TIDMVLU
RNS Number : 4165T
Valeura Energy Inc.
25 March 2021
FOURTH QUARTER 2020 RESULTS AND YEAR- RESERVES
Calgary, March 25, 2021 : Valeura Energy Inc. (TSX:VLE, LSE:VLU)
(the "Company" or "Valeura"), an upstream oil and gas company with
assets in the Thrace Basin of Turkey, reports its financial and
operating results for the three month period ended December 31,
2020 and the year ended December 31, 2020, and year-end 2020
reserves.
The complete quarterly reporting package for the Company,
including the audited financial statements and associated
management's discussion and analysis ("MD&A") and the 2020
annual information form ("AIF"), are being
filed on SEDAR at www.sedar.com and posted on the Company's website at www.valeuraenergy.com .
Financial and operating results presented in this announcement,
together with the financial statements, the MD&A, and the AIF,
include results from assets associated with the Company's shallow
conventional gas business which are subject to a share purchase
agreement announced on October 20, 2020 (the "Sale Transaction").
Valeura and TBNG Limited (the "Buyer") are progressing to closing
the Sale Transaction, however, until such time as the Sale
Transaction is completed, these assets remain owned and operated by
Valeura. All assets associated with the shallow conventional gas
business are identified as held for sale ("Assets Held for Sale")
in this announcement and the Company's associated reports,
identified above.
FINANCIAL AND OPERATING RESULTS HIGHLIGHTS
-- Full year 2020 average production of 650 boe/d, relatively unchanged from 660 boe/d in 2019;
-- Full year revenues of US$8.5 million, down 16% from the full
year 2019, mainly due to lower realised gas prices;
-- Total Proved Plus Probable reserves of 7,798 Mboe at year end, down 2% from the prior year;
-- Cash position of US$30.1 million at year end; and
-- Positive progress toward closing the Sale Transaction for
cash consideration of US$15.5 million, plus future royalty
payments.
Sean Guest, President and CEO commented:
"The sale of our conventional gas business is progressing and
has now obtained all but one remaining government consent to
complete the transaction. Both Valeura and the Buyer remain
committed to the deal, with confidence on both sides stemming from
a solid ongoing production performance which has delivered average
full year volumes that are virtually unchanged from the prior
year.
"Meanwhile, we are continuing in our efforts to farm out part of
our interest in our deep tight gas play. We believe the
increasingly positive investment environment we see today should
increase interest by potential partners and are therefore
continuing the farmout process into 2021.
"We are also pressing ahead on our evaluation of inorganic
growth opportunities. With our strong balance sheet and
internationally-experienced team, we see M&A as the right way
to add near-term cash flow to our portfolio. While our team has
been aggressively evaluating and advancing potential opportunities,
we are maintaining discipline in these efforts and will only do
deals where we have a clear line of sight to generating value for
shareholders both through the deal itself and through follow-on
investment thereafter."
Table 1 Financial and Operating Results Summary
Three Three Year ended Three Year ended
Months Months December Months December
Ended Ended 31, 2020 Ended 31, 2019
December September December
31, 2020 30, 2020 31, 2019
Financial
(thousands of US$ except
share amounts)
------------- ------------- ------------- ------------- -------------
Petroleum and natural
gas revenues 1,978 1,843 8,547 2,653 10,177
------------- ------------- ------------- ------------- -------------
Adjusted funds flow
(used) (1) (335) (1,210) (1,154) 1,595 3,741
------------- ------------- ------------- ------------- -------------
Net loss from operations (15,294) (2,149) (19,534) (735) (4,815)
------------- ------------- ------------- ------------- -------------
Exploration and development
capital 934 295 4,845 3,669 11,801
------------- ------------- ------------- ------------- -------------
Banarli Farm-in proceeds
(2) - - - - (1,452)
------------- ------------- ------------- ------------- -------------
Net working capital
surplus 42,190 32,182 42,190 37,645 37,645
------------- ------------- ------------- ------------- -------------
Cash 30,143 31,297 30,143 36,111 36,111
------------- ------------- ------------- ------------- -------------
Common shares outstanding
Basic 86,584,989 86,584,989 86,584,989 86,584,989 86,584,989
Diluted 92,221,822 94,463,323 92,221,822 92,421,565 92,421,565
------------- ------------- ------------- ------------- -------------
Share trading (CDN$)
High 0.60 0.38 0.65 2.65 3.99
Low 0.29 0.30 0.20 0.48 0.48
Close 0.57 0.31 0.57 0.60 0.60
------------- ------------- ------------- ------------- -------------
Operations
------------- ------------- ------------- ------------- -------------
Production
------------- ------------- ------------- ------------- -------------
Crude oil (barrels ("bbl")/d) 16 - 13 - 9
------------- ------------- ------------- ------------- -------------
Natural Gas (one thousand
cubic feet ("Mcf")/d) 4,145 3,690 3,824 3,877 3,907
------------- ------------- ------------- ------------- -------------
boe/d 707 615 650 646 660
------------- ------------- ------------- ------------- -------------
Average reference price
Brent ($ per bbl) 44.32 42.91 47.43 - 64.3
BOTAS Reference ($ per
Mcf) (3) 5.07 5.47 6.01 7.54 7.13
------------- ------------- ------------- ------------- -------------
Average realised price
Crude oil ($ per bbl) 43.48 - 50.16 - 64.90
Natural gas ($ per Mcf) 5.02 5.43 5.94 7.44 6.98
------------- ------------- ------------- ------------- -------------
Average Operating Netback
($ per boe) (1) 15.17 11.63 17.04 24.53 24.00
------------- ------------- ------------- ------------- -------------
Notes:
See the MD&A for further discussion.
(1) The above table includes non-IFRS measures, which may not be
comparable to other companies. Adjusted funds flow is calculated as
net income (loss) for the period adjusted for non-cash items in the
statement of cash flows. Operating netback is calculated as
petroleum and natural gas sales less royalties, production expenses
and transportation.
(2) Proceeds received from Equinor to complete spending
commitment for Phase 2 of the Banarli Farm-in. Recorded in the
financial statements as a reduction of exploration and evaluation
assets.
(3) BOTAS regularly posts prices and its Level-2 Wholesale
Tariff benchmark is shown herein as a reference price. See the AIF
for further discussion.
Net petroleum and natural gas sales in Q4 2020 averaged 707
boe/d, which was 15% higher than Q3 2020. This increase in
production primarily reflects the impact of successful well
workovers. Year on year, there was minimal change in production,
even considering the significant reduction in gas demand in 2020
due to COVID-19 shutdowns and restrictions.
Production revenue in Q4 2020 was US$2.0 million, an increase of
7% over Q3 2020 due to the higher production in Q4 more than
offsetting the impact of lower realised gas prices. For the full
year ended December 31, 2020, production revenue was US$8.5
million, a decrease of 16% from the prior year.
Exploration and development capital spending was US$0.9 million
in Q4 2020, reflecting increased spending related to well
workovers. The majority of the full year 2020 capital spending of
US$4.8 million was on drilling two licence commitment exploration
wells and workover programmes on the shallow, conventional gas
production.
As of December 31, 2020, the Company had US$30.1 million of cash
and a net working capital surplus of US$42.2 million. The increase
in working capital at December 31, 2020 over the prior reporting
period, and the primary difference between cash and working
capital, is due to the inclusion of assets and liabilities
associated with the Assets Held for Sale in working capital. Please
see the financial statements for details of the calculation.
The Company reported a net loss from operations of US$15.3
million in Q4 2020, which is primarily due to an impairment charge
of US$13.4 million relating to removal of the property, plant and
equipment associated with the Company's deep, tight gas assets in
the Thrace Basin (the "Deep Gas Play").
2021 OUTLOOK
Conventional gas business sale
Valeura has made good progress toward completing the Sale
Transaction and both parties remain committed to concluding the
deal as soon as possible. The Sale Transaction has received one of
two key government consents in January 2021, with only one approval
outstanding before the transaction can be completed.
The Sale Transaction's headline cash consideration price is
US$15.5 million, and Valeura will receive royalty payments of up to
an additional US$2.5 million thereafter. The Sale Transaction is
based on an economic effective date of July 1, 2020, meaning the
purchase price will be adjusted at the time of closing to account
for the net benefits of the assets accruing to the Buyer as of that
time.
Deep Gas Play Farmout
Valeura views its Deep Gas Play as a core constituent of its
portfolio and believes this play to be a material source of
potential long-term value for shareholders. In 2020, the Company
confirmed its increased working interest in the Deep Gas Play and
secured the first of three possible two-year extensions. The three
exploration licences in the core of the Deep Gas Play are now valid
up to June 27, 2022. Under Turkey's licence terms, the Company has
the ability to maintain these assets for up to approximately five
more years through work programme commitments for each two-year
extension period. During the current two-year extension period,
Valeura is required to drill one exploration well on each of the
three exploration licences, for an estimated total net cost of
approximately US$1.6 million for the three wells combined.
Valeura initially planned to undertake a farm-out process
starting in Q2 2020 aimed at identifying a new partner for the Deep
Gas Play, however, the decision was taken to delay the process
until Q4 2020 given the COVID-19 pandemic and resultant challenges
in the oil and gas industry, which meant that fewer companies were
seeking new opportunities. The farm-out process was conducted in Q4
2020 and continues into 2021. As of today, there is no agreement
with a new party to farm in to the Deep Gas Play. As commodity
prices are now recovering, the Company anticipates an increase in
appetite for opportunities of this type, and believes the Thrace
basin is an appealing proposition, particularly as more companies
are expressing a preference for gas-oriented opportunities and the
potential for material upside.
Growth Strategy
Following a very challenging year for the upstream industry as a
whole, Valeura is in a uniquely strong financial position. The
Company has no debt, and US$30.1 million in cash. This cash
position is expected to be further bolstered upon completion of the
Sale Transaction, which would contribute US$15.5 million in cash,
subject to normal closing adjustments as detailed above, and
supplemented further with ongoing royalty payments of up to US$2.5
million.
Valeura's strong balance sheet, coupled with its internationally
experienced management team, positions it well to grow by way of
mergers and acquisitions ("M&A"). 2020 was a year of historic
lows for M&A transactions globally due to COVID-19 and the
associated downturn in the industry. The ability to transact has
improved in 2021 as stability returns to the industry, and upon
completion of the Sale Transaction, Valeura is well positioned to
capitalise on its strengths. The Company remains actively engaged
in evaluating inorganic growth opportunities while maintaining
M&A screening criteria oriented toward assets that generate
cash flow in the near term and provide opportunities for further
cash flow growth through reinvestment.
2020 YEAR- CORPORATE RESERVES REPORT
The Company has signed an agreement to sell its entire shallow
gas production business and these assets are reported in the
Company's financial results as assets held for sale. However, at
year end the subject assets were still owned by Valeura and the
Company is required to complete an independent reserves evaluation
as at December 31, 2020. This evaluation was conducted by
independent petroleum engineering consultants, GLJ Ltd. of Calgary
Canada, ("GLJ") and is presented in their report dated March 23,
2021 (the "GLJ Reserves Report").
At December 31, 2020, all of the Company's reserves are
associated with gas production from the shallow assets in the
Banarli exploration licences (100% working interest), the West
Thrace production leases and exploration licences (81.5% working
interest), and the South Thrace production leases (81.5% working
interest). Table 2 summarises the Company's reserves in Turkey and
the before tax net present value discounted at 10% ("NPV(10)
").
The forecast realised prices used in the GLJ Reserves Report to
calculate value are US$5.38/Mcf for natural gas and US$47.93/bbl
for light and medium crude in 2021, and these prices escalate at
approximately 2% per year going forward. More details on assets and
the commodity price assumptions are included in the AIF.
