VLU.L Regulatory News (VLU)

FOURTH QUARTER 2020 RESULTS AND YEAR-END RESERVES

Calgary, March 25, 2021: Valeura Energy Inc. (TSX:VLE, LSE:VLU) (the "Company" or "Valeura"), an upstream oil and gas company with assets in the Thrace Basin of Turkey, reports its financial and operating results for the three month period ended December 31, 2020 and the year ended December 31, 2020, and year-end 2020 reserves.

The complete quarterly reporting package for the Company, including the audited financial statements and associated management's discussion and analysis ("MD&A") and the 2020 annual information form ("AIF"), are being filed on SEDAR at www.sedar.com and posted on the Company's website at www.valeuraenergy.com.

Financial and operating results presented in this announcement, together with the financial statements, the MD&A, and the AIF, include results from assets associated with the Company's shallow conventional gas business which are subject to a share purchase agreement announced on October 20, 2020 (the "Sale Transaction"). Valeura and TBNG Limited (the "Buyer") are progressing to closing the Sale Transaction, however, until such time as the Sale Transaction is completed, these assets remain owned and operated by Valeura. All assets associated with the shallow conventional gas business are identified as held for sale ("Assets Held for Sale") in this announcement and the Company's associated reports, identified above.

FINANCIAL AND OPERATING RESULTS HIGHLIGHTS

• Full year 2020 average production of 650 boe/d, relatively unchanged from 660 boe/d in 2019;

• Full year revenues of US$8.5 million, down 16% from the full year 2019, mainly due to lower realised gas prices;

• Total Proved Plus Probable reserves of 7,798 Mboe at year end, down 2% from the prior year;

• Cash position of US$30.1 million at year end; and

• Positive progress toward closing the Sale Transaction for cash consideration of US$15.5 million, plus future royalty payments.

Sean Guest, President and CEO commented:

"The sale of our conventional gas business is progressing and has now obtained all but one remaining government consent to complete the transaction. Both Valeura and the Buyer remain committed to the deal, with confidence on both sides stemming from a solid ongoing production performance which has delivered average full year volumes that are virtually unchanged from the prior year.

"Meanwhile, we are continuing in our efforts to farm out part of our interest in our deep tight gas play. We believe the increasingly positive investment environment we see today should increase interest by potential partners and are therefore continuing the farmout process into 2021.

"We are also pressing ahead on our evaluation of inorganic growth opportunities. With our strong balance sheet and internationally-experienced team, we see M&A as the right way to add near-term cash flow to our portfolio. While our team has been aggressively evaluating and advancing potential opportunities, we are maintaining discipline in these efforts and will only do deals where we have a clear line of sight to generating value for shareholders both through the deal itself and through follow-on investment thereafter."

Table 1 Financial and Operating Results Summary

Notes:

See the MD&A for further discussion.

(1) The above table includes non-IFRS measures, which may not be comparable to other companies. Adjusted funds flow is calculated as net income (loss) for the period adjusted for non-cash items in the statement of cash flows. Operating netback is calculated as petroleum and natural gas sales less royalties, production expenses and transportation.

(2) Proceeds received from Equinor to complete spending commitment for Phase 2 of the Banarli Farm-in. Recorded in the financial statements as a reduction of exploration and evaluation assets.

(3) BOTAS regularly posts prices and its Level-2 Wholesale Tariff benchmark is shown herein as a reference price. See the AIF for further discussion.

Net petroleum and natural gas sales in Q4 2020 averaged 707 boe/d, which was 15% higher than Q3 2020. This increase in production primarily reflects the impact of successful well workovers. Year on year, there was minimal change in production, even considering the significant reduction in gas demand in 2020 due to COVID-19 shutdowns and restrictions.

Production revenue in Q4 2020 was US$2.0 million, an increase of 7% over Q3 2020 due to the higher production in Q4 more than offsetting the impact of lower realised gas prices. For the full year ended December 31, 2020, production revenue was US$8.5 million, a decrease of 16% from the prior year.

Exploration and development capital spending was US$0.9 million in Q4 2020, reflecting increased spending related to well workovers. The majority of the full year 2020 capital spending of US$4.8 million was on drilling two licence commitment exploration wells and workover programmes on the shallow, conventional gas production.

As of December 31, 2020, the Company had US$30.1 million of cash and a net working capital surplus of US$42.2 million. The increase in working capital at December 31, 2020 over the prior reporting period, and the primary difference between cash and working capital, is due to the inclusion of assets and liabilities associated with the Assets Held for Sale in working capital. Please see the financial statements for details of the calculation.

The Company reported a net loss from operations of US$15.3 million in Q4 2020, which is primarily due to an impairment charge of US$13.4 million relating to removal of the property, plant and equipment associated with the Company's deep, tight gas assets in the Thrace Basin (the "Deep Gas Play").

2021 OUTLOOK

Conventional gas business sale

Valeura has made good progress toward completing the Sale Transaction and both parties remain committed to concluding the deal as soon as possible. The Sale Transaction has received one of two key government consents in January 2021, with only one approval outstanding before the transaction can be completed.

The Sale Transaction's headline cash consideration price is US$15.5 million, and Valeura will receive royalty payments of up to an additional US$2.5 million thereafter. The Sale Transaction is based on an economic effective date of July 1, 2020, meaning the purchase price will be adjusted at the time of closing to account for the net benefits of the assets accruing to the Buyer as of that time.

Deep Gas Play Farmout

Valeura views its Deep Gas Play as a core constituent of its portfolio and believes this play to be a material source of potential long-term value for shareholders. In 2020, the Company confirmed its increased working interest in the Deep Gas Play and secured the first of three possible two-year extensions. The three exploration licences in the core of the Deep Gas Play are now valid up to June 27, 2022. Under Turkey's licence terms, the Company has the ability to maintain these assets for up to approximately five more years through work programme commitments for each two-year extension period. During the current two-year extension period, Valeura is required to drill one exploration well on each of the three exploration licences, for an estimated total net cost of approximately US$1.6 million for the three wells combined.

Valeura initially planned to undertake a farm-out process starting in Q2 2020 aimed at identifying a new partner for the Deep Gas Play, however, the decision was taken to delay the process until Q4 2020 given the COVID-19 pandemic and resultant challenges in the oil and gas industry, which meant that fewer companies were seeking new opportunities. The farm-out process was conducted in Q4 2020 and continues into 2021. As of today, there is no agreement with a new party to farm in to the Deep Gas Play.  As commodity prices are now recovering, the Company anticipates an increase in appetite for opportunities of this type, and believes the Thrace basin is an appealing proposition, particularly as more companies are expressing a preference for gas-oriented opportunities and the potential for material upside.

Growth Strategy

Following a very challenging year for the upstream industry as a whole, Valeura is in a uniquely strong financial position. The Company has no debt, and US$30.1 million in cash. This cash position is expected to be further bolstered upon completion of the Sale Transaction, which would contribute US$15.5 million in cash, subject to normal closing adjustments as detailed above, and supplemented further with ongoing royalty payments of up to US$2.5 million.

