VLU.L Regulatory News (VLU)

VALEURA ANNOUNCES FIRST QUARTER 2020FINANCIAL AND OPERATING RESULTS

Calgary, May 12, 2020: Valeura Energy Inc. (TSX:VLE, LSE:VLU) ("Valeura" or the "Company"), the upstream natural gas company focused on the Thrace Basin of Turkey, reports its financial and operating results for the three month period ended March 31, 2020.

The complete quarterly reporting package for the Company, including financial statements and associated management's discussion and analysis ("MD&A"), are being filed on SEDAR at www.sedar.com and have been posted on the Company's website at www.valeuraenergy.com. All dollar amounts are in US dollars unless otherwise stated.

Financial and Operating Results Highlights

· Maintained gas production operations in light of the COVID-19 pandemic by implementing measures to protect the health and well-being of Valeura personnel and contractors;

· Valeura net Q1 2020 average production increased to 716 boe/d, up 11% from Q4 2019;

· Average realised Q1 2020 gas prices unchanged on a Turkish Lira basis versus the prior quarter, equivalent to $7.08/Mcf, down 5% from Q4 2019;

· Revenue in Q1 2020 of $2.8 million, an increase of 6% over the prior quarter;

· Operating netback of $24.95/boe in Q1 2020, up 2% from Q4 2019;

· Net working capital surplus at March 31, 2020 of $34.1 million, including cash of $32.6 million;

· Valeura's interest in the Thrace deep rights doubled effective April 2, 2020, following the Government of Turkey approval for the transfer of Equinor's working interest to Valeura and partner Pinnacle Turkey Inc.;

· Successfully drilled two commitment wells on the West Thrace Exploration Licence with preliminary indications of hydrocarbons in both wells;

· All Valeura lands remain in good standing with no unsatisfied work commitments; and

· The Company is exploring the potential for mergers and acquisitions to grow its portfolio, capitalising on the current market environment.

Valeura remains committed to safe ongoing operations and has taken precautious both to protect the well-being of its staff and to sustain its ongoing production and revenue generation in Turkey. At the same time, the Company continues to pursue appraisal of the deep unconventional gas play and following the doubling of its working interest after Equinor's exit and is commencing the process to seek a new partner for the play. The Company's strong financial position, with an end-Q1 2020 working capital surplus of $34.1 million and no debt, affords it significant flexibility to support its strategy to extract maximum value from both its shallow conventional production and deep unconventional plays in the Thrace basin of Turkey.

Sean Guest, President and CEO commented:

"Keeping our people safe is our highest priority, and we are taking direction from public health authorities and medical professionals on how to both remain safe and continue operations. Our Q1 2020 results are an example of how even in the face of substantial new challenges due to the COVID-19 pandemic, we can maintain our health and safety record while continuing critical operations to maintain the supply of gas to our customers. By having direct control of the value chain all the way from the wellhead to the customer, coupled with pricing that has not been influenced by the recent sharp decline in crude oil prices, our shallow gas business is fundamentally well-positioned to remain resilient in these times.

"At the same time, we remain committed to our deep, tight gas play, and are commencing the process of securing a new partner to participate in an ongoing appraisal work programme. In the near term we will continue to work toward more low-cost data collection, including plans to resume long-term production testing at Devepinar-1.

"Valeura remains in a strong financial position, with a gas production asset that generates cash flow even in times of economic turmoil, and significant option value on a potentially very large unconventional gas play. We will continue to closely monitor economic conditions in Turkey, and to course-correct our operations as required to protect our ongoing revenue generation. With appropriate safeguards in place, we are well positioned to ride out the current economic turmoil and expect to emerge strong."

Financial and Operating Results Summary

Notes:

See the MD&A filed on SEDAR 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 Company's AIF filed on SEDAR for further discussion.

Net petroleum and natural gas sales in Q1 2020 averaged 716 boe/d, which was 11% higher than Q4 2019. While the Company experienced reduced gas demand by some of its light industrial customers in the latter part of Q1 2020 due to COVID-19, the reduction was managed primarily by curtailing third-party gas throughput, thereby imposing only minimal reductions to Valeura's equity gas production. Through this production management, the Company continues to benefit from the impact of successful well workovers performed in late 2019 and early in Q1 2020.

Production revenue in Q1 2020 was $2.8 million, an increase of 6% over Q4 2019 due to the higher production in Q1, partly offset by the impact of a stronger US dollar on price realisations. Turkey's gas prices were unchanged from the prior quarter, as denominated in Turkish Lira.

Exploration and development capital spending was $1.9 million in Q1 2020, comprised of $1.1 million spent on shallow operations, with the remainder on concluding the Devepinar-1 short-term production test and completing the well in preparation for a long-term production test.

