The Investment Potential of Trillion Energy's Natural Gas Development in the Black Sea

Introduction

Trillion Energy is an oil and gas company focused on developing its 49% stake in the South Akcakoca gas field, called SASB, located in the Black Sea offshore Turkey. With high natural gas prices, growing demand in Turkey, and solid reserves, Trillion Energy presents an interesting investment opportunity. This article will examine Trillion Energy's assets, financial position, operations, and growth prospects to assess its investment potential.

High Natural Gas Prices Enhance Project Economics

Natural gas prices have surged in 2022, with European prices over $12/MCF currently. Turkey relies on imports for almost all its gas, so domestic production is highly profitable. Trillion's gas fetches around 90% of the Turkish benchmark price. At $12/MCF, SASB gas could generate operating netbacks exceeding $35/BOE, making it highly economic even after transportation costs and royalties. These high prices enhance the value of Trillion's reserves and give upside to its production.

Material Gas Reserves in Place

Trillion Energy has 323 BCF of original gas in place (OGIP) at SASB, of which it owns 49%. In 2022, reserves were certified at 173 BCF proven + probable, up over 300% from 51 BCF. The net present value of 2P reserves jumped 600% to $548 million. This demonstrates Trillion's acreage holds considerable natural gas resources that support many years of production and reserves additions. Trillion also sees exploration upside, with 189 BCF of prospective gas resources identified.

Ramping Up Production

SASB currently produces around 7.5 mmcf/d net to Trillion from existing wells. Trillion drilled and completed 6 new wells in 2023, which should boost output to 10-12 mmcf/d by year-end. Another 5 wells are planned in 2024, targeting 12-15 mmcf/d. Historical wells produced 5+ BCF per well, so Trillion's program should add considerable reserves. Growing production at attractive gas prices will increase cash flow available for drilling and dividends.

Strong Gas Market Fundamentals in Turkey

As the 6th largest gas market globally, Turkey offers a robust demand outlook. Gas demand has risen steadily, driven by economic and population growth. Turkey produces just 2% of its gas needs, importing the rest. Import reliance leaves Turkey vulnerable to supply disruptions. Domestic production like Trillion's SASB gas reduces these energy security concerns. The national pipeline network connects Trillion's gas processing facility directly into the main grid. These supportive conditions make Turkey an ideal market.

Major Historic Investment in Infrastructure

Around $600 million was invested into SASB historically by prior owners, including offshore platforms, subsea pipelines, and an onshore gas plant. This infrastructure enables Trillion to tie new wells in quickly and control costs. These facilities have capacity for upwards of 150 mmcf/d, giving ample room to accommodate Trillion's production growth. Having this infrastructure de-risks Trillion's gas development plans.

Attractive Fiscal Regime

Turkey offers a favorable royalty and tax regime to encourage domestic oil and gas development. Trillion has a low 12.5% royalty rate and 22% corporate tax rate at SASB. Government take of around 35% is competitive versus other jurisdictions. The fiscal regime allows Trillion to achieve solid after-tax returns from SASB gas production.

Experienced Leadership Team

Trillion's executive team has considerable technical and commercial expertise in the Turkish oil and gas industry. CEO Dr. Arthur Halleran previously discovered major offshore gas fields in South America. Turkish Country Manager Kubilay Yildirim has overseen Trillion's local operations for over 15 years. This experienced team provides credibility in successfully executing Trillion's development plans.

Financial Position Supports Growth Plans

In 2022, Trillion raised over $20 million in equity financings to fund its drilling program. As of September 2022, the company had no debt and $10 million in cash. Existing funds plus increasing cash flow should enable Trillion to carry out its drilling plans without further dilution. The shares also trade reasonably at below 2X projected 2023 cash flow. Trillion appears to have a solid financial base for executing its high-impact development.

High-Potential Oil Exploration Upside

In addition to SASB gas, Trillion has a joint venture on three onshore oil blocks in southeast Turkey near major discoveries. The JV plans extensive seismic shooting and at least 10 exploration wells, providing substantial upside if it can uncover large oil fields. Trillion is carried for up to $40 million in JV costs, reducing its risk exposure. While early-stage, this oil exploration provides free upside potential from Trillion's gas base business.

Conclusion

With quality gas assets, surging commodity prices, infrastructure in place, a strong reserve base, production growth, and financial flexibility, Trillion Energy gives investors leveraged exposure to high gas prices in Turkey's lucrative market. The company estimates it can generate over $100 million in annual operating cash flow from SASB by 2024. Compared to Trillion's modest $80 million market capitalization, this highlights significant upside if it meets production targets. While not without risks inherent in oil and gas development and exploration, Trillion Energy appears well-positioned to create substantial shareholder value. The company's gas development and exploration activities could potentially transform Trillion into a mid-cap producer. For investors seeking overlooked gas leverage, Trillion Energy warrants consideration.