Valeura's strong balance sheet, coupled with its internationally experienced management team, positions it well to grow by way of mergers and acquisitions ("M&A"). 2020 was a year of historic lows for M&A transactions globally due to COVID-19 and the associated downturn in the industry. The ability to transact has improved in 2021 as stability returns to the industry, and upon completion of the Sale Transaction, Valeura is well positioned to capitalise on its strengths. The Company remains actively engaged in evaluating inorganic growth opportunities while maintaining M&A screening criteria oriented toward assets that generate cash flow in the near term and provide opportunities for further cash flow growth through reinvestment.

2020 YEAR-END CORPORATE RESERVES REPORT

The Company has signed an agreement to sell its entire shallow gas production business and these assets are reported in the Company's financial results as assets held for sale. However, at year end the subject assets were still owned by Valeura and the Company is required to complete an independent reserves evaluation as at December 31, 2020. This evaluation was conducted by independent petroleum engineering consultants, GLJ Ltd. of Calgary Canada, ("GLJ") and is presented in their report dated March 23, 2021 (the "GLJ Reserves Report").

At December 31, 2020, all of the Company's reserves are associated with gas production from the shallow assets in the Banarli exploration licences (100% working interest), the West Thrace production leases and exploration licences (81.5% working interest), and the South Thrace production leases (81.5% working interest). Table 2 summarises the Company's reserves in Turkey and the before tax net present value discounted at 10% ("NPV10").

The forecast realised prices used in the GLJ Reserves Report to calculate value are US$5.38/Mcf for natural gas and US$47.93/bbl for light and medium crude in 2021, and these prices escalate at approximately 2% per year going forward. More details on assets and the commodity price assumptions are included in the AIF. 

Table 2 Company Gross Reserves Volumes and Values (1)(2)

Notes:

(1) See Oil and Gas Advisories and Reserves Definitions below.

(2) Due to rounding, summations in the table may not add.

The reserves are almost wholly natural gas, but small oil and natural gas liquids volumes are assigned to a number of wells. The 2020 year-end reserves by principal product type are summarised in Table 3.

Table 3 2020 Year-end Company Gross Reserves Volumes by Principal Product Type (1)

Notes:

(1) See Oil and Gas Advisories and Reserve Definitions below.

(2) Natural Gas Liquids have been included in Light and Medium Crude Oil

Table 4 sets forth a reconciliation of reserves changes in 2020.

Table 4 2020 Year-end Company Gross Reserves Reconciliation

ANNUAL AND SPECIAL MEETING

Valeura will hold its annual and special meeting of shareholders on May 13, 2021 at 3:00 p.m. in Calgary. The Company continues to monitor the restrictions related to COVID-19 and will announce the format for the meeting when meeting materials are mailed in early April 2021, and in all instances, will provide an opportunity for shareholders to access the meeting remotely.

ABOUT THE COMPANY

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

OIL AND GAS ADVISORIES

GLJ Reserves ReportThe GLJ Reserves Report was prepared using guidelines outlined in the Canadian Oil and Gas Evaluation Handbook and in accordance with National Instrument 51-101, Standards of Disclosure for Oil and Gas Activities ("NI 51-101"). Additional reserves information as required under NI 51-101 is included in the AIF.

BOEsA BOE is determined by converting a volume of natural gas to barrels using the ratio of 6 Mcf to one barrel. BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 6 Mcf:1 BOE is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Further, a conversion ratio of 6 Mcf:1 BOE assumes that the gas is very dry without significant natural gas liquids. Given that the value ratio based on the current price of oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilising a conversion on a 6:1 basis may be misleading as an indication of value.

RESERVES DEFINITIONS

With respect to the reserves data contained herein, the following terms have the meanings indicated:

 "Company Gross reserves" are the Company's working interest (operating or non-operating) share before deducting royalties and without including any royalty interests of the Company.

"developed" reserves are those reserves that are expected to be recovered from existing wells and installed facilities or, if facilities have not been installed, that would involve a low expenditure (e.g. when compared to the cost of drilling a well) to put the reserves on production.

"developed producing" reserves are those reserves that are expected to be recovered from completion intervals open at the time of the estimate. These reserves may be currently producing or, if shut-in, they must have previously been on production, and the date of resumption of production must be known with reasonable certainty.

"developed non-producing" reserves are those reserves that either have not been on production, or have previously been on production, but are shut in, and the date of resumption of production is unknown.

 "possible" reserves are those additional reserves that are less certain to be recovered than probable reserves. It is unlikely that the actual remaining quantities recovered will exceed the sum of the estimated proved plus probable plus possible reserves.

"probable" reserves are those additional reserves that are less certain to be recovered than proved reserves. It is equally likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated proved plus probable reserves.

 "proved" reserves are those reserves that can be estimated with a high degree of certainty to be recoverable. It is likely that the actual remaining quantities recovered will exceed the estimated proved reserves.

"reserves" are estimated remaining quantities of oil and natural gas and related substances anticipated to be recoverable from known accumulations, from a given date forward, based on: (a) analysis of drilling, geological, geophysical, and engineering data; (b) the use of established technology; and (c) specified economic conditions, which are generally accepted as being reasonable and shall be disclosed. Reserves are classified according to the degree of certainty associated with the estimates.

 "undeveloped" reserves are those reserves expected to be recovered from known accumulations where a significant expenditure (e.g., when compared to the cost of drilling a well) is required to render them capable of production. They must fully meet the requirements of the reserves classification (proved, probable, possible) to which they are assigned.

ADVISORY AND CAUTION REGARDING FORWARD-LOOKING INFORMATION

This news release contains certain forward-looking statements and information (collectively referred to herein as "forward-looking information") including, but not limited to: the completion of the Sale Transaction; the total cash consideration for the Sale Transaction; the Company's entitlement to contingent payments over a five-year period; the receipt of regulatory approvals, other government authorisations, and successful negotiations with the Buyer regarding any extension to the outside date, as may be required, relating to the Sale Transaction; the Company's farm-out process for the Deep Gas Play continuing; the Company's belief regarding the potential of the Company's Deep Gas Play; and, the Company's ability to find another partner in the Deep Gas Play and to realise other growth opportunities through M&A; management's assessment of the M&A market; the Company's commitment to safety, environmentally responsible practices and optimising operational and administrative functions; and the Company's business strategy and outlook.

Forward-looking information typically contains statements with words such as "anticipate", estimate", "expect", "target", "potential", "could", "should", "would" or similar words suggesting future outcomes. The Company cautions readers and prospective investors in the Company's securities to not place undue reliance on forward-looking information, as by its nature, it is based on current expectations regarding future events that involve a number of assumptions, inherent risks and uncertainties, which could cause actual results to differ materially from those anticipated by the Company.

Statements related to "reserves" are deemed forward-looking statements as they involve the implied assessment, based on certain estimates and assumptions, that the reserves can be profitably produced in the future. Specifically, forward-looking information contained herein regarding "reserves" may include: estimated volumes and value of Valeura's oil and gas reserves and the ability to finance future development.

