TransGlobe Energy Corporation
Q3 2016 Earnings Call Transcript

Published: 8 Mar 2017

[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 would 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 Fourth Quarter 2016 Conference Call. This is Ross Clarkson here, 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’re going to start out with a summary of the financial and operating highlights. Randy Neely will review the financials of the quarter, starting on the next slide.

[Randy Neely:]

Thanks, Ross. Sales volumes for the year averaged 11,165 barrels a day, and only 7,165 barrels a day for Q4. These figures are both lower than production, which resulted in an overall build of inventory of just under 342,000 barrels over 2016 to 1,265,000 barrels. This is principally due to not having the lifting in Q4. Subsequent to the end of the year, we were provided with a lifting schedule for 2017, which provides us with three liftings beginning in June than one in September, and another one in December. In the interim to decrease our inventory and provide for operating funds, we've arranged for Q1 to sell EGPC approximately 100,000 to 120,000 barrels per month, which we will use to pay Egyptian pound denominated expenses, including handling fees and personnel costs. We do not anticipate that this will have a material impact on our AR balance, and we protest we may be able to continue this beyond Q1. Overall, the Company lost $87.7 million in 2016, which was due to several factors, including oil price remaining very low, particular in the first half of the year. Our write-down of E&E costs associated with South West Gharib and Southeast Gharib, due to disappointing exploration results and $7 million mark-to-market loss on our convertible debenture, which was caused by the recovery of the convertible debenture to par during the year. A certainty of a cash repayment became accepted in the market. From a fund flow from operations basis, the Company had negative $8.4 million for the year which is comparable to 2015, which was negative $8.9 million. This could be viewed as a significant achievement, given oil prices averaged approximately $10 per barrel less in 2016 versus 2015, and we had lower productions. This achievement was principally a result of both lower operating cost and lower G&A cost year-over-year, which were down 23% and 24% respectively as compared to 2015. This translates into an 18% decrease on per barrel basis for both OpEx and G&A, and again despite a 7% reduction in sales volumes in 2016. We exited the year with just under $50 million of cash and restricted cash, and a small working capital deficiency of $16.8 million. This was due to the convertible debenture being now included in current liabilities. This deficit does not include any unrecognized fair value increment of approximately $30 million, which will be in our crude oil inventory at the end of the year. Next slide. Subsequent to the end of the year, we finalized the prepayment agreement and crude oil marketing agreement with Macquarie Energy Trading, a world leading commodities group based in Geneva, Switzerland. The proceeds of the prepayment agreement will be used to repay the maturing convertible debentures on March 31st. We’re really excited about this new business relationship with Macquarie, they bring significant market knowledge and influence in the crude marketing arena. And will be a great partner for us to look for other opportunities. While we have dedicated 9 million barrels to this arrangement, we expect that this will extend as we grow our production and operations in Egypt. From a cost perspective, this arrangement is very comparable for our maturing converts and we couldn’t be more pleased in what we have achieved with this arrangement considering there’s no dilution involved. Our oil will be sold at market rates with a powerful incentive from Macquarie to seek out exceptional pricing on our listings to maximize marketing fees. Over to you, Lloyd.

[Lloyd Herrick:]

