That would be humongous cash flow and none of those expectations would be grazy.

Acquisition or Buybacks?

Valeura has about 50% of their market cap in cash and no debt so capital allocation is a big question at the moment.

You would think at this valuation I would want buybacks above all else and not want the company to do a potentially bad acquisition. But in this case, it’s different the 2 Thailand acquisitions Valeura did are the best acquisitions I have seen during my long investing career of 4 years.

Source: Valeura July 2023 presentation

Still makes me shake my head how they got these things as cheap as they did. These assets have already paid themselves back multiple times.

The reason they could do this was motivated sellers who did not understand nor want the assets and an inefficient market(Thailand offshore oil is quite a niche and unknown market). The Kris Energy assets were bought from bankruptcy.

https://www.energyvoice.com/oilandgas/asia/407624/valeura-energy-buys-thai-oil-assets-from-bankrupt-krisenergy/

Quote from the above article “An industry source that has followed the demise of KrisEnergy described the deal’s price tag as an “insult to those who believed and promoted that KrisEnergy’s value was nearly US$1 billion (Kris Energy’s stated group assets were US$886 million in 2016), as these two Thai assets were a large chunk of the company.”

And Valeura buys them for 14.3m. I love to hear it. And I love to see it.

Sean Guest, president, and CEO of Valeura, commented that “the acquisition will rapidly transform Valeura into a significant licence holder and new oil producer in Thailand, and in doing so will establish a platform for our goal to acquire further high-value cash flowing assets in the region.”

Yes, it did. Valeura is now Thailand’s largest independent oil producer.

From when they started these Thai acquisitions in June 2022 the stock is up 10x while the oil price is down.

The stock is “ #1 company in Peer Group in 2022 and 2023, and YTD in 2024” according to the company in terms of share price performance.

And they seem to believe they can do it again.

Source: Valeura June 2023 presentation

I’m not going to assume the next acquisition will be as good as the 2 last ones. It’s possible, but I would assume other companies have seen what Valeura did in Thailand and there is more eyes looking at that market now and amazing deals are harder to find. But I’m not 100% sure about that and Valeura has a great track record so I want them to find another great deal in Thailand and I would prefer that over stock buybacks.

They did so much with 24.7m$. What could they do with 200m$?

This is what some guy who works at the company answered in a recent investor conference when asked about implementing a buyback or a special dividend.

“next question have you considered implementing a dividend and I'm going to bundle that together uh actually there's another question follow up I knew this was coming or a share buyback and listen we historically have taken the approach that with a strong and stable production base and high margins our intent is to um stockpile cash resources in order to support our strategy which is growth oriented and um largely predicated on opportunities within the m&a market so we are very keen to ensure we have maximum optionality when it comes to being able to transact on additional m&a opportunities that said it is difficult to deny that um a purchase of valura shares would be a good investment and I suspect the market would take note um now this is this is obviously a board level decision to be made um comments like this we do feed up to the board I suspect our board is listening um and and as such I expect that this is the sort of thing that they will deliberate on in their next meeting as to whether it's appropriate to think about uh some form of direct shareholder returns as for whether that would be a dividend or special dividend or a buyback I don't know I think the decision first would need to be do we  want to engage in direct shareholder returns and uh if so what mechanism so the idea is really continue watching the m&a market and in so far as we see compelling opportunities for Value ad that would be our preference um but we also need to pay attention to shareholders and uh and and definitely this is something that we will be discussing”

Short version: Acquisitions are our number 1 focus, but we are open to the idea of doing direct shareholder returns.

Thailand as a jurisdiction

The thesis is they can continue to grow organically and inorganically production and reserves and if they can do that they should not trade at 1-2 EV/FCF. Right? Maybe if the company was operating in somewhere like Venezuela or Turkmenistan that would be fair. But what about Thailand? I think we can all agree that 1-2 EV/FCF is too low for Thailand. But What is a fair valuation for an oil company operating in Thailand?

Source: Valeura website

That government take is high, but it’s quite normal for the oil industry.

Source: Rystand Energy, Offshore

Only Canada and the US are nice to the oil companies. They might talk trash about the oil companies, but they are nice to them. But for us investors, the government take does not matter. Why not? Because the current government take is already priced into the stock. What matters is the direction of the government take. Is it increasing or decreasing in the future? Just the fear of government take increasing or other anti-oil policies possibly being enacted can send oil companies' share prices tumbling. Like the national oil companies Brazilian Petrobras and Colombian Ecopetrol in 2022 when leftist presidents were elected in their countries.

Could Thailand experience something similar? It’s always possible, but not very probable imo. Thailand is a mix between a monarchy and a flawed democracy. It’s a second-world country. They scored highly on the World Bank’s ease of doing business index in 2020 when that was still around. Thailand was 21st out of 190 countries. And had been improving their placing over the years. This is quite a positive for Valeura as they intend to be in Thailand for a while and they need to work with the government to get the tax restructuring done.

Thai voters and the government are not very climate conscious compared to the West. This is good for Valeura as they are less likely to get attacked from that angle. In 2nd and 3rd world countries the bigger risks are usually things like expropriation and political instability. There is usually populism behind expropriation ”Let’s take the wealth from the rich oil companies for the people” But because oil is not one of the biggest industries in Thailand like it is in Brazil and Colombia the oil industry is not as big of a target for populism. Most voters probably don’t even know Thailand produces oil. So it’s more likely the companies can keep making their money in hiding.

But still, anything can happen.

As an answer to my earlier question about a fair valuation for an oil company in Thailand. EV/FCF of 5-10 seems pretty reasonable and I think Valeura can get there.

Summary

I named this article “Relentless Climb to Fair Value” because ever since these acquisitions were completed that is what Valeura has been doing and is doing. Valeura is executing and the market is gradually realizing that this stock is very cheap. Remember how I named my Africa Oil article “The cheapest oil stock I know” That was before I knew about Valeura. Shoutout to Geodan in ceo.ca who told me about Valeura. I don’t know maybe based on reserves+cash flow Africa Oil is still the cheapest(Venus), but just based on FCF nothing I have seen in the O&G space comes close to Valeura. If you know a stock that does, tell me about it.

Disclaimer: I’m not an investment advisor. Nothing I have written in this article should be taken as investment advice. It’s all opinions. Everything I have written here could be inaccurate. Trust nothing you just read.

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