TransGlobe Energy Corporation
Q1 2015 Earnings Call Transcript

Published: 10 May 2015

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

[Ross Clarkson:]

Good morning, everyone and welcome to TransGlobe Energy Corporation's first quarter 2015 conference call. This is Ross Clarkson, President and CEO, and with me, I have Mr. Lloyd Herrick, Vice President and COO; and Mr. Randy Neely, Vice President Finance and CFO. As usual, we will start out with a summary of the financial and operating highlights, and then we move into a discussion of the plans for the balance of the year, and then we'll follow that with a Q&A session. Randy Neely will review the financials and highlights of the quarter starting on the next slide.

[Randy Neely:]

Thanks Ross. Good morning, everyone. Production for the quarter averaged 14,886 barrels of oil per day, and sales averaged 12,876 barrels per day. This difference is principally due to the change in the way we sell our crude oil in Egypt. Historically, we sold all of our production in Egypt to EGPC and now we sell only our East Ghazalat production to EGPC, and the rest, all of our Eastern Desert production from West Gharib and West Bakr is sold to third-parties through tanker liftings. So far this year, we have sold two tankers of our entitlement production, the first one in February and the second one in early April. EGPC takes the royalties and taxes in barrels and that portion of our production is considered sold on a monthly basis. Due to not selling all of our entitlement production in the quarter, we had negative fund flow for the quarter of $3.3 million. Had we sold all of our production, we would've had a small but positive fund flow of $2.8 million for the quarter. Net loss for the quarter was $11.2 million or $0.17 per share on a diluted basis. This was principally result of low oil prices. Our realized price in Egypt for the quarter was $46.71 on an average Brent price of $53.92. Prices were down 29% from the fourth quarter of 2014 and over 50% from Q1 a year ago. During the quarter, the Company spent $14.1 million on capital expenditures, principally on the drilling on five wells, some facility projects and a bonus fee on the North West Sitra concession. The seismic project in the Western Desert which was scheduled for -- to begin in Q1, has only recently begun in the last month. We ended the quarter in a strong financial position with $126.1 million in cash and approximately $208 million in positive working capital. During the quarter, we also collected $27.1 million in outstanding accounts receivable from EGPC, which included approximately $6 million through the sale of an over-lift on the crude in our February tanker sale. The Company also paid $0.05 a share of dividend on March 31st and recently declared $0.05 a share to be paid on June 30th. Now, I just want to take a few minutes to go through these netbacks to make sure that people fully understand how this works now. This table on this page shows, under the actual sales columns, is the calculation of our netback based solely on the volumes sold. From this, you can see that we received an Egyptian only netback of $4.78 a barrel. The three columns on the right-hand side of the table, show notionally what the quarter's netback could have looked like, if we had sold all of our production in the quarter, at the same price and in the same manner, that is, we would've incurred the same selling costs as the actual barrels sold. If that had occurred, we would've had a realized netback of $8.72 a barrel in Egypt. They're almost $4 higher. So, why is that? It is because, we did not sell any of our West Bakr entitlement production. That is our working interest production after the deduction or delivery of the government's portion or take, which is the royalties and taxes. As a result, the actual sales netback per barrel is being impacted principally by lower revenue. All of the royalties and taxes associated with the barrels held in inventory have been paid to EGPC through the delivery of those barrels. That portion, as I said earlier, is taken in kind and sold by EGPC. What we are left with in inventory is just our entitlement barrels. Now, subsequent to the end of the quarter, we have sold those inventory barrels, the 179,730 barrels and so in Q2 we will recognize the revenue and the direct operating expenses associated with those barrels, in this quarter, but we will not be recognizing the royalties and taxes, as I've said, they've already been recognized in Q1. At this time, based on our production expectations and the volumes listed last month, we anticipate holding inventory again at the end of Q2. For our initial listings, we incurred substantial selling costs of $2.70 per barrel, which are attributable to a number of factors, the key one being, that the initiation of self-export or marketing [ph] came at a time when the world very flushed with oil and heavy oil in particular. As a result, the Company chose to sell the oil in a manner, that is, we chose to float the cargo for a month and sell it in February rather than January. That resulted in both increased costs but also increased revenue and from our calculations, this resulted in at least $3 dollars more per barrel inclusive of the selling costs. Our view is that as our marketing experience grows, we expect that these costs will decrease on a per barrel basis. We, as a lot of you know, we've been talking about marketing for about two years now and I'm sure some of you on the line had your doubts, but as you've seen in Q1, we sold our first cargo. We've now sold the second cargo in April. We're now just having ongoing discussions with EGPC to schedule the two additional cargoes for the second half of the year. In the near-term, the benefits of self-marketing are obviously being used [ph] by local oil prices and as a result of that our flat declining production base from spending less capital, but in the mid-to long-term, we strongly believe that this achievement positions the Company to be very competitive and possibly opportunistic in the Egyptian market. As a result of that change, we will only see our outstanding receivable balance from EGPC moving in one direction and that is down. During the quarter, we collected $27.1 million from EGPC and our AR balance is now below $100 million dollars for the first time since mid-2011. If payments continue as they have been to date this year, we expect our AR balance from EGPC to be below $50 million by the end of year. I'll now turn it over to Lloyd, who'll go through operations and production [ph].

