TransGlobe Energy Corporation
Q2 2017 Earnings Call Transcript

Published: 14 Aug 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 now like to turn the meeting over to Mr. Ross Clarkson, President and Chief Executive Officer. Please go ahead.

[Ross Clarkson:]

Good morning, everyone and welcome to TransGlobe Energy Corporation's Second 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 Finance and CFO. As normal, we will start out with a summary of the financial and operating highlights, and then we'll go into a discussion on the plans for the balance of the year and discuss some of the results. And that 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. Well, if it had not been for the impairment charge we took in the quarter on our first gear, this would have been the best quarterly financial result for the Company since the fourth quarter of 2014. We had funds flow from operations of 16.9 million and net income negative 56.6. If you normalized that impairment charge of 67.5 and the non-cash impact of our hedging gains of 6.6 million, net income would have been approximately 4.3 million. Company production averaged over 16,600 BOE a day, broken between Egypt with 13,851 barrels of oil a day and Canada with 1,415 of oil and liquids and approximately 7.2 million cubic feet of gas per day. During the quarter we put a dent in our inventory to entitlement crude oil in Egypt by listing approximately one quarter million barrels more than we produced. In total, sales in Egypt were 818,000 barrels of entitlement crude, which was done through a lifting in June and three incremental 100,000 barrels sales to ECPC. This over lift put our inventory balance at approximately 1.27 million barrels back close to where we began the year. On average, we realized $39.91 per barrel on our sales in Egypt, which equated to $9.76 discount from brand average price for the quarter. This discount is a little exaggerated as the bulk of our sales were done in June, when brand averaged approximately $47 a barrel. Overall, we've seen strengthening of the heavy oil differential in the first half of 2017. In Canada, our crude sales averaged $44.47 per barrel or it was approximately $1.50 lower than Q1. Eco pricing was effectively flat quarter-over-quarter, but we did see a weakening in natural gas and liquid prices in June and unlike crude prices, we expect this weakness to continue through Q3 before we begin to strengthen in the fall as traditionally seen. During the quarter we also incurred both a realized gain of 1.5 million and an unrealized gain of 6.6 million on our hedging book. Currently the company only has hedges on its Egyptian production, which are detailed in the quarterly financial report, although, we now haven't placed in connection with our Canadian RBL, the capacity to push hedges in place for Canadian production. Both operating expenses and G&A cost per barrel continue to trend below our budget expectations and below prior years. In part we continue to benefit from the Egyptian pound evaluation that occurred last fall, so however we continue to expect a gradual erosion of that benefit and we do not expect these expenditures to stay below our budgeted expectations indefinitely. With regard to the impairment in the North West Gharib, during the quarter we finished the first exploration phase which had been extended May 7. To date we have four development leases or pending leases. We've recognized reserves on new leases, but those reserves combined with the reality at current prices does not support robust exploration programs in the near future and the reality that the geology is very complex in this area make it difficult to predict future success and the timing of such activities. As a result, the company determined that it would not be able to justify current. The capitalized acquisition and exploration cost incurred over and above the current reserve guide. As a remainder, much of the write down included the original bonus amounts paid a deduction and over the past three years, all of which were bid in 2012 when oil prices were averaging approximately $110 a barrel. At the end of the quarter, we held 21.6 million in cash and a total of 60.3 million in working capital. This excludes the fair value increment over both of our inventory crude oil, which would add an additional approximately 34 million to that total. Debt outstanding included 75 million on the prepayment agreement and 10 million on the Canadian RBL. We've revised the budget to between 40 million and 45 million, which Lloyd will discuss momentarily and we have refined our production average guidance to between 15.5 and 16.5. This revision is a result of weaker oil and commodity prices and our original budget expectations. This production target would still result in production growth of between 30% and 40% for the year. As you could tell, we continue to focus on increasing the frequency of selling our crude oil inventory. While our party is telling our crude to tanker lifting's in order to provide local currency for both operating and general and administrative cost, we began in the first half of the year selling modest amounts of inventory position to EGPC. In the first half of 2017, we sold approximately 25 million of crude to EGPC and collected approximately 19.9 million, both in the form of offsets and in currency. We have two more lifting's scheduled for 2017, one in September and one in December. Based on those lifting's and current expectations of additional internal sales to EGPC, we expect our inventory crude balance to drop below 1 million by the end of the year. On May 16, we finalized and drew on our Canadian RBL, from the Alberta Treasury Branches, though the proceeds were used to retire the vendor-take-back loan and will be utilized to fund our Canadian development program. I'll now turn it over to Lloyd.