Forward-looking information is based on management's current expectations and assumptions regarding, among other things: the ability to close the Sale Transaction on the terms described herein and the ability to negotiate an extension to the outside date with the Buyer if required; the continuation of operations during the COVID-19 pandemic; political stability of the areas in which the Company is operating and completing transactions; continued safety of operations and ability to proceed in a timely manner; continued operations of and approvals forthcoming from the Turkish Government in a manner consistent with past conduct; future drilling activity on the expected timelines; the prospectivity of the Deep Gas Play; the continued favourable pricing and operating netbacks in Turkey; future production rates and associated operating netbacks and cash flow; decline rates; future sources of funding; future economic conditions; future currency exchange rates; the ability to meet drilling deadlines and other requirements under exploration licences and production leases; and the Company's continued ability to obtain and retain qualified staff and equipment in a timely and cost efficient manner. In addition, the Company's work programmes and budgets are in part based upon expected agreement among joint venture partners and associated exploration, development and marketing plans and anticipated costs and sales prices, which are subject to change based on, among other things, the actual results of drilling and related activity, availability of drilling, high-pressure stimulation and other specialised oilfield equipment and service providers, changes in partners' plans and unexpected delays and changes in market conditions. Although the Company believes the expectations and assumptions reflected in such forward-looking information are reasonable, they may prove to be incorrect.

Forward-looking information involves significant known and unknown risks and uncertainties. Exploration, appraisal, and development of oil and natural gas reserves are speculative activities and involve a degree of risk. A number of factors could cause actual results to differ materially from those anticipated by the Company including, but not limited to: uncertainty in capital markets and ability to raise debt and equity, as required, particularly for companies with a small market capitalisation; the ability to finance future developments and/or inorganic growth; the risks of currency fluctuations; changes in gas prices and netbacks in Turkey; potential changes in joint venture partner strategies and participation in work programmes; uncertainty regarding the contemplated timelines and costs for the Deep Gas Play evaluation; the risks of disruption to operations and access to worksites (including the impact of the COVID-19 pandemic), threats to security and safety of personnel; potential changes in laws and regulations, the uncertainty regarding government and other approvals; uncertainty regarding the ability to negotiate an extension to the outside date with the Buyer as required; counterparty risk; risks associated with weather delays and natural disasters; and the risk associated with international activity. The forward-looking information included in this news release is expressly qualified in its entirety by this cautionary statement. The forward-looking information included herein is made as of the date hereof and Valeura assumes no obligation to update or revise any forward-looking information to reflect new events or circumstances, except as required by law. See the AIF for a detailed discussion of the risk factors.

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

This announcement contains inside information as defined in EU Regulation No. 596/2014, part of UK law by virtue of the European Union (Withdrawal) Act 2018, and is in accordance with the Company's obligations under Article 17 of that Regulation.

This announcement does not constitute an offer to sell or the solicitation of an offer to buy securities in any jurisdiction, including where such offer would be unlawful. This announcement is not for distribution or release, directly or indirectly, in or into the United States, Ireland, the Republic of South Africa or Japan or any other jurisdiction in which its publication or distribution would be unlawful.

Neither the Toronto Stock Exchange nor its Regulation Services Provider (as that term is defined in the policies of the Toronto Stock Exchange) accepts responsibility for the adequacy or accuracy of this news release.

For further information please contact:

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

Auctus Advisors LLP (Corporate Broker) +44 (0) 7711 627 449 Jonathan WrightValeura@auctusadvisors.co.uk 

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

MANAGEMENT'S REPORT

The management of Valeura Energy Inc. is responsible for the preparation of all information included in the consolidated financial statements and Management's Discussion & Analysis ("MD&A"). The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"). Financial information that is presented in the MD&A is consistent with the consolidated financial statements.

In preparation of the consolidated financial statements, estimates are sometimes necessary because a precise determination of certain assets and liabilities is dependent on future events. Management believes such estimates have been based on careful judgments and have been presented fairly in all material respects.

Management maintains appropriate systems of internal control that provide reasonable assurance that transactions are appropriately authorized, assets are safeguarded from loss or unauthorized use and financial records provide reliable and accurate information for the presentation of the consolidated financial statements.

KPMG LLP, an independent firm of chartered professional accountants, was appointed by the shareholders to audit the consolidated financial statements of Valeura Energy Inc. and provide an independent professional opinion. Their report is presented with the consolidated financial statements herein.

The Board of Directors, through its Audit Committee, has reviewed the consolidated financial statements including notes thereto with management and KPMG LLP. The Audit Committee is composed of independent directors. Valeura Energy Inc.'s Board of Directors has approved the consolidated financial statements based on the recommendation of the Audit Committee.

(signed) "Sean Guest" (signed) "Heather Campbell"

President and CEO CFO

March 24, 2021

INDEPENDENT AUDITORS' REPORT

To the Shareholders of Valeura Energy Inc.

Opinion

We have audited the consolidated financial statements of Valeura Energy Inc. (the Entity), which comprise:

· the consolidated statements of financial position as at December 31, 2020 and December 31, 2019

· the consolidated statements of loss and comprehensive loss for the years then ended

· the consolidated statements of changes in shareholders' equity for the years then ended

· the consolidated statements of cash flows for the years then ended

· and notes to the consolidated financial statements, including a summary of significant accounting policies

(Hereinafter referred to as the "financial statements").

In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial position of the Entity as at December 31, 2020 and December 31, 2019, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRS).

Basis for Opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the "Auditors' Responsibilities for the Audit of the Financial Statements" section of our auditors' report.

We are independent of the Entity in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements for the year ended December 31, 2020. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

We have determined the matters described below to be the key audit matters to be communicated in our auditors' report.

Assessment of the recoverable amount of the deep gas assets

Description of the matter

We draw attention to Note 2(d), Note 3(d) and Note 8 to the financial statements. Judgments are required to assess when internal or external indicators of impairment exist and impairment testing is required. If any such indication exists, the asset's recoverable amount is estimated through an impairment test. An impairment loss is recognized if the carrying amount of an asset or its cash generating unit ("CGU") exceeds its estimated recoverable amount. In determining the recoverable amount of assets or CGUs, in the absence of quotes market prices, impairment tests are based on estimates of proved and probable reserves which are dependent upon variables including forecasted oil and natural gas prices, operating costs, royalties, production volumes, future development costs, and other relevant assumptions all of which are subject to many uncertainties and interpretations. The Entity conducted an assessment of impairment triggers and concluded there was a trigger for impairment with respect to the deep gas assets within the Entity's only CGU. The Entity has recorded an impairment charge of $13.4 million.

The Entity engages independent third-party reserve evaluators annually to estimate the proved and probable reserves.

Why the matter is a key audit matter

We identified the assessment of the recoverable amount of the deep gas assets as a key audit matter. Significant auditor judgment was required to evaluate the results of our audit procedures regarding the estimate of proved and probable reserves and the resulting recoverable amount.

How the matter was addressed in the audit

The following are the primary procedures we performed to address this key audit matter:

With respect to the estimate of proved and probable reserves:

· We evaluated the competence, capabilities and objectivity of the independent third-party reserve evaluators engaged by the Entity

· We compared forecasted oil and natural gas prices to those published by government entities

· We compared the 2020 actual oil and natural gas prices, production volumes, operating costs, royalty costs and development costs to those estimates used in the prior year's estimate of proved and probable reserves to assess the Entity's ability to accurately forecast

We evaluated the appropriateness of forecasted production volumes, operating costs, royalty costs, and future development cost assumptions by comparing to 2020 historical results. We took into account changes in conditions and events affecting the Entity to assess the adjustments or lack of adjustments made by the Entity in arriving at the assumptions.

