As I watched Valeura Energy (VLE.TO, last at $1.58) soar 125% yesterday on the news of its >20,000 bopd acquisition in Thailand, something really crystallized for me. The concept of larger companies divesting of oil assets for ESG or portfolio rationalization reasons is well-established, but finding quality teams, capable of optimizing, running, and eventually decommissioning those assets is a different animal altogether. Any quality asset seller will want to sell to a quality buyer in order to minimize the risk of, in the future, being accused of laying off assets just to get them off the sheets. It’s the seller’s responsibility to ensure that the buyers are qualified and capable, both financially and organizationally, to carry on the business to the same or better standards. As a result, sometimes divestitures may be less about the headline sales price and more about simply finding good homes for non-core holdings.
When I first read VLE’s news, I have to admit that disbelief was my first reaction. I understood that there must have been some decommissioning liability that came with the asset, but it was clear there was going to be a lot of torque to the equity. As it turns out, the decommissioning liability in VLE’s deal is about US$214 million, but that’s where things start getting interesting. VLE believes that the fields and facilities that they plan to purchase have the potential for optimization/extension which would push those decommissioning liabilities further out in time, giving VLE more time to invest its cash flows to generate returns for shareholders. For example, say that you take on a field with a decommissioning obligation that is scheduled for 2026. In that case, the seller has this liability on their balance sheet that reads like a bond that matures in 2026. You come along and say, “Hey, that bond isn’t due in 2026… if I optimize this and/or drill these wells to extend the field life, the bond doesn’t come due until 2030, or 2032, or…” — you get the point. All of a sudden you get years of additional cash flow by investing a little more in order to extend the field life, while leveraging a capital asset that’s already in place.
None of this is of interest to the sellers — as they are in “divest mode” — nor does it concern them. What concerns the sellers is finding good homes for their assets, while the buyers focus on extending the field lives. The best part is that the buyers are effectively getting very low cost debt financing, from the sellers, by paying a lower headline purchase price, plus assuming the decommissioning liability. There’s no need for any debt (other than operating/bridge debt) within this kind of deal structure and it gives a massive amount of torque to the underlying equity of the buyer, as any additional asset value creation, on a big production base in this case, accrues to the buyer’s shareholders. Hence the big pop in VLE. I expect that management will have more to say about the plan over the coming weeks and months (this hasn’t been “marketed” to institutions yet), but the deal is expected to close in Q1 2023 and it will vault VLE into a completely new size category. Congratulations to Sean Guest and his team — and cue the golf clap. Quite a deal. I’ve read two analyst reports with targets of $4.50 and $8.25, so take your pick. I’ll use them as goalposts for now.