[Lloyd Herrick:]

Thanks, Randy. This table is a summary of our 2017 operational plan at the midpoint of the year. Today, I'll just summarize where we stand against plan approximately half way through and Ross will get into some of the specifics later on the presentation. The original plan was 56 million, consisting of 35 million firm and 25 million contingent. We're now forecasting a spend of just under 42 million and not including capitalized G&A. At the end of the second quarter, the majority of the expenditures had occurred in Egypt. In the Eastern Desert the company completed of the exploration programs while development leases North West Gharib and relinquished the balance of the exploration lands of North West and South West Gharib. All exploration commitments have been met. In the Western Desert, completed the 600 square kilometer 3D seismic acquisition program at North West Sitra and subsequent to the quarter finished growing the Boraq 5 appraisal well in South Alamein that Ross will talk about more in a minute. In Canada, the planned 2017 Cardium horizontal drilling program will scale back to three wells from the original plan of four to eight wells, primarily due to lower commodity prices experienced in Q2 and Q3 of this year. We are currently drilling the third well and expect to finish this later this week. This slide shows daily production by major producing areas for the company. West Gharib is shown in red, West Bakr is shown in orange, continued to deliver stable production base for the company. North West Gharib shown in green was placed on production in late December and is currently producing in the 1,200 to 1,300 barrel a day range. In total, Egypt produced 13,851 barrels a day during the second quarter and just under 13,000 barrels a day in July. Guidance for 2017, Egypt production ranges from 13,000 to 13,800 barrels a day for the year. And Canada shown in brown, produced 2,614 BOEs during the second quarter and 2,634 BOEs during July, with an average oil liquids ratio of approximately 58%. Guidance for the Canadian production ranges from 2,500 to 2,700 BOEs for 2017. Corporate production average 16,671 BOEs during the second quarter, which is very similar to the first quarter and 15,607 BOEs a day during July, with an average oil liquids ratio of approximately 93%. In total, we expect to average 15,500 to 16,500 during 2017 with midpoint of guidance at approximately 16,000 BOEs for the year. I will now turn the presentation over to Ross to talk about the projects in more detail.

[Ross Clarkson:]