Thanks, Randy. This table is a summary of our 2017 operational plan, which is approved as deferment continue to budget. In Egypt, firm budget of $25.8 million includes; eight wells planned for the Eastern Desert, one well at South Alamein in Western Desert. The program includes the remaining Eastern Desert Phase 1 exploration commitments of up to seven wells, primarily in the North West Gharib concession, which will be completed by April. The firm budget includes points to complete test and covert Phase 1 exploration discoveries in North West Gharib to do development leases. The remainder of the firm budget includes one well in K-South at West Bakr, facility upgrades in West Bakr, maintenance infrastructure projects on that West Bakr in West Gharib, testing at Boraq and South Alamein in a 600 kilometers 3D seismic program in North West Sitra. The $14.4 million contingent budget in Egypt includes an additional nine wells, which are primarily focused on the appraisal of the North West Gharib development leases and the ramp up of North West Gharib productions. The initial focus will be on the North West Gharib development lease number one, which was approved in December of 2016 and includes the North West Gharib 3 and 38 Red Bed discoveries, which will brought on production at a 1,000 barrels a day, and 750 barrels a day respectively in the past two months. The contingent budget also includes funds for production growth projects in West Bakr and West Gharib. In Egypt, we expect 2017 production to average approximately 13,000 barrels a day in firm case, approximately 15,500 barrels a day in perm and contingent case. In Canada, the firm budget of $9.4 million includes four horizontal Cardium oil wells with multi stage fracs in the Harmattan and minor capital for initial well optimization. We’re targeting mid-year to begin our initial drilling program in Canada. The $6.8 million U.S. dollars contingent budget for Canada includes an additional four horizontal Cardium wells in the Harmattan area. In Canada, we expect 2017 production to average approximately 2,500 Boe's in the perm case and approximately 3,000 Boe's per day in the perm plus contingent case. The primary contingencies in our plan include the price of oil, additional oil sales in Egypt, timely approval of development leases and available capital. Next slide. This slide shows our daily production by our major producing areas for the Company. West Gharib, shown in red, continues to deliver a stable production base for the Company. At West Bakr, shown in orange, production was ramped up during the second half of 2016 primarily due to the production recovery plan was commenced in mid-2016. In total, Egypt production exited 2016 just under 14,000 barrels a day with first production from North West Gharib coming on stream in late December, which is shown in green. Currently, Egypt production is about 14,500 a day and expected to average between 13,000 and 15,500 barrels a day in 2017 on the perm and contingent basis. Canada, shown in brown, averaged about 2,800 Boe's a day since we acquired the property in late December. As I said earlier, Canada and we expect average between 2,500 and 3,000 Boe's per day in ‘17. In total, we expect corporate production to average 15,500 to 18,500 Boe's per day during 2017, which represents a growth rate of 30% to 55% of our 2016 production. Excluding the Canadian acquisition in late 2016, Egypt is projected to provide organic growth of 10% to 30% with the ramp up of production from North West Gharib and West Bakr. We have not included any production from South Alamein in the 2017 forecast. Next slide. This slide summarizes our corporate reserves at year-end 2016. 2P reserves increased 74% from year-end 2015 from $28.7 million Boe's to $58 million Boe's at year-end 2016, which included the $20.7 million Boe's acquired in Canada in the late 2016. The Canadian 2P reserves of $20.7 million Boes, includes 7.7 million Boe's or 46 Bcf of natural gas. In Egypt, the Company increased 2P reserves by approximately 5 million barrels, which were primarily proven or is a fund key reserve additions associated with performance stimulation results for the West Gharib Arta Red Bed pool and West Bakr fields. The reserve increase in Egypt represents the 2P production replacement ratio of 114% of 2016 production, which was 4.4 million barrels. It is worth noting that we did not assign any new reserves for North West Gharib discoveries in 2016 due to the timing of completion and testing and development lease applications, which are scheduled for 2017. It is expected that North West Gharib will be a main contributor to Egypt reserve growth during 2017. I'll now turn it over to Ross to discuss our projects in more detail.

[Ross Clarkson:]