Other Information

Management is responsible for the other information. Other information comprises:

· the information included in the Management's Discussion and Analysis filed with the relevant Canadian Securities Commissions.

Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit and remain alert for indications that the other information appears to be materially misstated.

We obtained the information, included in Management's Discussion and Analysis filed with the relevant Canadian Securities Commissions as at the date of this auditors' report.

If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in the auditors' report.

We have nothing to report in this regard.

Responsibilities of Management and Those Charged with Governance for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards (IFRS), and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is responsible for assessing the Entity's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Entity or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Entity's financial reporting process.

Auditors' Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion.

Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists.

Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit.

We also:

· Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.

The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

· Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Entity's internal control.

· Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

· Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Entity's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors' report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors' report. However, future events or conditions may cause the Entity to cease to continue as a going concern.

· Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

· Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. 

· Provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

· Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group Entity to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

· Determine, from the matters communicated with those charged with governance, those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors' report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our auditors' report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this auditor's report is Jason Stuart Brown.

Chartered Professional Accountants

Calgary, Canada

March 24, 2021

Consolidated Statements of Financial Position

See accompanying notes to the consolidated financial statements

Approved by the Board

("Tim Marchant")  ("Russell Hiscock") Marchant, Chairman, Director Russell Hiscock, Director

Consolidated Statements of Loss and Comprehensive Loss

For the years ended December 31, 2020 and 2019

See accompanying notes to the consolidated financial statements

Consolidated Statements of Cash Flows

For the years ended December 31, 2020 and 2019

See accompanying notes to the consolidated financial statements

Consolidated Statements of Changes in Shareholders' Equity

For the years ended December 31, 2020 and 2019

See accompanying notes to the consolidated financial statements

1. Reporting Entity

Valeura Energy Inc. ("Valeura" or the "Company") and its subsidiaries are currently engaged in the exploration, development and production of primarily natural gas in Turkey. Valeura is incorporated in Alberta, Canada and has subsidiaries in the Netherlands, British Virgin Islands and Turkey. Valeura's shares are traded on the Toronto Stock Exchange ("TSX") under the trading symbol VLE and on the Main Market of the London Stock Exchange ("LSE"), under the trading symbol "VLU". Valeura's head office address is 1200, 202 - 6 Avenue SW, Calgary, AB.

2. Basis of Preparation

(a) Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") as at and for the years ended December 31, 2020 and 2019 and have been prepared in accordance with the accounting policies and methods of computation as set forth in note 3 below.

Operating, transportation and marketing expenses in the statement of loss and comprehensive loss are presented as a combination of function and nature in conformity with industry practices. Depletion, depreciation and finance expenses are presented in separate lines by their nature, while net administrative expenses are presented on a functional basis. Significant expenses such as salaries and benefits and share-based compensation are presented by their nature in the notes to the consolidated financial statements.

The consolidated financial statements were authorized for issue by the Board of Directors on March 24, 2021.

(b) Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis except for certain financial and non-financial assets and liabilities, which have been measured at fair value. The methods used to measure fair value are discussed in note 4.

The global impact of the COVID-19 pandemic as well as recent declines in spot prices for oil and gas have resulted in significant declines in global stock markets and has created a great deal of uncertainty as to the health of the global economy. As a result, oil and gas companies are subject to liquidity risks from not maintaining their revenues and earnings as well as maintaining ongoing operating expenditure requirements and funding future development expenditures. These factors are likely to have a negative impact on the Company's ability to raise equity, if required, in the near future or on terms favourable to the Company.

In 2020, the Company was able to maintain its gas production and serve its customers in Turkey during the period of shutdowns and curfews related to COVID-19. Staffing was reduced and additional safety and health measures were introduced across all operations. These measures were successful, and the Company experienced no COVID outbreaks in any of its operations.

Any shutdowns requested or mandated by government authorities in response to the outbreak of COVID-19 may have a material impact to the Company's planned operating activities, however, no mandated shutdowns have affected operations to date. Valeura is adhering to advice provided by local and international health authorities regarding social distancing and increased hygiene practices. 

The COVID-19 pandemic is an evolving situation that may continue to have widespread implications for the Company's business environment, operations, and financial conditions. Management cannot reasonably estimate the length or severity of this pandemic and will continue to monitor the situation closely.

The Company's consolidated financial statements include the accounts of Valeura and its subsidiaries and are expressed in US Dollars, unless otherwise stated.

(c) Functional and presentation currency

The consolidated financial statements are presented in US Dollars which is Valeura's reporting currency. Valeura's and its foreign subsidiaries transact in currencies other than the US Dollar and have a functional currency of Turkish Lira and Canadian dollars as follows:

The functional currency of a subsidiary is the currency of the primary economic environment in which the subsidiary operates. Transactions denominated in a currency other than the functional currency are translated at the prevailing rates on the date of the transaction. Any monetary items held in a currency which is not the functional currency of the subsidiary are translated to the functional currency at the prevailing rate as at the date of the statement of financial position. All exchange differences arising as a result of the translation to the functional currency of the subsidiary are recorded in earnings.

Translation of all assets and liabilities from the respective functional currencies to the reporting currency are performed using the rates prevailing at the statement of financial position date. The differences arising upon translation from the functional currency to the reporting currency are recorded as currency translation adjustments in other comprehensive income or loss ("OCI") and are held within accumulated other comprehensive income or loss ("AOCI") until a disposal or partial disposal of a subsidiary. A disposal or partial disposal will then give rise to a realized foreign exchange gain or loss which is recorded in earnings.

(d) Use of estimates and judgments

The preparation of consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimates are revised and in any future years affected.

Critical judgments in applying accounting policies:

The following are the critical judgments that management has made in the process of applying the Company's accounting policies and that have the most significant effect on the amounts recognized in the consolidated financial statements:

· Valeura's assets are aggregated into cash-generating units for the purpose of calculating impairment. Cash generating units ("CGU" or "CGUs") are based on an assessment of the unit's ability to generate independent cash inflows. The determination of these CGUs was based on management's judgment in regard to shared infrastructure, geographical proximity, petroleum type and similar exposure to market risk and materiality.

· Judgments are required to assess when internal or external indicators of impairment exist and impairment testing is required. In determining the recoverable amount of assets or CGUs, in the absence of quoted market prices, impairment tests are based on estimates of proved and probable reserves which are dependent upon variables including forecasted oil and natural gas prices, operating costs, royalties, production volumes, future development costs, and other relevant assumptions all of which are subject to many uncertainties and interpretations.

· The application of the Company's accounting policy for exploration and evaluation assets requires management to make certain judgments as to future events and circumstances as to whether economic quantities of reserves have been found.

· Judgments are made by management to determine the likelihood of whether deferred income tax assets at the end of the reporting period will be realized from future taxable earnings.

