Valeura Energy Inc. (TSX:VLE) is the topic of conversation when Auctus Advisors’ Co-Founder and Head of Research Stephane Foucaud caught up with DirectorsTalk for an exclusive interview.
Q1: Valeura Energy announced what looks to be an incredible acquisition in Thailand, what do you think of the transaction?
A1: The company effectively acquired 20,000 barrels a day offshore Thailand for just $10 million and I think that looks really great at face value but if one looks a bit more into the details, the deal looks even better, let me explain why.
First, the transaction is an effective date of August 2022 and given the amount of free cash flow the asset generated until transaction close in March 2023, the company will receive more cash than it has to pay by the time it closes in March. That means that effectively they get paid to acquire those Thailand assets.
Second, the transaction comes with about $250 million of decommissioning liabilities that have to be paid over the coming years. In reality, the free cash flow again are so free cash generative that by the end of ’23, the company will have accumulated arguable almost as much or even more cash from those assets than the amount of the decommissioning liability. That means that even without any further operational performance improvement, from 2024 all the free cash flow is effectively ‘gravy’, $200 million of free cash flow per year and first decommissioning not expected for a few years, we talk of a lot of money. This is before we start discounting the decommissioning costs with the cost of capital.
My third point is that assets in the Gulf of Thailand, typically they grow, it is the nature of the basin and this was the case, for those that remember, for Salamander and Coastal Energy. So, the two periods of increase at the time, as the company drills more infill wells, means there is visible upside for VLE and that means that the decommissioning costs will probably be pushed back and that means, again, additional free cash flow.
Q2: How could they get such a good deal?
A2: I think it really comes down to the length of time it took to negotiate a final agreement since the first price was agreed. So, they have been in discussions with Mubadala for probably over a year, and initially the asking price was probably very different.
What has happened is in the interim period of discussion, oil price has increased and the asset has vastly outperformed expectations so the announce price of $10 million probably reflects the initial price agreed minus the free cash flow that was generated over the interim period.
For Mubadala, if you think about them, they have decided to exit Thailand so it’s probably very difficult for the management team to go back to their Board and say after 18 months of discussion, we don’t like the deal, let’s start this 18-month process again. It’s very difficult to imagine that.
Q3: Just talking about the decommissioning, how should we think about these liabilities?
A3: Well, since the deal was agreed 18 months ago, initial decommissioning has already been pushed back by a few years and in my view will probably continue.
Second, the Valeura Energy is a nimble, more cost effective operator than Mubadala so I think you can expect the cost to them will be very different to Mubadala.
Lastly, the entire area in the Gulf of Thailand is coming for decommissioning so we would expect economic upscale and economy of learning as more operators probably work together and the service industry will do effectively a better job.
So, in conclusion, I think the decommissioning liabilities will go down and that will probably happen later than we think.