[Lloyd Herrick:]

Thanks Randy. This graph shows our daily production by producing concession. At West Gharib, shown in red, production averaged 9,258 barrels a day during the first quarter, which is up 10% from the previous quarter due to the installation of replacement pumps brining the field back up to its productive capacity. I've highlighted the period where the pumps were installed on the graph. To date, the new pumps are performing as designed and we're optimistic that we're back to a more traditional run life of one to two years on our PCP pumps. Production in West Gharib was 9,010 barrels a day in April, with continued good uptime numbers across the field. At West Bakr, shown in orange, production averaged 4,931 barrels a day during the first quarter, which is down 17% from the previous quarter primarily due to a significantly reduced number of wells servicing, due to -- significantly reduced well servicing program during January and February. In early January, we released our service rig due to continued performance and safety issues and contracted a new service rig which was brought into service in mid-February following extensive acceptance testing associated with a new rig. The well activations, reactivations began in mid-February which is highlighted on the graph. Production averaged 5,051 -- 5,516 barrels a day during April, which is essentially on plan with West Bakr. At East Ghazalat, shown in blue, production averaged 514 barrels a day compared to the first quarter, which was down 8% lower than the previous quarter, at an average of 397 barrels a day to TransGlobe in April. Production was lower due to shut-in wells waiting on pump changes. Yemen production averaged 169 barrels a day to the company during the first quarter. We relinquished our interest in March of 31, so you won't see Yemen production from Block 32 again. Corporately production averaged 14,886 barrels a day during the first quarter and 14,917 2917 barrels a day during April. It's expected that production will average about 13,800 barrels a day during the second quarter which represents a 500 barrel a day increase from previous guidance of the second quarter. This is primarily due to performance of West Gharib and West Bakr. Next slide. This slide has a high level summary of our development project inventory which is currently sitting in inventory due to low oil prices and approvals for both [ph]. With the strengthening in Brent oil prices we are currently looking to bring forward increased development budget for 2015 to start working on the first three projects sometime in the second half of 2015 with potential production additions prior to year end 2015. I will now turn the presentation over to Ross where he'll discuss these projects and others in more detail.

[Ross Clarkson:]