As of March 31, 2020, the Company had a net working capital surplus of $34.1 million, of which $32.6 million was cash. This compares to a net working capital surplus of $37.7 million at December 31, 2019, of which $36.1 million was cash. The decrease in the Company's reported cash position was due in part to the strengthening of the US dollar in relation to the Canadian dollar, reflecting the fact that the Company holds its cash in a mix of US dollar and Canadian dollar accounts. In addition, the Company incurred non-recurring expenses in Q1 2020, including severance payments, which are not expected in the remaining quarters of 2020.

Operations Update

Valeura's gas production continues to generate strong operating netbacks, most recently averaging $24.95/boe during Q1 2020. This creates a stream of operating income for the business and also underscores the long-term potential value of the Company's unconventional gas resource.

During the first part of Q1 2020, Valeura continued its programme of selective low-cost well workovers across its conventional production base, leading to increased production capacity. Workover operations, along with other non-critical field work, were suspended in March 2020 as part of the Company's measures to protect the health of the Company's employees and contractors due to the COVID-19 pandemic. While Valeura is maintaining its production operations, the Company acknowledges that the combined effect of reduced field activity, the potential for lower industrial gas demand in light of COVID-19, and the upcoming holiday period at the end of Ramadan, is expected to have a negative impact on Q2 2020 production volumes.

The Company has drilled two shallow exploration commitment wells, Kuzey Atakoy-4 and Bati Sariyer-1, on its West Thrace exploration licence. At Bati Sariyer-1, the Company observed positive indications of hydrocarbons during drilling, and is preparing for wireline evaluation of the objective section. Wireline logs from Kuzey Atakoy-4 indicate gas zones, but this will need to be confirmed with production testing. This testing is planned to begin once safe field operations can resume and the Company has constructed pipelines to tie the wells to its gas sales network.

The Company is continuing to assess the potential for further exploitation from its producing fields by converting reserves into production. A technical study will be completed in Q2 2020 with recommendations on further infill drilling opportunities. With suitable equipment and a capable workforce available in country, Valeura can ramp up investment activities rapidly once public health guidelines permit doing so.

All production leases and exploration licences remain in good standing with no unsatisfied work commitments. On March 26, 2020 the Government of Turkey approved a 10-year extension of the Company's Hayrabolu Production Lease until February 16, 2030. In April, the Company submitted applications for the first 2-year extension period for the Banarli and West Thrace Exploration Licences. Early in Q2 2020, Valeura exited from the non-core Edirne Production Lease, which has not had any production or activity for several years and is no longer deemed prospective.

Valeura remains committed to the appraisal of the deep tight gas play, as the management and directors continue to see the potential for significant long-term gas production. During Q1 2020, Equinor announced their intent to discontinue participation in the deep tight gas play, and their exit was completed early in Q2. As a result, Valeura's working interest in the deep play has effectively doubled, resulting in the Company holding 100% in the Banarli exploration licences, and 63% of the deep rights in the West Thrace Exploration Licence and production leases. Valeura remains operator of all the blocks.

Valeura recognises that the deep gas play is at an early phase of its life cycle and will ultimately require more drilling and testing. The Company has begun seeking an additional partner to participate in the deep unconventional play and intends to engage an advisor, with a mandate to secure a suitable candidate. The target will be a partner who brings both financial and technical capability to the joint venture, for a carried work programme that is expected to include drilling new vertical and horizontal wells, reservoir stimulation, and production testing.

In the near term, the Company is pursuing a programme of low-cost data collection for the deep play and plans to re-start production from the Devepinar-1 well for a longer-term test. Valeura is currently in the process of securing suitable equipment and the timing for field operations is likely to be influenced by restrictions on movement of people and equipment as a result of the global COVID-19 response.

Valeura is also exploring the potential for inorganic opportunities including mergers and acquisitions to play a role in the Company's growth, particularly in light of recent economic turmoil which may result in new opportunities emerging across the region. In all instances, the Company will evaluate opportunities to assess strategic fit, with a priority on adding value to the portfolio in the near to mid-term and retaining relative balance sheet strength.

Annual and Special Meeting

Valeura has rescheduled its annual and special meeting of shareholders as a result of restrictions on public gatherings due to COVID-19. The Company is now planning to hold the meeting on August 12, 2020 at 9:00 a.m. (MDT), in Calgary. The meeting materials will be mailed in early July 2020.

Webcast and Conference Call

The management team will host an investor and analyst call and question session at 9:00 a.m. Calgary (11:00 a.m. Toronto, 4:00 p.m. London) today, Tuesday, May 12, 2019. A live audio feed of the call will be available via the webcast link below, and those interested in participating in the question session should use the dial-in numbers below. Please register approximately 15 minutes prior to the start of the call. The quarterly results will be made available on the Company's website at: www.valeuraenergy.com.

