TransGlobe Energy Corporation
Q2 2015 Earnings Call Transcript

Published: 13 Aug 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 second 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. 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 15,064 barrels of oil per day and sales averaged 14,251 barrels per day. We continue to sale West Gharib and West Bakr crude to third parties through tanker lifting which causes differences between production and sales volumes in the quarter and from quarter-to-quarter. We completed one full lifting of oil during the quarter which consisted of approximately 386,000 barrels of oil per day after entitlement oil, effectively our entire entitlement production for the first half of the year and then additional 159,000 barrels of West Gharib entitlement oil. At the end of the quarter, we held just under 254,000 barrels of entitlement oil as crude oil inventory, all of which was entitlement production from West Gharib concession. Our next tanker lifting is scheduled for late September. The company had positive fund flow in the quarter of $7 million or $0.09 per share on a diluted basis. Fund flow increased this quarter as compared to the first quarter principally as a result of greater volumes of entitlement barrel sales along with decreased operating, G&A and selling costs. The decreases in operating and G&A costs are direct result of the company-wide efforts to reduce costs and conserve cash wherever possible in this low oil price environment. Selling costs were reduced as a sale of the second cargo in the second quarter with FOB shipping point where as the first quarter lifting was CIF destination. This resulted in savings of approximately 2.3 million on selling costs quarter-over-quarter. On a notional basis fund flow would have been approximately 2.6 million higher, if all oil produced was sold in the quarter. Net loss for the quarter was 12.6 million or $0.17 per share on a diluted basis, which is mainly due to low oil prices and $7.8 million non-cash loss on a comparable debenture. The company spent $22.3 million on capital projects during the quarter, the seismic shoot at South Ghazalat was completed in the second quarter and cost incurred on this project alone amounted to $12.7 million. The rest is the capital spending is attributable to facilities projects in Eastern Desert and principal and additional purchases of material inventory. We continue to remain in a strong financial position at the end of the quarter with the 123 million of cash and approximately 179 million in positive working capital. Although we no longer sell entitlement oil from West Gharib or West Bakr to EGPC. We do continue to collect on the EGPC receivable balance over those standing at the end of 2014. During the quarter, we collected $18.2 million from EGPC bringing our year-to-date EGPC collections to total of $45.3 million as of June 30, 2015. The company paid a $0.05 dividend on June 30, 2015 and earlier this week, we declared an additional $0.05 dividend to be paid on September 30, 2015. In addition, the company repurchased 2.3 million shares during the quarter and an additional 834,000 shares subsequent to the end of the quarter. This is an effective 4% reduction in the shares outstanding since beginning of the year. The table in this slide presents a summary of second quarter netbacks, because we sell all oil, entitlement oil directly to third-parties their timing differences between entitlement barrels are producing one they’re ultimately sold. However our royalty and tax liabilities are covered in-time during the period of production, this can lead to potentially significant swings in that back from one period to another. The figure shown on under actual sales reflect what is in our financial statements. These figures are based on volumes actually sold. In the three columns on the right hand side of the table under production as it’s sold, we have presented our estimate of what netbacks would have look like, have we completed to sale of although produced during the quarter that is a notional netbacks estimate. In calculating our notional netbacks we’ve also adjusted for the impact of the sale of the second quarter, sales in the second quarter’s opening crude in inventory, which is a 179,000 barrels is held at the end of Q1. Our actual realize netback in the quarter was $10.05 per barrel. On a notional basis netbacks would have been approximately $11.43 a barrel again had all the entitlement oil produced during the quarter in field. The reason in notional the netbacks are higher than actual netbacks is twofold, the primary reason being that we have a build up a crude oil inventory in the quarter of approximately 75,000 barrels. The second is that inventory build is held that the end of the second quarter a higher netback barrels in those held at the end of the first quarter. Inventory held at the end of Q2 was 100% West Gharib crude or as at the end of the Q1 is a 100% West Bakr crude. The West Gharib concession agreement has more profitable in terms of West Bakr hence difference. So our actual netbacks were impacted, because in some barrels were unsold at the end of the quarter and because of the company’s higher netbacks barrels for inventory. Next slide. Oil marketing, the company sold one full cargo during the quarter consisting of 545,000 barrels of TransGlobe entitlement crude reduced our selling costs by approximately 3.1 million to 800,000 on the second quarter lifting as compared to first quarter lifting. Again mainly due to the second quarter lifting being FOB shipping point where as the first quarter with CIF, where we incurred all the additional costs. Our third quarter lifting will take place in late September. We continue to work with EGPC scheduled our Q4 lifting and as well as liftings into 2016. As a result of this direct marketing, we are seeing in our AR balance continue to move downward. During the quarter we collected 18.2 million from EGPC bringing total receivable balance down to $72.8 million. We expect that if payments continue as they have been so far this year our AR balance from EGPC could be below $50 million by the end of the year. I will now turn it over to Lloyd to discuss operations.

