TransGlobe Energy Corporation
Q1 2017 Earnings Call Transcript

Published: 11 May 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'd 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 2017 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 of Finance and CFO. As usual, we’re going to start out with a summary of the financial and operating highlights, and then we'll move into a discussion on some of the properties. This will be followed by a Q&A session. Randy Neely will review the financials and highlights of the quarter starting on the next slide.

[Randy Neely:]

Thanks, Ross, and good morning everyone. For everyone's information, all amounts discussed herein are in U.S. dollars unless otherwise stated. For the quarter, sales volume averaged approximately 13,800 barrels equivalent per day with approximately 2,800 Boe per day coming from Canada and approximately 11,000 barrels of oil per day coming from Egypt. Approximately 300,000 barrels of Egyptian entitlement production was inventoried or unsold in Q1. This resulted in inventory barrels increasing to 1.5 million barrels by the end of Q1 versus 1.2 million at the end of 2016. Pricing for our Egyptian sales was up significantly in the quarter to $41.29 per barrel, first is 22.58 in Q1 of 2016 or 36.45 in Q4 of 2016 as well. In Canada, revenue averaged $48.82 per barrel for our oil production, $19.08 per barrel for our natural gas liquids production and $1.96 per mcf for our natural gas production. As a result, even with underselling our production in Egypt, the Company managed at a small funds flow positive quarter of 2.5 million. This is a result of both the increased in crude prices and the decrease in operating expenses. Although G&A expenses were up in the quarter due to staffing realignment, financing and increased staffing associated with Canadian operation. On a produced Boe basis, G&A costs were down 9% over Q1 2015 and down approximately 25% over the average of 2016. Net loss for the quarter was 12.9 million which was principally due to write-downs of investments in selfless care about 1.2 million due to relinquishment of that concession, our mark-to-market loss and derivates or hedge positions of 3.7 million and under listing our production for the quarter. At the end of the quarter, we remained in the health balance sheet position with 37.8 million in cash and 42.7 million in working capital, which excludes the fair market value of our inventory crude oil. During the quarter, we invested 10.7 million on capital expenditures and subsequent to the quarter have met all of our explorations commitments in the Eastern Desert concessions. As such, we expect to remain in restricted cash to be unrestricted by the end of Q3. In fact, we subsequent to the release we've have had 8.5 million released from restricted cash. Over on the next slide, for 2017 as previously announced, we expect to spend up to 56 million on capital expenditures and Lloyd will go through this in more detail in a moment. For the year, we are guiding production in the range of 15,500 to 18,500 Boe per day depending on final capital expenditures, commodity prices and the timing of the Egyptian entitlement sales. We continue to focus on increasing the frequency of our sales in Egypt and currently have three cargos scheduled for 2017, including the first one expected to list in the third week of June. In addition to the cargo sales, we have also been selling approximately 100,000 per month to EGPC to provide fund for local operations. During the quarter, we also completed the prepayment agreement with Macquarie Energy Trading at Geneva, Switzerland, which we previously announced. This agreement provided the funds to repay the convertible debenture retired on March 31st. In conjunction with the prepayment agreement, we also entered into a marketing agreement with Macquarie to sell our entitlement cargos. The pricing on those sales was based on the market at the time of sale and Macquarie will be in center to achieve the highest price on those sales. In addition, the Company also entered into some hedging positions both during and subsequent to the end of the quarter and those details with hedges are provided in the quarterly report. Currently, based on per barrel in oil prices, our employees hedges, our production in sales forecast particularly as that relate to Egypt, we expect funds flow for the remaining three quarter of 2017 to be in the 12 to 15 million range per quarter. This return to positive fund flow is not only resulted better pricing, but also higher production our profitable Canadian operations and only efforts put into decreasing operating G&A cost over the past couple of years. And I'll now pass it over to Lloyd.