Table 2 Company Gross Reserves Volumes and Values (1)(2)
RESERVES Before Tax NPV(10)
(Mboe) (US$ MILLIONS - $MM)
% %
2020 2019 CHANGE 2020 2019 CHANGE
------- ------- -------- ------ ------- ---------
Proved
------- ------- -------- ------ ------- ---------
Developed producing 811 526 54% 8.6 9.5 (9%)
------- ------- -------- ------ ------- ---------
Developed non-producing 356 477 (25%) 4.3 10.2 (58%)
------- ------- -------- ------ ------- ---------
Undeveloped 1,226 1,300 (6%) 1.3 12.7 (90%)
------- ------- -------- ------ ------- ---------
Total Proved (1P) 2,393 2,303 4% 14.2 32.4 (56%)
------- ------- -------- ------ ------- ---------
Probable 5,405 5,633 (4%) 17.8 59.5 (70%)
------- ------- -------- ------ ------- ---------
Total Proved Plus
Probable (2P) 7,798 7,936 (2%) 32.0 91.9 (65%)
------- ------- -------- ------ ------- ---------
Possible 3,827 4,441 (14%) 17.7 55.1 (68%)
------- ------- -------- ------ ------- ---------
Total Proved Plus
Probable Plus Possible
(3P) 11,625 12,377 (6%) 49.8 147.0 (66%)
------- ------- -------- ------ ------- ---------
Notes:
(1) See Oil and Gas Advisories and Reserves Definitions
below.
(2) Due to rounding, summations in the table may not add.
The reserves are almost wholly natural gas, but small oil and
natural gas liquids volumes are assigned to a number of wells. The
2020 year-end reserves by principal product type are summarised in
Table 3.
Table 3 2020 Year-end Company Gross Reserves Volumes by
Principal Product Type (1)
RESERVES LIGHT AND MEDIUM CONVENTIONAL TOTAL OIL EQUIVALENT
CATEGORY CRUDE OIL NATURAL GAS (Mboe)
(Mbbl) (Bcf)
Proved 45 14.1 2,393
---------------- ------------ --------------------
Probable 10 32.4 5,405
---------------- ------------ --------------------
Total Proved Plus Probable 56 46.5 7,798
---------------- ------------ --------------------
Possible 13 22.9 3,827
---------------- ------------ --------------------
Total Proved Plus Probable
Plus Possible 69 69.3 11,625
---------------- ------------ --------------------
Notes:
(1) See Oil and Gas Advisories and Reserve Definitions below.
(2) Natural Gas Liquids have been included in Light and Medium Crude Oil
Table 4 sets forth a reconciliation of reserves changes in
2020.
Table 4 2020 Year-end Company Gross Reserves Reconciliation
CHANGES 1P 2P
(Mboe) (Mboe)
At December 31, 2019 2,303 7,936
------- -------
Extensions 12 61
------- -------
Improved Recovery 8 3
------- -------
Technical Revisions 308 36
------- -------
Discoveries - -
------- -------
Acquisitions - -
------- -------
Economic Factors - -
------- -------
Production (238) (238)
------- -------
At December 31, 2020 2,393 7,798
------- -------
ANNUAL AND SPECIAL MEETING
Valeura will hold its annual and special meeting of shareholders
on May 13, 2021 at 3:00 p.m. in Calgary. The Company continues to
monitor the restrictions related to COVID-19 and will announce the
format for the meeting when meeting materials are mailed in early
April 2021, and in all instances, will provide an opportunity for
shareholders to access the meeting remotely.
ABOUT THE COMPANY
Valeura Energy Inc. is a Canada-based public company currently
engaged in the exploration, development and production of petroleum
and natural gas in Turkey.
OIL AND GAS ADVISORIES
GLJ Reserves Report
The GLJ Reserves Report was prepared using guidelines outlined
in the Canadian Oil and Gas Evaluation Handbook and in accordance
with National Instrument 51-101, Standards of Disclosure for Oil
and Gas Activities (" NI 51-101 "). Additional reserves information
as required under NI 51-101 is included in the AIF.
BOEs
A BOE is determined by converting a volume of natural gas to
barrels using the ratio of 6 Mcf to one barrel. BOEs may be
misleading, particularly if used in isolation. A BOE conversion
ratio of 6 Mcf:1 BOE is based on an energy equivalency conversion
method primarily applicable at the burner tip and does not
represent a value equivalency at the wellhead. Further, a
conversion ratio of 6 Mcf:1 BOE assumes that the gas is very dry
without significant natural gas liquids. Given that the value ratio
based on the current price of oil as compared to natural gas is
significantly different from the energy equivalency of 6:1,
utilising a conversion on a 6:1 basis may be misleading as an
indication of value.
RESERVES DEFINITIONS
With respect to the reserves data contained herein, the
following terms have the meanings indicated:
" Company Gross reserves " are the Company's working interest
(operating or non-operating) share before deducting royalties and
without including any royalty interests of the Company.
" developed " reserves are those reserves that are expected to
be recovered from existing wells and installed facilities or, if
facilities have not been installed, that would involve a low
expenditure (e.g. when compared to the cost of drilling a well) to
put the reserves on production.
" developed producing " reserves are those reserves that are
expected to be recovered from completion intervals open at the time
of the estimate. These reserves may be currently producing or, if
shut-in, they must have previously been on production, and the date
of resumption of production must be known with reasonable
certainty.
" developed non-producing " reserves are those reserves that
either have not been on production, or have previously been on
production, but are shut in, and the date of resumption of
production is unknown.
" possible " reserves are those additional reserves that are
less certain to be recovered than probable reserves. It is unlikely
that the actual remaining quantities recovered will exceed the sum
of the estimated proved plus probable plus possible reserves.
" probable " reserves are those additional reserves that are
less certain to be recovered than proved reserves. It is equally
likely that the actual remaining quantities recovered will be
greater or less than the sum of the estimated proved plus probable
reserves.
" proved " reserves are those reserves that can be estimated
with a high degree of certainty to be recoverable. It is likely
that the actual remaining quantities recovered will exceed the
estimated proved reserves.
" reserves " are estimated remaining quantities of oil and
natural gas and related substances anticipated to be recoverable
from known accumulations, from a given date forward, based on: (a)
analysis of drilling, geological, geophysical, and engineering
data; (b) the use of established technology; and (c) specified
economic conditions, which are generally accepted as being
reasonable and shall be disclosed. Reserves are classified
according to the degree of certainty associated with the
estimates.
" undeveloped " reserves are those reserves expected to be
recovered from known accumulations where a significant expenditure
(e.g., when compared to the cost of drilling a well) is required to
render them capable of production. They must fully meet the
requirements of the reserves classification (proved, probable,
possible) to which they are assigned.
ADVISORY AND CAUTION REGARDING FORWARD-LOOKING INFORMATION
This news release contains certain forward-looking statements
and information (collectively referred to herein as
"forward-looking information") including, but not limited to: the
completion of the Sale Transaction; the total cash consideration
for the Sale Transaction; the Company's entitlement to contingent
payments over a five-year period; the receipt of regulatory
approvals, other government authorisations, and successful
negotiations with the Buyer regarding any extension to the outside
date, as may be required, relating to the Sale Transaction; the
Company's farm-out process for the Deep Gas Play continuing; the
Company's belief regarding the potential of the Company's Deep Gas
Play; and, the Company's ability to find another partner in the
Deep Gas Play and to realise other growth opportunities through
M&A; management's assessment of the M&A market; the
Company's commitment to safety, environmentally responsible
practices and optimising operational and administrative functions;
and the Company's business strategy and outlook.
Forward-looking information typically contains statements with
words such as "anticipate", estimate", "expect", "target",
"potential", "could", "should", "would" or similar words suggesting
future outcomes. The Company cautions readers and prospective
investors in the Company's securities to not place undue reliance
on forward-looking information, as by its nature, it is based on
current expectations regarding future events that involve a number
of assumptions, inherent risks and uncertainties, which could cause
actual results to differ materially from those anticipated by the
Company.
Statements related to "reserves" are deemed forward-looking
statements as they involve the implied assessment, based on certain
estimates and assumptions, that the reserves can be profitably
produced in the future. Specifically, forward-looking information
contained herein regarding "reserves" may include: estimated
volumes and value of Valeura's oil and gas reserves and the ability
to finance future development.
Forward-looking information is based on management's current
expectations and assumptions regarding, among other things: the
ability to close the Sale Transaction on the terms described herein
and the ability to negotiate an extension to the outside date with
the Buyer if required; the continuation of operations during the
COVID-19 pandemic; political stability of the areas in which the
Company is operating and completing transactions; continued safety
of operations and ability to proceed in a timely manner; continued
operations of and approvals forthcoming from the Turkish Government
in a manner consistent with past conduct; future drilling activity
on the expected timelines; the prospectivity of the Deep Gas Play;
the continued favourable pricing and operating netbacks in Turkey;
future production rates and associated operating netbacks and cash
flow; decline rates; future sources of funding; future economic
conditions; future currency exchange rates; the ability to meet
drilling deadlines and other requirements under exploration
licences and production leases; and the Company's continued ability
to obtain and retain qualified staff and equipment in a timely and
cost efficient manner. In addition, the Company's work programmes
and budgets are in part based upon expected agreement among joint
venture partners and associated exploration, development and
marketing plans and anticipated costs and sales prices, which are
subject to change based on, among other things, the actual results
of drilling and related activity, availability of drilling,
high-pressure stimulation and other specialised oilfield equipment
and service providers, changes in partners' plans and unexpected
delays and changes in market conditions. Although the Company
believes the expectations and assumptions reflected in such
forward-looking information are reasonable, they may prove to be
incorrect.
Forward-looking information involves significant known and
unknown risks and uncertainties. Exploration, appraisal, and
development of oil and natural gas reserves are speculative
activities and involve a degree of risk. A number of factors could
cause actual results to differ materially from those anticipated by
the Company including, but not limited to: uncertainty in capital
markets and ability to raise debt and equity, as required,
particularly for companies with a small market capitalisation; the
ability to finance future developments and/or inorganic growth; the
risks of currency fluctuations; changes in gas prices and netbacks
in Turkey; potential changes in joint venture partner strategies
and participation in work programmes; uncertainty regarding the
contemplated timelines and costs for the Deep Gas Play evaluation;
the risks of disruption to operations and access to worksites
(including the impact of the COVID-19 pandemic), threats to
security and safety of personnel; potential changes in laws and
regulations, the uncertainty regarding government and other
approvals; uncertainty regarding the ability to negotiate an
extension to the outside date with the Buyer as required;
counterparty risk; risks associated with weather delays and natural
disasters; and the risk associated with international activity. The
forward-looking information included in this news release is
expressly qualified in its entirety by this cautionary statement.
The forward-looking information included herein is made as of the
date hereof and Valeura assumes no obligation to update or revise
any forward-looking information to reflect new events or
circumstances, except as required by law. See the AIF for a
detailed discussion of the risk factors.
Additional information relating to Valeura is also available on
SEDAR at www.sedar.com .
This announcement contains inside information as defined in EU
Regulation No. 596/2014, part of UK law by virtue of the European
Union (Withdrawal) Act 2018, and is in accordance with the
Company's obligations under Article 17 of that Regulation.
This announcement does not constitute an offer to sell or the
solicitation of an offer to buy securities in any jurisdiction,
including where such offer would be unlawful. This announcement is
not for distribution or release, directly or indirectly, in or into
the United States, Ireland, the Republic of South Africa or Japan
or any other jurisdiction in which its publication or distribution
would be unlawful.
Neither the Toronto Stock Exchange nor its Regulation Services
Provider (as that term is defined in the policies of the Toronto
Stock Exchange) accepts responsibility for the adequacy or accuracy
of this news release.