Okay. We're on Slide 8, which is just an overview map of our Egyptian holdings. We are now in 9 production sharing contracts in the Eastern and Western Desert areas, 8 of those licenses are 100% operated and is 50%, which is non-operated. We built a large land position producing basins during a time when many decided not to invest because of political uncertainty. Now, we have 3-D seismic covering the Eastern desert lands and are busy acquiring 3-D on the Western Desert areas. So, we will be in a position to drill in the very near future. It is interesting that now that the political situation has stabilized in Egypt and the Egyptian economy is on the rise, there are many companies trying to get into Egypt, while TransGlobe is well ahead of those guys. We are currently evaluating several additional opportunities for acquisitions in Egypt. As Randy was saying about the oil export sales process, we are now using our view on the credit risk. It's really changed quite a lot and this has allowed us to relook at potential expansion of our position in the country. I'll go on to the current assets in the next few slides. The next slide, you can see the extent of our Eastern desert land holdings. We completed the 3-D seismic acquisition work on the red outlined seismic programs in December and the processing on the first area in the north is now out -- it's completed and we're now getting into interpretations. The other two programs in the South are nearly completed processing and we'll be interpreting those through the summer. Mapping of this data will take place from April through September this year and by the fall, we expect to have a risked and ranked prospect list and be ready to start drilling. We fully expect these programs will identify additional drilling targets in the play types that we have been so successful on in West Gharib and West Bakr, and that should keep us busy for several years. As Lloyd mentioned, we have several development projects in inventory that we can bring forward as oil prices improve. They are located on the new discoveries at North West Gharib and on West Bakr and I'll go into those in a minute. We are preparing all the government permitting for these projects so that we can move quickly on them later this year. Moving on to West Gharib, lands, which are the darker yellow lands on the slide, recent production has just been -- just over 9,000 barrels a day, which is more stable now that we seem to have solved the pump issues we faced last year. We are not planning any further drilling on these lands as they are pretty much entirely drilled up. We do have a waterflood pilot underway on the tighter upper [indiscernible] sands, which could lead to some reserve upgrades and we're also progressing on the lab core work for ASP flooding on the Hoshia field. There's not too much to say about the West Gharib lands at this stage. In North West Gharib, on the next slide, the red ovals there are the ones that we are getting ready -- the development plan's prepared and going through all the government approvals over the next six months. These developments are immediately adjacent to our current operations, so we have some benefit from the infrastructure that's already in place. We are planning to get the first development at North West Gharib 3 on-stream prior to year end and then follow with the other two developments early in 2016, and this is expected to bring on approximately 1,500 to 2,000 barrels a day of new production. And then, we'll continue on with development drilling on these new discoveries and then some exploration drilling that is expected to come out of the new 3-D seismic that surrounds this area. Moving on to West Bakr, that's the orange licenses on the map where we're producing approximately 5,500 barrels a day currently. We changed out the service rig in February as Lloyd said to a better unit and have restored production on a number of wells that needed pump jobs. Recently, we worked out an agreement for access to the south portion of a K-Field where it extends onto a military restricted access area, and we have approximately 12 development locations identified here from seismic and a couple of old producers that were drilled prior to the area becoming restricted. The new government in Cairo has been much more cooperative in working with us to gain access to these military areas, and we expect to move forward with the drilling of up to six development wells in the near future, and these are expected to be quite productive wells, with initial rates of up to 400 barrels a day and recoveries of up to 300,000 barrels per well. So, it's quite an attractive project and we'll move that forward quite quickly. In the Western Desert, this map covers all of our lands out in the Western Desert and we're working quite closely with the Minister of Oil and engaging the military to try and get access to the South Alamein discovery on the right side of the map and if we get approval, we could move that project forward. Further to the west is where we're operating right now, on the South Alamein and North West Sitra blocks. The next slide, shows the zoomed-in version there. In the South Ghazalat license, this week, we just started recording 3-D seismic and that's a 400 square kilometre program. It should be acquired by midyear and processed by the late fall. We expect to be ready to drill on South Ghazalat in 2016. The adjacent block to the west is North West Sitra. It's the new block that we picked up in the 2014 bid round and it was ratified in early January, and we're preparing for a 3-D acquisition program on that block also and could be -- the plan there is really, be out drilling there probably in 2017. And that's really the overview of the projects. I mean, the Company is still in a very strong financial position, well positioned to get through the downturn. We're starting to see prices turn back upward and we're quite happy to see that. So, we'll continue to steward the capital programs and the debt levels to maintain a strong balance sheet in 2015. We'll adjust our capital budget as we see the oil prices move, but we'll always maintain a three to six-month operating cash balance, and that conservative approach should provide our shareholders with the assurance that we go through these cycles, that we so often, that -- and that causes us to adjust our budget, but it in no way, puts the Company's future in any jeopardy. The Egyptian economy is going in the right direction. It's improving and the government is demonstrating a strong alignment with the foreign investors. So, we're continuing to reduce our receivables through cash payments and we expect, really to eliminate that credit risk over the next 18 months. Directly marketing our oil is a huge achievement for us and we really think that gives us the opportunity to look at additional lands in Egypt. From there, I'm going to turn it over to Q&A period. If anyone has any questions. Operator?

