TransGlobe Energy Corporation
Q4 2018 Earnings Call Transcript

Published: 13 Mar 2019

[Operator:]

Good morning, ladies and gentlemen, and welcome to the TransGlobe Energy's Q4 2018 Conference Call and Webcast. This webcast includes certain statements that may be deemed to be forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. All statements in this webcast, other than statements of historical facts that address future production, reserve potential, exploration drilling, exploitation activities and events or developments that the company expects are forward-looking statements. Although, TransGlobe believes that expectations expressed in such forward-looking statements are based on reasonable assumptions, such statements are not guarantees of future performance and actual results or developments may differ materially from those in the forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements, include oil and gas prices, well production performance, exploitation and exploration successes, continued availability of capital and financing, and general economic, market or business conditions. I would now like to turn the meeting over to Mr. Randy Neely, President and Chief Executive Officer. Please go ahead, Mr. Neely.

[Randall Neely:]

Thank you. Good morning and good afternoon to everyone. Thanks for joining us today for 2018 year-end and Q4 webcast. We’ll start with Eddie Ok our CFO who will provide an overview of the financial results, followed by Lloyd Herrick, our COO who will give an overview of the 2019 capital plan, 2018 year-end results and our current and recent production. I will then close off with a walk through of some of our highlights of what we are focused on each area, and then we can wrap up with the Q&A session. Over to you, Eddie.

[Eddie Ok:]

Thanks, Renee. Good morning everyone, and thanks for joining us on the call. Go to first, light. Average production volumes for the year were about fourteen and a half thousand Boe per day versus 15 5 in the year prior. Our total sales for the year exceeded production as we were able to draw down our inventory crude balance by about 200,000 barrels throughout the year. As we only inventory up depletion and OpEx costs, our inventory barrels with the royalties and taxes on the produce barrels expensed in the period produced financial reporting periods with net crores on inventory tend to have in higher net back. Our annual funds flow from operations were quite strong on a relative basis when compared against the prior year, $63.3 million relative to $55.6 million in 2017. Despite lower produced and sold volumes this year, we had an approximate 14% improvement in funds flow due to higher Brent prices. Further impacting our results in Q4, was a decision made late in the fall of 2018 to remove the ceiling on half of our clean 18 hedge position and we set the 2020 ceilings to $7 Brent. Our strengthened results due to opportune sales of our Egyptian crude at good prices were partially offset by pricing weakness in Canadian dry gas and apportionment differentials apply to our liquids production in Canada. Oversupply and capacity constraints from our product purchases were hitting us with upto around $40 a barrel discount on light oil at certain periods throughout the fall and winter. In line with our discussion last quarter, annual OpEx for Egypt was 981 a barrel as Q4 OpEx was largely in line with the previous quarter, and annual OpEx for Canada was $926 inclusive of May turnaround. G&A costs for the year were $355 Boe higher than prior years, the additional costs related to the listing were averaged over lower production volumes year-over-year. Net income was $15.6 million versus a $78 million loss in 2017. On an annual basis, these results included $79 million impairment in 2017 and a $14.5 million impairment in 2018, all related to our 2012 and 2014 concession acquisitions and subsequent exploration campaigns. We ended up the year with just under $52 million in cash and pay down about $18 million in long term debt. Next one please, our 2019 capital plan was prepared with the aim of maintaining production and maximizing free cash flow to direct towards growth activities. We've budgeted $34 million in capital for 2019, $24 million to Egypt and $10 in Canada. We are actively managing our debt and capital allocation strategy and recently announced a three and a half cent dividend payable to shareholders of record on March 29, 2019. I'll pass things over to Lloyd for some additional commentary on our 2019 program.

