TransGlobe Energy Corporation
Q1 2016 Earnings Call Transcript

Published: 12 May 2016

[Operator:]

Good morning, ladies and gentlemen, and welcome to the TransGlobe Energy Corporation 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 the expectations expressed in such forward-looking statements are based on a 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 forward-looking statements include oil and gas price, 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. Ross Clarkson, President and Chief Executive Officer. Please go ahead, Mr. Clarkson.

[Ross Clarkson:]

Good morning everyone, and welcome to TransGlobe Energy Corporation's first quarter 2016 conference call. This is Ross Clarkson, President and CEO. And with me, I have Mr. Lloyd Herrick, Vice President and COO; and Mr. Randy Neely, Vice President Finance and CFO. As usual, we will start out with a summary of the financial and operating highlights of the quarter. Randy Neely will review the financials and highlights of the quarter starting on the next slide.

[Randy Neely:]

Good morning. Q1 was another tough quarter financially for TransGlobe although it is starting to feel as though the worst may be behind us. The loss of $16.2 million and negative fund flow of $2.8 million we experienced were both cheaply a result of very low oil prices experienced from Q1. On the sales side, we had the unfortunate timing with our one full cargo lifting during the quarter that cargo was sold at February Dated Brent less $14.05 a barrel resulting in net sales price of about $18.43. We attribute the larger than historical record of differential to a couple of factors. First, we continue to have less time in optimal to place the cargo after being allotted the cargo slot by EGPC. And we had this same issue with our Q2 lifting. However we are working with the EGPC to improve that process and we already know the timing of our next lifting which will be in September. The second factor related to the wide differential simply the amount of other heavy barrels that are on the market. Most recently Iran heavy sales have increased. We’re continuing to monitor what the long-term effects will be but don’t anticipate to a return to more normal differential as world demand and supply began to become more aligned. In addition to the one cargo lifting we had in Q1, we were also able to arrange for the swap of another one-third of a cargo through EGPC where we received a notional sales price per Ras Gharib of about $20.50 per barrel. The $4.5 million sale proceeds were also collected during the quarter. As a result with those two sales of our entitlement oil and the delivery of the government sales in kinds, the average sales price for the quarter was $22.58 a barrel down 30% from Q4 and at the lowest average quarterly per barrel oil prices the company has ever experienced in Egypt. So despite having market full than ever on our sales and better cash collection than ever, low oil prices continue to hamper our realizing the benefit of that fundamental change in our business immediate. We hope to see that change as prices return to a more sustainable level. As down flow 2015 the company continued to work on increasing efficiencies and decreasing cost, cost across the board during the quarter. As a result both G&A and operating cost fell on a gross basis quarter-over-quarter by 9% and 15% respectively. Before the impact of inventory movements on a per barrel basis OpEx remained at approximately $10.21 a barrel and G&A at $3.21 a barrel. What we are experiencing now though is a lot of resistance of further reductions in both G&A and OpEx. In the future in order for us to see per barrel numbers decrease any further we will need to move the denominator that is we will need to start going production again. But I will leave that subject for Lloyd to review with you. Net income was also impacted by the strengthening of the Canadian Dollar which caused $5.4 million loss in the convertible debenture. Our balance sheet remains very strong and at the end of the quarter, we held approximately $122 million in cash and cash equivalents and had net working capital of $75.2 million. The big change quarter-over-quarter on working capital that we now include the balance of the convertible debenture in the working capital figure as it is due within 12 months. Our plan with respect to the convertible debenture had not changed, that is we intend market conditions cooperating to repay the convertible with cash. We would hope to provide more details on that plan later in the year. I will now turn you over to Lloyd to give you an overview of the plan for the remainder of the year.