[Lloyd Herrick:]

Thanks, Randy. This table is a summary of our approved 2017 operational plan, which was presented and reviewed during our year end webcast back in March. Today, I'll just summarize where we stand against the plan approximately a third of the way to the year, and Ross will get into some more of the specifics later on the presentation. To date, all the expenditures this year occurred in Egypt, as of last week, we have completed our Eastern Desert exploration program, commitments and filed our development lease applications in North West Gharib. Remaining Eastern Desert land, our exploration land that is have been relinquished. The first development lease of North West Gharib was first on production at year end and it was producing approximately 1,500 barrels of oil a day from the first two wells. This week, we commenced drilling on our first appraisal well in the North West development, North West Gharib development lease number one, offsetting the North West Gharib 38 producer. In addition to appraisal drilling, we're upgrading facilities in the West Bakr area to handle production increases later in the area and into 2018. In the Western Desert, we completed a 600 square kilometer 3D seismic acquisition program at North West Sitra and are preparing to commence drilling at Boraq 5 in South Alamein later this week. In Canada, we're on plan to commence our Cardium horizontal drilling program this summer and into the fall. We're targeting up to eight wells in the Cardium this year. Now the next slide, this slide shows our daily production by our major producing area for the Company. West Gharib which is shown in red and West Bakr shown in orange continue to deliver the stable production base for the Company. North West Gharib showed in green has placed some production in December. North West Gharib initially flowing by about 1,000 barrels a day. During the first quarter, North West Gharib 38 was placed on production, and pumping and tubing were installed in North West Gharib 3. Production from North West Gharib averaged 982 barrels a day during the first quarter and 1,722 barrels a day during April. In total, Egypt produced 13,941 barrels a day during the first quarter and 14,260 barrels a day in April. Guidance for 2017 Egypt production ranges from 13,000 to 15,500 barrels a day for the year, depending on the amount of contingent budget deployed during the year. Canada shown in brown produced 2,731 Boe's during the first quarter and 2,670 Boe's during April with an average oil liquids ratio of about 58%. Guidance for 2017 Canadian production ranges from 2,500 to 3,000 Boe's per day on a firm and contingent basis. Corporate production averaged 16,672 Boe's during the first quarter and increased to 16,939 Boe's during April with average oil liquid ratio of about 93%. In total, we expect to average 15,500 to 18,500 Boe's during 2017 which represents a corporate growth rate of 30% to 55% over 2016. Midpoint of guidance at approximately 17,000 Boe per day would represent a year-over-year production increase of 43% from 2016. I'll now turn the presentation over to Ross to talk about the projects in more detail.

[Ross Clarkson:]