Event title: Valeura First Quarter 2020 Results Conference CallWebcast link: https://produceredition.webcasts.com/starthere.jsp?ei=1312681&tp_key=5a72d7796a Calgary dial-in: +1 587 880 2171Toronto dial-in: +1 416 764 8688North America toll-free: +1 888 390 0546UK toll-free: +44 0800 6522 435

For further information, please contact:

Valeura Energy Inc. (General and Investor Enquiries) +1 403 237 7102Sean Guest, President and CEOHeather Campbell, CFORobin Martin, Investor Relations ManagerContact@valeuraenergy.com, IR@valeuraenergy.com 

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

CAMARCO (Public Relations, Media Adviser) +44 (0) 20 3757 4980Owen Roberts, Monique Perks, Hugo Liddy, Billy CleggValeura@camarco.co.uk 

Oil and Gas Advisories

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

Advisory and Caution Regarding Forward-Looking Information

Certain information included in this new release constitutes forward-looking information under applicable securities legislation. Such forward-looking information is for the purpose of explaining management's current expectations and plans relating to the future. Readers are cautioned that reliance on such information may not be appropriate for other purposes, such as making investment decisions. Forward-looking information typically contains statements with words such as "anticipate", "believe", "expect", "plan", "intend", "estimate", "propose", "project", "target" or similar words suggesting future outcomes or statements regarding an outlook. Forward-looking information in this new release includes, but is not limited to: resumption of the Company's operations following the COVID-19 pandemic; the potential for hydrocarbons at Kuzey Atakoy-4 and Bati Sariyer-1 wells and that production testing will confirm such; the ability to extract maximum value from both its shallow conventional production and deep unconventional plays in the Thrace basin of Turkey; the resiliency of the Company's shallow gas business; the short-term impact of COVID-19 and the Ramadan holiday period on Q2 2020 production volumes; the ability to conduct a long term test on Devpinar-1; the completion of geological and geophysical studies on the Banarli Exploration Licences and resulting satisfaction of the work programme obligations thereon in the current term of the licences; the potential of a deep gas play in the Thrace Basin; the completion of the Company's technical study assessing the potential for further exploitation of its conventional shallow play; management's belief regarding the potential of the Company's deep basin-centred gas play and shallow gas business in the Thrace Basin; the optimisation of the Company's conventional shallow gas assets; the Company's ability to find another partner for the deep unconventional gas appraisal programme; the ability to secure new equipment; the Company's commitment to safety, environmentally responsible practices and optimising operational and administrative functions; the Company's business strategy and outlook, operational plans, and expected capital expenditures; and the potential for inorganic opportunities to play a role in the Company's growth.

Forward-looking information is based on management's current expectations and assumptions regarding, among other things: the resumption of operations following 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; the impact of Equinor's withdrawal from joint operations; 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 TBNG JV Lands and Banarli Exploration Licences, including the deep potential; 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 licences 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 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: 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 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 new release is expressly qualified in its entirety by this cautionary statement. See the 2019 AIF for a detailed discussion of the risk factors.

The forward-looking information contained in this new release is made as of the date hereof and the Company undertakes no obligation to update publicly or revise any forward-looking information, whether as a result of new information, future events or otherwise, unless required by applicable securities laws. The forward-looking information contained in this new release is expressly qualified by this cautionary statement.

Additional information relating to Valeura is also available on SEDAR at www.sedar.com.

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 Statements of Financial Position

See accompanying notes to the condensed interim consolidated financial statements.

Condensed Interim Consolidated Statements of Loss and Comprehensive Loss

For the three months ended March 31, 2020 and 2019

(1) Presented in US Dollars to conform with current period presentation (note 2b)

See accompanying notes to the condensed interim consolidated financial statements.

Condensed Interim Consolidated Statements of Cash Flows

For the three months ended March 31, 2020 and 2019

(1) Presented in US Dollars to conform with current period presentation (note 2b)

See accompanying notes to the condensed interim consolidated financial statements.

Condensed Interim Consolidated Statements of Changes in Shareholders' Equity

For the three months ended March 31, 2020 and 2019

(1) Presented in US Dollars to conform with current period presentation (note 2b)

See accompanying notes to the condensed interim consolidated financial statements.

1. Reporting Entity

Valeura Energy Inc. ("Valeura" or the "Company") and its subsidiaries (refer to note 2c) 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, British Virgin Islands and Turkey. Valeura's shares are traded on the Toronto Stock Exchange ("TSX") under the trading symbol VLE and 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 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, 2019. 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, 2019, 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.

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, 2019 financial statements.

The unaudited condensed interim consolidated financial statements were authorised for issue by the Board of Directors on May 11, 2020.

(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, 2019 audited consolidated financial statements.

Effective December 31, 2019, the Company changed its presentation currency from Canadian Dollars to US Dollars to better reflect the Company's business activities, the needs of investors and comparability to peers in the oil and gas industry. All comparative amounts have been presented in US Dollars to conform with current period presentation.