Okay. Let's start with Canada on slide seven, which is our Canadian Cardium light oil and liquids rich gas production that we got in December 20, 2016. This slide is really just to orient you to the location where we are currently drilling. It's immediately north of Calgary, roughly a 40-minute drive from the office. The next slide will focus in on the core area of Harmattan, which on this slide here in that locator map is the dense patch of land in the center west part of the locator map. And so we'll zoom in on that on the next slide on page eight, the orange and yellow lands are TransGlobe plants on this map and we have 39 horizontal and Cardium producers here. These were drilled in 2012 and 2013 primarily and that was using a technology that's really now considered somewhat outdated. These wells were fracked at an average frac density of about 18 fracs per one mile horizontal section. And the operators in the same formation to the north of it, immediately to the north of it, so now are using 30 and as many as 50 fracs per lineal mile and getting significantly higher initial flow rates and seem to be getting higher recovery rates also. We have 17 proved Cardium locations and five probable locations booked here. And the drilling locations, we are going after initially are the black stars on the map. And some of them are already drilled, which are in sort of the darker red lines in the map. We drilled two wells over the past two weeks and are nearly completed drilling on the third as of today. The wells we are working on are located in the center of the land position. In our drill from a common pad that is already pipeline connected in. So I have to say I'm really incredibly impressed with this new drilling technique and wish we could get it over to Egypt. These wells went down to 3,700 meters, really a less incredible drilling in only 7.5 days roughly, the recession to the hole where we were making over 100 meters per hour, which is phenomenal penetration rate. We're now getting completion cost locked down for the September frac program on all three wells. And those are also looking good. We'll be using a 40 stage frac program, 15 tons per stage on these wells and expect to get them on production by the fall because essentially they're already on a pad that's tied in. So it's very quick to put them on production and that'll give us our initial rates. I am really optimistic that the rates will outperform the older wells and approaches like this Cardium Halo sands, it's really about lowering costs and improving production and recoveries. And I think we're doing well on the lower cost front. And we're increasing our frac intensity to improve the rates and recoveries, so we'll see the first production numbers probably in the third quarter release. Slide nine is the locator map for the Egyptian outfits. There is two focus areas, the Eastern desert where we currently are producing all of our oil at this time and then the Western desert which has got appraisal drilling that we've done on the South Alamein likes and that will hopefully lead to a production start-up later this year or the early 2018. And then the far Western desert lands, at the South Ghazalat and North West Sitra blocks, we have exploration seismic work that we've completed and we're now processing and that will lead to drilling in 2018. Let's move on to the next slide where we look at our Eastern desert area. The program for the year is summarized on slide 10. The pale green stars show the discoveries we've made so far on the North West Gharib blocks on that sort of a pale tan color lands. Two of the discoveries are located north and south of the Arta field, which are really extensions of that field. We apply for development leases on those areas, which will be on another slide later. And we'll be putting the wells on production after we get the development approval. 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 at the top approved in late 2016 and we started producing the initial well. We'll go into some detail on the next slide. So slide 11 shows the five discoveries on the Northern Red Bed trend as the black wells. The southern boxed area is the development permit where we got approval late last year. And then there is a northerly triangular area that's adjacent to the first development leased, we submitted that for approval in May and expect approval on that this quarter. We've currently stacked the rig waiting on development approvals and while we do that we will simulate all the data from the wells we've drilled to-date. The plan is to restart drilling in Q4 to add some additional development wells into this area. It is quite complicated faulting and will take some time to figure all the pools out. The good thing is that we have found good to great reservoirs in all the wells drilled to-date. Reservoir is a key risk in the Eastern desert and it seems to be a bit better in this location. The other key risk in the Eastern desert is structure and that's really hard to see on the seismic. The only way to figure it out here is to drill and then do detailed analysis on the faults in the different pads found in the well bores. Fortunately, we have some oil pools to work with here and the good flow rates, so we believe that the overall project will eventually end up being quite economic. The yellow dots are drilling locations on this