So, we’re on, I think, slide eight here, shows our Canadian Cardium light oil and Ellerslie liquids rich gas production that we acquired on December 20th. And you can see that the lands are just north of Calgary, and I can actually see the southernmost section of land from my office window. So, it’s pretty easy bolt-in operating for TransGlobe. It doesn't involve a lot of extra G&A to run this. We find this to be an entry back into a stable geopolitical environment, and a favorable tax structure, very attractive royalty regimes. And the purchase price of Canadian CAD80 million or roughly $60 million and what really gives us acquisition metrics that are very attractive, about 25,800 per flowing Boe or about $3.76 per 2P Boe. The acquisition has a lot of low risk development upside. There are well design Cardium drilling locations to provide significant production and cash flow for the foreseeable future. We have access to surplus infrastructure capacity to accommodate more production growth. And the chart on the right side there shows the current outside decline rate of about 12%, and that really provides a stable production platform. There haven’t been any wells drilled on this property in over three years, and that’s what we intent to get after. We see over 145 gross potential drilling opportunities on the acquired assets. Above 45 of those are booked and about 100 are unbooked on the reserve statement. There is significant liquids rich Ellerslie gas potential here too on the acquired lands. And we’re doing some work on that to see whether we moved forward probably in the next year. It really adds material reserves, and significantly increases our reserves life and NAV. The 2P reserves add is just over 20 million barrels. The reserve life index of 18.3 years increases the total corporate reserve life index significantly. We have a high working interest, averaging about 88%, and so largely everything is operated, so it’s a great thing. On the next slide, I’ll look at in a little bit detail on the Harmattan core area, which is on the west side of this map on this page. So now, we’re on the detailed map of Harmattan. The orange and yellow lands are TransGlobe plans on this map. And we have 39 horizontal Cardium producers here. These were drilled in the 2012-2013 period, using technology that is now considered outdated. These wells were fraced with an average frac density of 18 fracs per linear mile. And right now what we’re seeing to the north of us where Whitecap and other operators are working, they are using more than 30 fracs per linear mile, and that gives some significantly higher initial flow rates. And they seem to be getting higher recovery rates, the ultimate recoveries is higher also. So, in this map sheet, we’ve got 17 proved Cardium locations and five probable locations booked here, and we plan to drill up to eight wells following spring breakup, probably June start-up. The drilling locations we are going after are the black stars on the map, and you can see some of those are just infill locations and couples are further step-outs. And we’re going to try and use the latest technology that everybody else is using on these wells, and get them into production by late fall. So, we should see a minor impact on our exit rate, but it's going to set us up for the next year. The other play that we have yet to focus on are the Ellerslie sands, which are located on the lands just east, on the east side of the map, and they continue on further east on other lands of ours. This is a deeper gassier play that we are just starting to review, and probably will drill in 2018. So, there’s plenty of room to go on these lands. Going on to the next slide, we're going to back to -- we’re on slide 10, and we’ll go to the locator map to the Egyptian assets. This year there is really two focus areas in the Eastern Desert, that’s where we're producing all our current oil and where we expect to see significant growth in 2017 and ‘18. In the Western Desert, we're going to be doing some appraisal drilling on South Alamein license, and hopefully that will lead to production start-up at year-end or early 2018. In the far Western Desert lands at South Ghazalat and North West Sitra, that will be exploration seismic work on Sitra in 2017. We're almost through shooting seismic out there and probably will be in another 30 days. And then we’ll interpret that and that will lead to exploration drilling in 2018. Now, let's move on to the next slide, and we're going to look at detail of the Eastern Dessert land. So, the Eastern Desert 2017 exploration and development programs really summarized on slide -- this slide here on 11. The pale green stars that you see up on the Northern part there, they show the discoveries we’ve made so far on North West Gharib. Two other discoveries located just to the north and the south of the Arta field the two southern stars, are really extensions of that field. We’ll be moving those discoveries into the development leases shortly and then putting the wells on production after we get development approval. But the really interesting discoveries are the five stars at the top of the map. Those are Red Bed reservoirs, and we got the first development area, the rectangle that’s sitting under very top of the map, approved in December and have started producing the initial wells. On the next slide, we're going to look in detail at this development area up here, and this is on slide 12. You can see the five discoveries in the Northern Red Bed area as the black wells on the map. And the boxed area is the development permit that we got approval on in December. We brought North West Gharib 3 in the middle of that permit on production in December, and it really quite surprised us. It started flowing 1,000 barrels a day of the casing even before we got tubing and pump in the wholes. All of the other wells in our licenses require pumps to produce. So, this reservoir and the oil is quite a bit livelier. We're bleeding pressure off on the well by flowing it over the next few months. And then we're going to install tubing, and are pumping probably produces well at an initial rate of somewhere between 1,500 and 2,000 barrels a day, which is significantly higher than anything we've experienced in this region. The next well we completed on this project was North West Gharib 38, which is just on the east side there. And it was brought on production at 750 barrels a day with a pump, and our initial productions estimates were only 300 to 400 barrels a day; so, once again, exceeded our expectations. The reason for