[Operator:]

Thank you. [Operator Instructions] The first question is from David Dudlyke of Dundee Capital Markets. Please go ahead.

[David Dudlyke:]

Yeah. Good morning, everyone. My first question's on the direct marketing, if I understand you correctly, you believe that you benefitted on a netback basis, by about $3.60 per barrel, net of the selling costs, by virtue of achieving higher pricing for your oil? I guess, my first comment would, if I understand, that would suggest that the realization in the absence of direct marketing would have been, perhaps $14 below Brent, a realization of closer to 40% or 75% of Brent, which -- it seems, a very, very large discount, both on a percentage or absolute basis. More importantly, looking forward, how should we be looking at your realizations going forward? $8 and change discounts to Brent in this first quarter. Should we be thinking about it as a percentage of Brent or $8 or thereabouts going forward? I know that we've previously talked about sort of a $10 delta on an absolute basis to Brent. That seems to have compressed by $2. And the second point would be, how much do you think you can compress these selling costs by? I know it's early days, but you must have a sense as to what the incremental cost for floating the cargo in the first quarter was and how much we could strip out with more efficiency of your marketing?

[Randy Neely:]

Hi David. It's Randy. The numbers aren't too far off. I mean, from our view, first off, with respect to the spread of Brent to West Gharib was at pretty much historic spread there, and that was really due to the overall industry. I think if you looked at a lot of places around the world you saw the oil, the heavy oil differential spread out pretty wide in -- certainly in January, February. So, we looked at what -- originally that cargo was scheduled to sell in January and so what we did there was, we floated it for a month and got a much better price, but of course, we incurred these extra costs to do that. So yeah, if we had sold it in January as originally scheduled, we would've ended up with a larger spread, but that spread would've been based on January Brent price not the quarter's Brent price. So, the quarter's Brent is $53 et cetera. So, that $3 plus is really based on our view of what we would've made otherwise in January as opposed to what we could've made on average over the quarter. That's the first point. With respect to the selling costs, [indiscernible] finish on the spread. So, what our numbers seem to indicate, we look back over the last several years is that, the spread of Ras Gharib to Brent is generally -- and we haven't been in a situation over the last few years, what we've gone through the last six months, but the last few years, we looked at Brent generally was somewhere between $9 and maybe up to $13 on the spread and the percentage discount really was everyone sort of fell into that view because oil prices tended to be in the $100 to $110 range and so we didn't see a lot of different variation across that, really the spread seems to be more of a dollar spread, $9 to $13, and perhaps even a little larger at the worst of times. With respect to the selling costs, we incurred a lot of costs in that first lifting and that's because we loaded it and floated it, because of the market -- there was no buyers really at that point in time. And so, we incurred floating costs, insurance costs, a whole bunch of extra costs that we wouldn't incur normally. So, our expectation is on a go-forward basis, most of our cargoes will be sold on an FOB basis. So, we sell into that port and not incurring these other costs. Now, granted you may end up with lower revenues, because of that, but we'll see as we go forward. Our expectation is, we'll bring those costs down probably into the $1.50 range as opposed to $2.70 range.

[David Dudlyke:]

Okay, and in terms of the -- so that's the selling cost. In terms of the realizations, I mean, should we, at $9 to $13, that's the historic range of spreads, we see an $8 spread that you've achieved this quarter --?

[Randy Neely:]

Again, David, you're looking at an $8 spread based on an average Brent for the quarter and our realized price at that moment. So, it's a little bit more difficult to look at, at that way, because we're selling it based on month -- month average.

[David Dudlyke:]

Let's move on.

[Ross Clarkson:]

Sorry David. Just one other thing that you should take note of is that we're now selling West Bakr crude also. So, that significant discount we used to experience on West Bakr has gone away.