[Lloyd Herrick:]

Thanks, Randy. This slide shows daily production by concession for the past 12 months, production declines in Q4 2015 and 2016 are a combination of natural declines but the intentional reductions to operational and development investments in response to a very low oil prices that we’ve experienced in early 2016. The Brent oil prices returning to the mid-40s, the company has began to make select operational investments which are expected to stabilize production declines in Q2. Q2 guidance is estimated at 10,800 barrels a day for the quarter. In addition, the company is preparing a production recovery plan to increase production from the Eastern Desert through Q4 and into 2017. Timing and scope of the production recovery plan will depend on continued strengthening of Brent oil pricing. Next slide. This slide is a summary of the 2016 plan based on current pricing. The 2016 plan has remained essentially unchanged from the last webcast with the exception of the production recovery plan which has been added to the 2016 plan. The primary elements of the plan are one, continued focus on cost reduction and optimization to improve cost structure across the business; delivery of the 2016 exploration program in a cost effective safe and environmentally responsible manner on all our first phase exploration commitments in the Eastern Desert which actually commenced this quarter in Q2; finalize and implement production recovery plan to arrest production declines and grow production through the end of the year and into 2017 and diversification through business development opportunities. Next slide. This slide is a summary of the 2016 production recovery plan. With improved oil prices to the mid-40s for Brent in April and May, the company has begun preparing this plan to arrest production declines and grow production through the balance of this year and into 2017. The plan is comprised of a number of investment opportunities starting with low cost everyday operational investments such as replacing the worn pumps, reactivating marginal producers which we’re losing money sub-$40 oil. Next level investment will consist of workovers and recompleting a number of existing wells with significant upside potential and the associated facility upgrades. In parallel, the company is evaluating the timing of several development growing opportunities such as K-South which could be drilled and on production prior to year-end. Plan also includes the development of Northwest Gharib discoveries which were made back in the 2014 exploration program which could start as early as Q4 this year. In November of 2015, the company approved the capital budget of $41 million for 2016. In response to further dramatic oil prices, drop in oil prices through the end of the year and into 2016, the company identified approximately $10 million of CapEx which could be deferred into 2017. It is expected that the production recovery plan could restore anywhere from $4 million to $8 million of the capital expenditure back into the 2016 plan which is contingent on the strengthening oil prices and the associated timing. Providing a production target for Q4 is premature due to the volatility of oil prices, however plan has the potential to add 2,000 to 3,000 barrels a day production to current production levels by year-end. I will now turn the presentation over to Ross to discuss the projects in more detail.

[Ross Clarkson:]

