Valeura Energy Inc Announces 3rd Quarter 2019 Results

VALEURA ANNOUNCES THIRD QUARTER 2019 RESULTS

CALGARY, AB / ACCESSWIRE / November 13, 2019 / Valeura Energy Inc. (TSX:VLE)(LSE:VLU) (“Valeura” or the “Company“), the upstream natural gas producer focused on appraising and developing an unconventional gas accumulation play in the Thrace Basin of Turkey in partnership with Equinor, is pleased to report its financial and operating results for the three month and nine month period ended September 30, 2019.

Highlights

· Safety – The Company achieved a milestone of 893 days of continuous operations without a lost time incident;

· Testing operations at Inanli-1 resulted in stable gas flow rates at all four stimulated zones. Stimulation and testing operations have begun at the Devepinar-1 well;

· Production from conventional operations averaged 531 boe/d in Q3, 2019, down 19% from Q3 2018 due to natural declines and customer holiday shutdowns;

· Price realisations were strong, averaging $9.64/Mcf in Q3 2019, 45% higher than Q3 2018;

· Netbacks averaged $33.04/boe in Q3 2019, 40% higher than Q3 2018;

· Net working capital increased to $52.8 million at end Q3 2019 as a result of a net increase in the Company’s cash position to $51 million;

· Operating conditions in country remained favourable for the industry;

· USD reporting – The Company intends to transition to reporting its financial results in US dollars, starting with its year-end 2019 results.

Valeura’s primary focus is on flow testing the significant interpreted gas columns encountered in its new appraisal wells to demonstrate the extent and potential commerciality of the Company’s Basin Centered Gas Accumulation (“BCGA“) estimated to hold 10 Tcfe (286 BCM) of mean unrisked prospective natural gas resources, including 236 MMbbl (32 MMTonnes) of condensate, net to Valeura. Stimulation and production testing is being conducted on a zone-by-zone basis to provide definitive flow characteristics that can be used to calibrate the petrophysical data, core data and hydrocarbon shows encountered during drilling operations. Identifying zones that sustain gas flow and that could therefore be amenable to commercial-scale drilling and hydraulic stimulation will underpin the work programme for the next stage of appraisal.

In addition, the Company continues to produce natural gas from its shallow conventional play, and is evaluating opportunities to enhance value, including activities such as additional well workovers and new drilling. The Company’s production yields strong operating netbacks, most recently in excess of $33/boe, which both generates operating income for the business, and underscores the long-term potential value of the Company’s unconventional gas resource.

Sean Guest, President and CEO commented:

“I am pleased with our third quarter performance as operating conditions in country remained favourable for the industry and as our testing programme of our deep gas appraisal continued as planned. Encouragingly, all zones tested to date flow gas and we are at the cusp of the next exciting phase of our stimulation and testing programme alongside partner Equinor, with operations now underway at the Devepinar-1 well.

At the same time, it is important to highlight to everyone the strength of our Company. Valeura has over $50 million of cash and holds no debt. We continue to generate positive cash flow from ongoing production, and in addition carry 2P reserves of 7.4 million boe; valued at $88 million as of our last external audit. Financial returns associated with our production and reserves continue to improve with strong netbacks of over $33/boe due to Turkey’s attractive fiscal terms and gas price realisations of nearly $10/Mcf.

Valeura offers investors tremendous value, including a stable-cash generating business from our shallow production with access to substantial potential upside as we continue with operations to demonstrate the commerciality of our deep gas play and its 10 Tcfe of mean unrisked prospective natural gas resources.”

Financial and Operating Results Summary

 

Three Months Ended

September 30, 2019

Three Months Ended

June 30, 2019

Nine Months Ended

September 30, 2019

Three Months Ended

September 30, 2018

Nine Months Ended

September 30, 2018

Financial

(thousands of CDN$ except share amounts)

         

Petroleum and natural gas revenues

2,860

3,265

10,005

2,401

8,819

Adjusted funds flow (1)

1,363

1,034

2,851

(430)

576

Net loss from operations

(219)

(2,148)

(5,437)

(2,647)

(6,846)

Exploration and development capital

1,068

4,081

10,831

2,739

4,741

Banarli Farm-in proceeds (2)

(1,930)

Net working capital surplus

52,787

52,272

52,787

56,337

56,337

Cash

50,957

50,581

50,957

56,522

56,522

Common shares outstanding

Basic

Diluted

86,584,989

92,406,655

86,584,989

92,406,655

86,584,989

92,406,655

86,136,988

90,831,655

86,136,988

90,831,655

Share trading

High

Low

Close

3.60

1.91

2.66

3.16

2.09

2.32

3.99

1.91

2.66

4.85

2.58

4.18

8.27

2.58

4.18

Operations

         

Production

         

Crude oil (barrels (“bbl“)/d)

18

13

8

Natural Gas (one thousand cubic feet (“Mcf“)/d)

3,078

4,202

3,917

3,931

4,448

boe/d

531

700

666

655

749

Average realised price

Crude oil ($ per bbl)

Natural gas ($ per Mcf)

79.07

9.64

8.54

85.95

9.08

6.64

87.59

7.11

Average Operating Netback

($ per boe) (1)

33.04

28.55

31.69

23.63

23.91

Notes:
See the Company’s 2019 Management’s Discussion and Analysis for the three and nine months ended September 30, 2019 and 2018 filed on SEDAR for further discussion.