these higher rates seems to be a combination of good reservoir and a lighter less viscous oil that flows there. We have development locations approved by the government, which are all the yellow dots you see on the map. And our plan is to keep one rig pretty busy in this area during 2017, and probably into 2018 carrying on. To the North, the North West Gharib 27 and 26 and then there is a 27A1, wells just North of the development area, were not included in this development area at this time, because we have a requirement to drill three more exploration wells to satisfy all of our Phase 1 drilling commitments. And we’ll complete that over the next 60 days. And then we expect that we’ll file a new development plan to add-on one to the south probably during Q2. And then there is more yellow dots, which are drilling locations on this map that will make-up the majority of our 2017 and 2018 drill campaign. The focus is really shifted in 2017 to mainly appraisal and development program as compared to 2015 and ‘16, which was essentially all exploration work. And this should result in quite a lot of production growth as we drill-up these development wells. And we should also see reserves growth for the year, because very little has been booked on these discoveries in the 2016 reserve statement. Moving on to the Western Desert on slide 13, you can see east to west our 3 PSC’s at South Alamein, South Ghazalat and North West Sitra. The two western licenses are really in the seismic acquisition phase, and interpretation phase. We’re acquiring seismic over North West Sitra over the next few months, and expect that will set us up for a four well exploration program, two on each block in 2018. We’ve had a fair number of inquiries from other companies regarding these blocks. So, we may consider bringing a partner in unless drilling stage out here, because it is high-risk exploration. The real excitement was finally getting access to South Alamein. And we worked with Ministry of Oil and the Military to gain access to these lands, and it took as over four years. It's a large artillery firing range, and we have to get the military to move their range so that we could develop the discovery that's on those lands, and there is a detailed map on the next slide. So, we’re on slide 14, which shows a map of the Boraq structure and the wells that have been drilled, and the wells we plan to drill. The one in the center that black dot on the map on the right hand side is Boraq 2. It tested around 1,600 barrels a day of light oil from two different zones. And the red stars are the appraisal locations we've identified to prove up the extent of the oil pool. We've completed the ordinance clearance out here and are getting ready to mobilize a rig to the stars immediately adjacent to Boraq 2, the discovery well. We're also going to go into the Boraq 2 well, and retest it to make sure we can firm that oil rate. We’ll probably drill some of the other start locations into 2017, depending on the results of Boraq 5. The upside here is really significant if this pool proves out. Development could proceed very quickly because there are two oil terminals just to the north of us on the Mediterranean Coast. And the real attraction of the high-flow rates, the light oil that’s going to be sold very close to Brent pricing and the large sum cost pools on it of over $80 million that we inherited from the previous owners, and we get to recover all those costs. And that's what we really see that enhances the economics of this project. There are other exploration targets on the Alamein block that we can drill in the future. But our first priority is to get the Boraq discovery appraised and into production, and we should see that impact in early 2018. Now, I have added a slide here on slide 15, it's a field net-back slide. And I put that in really just to show how much progress we've made on returning to profitability. And then we've relentlessly on cost reductions and control over the past three years. And G&A cost are almost half of what they were three years ago. Drilling and completion costs are down significantly, trending to 40% overall reduction. Operating cost reduced over from the over $13 a barrel to now under $10 a barrel. And all of this hard work and the improving oil prices we’ve seen in the last six months have improved the economics of the assets in Egypt to the point where we are making positive cash flow and confront a larger capital program. The Canada acquisition is on the right side, and from edge, you can see that Canada has better economics in a very low oil price environment, and that’s what we wanted. This really helps the Company to make some cash flow during price lows and provide significant balance to keep the ship upright during the difficult times. I mean, I’d like to grow the Canadian asset base over the next three years, but the real leverage to the oil price is in the bigger stuff that we can chase is in Egypt, and you can see how much leverage you get to increasing oil prices in Egypt. So, it's all about balance and stability. And then the last slide is really a summary of all the incredible value propositions for TransGlobe shareholders. We’re trading at a significant discount, all of the international companies are, been -- totally been out of favor through the downturn, and they’re all trading at very cheap valuation. But TransGlobe’s 2P reserve value at a 10% discount works out to about $4.79 a share. And I will add that there is nothing booked on South Alamein, Boraq discovery, there is very little booked on North West Gharib, only about 300,000 barrels. So, we’ve got quite a bit of reserves that aren’t even in that number. And I expect that both of those areas could bring significant new reserves during 2016. The refinancing of the convertible debentures was done in a very cost effective manner, and should remove that dilution overhang from the stock. We hope to see that happen as we clear those out. And then return to growth mode is happening now with really a successful production recovery plan underway, development of the K-field and the North West Gharib discoveries, and to capital it off we are finally testing the South Alamein Boraq discovery and could be into production there by year-end or early next year. We also plan to grow Canada this year with a relatively modest drilling campaign, but that could ramp up further in 2018. All of these things provide significant catalyst for the shares over the next 12 months. And with that, I’m going to turn it back to the operator and we’ll take questions.

