Valeura Energy - it´s an oil company, but...
Valeura Energy is a company that currently produces oil in Thailand. I think that its valuation (at a price of CAD 7.8/share and a market cap of $575 million, they trade on estimated annual earnings of $170 million at a valuation P/E of 3.38 and an EV/FCF of 1.85) and the potential for further acquisitions and buybacks can make this company, albeit a commodity, a great investment.
History and current state of bussines
Valeura originally produced gas in Turkey, but in 2019 they sold most of their assets there, and in 2022, with a total investment of about $30 million, they acquired two oil producing companies in the Gulf of Thailand. $14.3 million went directly to the purchase and the rest to the necessary injections of funds to restart production and find new wells.
Thanks to their know how they were able to massively increase the value of these assets. They did this by repeatedly finding new oil resources, which enabled them to consistently extend the life of the fields and increase the daily yield. For 2025, they project daily production in the range of 23,000 to 25,500 barrels per day.
The acquisitions were so cheap because the KrisEnergy field was already in closure and the fields acquired through the Mubadala acquisition had a short life. Valeura engineers were able to replace existing oil reserves with new wells, sometimes to the tune of 200% per year, which to me also shows the great quality of management. The CEO is talking about being able to extend the life of all the fields into the next decade, perhaps into the 2040s for some.
The geology of the Gulf of Thailand is such that the oil is in a number of small pockets. Valeura is able to drill new wells with a 95% success rate, and many of the fields they know they will find oil in cannot be added to their official reserves because of regulatory standards. Field life is one of the things that is important in valuing this company's assets and the fact that reserves appear smaller than they probably are in reality may be contributing to the low valuation.
Valeura still owns a large natural gas field in Turkey. They have USD 100 million invested there, but there is no production at the moment. I hope that this field will be an asset for them rather than a ball on their foot and they can extract additional cash flow from this asset through a sale or lease. Any potential investor should keep an eye on the situation regarding this field.
Valuation, growth
At a share price of CAD 7.8, Valeura trades at a valuation of $575 million, earnings of $170 million, 260 million cashes and zero debt on a P/E of 3.38 and EV/FCF of 1.85. EV/EBITDA is 1.02 due to high taxes for oil producer in Thailand, but I don't use that metric much. I used the calculation from this blog to estimate earnings, updating to current guidance I came up with roughly the same number. The big variable in the calculation is of course the realised oil price, I used the $75 per barrel Brent price for the calculation. There will be more on this later in the article. The interesting thing is that Bloomberg and also Yahoo Finance has some strange numbers in the earnings data, I have no idea what it is. It is possible that the analysts are not taking into account tax optimizations or there are some other accounting rules, however I stand by my estimate, among other reasons, because at this rate they are adding cash to their balance sheet and they would also have to lie in multiple places in their investor materials. But the strange data may be confusing analysts and may be the main reason why Valeura is trading so cheaply. For a company with such a small market capitalization, analysts at large funds probably don't look at it at all or very superficially, specially when it is a small oil producer operating in Southeast Asia. Make up your own mind and do your own research.
This is data from Bloomberg (thanks to J. Brychta, the data is in CAD) where we can see that earnings are reported here as a fraction of real number. Moreover, the estimates assume a decline in business. Thus, to an analyst's eye, Valeura may seem like a company trading at 10 times earnings, and declining, whereas I see them at completely different valuations, and I'm also counting on new acquisitions and buybacks.
And now for growth. The CEO expressed in a recent YouTube presentation that they want to primarily focus on growth through further acquisitions and see many opportunities in the Southeast Asia space. They say a big player (probably Chevron) is leaving the region and that could create more opportunities. I like this, although further acquisitions will probably not be as cheap as the original two, time will tell. Also, they recently announced a buyback planned for 2025 where they can buy up to 10% of the outstanding shares. A dividend is possible in the future, but a buyback at this valuation makes more sense. Personally, I agree 100% with this allocation.
The CEO even stated that they could produce up to 100,000 barrels per year by the end of 2026. I find that bold but not entirely impossible, for myself I'm counting on lower numbers.
There is one more thing to mention here. With the KrisEnergy acquisition they also bought 400 million of losses that they can claim as tax optimization and it will produce about $200 million of extra profits. It should be reckoned that after about another two years this will end and the profit would fall somewhere towards 100 million at current production capacity. I am assuming that by then they will have offset this by investing for shareholders and profits in 2027 will be higher than they are now despite the end of optimization.
The thing that bothers me the most is that Valeura was just three months ago trading at CAD4.5/share. You could have bought the company as of today with 260 million cash for 340 million. Damn. But it's still pretty cheap.
So how much can be a fair price? The presentations claim that similar companies are trading at double that. I was braver and created my own valuations. Plus, I'm not counting future growth at all, which I think will be very decent. In fact, very cheap acquisitions and buybacks at the current price have very high returns. Their valuations from the presentation are from when the stock was about CAD 5.5.
Risks
Of course, given the pricing, the first thing I looked for was, where the hell is the problem. I didn't find anything fundamental. The first risk I thought of was the unfamiliar environment of Thailand. But by all accounts, Thailand is a very good location for miners. They pay high taxes and royalties, they employ local people (95% of Valeura's employees are Thai). The fact that they have allowed them to claim tax deductions on multiple fields shows me the friendliness of the local authorities. ESG is probably not an issue here. Moreover, 12% of Valeura is owned by some local influential family. Comrade Xi is a long way from China and Taiwan is a priority for him.
Another risk is potential acquisition at the current undervalued prices. Management owns about 6% of the company, but I don't think they want to get rid of that asset seeing how they can grow in Asia, and I would still come out of a potential acquisition at a premium to what I bought them for. I don't have a strong opinion on that risk.
Probably the biggest risk here is the price of oil. I've always avoided commodities, but with Valeura I couldn't resist at the valuation and upside potential. I have absolutely zero ambition to predict the price of Brent in any way. All I can add is that they have a relatively low cost per barrel to produce, about $36 including royalties to Thailand, and a strong cash position, which makes them quite resilient. If oil is at $80 like it is now, I'm very happy. I'm prepared for a possible bad part of the cycle given valuations. Take into account that the calculations above are for a price of $75/bbl, a change in oil prices would greatly affect these numbers.
Ending
I think Valeura Energy is a company with the potential for a big upside in share price, both through future earnings growth and a revaluation to higher multiples. Even relative to commodities they are very cheap and with a great capital allocation. I sold my position in Spyrosoft and bought Valeura with it, it now makes up about 9.5% of my portfolio.
I have presented the financials in USD, beware of confusion with the Canadian dollar. I do so because Valeura also operates in USD in its reports.
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