(1) The above table includes some 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.are recorded in the financial statements as a reduction of exploration and evaluation assets.

Net petroleum and natural gas sales in Q3 2019 averaged 531 boe/d which was 19% lower than Q3 2018. Production was 24% lower when compared to Q2 2019, as a result of natural declines and planned shutdowns by most customers during Turkish national holidays in August. This production does not include the volumes produced during the testing of the Inanli-1 well.

Production revenue in Q3 2019 was $2.9 million, an increase of 19% over Q3 2018, and a decrease of 12.4% from Q2 2019. This reflects lower production volumes during the quarter, partly offset by higher realised prices. Price realisations in Q3 2019 averaged $9.64/Mcf, an increase of 45% over Q3 2018 and an increase of 13% over Q2 2019. The higher prices are the result of a period of relative stability in the value of the Turkish Lira coupled with the BOTAS reference price increase on August 1, 2019 of 15%.

Exploration and development capital spending was modest in Q3 2019 ($1.1 million) as most operational activity was focused on the Inanli-1 well stimulation and testing programme, where Equinor funded 100% of the cost of operations.

As of September 30, 2019, the Company had a net working capital surplus of $52.8 million compared to $52.3 million at June 30, 2019. Working capital increased as a result of increases in the Company’s cash position associated with funds flow from production.

Testing Programme Summary

During Q3, the Company’s main focus was on stimulation and testing of the Inanli-1 well which was funded by Equinor. In total, four intervals were stimulated and tested. During clean-up operations, and while utilising gas lift to recover fluids, all four zones produced gas at stablised rates. The flow data acquired has enabled the Company to identify trends in fluid composition across the vertical column accessed. These data are being analysed in conjunction with petrophysical and core data acquired during drilling operations to further correlate results and continue refining the forward appraisal programme. Operations on the Inanli-1 well were suspended in late October 2019, and the well has been left in a state so as to enable potential re-entry in the future to conduct additional work.

The Company is now focusing its attention on building an understanding of the lateral continuity of the play, and accordingly, has moved test equipment to the Devepinar-1 well, 20 km to the west of Inanli-1. Stimulation and testing operations are underway, and the Company will share flow results in due course. This programme is being funded by Equinor (50%), Valeura (31.5%) and Pinnacle Turkey (18.5%).

The results of testing from the Company’s deep wells, taken together with core and petrophysical data, will inform the forward work programme for 2020 and beyond. The Company’s goal remains to identify those zones which offer the best opportunity for further targeted appraisal work, so as to demonstrate the potential for commerciality of the play. Accordingly, Valeura is conducting scenario planning for its next appraisal steps and will disclose its 2020/2021 work programme once the testing operations are complete and the data have been analysed.

In all its activities, including its ongoing stimulation and testing programme, the Company adheres to high standards of environmental, social, and governance stewardship, and believes protecting the health and safety of all those affected by its business is paramount to its sustainability.

US Dollar Reporting

Valeura intends to transition to US dollar reporting for future financial results, starting with its results as at and for the year ending December 31, 2019. The Company believes this change will put it more in line with typical practice for its internationally-focused peer companies, and particularly those listed on multiple stock exchanges. Past financial results will be restated along with its year-end 2019 results for comparative purposes.

Webcast and Conference Call

Valeura’s management team will host an investor and analyst conference call and question session at 09:00 (Calgary) / 11:00 (Toronto) / 16:00 (London) today, Wednesday November 13, 2019.

Interested listeners can connect via live webcast or dial-in conference call, as indicated below. Please register approximately 15 minutes prior to the start of the call.

Event title: Valeura Third Quarter 2019 Results Conference Call

Webcast link: https://event.on24.com/wcc/r/2110782/925DB523D4E9677CD92351CF7EAF3C39
Calgary dial-in: +1 587 880 2171
Toronto dial-in: +1 416 764 8688
North America toll-free: +1 888 390 0546
UK toll-free: +44 0800 6522435

The complete quarterly reporting package for the Company, including financial statements and associated management’s discussion and analysis (“MD&A“), will be filed on SEDAR at www.sedar.com and posted on the Company’s website at www.valeuraenergy.com.

About Valeura Energy

Valeura Energy Inc. is a Canada-based public company engaged in the exploration, development and production of petroleum and natural gas in Turkey.

Since Valeura was established in 2010, the Company has executed a number of transactions and currently holds interests in 20 production leases and exploration licences in the Thrace Basin of Turkey totalling 0.46 MM acres (gross) or on a net basis 0.37 MM acres of shallow rights and 0.26 MM net acres of deep rights.

