Trillion Energy to Boost Gas Output with High-Impact Exploration Upside on Turkish Gas Reserves

• Trillion Energy discusses the company's plans to increase natural gas production from its SASB gas field offshore Türkiye
• The company is replacing tubing in existing wells and doing new perforations to boost production to 7-8 million cubic feet per day, generating $2-3 million/month in revenue
• Trillion has reached agreements with creditors to delay debt payments until production and revenue increase
• The company is selling non-core oil assets and inventory to raise $5-10 million to fund the SASB work
• With 55 BCF of proven gas reserves, SASB provides long-term production potential, and Trillion is evaluating other exploration prospects in Türkiye

Trillion Energy, a Canadian oil and gas company focused on production and exploration in Türkiye, is poised for a significant increase in natural gas output and revenue in 2024. Despite challenges posed by debt obligations and production declines, Trillion has developed a low-cost plan to rejuvenate its producing assets and improve its financial position. For investors seeking exposure to international energy producers with long-life reserves and near-term growth potential, Trillion offers a compelling opportunity.

Key Asset: SASB Gas Field

Trillion's core asset is the SASB natural gas field located in the Black Sea offshore Türkiye. The company holds a 49% interest in the field, which has been producing since 2007. SASB currently has four producing wells, with Trillion's share of output averaging around 3.3 million cubic feet per day (mmcf/d). However, production rates have declined due to "watering out" of the wells, where excess water in the tubing inhibits gas flow.

Trillion CEO Arthur Halleran explained, "All we need to do is really replace the tubing size from 4.5 inches to 2.375 inches. We have that all in place." With this simple workover to reduce the tubing diameter, Halleran expects the wells to return to initial production rates of 7-8 mmcf/d. At current gas prices of $10-12 per mcf in Türkiye, this would generate $2-3 million per month in revenue net to Trillion.

The company is also perforating new intervals in the existing wellbores that had not been previously produced. This will allow more gas to flow into the wells. These perforations are expected to yield flush production for 2-3 months before decline sets in and the velocity strings are installed.

Importantly, the production increases will come from proven developed reserves, not exploratory resources. Halleran noted that Trillion's year-end 2023 reserve report showed an increase to 55 billion cubic feet (BCF) of proven gas, up from 43 BCF previously. "The reserves are there, they just moved from the proven producing to the proven non-producing category," he explained. This provides clear line-of-sight to the production forecast.

Interview with President & CEO Dr. Arthur Halleran

Financial Position

Like many junior energy companies, Trillion has faced financial constraints in recent years. The company reported $17 million in revenue for 2023, but has $14.5 million in outstanding obligations. These include $6 million owed to a drilling contractor, Schlumberger, and another $6 million in collectibles.

However, Trillion has reached accommodations with its key creditors to defer payments until the SASB production enhancements are executed. "Schlumberger understands. They said okay, we won't bother you for the $6 million because we've done work on this field, they know the gas is going to come. Just pay us when the production comes back on," said Halleran.

To fund the SASB work, Trillion is selling its non-operated 19% interest in the Cendere oil field to its partner TPAO, the Turkish national oil company. While terms have not been disclosed, Halleran indicated the sale price would be in the "single-digit millions" of dollars. Proceeds will be more than sufficient to cover Trillion's share of the SASB de-bottlenecking costs, estimated at around $400,000.

The company is also monetizing some of its $5 million in offshore consumable inventory that had been previously purchased for SASB. Halleran relayed that Trillion has received bids totalling close to $1 million for some of the equipment. These sales, combined with the Cendere proceeds, will provide a $5-10 million injection to clean up the balance sheet and fund growth.

Exploration Upside

Beyond the immediate production enhancement at SASB, Trillion has a portfolio of development and exploration prospects that could add meaningfully to reserves and production in the coming years. These include six additional development well locations at SASB that could be drilled and completed for around $1 million each.

On the exploration front, the company will be drilling the West Akcakoca-1 well later this year to test a large prospect identified on modern 3D seismic. If successful, Halleran believes this well could open up a new fairway for Trillion that would be highly attractive to potential industry partners.

Trillion also holds a 100% interest in the Derecik Zagros Basin Oil exploration license in the Hakkari area of Southeastern Türkiye, near several oil discoveries that have been made in the region. The play is a large thrust anticline that could hold over 200 million barrels of oil, and Trillion is currently seeking a partner to drill the prospect. A discovery at Derecik would be a game-changer for the company.

Conclusion

The key takeaways for investors are that Trillion has a clear path to meaningfully grow production and cash flow from its SASB gas field in the near-term through low-cost well interventions. This will strengthen the company's balance sheet and help meet its debt obligations. Longer-term, Trillion offers investors a portfolio of exploration prospects in Türkiye that could add significant reserves and production if successful. With several actionable catalysts on the horizon, Trillion is a unique opportunity among international junior energy producers.

The Investment Thesis for Trillion Energy

• Proven reserves: 55 BCF of gas (up from 43 BCF previously) in SASB field with long-life production
• Low-cost production growth: Well workovers and perforations at SASB to boost production to 7-8 mmcf/d, generating $2-3 million/month
• Financial flexibility: Selling Cendere oil field stake for $5-10 million to fund SASB work and pay down debt; creditors have deferred obligations
• Exploration upside: Multiple development drilling locations at SASB plus high-impact prospects in West Akcakoca and Derecik exploration licenses
• Actionable catalysts: Gas production to increase in Q3 2024 from SASB perforations and by year-end with tubing replacement; exploration drilling in late 2024

Macro Thematic Analysis

Trillion Energy's fortunes are closely tied to natural gas supply and demand fundamentals in Türkiye. With indigenous gas production meeting only 2% of the country's needs, Türkiye is highly reliant on imports from Russia, Iran, and LNG suppliers. As its economy has grown, Türkiye's gas consumption has risen steadily to over 60 BCM per year. The government is keen to boost domestic production and reduce the import burden.

This provides a strong macro backdrop for Trillion. Gas prices in Türkiye are currently $10-12/mcf, well above European and North American benchmarks. These prices are expected to be sustained or increase as Türkiye's import contracts expire in the coming years and it turns to more expensive LNG to meet demand. "It's projected that the price in Türkiye will go up a couple of bucks towards the end of 2024 and 2025 because their long-term contracts are expiring," explained Halleran. "Until they secure a long-term contract, there's going to be a larger percentage of spot market and it's not going to be like $20 but it's like $13 or $14."

For investors, this means that Trillion's gas production will enjoy premium netbacks. Even at current prices, the company's production generates an operating netback of over $9/mcf after royalties and operating costs. If prices rise to $13-14/mcf as Halleran suggests, netbacks would increase to $11-12/mcf, providing a huge cash flow margin for a company of Trillion's size.