Subsequent to December 31, 2019, the global impact of the COVID-19 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 in maintaining their revenues and earnings as well as ongoing and future development and operating expenditure requirements. 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 favorable to the Company. The potential impact that COVID-19 will have on our business or financial results cannot be reasonably estimated at this time. 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.

The situation is dynamic and the ultimate duration and magnitude of the impact on the economy and the financial effect to the Company is not known at this time. Estimates and judgments made by management in the preparation of these condensed interim consolidated financial statements are subject to a higher degree of measurement uncertainty during this volatile period.

The Company's unaudited condensed interim consolidated financial statements include the accounts of Valeura and its subsidiaries and are expressed in thousands of 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:

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 loss 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

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.

(e) Changes in accounting policies

The following amendment as issued by the IASB has been adopted by the Company effective January 1, 2020.

IFRS 3 - Business Combinations sets out the principles in accounting for the acquisition of a business. The amendments to this standard include a change in the definition of a business and the addition of an optional concentration test to determine if the acquisition is a business.

The definition of a business under the amendment to IFRS 3 is now that a business consists of inputs and processes applied to those inputs that have the ability to contribute to the creation of outputs. The three elements of a business are defied as follows:

· Input: any economic resource that creates outputs, or has the ability to contribute to the creation of outputs, when one or more processes are applied to it.

· Process: any system, standard, protocol, convention or rule that, when applied to an input or inputs, creates outputs or has the ability to contribute to the creation of outputs.

· Output: the result of inputs and processes applied to those inputs that provide goods or services to customers, generate investment income or generate other income from ordinary activities.

The optional concentration test permits a simplified assessment of whether an acquired set of activities and assets is in fact a business. An entity may elect to apply, or not apply, the test. An entity may make such an election separately for each transaction or other event. If the concentration test is met, the set of activities and assets is determined not be a business and no further assessment is needed.

3. Restricted Cash

The Company has restricted cash in the amount of $0.3 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 with National Bank of Canada ("NBC") as security, along with the Account Performance Security Guarantee ("APSG") facility described below, 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 9 - Revenue. As the expected abandonment date and work programmes for these assets is more than one year from March 31, 2020, this restricted cash and deposit have been classified as non-current in the Company's financial statements.

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.

4. Exploration and Evaluation Assets

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. 

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

(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 $114.2 million (December 31, 2019 - $114.6 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.

6. Decommissioning Obligations

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 mainly due to an increase in the risk free interest rate in Turkey (March 31, 2020 - 13.5%; December 31, 2019 - 12.0%)

7. Share Capital

(a) Issued

(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 months ended March 31, 2020 is 86,584,989 (March 31, 2019 - 83,491,203; December 31, 2019 - 86,561,863). 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:

The following table summarises information about the stock options outstanding and exercisable at March 31, 2020:

The fair value, at the grant date during the period, of the stock options issued was estimated using the Black-Scholes model with the following weighted average inputs (weighted average fair value per option in CAD):

8. Leases

All leases 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 March 31, 2020 are $0.1 million. Total lease expenses included in the financial statements related to these contracts are as follows:

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.

10. Severance

In January 2020, the Company recorded severance costs of $0.45 million compared to $nil in 2019. The majority of the severance costs related to the departure of the previous Chief Financial Officer and were paid in accordance with his executive employment agreement.

11. Supplemental Cash Flow Information

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:

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 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 Deep Unconventional Gas Play 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 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 three months ended March 31, 2020:

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 March 31, 2020:

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.

In the past two years, the government has increased 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 three months ended March 31, 2020 was $7.08/mcf which represents a 1.0% discount to the BOTAS price.

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 itsgrowth strategy through expenditures on exploration and development activities while maintaining a strong financialposition. 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

On February 4, 2020, Valeura's joint venture partner Equinor Turkey B.V ("Equinor") provided formal notice under the applicable joint operating agreements ("JOAs") that they intended to discontinue participation in the deep unconventional gas appraisal programme. Equinor elected to relinquish their interests under the terms of the JOAs between the parties, and as such their working interests and rights transfer to the remaining parties, Valeura and Pinnacle Turkey Inc. ("PTI"), at no cost. As a result of Equinor's withdrawal, Valeura will retain operatorship and continue to have control and flexibility in planning its capital spend. This also doubles Valeura's interest in the Deep play but may result in operation delays as the Company searches for another partner to participate in the deep unconventional gas appraisal programme.

13. Subsequent Event

On April 2, 2020, the Government of Turkey provided notice that it had approved the transfer of Equinor's working interests and rights to Valeura and PTI. In the Banarli exploration licences, Valeura now holds a 100% working interest, and in the West Thrace Exploration Licence and production leases the Company's holdings increase to 63% working interest in the deep rights. Valeura remains operator of all the blocks.