For further information please contact:
Valeura Energy Inc. (General and Investor Enquiries) +1 403 237 7102
Sean Guest, President and CEO
Heather Campbell, CFO
Robin Martin, Investor Relations Manager
Contact@valeuraenergy.com , IR@valeuraenergy.com
Auctus Advisors LLP (Corporate Broker) +44 (0) 7711 627 449
Jonathan Wright
Valeura@auctusadvisors.co.uk
CAMARCO (Public Relations, Media Adviser) +44 (0) 20 3757 4980
Owen Roberts, Billy Clegg, Monique Perks, Hugo Liddy
Valeura@camarco.co.uk
MANAGEMENT'S REPORT
The management of Valeura Energy Inc. is responsible for the
preparation of all information included in the consolidated
financial statements and Management's Discussion & Analysis
("MD&A"). The consolidated financial statements have been
prepared in accordance with International Financial Reporting
Standards ("IFRS"). Financial information that is presented in the
MD&A is consistent with the consolidated financial
statements.
In preparation of the consolidated financial statements,
estimates are sometimes necessary because a precise determination
of certain assets and liabilities is dependent on future events.
Management believes such estimates have been based on careful
judgments and have been presented fairly in all material
respects.
Management maintains appropriate systems of internal control
that provide reasonable assurance that transactions are
appropriately authorized, assets are safeguarded from loss or
unauthorized use and financial records provide reliable and
accurate information for the presentation of the consolidated
financial statements.
KPMG LLP, an independent firm of chartered professional
accountants, was appointed by the shareholders to audit the
consolidated financial statements of Valeura Energy Inc. and
provide an independent professional opinion. Their report is
presented with the consolidated financial statements herein.
The Board of Directors, through its Audit Committee, has
reviewed the consolidated financial statements including notes
thereto with management and KPMG LLP. The Audit Committee is
composed of independent directors. Valeura Energy Inc.'s Board of
Directors has approved the consolidated financial statements based
on the recommendation of the Audit Committee.
(signed) "Sean Guest" (signed) "Heather Campbell"
President and CEO CFO
March 24, 2021
INDEPENT AUDITORS' REPORT
To the Shareholders of Valeura Energy Inc.
Opinion
We have audited the consolidated financial statements of Valeura
Energy Inc. (the Entity), which comprise:
-- the consolidated statements of financial position as at
December 31, 2020 and December 31, 2019
-- the consolidated statements of loss and comprehensive loss for the years then ended
-- the consolidated statements of changes in shareholders' equity for the years then ended
-- the consolidated statements of cash flows for the years then ended
-- and notes to the consolidated financial statements, including
a summary of significant accounting policies
(Hereinafter referred to as the "financial statements").
In our opinion, the accompanying financial statements present
fairly, in all material respects, the consolidated financial
position of the Entity as at December 31, 2020 and December 31,
2019, and its consolidated financial performance and its
consolidated cash flows for the years then ended in accordance with
International Financial Reporting Standards (IFRS).
Basis for Opinion
We conducted our audit in accordance with Canadian generally
accepted auditing standards. Our responsibilities under those
standards are further described in the " Auditors' Responsibilities
for the Audit of the Financial
Statements " section of our auditors' report.
We are independent of the Entity in accordance with the ethical
requirements that are relevant to our audit of the financial
statements in Canada and we have fulfilled our other ethical
responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional
judgment, were of most significance in our audit of the financial
statements for the year ended December 31, 2020. These matters were
addressed in the context of our audit of the financial statements
as a whole, and in forming our opinion thereon, and we do not
provide a separate opinion on these matters.
We have determined the matters described below to be the key
audit matters to be communicated in our auditors' report.
Assessment of the recoverable amount of the deep gas assets
Description of the matter
We draw attention to Note 2(d), Note 3(d) and Note 8 to the
financial statements. Judgments are required to assess when
internal or external indicators of impairment exist and impairment
testing is required. If any such indication exists, the asset's
recoverable amount is estimated through an impairment test. An
impairment loss is recognized if the carrying amount of an asset or
its cash generating unit ("CGU") exceeds its estimated recoverable
amount. In determining the recoverable amount of assets or CGUs, in
the absence of quotes market prices, impairment tests are based on
estimates of proved and probable reserves which are dependent upon
variables including forecasted oil and natural gas prices,
operating costs, royalties, production volumes, future development
costs, and other relevant assumptions all of which are subject to
many uncertainties and interpretations. The Entity conducted an
assessment of impairment triggers and concluded there was a trigger
for impairment with respect to the deep gas assets within the
Entity's only CGU. The Entity has recorded an impairment charge of
$13.4 million.
The Entity engages independent third-party reserve evaluators
annually to estimate the proved and probable reserves.
Why the matter is a key audit matter
We identified the assessment of the recoverable amount of the
deep gas assets as a key audit matter. Significant auditor judgment
was required to evaluate the results of our audit procedures
regarding the estimate of proved and probable reserves and the
resulting recoverable amount.
How the matter was addressed in the audit
The following are the primary procedures we performed to address
this key audit matter:
With respect to the estimate of proved and probable
reserves:
-- We evaluated the competence, capabilities and objectivity of
the independent third-party reserve evaluators engaged by the
Entity
-- We compared forecasted oil and natural gas prices to those published by government entities
-- We compared the 2020 actual oil and natural gas prices,
production volumes, operating costs, royalty costs and development
costs to those estimates used in the prior year's estimate of
proved and probable reserves to assess the Entity's ability to
accurately forecast
We evaluated the appropriateness of forecasted production
volumes, operating costs, royalty costs, and future development
cost assumptions by comparing to 2020 historical results. We took
into account changes in conditions and events affecting the Entity
to assess the adjustments or lack of adjustments made by the Entity
in arriving at the assumptions.
Other Information
Management is responsible for the other information. Other
information comprises:
-- the information included in the Management's Discussion and
Analysis filed with the relevant Canadian Securities
Commissions.
Our opinion on the financial statements does not cover the other
information and we do not and will not express any form of
assurance conclusion thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information identified above
and, in doing so, consider whether the other information is
materially inconsistent with the financial statements or our
knowledge obtained in the audit and remain alert for indications
that the other information appears to be materially misstated.
We obtained the information, included in Management's Discussion
and Analysis filed with the relevant Canadian Securities
Commissions as at the date of this auditors' report.
If, based on the work we have performed on this other
information, we conclude that there is a material misstatement of
this other information, we are required to report that fact in the
auditors' report.
We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance
for the Financial Statements
Management is responsible for the preparation and fair
presentation of the financial statements in accordance with
International Financial Reporting Standards (IFRS) , and for such
internal control as management determines is necessary to enable
the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible
for assessing the Entity's ability to continue as a going concern,
disclosing as applicable, matters related to going concern and
using the going concern basis of accounting unless management
either intends to liquidate the Entity or to cease operations, or
has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the
Entity's financial reporting process.
Auditors' Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditors' report that includes our opinion.
Reasonable assurance is a high level of assurance but is not a
guarantee that an audit conducted in accordance with Canadian
generally accepted auditing standards will always detect a material
misstatement when it exists.
Misstatements can arise from fraud or error and are considered
material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users
taken on the basis of the financial statements.
As part of an audit in accordance with Canadian generally
accepted auditing standards, we exercise professional judgment and
maintain professional skepticism throughout the audit.
We also:
-- Identify and assess the risks of material misstatement of the
financial statements, whether due to fraud or error, design and
perform audit procedures responsive to those risks, and obtain
audit evidence that is sufficient and appropriate to provide a
basis for our opinion.
The risk of not detecting a material misstatement resulting from
fraud is higher than for one resulting from error, as fraud may
involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.
-- Obtain an understanding of internal control relevant to the
audit in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Entity's internal control.
-- Evaluate the appropriateness of accounting policies used and
the reasonableness of accounting estimates and related disclosures
made by management.
-- Conclude on the appropriateness of management's use of the
going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events
or conditions that may cast significant doubt on the Entity's
ability to continue as a going concern. If we conclude that a
material uncertainty exists, we are required to draw attention in
our auditors' report to the related disclosures in the financial
statements or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evidence obtained
up to the date of our auditors' report. However, future events or
conditions may cause the Entity to cease to continue as a going
concern.
-- Evaluate the overall presentation, structure and content of
the financial statements, including the disclosures, and whether
the financial statements represent the underlying transactions and
events in a manner that achieves fair presentation.
-- Communicate with those charged with governance regarding,
among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies
in internal control that we identify during our audit.
-- Provide those charged with governance with a statement that
we have complied with relevant ethical requirements regarding
independence, and communicate with them all relationships and other
matters that may reasonably be thought to bear on our independence,
and where applicable, related safeguards.
-- Obtain sufficient appropriate audit evidence regarding the
financial information of the entities or business activities within
the group Entity to express an opinion on the financial statements.
We are responsible for the direction, supervision and performance
of the group audit. We remain solely responsible for our audit
opinion.
-- Determine, from the matters communicated with those charged
with governance, those matters that were of most significance in
the audit of the financial statements of the current period and are
therefore the key audit matters. We describe these matters in our
auditors' report unless law or regulation precludes public
disclosure about the matter or when, in extremely rare
circumstances, we determine that a matter should not be
communicated in our auditors' report because the adverse
consequences of doing so would reasonably be expected to outweigh
the public interest benefits of such communication.
The engagement partner on the audit resulting in this auditor's
report is Jason Stuart Brown.