So, we're on Slide 7 which shows the Canadian acquisition that we bought just north of Calgary at Cardium light oil and liquids rich gas production also in the Ellerslie formation. We've really liked this acquisition so far I mean it's worked very well for us. We purchased it for a Canadian 80 million which is roughly $60 at the time, and the acquisition metrics are very attractive. The real plan here is to expand on these assets and grow it. Right now, it's a very stable production base with a low decline rate, and we're going to drill a bunch of more wells on it and increase it. One of the easiest things about it is its just north of Calgary, it's just north of our office, it's 40 minutes to get there. So, it's a very easy operating environment. We're preparing for drilling in Harmattan for a summer campaign as Lloyd mentioned, and I'll go onto the next slide really to kind of show some detail on the Harmattan area. So, on Slide 8, the orange and yellow lands are TransGlobe plans on this map, and we have got 39 horizontal Cardium producers here right now and they were drilled back in 2012 and 2013 using a technology that really is now considered somewhat outdated. These wells were fracked at an average frac density of 18 fracs per linear mile and most to the operators in this formation to the north of us now are using 30 fracs per mile some as high as 40, and they really get significantly higher initial flow rates and get a higher recovery of oil out of the well. So that’s what we are planning and doing. We have got eight wells in our program. The drawing locations were going after or the black stars on the map. We will be using the latest technology on these wells and we will get them on production by the fall to start seeing results by the end of the year. The well drill and complete cost we are using for the AFEs are about Canadian 2.5 million each. And these are based on the codes we are getting from the drilling and completion contractors and are considerably lower than the cost we have in our reserve report. And we will have some initial production results out of the fall, and we will see if we can beat the previous tight curves that we purchased these assets on. And that along with the lower cost structure should see a good bump in the valuation for this asset. And the other play that we have yet to focus on or just doing our initial work on the Ellerslie sands, which are located on the lands on the east side of that map, and that’s a little bit deeper and it’s a gassier play and less liquids, but with improving gas prices we can probably drill out in 2018. And that’s Canada, so let's flip over to Egypt on Slide 9, which is the locator map for the assets. As you can see there is two focus areas there, the Eastern Desert where we are producing all of our oil at this time and where we are increasing production significantly in 2017. And then the Western Desert where we will some appraisal drilling on the South Alamein license, and that will hopefully lead to production start-up at year-end or early in 2018. And then, the far Western Desert lands at South Ghazalat and North West Sitra, which we have completed some seismic work on and that's going to be lead to exploration drilling in 2018. Let's jump over to the next Slide, which is a detailed map on our remaining lands in the Eastern Desert. The original West Gharib lands that we purchased back in 2007 and those of the yellow lands and then the 2011 acquisition of the West Bakr fields are shown in orange and then really all of that production that comes out of that is transported by truck and pipelines to the coast, and ultimately exported from a terminal located on the south east corner of the map sheet or that point of land. The new North West Gharib development leases are the tan colored pieces on the upper left of the map. And when we completed the exploration campaign in late April, we relinquished all the exploration lands except for the tan areas where we applied for 20 development licensees. The 20-year development areas that are shown in more detail on the next two slides cover all of the discoveries that we made in the area. So Slide 11 shows the all discoveries in the northern red bed trends and those are the black wells. The southern boxed area on that map is the first development permit that we got approval on in December last year. In that block, we brought on North West Gharib 3 on production in December at a flowing rate of 1,000 barrels a day and then we flowed it for several months and then installed tubing in a pump to produce the well at an initial rate of 1,500 barrels a day, and it's currently pumping around 950 and it's a really strong well, we're very pleased with it. The next well we completed was North West Gharib 38, which was brought on production around 750 barrels a day with the pump and this again exceeded our expectations, and the reason to these higher rates seems to be a combination of the great reservoir and lighter less viscous oil. We're currently on location drilling the yellow dot just north of North West Gharib 38, which is an appraisal development location. And then following that, we'll drill an offset to North West Gharib #3 which is another appraisal development location, and assuming both those wells work we should see a nice production increase for this area in late Q3. To the north, the North West Gharib 26 and 27 discovery wells just north of that first development area. Those both were fracked and recently captured to crude oil production. We don't do extended tests because test oil during -- when you're on an exploration license is really all given to the state. You can only switch your oil when you go into a development license. So, testing a small amount of oil is all that's necessary to allow us to apply for another development lease, and this was done prior to the May 5th relinquishment of the exploration lands. The new development lease is that triangular area outlined on the map and the combination of these two development areas should cover everything we want to drill for appraisal and development wells on this area. Moving further south on the next slide is the areas around the Arta field which is all the black dots in the center of the map. There're two new development areas under application here that cover the North West Gharib 1 and 1A wells in the north and the 5X and 5B in the south, and we fracked one well in each of these areas and pumped them to crude oil production and then went on to make the applications for development leases. These new development leases will consolidate our holdings around the Arta field and provide additional future drilling opportunities. And you can see how the original Arta pools were drilled up to roughly 400 meters of the boundaries. In Egypt, you can't drill closer than 400 meters from the edge of your land and that's done to prevent drainage of the offsetting land. However now that we secured the offsetting land, we can apply to infield drill, the gaps in the fields and really drill them right up to the boundaries. So that provides us with some additional development inventory for the future. So, moving now to the Western Desert, Slide 13, you can see from east to west our three PSC's at South Alamein, South Ghazalat and North West Sitra. On the two western licenses, we're still in that seismic acquisition phase, which we completed the 3D seismic over North West Sitra and that data has now been processed and will be interpreted this year. We expect that'll set us up for a four well exploration program, two on each block in 2018. And the early look at the North West Sitra data is really quite interesting, it's showing some large structures from Cretaceous down to Jurassic level, so I'm quite confident we're going to come up with some sizeable targets out there. But the real excitement right now is getting that access to South Alamein which we worked with the Ministry of Oil and the military to access to those lands, it is the large artillery firing range and we've to get the military to move their range so that we can develop the discovery there. There's a detailed map of South Alamein on that next slide. On that slide, you can see the Boraq 2 well which tested around 1,600 barrels of light oil from the two zones. And then the red stars of the appraisal locations we have identified to prove up the extent of the oil pool. We have completed all the ordinance clearance. We mobilized the rate. We are getting to start drilling this weekend on Boraq 5. We are just doing all the acceptance to test on the rig right now. And that immediately adjacent to the Boraq 2 discovery well, just slightly down deep to test down and see how far the oil is stands to. And we are going to probably drill some of the stared locations in 2017 later in the year just depending on the results of Boraq 5. The other thing we will be doing is going in retesting Boraq 2 to get some better results, test information on the two zones that we discovered in that well. And the upside here is quite significant, as this pool proves out. Development can proceed quickly because there is two oil terminals just to the north of us on the Mediterranean Coast. The real attraction on this block are the high flow rates and the light oil that’s going to be sell much closer to Brent pricing. We have roughly an $8 to $10 discount on the Eastern Desert, but on this we will sell very close to Brent. We really intend to pivotal a lot of our investment focus into the Western Desert over the next two years because the economics are much better for this lighter oil. Another positive impact is really -- it's very specific to South Alamein as when we purchased that, we acquired all the sum cost pools of over $80 million. We inherited those cost pools from the previous owners. TransGlobe can recover those costs, if we get this pool into production. So that’s a big bmp for us. There is a lot of other additional 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. So the value proposition really is -- really all of the stuff that we are working on was already completed a lot of this year, but it's all the new stuff was coming on production. We increased production significantly and we have really done a lot of work on cost cutting. So we've brought the Company back to a position of profitable, well not profitability. but positive funds flow. And that has taken a lot of work. And what we see going forward into the next few quarters, we are going to be selling a lot more crude because we got list in schedules, we have got the next one going note on June 19, and we will also selling additional crude through the government. So, we are going to see a nice bump through the next few quarters on cash flow. The international companies really have been out of favor through the downturn, and they’re trading just incredibly cheap valuations. If you look at TransGlobe’s 2P reserve value at a 10% discount that’s $4.79 a share. And there is nothing booked on our assets its South Alamein, and very little booked to North West Gharib, so we should see both of those bringing significantly reserves during 2016. TransGlobe return to a growth mode and that’s happening right now through all the development in K-South and North West Gharib. And finally, we are testing South Alamein at the Boraq discovery which could come on production at year end. We are also planned to grow Canada this year with a relevantly modest drilling campaign, but that that’s going to potentially ramp up in 2018, depending on the results. I think all of these initiatives should provide significant catalyst for the shares over the next 12 months. In summary, TransGlobe is well positioned to grow and increase value. We've significant production growth and sizeable concentrated projects. TransGlobe operates everything in Egypt with a 100% interest and almost all our properties in Canada with an average 88% interest. Our investment programs are pivoting to a low risk development focus for the next near term area. Next, year we'll see more development drilling and four really exciting exploration wells in the Western Desert that will target high impact structures. It's painful to see our low share price after all the success we've had in reducing costs, increasing production and bringing the Company back to positive funds flow. The hope we're seeing finally to turn in the oil markets and we'll get a renewed interest in the international company. And with that, I'm going to turn it over to the operator for any questions.