· Costs associated with acquiring oil and natural gas licenses, carrying out seismic surveys and other technical studies and exploratory drilling are accumulated as exploration and evaluation ("E&E") assets pending determination of technical feasibility and commercial viability. Establishment of technical feasibility and commercial viability is subject to judgment and involves management's review of project economics, resource quantities, expected production techniques, production costs and required capital expenditures to confirm continued intent to develop and extract the underlying resources. Management uses the establishment of commercial reserves within the exploration area as the basis for determining technical feasibility and commercial viability. Upon determination of commercial reserves, E&E assets attributable to those reserves are tested for impairment and reclassified from E&E assets to a separate category within property, plant and equipment referred to as oil and natural gas properties.

Key sources of estimation uncertainty:

The following are key estimates and their assumptions made by management affecting the measurement of balances and transactions in the consolidated financial statements:

· Estimation of recoverable quantities of proved and probable reserves are used in the calculation of depletion, impairment and impairment reversals. Reserve estimates and their related cash flows are based on a number of significant assumptions, which include forecasted oil and natural gas prices, operating costs, royalties, production volumes and future development costs, all of which are subject to many uncertainties and interpretations. The Company expects that, over time, its reserve estimates will be revised upward or downward based on updated information such as the results of future drilling, testing and production levels and changes in commodity prices.

Independent third-party reserve evaluators are engaged annually to estimate proved and probable reserves and the related cash flows from the Company's interest in oil and gas properties. This evaluation of proved and probable reserves is prepared in accordance with the reserves definitions as set up by the Canadian Securities Administrators in National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities and the Canadian Oil and Gas Evaluation ("COGE") Handbook.

· The Company estimates the decommissioning obligations for oil and natural gas wells and their associated production facilities and pipelines. In most instances, removal of assets and remediation occurs many years into the future. Amounts recorded for the decommissioning obligations and related accretion expense require assumptions regarding removal date, future environmental legislation, the extent of reclamation activities required, the engineering methodology for estimating cost, inflation estimates, future removal technologies in determining the removal cost, and the estimate of the liability specific discount rates to determine the present value of these cash flows.

· The Company's estimate of share-based compensation is based upon estimates of historic volatility and forfeiture rates.

· The deferred tax liability is based on estimates as to the timing of the reversal of temporary differences, substantively enacted tax rates and the likelihood of assets being realized.

3. Significant Accounting Policies

The accounting policies set out below have been applied consistently to all years presented in the consolidated financial statements and have been applied consistently by the Company and its subsidiaries, except as described below.

(a) Basis of consolidation

(i) Subsidiaries:

Subsidiaries are entities controlled by the Company. Control exists when the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, substantive potential voting rights are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

The acquisition method of accounting is used to account for acquisitions of subsidiaries and assets that meet the definition of a business under IFRS. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the identifiable assets, liabilities and contingent liabilities acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized immediately in earnings.

(ii) Jointly controlled operations and jointly controlled assets:

A portion of the Company's exploration and development activities are conducted jointly with others. The joint interests are accounted for on a proportionate consolidation basis and as a result the financial statements reflect only the Company's proportionate share of the assets, liabilities, revenues, expenses and cash flows from these activities.

Valeura has one joint venture arrangements as follows:

(iii) Transactions eliminated on consolidation:

Intercompany balances and transactions, and any unrealized income and expenses arising from intercompany transactions, are eliminated in preparing the consolidated financial statements.

(b) Financial instruments

(j) Non-derivative financial instruments:

Financial assets are classified in three principal classification categories: measured at amortized cost, fair value through other comprehensive income ("FVOCI"), or fair value through profit or loss ("FVTPL"). Financial liabilities are classified and measured at amortized cost of FVTPL. Financial instruments are recognized initially at fair value, net of any directly attributable transactions costs.

Where the fair value option is applied to financial liabilities, any change in fair value resulting from an entity's own credit risks is recorded through other comprehensive income or loss rather than net income or loss. The classification of financial assets is generally based on the business model in which a financial asset is managed and the characteristics of its contractual cash flows.

A financial asset is measured at amortized cost if it meets both of the following conditions: (a) the asset is held with a business model whose objective is to hold assets to collect contractual cash flows; and (b) the contractual terms of the financial assets give rise to cash flows on specified dates that are solely payments of principal and interest on principal amounts outstanding.

Financial assets that meet criteria (b) above that are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets is subsequently measured at FVOCI. All other financial assets and liabilities are subsequently measured at FVTPL.

Accounts receivable, prepaid expenses and deposits, accounts payable and accrued liabilities are measured at amortized cost.

Valeura does not currently have financial instrument contracts to which it applies hedge accounting.

(ii) Share capital:

Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares and share options are recognized as a deduction from equity, net of any tax effects.

(c) Property, plant and equipment and exploration and evaluation assets

(i) Recognition and measurement:

Exploration and evaluation expenditures:

Pre-licence costs are recognized in earnings as incurred. Exploration and evaluation ("E&E") costs, including the costs of acquiring licences and directly attributable general and administrative costs, are initially capitalized as exploration and evaluation assets. The costs are accumulated in cost centres by well, field or exploration area pending determination of technical feasibility and commercial viability.

Exploration and evaluation assets are assessed for impairment if sufficient data exists to determine technical feasibility and commercial viability, and facts and circumstances suggest that the carrying amount exceeds the recoverable amount. For purposes of impairment testing, exploration and evaluation assets are allocated to cash-generating units. The technical feasibility and commercial viability of extracting a mineral resource is considered to be determinable when proved and/or probable reserves are determined to exist. A review of each exploration CGU is conducted, at least annually, to ascertain whether proved and/or probable reserves have been discovered. Upon determination of proved and/or probable reserves, the CGU within which the intangible exploration and evaluation assets attributable to those reserves is first tested for impairment and then the applicable value is reclassified from exploration and evaluation assets to property, plant and equipment. Proceeds on E&E assets are recorded against the recognized E&E balance, and no gain or loss is recognized.

Development and production costs:

Items of property, plant and equipment ("PP&E"), which include oil and gas development and production assets, are measured at cost less accumulated depletion and depreciation and accumulated impairment losses. Development and production assets are grouped into CGUs for impairment testing. When significant parts of an item of PP&E, including oil and natural gas interests, have different useful lives, they are accounted for as separate items (components).

Gains and losses on disposal of an item of property, plant and equipment, including oil and natural gas interests, are determined by comparing the proceeds from disposal with the carrying amount of PP&E and are recognized in earnings.

(ii) Subsequent costs:

Costs incurred subsequent to the determination of technical feasibility and commercial viability and the costs of replacing parts of PP&E are recognized as oil and natural gas interests only when they increase the future economic benefits embodied in the specific asset to which they relate. All other expenditures are recognized in earnings as incurred. Such capitalized oil and natural gas interests generally represent costs incurred in developing proved and/or probable reserves and bringing in or enhancing production from such proved and probable reserves, and are accumulated on a field or geotechnical area basis. The carrying amount of any replaced or sold component is derecognized. The costs of the day-to-day servicing of property, plant and equipment are recognized in earnings as incurred.

(iii) Depletion and depreciation:

The net carrying value of development or production assets is depleted using the unit of production method by reference to the ratio of production in the year to the related proved and probable reserves, taking into account estimated future development costs necessary to bring those proved and probable reserves into production. Future development costs are estimated taking into account the level of development required to produce the proved and probable reserves. These estimates are reviewed by independent reserve engineers at least annually.

Other corporate assets are recorded at cost on acquisition and amortized on a declining-balance basis at rates of 20 percent to 50 percent per year.