Valeura is appraising an unconventional BCGA play in the Thrace Basin on its deep rights, which has been evaluated by DeGolyer and MacNaughton to hold, effective December 31, 2018, 10.1 Tcfe of estimated working interest unrisked mean prospective resources of natural gas, which includes 236 MMbbl of condensate. By applying 3D seismic, modern reservoir stimulation technology and horizontal and deeper vertical well drilling, Valeura is aiming to achieve commercial scale operations from this tight gas resource.

In addition, the Company owns an extensive network of gas gathering and sales infrastructure to support direct marketing of natural gas to end users, and in Q3 2019, produced an average of 3.1 MMcf/d of natural gas from conventional gas accumulations in its shallower rights.

The Company is listed on both the Toronto Stock Exchange under VLE and on the Main Market of the London Stock Exchange under VLU.

Additional information relating to Valeura is also available on SEDAR at www.sedar.com and on the Company’s corporate website at www.valeuraenergy.com.

For further information please contact:

Valeura Energy Inc. (General and Investor Enquiries) +1 403 237 7102
Sean Guest, President and CEO
Steve Bjornson, CFO
Robin Martin, Investor Relations Manager
Contact@valeuraenergy.com, IR@valeuraenergy.com

GMP First Energy (Financial Adviser and Joint Corporate Broker) +44 (0) 20 7448 0200
Jonathan Wright, Hugh Sanderson

Canaccord Genuity Limited (Joint Corporate Broker) +44 (0) 20 7523 8000
Henry Fitzgerald-O’Connor, James Asensio

CAMARCO (Public Relations, Media Adviser) +44 (0) 20 3757 4980
Owen Roberts, Billy Clegg, Monique Perks, Thayson Pinedo
Valeura@camarco.co.uk

Oil and Gas Advisories

boe

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.

Use of Unrisked Estimates

The unrisked estimates of prospective resources referred to in this news release have not been risked for either the chance of discovery or the chance of development. There is no certainty that any portion of the prospective resources will be discovered. See the 2018 AIF for details regarding risked estimates. If a discovery is made, there is no certainty that it will be developed or, if it is developed, there is no certainty as to the timing of such development or that it will be commercially viable to produce any portion of the prospective resources.

Prospective Resources

Prospective resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects. Prospective resources have both an associated chance of discovery and a chance of development.

There is no certainty that any portion of the prospective resources will be discovered. If a discovery is made, there is no certainty that it will be developed or, if it is developed, there is no certainty as to the timing of such development or that it will be commercially viable to produce any portion of the prospective resources.

Please see the AIF, which is available under Valeura’s issuer profile on SEDAR at www.sedar.com, for more information with respect to the Company’s prospective resources, including details regarding risked estimates.

Forward-Looking Statements and Cautionary Statements

This news release contains certain forward-looking statements and information (collectively referred to herein as “forward-looking information“) including, but not limited to: the extent of the Devepinar-1 completion and testing programme; the Company’s ability to use the results from the current programme to understand the flow characteristics and fluid compositions of the rock across the wide depth range of the BCGA; the potential re-entry and additional testing of the Inanli-1 well; the Company’s priorities with respect to its work programme; the assessment of the resources in the test formations; the potential of the Company’s unconventional basin-centered gas accumulation play in the Thrace Basin and the potential to achieve commercial scale operations; the long-term potential value of the Company’s unconventional gas resource; the value and potential upside of Valeura to investors; the Company’s scenario planning for its next appraisal steps following the stimulation and testing campaign; and Valeura’s intention to transition to US dollar reporting for future financial results.

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 “prospective resources” are deemed forward-looking statements as they involve the implied assessment, based on certain estimates and assumptions, that the prospective resources can be profitably produced in the future. Specifically, forward-looking information contained herein regarding “prospective resources” include volumes of prospective resources and the ability to finance future development and, the conversion of a portion of prospective resources into reserves.

Forward-looking information is based on management’s current expectations and assumptions regarding, among other things: continued political stability of the areas in which the Company is operating; continued safety of operations and ability to proceed in a timely manner; continued operations of and approvals forthcoming from the Turkish government and regulators in a manner consistent with past conduct; future seismic and drilling activity on the expected timelines; 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 licenses and 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 support of 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, reservoir 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: the risks of currency fluctuations; changes in gas prices and netbacks in Turkey; uncertainty regarding the contemplated timelines and costs for the deep evaluation; the risks of disruption to operations and access to worksites, threats to security and safety of personnel and potential property damage related to political issues or civil unrest in Turkey; potential changes in laws and regulations, the uncertainty regarding government and other approvals; 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.

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.