[Lloyd Herrick:]

Thanks Eddie. Just a couple more comments on the plan. Production is averaging about 15,400 Boe’s year-to-date which is currently ahead of plan. Increased production is primarily driven by increased oil production from our West Bakr and North West Gharib Concessions in Egypt. The 2009 production plan as presented does not currently include any production from the South Ghazalat 6X oil discovery which could be producing prior to the year and subject to government approvals and equipment availability. As Eddie mentioned, the capital plan is targeting $34 million. We’ll now go to the next slide. This table summarizes the capital program for 2019. The total program is $34 million, which is split about 70% to Egypt and just under 30% to Canada. In Egypt, we have seven wells plan consisting of four development wells, and three exploration wells. 60% of the budget about $14 million is focused in the West Bakr Concession where we plan to drill three development wells, one exploration well, and conduct 10 well in recompletions along with the Phase 3 expansion of the K station CPF panel additional volumes to sustain production and increased reserve recoveries. We've also plan for two Northwest Gharib Wells focused largely on development lease number one, which we'll discuss in more detail later in the presentation. In the Western Desert, we’ve allocated $3.5 million for South Ghazalat to appraise and develop the South Ghazalat, six discoveries which is contingent on approvals. In Canada, we have a 4 well Cardium horizontal plan for three development wells and one outpost well to evaluate the Harmattan south acreage that we acquired in 2018. This slide summarizes our 2018 year-end reserves announced in January compared to the 2017 year-end reserves. An approved plus probable 2P basis, we ended 2018 with $44.1 million Boe’s of reserve which is about 4% lower than year-end 2017 primarily due to the 2018 production of 5.3 million Boe’s. During 2018, the company had positive reserve additions and revisions of 4.7 million Boe’s on a proven or 1P basis and 3.5 million Boe’s on a proved plus probable 2P basis representing a reserve replacement of 89% and 68% on a respective 1P and 2P basis. At year-end 2018, the net present value of 2P reserves using forecast pricing discounted at 10% was $339 million before tax and $323 million after tax. This slide shows our daily production by major producing areas. Production in Egypt is currently above plan, primarily due to significant increases in the West Bakr area, which are primarily attributed to the 2019 well optimization recompletion programs in K and H field that are underway, and production from new wells in M Field which continue to exceed forecast, that's the growing orange wedge on the graph. In Canada, oil production increased in January primarily due to the 2018 drilling program which was tied in and equipped over year end. The oil production increases in Canada were partially offset by an unplanned two week shut in of the main oil battery to replace a burner in the main treater. The burner failure occurred in February, which coincided with below normal temperatures during the month of February, which were in the minus 30 to minus 40 Celsius range. Extreme cold exacerbated the repair efforts and the restarting of production, which was restored by March. I would like to give a big shout out to the field staff and contractors for getting things repaired and back on production without any incidents under very difficult conditions. The new wells have performed as expected. However, it is too early to measure against production type curves due to the unplanned shut-in of the wells in February. In addition, approximately 300 Boe’s of ethane production was diverted to natural gas sales in January, when the operator of the third party gas processing plant shut down their deep cut ethane extraction plant primarily due to low ethane prices and associated pipeline egress issues in Alberta. Despite the loss of up to 300 Boe’s of ethane from the production numbers, the increased natural gas value and associated gas volumes are expected to generally offset the loss of ethane revenue.

[Randall Neely:]

