TransGlobe Energy Corporation
Q2 2016 Earnings Call Transcript

Published: 11 Aug 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 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 prices, well production performance, exploitation and exploration successes, continued availability of capital and financing, and general economic, market or business conditions. I'd like to turn the meeting over to Mr. Ross Clarkson, President and Chief Executive Officer. Please go ahead, sir.

[Ross Clarkson:]

Good morning everyone, and welcome to TransGlobe Energy Corporation's second quarter 2016 conference call. This is Ross Clarkson; I'm the 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'll start out with a summary of the financial and operating highlights. Randy Neely will review the financials and the highlights of the quarter starting on the next slide.

[Randy Neely:]

Thanks, Ross. Good morning everyone. The quarter was relatively uneventful from a financial perspective. We did see a substantial increase in realized oil prices, from $22.58 in Q1 to $30.27 in Q2. Our liftings in Q1 and Q2 were both done at approximately $14 negative differentials to Brent, but we continue to believe that these differentials will narrow as oil prices recover. The lifting in the quarter netted us approximately $16.9 million in proceeds. Production for the quarter was down approximately 5%, to just under 11,500 barrels a day, and sales were slightly higher than that at 11,783 barrels a day as we lifted some of our opening inventory in the quarter. At quarter end, we had 706,577 barrels remaining in inventory, down from just under 780,000 at the end of Q1. Funds flow for the quarter were approximately $2 million, up from negative $2.8 million in Q1. Much of this increase is attributable to the higher oil prices we see, but also indicative of the lower overall cost structure we have worked to achieve over the past 18-plus months. We also note that we achieved further decreases of 5% of both gross G&A and gross operating costs in Q2 versus Q1. During the quarter the company lost $12.1 million, down from a Q1 loss of $16.2 million. The loss is generally a result of lower oil prices, but as well foreign exchange losses attributable to our convertible debenture. During the quarter, we spent $4.8 million on capital expenditures, and Lloyd will give more color on that in a moment. We ended the quarter with positive working capital of $65.4 million, which includes approximately $124.3 million in cash remaining at the end of June offset by our entire convertible debenture balance which is held as a current liability. And it is due on March 31, 2017. As for our future liftings, we have another lifting scheduled for September, and we continue to be in discussions and negotiation with the EGPC for a fourth quarter lifting. I'll now turn you over to Lloyd for operations update.

[Lloyd Herrick:]

Thanks, Randy. This slide shows daily production by concession for the past 12 months. Production declines in Q4 and early-2016 are a combination of natural declines and intentional reductions to operational and development investments in response to the very low oil prices in early 2016. With Brent oil prices returning to the mid-40s, companies began to make select operational investments which stabilized production in the 11,400 barrel-a-day range, which is also guidance for Q3. West Gharib, shown in red, has been fairly stable, and is expected to increase in Q4 with several recompletions scheduled as part of our production recovery plan, which I'll discuss later in the presentation. Slight dip in production at the end of July relates to a few wells that were waiting on pump and rod changes, while the workover rate was down for the annual maintenance and recertification, which was completed this past weekend. At West Bakr, shown in orange, production increased in June, with the addition of K-48 and a few well reactivations. Production will ramp up in the fourth quarter with the addition of K-51, and the remainder of the PRP wells and recompletions. This slide is a summary of the current 2016 plan. Primary elements of the plan are the 18-well exploration drilling program, which commenced in Q2 with one drilling rig, and has been accelerated with the addition of a second drilling rig in Q3. Today, we have drilled five prospects and made two oil discoveries, which Ross will discuss later in the presentation. Development of the West Bakr K-South field, with an initial three wells scheduled in 2016, two oil wells have been drilled to date; implementation of the production recovery plan, or as we call it the PRP, through the balance of the year targeting production of 13,000 to 14,000 by year-end. Advanced development plans for existing North West Gharib discoveries, including the appraisal of recent discoveries which will occur in 2017. We will continue with mapping at South Ghazalat and preparing for North West Sitra seismic tender. And our Western Desert operations continue to look at the diversification through development opportunities, and of course continued focus on cost reduction and optimization to improve our overall cost structure, which are evident in the recent financials. Based on a significantly better drilling cost, which are trending 30% to 40% below plan, and optimized PRP re-completion plans, it's expected that the 2016 capital spend will be approximately $33 million in '16, which is about $5 million lower than the preliminary estimates. The significantly improved drilling costs are due to improved drilling practices and better contract pricing. During the 2015-'16 drilling hiatus, we conducted a detailed review of over 200 wells that we've drilled in Eastern Desert to optimize our Eastern Desert drilling program. These well-programmed design changes have been a significant contributor to our lower well costs in the 2016 program. This slide summarizes the production recovery plan as identified in the Q1 webcast. The program is proceeding as planned with a majority of the fieldwork scheduled for September through December of this year. This slide, our current production comes from West Gharib and West Bakr Concessions in Eastern Desert. As discussed, we expect production to average 11,400 during Q3. In addition to the production recovery plan, the company completed construction of a new geostatistical reservoir simulation model for the Arta Red Bed pool during the second quarter. Based on better than forecast pool production for the past two years and the simulation results, we believe that 2 to 4 million barrels of additional oil reserves will be recovered from the Red Bed pool. On a 2P basis, that would represent a 7% to 14% increase to our year-end reserves. We are working with our independent reserve evaluator to confirm the Red Bed reserve additions. Additionally, two infill wells were identified which are now scheduled for either late '16 or '17 depending on regulatory approvals. Those two wells are targeting a combined 6 to 800 barrels a day of incremental production and are expected to cost $100 million per well to drill and place them in production. I will discuss the West Bakr, K-South in more detail on the next slide. This slide is a map of our K-South area which has had limited access due to military restrictions in the area. In late 2015, we finalized an agreement to allow access to South K. Based on historical oil control we currently estimate that South K contained 55 million barrels of oil in place. Approximately, 5.9 barrels of oil have been produced representing a 10.7% recovery factor. Our 2P remaining reserves at year end 2015, were booked at 3.9 million barrels, which would equate to an implied ultimate recovery factor of about 18% for K-South. Comparatively, the main K pool to the north has an expected recovery factor of 29%, which if applied to K-South would equate to 8 to 10 million barrels remaining reserves. Today, we have drilled two of the planned three wells for 2016. The first well, K-48 encountered at 108 feet of net Asl A oil pay was placed on production with an initial rate of 460 barrels a day in June. The second well K-51 encountered at 120 feet of net Asl A oil pay on the weekend and will be completed and placed on production in September. I'll turn the presentation over to Ross to discuss our 2016 exploration program in more detail.