Chartered Professional Accountants
Calgary, Canada
March 24, 2021
Consolidated Statements of Financial Position
December 31, December 31,
(thousands of US Dollars) 2020 2019
--------------------------------- ---------------- ----------------
Assets
Current Assets
Cash and cash equivalents $ 30,143 $ 36,111
Restricted cash (note 5) 232 -
Accounts receivable (note
16) 199 5,590
Prepaid expenses and deposits 330 1,123
Inventory - 214
Assets held for sale (note
6) 22,032 -
52,936 43,038
Restricted Cash (note 5) - 258
Right of use lease asset - 78
Exploration and evaluation
assets (note 7) 1,643 4,006
Property, plant and equipment
(note 8) 278 34,283
$ 54,857 $ 81,663
--------------------------------- ---------------- ----------------
Liabilities and Shareholders'
Equity
Current Liabilities
Accounts payable and accrued
liabilities $ 506 $ 5,393
Liabilities directly associated
with the assets held for sale
(note 6) 10,240 -
--------------------------------- ---------------- ----------------
10,746 5,393
Lease Liability - 69
Decommissioning obligations
(note 9) 2,161 8,181
Deferred income taxes (note
11) - 1,702
---------------------------------- ---------------- ----------------
12,907 15,345
Shareholders' Equity
Share capital (note 13) 179,717 179,717
Contributed surplus 22,410 21,229
Accumulated other comprehensive
loss (55,288) (49,273)
Deficit (104,889) (85,355)
---------------------------------- ---------------- ----------------
41,950 66,318
--------------------------------- ---------------- ----------------
$ 54,857 $ 81,663
--------------------------------- ---------------- ----------------
See accompanying notes to the consolidated financial
statements
Approved by the Board
("Tim Marchant") ("Russell Hiscock")
Marchant, Chairman, Director Russell Hiscock, Director
Consolidated Statements of Loss and Comprehensive Loss
For the years ended December 31, 2020 and 2019
(thousands of US Dollars, except share December 31, December 31,
and per share amounts) 2020 2019
--------------------------------------------------
Revenue (note 10)
Petroleum and natural gas sales $ 8,547 $ 10,177
Royalties (1,152) (1,370)
Other Income 615 1,718
-------------------------------------------------- -------------
8,010 10,525
-------------------------------------------------- -------------
Expenses
Production 3,343 3,020
General and administrative (note 12) 4,417 2,350
Severance 580 -
Transaction costs (note 12) 223 983
Accretion on decommissioning liabilities
(note 9) 913 1,261
Foreign exchange loss 901 858
Settlement Income (332) -
Share-based compensation (note 12) 1,032 1,766
Impairment (note 8) 13,445 -
Depletion and depreciation (note 8) 3,649 4,633
28,171 14,871
--------------------------------------------------
Loss for the year before income taxes (20,161) (4,346)
Income taxes (note 11)
Current tax expense 265 -
Deferred tax expense (recovery) (892) 469
-------------------------------------------------- -------------
(627) 469
Net loss (19,534) (4,815)
-------------------------------------------------- -------------
Other comprehensive loss
Currency translation adjustments (6,015) (1,884)
-------------------------------------------------- -------------
Comprehensive loss (25,549) (6,699)
-------------------------------------------------- ------------- -------------
Net loss per share (note 13)
Basic and diluted $ (0.23) $ (0.06)
Weighted average number of shares outstanding
(thousands) 86,585 86,562
-------------------------------------------------- ------------- -------------
See accompanying notes to the consolidated financial
statements
Consolidated Statements of Cash Flows
For the years ended December 31, 2020 and 2019
December 31, December 31,
(thousands of US Dollars) 2020 2019
Cash was provided by (used in):
Operating activities:
Net loss for the year $ (19,534) $ (4,815)
Depletion and depreciation (note 8) 3,649 4,633
Impairment (note 8) 13,445 -
Share-based compensation (notes 12) 1,032 1,766
Accretion on decommissioning liabilities
(note 9) 913 1,261
Unrealized foreign exchange loss 233 427
Deferred tax (recovery) expense (note
11) (892) 469
Decommissioning costs incurred (note
9) (121) (554)
Change in restricted cash (232) -
Change in non-cash working capital (note
15) 1,362 (1,615)
------------------------------------------- --------------
Cash (used in) provided by operating
activities (145) 1,572
------------------------------------------- --------------
Financing activities:
Payment under lease liability (68) (75)
Proceeds from stock options exercised - 201
------------------------------------------- --------------
Cash (used in) provided by financing
activities (68) 126
------------------------------------------- --------------
Investing activities:
Property and equipment expenditures (note
8) (3,130) (3,355)
Exploration and evaluation expenditures
(note 7) (1,715) (8,446)
Banarli Farm-in - 1,452
Change in restricted cash 258 (62)
Change in non-cash working capital (note
15) (447) (1,740)
------------------------------------------- --------------
Cash used in investing activities (5,034) (12,151)
------------------------------------------- --------------
Foreign exchange gain (loss) on cash
held in foreign currencies (721) 571
------------------------------------------- --------------
Net change in cash and cash equivalents (5,968) (9,882)
Cash and cash equivalents, beginning
of year 36,111 45,993
------------------------------------------- --------------
Cash and cash equivalents, end of year $ 30,143 $ 36,111
------------------------------------------- --------------- --------------
See accompanying notes to the consolidated financial
statements
Consolidated Statements of Changes in Shareholders' Equity
For the years ended December 31, 2020 and 2019
(thousands of Number Accumulated
US Dollars and of Other
thousands of common Contributed Comp. Total Shareholders'
shares) Shares Share Capital Surplus Deficit Loss Equity
--------------- --------- ----------------------------- ---------------------------- ------------------------------ ------------- ---------------------------------
Balance,
January
1, 2020 86,585 $ 179,717 $ 21,229 $ (85,355) $ (49,273) $ 66,318
Net loss for
the
year - - - (19,534) - (19,534)
Shares issued - - - - -
Stock option
cancellation - - (14) - - (14)
Currency
translation
adjustments - - - - (6,015) (6,015)
Share-based
Compensation - - 1,195 - - 1,195
--------------- --------- ----------------------------- ---------------------------- ------------------------------ ------------- ---------------------------------
December 31,
2020 86,585 $ 179,717 $ 22,410 $ (104,889) $ (55,288) $ 41,950
--------------- --------- ----------------------------- ---------------------------- ------------------------------ ------------- ---------------------------------
(thousands of Number Accumulated
US Dollars and of Other
thousands of common Contributed Comp. Total Shareholders'
shares) Shares Share Capital Surplus Deficit Loss Equity
--------------- --------- ----------------------------- -------------------- ------------------------------ ------------- ---------------------------------
Balance,
January
1, 2019 86,233 $ 179,384 $ 19,488 $ (80,540) $ (47,389) $ 70,943
Net loss for
the
year - - - (4,815) - (4,815)
Shares issued 352 333 (132) - - 201
Shares -
issuance
costs - - - - -
Currency
translation
adjustments - - - - (1,884) (1,884)
Share-based
Compensation - - 1,873 - - 1,873
--------------- --------- ----------------------------- -------------------- ------------------------------ ------------- ---------------------------------
December 31,
2019 86,585 $ 179,717 $ 21,229 $ (85,355) $ (49,273) $ 66,318
--------------- --------- ----------------------------- -------------------- ------------------------------ ------------- ---------------------------------
See accompanying notes to the consolidated financial
statements
1. Reporting Entity
Valeura Energy Inc. ("Valeura" or the "Company") and its
subsidiaries are currently engaged in the exploration, development
and production of primarily natural gas in Turkey. Valeura is
incorporated in Alberta, Canada and has subsidiaries in the
Netherlands, British Virgin Islands and Turkey. Valeura's shares
are traded on the Toronto Stock Exchange ("TSX") under the trading
symbol VLE and on the Main Market of the London Stock Exchange
("LSE"), under the trading symbol "VLU". Valeura's head office
address is 1200, 202 - 6 Avenue SW, Calgary, AB.
2. Basis of Preparation
(a) Statement of compliance
The consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards
("IFRS") as issued by the International Accounting Standards Board
("IASB") as at and for the years ended December 31, 2020 and 2019
and have been prepared in accordance with the accounting policies
and methods of computation as set forth in note 3 below.
Operating, transportation and marketing expenses in the
statement of loss and comprehensive loss are presented as a
combination of function and nature in conformity with industry
practices. Depletion, depreciation and finance expenses are
presented in separate lines by their nature, while net
administrative expenses are presented on a functional basis.
Significant expenses such as salaries and benefits and share-based
compensation are presented by their nature in the notes to the
consolidated financial statements.
The consolidated financial statements were authorized for issue
by the Board of Directors on March 24, 2021.
(b) Basis of measurement
The consolidated financial statements have been prepared on the
historical cost basis except for certain financial and
non-financial assets and liabilities, which have been measured at
fair value. The methods used to measure fair value are discussed in
note 4.
The global impact of the COVID-19 pandemic as well as recent
declines in spot prices for oil and gas have resulted in
significant declines in global stock markets and has created a
great deal of uncertainty as to the health of the global economy.
As a result, oil and gas companies are subject to liquidity risks
from not maintaining their revenues and earnings as well as
maintaining ongoing operating expenditure requirements and funding
future development expenditures. These factors are likely to have a
negative impact on the Company's ability to raise equity, if
required, in the near future or on terms favourable to the
Company.
In 2020, the Company was able to maintain its gas production and
serve its customers in Turkey during the period of shutdowns and
curfews related to COVID-19. Staffing was reduced and additional
safety and health measures were introduced across all operations.
These measures were successful, and the Company experienced no
COVID outbreaks in any of its operations.
Any shutdowns requested or mandated by government authorities in
response to the outbreak of COVID-19 may have a material impact to
the Company's planned operating activities, however, no mandated
shutdowns have affected operations to date. Valeura is adhering to
advice provided by local and international health authorities
regarding social distancing and increased hygiene practices.
The COVID-19 pandemic is an evolving situation that may continue
to have widespread implications for the Company's business
environment, operations, and financial conditions. Management
cannot reasonably estimate the length or severity of this pandemic
and will continue to monitor the situation closely.
The Company's consolidated financial statements include the
accounts of Valeura and its subsidiaries and are expressed in US
Dollars, unless otherwise stated.
(c) Functional and presentation currency
The consolidated financial statements are presented in US
Dollars which is Valeura's reporting currency. Valeura's and its
foreign subsidiaries transact in currencies other than the US
Dollar and have a functional currency of Turkish Lira and Canadian
dollars as follows:
Company Functional Currency
Valeura Energy Inc. Canadian Dollars
--------------------
Valeura Energy (Netherlands) Turkish Lira
Cooperatief UA
--------------------
Valeura Energy (Netherlands) Turkish Lira
BV
--------------------
Corporate Resources BV Turkish Lira
--------------------
Thrace Basin Natural Gas Turkiye Turkish Lira
Corporation
--------------------
The functional currency of a subsidiary is the currency of the
primary economic environment in which the subsidiary operates.
Transactions denominated in a currency other than the functional
currency are translated at the prevailing rates on the date of the
transaction. Any monetary items held in a currency which is not the
functional currency of the subsidiary are translated to the
functional currency at the prevailing rate as at the date of the
statement of financial position. All exchange differences arising
as a result of the translation to the functional currency of the
subsidiary are recorded in earnings.
Translation of all assets and liabilities from the respective
functional currencies to the reporting currency are performed using
the rates prevailing at the statement of financial position date.
The differences arising upon translation from the functional
currency to the reporting currency are recorded as currency
translation adjustments in other comprehensive income or loss
("OCI") and are held within accumulated other comprehensive income
or loss ("AOCI") until a disposal or partial disposal of a
subsidiary. A disposal or partial disposal will then give rise to a
realized foreign exchange gain or loss which is recorded in
earnings.
(d) Use of estimates and judgments
The preparation of consolidated financial statements in
conformity with IFRS requires management to make judgments,
estimates and assumptions that affect the application of accounting
policies and the reported amounts of assets, liabilities, income
and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognized in the year
in which the estimates are revised and in any future years
affected.
Critical judgments in applying accounting policies:
The following are the critical judgments that management has
made in the process of applying the Company's accounting policies
and that have the most significant effect on the amounts recognized
in the consolidated financial statements:
-- Valeura's assets are aggregated into cash-generating units
for the purpose of calculating impairment. Cash generating units
("CGU" or "CGUs") are based on an assessment of the unit's ability
to generate independent cash inflows. The determination of these
CGUs was based on management's judgment in regard to shared
infrastructure, geographical proximity, petroleum type and similar
exposure to market risk and materiality.
-- Judgments are required to assess when internal or external
indicators of impairment exist and impairment testing is required.
In determining the recoverable amount of assets or CGUs, in the
absence of quoted market prices, impairment tests are based on
estimates of proved and probable reserves which are dependent upon
variables including forecasted oil and natural gas prices,
operating costs, royalties, production volumes, future development
costs, and other relevant assumptions all of which are subject to
many uncertainties and interpretations.
-- The application of the Company's accounting policy for
exploration and evaluation assets requires management to make
certain judgments as to future events and circumstances as to
whether economic quantities of reserves have been found.
-- Judgments are made by management to determine the likelihood
of whether deferred income tax assets at the end of the reporting
period will be realized from future taxable earnings.
-- Costs associated with acquiring oil and natural gas licenses,
carrying out seismic surveys and other technical studies and
exploratory drilling are accumulated as exploration and evaluation
("E&E") assets pending determination of technical feasibility
and commercial viability. Establishment of technical feasibility
and commercial viability is subject to judgment and involves
management's review of project economics, resource quantities,
expected production techniques, production costs and required
capital expenditures to confirm continued intent to develop and
extract the underlying resources. Management uses the establishment
of commercial reserves within the exploration area as the basis for
determining technical feasibility and commercial viability. Upon
determination of commercial reserves, E&E assets attributable
to those reserves are tested for impairment and reclassified from
E&E assets to a separate category within property, plant and
equipment referred to as oil and natural gas properties.