Okay. Thanks, Lloyd. You see, this is a map for lands in Egypt, in the eastern desert we have three producing concessions with 11 development leases, with varying expiries. One of our primary strategic objectives this year is to consolidate, amend and extend these concessions into one merged concession agreement. This is something that we've been working on for some time, and we are hopeful we concluded -- we can conclude it this year. In the western desert, we have two exploration concessions, although we have a discovery in South Ghazalat as well as in South Alamein. We have not yet moved in development. We are currently working with the EGPC on a development proposal for South Ghazalat and expect to be moving into development sometime during 2019. Zooming in on South Ghazalat, where we had the discovery last fall highlighted on the map with the Red Star. In November, we announced that we had drilled and tested the second South Ghazalat exploration well at a rate of just over 3800 barrels of oil per day. This is a combined rate from two zones. Based on this positive test results, we filed a declaration of commerciality with EGC in December, and the development plan in late February. We expect to conclude negotiations and receive approval of a development lease in the next few months. Assuming our plan is approved, we should be able to begin the delineation of the existing discovery and begin an early development and production later this year. Concurrently, we will be merging and processing two existing 3D seismic surveys in the discovery area to firm up additional drilling locations for 2020. In the Eastern desert, we have provided 2019 full year production guidance in the range of 11,500 barrels to 12,400 barrels of oil per day. As Lloyd just mentioned, we are currently running above guidance, but at this time we are not revising our full year estimates. Post consolidation of the PSCs we anticipate that we will be able to advance additional work in the Eastern desert with a focus on introducing horizontal drilling and completions in the Nukhul formation, increase the application of water flooding and eventually pursue tertiary recovery applications including polymer and possibly ASP flooding. We don't expect given the expected timeline to approval of a merger of the concessions to advance these projects until 2020 beyond the desktop technical work that would be necessary. For any of you on the line who are new to TransGlobe, we bought West Bakr these assets in late 2011. The fields had been producing consistently since the early 1980s between three and four thousand barrels a day. Since we took them over in 2011, we have more than doubled the average daily production. This is exactly the type of opportunity we are looking for from an M&A perspective, under loved and underdeveloped or under exploited opportunities. For 2019, we will continue to focus on maintaining and optimizing production through a combination of recompletion and three additional drills as well as facilities and pumping upgrades. As Lloyd discussed earlier, production at West Bakr has exceeded plan due to positive results from our K and H well optimization programs that are underway and the performance of our newly drilled M wells that continue to exceed forecast. In December, we commenced drilling the M-10 twin well to replace the original M-10 well which had to be abandoned last year due to casing integrity issues encountered during a remedial water shut off program. The M-10 twin or replacement well was placed on production from the main Asl A sand in late February and is currently producing 495 barrels a day. We also have one exploration well in the plan for 2019, which we drilled in the second quarter. It's highlighted by the far west pink dot on the map and the Northern Development Block. This well, we'll be targeting the formation that is proven to be successful by a neighboring company. So we are cautiously optimistic about our chances of having discovery here in 2019. Up in Northwest Gharib, we again ended up drilling another oil well at Northwest Gharib 38-A while we were looking for a potential water injector. The well was drilled further down the structure as a potential water injector to provide precious support on 38-A field. This well is currently being completed and depending on the results may be converted to an injector. As a result of this development, the planned exploration well to the north of the 38-A pool may be deferred to next year to accommodate an additional well in the 38-A pool in 2019. Now let's take a look at our Canadian assets. In 2018, we drilled six horizontal wells in the Cardium, all -- five of them were 1 mile horizontals and we drilled our first 2 mile horizontal well in 2018. All six wells were drilled from a common pad. The wells were completed and fracked in the fourth quarter and equipped and tied in over the year end. As Lloyd just discussed, we had some terrible winter weather in Canada this year, and this did not allow us to fully optimize the initial production as early as expected, but we’re now getting on track and so far the wells are performing as expected. On a high level basis, the real challenge in Canada besides weather is pricing. The curtailments of liquids production in Alberta to improve prices, which certainly helped, also had a ripple effect throughout the industry. This includes leaving ethane in the gas stream rather than knocking it out. And while this will have an impact on production rates, it will not have a material impact on revenue as ethane prices have been under significant pressure, price pressure for many months with no end in sight. Despite the headwinds in Canada, we are very pleased with the technical performance of our Canadian assets and plan to drill 4 Cardium horizontal wells in 2019 including an outpost well to begin evaluating the South Harmattan acreage acquired in 2018. In addition, importantly, the learnings from our Canadian program are being integrated into our plans for development of our Nukhul pools in the eastern desert region. So to sum up, from an investment proposition perspective, TransGlobe is positioned with a very healthy balance sheet, a long history of consistent operating performance, production guidance of 14,000 to 15,000 barrels of equivalent per day, leverage to Brent oil and in a very good position to grow through acquisitions by leveraging our expertise and strong reputation. So please stay tuned as we are working very hard to add both cash flow and value per share in the coming years. One final note is to welcome Geoff Probert, our incoming COO who stepped into the very big shoes of Lloyd Herrick, who will shift his focus to Corporate and Business Development. And we'd also like to extend a welcome to two board members, Miss Carol Bell and Mr. Ed LaFehr, both highly experienced industry professionals who have joined us to help guide us through what we hope is some exciting times ahead for TransGlobe. Thanks very much. We'll now turn it over for the Q&A session.