[Ross Clarkson:]

Okay, this is the exciting stuff. Well, K-South is pretty exciting too, but I've got our 2016 18-Well program here, and the 3-Well Development program in a summary form on the slide nine. And you can see in this that we are targeting the higher productivity formations in three main play types

[Operator:]

Thank you, sir. [Operator Instructions] First question is from Shahin Amini from TD Securities. Please go ahead.

[Shahin Amini:]

Good morning gentlemen. Well, congratulations. This is a very exciting update on the North West Gharib Red Bed discoveries. Ross, you've done a great job of describing the discoveries 27 and 38. But you also -- I was wondering whether we could quickly revisit the two dry wells in the Red Bed, which is further South. And any color, any detail you could provide with a view to get a feel for the prospect, following [ph] on slide eight, you showed the other two prospects as well, 2016 locations. And what do those failures mean for the follow-on prospects?

[Ross Clarkson:]

Yes, those two in the south, we also encountered the Red Bed reservoir but however it was wet in both of those. And so we're reworking that, and seeing is there opportunity to either move up dip on those or was there a charge problem or something like that. But we do know that there is -- oil moves through that area, because they are relatively close to our Arta discoveries. So it's really just an iterative process, okay, now we found the reservoir, we tend to look for that first. Perhaps the next step is we do an up-dip test closer to the [indiscernible].

[Shahin Amini:]

Okay. And page five of your report, you have a table that also shows the TBs for these prospects. Can't really read too much into those, right?

[Lloyd Herrick:]

It's Lloyd here. Yes, it varies. As you can see from the cartoon maps that Ross showed, that you're stepping down quite quickly on somebody's little fault box and [indiscernible], so -- but the message is, they're really shallow wells. I mean, certainly on the Red Bed area, we're looking at $500,000 to go down and do a test on these various wells. So it's very inexpensive exploring.

[Shahin Amini:]

Yes. And just two quick follow-on questions, one is, Ross, did you say assume your recovery facts [ph] for 20%. Just wanted to confirm that I heard you right? And could you give the free drill estimates for the follow-on prospects on the rest?

[Ross Clarkson:]

Well, there's a whole list. There's 13 of them. I don't think I'm going to be able to go through it.