Key sources of estimation uncertainty:
The following are key estimates and their assumptions made by
management affecting the measurement of balances and transactions
in the consolidated financial statements:
-- Estimation of recoverable quantities of proved and probable
reserves are used in the calculation of depletion, impairment and
impairment reversals. Reserve estimates and their related cash
flows are based on a number of significant assumptions, which
include forecasted oil and natural gas prices, operating costs,
royalties, production volumes and future development costs, all of
which are subject to many uncertainties and interpretations. The
Company expects that, over time, its reserve estimates will be
revised upward or downward based on updated information such as the
results of future drilling, testing and production levels and
changes in commodity prices.
Independent third-party reserve evaluators are engaged annually
to estimate proved and probable reserves and the related cash flows
from the Company's interest in oil and gas properties. This
evaluation of proved and probable reserves is prepared in
accordance with the reserves definitions as set up by the Canadian
Securities Administrators in National Instrument 51-101 - Standards
of Disclosure for Oil and Gas Activities and the Canadian Oil and
Gas Evaluation ("COGE") Handbook.
-- The Company estimates the decommissioning obligations for oil
and natural gas wells and their associated production facilities
and pipelines. In most instances, removal of assets and remediation
occurs many years into the future. Amounts recorded for the
decommissioning obligations and related accretion expense require
assumptions regarding removal date, future environmental
legislation, the extent of reclamation activities required, the
engineering methodology for estimating cost, inflation estimates,
future removal technologies in determining the removal cost, and
the estimate of the liability specific discount rates to determine
the present value of these cash flows.
-- The Company's estimate of share-based compensation is based
upon estimates of historic volatility and forfeiture rates.
-- The deferred tax liability is based on estimates as to the
timing of the reversal of temporary differences, substantively
enacted tax rates and the likelihood of assets being realized.
3. Significant Accounting Policies
The accounting policies set out below have been applied
consistently to all years presented in the consolidated financial
statements and have been applied consistently by the Company and
its subsidiaries, except as described below.
(a) Basis of consolidation
(i) Subsidiaries:
Subsidiaries are entities controlled by the Company. Control
exists when the Company has the power to govern the financial and
operating policies of an entity so as to obtain benefits from its
activities. In assessing control, substantive potential voting
rights are taken into account. The financial statements of
subsidiaries are included in the consolidated financial statements
from the date that control commences until the date that control
ceases.
The acquisition method of accounting is used to account for
acquisitions of subsidiaries and assets that meet the definition of
a business under IFRS. The cost of an acquisition is measured as
the fair value of the assets given, equity instruments issued and
liabilities incurred or assumed at the date of exchange.
Identifiable assets acquired and liabilities and contingent
liabilities assumed in a business combination are measured
initially at their fair values at the acquisition date. The excess
of the cost of acquisition over the fair value of the identifiable
assets, liabilities and contingent liabilities acquired is recorded
as goodwill. If the cost of acquisition is less than the fair value
of the net assets of the subsidiary acquired, the difference is
recognized immediately in earnings.
(ii) Jointly controlled operations and jointly controlled assets:
A portion of the Company's exploration and development
activities are conducted jointly with others. The joint interests
are accounted for on a proportionate consolidation basis and as a
result the financial statements reflect only the Company's
proportionate share of the assets, liabilities, revenues, expenses
and cash flows from these activities.
Valeura has one joint venture arrangements as follows:
Name of the joint Nature of the relationship Principal place Proportion of
arrangement with the joint of business participating
arrangement of joint arrangement share
TBNG Joint Venture Operator Turkey 81.5% (all rights)
--------------------------- ---------------------- -------------------
(iii) Transactions eliminated on consolidation:
Intercompany balances and transactions, and any unrealized
income and expenses arising from intercompany transactions, are
eliminated in preparing the consolidated financial statements.
(b) Financial instruments
(j) Non-derivative financial instruments:
Financial assets are classified in three principal
classification categories: measured at amortized cost, fair value
through other comprehensive income ("FVOCI"), or fair value through
profit or loss ("FVTPL"). Financial liabilities are classified and
measured at amortized cost of FVTPL. Financial instruments are
recognized initially at fair value, net of any directly
attributable transactions costs.
Where the fair value option is applied to financial liabilities,
any change in fair value resulting from an entity's own credit
risks is recorded through other comprehensive income or loss rather
than net income or loss. The classification of financial assets is
generally based on the business model in which a financial asset is
managed and the characteristics of its contractual cash flows.
A financial asset is measured at amortized cost if it meets both
of the following conditions: (a) the asset is held with a business
model whose objective is to hold assets to collect contractual cash
flows; and (b) the contractual terms of the financial assets give
rise to cash flows on specified dates that are solely payments of
principal and interest on principal amounts outstanding.
Financial assets that meet criteria (b) above that are held
within a business model whose objective is achieved by both
collecting contractual cash flows and selling financial assets is
subsequently measured at FVOCI. All other financial assets and
liabilities are subsequently measured at FVTPL.
Accounts receivable, prepaid expenses and deposits, accounts
payable and accrued liabilities are measured at amortized cost.
Valeura does not currently have financial instrument contracts
to which it applies hedge accounting.
(ii) Share capital:
Common shares are classified as equity. Incremental costs
directly attributable to the issue of common shares and share
options are recognized as a deduction from equity, net of any tax
effects.
(c) Property, plant and equipment and exploration and evaluation assets
(i) Recognition and measurement:
Exploration and evaluation expenditures:
Pre-licence costs are recognized in earnings as incurred.
Exploration and evaluation ("E&E") costs, including the costs
of acquiring licences and directly attributable general and
administrative costs, are initially capitalized as exploration and
evaluation assets. The costs are accumulated in cost centres by
well, field or exploration area pending determination of technical
feasibility and commercial viability.
Exploration and evaluation assets are assessed for impairment if
sufficient data exists to determine technical feasibility and
commercial viability, and facts and circumstances suggest that the
carrying amount exceeds the recoverable amount. For purposes of
impairment testing, exploration and evaluation assets are allocated
to cash-generating units. The technical feasibility and commercial
viability of extracting a mineral resource is considered to be
determinable when proved and/or probable reserves are determined to
exist. A review of each exploration CGU is conducted, at least
annually, to ascertain whether proved and/or probable reserves have
been discovered. Upon determination of proved and/or probable
reserves, the CGU within which the intangible exploration and
evaluation assets attributable to those reserves is first tested
for impairment and then the applicable value is reclassified from
exploration and evaluation assets to property, plant and equipment.
Proceeds on E&E assets are recorded against the recognized
E&E balance, and no gain or loss is recognized.
Development and production costs:
Items of property, plant and equipment ("PP&E"), which
include oil and gas development and production assets, are measured
at cost less accumulated depletion and depreciation and accumulated
impairment losses. Development and production assets are grouped
into CGUs for impairment testing. When significant parts of an item
of PP&E, including oil and natural gas interests, have
different useful lives, they are accounted for as separate items
(components).
Gains and losses on disposal of an item of property, plant and
equipment, including oil and natural gas interests, are determined
by comparing the proceeds from disposal with the carrying amount of
PP&E and are recognized in earnings.
(ii) Subsequent costs:
Costs incurred subsequent to the determination of technical
feasibility and commercial viability and the costs of replacing
parts of PP&E are recognized as oil and natural gas interests
only when they increase the future economic benefits embodied in
the specific asset to which they relate. All other expenditures are
recognized in earnings as incurred. Such capitalized oil and
natural gas interests generally represent costs incurred in
developing proved and/or probable reserves and bringing in or
enhancing production from such proved and probable reserves, and
are accumulated on a field or geotechnical area basis. The carrying
amount of any replaced or sold component is derecognized. The costs
of the day-to-day servicing of property, plant and equipment are
recognized in earnings as incurred.
(iii) Depletion and depreciation:
The net carrying value of development or production assets is
depleted using the unit of production method by reference to the
ratio of production in the year to the related proved and probable
reserves, taking into account estimated future development costs
necessary to bring those proved and probable reserves into
production. Future development costs are estimated taking into
account the level of development required to produce the proved and
probable reserves. These estimates are reviewed by independent
reserve engineers at least annually.
Other corporate assets are recorded at cost on acquisition and
amortized on a declining-balance basis at rates of 20 percent to 50
percent per year.
(iv) Exploration and evaluation expense:
Upon determination that an exploration and evaluation CGU is
impaired, the Company will transfer costs associated with the
applicable CGU to exploration and evaluation expense in the
period.
(v) Farm-in arrangements:
In circumstances where the Company has entered into farm-in
arrangements whereby the farm-in partner ("partner") will earn a
working interest on certain properties through payment of a
pre-determined portion of the costs of exploration or development
activities, Valeura recognizes a disposal of the partner's working
interest once the commitment has been met and the difference
between the proceeds received and the carrying amount of the asset
are recognized as a gain or loss in earnings for Property, Plant
and Equipment assets and as a reduction of Exploration and
Evaluation Assets for instances where the farm in is on undeveloped
land.
(d) Impairment
(i) Financial assets:
Loss allowances are recognized for expected credit losses
("ECL's) on its financial assets measured at amortized cost. Due to
the nature of the financial assets, loss allowances are measured at
an amount equal to expected lifetime ECLs. Lifetime ECLs are the
anticipated ECLs that result from all possible default events over
the expected life of a financial asset. ECLs are a
probability-weighted estimate of credit loss and are discounted at
the effective interest rate of the related financial asset.
(ii) Non-financial assets:
The carrying amounts of the Company's non-financial assets are
reviewed at each reporting date to determine whether there is any
indication of impairment. If any such indication exists, the
asset's recoverable amount is estimated through an impairment test.
The recoverable amount of an asset or a CGU is the greater of its
value-in-use and its fair value less costs to sell. Fair value less
costs to sell is determined as the amount that would be obtained
from the sale of the assets in an arm's length transaction between
knowledgeable and willing parties.
E&E assets are assessed for impairment when they are
reclassified to property, plant and equipment, and also if facts
and circumstances suggest that the carrying amount exceeds the
recoverable amount. For the purpose of impairment testing, assets
are grouped together into the smallest group of assets that
generates cash inflows from continuing use that are largely
independent of the cash inflows of other assets or groups of
assets, or CGUs.
In assessing value-in-use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate
that reflects current market assessments of the time value of money
and the risks specific to the asset or CGU. Value-in-use is
generally computed by reference to the present value of the future
cash flows expected to be derived from production of proved and
probable reserves. E&E assets are allocated to related CGUs
when they are assessed for impairment, both at the time of any
triggering facts and circumstances as well as upon their eventual
reclassification to PP&E.
An impairment loss is recognized if the carrying amount of an
asset or its CGU exceeds its estimated recoverable amount.
Impairment losses are recognized in earnings. Impairment losses
recognized in respect of CGUs are allocated to reduce the carrying
amounts of the assets in the unit (group of units) on a pro-rata
basis.
An impairment loss in respect of PP&E and E&E assets,
recognized in prior years, is assessed at each reporting date for
any indications that the loss has decreased or no longer exists. An
impairment loss is reversed if there has been a change in the
estimates used to determine the recoverable amount. An impairment
loss is reversed only to the extent that the asset's carrying
amount does not exceed the carrying amount that would have been
determined, net of depletion and depreciation or amortization, if
no impairment loss had been recognized.
(e) Share based payments
The grant date fair value of options and performance warrants
granted to employees is recognized as compensation expense, with a
corresponding increase in contributed surplus over the vesting
period. A forfeiture rate is estimated on the grant date and is
subsequently adjusted to reflect the actual number of options that
vest.