(iv) Exploration and evaluation expense:

Upon determination that an exploration and evaluation CGU is impaired, the Company will transfer costs associated with the applicable CGU to exploration and evaluation expense in the period.

(v) Farm-in arrangements:

In circumstances where the Company has entered into farm-in arrangements whereby the farm-in partner ("partner") will earn a working interest on certain properties through payment of a pre-determined portion of the costs of exploration or development activities, Valeura recognizes a disposal of the partner's working interest once the commitment has been met and the difference between the proceeds received and the carrying amount of the asset are recognized as a gain or loss in earnings for Property, Plant and Equipment assets and as a reduction of Exploration and Evaluation Assets for instances where the farm in is on undeveloped land.

(d) Impairment

(i) Financial assets:

Loss allowances are recognized for expected credit losses ("ECL's) on its financial assets measured at amortized cost. Due to the nature of the financial assets, loss allowances are measured at an amount equal to expected lifetime ECLs. Lifetime ECLs are the anticipated ECLs that result from all possible default events over the expected life of a financial asset. ECLs are a probability-weighted estimate of credit loss and are discounted at the effective interest rate of the related financial asset.

(ii) Non-financial assets:

The carrying amounts of the Company's non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated through an impairment test. The recoverable amount of an asset or a CGU is the greater of its value-in-use and its fair value less costs to sell. Fair value less costs to sell is determined as the amount that would be obtained from the sale of the assets in an arm's length transaction between knowledgeable and willing parties.

E&E assets are assessed for impairment when they are reclassified to property, plant and equipment, and also if facts and circumstances suggest that the carrying amount exceeds the recoverable amount. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets, or CGUs.

In assessing value-in-use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. Value-in-use is generally computed by reference to the present value of the future cash flows expected to be derived from production of proved and probable reserves. E&E assets are allocated to related CGUs when they are assessed for impairment, both at the time of any triggering facts and circumstances as well as upon their eventual reclassification to PP&E.

An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in earnings. Impairment losses recognized in respect of CGUs are allocated to reduce the carrying amounts of the assets in the unit (group of units) on a pro-rata basis.

An impairment loss in respect of PP&E and E&E assets, recognized in prior years, is assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depletion and depreciation or amortization, if no impairment loss had been recognized.

(e) Share based payments

The grant date fair value of options and performance warrants granted to employees is recognized as compensation expense, with a corresponding increase in contributed surplus over the vesting period. A forfeiture rate is estimated on the grant date and is subsequently adjusted to reflect the actual number of options that vest.

(f) Provisions

A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Provisions are not recognized for future operating losses.

(i) Decommissioning obligations:

The Company's activities give rise to dismantling, decommissioning and site disturbance re-mediation activities. Provision is made for the estimated cost of site restoration and capitalized in the relevant asset category. Decommissioning obligations are measured at the present value of management's best estimate of expenditure required to settle the present obligation at the statement of financial position date. Subsequent to the initial measurement, the obligation is adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The increase in the provision due to the passage of time is recognized as finance costs whereas increases/decreases due to changes in the estimated future cash flows are capitalized. Actual costs incurred upon settlement of the decommissioning obligations are charged against the provision to the extent the provision was established.

(g) Revenue from contracts with customers

Valeura's petroleum and natural gas revenues from the sale of natural gas and crude oil are based on the consideration specified in the contracts with customers. For natural gas, pricing is linked to BOTAS benchmark pricing, while crude oil pricing is linked to Brent benchmark pricing. Valeura recognizes revenue when it transfers control of the product to the customer, which is generally when legal title passes to the customer and collection is reasonably assured.

Valeura evaluates its arrangements with third parties and partners to determine if Valeura is acting as the principal or as the agent. Valeura is considered the principal in a transaction when it has primary responsibility for the transaction. If Valeura acts in the capacity of an agent rather than as a principal in a transaction, then the revenue is recognized on a net basis, only reflecting the fee, if any realized by Valeura from the transaction.

(h) Finance income and expenses

Finance expense comprises interest expense on any borrowings, accretion of the discount on provisions and impairment losses recognized on financial assets.

Borrowing costs incurred for the construction of qualifying assets are capitalized during the period of time that is required to complete and prepare the assets for their intended use or sale. All other borrowing costs are recognized in earnings using the effective interest method. The capitalization rate used to determine the amount of borrowing costs to be capitalized is the weighted average interest rate applicable to the Company's outstanding borrowings during the period.

Interest income is recognized as it accrues in earnings, using the effective interest method.

(i) Income tax

Income tax expense comprises current and deferred tax. Income tax expense is recognized in earnings except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity.

Current tax is the expected taxes payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to taxes payable in respect of previous years.

Deferred tax is recognized using the statement of financial position method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized on the initial recognition of assets or liabilities in a transaction that is not a business combination.

Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.

A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

(j) Earnings per share

Basic per share amounts are calculated by dividing the net income or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted per share amounts are determined by adjusting the net income or loss attributable to common shareholders and the weighted average number of common shares outstanding for the effects of dilutive instruments such as options granted to employees.

(k) Assets held for sale

Non-current assets or disposal groups comprising assets and liabilities, are classified as held for sale if it is highly probably that they will be recovered primarily through sale rather than through continuing use.

Such assets, or disposal groups, are generally measured at the lower of their carrying amount and fair value less costs to sell. Any impairment loss on a disposal group is allocated first to goodwill, and then to the remaining assets and liabilities on a pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, which continue to be measured in accordance with the Company's other accounting policies. Impairment losses on initial classification as asset held for sale and subsequent gains and losses on remeasurement are recognized in profit and loss. Once classified as held for sale, property, plant and equipment are no longer amortised or depreciated.

4. Determination of Fair Values

A number of the Company's accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the methods described below. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.

(i) Cash, deposits, accounts receivable, accounts payable and accrued liabilities:

The fair value of cash, deposits, accounts receivable, accounts payable and accrued liabilities are estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. At December 31, 2020 and December 31, 2019, the fair value of these balances approximated their carrying values due to their short term to maturity.

(ii) Stock options:

The fair value of employee stock options is measured using a Black Scholes option pricing model. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility based on the weighted average historic volatility adjusted for changes expected due to publicly available information, weighted average expected life of the instruments based on historical experience and general option holder behavior, expected dividends, the risk-free interest rate based on government bonds, and an estimated forfeiture rate.

5. Restricted Cash

The Company has restricted cash in the amount of $0.2 million (2019 - $0.3 million) that is securing licence deposits with the General Directorate of Mining and Petroleum Affairs of the Republic of Turkey ("GDMPA"). This restricted cash is held mostly with National Bank of Canada ("NBC") as security, along with the Account Performance Security Guarantee ("APSG") facility described in note 14, for decommissioning or abandonment obligations and ongoing work programmes on the Company's Turkish licences and as security for third party gas purchase, as described in Note 10 - Revenue.