Condensed Interim Consolidated Financial Statements (unaudited)

as at September 30, 2019 and for the three and nine months ended September 30, 2019 and 2018

Condensed Interim Consolidated Statements of Financial Position

(thousands of Canadian Dollars, unaudited)

 

September 30, 2019

December 31, 2018

       

Assets

     

Current Assets

     

Cash

 

$ 50,957

$ 62,380

Accounts receivable

 

13,912

9,242

Prepaid expenses and deposits

 

1,320

2,090

Inventory

 

273

195

   

66,462

73,907

       

License deposit (note 3)

 

115

127

Restricted cash (note 3)

 

342

274

       

Right of use lease asset (note 8)

 

88

Exploration and evaluation assets (note 4)

 

14,423

9,385

Property, plant and equipment (note 5)

 

31,729

44,630

   

$ 113,159

$ 128,323

       
       

Liabilities and Shareholders’ Equity

     

Current Liabilities

     

Accounts payable and accrued liabilities

 

$ 13,675

$ 14,387

Lease Liability (note 8)

 

80

Decommissioning obligations (note 6)

 

8,100

15,821

Deferred taxes

 

1,944

1,896

       

Shareholders’ Equity

     

Share capital (note 7)

 

205,762

205,320

Contributed surplus

 

21,963

20,123

Accumulated other comprehensive loss

 

(46,265)

(42,561)

Deficit

 

(92,100)

(86,663)

   

89,360

96,219

   

$ 113,159

$ 128,323

See accompanying notes to the condensed interim consolidated financial statements

Condensed Interim Consolidated Statements of Loss and Comprehensive Income (Loss)

For the three and nine months ended September 30, 2019 and 2018

 

Three Months Ended

Nine Months Ended

(thousands of Canadian Dollars, except share and per share amounts, unaudited)

September 30, 2019

September 30, 2018

September 30, 2019

September 30, 2018

         

Revenue (note 9)

       

Petroleum and natural gas sales

$ 2,860

$ 2,401

$ 10,005

$ 8,819

Royalties

(389)

(323)

(1,345)

(1,179)

Other Income

542

571

1,827

1,432

 

3,013

2,649

10,487

9,072

         

Expenses and other items

       

Production

857

654

2,902

2,748

General and administrative

495

558

2,529

3,299

Transaction costs (note 11)

63

1,307

287

Accretion on decommissioning liabilities

401

545

1,439

1,470

Foreign exchange (gain) loss

(559)

1,314

631

1,264

Share-based compensation

523

421

1,915

971

Depletion and depreciation (note 5 and 8)

1,260

1,507

4,762

5,373

 

3,040

4,999

15,485

15,412

Loss for the period before income taxes

(27)

(2,350)

(4,998)

(6,340)

         

Income taxes

       

Current tax expense

196

831

216

1,029

Deferred tax expense (recovery)

(4)

(534)

223

(883)

         

Net loss

(219)

(2,647)

(5,437)

(6,486)

         

Other comprehensive income (loss)

       

Currency translation adjustments

1,085

(11,006)

(3,704)

(17,046)

Comprehensive income (loss)

866

(13,653)

(9,141)

(23,532)

         

Net loss per share

       

Basic and diluted

$ (0.00)

$ (0.03)

$ (0.06)

$ (0.08)

         

Weighted average number of shares outstanding (thousands)

86,585

86,137

86,554

83,299

See accompanying notes to the condensed interim consolidated financial statements

Condensed Interim Consolidated Statements of Cash Flows

For the three and nine months ended September 30, 2019 and 2018

 

Three Months Ended

Nine Months Ended

(thousands of Canadian Dollars, unaudited)

September 30, 2019

September 30, 2018

September 30, 2019

September 30, 2018

         

Cash was provided by (used in):

       
         

Operating activities:

       

Net loss for the period

$ (219)

$ (2,647)

$ (5,437)

$ (6,486)

Depletion and depreciation

1,260

1,507

4,762

5,373

Share-based compensation

523

421

1,915

971

Accretion on decommissioning liabilities (note 6)

401

545

1,439

1,470

Unrealised foreign exchange (gain) loss

(598)

278

(51)

131

Deferred tax expense (recovery)

(4)

(534)

223

(883)

Decommissioning costs incurred (note 6)

(393)

(355)

(553)

(397)

Change in non-cash working capital (note 10)

(171)

(726)

(3,240)

(6,072)

Cash provided by (used in) operating activities

799

(1,511)

(942)

(5,893)

         

Financing activities:

       

Payments under lease liability

(9)

(71)

Share issuance

60,004

Share issuance costs

(4,596)

Proceeds from stock option exercises

267

1,816

Cash provided by (used in) financing activities

(9)

196

57,224

         

Investing activities:

       

Exploration and evaluation expenditures (note 4)

(483)

(3,448)

(7,780)

(5,064)

Property and equipment expenditures (note 5)

(585)

709

(3,051)

323

Banarli Farm-in (note 4)

1,930

Change in restricted cash

(8)

440

(68)

840

Change in non-cash working capital (note 10)

308

3,472

(851)

(3,454)

Cash provided by (used in) investing activities

(768)

1,173

(9,820)

(7,355)

Foreign exchange gain (loss) on cash held in foreign currencies

354

915

(857)

1,438

         

Net change in cash

376

577

(11,423)

45,414

Cash, beginning of period

50,581

55,945

62,380

11,108

Cash, end of period

$ 50,957

$ 56,522

$ 50,957

$ 56,522

See accompanying notes to the condensed interim consolidated financial statements

Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity

For the nine months ended September 30, 2019 and 2018

(thousands of Canadian Dollars and thousands of shares or warrants, unaudited)