(f) Provisions
A provision is recognized if, as a result of a past event, the
Company has a present legal or constructive obligation that can be
estimated reliably, and it is probable that an outflow of economic
benefits will be required to settle the obligation. Provisions are
determined by discounting the expected future cash flows at a
pre-tax rate that reflects current market assessments of the time
value of money and the risks specific to the liability. Provisions
are not recognized for future operating losses.
(i) Decommissioning obligations:
The Company's activities give rise to dismantling,
decommissioning and site disturbance re-mediation activities.
Provision is made for the estimated cost of site restoration and
capitalized in the relevant asset category. Decommissioning
obligations are measured at the present value of management's best
estimate of expenditure required to settle the present obligation
at the statement of financial position date. Subsequent to the
initial measurement, the obligation is adjusted at the end of each
period to reflect the passage of time and changes in the estimated
future cash flows underlying the obligation. The increase in the
provision due to the passage of time is recognized as finance costs
whereas increases/decreases due to changes in the estimated future
cash flows are capitalized. Actual costs incurred upon settlement
of the decommissioning obligations are charged against the
provision to the extent the provision was established.
(g) Revenue from contracts with customers
Valeura's petroleum and natural gas revenues from the sale of
natural gas and crude oil are based on the consideration specified
in the contracts with customers. For natural gas, pricing is linked
to BOTAS benchmark pricing, while crude oil pricing is linked to
Brent benchmark pricing. Valeura recognizes revenue when it
transfers control of the product to the customer, which is
generally when legal title passes to the customer and collection is
reasonably assured.
Valeura evaluates its arrangements with third parties and
partners to determine if Valeura is acting as the principal or as
the agent. Valeura is considered the principal in a transaction
when it has primary responsibility for the transaction. If Valeura
acts in the capacity of an agent rather than as a principal in a
transaction, then the revenue is recognized on a net basis, only
reflecting the fee, if any realized by Valeura from the
transaction.
(h) Finance income and expenses
Finance expense comprises interest expense on any borrowings,
accretion of the discount on provisions and impairment losses
recognized on financial assets.
Borrowing costs incurred for the construction of qualifying
assets are capitalized during the period of time that is required
to complete and prepare the assets for their intended use or sale.
All other borrowing costs are recognized in earnings using the
effective interest method. The capitalization rate used to
determine the amount of borrowing costs to be capitalized is the
weighted average interest rate applicable to the Company's
outstanding borrowings during the period.
Interest income is recognized as it accrues in earnings, using
the effective interest method.
(i) Income tax
Income tax expense comprises current and deferred tax. Income
tax expense is recognized in earnings except to the extent that it
relates to items recognized directly in equity, in which case it is
recognized in equity.
Current tax is the expected taxes payable on the taxable income
for the year, using tax rates enacted or substantively enacted at
the reporting date, and any adjustment to taxes payable in respect
of previous years.
Deferred tax is recognized using the statement of financial
position method, providing for temporary differences between the
carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for taxation purposes. Deferred tax
is not recognized on the initial recognition of assets or
liabilities in a transaction that is not a business
combination.
Deferred tax is measured at the tax rates that are expected to
be applied to temporary differences when they reverse, based on the
laws that have been enacted or substantively enacted by the
reporting date. Deferred tax assets and liabilities are offset if
there is a legally enforceable right to offset, and they relate to
income taxes levied by the same tax authority on the same taxable
entity, or on different tax entities, but they intend to settle
current tax liabilities and assets on a net basis or their tax
assets and liabilities will be realized simultaneously.
A deferred tax asset is recognized to the extent that it is
probable that future taxable profits will be available against
which the temporary difference can be utilized. Deferred tax assets
are reviewed at each reporting date and are reduced to the extent
that it is no longer probable that the related tax benefit will be
realized.
(j) Earnings per share
Basic per share amounts are calculated by dividing the net
income or loss attributable to common shareholders of the Company
by the weighted average number of common shares outstanding during
the period. Diluted per share amounts are determined by adjusting
the net income or loss attributable to common shareholders and the
weighted average number of common shares outstanding for the
effects of dilutive instruments such as options granted to
employees.
(k) Assets held for sale
Non-current assets or disposal groups comprising assets and
liabilities, are classified as held for sale if it is highly
probably that they will be recovered primarily through sale rather
than through continuing use.
Such assets, or disposal groups, are generally measured at the
lower of their carrying amount and fair value less costs to sell.
Any impairment loss on a disposal group is allocated first to
goodwill, and then to the remaining assets and liabilities on a pro
rata basis, except that no loss is allocated to inventories,
financial assets, deferred tax assets, which continue to be
measured in accordance with the Company's other accounting
policies. Impairment losses on initial classification as asset held
for sale and subsequent gains and losses on remeasurement are
recognized in profit and loss. Once classified as held for sale,
property, plant and equipment are no longer amortised or
depreciated.
4. Determination of Fair Values
A number of the Company's accounting policies and disclosures
require the determination of fair value, for both financial and
non-financial assets and liabilities. Fair values have been
determined for measurement and/or disclosure purposes based on the
methods described below. When applicable, further information about
the assumptions made in determining fair values is disclosed in the
notes specific to that asset or liability.
(i) Cash, deposits, accounts receivable, accounts payable and accrued liabilities:
The fair value of cash, deposits, accounts receivable, accounts
payable and accrued liabilities are estimated as the present value
of future cash flows, discounted at the market rate of interest at
the reporting date. At December 31, 2020 and December 31, 2019, the
fair value of these balances approximated their carrying values due
to their short term to maturity.
(ii) Stock options:
The fair value of employee stock options is measured using a
Black Scholes option pricing model. Measurement inputs include
share price on measurement date, exercise price of the instrument,
expected volatility based on the weighted average historic
volatility adjusted for changes expected due to publicly available
information, weighted average expected life of the instruments
based on historical experience and general option holder behavior,
expected dividends, the risk-free interest rate based on government
bonds, and an estimated forfeiture rate.
5. Restricted Cash
The Company has restricted cash in the amount of $0.2 million
(2019 - $0.3 million) that is securing licence deposits with the
General Directorate of Mining and Petroleum Affairs of the Republic
of Turkey ("GDMPA"). This restricted cash is held mostly with
National Bank of Canada ("NBC") as security, along with the Account
Performance Security Guarantee ("APSG") facility described in note
14, for decommissioning or abandonment obligations and ongoing work
programmes on the Company's Turkish licences and as security for
third party gas purchase, as described in Note 10 - Revenue.
6. Assets Held for Sale
On October 20, 2020, the Company announced the execution of a
Share Purchase Agreement to sell its shallow conventional gas
business for cash consideration of $15.5 million, deferred cash
consideration of $1.0 million and contingent consideration of up to
$1.5 million subject to normal closing adjustments with an economic
effective date of July 1, 2020. The transaction is structured as a
sale of shares of Thrace Basin Natural Gas (Turkiye) Corporation
("TBNG") and Corporate Resources B.V. ("CRBV"), both wholly owned
subsidiaries of Valeura which, following an internal reorganisation
completed during Q3 2020, are the entities which collectively hold
the Company's conventional gas producing business. Deal completion
is subject to regulatory approvals and the transaction is expected
to close in 2021.
As at December 31, 2020, assets and liabilities held for sale
include the current and non-current assets and liabilities of TBNG
and CRBV as a disposal group. The following table summarizes the
major classes:
Assets held for Sale Total
------------------------------------------
Accounts receivable $ 2,826
Inventory 179
Prepaid expenses and deposits 245
Right of use asset 90
Exploration and evaluation assets (note
7) 1,339
Property and Equipment (note 8) 17,353
------------------------------------------- ---------------
Balance, December 31, 2020 $ 22,032
------------------------------------------- ---------------
Liabilities directly associated with the Total
assets held for sale
------------------------------------------ ---------------
Accounts payable and accrued liabilities 2,189
Lease liability 87
Deferred income taxes 430
Asset retirement obligation (note 9) 7,534
------------------------------------------- ---------------
Balance, December 31, 2020 $ 10,240
------------------------------------------- ---------------
7. Exploration and Evaluation Assets
Cost Total
--------------------------------------------
Balance, December 31, 2018 $ 6,920
Additions 8,446
Banarli Farm-in payments received (1,452)
Transfers to property, plant and equipment
(note 8) (8,878)
Capitalized share-based compensation 107
Effects of movements in exchange rates (1,137)
-------------------------------------------------- --------------
Balance, December 31, 2019 $ 4,006
-------------------------------------------------- --------------
Additions 1,715
Transfer to property, plant and equipment
(note 8) (1,918)
Capitalized share-based compensation 167
Effects of movements in exchange rates (988)
Transfer to assets held for sale (note
6) (1,339)
-------------------------------------------------- --------------
Balance, December 31, 2020 $ 1,643
-------------------------------------------------- --------------
Exploration and evaluation ("E&E") assets consist of the
Company's exploration projects which are pending the determination
of proved or probable reserves. Additions represent the Company's
share of costs incurred on E&E assets during the period.
Phase 2 of the Banarli Farm-in was a commitment to complete a 3D
seismic programme with a minimum cost of at least $10 million. The
final cost total for the Karaca 3D seismic programme, agreed by
partners totaled US$8.5 million, requiring an additional payment
from Equinor to Valeura of $1.5 million in 2019, which is recorded
as an additional farm-in payment against exploration and evaluation
assets.
In Q2 2020, the Company received approval for the first two-year
exploration period extension for the Company's three exploration
licences which will now expire on June 27, 2022. This is the first
of up to three possible two-year extensions providing a period of
up to six additional years to explore and appraise the Deep Gas
play before the requirement to convert the licences to production
leases. Each licence carries an obligation for one exploration well
and geological studies for the current exploration period.
Recoverability of exploration and evaluation assets
The Company assesses the recoverability of exploration and
evaluation assets, before and at the moment of reclassification to
property, plant and equipment, by allocating the E&E assets to
appropriate CGUs. Valeura tested its E&E assets for any
transfers during 2020 and there was no impairment on these transfer
dates. At December 31, 2020, Valeura determined that no indicators
of impairment existed with respect to the Company's E&E
assets.
Impairment of exploration and evaluation assets is recognized in
earnings. E&E expense consists of exploration projects that are
considered to have a lower recoverable amount when compared to book
value. E&E expense for the year ended December 31, 2020 was nil
(2019 - nil).
8. Property, Plant and Equipment
Cost Total
------------------------------------------
Balance, December 31, 2018 $ 63,788
Additions 3,355
Transfer from exploration and evaluation
assets (note 7) 8,878
Change in decommissioning
obligations (note 9) (3,122)
Effects of movements in exchange
rates (6,773)
Balance, December 31, 2019 $ 66,126
-------------------------------------------------
Additions 3,130
Transfer from exploration and evaluation
assets (note 7) 1,918
Change in decommissioning
obligations (note 9) 2,021
Effects of movements in exchange
rates (13,048)
Transfer to assets held for
sale (note 6) (45,039)
Balance, December 31, 2020 $ 15,108
-------------------------------------------------
Accumulated depletion and Total
depreciation
----------------------------------
Balance, December 31, 2018 $ 30,882
Depletion and depreciation
expense 4,563
Effects of movements in exchange
rates (3,602)
------------------------------------ ------------------
Balance, December 31, 2019 $ 31,843
------------------------------------ ------------------
Depletion and depreciation
expense 3,566
Impairment 13,445
Effects of movements in exchange
rates (6,338)
Transfer to assets held for
sale (note 6) (27,686)
Balance, December 31, 2020 $ 14,830
------------------------------------
Net book value Total
----------------------------
Balance, December 31, 2019 $ 34,283
Balance, December 31, 2020 $ 278
------------------------------ ------------------
The ultimate recovery of property, plant and equipment costs in
Turkey is dependent upon the Company obtaining government
approvals, obtaining and maintaining licences in good standing, the
existence and commercially viable exploitation of petroleum and
natural gas reserves and undeveloped lands, and other
uncertainties.