[Shahin Amini:]

Well, the next two that are shown on your -- have been highlighted on your slide…

[Ross Clarkson:]

[Indiscernible]

[Lloyd Herrick:]

Yes, we haven't press-released those so we can't release that in this call. But certainly the next one, we're just running production casing on North West Gharib 38, and we are moving over to North West Gharib 26, which is immediately west and up in the next structure, up from North West Gharib 27 discovery. So we're pretty excited about that on. We know there is big sand presence in the area. So we've got a lot of drilling to do out there.

[Shahin Amini:]

Okay. Actually, one of your previous presentations show there are eight prospects in North West off the block right on the edge of the boundary. That seems to have dropped off in your latest presentation.

[Ross Clarkson:]

Yes, we had notionally put in up to 22 in the previous presentation. Our actual commitment is for 18, and will be tight to get all those into 2016. There's other ones we can drill in 2017. So that's probably the difference. We're really focused on the 2016 program.

[Shahin Amini:]

Okay.

[Ross Clarkson:]

Yes, we do have a six months extension into 2017 on North West Gharib. So there may be some additional drilling in 2017 on North West Gharib.

[Shahin Amini:]

Okay. And just to confirm, Ross, you did say assume 20% recovery facts.

[Ross Clarkson:]

No, I said 25 actually. That's about normal for these kind of reservoirs.

[Shahin Amini:]

I've had a senior moment. My hearing is going. Thank you.

[Ross Clarkson:]

Thank you.

[Operator:]

Thank you. The next question is from David Dudlyke from Dundee Capital Markets. Please go ahead.

[David Dudlyke:]

Yes, good morning everyone. Interesting to read of your new reservoir simulation, you're having two to four million incremental million barrels. Are there other field pools that offer themselves up as candidates for such reanalysis within the Eastern Desert?

[Lloyd Herrick:]

Yes, absolutely. I mean, one of the key drivers of course was the performance of the pool has been running ahead of what we had been forecasting. But it took the better part of nine to 12 months to build a brand new detailed simulation model incorporating all the new wells and core data. So these things are big undertakings. We see a lot of potential, certainly in the K Field with K South, but we held off on redoing our simulation there until we've got the current K South wells. Well, we'll look at kicking that off probably in 2017, but we're not likely to see that new [ph] fully developed model till sometime later next year. There's other fields like Hana, we could do some more work on, and some of the H fields. But probably the next big one would be the K area where we have this exciting development going on in the K South.

[David Dudlyke:]

Okay, thank you. And with the third quarter guidance, which is pretty much in line with what you delivered in the second quarter. Perhaps I've misheard you, is it safe to assume that your PRP program is already in action, and yielding results or what else should I be looking for because obviously you have high production modestly done?

[Lloyd Herrick:]

Yes, sure. Really the PRP, a lot of that work, the identified recompletions and workovers, that's in the approval process right now. We've probably got 10 out of the 16 recompletions have received approvals. They're in the schedule for the completion [indiscernible] and start doing that work. The only thing that we've really kicked off, I think we've done one re-completion. And of course, we started the drilling in K Field. So the first K well went on in June. The one that we're just finishing up on today, we'll have that on production sometime in September. So the plan always envision the actual fieldwork kicking off primarily end of August-September. So we'll be ramping up through Q4.

[David Dudlyke:]

You got a hockey stick. So in terms of the impact of the various projects and timing, yes, you're obviously still confident you can hit your numbers as published there?

[Ross Clarkson:]

Yes, we hope it's going to coincide with that hockey stick in the oil prices.

[David Dudlyke:]

Indeed. Just a quick question on costs, it's nice to see a 5% trimmed off both OpEx and G&A sequentially. Have you identified any further savings that you expect or plan to realize this year or do you think 5% is pretty good?

[Lloyd Herrick:]

We think we've largely driven those costs down pretty much to the baseline. There is one area we're still focusing on and working on. And that is we're in the process of consolidating or trying to consolidate our two joint ventures, West Bakr and West Gharib operationally. We're partially merged. We're starting to share things like the completion rate. We're looking at warehousing; we're looking at joint tenders. So as we work that through we expect to see significant efficiencies in cost savings through contracting. But it's hard to put a real number on that, but we still see some running room there. But baseline costs, we're down around $10 a barrel. These are fairly mature fields, so of course you're always dealing with increasing water cuts and those sorts of things. So it's a pretty good number. North West Gharib we would expect to see lower cost because they're younger fields, and you're moving less fluid.

[David Dudlyke:]

Okay. And lastly, regarding your cargo sales, I know we've spoken about this before, but are you slowly getting any further traction through your conversations with EGPC with regard to getting visibility, increased lead times so that you can bet the market you're [indiscernible].