6. Assets Held for Sale

On October 20, 2020, the Company announced the execution of a Share Purchase Agreement to sell its shallow conventional gas business for cash consideration of $15.5 million, deferred cash consideration of $1.0 million and contingent consideration of up to $1.5 million subject to normal closing adjustments with an economic effective date of July 1, 2020. The transaction is structured as a sale of shares of Thrace Basin Natural Gas (Turkiye) Corporation ("TBNG") and Corporate Resources B.V. ("CRBV"), both wholly owned subsidiaries of Valeura which, following an internal reorganisation completed during Q3 2020, are the entities which collectively hold the Company's conventional gas producing business. Deal completion is subject to regulatory approvals and the transaction is expected to close in 2021.

As at December 31, 2020, assets and liabilities held for sale include the current and non-current assets and liabilities of TBNG and CRBV as a disposal group. The following table summarizes the major classes:

7. 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.

Phase 2 of the Banarli Farm-in was a commitment to complete a 3D seismic programme with a minimum cost of at least $10 million. The final cost total for the Karaca 3D seismic programme, agreed by partners totaled US$8.5 million, requiring an additional payment from Equinor to Valeura of $1.5 million in 2019, which is recorded as an additional farm-in payment against exploration and evaluation assets.

In Q2 2020, the Company received approval for the first two-year exploration period extension for the Company's three exploration licences which will now expire on June 27, 2022. This is the first of up to three possible two-year extensions providing a period of up to six additional years to explore and appraise the Deep Gas play before the requirement to convert the licences to production leases. Each licence carries an obligation for one exploration well and geological studies for the current exploration period.

Recoverability of exploration and evaluation assets

The Company assesses the recoverability of exploration and evaluation assets, before and at the moment of reclassification to property, plant and equipment, by allocating the E&E assets to appropriate CGUs. Valeura tested its E&E assets for any transfers during 2020 and there was no impairment on these transfer dates. At December 31, 2020, Valeura determined that no indicators of impairment existed with respect to the Company's E&E assets.

Impairment of exploration and evaluation assets is recognized in earnings. E&E expense consists of exploration projects that are considered to have a lower recoverable amount when compared to book value. E&E expense for the year ended December 31, 2020 was nil (2019 - nil).

8. Property, Plant and Equipment

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

The Company's right of use lease asset, which is classified as asset held for sale, had a depreciation expense of $0.1 million in 2020.

(a) Impairment testing

The Company conducted an assessment of impairment triggers and concluded there was a trigger for impairment with respect to the Deep Gas assets within the Company's only CGU in the Thrace Basin of Turkey as at December 31, 2020. The Deep Gas assets comprising the property, plant and equipment substantially related to drilling costs in the deep zone within the Thrace Basin CGU. The triggers assessed included the recent execution of the sale and purchase agreement described in Note 6 Assets Held for Sale which includes the sale of all of the Company's proved and probable reserves as reported at December 31, 2020.

At December 31, 2020, all of the Company's proved and probable reserves are related to the assets held for sale. Accordingly, a non-cash impairment charge of $13.4 million was included in the net loss.

(b) Contingencies

Although the Company believes that it has title to its oil and natural gas properties, it cannot control or completely protect itself against the risk of title disputes or challenges.

(c) Depletion - future development costs

For the purposes of calculating depletion, petroleum and natural gas properties in Turkey include estimated future development costs of $101.7 million (December 31, 2019 - $114.6 million) associated with development of the Company's proved and probable reserves. At December 31, 2020, the future development costs are associated with the assets held for sale.

9. Decommissioning Obligations

The Company's decommissioning obligations result from its ownership interest in oil and natural gas assets including well sites and gathering systems. The total decommissioning obligation is estimated based on the Company's net ownership interest in all wells and facilities, estimated costs to reclaim and abandon these wells and facilities and the estimated timing of the costs to be incurred in future years.

The following significant assumptions were used to estimate the decommissioning obligations:

10. Revenue

Under the contracts, the Company is required to deliver a variable volume of natural gas to the contract counter party. Revenue is recognised when a unit of production is delivered to the contract counterparty. The amount of revenue recognised is based on the agreed transaction price, whereby any variability in revenue relates specifically to the Company's efforts to transfer production or the customer's demand for natural gas, and therefore the resulting revenue is allocated to the production delivered in the period during which the variability occurs. As a result, none of the variable revenue is considered constrained.

The Company's contracts have a term of one year or less, whereby delivery takes place throughout the contract period. Revenues are typically collected between the 12th and 25th day of the month following production.

The Company produces a small amount of crude oil that is sold on a spot basis as volumes warrant. Oil is delivered by truck to customers and revenue is recognised in the period in which the delivery occurs.

In addition to selling natural gas that the Company produces, the Company sells natural gas that it purchases from other producers in the area. This purchased natural gas is sold to the same customers, using the same contracts, through the same distribution network as natural gas the Company produces. The Company purchases natural gas from other producers under contracts that are typically one year or less in length at a discount of between 12.5% and 15% to the BOTAS price. These contracts require the Company to deliver the purchased natural gas to customers. The Company does not have the right, nor the ability, to store the purchased natural gas. Since the Company does not have the ability to influence the decision making process for the purchased natural gas volumes or the discretion to set prices, does not experience any inventory risk, does not perform any processing of the product and does not remit royalties to the Turkish government for the product, it considers itself an agent in these transactions. Revenue for this purchased gas is included net of purchase cost in Other income.

Interest and other revenue is comprised mainly of interest on cash in hand.

All of the Company's natural gas is sold in Turkey, in the Thrace Basin, which is the same area in which it is produced.

11. Income Taxes

A reconciliation of the expected tax expense to the actual provision for current and deferred taxes is as follows:

The deferred income tax rate applied to the temporary differences in 2020 was 24.0 percent (2019 - 27.0 percent). The Turkish tax rate for 2020 and 2019 is 22%.

The components of the deferred tax balances are as follows:

The temporary differences that determine the unrecognized deferred tax assets are as follows:

The Company has tax assets of approximately $73.2 million at December 31, 2020 (2019 - $73.4 million) available for deduction against future taxable income. Cumulative non-capital loss carry-forwards in the amount of $58.3 at December 31, 2020 (2019 - $52.4 million) expire between 2020 and 2037.

A continuity of the deferred income tax liability for 2019 and 2020 is detailed in the following tables:

12. Administrative Expenses

The components of administrative expenses are as follows:

(1) Includes salaries, benefits and bonuses earned by all Directors, Officers and employees of the Company.

(2) Includes costs such as rent, professional fees, insurance, travel, office, and other business expenses incurred by the Company.

(3) Includes a portion of salaries, benefits, share-based compensation and other G&A directly attributable to the exploration and development activities of the Company. The reduction in recoveries in 2020 reflects the reduction in capital expenditures on the deep gas play and exit of Equinor as a partner in the play.

Compensation for Executive Officers and Directors are comprised of the following:

(1) Includes salaries, benefits and bonuses earned by Executive Officers and Directors comprised of: Chairman of the Board, President and Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Vice President, Commercial and other independent Directors.

(2) Represents the amortization of share-based compensation expense in the year associated with options granted to Executive Officers and Directors participating in the Company's Stock Option Plan.

The Company recorded transaction costs for the year ended December 31, 2020 of $0.2 million. The 2020 transaction costs are fees related to the transaction described in Note 6 Assets held for sale.