The Company's right of use lease asset, which is classified as
asset held for sale, had a depreciation expense of $0.1 million in
2020.
(a) Impairment testing
The Company conducted an assessment of impairment triggers and
concluded there was a trigger for impairment with respect to the
Deep Gas assets within the Company's only CGU in the Thrace Basin
of Turkey as at December 31, 2020. The Deep Gas assets comprising
the property, plant and equipment substantially related to drilling
costs in the deep zone within the Thrace Basin CGU. The triggers
assessed included the recent execution of the sale and purchase
agreement described in Note 6 Assets Held for Sale which includes
the sale of all of the Company's proved and probable reserves as
reported at December 31, 2020.
At December 31, 2020, all of the Company's proved and probable
reserves are related to the assets held for sale. Accordingly, a
non-cash impairment charge of $13.4 million was included in the net
loss.
(b) Contingencies
Although the Company believes that it has title to its oil and
natural gas properties, it cannot control or completely protect
itself against the risk of title disputes or challenges.
(c) Depletion - future development costs
For the purposes of calculating depletion, petroleum and natural
gas properties in Turkey include estimated future development costs
of $101.7 million (December 31, 2019 - $114.6 million) associated
with development of the Company's proved and probable reserves. At
December 31, 2020, the future development costs are associated with
the assets held for sale.
9. Decommissioning Obligations
December 31, December 31,
2020 2019
Decommissioning obligations, beginning
of year $ 8,181 $ 11,665
Obligations incurred 871 548
Obligations settled (121) (554)
Change in estimates 1,610 (3,669)
Accretion of decommissioning obligations 913 1,261
Effects of movements in exchange rates (1,759) (1,070)
Transfer to liabilities directly associated (7,534) -
with assets held for sale
--------------------------------------------- ------------------------ ---------------------
Decommissioning obligations, end of
year $ 2,161 $ 8,181
--------------------------------------------- ------------------------ ---------------------
The Company's decommissioning obligations result from its
ownership interest in oil and natural gas assets including well
sites and gathering systems. The total decommissioning obligation
is estimated based on the Company's net ownership interest in all
wells and facilities, estimated costs to reclaim and abandon these
wells and facilities and the estimated timing of the costs to be
incurred in future years.
The following significant assumptions were used to estimate the
decommissioning obligations:
December 31, December 31,
2020 2019
Undiscounted cash flows $ 8,084 $ 23,432
Undiscounted cash flows associated with $ 20,130 -
assets held for sale
Risk free rate - Turkey 12.5% 12.0%
Inflation rate - Turkey 14.6% 11.8%
Timing of cash flows 2-13 years 1-14 years
----------------------------------------- ------------------------- ---------------------
10. Revenue
Under the contracts, the Company is required to deliver a
variable volume of natural gas to the contract counter party.
Revenue is recognised when a unit of production is delivered to the
contract counterparty. The amount of revenue recognised is based on
the agreed transaction price, whereby any variability in revenue
relates specifically to the Company's efforts to transfer
production or the customer's demand for natural gas, and therefore
the resulting revenue is allocated to the production delivered in
the period during which the variability occurs. As a result, none
of the variable revenue is considered constrained.
The Company's contracts have a term of one year or less, whereby
delivery takes place throughout the contract period. Revenues are
typically collected between the 12th and 25th day of the month
following production.
The Company produces a small amount of crude oil that is sold on
a spot basis as volumes warrant. Oil is delivered by truck to
customers and revenue is recognised in the period in which the
delivery occurs.
In addition to selling natural gas that the Company produces,
the Company sells natural gas that it purchases from other
producers in the area. This purchased natural gas is sold to the
same customers, using the same contracts, through the same
distribution network as natural gas the Company produces. The
Company purchases natural gas from other producers under contracts
that are typically one year or less in length at a discount of
between 12.5% and 15% to the BOTAS price. These contracts require
the Company to deliver the purchased natural gas to customers. The
Company does not have the right, nor the ability, to store the
purchased natural gas. Since the Company does not have the ability
to influence the decision making process for the purchased natural
gas volumes or the discretion to set prices, does not experience
any inventory risk, does not perform any processing of the product
and does not remit royalties to the Turkish government for the
product, it considers itself an agent in these transactions.
Revenue for this purchased gas is included net of purchase cost in
Other income.
Interest and other revenue is comprised mainly of interest on
cash in hand.
All of the Company's natural gas is sold in Turkey, in the
Thrace Basin, which is the same area in which it is produced.
December 31, December 31,
2020 2019
Natural gas $ 8,315 $ 9,954
Crude oil 232 223
Petroleum and natural gas sales $ 8,547 $ 10,177
December 31, December 31,
2020 2019
Royalties - natural gas $ 1,039 $ 1,245
Crude oil 28 25
Gross overriding royalty 85 100
Royalties $ 1,152 $ 1,370
December 31, December 31,
2020 2019
-------------------------------------- ------------------ ------------------
Third party natural gas sales net of
costs $ 303 $ 701
Interest and other revenue 312 1,017
Other income $ 615 $ 1,718
11. Income Taxes
A reconciliation of the expected tax expense to the actual
provision for current and deferred taxes is as follows:
December 31, December 31,
2020 2019
-------------------------------------
Loss before taxes from operations $ (20,161) $ (4,346)
Combined federal and provincial tax
rate 24.00% 27.00%
------------------------------------- -----------------------
Expected income tax recovery (4,840) (1,173)
Change in tax rates 1,662 -
Non-taxable items and other 764 (348)
Foreign tax rate differential 277 (86)
Change in unrecognized deferred tax
assets 1,510 2,076
Income tax (recovery) expense $ (627) $ 469
-------------------------------------
The deferred income tax rate applied to the temporary
differences in 2020 was 24.0 percent (2019 - 27.0 percent). The
Turkish tax rate for 2020 and 2019 is 22%.
The components of the deferred tax balances are as follows:
December 31, December 31,
2020 2019
-----------------------------------------------
Property, plant and equipment and exploration
and evaluation assets $ (3,215) $ (5,687)
Decommissioning obligations 1,657 1,779
Non-capital losses and other 538 662
Foreign Exchange 590 1,544
Transferred to assets held for sale 430
$ - $ (1,702)
-----------------------------------------------
The temporary differences that determine the unrecognized
deferred tax assets are as follows:
December 31, December 31,
2020 2019
-----------------------------------------------
Property, plant and equipment and exploration
and evaluation assets $ 7,880 $ 5,515
Share issuance costs 1,769 2,386
Non-capital losses and other 57,957 49,414
Foreign Exchange 5,206 (235)
$ 72,812 $ 57,080
-----------------------------------------------
The Company has tax assets of approximately $73.2 million at
December 31, 2020 (2019 - $73.4 million) available for deduction
against future taxable income. Cumulative non-capital loss
carry-forwards in the amount of $58.3 at December 31, 2020 (2019 -
$52.4 million) expire between 2020 and 2037.
A continuity of the deferred income tax liability for 2019 and
2020 is detailed in the following tables:
December December
Movement in temporary 31, 31,
2019 Recognized
differences during in profit Other comprehensive
the year or loss income (loss) 2020
----------
Property, plant and
equipment and
exploration and evaluation
assets $ (5,687) $ 1,313 $ 1,159 $ (3,215)
Decommissioning obligations 1,779 217 (339) 1,657
Non-capital losses 662 1 (125) 538
Foreign exchange and
other 1,544 (639) (315) 590
Transferred to asset
held for sale 430
$ (1,702) $ 892 $ 380 $ -
----------
December December
Movement in temporary 31, 31,
2018 Recognized
differences during in profit Other comprehensive
the year or loss income (loss) 2019
----------
Property, plant and
equipment and
exploration and evaluation
assets $ (5,692) $ (660) $ 665 $ (5,687)
Decommissioning obligations 2,540 (479) (282) 1,779
Non-capital losses 46 637 (21) 662
Foreign exchange and
other 1,708 35 (199) 1,544
$ (1,398) $ (467) $ 163 $ (1,702)
----------
12. Administrative Expenses
The components of administrative expenses are as follows:
For the years ended December 31, December 31,
2020 2019
Cash:
Salaries and benefits (1) $ 2,777 $ 2,833
Other (2) 3,212 3,229
--------------------------------------- -------------------------------------- -----------------------------------
5,989 6,062
Capitalized overhead and recoveries
(3) (1,572) (3,712)
--------------------------------------- -------------------------------------- -----------------------------------
General and administrative 4,417 2,350
--------------------------------------- -------------------------------------- -----------------------------------
Non-cash:
Share-based compensation 1,199 1,873
Capitalized share-based compensation
(3) (167) (107)
--------------------------------------- -------------------------------------- -----------------------------------
Share-based compensation $ 1,032 $ 1,766
--------------------------------------- -------------------------------------- -----------------------------------
(1) Includes salaries, benefits and bonuses earned by all
Directors, Officers and employees of the Company.
(2) Includes costs such as rent, professional fees, insurance,
travel, office, and other business expenses incurred by the
Company.
(3) Includes a portion of salaries, benefits, share-based
compensation and other G&A directly attributable to the
exploration and development activities of the Company. The
reduction in recoveries in 2020 reflects the reduction in capital
expenditures on the deep gas play and exit of Equinor as a partner
in the play.
Compensation for Executive Officers and Directors are comprised
of the following:
For the years ended December 31, December 31,
2020 2019
Salaries and benefits (1) $ 1,468 $ 1,520
Share-based compensation (2) 832 1,499
Executive Officers and Directors compensation $ 2,300 $ 3,019
(1) Includes salaries, benefits and bonuses earned by Executive
Officers and Directors comprised of: Chairman of the Board,
President and Chief Executive Officer, Chief Financial Officer,
Chief Operating Officer, Vice President, Commercial and other
independent Directors.
(2) Represents the amortization of share-based compensation
expense in the year associated with options granted to Executive
Officers and Directors participating in the Company's Stock Option
Plan.
The Company recorded transaction costs for the year ended
December 31, 2020 of $0.2 million. The 2020 transaction costs are
fees related to the transaction described in Note 6 Assets held for
sale.
13. Share Capital
(a) Authorized
Unlimited number of common shares
Unlimited number of preferred shares, issuable in series
(b) Per share amounts
Per share amounts have been calculated using the weighted
average number of common shares outstanding. The weighted average
number of common shares outstanding for the year ended December 31,
2020 is 86,584,989 (2019 - 86,561,863). As a result of the company
incurring a net loss during each of the last two years, the average
number of common shares outstanding was not increased for
outstanding stock options as the effect would be anti-dilutive.
(c) Stock options
Valeura has an option program that entitles officers, directors,
and employees to purchase shares in the Company. Options are
granted at the market price of the shares at the date of grant,
have a 7 year term and vest over 3 years.
The number and weighted average exercise prices of share options
are as follows:
Weighted average
exercise price
Number of Options (CAD)
Balance, December 31, 2018 4,598,667 $ 1.57
Granted 2,025,000 2.94
Exercised (352,001) 0.76
Forfeited /cancelled (434,999) 3.26
Balance, December 31, 2019 5,836,667 $ 1.97
Granted 3,195,000 0.28
Exercised - -
Expired (240,000) 1.00
Forfeited/cancelled (3,154,834) 2.85
Balance, December 31, 2020 5,636,833 $ 0.57
Exercisable at December 31, 2020 2,768,500 $ 0.77
---------------------------------- ------------------ ---------------------
On November 25, 2020, directors, officers and employees of the
Company voluntarily surrendered stock options for a nominal payment
of $0.01 per option. This resulted in the cancellation of 1,957,500
stock options and the immediate recognition of the remaining $0.3
million of share-based compensation expense associated with these
options.