map that will make up the balance of our 2017 and into early 2018 drill campaign. The focus really has shifted now mainly to an appraisal and development program as compared to 2016 and earlier this year, which essentially was all exploration drilling. The next map is an old map from the Arta field complex that we discovered in 2010. I put this up to show the two new development leases, which are north and south extensions of the Arta fields and they're highlighted on that map. And we fracked one well in each extension to prove oil recovery and then submitted the development lease applications. The fracked wells can be placed on production as soon as we receive the approvals on the development leases. And we expect those applications to be approved as 20-year development period this quarter. One of the benefits of getting these new development leases is having contiguous ownership across the field extensions. In Egypt, you can only drill within 400 meters of the boundaries of your lands, unless you own the adjacent lands also. And you can see there's gapped in our well density on these fields near the edges of the leases on the north and the south sides. We will now hopefully be able to drill wells in the exclusion zone and increase the density of wells in there to fully drain the reservoirs. This gives us more drilling inventory for the future. Moving on to the Western desert on slide 13, you can see east to west are 3 TFCs, South Alamein, South Ghazalat and North West Sitra. The two western licenses are still in the seismic acquisition phase, we completed the acquisition over North West Sitra in the Spring here and now speaking of computer process now. We expect that's going to set us up for four well exploration programs, two on each block in 2018. But I'm sure everyone will really want to know what's going on in South Alamein and that's on the detail map on the next slide. Slide 14 shows a map of the Boraq structure, the zoom in is on the right hand side. The Boraq 2 well which tested around 1,600 barrels a day of light oil from two zones and then we just completed the Boraq 5 well, which is the red star adjacent to Boraq 2. Boraq 5 was a really tough drill, with incredible loss circulations probably due to crossing faults and required two side tracks to get the well down. We finally got it down and test last week and just literally two days ago and we will be testing on the same two zones as found in Boraq 2. I'm optimistic we will get a commercial oil rate from these wells and proceed with the development on this pool. And the upside here is significant if this pool proves out, development could proceed quickly because there are two oil terminals just to the north on the Mediterranean coast. We've already done some of the front end work to determine where to take the oil and figured out the equipment needed for an early production facility. And the real attraction on the block is the light oil and that's going to sell closer to Brent versus the oil we have over on the Eastern desert, which has a significant discount to Brent. And also the large sunk cost pools of over 80 million that we inherited from the previous owners. We'll recover those costs if we get this pool into production. There's additional exploration targets on the Alamein block that we can drill in the future, but our first priority is to get the Boraq discovery upraised and into production. On the next slide I really want to discuss the incredible value proposition for TransGlobe shareholders. The international companies have been out of favor through the downtown and really are trading at incredibly cheap valuations. And that includes TransGlobe and we're trading well below our 2T reserve value. And I will ask there's nothing booked for the South Alamein Boraq discovery and only about 3,000 barrels booked in the Northwest Gharib area which we are still developing. I expect both those areas could bring additional reserves during 2016. The return to growth mode for the company is happening now and we've got a successful production recovery plan that's largely completed. We finally got South Alamein, Boraq 5 well down and taste and look forward to the testing program there. But we also plan to drill Canada this year with a relatively modest drilling campaign, but we can ramp that up further we can see commodity strength going into 2018. All of that provides a lot of catalysts for the shares over the next 12 months. So in summary, I mean the company's in good shape with a production base of roughly 16,000 BOEs per day and inventory of projects to deliver on future growth, all the projects are 100% interest or very high working interest, which allows us to scale up or down quickly to react to volatile commodity prices. We believe the share price is severely depressed because of the general investor focus on a few North American shale plays. International stories are really not getting much interest in the North American markets whereas in the European markets and Middle East markets, there's still a lot of interest in international plays. Because of this dynamic we are focusing a lot of our investor relations effort this fall in the U.K., Europe and Middle East, and we're also investigating the possibility of a London name listing to better access those markets. Let's turn it over to the operator now and see if there are any questions.