[Operator:]

We’ll now take questions from the telephone lines [Operator Instructions]. And your first question is from Shahin Amini from TD Securities. Please go ahead.

[Shahin Amini:]

Just couple of questions on your Canadian, your 2017 drilling program; clearly you spend some time looking at Silverstone, and what’s been done in the past. And just what would be a good favorable outcome out of your 2017 program from the horizontal completions using the completion fracking techniques; in terms of IP rates and decline curves, and indeed in terms of recoverable resources.

[Lloyd Herrick:]

We’ve got some type curves that we actually have put up. And I think it's in our corporate presentation on the Web. But generally, we're targeting on the Cardium horizontals to have an IP of around 164 barrels a day on the IP 90, and the 365 day IP of about 113 Boes. We expect reserve recovery in EUR of around 190,000 barrels, that’s really based on what we saw from the historical, we think. But we haven’t done it yet with the new techniques and the higher frac in. So, we should be able to improve those numbers by 20% to 30%. But the real intent of this first program is to get out there, drill these, apply this new technology, and then recalibrate as to what the true potential this property is.

[Shahin Amini:]

And on slide nine, you are showing eight stars, so that is full term possible contingent. Could you just quickly point out which ones are the firm locations, now you're drilling in Q3?

[Lloyd Herrick:]

We’re better to have a separate call on that. What we’ve done is we were actually going out to license on more than eight. And then, clearly, we’ve got to work with the landowners and all that and prioritize from there. But I think it's fair to say that pretty much all are pretty equal as far as risk and expecting productivities.

[Operator:]

Thank you. The next question is from Jenny Xenos from Canaccord Genuity. Please go ahead.

[Jenny Xenos:]

Could you please provide us with some color, some technical color on the NW 40 prospect that you're currently drilling in Egypt? Thank you.

[Ross Clarkson:]

NW 40 is a look alike to the other discoveries in the region. So, it's targeting Red Bed, and it's due to spud any day now and removing and rig on and should be…

[Lloyd Herrick:]

…couple of days from now.

[Ross Clarkson:]

So, typical Red Bed wells are pretty productive. But we’ve got three structures. As you can see as you move from West to East, there is horse structure then there is a ramp structure and then there is another ramp structure. So, all of three of those will get drilled in the next little while. Target wise probably something in between 5 million and 15 million barrel targets is the range.

[Operator:]

Thank you. The next question is from Darren Engels from GMP Securities. Please go ahead.

[Darren Engels:]

Quick question on, I guess, base declines on your Cardium or Canadian assets prior to drilling commencing in mid-year. What do you think the decline rate is?

[Lloyd Herrick:]

Well, what we’ve seen Darren is certainly over the last 12 months, it looks like the declines in that area it alter around 12%; we actually modeled typically a little steeper declines. But there hasn’t been a well drilled out there, and as Ross said, in over three years. So, we've got a pretty good sense of what that decline is on that tail of the curve.

[Operator:]

Thank you [Operator Instructions]. Mr. Clarkson, there are no further questions at this time.

[Ross Clarkson:]

Okay, thank you everyone for participating in our fourth quarter conference call. We should have lots of results coming out over the next quarter, because we've got a number of rigs working down in Egypt. And then we’re really looking forward to kicking-off our first drilling campaign in Canada as we move through the summer. Thank you everyone.

[Operator:]

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