Number of Shares

Share Capital

Contributed Surplus

Deficit

Accumulated Other Comp. Loss

Total Shareholders’ Equity

Balance, January 1, 2019

86,233

$ 205,320

$ 20,123

$ (86,663)

$ (42,561)

$ 96,219

Net loss for the period

(5,437)

(5,437)

Shares issued

352

442

(175)

267

Currency translation adjustments

(3,704)

(3,704)

Share-based compensation

2,015

2,015

September 30, 2019

86,585

$ 205,762

$ 21,963

$ (92,100)

$ (46,265)

$ 89,360

(thousands of Canadian Dollars and thousands of shares, unaudited)

Number of Shares

Share Capital

Contributed Surplus

Deficit

Accumulated Other Comp. Loss

Total Shareholders’ Equity

Balance, January 1, 2018

73,148

$ 146,694

$ 19,857

$ (79,543)

$ (32,183)

$ 54,825

Net loss for the period

(6,486)

(6,486)

Shares issued

12,989

63,057

(1,237)

61,820

Share Issuance Costs

(4,596)

(4,596)

Currency translation adjustments

(17,046)

(17,046)

Share-based compensation

1,072

1,072

September 30, 2018

86,137

$ 205,155

$ 19,692

$ (86,029)

$ (49,229)

$ 89,589

See accompanying notes to the condensed interim 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 petroleum and natural gas in Turkey. Valeura is incorporated in Alberta, Canada and has subsidiaries in the Netherlands and British Virgin Islands with branches in Turkey. Valeura’s shares are traded on the Toronto Stock Exchange (“TSX”) under the trading symbol VLE. On April 25, 2019, Valeura’s shares also commenced trading 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, Canada.

2. Basis of Preparation

(a) Statement of compliance

These unaudited condensed interim consolidated financial statements have been prepared in accordance with IAS 34 – Interim Financial Reporting of the International Financial Reporting Standards (“IFRS”). The unaudited condensed interim consolidated financial statements have been prepared in accordance with IFRS accounting policies and methods of computation as set forth in Valeura’s audited consolidated financial statements for the year ended December 31, 2018, with the exception as noted below of certain disclosures that are normally required to be included in annual consolidated financial statements which have been condensed or omitted in the interim statements, in addition to the adoption of IFRS 16 – Leases. The attached unaudited condensed interim consolidated financial statements should be read in conjunction with Valeura’s audited consolidated financial statements and MD&A for the year ended December 31, 2018.

Operating, transportation and marketing expenses in profit or loss are presented as a combination of function and nature in conformity with industry practices. Depletion and depreciation and finance expenses are presented in a separate line by their nature, while net administrative expenses are presented on a functional basis. The use of estimates and judgements is also consistent with the December 31, 2018 financial statements.

The unaudited condensed interim consolidated financial statements were authorised for issue by the Board of Directors on November 12, 2019.

(b) Basis of measurement

These unaudited condensed interim 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 consistent with the Company’s December 31, 2018 audited consolidated financial statements.

The Company’s unaudited condensed interim consolidated financial statements include the accounts of Valeura and its subsidiaries and are expressed in thousands of Canadian Dollars, unless otherwise stated.

(c) Functional and presentation currency

The unaudited condensed interim consolidated financial statements are presented in Canadian Dollars which is Valeura’s reporting currency. Valeura’s foreign subsidiaries transact in currencies other than the Canadian Dollar and have a Turkish Lira (“TL”) functional currency. 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 balance sheet. All exchange differences arising as a result of the translation to the functional currency of the subsidiary are recorded in net 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 realised foreign exchange gain or loss which is recorded in net earnings.

(d) Changes in Significant Accounting Policies

(i) IFRS 16 Leases

Valeura adopted IFRS 16, Leases, on January 1, 2019 on a modified retrospective basis.

In January 2016, the IASB issued the complete IFRS 16 Leases (“IFRS 16”) which replaces IAS 17, Leases. Under IFRS 16, a single recognition and measurement model applies for lessees which will require recognition of assets and liabilities for most leases. Valeura has elected to use the modified retrospective approach upon adoption and therefore the comparative information has not been restated. The Company has elected to apply the optional exemptions for short-term and low-value leases. The lease payments associated with these leases are recognised as expenses as incurred over the lease term.

The Company recognises a right-of-use asset (”ROU”) and a lease liability at the lease commencement date. The ROU asset is initially measured at cost based on the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received. The assets are depreciated to the earlier of the end of the useful life of the ROU asset or the lease term using the straight-line method as this most closely reflects the expected pattern of consumption of the future economic benefits. Valeura presents ROU as its own line item on the consolidated statement of financial position. The lease term includes periods covered by an option to extend if the Company is reasonably certain to exercise that option. In addition, the ROU is periodically reduced by impairment losses, if any, and adjusted for certain re-measurements of the lease liability. The average depreciation term is 1.5 to 2 years.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. Generally, the Company uses its incremental borrowing rate as the discount rate.