13. Share Capital

(a) Authorized

Unlimited number of common shares

Unlimited number of preferred shares, issuable in series

(b) Per share amounts

Per share amounts have been calculated using the weighted average number of common shares outstanding. The weighted average number of common shares outstanding for the year ended December 31, 2020 is 86,584,989 (2019 - 86,561,863). As a result of the company incurring a net loss during each of the last two years, the average number of common shares outstanding was not increased for outstanding stock options as the effect would be anti-dilutive.

(c) Stock options

Valeura has an option program that entitles officers, directors, and employees to purchase shares in the Company. Options are granted at the market price of the shares at the date of grant, have a 7 year term and vest over 3 years.

The number and weighted average exercise prices of share options are as follows:

On November 25, 2020, directors, officers and employees of the Company voluntarily surrendered stock options for a nominal payment of $0.01 per option. This resulted in the cancellation of 1,957,500 stock options and the immediate recognition of the remaining $0.3 million of share-based compensation expense associated with these options.

The following table summarizes information about the stock options outstanding at December 31, 2020:

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

14. Credit Facilities

Effective March 17, 2020, the Company renewed its APSG facility with Export Development Canada ("EDC"). The APSG facility, which was issued to NBC allows the Company to use the facility as collateral for certain letters of credit issued by NBC. The facility is effective from March 17, 2020 to May 31, 2021 with a limit of US$4.5 million and can be renewed on an annual basis. The Company has issued approximately US$2.9 million in letters of credit under the APSG facility at current exchange rates.

15. Supplemental Cash Flow Information

16. Financial Risk Management

The Company's activities expose it to a variety of financial risks that arise as a result of its exploration, development, production, and financing activities such as:

· Credit risk

· Market risk

· Liquidity risk

This note presents information about the Company's exposure to each of the above risks, the Company's objectives, policies and processes for measuring and managing risk, and the Company's management of capital. Further quantitative disclosures are included throughout the consolidated financial statements.

The Board of Directors oversees managements' establishment and execution of the Company's risk management framework. Management has implemented and monitors compliance with risk management policies. The Company's risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to market conditions and the Company's activities.

(a) Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's receivables from joint venture partners and oil and natural gas marketers. The maximum exposure to credit risk at year-end is as follows:

(1) Accounts receivable balance includes the portion transferred to assets held for sale of $2.8 million.

Trade and other receivables:

Substantially all of the Company's petroleum and natural gas production is marketed under standard industry terms. The Company's policy to mitigate credit risk associated with the balances is to establish marketing relationships with credit worthy purchasers. The Company historically has not experienced any collection issues with its petroleum and natural gas marketers. Joint venture receivables are typically collected within one to three months of the operator invoices being issued to the joint venture partner. The Company attempts to mitigate the risk from joint venture receivables by obtaining partner approval of significant capital expenditures.

Receivables from participants in the petroleum and natural gas sector, and collection of the outstanding balances can be impacted by industry factors such as commodity price fluctuations, limited capital availability and unsuccessful drilling programs. The Company does not typically obtain collateral from petroleum and natural gas marketers or joint venture partners; however the Company can cash call for major projects and does have the ability, in most cases, to withhold production from joint venture partners in the event of non-payment, or withhold accounts payable remittances.

(b) Market risk

Market risk is the risk that changes in market conditions, such as commodity prices, foreign exchange rates and interest rates will affect the Company's income or the value of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while maximizing the Company's return.

Foreign currency exchange rate risk:

Foreign currency exchange rate risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in foreign exchange rates. Historically, any devaluation in the TL has been followed by a legislated increase in the posted BOTAS Reference Price for natural gas. However, devaluation of the TL without a corresponding increase in the natural gas reference price will have a negative impact on adjusted funds flow and could affect the ability of the Company to fund its capital programme in the future. Devaluation of the TL will also result in decreases in royalties, and operating expenses, all other things being equal.

The Company's seismic and drilling operations and related contracts in Turkey are predominantly based in USD for BGCA operations. Material increases in the value of the USD against the TL will negatively impact the Company's costs of drilling and completions activities. Future USD/TL exchange rates could accordingly impact the future value of the Company's proved and probable reserves as determined by independent evaluators.

Changes to the TL/USD exchange rate would have had the following impact on revenues, royalties and production costs for the year ended December 31, 2020:

The Company's drilling and seismic operations and related contracts in Turkey are predominantly based in US Dollars. Material changes in the value of the US Dollar against the Turkish Lira will impact the Company's capital costs.

Changes to the TL/USD exchange rate, would have had the following impact on capital expenditures for the year ended December 31, 2020:

Interest rate risk:

Interest rate risk is the risk that future cash flows or valuations of assets or liabilities will fluctuate as a result of changes in market interest rates. The Company currently has limited exposure to interest rate risk as it has no debt and interest rates on cash balances are at historic lows. Market interest rates currently affect the present value of the Company's decommissioning liability.

Commodity price risk:

Commodity price risk is the risk that future cash flows will fluctuate as a result of changes in commodity prices. Commodity prices for petroleum and natural gas are impacted by the relationship between the United States Dollar and Turkish Lira, global economic events and Turkish government policies.

The natural gas reference price in Turkey (in TL) is in part correlated to contract prices for natural gas imports into Turkey and also government policy with respect to subsidies to consumers. Natural gas sales for Valeura are under direct sales contracts to industrial buyers and power generation companies in the area and each contract is at a negotiated discount or premium to the BOTAS benchmark price.

In the past two years, the government was increasing the BOTAS reference price thereby offsetting the decline in the value of the TL and reflecting the increase in regional gas prices, resulting in five price increases from the beginning of 2018 through mid-2020. Effective July 1, 2020 the Government of Turkey lowered the natural gas reference price by 10% (in TL). The Company's average realised natural gas price in Turkey for the year ended December 31, 2020 was $5.94/mcf which represents a 1.0% discount to the BOTAS price. Effective January 1, 2021, February 1, 2021 and March 1, 2021 the Government of Turkey increased the natural gas reference price by 1% (in TL) respectively.

Liquidity risk:

Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company's financial liabilities consist of accounts payable. Accounts payable consists of invoices payable to trade suppliers for office, field operating activities and capital expenditures. The Company processes invoices within a normal payment period. Accounts payable have contractual maturities of less than one year. The Company maintains and monitors a certain level of cash which is used to finance all budgeted and approved operating and capital expenditures.

Capital management:

The Company's objective when managing capital is to maintain a flexible capital structure which allows it to execute 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.

Fair value of financial assets and liabilities:

The Company's fair value measurements are classified as one of the following levels of the fair value hierarchy:

Level 1 - inputs represent unadjusted quoted prices in active markets for identical assets and liabilities. An active market is characterized by a high volume of transactions that provides pricing information on an ongoing basis.

Level 2 - inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These valuations are based on inputs that can be observed or corroborated in the marketplace, such as market interest rates or forecasted commodity prices.

Level 3 - inputs for the asset or liability are not based on observable market data.

The Company aims to maximize the use of observable inputs when preparing calculations of fair value. Classification of each measurement into the fair value hierarchy is based on the lowest level of input that is significant to the fair value calculation.

The fair value of cash and cash equivalents, accounts receivable, prepaid expenses and deposits, and accounts payable and accrued liabilities approximate their carrying amounts due to their short terms to maturity.