[Ross Clarkson:]

Well, you've hit the nail on the head there, David. That's exactly what we've been working with them on, is trying to get more long-term visibility on it. It's been difficult. And I think in part that's what's hurt us on our pricing over the past two years, is that we haven't had enough visibility in order for us to properly market these cargos. But we're working on it with them. And we're hopeful that this quarter -- this next quarter we'll be able to get something worked out so that we'll have full visibility on 2017 cargos without doing this kind of quarter-to-quarter thing that really puts us in a bit of a corner in trying to market lifting with only four to six weeks of lead time.

[David Dudlyke:]

Yes, I agree. Okay, thank you all. That's it from me.

[Operator:]

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

[Luana Siegfried:]

Hi, this is Luana Siegfried in for Pavel. Well, thank you for the conference, and congratulations, and the exploration program. I want to touch a little bit on the potential acquisition. I understand the company is still looking for a good portfolio. I was just wondering, when the time comes, as TransGlobe has a preference for an all-cash acquisition?

[Ross Clarkson:]

Well, it depends on the size of the asset, and what we're looking at and where we're going. That's kind of an open-ended thing, how to finance the acquisition. There's lots of different ways to do it.

[Luana Siegfried:]

I'm sure, I understand. If I could maybe have one follow-up. I was wondering in terms of cash allocation, TransGlobe has definitely a very cash-rich balance sheet. So when the environment gets better where the preference for the cash allocation would go?

[Lloyd Herrick:]

Well, with cash, we're holding the cash obviously for the convertible debenture that's coming due in seven months. When you take that off there's actually not that much cash sitting there free. And we've got a very active program with discoveries which are going to require development. So I wouldn't characterize it as -- I mean, we've certainly got a clean balance sheet but I wouldn't characterize it as super cash-rich.

[Ross Clarkson:]

And a lot of it is also if we're able to do an acquisition, the expectation is we'd be going into an acquisition that may be hadn't had as much capital put to it as it would need to. And so that cash would be deployed in developing the acquisition. So it really depends.

[Luana Siegfried:]

Perfect. Thank you very much.

[Operator:]

Thanks. [Operator Instructions] The next question is from Al Stanton from RBC. Please go ahead.

[Al Stanton:]

Yes, good morning guys. I've got two questions. One about the portfolio and the other about the debt, I'll do them separately. So in terms of the current portfolio, are you still looking at maybe farming out and getting some help with the expiration campaign? And also on -- with respect to that, I see from the slide eight that the prospects extend off the block. That's quite unusual. Usually they die at the edge of the block, particularly if somebody owns the block next door. So I'm just wondering if somebody does own the block next door to the North of North West Gharib.

[Ross Clarkson:]

It's open land to the North, but in our models, I mean, we have a much more sophisticated model on sand deposition. It's unlikely that sand does extend there, because it comes off of the high to the West. So it is a stratographic [ph] trap, it's not a structural trap.

[Al Stanton:]

Right, and farm out?

[Ross Clarkson:]

That's not underway anymore.

[Al Stanton:]

Okay. And then just going back to that debt question, I mean you say you are keeping the cash to pay for the convertible but, Randy, we have looked at alternatives. So I suppose the question is what deck is currently available to company folks from Egypt?

[Randy Neely:]

Yes, we are looking at actually a whole host of alternatives that you know -- you'd say plan, Plan A would be that we refinance the convertible debenture, because we have an acquisition and we have plenty of opportunity to invest the cash that we hold. That's plan A. But time will tell in terms of oil price and receptivity to debt offerings by oil and gas, or small oil and gas companies. So we are looking at a number of alternatives, and they are quite arranged. I'd say, currently we feel there is definitely interest out there, but we will have to work through that, through the fall, that's sort of objective one for me really starting in September to work up that number of alternatives in order for us to sort of come up with the right one. If the whole market goes south again, we are back to $30-oil, then January, February, and we are going to have to use our, you know, a big chunk for cash to pay that out, but that's not the objective.

[Al Stanton:]

Okay, thank you.

[Operator:]

Thank you. This concludes today's question-and-answer session. I will now turn the meeting back over to Mr. Ross Clarkson. Please go ahead, sir.

[Ross Clarkson:]

Okay, I want to thank all the participants in our Q2 conference call. We should have a mid-quarter update in September to keep everyone up to speed on our drilling results, in our production numbers, as we move through the PRP. Thank you everyone, and that's all for today.

[Operator:]

Thank you, the conference has now ended. Please disconnect your line at this time, and thank you for your participation.