The lease liability is measured at amortised cost using the effective interest method. It is re-measured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Company’s estimate of the amount expected to be payable under a residual value guarantee, or if the Company changes its assessment of whether it will exercise a purchase, extension or termination option. When the lease liability is re-measured in this way, a corresponding adjustment is made to the carrying amount of the ROU asset, or is recorded in profit or loss if the carrying amount of the ROU asset has been reduced to zero. Lease payments are applied against the lease obligation, with a portion reflected as interest expense using the effective interest rate method. Valeura presents the lease liability as its own line item on the consolidated statement of financial position.

The effect of initially applying the standard was a $0.2 million increase to the lease liability, with a corresponding ROU asset recorded. The ROU asset was measured at the amount equal to the lease liability on January 1, 2019 with no impact on deficit. The lease liability was measured at the present value of the remaining lease payments, discounted using Valeura’s incremental borrowing rate as at January 1, 2019. The weighted average incremental borrowing rate used to determine the lease obligation on adoption was approximately 28% percent. The ROU assets and lease liabilities recognised relate to leases on the Company’s offices and facilities in Turkey.

The preparation of the condensed interim consolidated financial statements in accordance with IFRS requires management to make judgments, estimates, and assumptions that affect the reported amount of assets, liabilities, income, and expenses. Actual results could differ significantly from these estimates. Key areas where management has made judgments, estimates, and assumptions related to the application of IFRS 16 include:

Incremental borrowing rate: The incremental borrowing rates are based on judgments including economic environment, term, currency, and the underlying risk inherent to the asset. The carrying balance of the ROU assets, lease obligations, and the resulting interest and depletion and depreciation expense, may differ due to changes in the market conditions and lease term.

Lease term: Lease terms are based on assumptions regarding extension terms that allow for operational flexibility and future market conditions.

The table below shows the impact on the consolidated statement of loss upon adoption of IFRS 16 for the three and nine months ended September 30, 2019 is a reduction to loss for the period as follows:

 

Three months ended

Nine months ended

Cost

September 30, 2019

September 30, 2019

Depreciation of right of use asset

$ (21)

$ (65)

Interest Expense

(6)

(22)

Lease Payments

32

94

 

$ 5

$ 7

Cash flow from financing activities for the nine months ended September 30, 2019 was $0.07 million lower due to the deduction of the lease and interest payments reflected in this section while cash flow from operating activities increased $0.07 million.

(e) Use of estimates

The preparation of 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. The ability to make reliable estimates is further influenced by political and economic factors. Management has based its estimates with respect to the Company’s operations in Turkey based on information available up to the date these condensed interim consolidated financial statements were approved by the Board of Directors. Significant changes could occur which could materially impact the assumptions and estimates made in these consolidated financial statements. Changes in assumptions are recognised in the financial statements prospectively.

3. Restricted Cash and Licence Deposits

The Company has restricted cash in the amount of $0.3 million (December 31, 2018 – $0.3 million) that is securing licence deposits with the General Directorate of Mining and Petroleum Affairs of the Republic of Turkey (“GDMPA”), and a further $0.1 million (December 31, 2018 – $0.1 million) on deposit with the GDMPA. This restricted cash and deposit is security for decommissioning or abandonment obligations and ongoing work programmmes on the Company’s Turkish licences. These deposits and restricted cash equal the amount to satisfy the underlying commitments with the GDMPA and there are no other outstanding commitments. As the expected abandonment date and work programmmes for these assets is more than one year from September 30, 2019, this restricted cash and deposit have been classified as non-current in the Company’s financial statements.

Effective April 10, 2019, the Company renewed its Account Performance Security Guarantee (“APSG”) facility with Export Development Canada (“EDC”). The APSG, which was issued to National Bank of Canada (“NBC”) allows the Company to use the APSG as collateral for certain letters of credit issued by NBC. The facility is effective from April 10, 2019 to March 31, 2020 with a limit of US$4.5 million and can be renewed on an annual basis. The Company has issued approximately US$2.5 million in letters of credit under the APSG facility.

4. Exploration and Evaluation Assets

Cost

 

Total

Balance, December 31, 2018

 

$ 9,385

Banarli Farm-in

 

(1,930)

Additions

 

7,780

Capitalised share-based compensation

 

101

Effects of movements in exchange rates

 

(913)

Balance, September 30, 2019

 

$ 14,423

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 US$10 million. The final cost total for the Karaca 3D seismic programme, agreed by partners in Q1 2019 totaled US$8.5 million, requiring an additional payment from Equinor to Valeura of US$1.5 million ($1.9 million), which is recorded as an additional farm-in payment against exploration and evaluation assets.

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 recognises 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 recognised 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.

5. Property, Plant and Equipment

Cost

   

Total

Balance, December 31, 2018

   

$ 86,515

Additions

   

3,051

Change in decommissioning obligations (note 6)

   

(7,136)

Effects of movements in exchange rates

   

(8,051)

Balance, September 30, 2019

   

$ 74,379

Accumulated depletion and depreciation

   

Total

Balance, December 31, 2018

   

$ 41,885

Depletion and depreciation expense

   

4,697

Effects of movements in exchange rates

   

(3,932)

Balance, September 30, 2019

   

$ 42,650

Net book value

   

Total

Balance, December 31, 2018

   

$ 44,630

Balance, September 30, 2019

   

$ 31,729

(a) 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.