[Operator:]

Thank you, sir. [Operator Instructions] Our first question is from Al Stanton from RBC. Please go ahead.

[Al Stanton:]

Two questions, the first one for Randy I suppose is, as you highlighted I think clearly highlighted the monthly payments from the local sales. Are you encouraging us to assume that continues through the course of this year despite targets going out on a quality basis?

[Randy Neely:]

Yes, at this point Al, we think we'll be able to continue to sell, we've been selling about 100,000 barrels a month to EGPC that providing funds locally to pay G&A and operating expenses as well as offsets to the government for handling costs and what not. At this point, our expectation is we'll be able to continue that through the rest of the year, but we're going to play it by a year little bit as well.

[Al Stanton:]

And then the other question. if I dig through my hard copy files, I think there's a production profile from 2012 for South Alamein which talked about 7,000 to 10,000 barrels a day, if you produced that over four years that 10 million barrels. Why aren't you showing presentation like that today and would you discourage me to go back and look at those presentations from the past?

[Ross Clarkson:]

This is Ross here, Al. Yes, those numbers still hold. We just haven't put anything out on it. We're just waiting for results. We got to drill the wells to be sure but those estimates still hold.

[Operator:]

Thank you. [Operator Instructions] So, this concludes today's question-and-answer session. I'll turn the meeting back to Mr. Clarkson. Please go ahead.

[Ross Clarkson:]

Okay, thank you. Not many questions, but it was a relatively quiet quarter. I really want to thank all the participants for the Q1 conference call. We're looking forward to the second half as we bring on several new oil fields and expand the development of our assets and really grow the production and reserve numbers as we go into towards the year end. Thank you very much.

[Operator:]

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