[Operator:]

Thank you. [Operator Instructions] Thank you for your patience. Our first question is from Jenny Xenos with Canaccord Genuity. Please go ahead.

[Jenny Xenos:]

Good morning, gentleman. Some questions on Boraq 5 to start, could you give us a little bit more color on this well? You mentioned that the final position of it was actually upped, is that up dip from the initial location that you targeted or how is that in relation to Boraq 2? And once you reach that play finally, could you give us more color on what you saw relative to what you know from Boraq 2 any more color on this would be very helpful. Thank you.

[Ross Clarkson:]

Sure. Thanks, Jenny. It is down dip from Boraq 2, we drilled down the structure and same two zones that we found in Boraq 2 and certainly the lowermost one looks like a layover identical to Boraq 2. So we expect to see and we got oil shores through that, so we expect to see an oil test out of that. The second thinner zone is a little more difficult on the log analysis. We think there's oil in that based on our log analysis comparison to Boraq 2. So we're going to test both zones and see what we get. But I'm confident we'll get some oil, we just don't know how much. We won't know until we test it, which is planned for September.

[Jenny Xenos:]

And how much did this well end up costing you?

[Lloyd Herrick:]

All in, this one was - it's Lloyd here, was think about $3 million, we're about a 1 million, 1.2 million over planned. We did encounter significant loss circulation on the last sidetrack which as we crossed the main bonding fault. We expect we can tighten this up in future wells and get them down probably in that $2 million or less range.

[Jenny Xenos:]

The AFE was about $2.5 million on this, was not over $2 million?

[Lloyd Herrick:]

$2.2 million.

[Jenny Xenos:]

$2.2 million, okay. And with regards to the Eastern desert and Northwest Gharib in particular, what should we expect in terms of reserves at the end of the year directionally speaking? Are you expecting that with the discoveries that you made there in the first half of the year that you will just replenish production from the area for the year or are you actually still expecting growth in reserves for sure there?

[Ross Clarkson:]

In Northwest Gharib, we're expecting - it will depend on the wells that we drill here that's scheduled for the fourth quarter, obviously, we expect the numbers to be up modestly based on the wells that we've drilled to date. It's going to take additional wells to bring those on to the books.

[Jenny Xenos:]

Okay. Great. Thank you so much.

[Operator:]

Thank you. The next question is from Al Stanton with RBC Capital. Please go ahead.

[Al Stanton:]

Yes. Good morning, guys. I've got two questions, one on some geology and the other on some finance. So with respect to the geology, Boraq, can you give us some color as to how the appraisal campaign is going, I mean, in terms of the original discovery well, was that oil down to as you went through the reservoir? Now if you've gone down dip, are you extending the oil further and still need to look for the oil, water contact? And also with respect to the thickness, is 19 feet good, bad or indifferent?

[Ross Clarkson:]

Well, the oil down to is clearly we're down dip. So it is lower now I don't know how much further we'll have to go to find it, the ultimate water contact at this stage is speculation. But 19 feet is pretty much an overlay for the same zone in the Boraq 2 so the continuity is there. And the same for the upper zone, the continuity of the reservoir was there. So first appraisal well tells us we've got something, but we don't know - we still don't know how big it is, we'll have to drill more wells, Al. Structurally it has held up.

[Al Stanton:]

Okay. Good. And then a question for Randy in terms of the clarity on timings of cargo, when should we be able to look past December in terms of what you could be anticipating in 2018?

[Ross Clarkson:]

Yeah. We're currently expecting to get clarity on 2018 lifting in the fall. So September, October timeframe, so probably by that time we're talking about that third quarter lot of clarity on 2018.

[Al Stanton:]

Thank you.

[Operator:]

Thank you. The next question is from Caroline Berzi with CI Capital. Please go ahead.

[Caroline Berzi:]

Hi. Good morning. Thanks for your presentation. I'm sorry I must have missed the first part Ross on matters maybe you've tackled these two the points. The first question is regarding the impairment, is this a normal practice in the industry to revalue with the intangible assets? And my second question is regarding the cargo list. I'm just trying to get the sense of what was the value of that cargo and how much was that an increase on TGL's revenue? Thanks.

[Ross Clarkson:]

Caroline, I'll address the first question, so on the impairment, yes, as a matter of course the company's required to look at these things on an ongoing basis. And given that we went through the expiration phase and ended the expiration phase and returned effectively relinquished all the lands that we didn't have at that point in time that we had to take a hard look at it. And as I mentioned which you probably missed was the fact that given current commodity prices particularly in June and early July combined with the complexity of the geology in Eastern desert, it's hard for us to predict what the future success will be and future timing of our activities out there in terms of robust programs going into the future. So as a result, we effectively wrote down our book value of those assets, all the money that we spent on North West Gharib down to effectively our reserve value as we estimate today. So that is the normal course situation to get higher prices and more success and more predictability, we may not have taken that right down at this time but we have. With regard to the lifting, yes, when we sell the cargo we recognize asset revenue, we also recognize the cost of that listing, which in this case would be the operating costs and the depletion and any costs associated with the sale directly. So all of those are recognized in the quarter and the cargo itself was a little over 515,000 barrel and we sold it for approximately $18.5 million in the quarter and we collected those funds in July.