(b) Depletion – future development costs

For the purposes of calculating depletion, petroleum and natural gas properties in Turkey include estimated future development costs of $151.1 million (December 31, 2018 – $155.0 million) associated with development of the Company’s proved plus probable reserves.

The ultimate recovery of property, plant and equipment and exploration and evaluation costs in Turkey is dependent upon the Company obtaining government approvals, obtaining and maintaining licences in good standing, the existence and commercial exploitation of petroleum and natural gas reserves and undeveloped lands, and other uncertainties.

The Company signed an agreement during the quarter to dispose of its non-producing Edirne assets for nominal consideration. This disposal is contingent on approval of the license transfer by the GDMPA and as such no amount has been booked.

6. Decommissioning Obligations

Cost

Total

Decommissioning obligations, beginning of period

$ 15,821

Obligations incurred

Obligations settled

(553)

Change in estimates

(7,135)

Accretion of decommissioning obligations

1,439

Effects of movements in exchange rates

(1,472)

Balance, September 30, 2019

$ 8,100

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 change in estimate is due to a decrease in the inflation rate, which has the effect of decreasing the obligation and a decrease to the discount rate which has the effect of increasing the obligation.

7. Share Capital

(a) Issued

Common shares

Number of Shares

Amount

Balance, December 31, 2018

86,232,988

$ 205,320

Shares issued pursuant to exercise of stock options

352,001

442

Balance, September 30, 2019

86,584,989

$ 205,762

(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 three and nine months ended September 30, 2019 is 86,584,989 and 86,554,070 respectively (September 30, 2018 – 86,136,988 and 83,298,646 respectively). 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 programme 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:

 

Number of Options

Weighted average exercise price

Balance outstanding, December 31, 2018

4,598,667

$ 1.57

Granted

1,725,000

3.03

Exercised

(352,001)

0.76

Forfeited

(150,000)

3.51

Balance outstanding, September 30, 2019

5,821,666

2.01

Exercisable at September 30, 2019

3,081,673

$ 1.13

The following table summarises information about the stock options outstanding and exercisable at September 30, 2019:

Exercise prices

Outstanding at September 30, 2019

Weighted average remaining life (years)

Weighted average exercise price

Exercisable at September 30, 2019

Weighted average exercise price

$0.57 – $0.66

1,152,500

2.06

$ 0.60

1,152,500

$ 0.60

$0.67 – $0.74

738,333

4.20

0.72

498,336

0.72

$0.75 – $2.01

1,343,333

3.59

0.80

1,093,333

0.81

$1.86 – $3.81

1,575,000

6.42

2.99

$3.82 – $4.62

1,012,500

5.51

4.61

337,504

4.62

 

5,821,666

4.46

$ 2.01

3,081,673

$ 1.13

The fair value, at the grant date during the nine month period, of the stock options issued was estimated using the Black-Scholes model with the following weighted average inputs:

Assumptions

   

September 30, 2019

December 31, 2018

Risk free interest rate (%)

   

1.7

2.1

Expected life (years)

   

4.5

4.5

Expected volatility (%)

   

86.5

83.7

Forfeiture rate (%)

   

4.5

3.4

Weighted average fair value per option

   

$ 2.01

$ 2.96

8. Leases

Right of use asset leases – real estate

September 30, 2019

Balance, January 1, 2019

$ 153

Depreciation

(65)

Balance, September 30, 2019

$ 88

Lease liability – real estate

September 30, 2019

Balance, January 1, 2019

$ 153

Interest

22

Principal payments

(94)

Effect of movement in exchange rates

(1)

Balance, September 30, 2019

$ 80

All leases disclosed above have terms between 14 and 18 months.

In addition to the leases disclosed above the Company has a number of leases with terms of 12 months or less. Total commitments under these short term leases at September 30, 2019 are $0.5 million. Total lease expenses included in the financial statements related to these contracts are as follows:

 

Three months ended

Nine months ended

Cost

September 30, 2019

September 30, 2019

Operating expenses

$ 81

$ 284

General and administrative expenses

1

4

Exploration and evaluation costs

4

9

Property, plant and equipment costs

12

32

 

$ 98

$ 329

 

Three months ended

Nine months ended

Total Cash outflow, leases

September 30, 2019

September 30, 2019

Principal payments

$ 32

$ 94

Interest payments

6

22

Payments under short term leases

116

329

 

$ 154

$ 445

9. 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.