The following table summarizes information about the stock
options outstanding at December 31, 2020:
Weighted
average
Outstanding remaining Weighted average Exercisable Weighted average
Exercise at December life exercise price at December exercise price
prices (CAD) 31, 2020 (years) (CAD) 31, 2020 (CAD)
$0.25 -
$0.33 2,395,000 6.2 $ 0.25 - $ -
$0.34 -
$0.61 1,074,500 3.1 0.54 674,500 0.57
$0.62 -
$0.71 484,000 0.5 0.65 484,000 0.65
$0.72 -
$0.74 505,000 3.2 0.73 505,000 0.73
$0.75 -
$4.62 1,178,333 3.3 1.13 1,105,000 0.97
------------- ------------ ------------ --------------------------- ------------- -------------------------------
5,636,833 4.3 $ 1.97 2,768,500 $ 0.77
------------- ------------ ------------ --------------------------- ------------- -------------------------------
The fair value, at the grant date during the year, of the stock
options issued was estimated using the Black-Scholes model with the
following weighted average inputs:
December December
Assumptions 31, 2020 31, 2019
--------------------------------
Risk free interest rate (%) 0.8 1.6
Expected life (years) 4.5 4.5
Expected volatility (%) 99.6 86.09
Forfeiture rate (%) 6.8 4.5
Weighted average fair value of
options granted (CAD) $ 0.20 $ 1.84
---------------------------------- ---------- ----------
14. Credit Facilities
Effective March 17, 2020, the Company renewed its APSG facility
with Export Development Canada ("EDC"). The APSG facility, which
was issued to NBC allows the Company to use the facility as
collateral for certain letters of credit issued by NBC. The
facility is effective from March 17, 2020 to May 31, 2021 with a
limit of US$4.5 million and can be renewed on an annual basis. The
Company has issued approximately US$2.9 million in letters of
credit under the APSG facility at current exchange rates .
15. Supplemental Cash Flow Information
December December
31, 2020 31, 2019
----------------------------------------
Change in non-cash working
capital:
Accounts receivable $ 5,850 $ 1,225
Prepaid expenses and deposits 793 418
Inventory 214 (70)
Deposits (non-current) - 94
Accounts payable and accrued
liabilities (509) (5,215)
Movements in exchange
rates 6 193
Transfer to assets held
for sale (5,439) -
---------------------------------------- ------------- -------------
915 (3,355)
---------------------------------------- ------------- -------------
The change in non-cash working capital has been allocated to the
following activities:
------------------------------------------------------------------------
Operating 1,362 (1,615)
Investing (447) (1,740)
------------------------------------------ ------------- -------------
$ 915 $ (3,355)
---------------------------------------- ------------- -------------
16. Financial Risk Management
The Company's activities expose it to a variety of financial
risks that arise as a result of its exploration, development,
production, and financing activities such as:
-- Credit risk
-- Market risk
-- Liquidity risk
This note presents information about the Company's exposure to
each of the above risks, the Company's objectives, policies and
processes for measuring and managing risk, and the Company's
management of capital. Further quantitative disclosures are
included throughout the consolidated financial statements.
The Board of Directors oversees managements' establishment and
execution of the Company's risk management framework. Management
has implemented and monitors compliance with risk management
policies. The Company's risk management policies are established to
identify and analyze the risks faced by the Company, to set
appropriate risk limits and controls, and to monitor risks and
adherence to market conditions and the Company's activities.
(a) Credit risk
Credit risk is the risk of financial loss to the Company if a
customer or counterparty to a financial instrument fails to meet
its contractual obligations, and arises principally from the
Company's receivables from joint venture partners and oil and
natural gas marketers. The maximum exposure to credit risk at
year-end is as follows:
December December
31, 2020 31, 2019
------------------------------- ----
Joint venture receivable from
partners $ 89 $ 1,334
Revenue receivables from
customers 1,688 2,155
Taxes receivable 1,248 2,101
Accounts receivable (1) $ 3,025 $ 5,590
--------------------------------------
(1) Accounts receivable balance includes the portion transferred
to assets held for sale of $2.8 million.
Trade and other receivables:
Substantially all of the Company's petroleum and natural gas
production is marketed under standard industry terms. The Company's
policy to mitigate credit risk associated with the balances is to
establish marketing relationships with credit worthy purchasers.
The Company historically has not experienced any collection issues
with its petroleum and natural gas marketers. Joint venture
receivables are typically collected within one to three months of
the operator invoices being issued to the joint venture partner.
The Company attempts to mitigate the risk from joint venture
receivables by obtaining partner approval of significant capital
expenditures.
Receivables from participants in the petroleum and natural gas
sector, and collection of the outstanding balances can be impacted
by industry factors such as commodity price fluctuations, limited
capital availability and unsuccessful drilling programs. The
Company does not typically obtain collateral from petroleum and
natural gas marketers or joint venture partners; however the
Company can cash call for major projects and does have the ability,
in most cases, to withhold production from joint venture partners
in the event of non-payment, or withhold accounts payable
remittances.
(b) Market risk
Market risk is the risk that changes in market conditions, such
as commodity prices, foreign exchange rates and interest rates will
affect the Company's income or the value of financial instruments.
The objective of market risk management is to manage and control
market risk exposures within acceptable parameters, while
maximizing the Company's return.
Foreign currency exchange rate risk:
Foreign currency exchange rate risk is the risk that the fair
value of future cash flows will fluctuate as a result of changes in
foreign exchange rates. Historically, any devaluation in the TL has
been followed by a legislated increase in the posted BOTAS
Reference Price for natural gas. However, devaluation of the TL
without a corresponding increase in the natural gas reference price
will have a negative impact on adjusted funds flow and could affect
the ability of the Company to fund its capital programme in the
future. Devaluation of the TL will also result in decreases in
royalties, and operating expenses, all other things being
equal.
The Company's seismic and drilling operations and related
contracts in Turkey are predominantly based in USD for BGCA
operations. Material increases in the value of the USD against the
TL will negatively impact the Company's costs of drilling and
completions activities. Future USD/TL exchange rates could
accordingly impact the future value of the Company's proved and
probable reserves as determined by independent evaluators.
Changes to the TL/USD exchange rate would have had the following
impact on revenues, royalties and production costs for the year
ended December 31, 2020:
Petroleum
+/- 5 percent change in realized and natural Production
TL/USD exchange rate gas revenues Royalties costs
------------------------------------
Year ended December 31, 2020 $ 474 $ 57 $ 168
------------------------------------ ---------- -----------
The Company's drilling and seismic operations and related
contracts in Turkey are predominantly based in US Dollars. Material
changes in the value of the US Dollar against the Turkish Lira will
impact the Company's capital costs.
Changes to the TL/USD exchange rate, would have had the
following impact on capital expenditures for the year ended
December 31, 2020:
+/- 5 percent change in realized TL/USD exchange rate, Capital
upon conversion to presentation currency expenditures
----------------------------------------------------------
Year ended December 31, 2020 $ 94
----------------------------------------------------------
Interest rate risk:
Interest rate risk is the risk that future cash flows or
valuations of assets or liabilities will fluctuate as a result of
changes in market interest rates. The Company currently has limited
exposure to interest rate risk as it has no debt and interest rates
on cash balances are at historic lows. Market interest rates
currently affect the present value of the Company's decommissioning
liability.
Commodity price risk:
Commodity price risk is the risk that future cash flows will
fluctuate as a result of changes in commodity prices. Commodity
prices for petroleum and natural gas are impacted by the
relationship between the United States Dollar and Turkish Lira,
global economic events and Turkish government policies.
The natural gas reference price in Turkey (in TL) is in part
correlated to contract prices for natural gas imports into Turkey
and also government policy with respect to subsidies to consumers.
Natural gas sales for Valeura are under direct sales contracts to
industrial buyers and power generation companies in the area and
each contract is at a negotiated discount or premium to the BOTAS
benchmark price.
In the past two years, the government was increasing the BOTAS
reference price thereby offsetting the decline in the value of the
TL and reflecting the increase in regional gas prices, resulting in
five price increases from the beginning of 2018 through mid-2020.
Effective July 1, 2020 the Government of Turkey lowered the natural
gas reference price by 10% (in TL). The Company's average realised
natural gas price in Turkey for the year ended December 31, 2020
was $5.94/mcf which represents a 1.0% discount to the BOTAS price.
Effective January 1, 2021, February 1, 2021 and March 1, 2021 the
Government of Turkey increased the natural gas reference price by
1% (in TL) respectively.
Liquidity risk:
Liquidity risk is the risk that the Company will encounter
difficulty in meeting obligations associated with financial
liabilities. The Company's financial liabilities consist of
accounts payable. Accounts payable consists of invoices payable to
trade suppliers for office, field operating activities and capital
expenditures. The Company processes invoices within a normal
payment period. Accounts payable have contractual maturities of
less than one year. The Company maintains and monitors a certain
level of cash which is used to finance all budgeted and approved
operating and capital expenditures.
Capital management:
The Company's objective when managing capital is to maintain a
flexible capital structure which allows it to execute its
growth strategy through expenditures on exploration and
development activities while maintaining a strong financial
position. The Company's capital structure includes working
capital and shareholders' equity. Currently, total capital
resources available include working capital and funds flow from
operations.
The Company's capital expenditures include expenditures in oil
and gas activities which may or may not be successful. The Company
makes adjustments to the capital structure in light of changes in
economic conditions and the risk characteristics of the underlying
petroleum and natural gas assets. In order to maintain or adjust
the capital structure, the Company may, from time to time, issue
shares, adjust its capital spending or issue debt instruments. The
Company is not currently subject to any externally imposed capital
requirements as it maintains operatorship over all of its lands in
the Thrace Basin.
The successful future operations of the Company are dependent on
the ability of the Company to secure sufficient funds through
operations, bank financing, equity offerings or other sources and
there are no assurances that such funding will be available when
needed. Failure to obtain such funding on a timely basis could
cause the Company to reduce capital spending and could lead to the
loss of exploration licences due to failure to meet drilling
deadlines, lower production volumes and associated revenues or
default under the Company's joint operating agreements. Valeura has
not utilised bank loans or debt capital to finance capital
expenditures to date.
Fair value of financial assets and liabilities:
The Company's fair value measurements are classified as one of
the following levels of the fair value hierarchy:
Level 1 - inputs represent unadjusted quoted prices in active
markets for identical assets and liabilities. An active market is
characterized by a high volume of transactions that provides
pricing information on an ongoing basis.
Level 2 - inputs other than quoted prices included in Level 1
that are observable for the asset or liability, either directly or
indirectly. These valuations are based on inputs that can be
observed or corroborated in the marketplace, such as market
interest rates or forecasted commodity prices.
Level 3 - inputs for the asset or liability are not based on
observable market data.
The Company aims to maximize the use of observable inputs when
preparing calculations of fair value. Classification of each
measurement into the fair value hierarchy is based on the lowest
level of input that is significant to the fair value
calculation.
The fair value of cash and cash equivalents, accounts
receivable, prepaid expenses and deposits, and accounts payable and
accrued liabilities approximate their carrying amounts due to their
short terms to maturity.
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END
FR PPUMPWUPGPPC
(END) Dow Jones Newswires
March 25, 2021 03:00 ET (07:00 GMT)
Valeura Energy (LSE:VLU)
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