[David Dudlyke:]

Good point, yes and you have spoken of that before. Okay. Second question, you, in your last paragraph of the corporate summary, you talked about and indeed, you referred to the fact that you made this second half CapEx, and you've spoken to where you might actually spend the money. I guess, early days, but -- can you give us an idea as to the magnitude of the lift in CapEx? Obviously you're running on very de minimis CapEx thus far this year in terms of guidance, and will we see an impact on production within this calendar year, should you lift the CapEx in the second half?

[Lloyd Herrick:]

Yeah sure. It's Lloyd here David. It depends. We're screening various projects to see what kind of returns we get at -- 60, 70 and above sort of Brent ranges, but in general, we're probably looking at something in that $10 million, $12 million, maybe $14 million. It depends on the timing and how quickly we can get out of there and deploy it. Yeah, we would look to have a production impact, certainly the West Bakr wells as we drill them, typically it takes 3 to 4 weeks per well. So, it depends when we start and we start brining those wells up, but we would see an impact maybe in the fourth quarter, but it won't materially change the annual numbers, but we'll see -- if we start brining those wells on 400 barrels a day, it starts to pile up into the fourth quarter. So you might have 1,000 barrels a day or more on the exit rate from West Bakr and then on the North West Gharib, realistically, we won't actually have that on production probably sometime in Q4. So, you might add 1,000 barrels a day sometime in the fourth quarter. So, again, more of an exit rate setting it up for 2016.

[David Dudlyke:]

Okay. That's all I've got. Thank you, very much.

[Operator:]

Thank you. The following question is from Shahin Amini of Td Securities. Please go ahead.

[Shahin Amini:]

Thank you. Good morning. Following on from the previous question regarding capital expenditure, your corporate summary in the reports does say that this is actually contingent on Brent price demonstrating spread in a $65 to $75 range. I mean, can you shed more light on that? I mean, what would you consider strength? Is that over a period of time and would you actually consider hedging some of your production to provide a degree of protection against a fall in oil prices later?

[Ross Clarkson:]

Sure Shahin, this is Ross here. I think we only just saw it get above $65 in the last week. So, it's earl days, but very optimistic at this point and I guess if we saw that trend or that stability in the positive above $65 range then we'll make that decision on moving forward on some of these projects, but we are preparing for them. We are getting licenses ready and getting all the government approvals ready -- and the rigs are laid down right in our licenses. They haven't moved. So, we can spool up fairly quickly.

[Lloyd Herrick:]

Yeah. The other thing, of course, is -- actually, it's not a hard target that we have to generate that extra cash flow to fund these things. We certainly have the capacity to do it. So, it's just the comfort that yeah, we've seen the last of sub $65 oil and that it looks like we're strengthening in something north of that. So, I think, realistically, we'll probably -- if we see these prices continuing to -- certainly through May and into June, I think that's probably all we need to see.

[Shahin Amini:]

Okay. A couple of other questions. It looks like your cargo lifts, I mean the size is -- seems to be driven by the top of the oil sands you're using 545,000 barrels. Is it possible to get larger tankers into the slots that you get from EGPC at Ras Gharib?

[Ross Clarkson:]

Not at Ras Gharib. That port, probably can't take larger tankers, but we are investigating the possibility of moving this oil through the internal pipeline system to a port where we could maybe intentionally bring in a VLCC, that gives us access to a broader market but that's very early days on that.

[Shahin Amini:]

So, in terms of thinking about your inventory, moving forward during this year, I mean, should we, I mean -- let me put it another way, how many cargo lifts should we be thinking of for the remainder of this year?

[Randy Neely:]

Two Shahin.

[Shahin Amini:]

Okay. So, four in total?

[Randy Neely:]

Yeah, but leave us a little bit of inventory at year end.

[Lloyd Herrick:]

Yeah we're almost seeing the same position we are today by our estimates, we have some inventory but not a tremendous amount of inventory.

[Shahin Amini:]

Okay, understood, and can you provide a breakdown for your Q2 production guidance of 13,800 into West Gharib, West Bakr and East Ghazalat, please?