     

Three Months ended

Nine Months Ended

     

September 30, 2019

September 30, 2018

September 30, 2019

September 30, 2018

Natural Gas

   

$ 2,728

$ 2,401

$ 9,710

$ 8,633

Crude Oil

   

132

295

186

Petroleum and natural gas sales

   

$ 2,860

2,401

$ 10,005

$ 8,819

     

Three Months ended

Nine Months Ended

     

September 30, 2019

September 30, 2018

September 30, 2019

September 30, 2018

Royalties – natural gas

   

$ 341

$ 300

$ 1,214

$ 1,078

Crude oil

   

20

33

16

Gross overriding royalty

   

28

23

98

85

Royalties

   

$ 389

323

$ 1,345

$ 1,179

     

Three Months ended

Nine Months Ended

     

September 30, 2019

September 30, 2018

September 30, 2019

September 30, 2018

Third party natural gas sales net of costs

   

$ 187

$ 196

$ 658

$ 625

Interest and other revenue

   

355

375

1,169

807

Other income

   

$ 542

571

$ 1,827

$ 1,432

10. Supplemental Cash Flow Information

     

Three Months ended

Nine Months Ended

     

September 30, 2019

September 30, 2018

September 30, 2019

September 30, 2018

Change in non-cash working capital:

           

Accounts receivable

   

$ (6,438)

$ 2,088

$ (4,670)

$ 142

Prepaid expenses and deposits

   

330

(3,794)

770

(4,730)

Inventory

   

(27)

56

(78)

89

Deposits (non-current)

   

(3)

36

12

58

Accounts payable and accrued liabilities

   

5,996

6,187

(712)

(3,003)

Movements in exchange rates

   

279

(1,827)

587

(2,082)

     

$ 137

$ 2,746

$ (4,091)

$ (9,526)

The change in non-cash working capital has been allocated to the following activities:

Operating

   

(171)

(726)

(3,240)

(6,072)

Investing

   

308

3,472

(851)

(3,454)

     

$ 137

$ 2,746

$ (4,091)

$ (9,526)

11. Transaction Costs

During the three and the nine months ended September 30, 2019 the Company recorded transaction costs of $0.1 million and $1.3 million respectively. The 2019 transaction costs are fees related to the Company’s listing on the London Stock Exchange and a final success fee payment for the Banarli Farm-in.

12. 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.

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 analyse 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 is as follows:

As at

   

September 30, 2019

December 31, 2018

Joint venture receivable from Equinor

   

$ 7,854

$ 3,486

Joint venture receivable from other partners

   

371

313

Revenue receivables from customers

   

2,881

3,485

Taxes receivable

   

2,708

1,958

Other receivables

   

98

Accounts receivable

   

$ 13,912

$ 9,242

           

Trade and other receivables:

Substantially all of the Company’s petroleum and natural gas production is marketed under standard industry terms that are specific by country. 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 purchasers. Joint venture receivables are typically collected within one to three months of the joint venture invoice being issued to the partner. The Company mitigates 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 programmmes. The Company does not typically obtain collateral from petroleum and natural gas purchasers 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 maximising 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 or CAD will negatively impact the Company’s costs of drilling and completions activities. Future CAD/USD and CAD/TL exchange rates could accordingly impact the future value of the Company’s reserves as determined by independent evaluators.

Changes to the TL/CAD exchange rate would have had the following impact on revenues, royalties and production costs for the three months and nine months ended September 30, 2019:

+/- 1 percent change in realised TL/CAD exchange rate

Petroleum and natural gas revenues

Royalties

Production costs

Three months ended September 30, 2019

$ 30

$ 4

$ 9

Nine months ended September 30, 2019

$ 106

$ 13

$ 29

Changes to the TL/USD exchange rate, which are impacted by the TL/CAD exchange rate upon conversion to the Company’s Canadian Dollar presentation currency, would have had the following impact on capital expenditures for the three months and nine months ended September 30, 2019:

+/- 1 percent change in realised TL/USD exchange rate, upon conversion to presentation currency

Capital expenditures

Three months ended September 30, 2019

$ 4

Nine months ended September 30, 2019

$ 90

Interest rate risk:

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Company is not currently exposed to interest rate risk as it has no debt.

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 Canadian Dollar and Turkish Lira, the Canadian Dollar and United States Dollar, global economic events and Turkish government policies.

The natural gas reference price in Turkey 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.

The government has continued to increase 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 since the beginning of 2018. The Company’s average realised natural gas price in Turkey for the first nine months of 2019 was $9.08/mcf which represents a 1.0% discount to the BOTAS price. BOTAS recently announced a 15% increase to the reference price effective August 1, 2019, the first increase in 2019, to an equivalent of $10.35/mcf resulting in an average realized price for Q3, 2019 of $9.64/Mcf.

Liquidity risk:

Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with the 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 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. This could change in mid 2020 if Equinor completes its earning obligations under the Banarli farm-in and requests operatorship of the deep operations. There is a risk that Equinor could propose a more significant drilling programme including a more extensive pilot project, for which the Company would have to contribute its participating interest (50% for Banarli and 31.5% for West Thrace). However, Valeura has rights under the farm-in agreement to limit the drilling program and any work program is also subject to the approval process and protections/rights in the joint operating agreement. The Company has working capital of approximately $52.3 million at September 30, 2019 in order to meet commitments of the current capital programme. If a more significant programme is proposed, the Company will be required to assess alternatives including the availability of equity and debt capital to fund the programme.

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.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

SOURCE: Valeura Energy Inc.

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