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Top Pick Upgraded After Oil Production Restarts
Research Report

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This Canadian energy company now deserves a Buy rating given its strong free cash flow production base, noted a Research Capital Corp. report.

Valeura Energy Inc. (VLE:TSX; PNWRF:OTCMKTS) was upgraded to Buy from Speculative Buy by Research Capital Corp. due to a trio of recent "positive developments," analyst Bill Newman reported in an April 28 research note.

"Valeura remains our Top Pick," Newman wrote. "We view the recent pullback in the stock price as an excellent buying opportunity."

The Calgary-based oil and gas explorer-developer is currently trading at about CA$2.38 per share, which compares to Research Capital's CA$8.25 per share target price on it. The difference between these two prices implies a potentially large 247% return for Valeura investors.

Wassana Production Restarted

Newman presented the latest news that led to the new Buy recommendation.

1) Production from the Wassana oilfield in the Gulf of Thailand resumed and did so earlier than expected, Newman noted. Initial net production is estimated to be about 3,370 barrels per day (3.37 Mbbl/d), up from 3 Mbbl/d.

Production will increase as more wells at Wassana get activated. This is likely to happen when Valeura starts its planned five-well infill drilling program once the jack-up rig gets mobilized to the site, likely in Q3/23. This work could boost net production from Wassana to about 5 Mbbl/d from 4.5 Mbbl/d by the end of this year.  

2) Valeura increased its working interest in license G10/48, which covers Wassana, to 100% from 89%. It did so by agreeing to discharge its 11%-owning partner from all outstanding and future liabilities.

3) Valeura transferred its 43% interest in license G6/48, for the Rossukon oilfield, also in the Gulf of Thailand, to its partner in exchange for a 2% royalty on gross production from there. Valeura made this move because it has large capex expenditures looming.

2023 Forecasts Revised

In light of the three described changes, Research Capital updated some of its modeled 2023 and 2024 projections for Valeura.

To reflect the early production start at Wassana and Valeura's increased interest in the relevant license, Research Capital increased its production estimate for Wassana in 2023 to 18.36 Mbbl/d from 17.81 Mbbl/d. For 2024, it raised the same to 26.714 Mbbl/d from 25.748 Mbbl/d.

To account for higher expected production and lower current taxes, Research Capital now expects Valeura to achieve US$249M in free funds flow in 2023, up from US$214M previously. For 2024, the new funds flow forecast is US$274M, which increased from US$236M.

As for capex, Research Capital lowered its estimated spend in 2024 to US$105M from US$180M, and this is because most of the Nong Yao C infill drilling program should be done this year. Also, the well development program for next year encompasses fewer wells (ten) than this year's campaign (21).

What To Watch For

The next possible catalyst for Valeura is the release of its Q1/23 financial and operational results, due out soon, on May 11.

Other big near-term events include the results of the infill drill program at Wassana in Q3/24, and the same from Nong Yao, in Q4/23.

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Disclosures for Research Capital Corp., Valeura Energy Inc., April 28, 2023

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