Okay. We’re on Slide 7 which shows our West Gharib, West Bakr lands in dark yellow and orange and those are the original core holdings in the Gulf of Suez and currently make up 100% of our producing assets. And then they’re surrounded by the pale yellow lands which we acquired in the 2014 bid round and all of those lands are 100% working interest to TransGlobe. As Lloyd mentioned, we did not actively work to bring up production in these projects during the past quarter because of negative economics with a low oil price. We had several thousand barrels a day of production behind hype and we are now focusing on that plan to restart many of those wells in the third and fourth quarters, if we continue to see that strengthening in the oil prices that we’re witnessing. Our focus on cost reductions and efficiencies has resulted in lowering the operating cost for the producing assets and we’re also seeing significant reductions for our drilling program for 2016. For example, rig rates are down by approximately 25% and some other services were seeing reductions as high as 50%. The direct marketing of our entitlement oil through the coastal pipeline and loading facilities is working reasonably well. We are getting the tendering and sale process smooth out with each tanker load. The tanker load in February was sold and another one was sold on May 2 and we’re now working on the sale of the next load in September for which we have a little more notice on. As Randy said, this has really improved the credit risk profile for the company now that we have eliminated the receivable problem with the government. We get paid in U.S. dollars into our London accounts 30 days after the tanker loads, which is a huge competitive advantage over other companies in the area. Moving on to Slide 8, that’s a detailed map of the South-K field, which we talked about quite a few times in the last conference calls. During the quarter, we drilled K-48 the first of three development wells on this pool and there is an arrow pointing to it there. The well came in as expected with 33 meters of net pay in the prolific Asl A sand. We’re now preparing the well for production and should have it on-stream by June at approximately 400 barrels a day. We expect to drill two more wells at the rig start locations later this year and this is a prolific pool that was really underdeveloped due to a military access restriction for many years. We successfully negotiated access to the pool and now are proceeding with the full development of it. Based on our 3D seismic and the well information we have mapped approximately 55 million barrels in place in this pool and to-date only 5.8 million barrels or just over 10% has been produced from that pool. We believe that the recovery should be in the range of 20% to 30% which is more typical for these types of pools and that means there could be a price of 5 million to 10 million barrels sitting here that we have just gained access to. So this is quite exciting. Moving on to exploration on the next slide. Got our 2016 exploration program in summary form and we’re targeting higher productivity formations in the three main play types. The red beds which are like those found in our Arta field; and then the Miocene Clastic prospects which are the same zones as found in the Hana field and the HK and M fields; and then the pre-Rift prospects that are the same zones as those found in offshore fields which have not yet produced onshore but it’s a new target for us. The first well Northwest Gharib Number 29 is pointed out on the slide; it’s a similar structure to our Hana field located immediately to the Southeast. The Hana field has produced over 13 million barrels to-date from approximately 45 million barrels in place. And these Miocene Clastic reservoirs tend to be a lighter oil and more prolific producers for example, some of the wells in the Hana field had initial rates of 2,000 barrels a day of 26 API oil. Following Northwest Gharib 29, the rigs going to move up to the Northwest to test look alkies to the Arta Red bed pool, so all those red stars up in there and that Red bed pool is the one we discovered in 2010. The risk statistical result assumes three to four successful discoveries out of 22 stars on the map with the statistical results of 8 million to 26 million barrels that's using an average chance of success between 17% and 32% and this is wildcat drilling in an oily area for play types that we know can work very well. But it’s as I’ve indicated there, there will be some dry wells in this mix, we only need a few of the discoveries to make a huge impact to the 2017 production. Now we’re seeing the first signs of the churn in the oil market, we’re going to work towards bringing the discoveries that we made in our original exploration program out here onto production by the fourth quarter. Moving out to the Western Desert lands, we’re mapping up our 3D seismic that we acquired last year and getting some very interesting results out of that, we’re quite excited about the opportunity but we’re preparing the bid tender documents for an additional 3D seismic shoes over the Northwest Sitra area, the adjacent block which should be acquired late this year or more likely early 2017. I'm really keen to get drilling out here, but we really need all the seismic data and properly mapped up all the structures before we get out and drill. The plan is to drill four exploration wells on these licenses in 2017 and that would be two wells on each license. So in conclusion that I mean we're still in a very strong financial position. We continue to steward the balance sheet through this period of volatility and world oil crisis and we’ll continue to work on cost reductions in every area of the business. I personally believe that we have seen the bottom in this cycle and we will climb out through the second half of 2016. That doesn’t mean we are going to see $100 oil anytime soon but return to $50 to $60 will be a healthy spot for this industry. We have an exciting drilling program underway which could lead to significant reserves and production growth in 2017. The first development well has confirmed our views of the potential of the South-K pool and with a couple of discoveries in the exploration campaign we will be very well positioned for 2017 growth. On the M&A front, we have worked through the evaluations on several companies and made offers to purchase three properties in Q1. But we have not been able to match the sellers’ price expectations yet. However there is lots of fish in the sea and we’re going to continue to go fishing for new opportunities. One thing that has changed is our focus area and is now really only on OECD countries with strong economics at lower oil prices. We’re looking for assets and countries that will be on a much lower risk spectrum and with much higher netbacks than what we’re currently experiencing in Egypt. That might mean there will be smaller assets but the higher netbacks would offset the size. And that’s all we have today, thank you for participating in TransGlobe’s Q4 conference call, let’s turn it over and we will get some questions.

[Operator:]

Thank you. We will now take questions from the telephone lines. [Operator Instructions]. The first question is from David Dudlyke of Dundee Capital Markets. Please go ahead.