[Lloyd Herrick:]

Just a moment here. Yeah, we're just -- notionally [ph] probably in that 8,500 barrel a day average for West Gharib and 5,000 average for West Bakr and 300 barrels a day at East Ghazalat.

[Shahin Amini:]

Okay, sorry, just one final -- sorry go on --

[Ross Clarkson:]

Yeah, of course, Yemen is off it now, so there's no production.

[Shahin Amini:]

Yes. Of course. Just one final question. Can you tell us what was, the price that -- you achieved for your second cargo during Q2?

[Ross Clarkson:]

Pricing is a little better than we achieved in the first cargo. We're probably about $3 higher per barrel.

[Shahin Amini:]

Okay. Thank you.

[Operator:]

The following question is from Pavel Molchanov of Raymond James. Please go ahead.

[Pavel Molchanov:]

Guys, thanks for taking the question. You've said in the past that, as recently as three months ago that for M&A opportunities you're looking further afield outside Egypt to try to diversify the asset base, but it sounds like, you're kind of looking closer to home now, is it fair that there's been a change in your thinking on that?

[Ross Clarkson:]

This is Ross here. Yes, that has changed -- certainly this marketing procedure takes away a lot of that credit risk and gives us the ability to consider reinvesting more money into Egypt. It's also just a factor of availability. We come across a number of opportunities in Egypt that we're now screening and going through due diligence on. So those things have moved more onto the front burner for us.

[Pavel Molchanov:]

Okay, but are you still open to potential purchases outside the country or is that off the table completely?

[Lloyd Herrick:]

No, no that's not off the table. We still have an intent that it's maybe not a huge purchase. We're just looking at smaller things to see if we can start to build a base to create some -- a second platform.

[Pavel Molchanov:]

Okay, and then second on -- when you say that you would be willing to increase your capital program, if Brent were to strengthen further, how long would it have to strengthen for -- in other words, how sustainable would you have to see that recovery in price before you'd be willing to put more rigs back to work?

[Lloyd Herrick:]

Well, it is hard to predict oil prices as we've all seen in the past, but, I guess, we're looking at, if we can see, 30 to 60 days where it holds in the mid-60s, then that gives us a little comfort. There's so many macro events that come into barrel in the price of oil, but we think we're seeing a little more stability into the 60s. Certainly, we didn't see the system as being very sustainable in the 40 prices.

[Pavel Molchanov:]

Right. All right. I appreciate it.

[Operator:]

Thank you. [Operator Instructions] The following question is from Al Stanton of RBC. Please go ahead.

[Al Stanton:]

Yes, hi guys. Just a couple of quick questions. First of all, on the share buybacks, I was wondering, what price you'd averaged so far in the quarter to date?

[Randy Neely:]

Al, we did 4.60 to 4.85 range. Canadian. It's all in Canadian. They're all done in [indiscernible].

[Al Stanton:]

Then, when you're looking at increasing spending, and the buyback, where does the -- you're thinking about the debentures coming to that decision, because I think Q1 2017, so, it's not that far away, but when does that outplay start to register on the radar?

[Randy Neely:]

Well, it's registered on the radar now, Al. I mean, we're certainly thinking about it. In particular, we're thinking about fixing the gain on the exchange rate. We've had a 20% gain on the debentures since they were issued, actually maybe even a little more, at the time they were issued, Canadian dollar was above the U.S. dollar. So, we're looking at it that way. From a buyback perspective it's difficult, because the volume on the debentures is quite low, so we wouldn't really get anywhere on a buyback. It's really just looking at maturity refinancing.

[Al Stanton:]

Then, sorry, one last thing on debt generally, are you looking at that at all? People's attitude to Egypt and the like?

[Randy Neely:]

Well, you're asking if we would put more debt on the Company to acquisition. It's possible. If the assets would support it, we certainly would look at it and as part of our financing structure.

[Al Stanton:]

Thanks guys.

[Operator:]

There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Clarkson.

[Ross Clarkson:]

Well, thank you, everyone for participating in our first quarter conference call. The next news will be the mid-quarter, which I expect will be around mid-June, and then once we get moving to the fall, we'll have a lot more discussions around the forward drilling program on the exploration ramps. Thank you.