[Caroline Berzi:]

Okay, thanks a lot for the answers. Just a follow up can you just clarify when was the last lift that occurred, was it one in 2Q 2015 and 2Q 2016 also in your third quarter?

[Ross Clarkson:]

The list we just did was in June for the June 18 to 20, we lifted and before that it had been September was the last third-party lifting we had done, September of 2016.

[Caroline Berzi:]

And why was that not reflected in revenue I mean it seems like this quarter was a much higher impact than the last two lists?

[Ross Clarkson:]

I'm not sure what you're referring to but Q3 2016, we would have recognized that lift, yes.

[Caroline Berzi:]

Okay.

[Ross Clarkson:]

And then we did.

[Operator:]

Thank you. The next question is from James Carmichael from Peel Hunt. Please go ahead.

[James Carmichael:]

Hi, good morning guys. You mentioned getting below 1 million barrels on the Egyptian inventories by year-end, I was just wondering if you have a longer term target of where you'd like to get to, how should we think about a sort of a run rate going forward? And then also just one if you could remind us of the current hedge position, I mean how you're thinking about that looking into 2018? Thanks.

[Ross Clarkson:]

Yeah, on the inventory, James, we're working to try to get that to zero that that would be our ultimate goal.

[James Carmichael:]

Yeah.

[Ross Clarkson:]

Realistically, we expect to be –we'd like to have it down into sort of sub let's call it 250,000 barrels would be comfortable in that range. And we'd expect it to go up and down from there but modestly where we'd like to get it to. Our planning is to try to drop that probably over the next 12 to 18 months into that range. Hopefully, we have to get the cooperation on EGPC to do that but we're working on it.

[James Carmichael:]

Yeah.

[Ross Clarkson:]

Your other question sorry was - oh, hedging. Yeah, we're going to continue to kind of move the hedges out while we're still working to complete kind of hedging out for 2019 and 2020, but in terms of rolling our hedging book, we'd expect to look to hedge portion of our book out 12 months on an ongoing basis. And you can see the structures that we're using in the financial statements would probably stick at that - at this point in time we like the structure of the three-way which we haven't seen sort of roll off because they don't start until 2018 but that's the structure that we're tending to look for currently to give us upside into the 60s and pretty robust downside protection below 50s.

[James Carmichael:]

Great. Thanks so much.

[Ross Clarkson:]

You're welcome.

[Operator:]

Thank you. We have a follow-up question from Jenny Xenos. Please go ahead.

[Jenny Xenos:]

Thank you. Just a quick follow up please, what have your sales to EGPC average so far in the third quarter and what have you seen in terms of differential so far? Thank you.

[Ross Clarkson:]

You know, Jenny, we don't know what the July - you don't July differentials until we're getting close to that time because you need to tabulate all the final sales for the month, which can be right till the end of August before you know that. But generally what we've seen is the differential for Gharib land getting down into the sub $10 range. So, you're seeing a Brent-Gharib differential we've seen it as low as $8 so far this year and the trend seems to be sticking at this point in time in that range.

[Randall Neely:]

More as we've looked, we've done about 100,000 barrels approximately.

[Ross Clarkson:]

Yeah and we're going to try to maintain that but we have to balance that against our need for local currency. So that's what's the - it's not our ability to sell the oil, it's our ability to use the currency.

[Jenny Xenos:]

Okay. Great. Thank you.

[Operator:]

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

[Ross Clarkson:]

Okay, I want to thank all our participants for our Q2 conference call participating in it. We're looking forward to seeing the early production numbers from our wells in Canada and the test results from the Boraq wells in South Alamein, those projects and the North West Gharib development continuing will ensure that the company can continue to increase reserves of production at compelling economics over the long term. Well, thank you very much.

[Operator:]

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