[David Dudlyke:]

Yes good morning everyone. Question for Randy, just on the Gharib I think I heard you say that your expectation, your desire was to redeem the convertible cash. Looking where the Brent is trading and notwithstanding your optimism for oil prices I just thought you would probably be out there looking to refinance that rather than just strengthening pad having your cash on your balance sheet? Why would you hold just option out, I believe, you’re starting both business development and just also acceleration [indiscernible] play to production.

[Randy Neely:]

Yes, David, effectively we pay with cash. I guess what I’m trying to say is our intention is to not pay the shares; if the market cooperates we certainly would rather keep the cash that we have and refinance the bond. But it will depend on market conditions at the time but yes it would be either cash from the balance sheet or cash from a refinancing but the intent would be not to do it with shares as we said all along.

[David Dudlyke:]

Okay. That’s all I have for the moment. I may come back with a follow-up question. Thank you.

[Operator:]

Thank you. The next question is from Pavel Molchanov from Raymond James. Please go ahead.

[Pavel Molchanov:]

Thank you guys. I have two questions first one you mentioned that there are some deliberate price driven production shut-ins, can you quantify how much production is offline for that specific reason?

[Randy Neely:]

We’re probably looking at 2,000 to 3,000 barrels a day; it’s a little hard to totally identify that because you do have natural declines that will come start so. Some of it is just shutting wells, some of it is we discover where our provincial requirement to reduce cost which include some pumps for water handling and the like. So it’s a mixed bag but we think we have the capacity to come back up in that 2,000 to 3,000 barrel a day range. Some of that will require some recompletions but we think that’s a reasonable number.

[Pavel Molchanov:]

And within what timeframe would you bring that 2,000 to 3,000 back?

[Randy Neely:]

While it is very dependent on oil pricing but realistically we would look at the fourth quarter to have that backup, if prices stay and strengthened.

[Pavel Molchanov:]

Okay. Second question on your M&A program, you said that you’re going to be limiting it to OECD countries only and I recall in the past, you were also open to other for example African geographies some of which have actually seem to have pretty good economics. So have you ruled that out completely?

[Ross Clarkson:]

Yes, this is Ross here. I think that’s true that we have pretty much ruled out a lot of the areas where we’re not only balancing netbacks; we’re also balancing political risk.

[Operator:]

[Operator Instructions]. Next question is from Kimberly Hedlin of Canaccord Genuity. Please go ahead.

[Kimberly Hedlin:]

Hi guys. Just wondering if you can run through the mechanics on your EGPC inventory swap and if you expect to see more of those in the coming years?

[Randy Neely:]

Yes I mean we’re pretty straightforward. We ended 2015 with 923,000 barrels and we have been putting a lot of pressure on EGPC to give its additional lifting. And there is obviously a limitation on how many there are available but they do sell oil at a cruise whether the Mediterranean, so we came up with the idea collectively that we should effectively just swap some of our barrels in inventory in the Ras Gharib land for barrels that they were going to sell out of at demand. And so when we did that, we then effectively took a third of a cargo and collected those funds. Do we expect it to happen in the future? Perhaps, I mean it should depend but I think ultimately we would like to be selling crude every month rather than crude once quarter, so we will see. For now it’s a one-off.

[Operator:]

Thank you. That concludes today’s question-and-answer session. I would like to turn the meeting back over to Mr. Ross Clarkson. Please go ahead sir.

[Ross Clarkson:]

Okay. Thank you everyone for participating in the conference call and for the great questions. We are all very excited here to be back to drilling and we will start now once again providing mid-quarter updates again to keep everyone up-to-date on our drilling results. So the next update will be probably at around six weeks near the end of June. And then we will have the quarter in August and another mid-quarter on the end of September. So a little more regular results coming out as we get through all this drilling campaign. And that’s all for now, thank you everyone.

[Operator:]

Thank you. The conference call has now ended. Please disconnect your line at this time. Thank you for your participation.