[Operator:]

Thank you. [Operator Instructions] The first question is from Stephane Foucaud with GMP. Please go ahead.

[Stephane Foucaud:]

Hi guys. Two production question from me and one exploration. First, on the production side, West Bakr as you said runs very strongly. Excluding any potential shutdown this year, do you see that production continuing trending up over the remaining part of the year, flat, or down a bit. And likewise, at West Gharib, the decline rates that we have seen over the last few quarters continued trending at the same -- at the same pace of 2019. And my second question is around the explosion well at West Bakr, could you give us sort of -- order of magnitude of the size. Are we talking 100,000 barrels, millions of barrels, billions of barrels, probably not? Thank you.

[Lloyd Herrick:]

Okay. So to your first question, I think I got the full question there Stephane. As far as the production trending, I think we were expecting to be trending above guidance. We have moved some of the program earlier in the year, so it's more front end loaded, but I think starting well above the curve puts us in good shape for the year. So, we expect to be on the strong side of guidance based on what we've seen so far. I'm sorry, the second question was around…

[Stephane Foucaud:]

Was Gharib going, the decline rate at West Gharib that we have seen right in the past -- the recent quarter.

[Lloyd Herrick:]

Yes, in West Gharib we had one of our key wells go down on us, and it was -- we try to recompletion, that didn't work. We've restored it back up in just the other day, so it's back doing two or three hundred barrels a day, which will flatten out some of that decline, but there's not a lot of work planned in West Gharib, so it's a pretty mature field. Until we get the consolidations done on the eastern desert and then start drilling back in the Nukhul for horizontals, which hopefully will be next year. West Gharib is probably going to continue at a similar decline rate. With respect to the West Bakr exploration well, the target on that one -- it's a bit, a bit challenging to give you a whole prospect size on that. We do know that the wells to the south there's a pool down there that is producing something in the order of 2500 barrels a day from three wells. So we're optimistic, we're going to get a positive well if it extends that far north. Typically those wells would recover in the three to five hundred thousand barrels per well range, but until we test the structure it's hard to say.

[Stephane Foucaud:]

Thank you. And you said for West Bakr, you expect production to be keep going up. Is that what you said, or just above guidance?

[Lloyd Herrick:]

It's continuing to climb. I think, we will continue to climb here in the first half and then as we finish up our capital program, I would think mother nature will kick in, and we'll see some declines along with that. But right now, as you can see from the production curve, it's on a pretty good growth rate. We drilled through 8000 barrels a day and we're quite a bit above that early in March. So I'm optimistic, we are off to a good start.

[Stephane Foucaud:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] There are no further questions registered on the phone lines at this time. I would like to turn the meeting back over to Mr. Neely.

[Randall Neely:]

Okay. Well great. Thanks everybody for joining in this morning, and thanks Stephane for the question. We look forward to a great year here, with a lot of excitement hopefully on both the consolidation of our Eastern Desert PSCs and hopefully some mergers and acquisitions in our future. And as well with a good start to the year in terms of production, we're very excited. Stay tuned. Thanks everybody.

[Operator:]

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you all for your participation.