[Lloyd Herrick:]

Thanks Randy. This graph shows daily production by producing concession. Now, West Gharib shown in red, production averaged 9,031 barrels a day during the second quarter, which is down about 2% from the previous quarter due to natural declines. July production was impacted by routine pump replacements on some of the larger producing wells. Production in early August is returning to plan. The pumps replaced in July were at the end of their expected run life and not related to the PCP pump issues of 2014. Our West Bakr, shown in orange, production averaged 5,592 barrels a day during the second quarter, which was up 13% from the previous quarter, primarily due to pump upgrades and the associated pump performance in uptimes with those pump upgrades. Production averaged 5,854 barrels a day during July which was up 5% from the second quarter. At East Ghazalat, shown in blue production averaged 442 barrels a day to the company during the second quarter which was 14% lower than the previous quarter and averaged 437 barrels a day to TransGlobe in July. Production is lower due to natural declines. Block S1, Yemen production remained shut in during the quarter and still shut in. Corporately production average 15,064 barrels a day during the second quarter and 14,589 barrels a day during July. Expected production will average around 13,800 barrels a day during the third quarter. I will now turn it over to Ross.

[Ross Clarkson:]

Okay. This is a pretty busy slide, really showing all of the gulf and lands north to south that we own and really it's a background on some of the exploration prospecting we have been doing. The 3D seismic we acquired last fall is now through for testing and in the first stage of interpretation is completed by our geophysical staff and it's underway. We are working through that data really from the north to the south the way - and the way we promoted processing. And we have done a preliminary review of the two northern blocks, Northwest Gharib and Southwest Gharib. We have currently identified 25 leads in five different play types in the Northwest Gharib and three leads in Southwest Gharib and the data on Southeast Gharib which is the southernmost block is still being worked on. We are still working through these leads to bring the mapping up to the prospect stage and then we will be ranking them based on size and risk. Some drilling areas have already been identified and we are expediting the military permits for those areas which should be completed by early 2016. And the plan really is to build up the inventory of drillable prospects so that we are in a position to start in 2016 if oil prices rebound a bit. In the western desert which I do not have a slide on that but we have now processing the new 3D that we acquired in the second quarter and that should be completed by October and that will allow us to start interpretation in building a prospect list for the South Ghazalat area. At this point the company remains in a very strong financial position and we are well positioned to weather this downturn in oil prices. TransGlobe's management will continue to steward the capital programs and debt levels to maintain a strong balance sheet through 2015. We have made some progress towards cost reduction and we will continue to work on cost reductions in every area of the business. On the merger and acquisition front, we have worked through evaluations on several companies and assets and made offers on several to purchase in the past nine months. Unfortunately the sellers are still resisting with unrealistic price expectations and we will not overpay for any acquisition. It is our belief that time is on our side in this downturn due to our strong cash position. And eventually the asset prices will adjust to the current reality. That's all we really have for the updates this quarter, it's been a fairly quite quarter. So we are going to turn it over to the operator and see if there are any questions.

[Operator:]

Thank you. We will now take questions from the telephone lines. [Operator Instructions] The first question is from Christopher Brown from Canaccord Capital. Please go ahead.

[Christopher Brown:]

Just to elaborate a little bit more on the M&A front if you could, I was just wondering, I know you are actively seeking opportunity both in Egypt and outside of Egypt, have most of your focus been or trying to capitalize opportunities that are sort of contiguous in the region to maximize sort of existing operations and keeping lower operating cost in check or are you really speaking to diversify outside Egypt now and capitalizing and use your balance sheet to leverage into some northern African countries, if you could just maybe expand on your mandate that's with you are looking at 2015?

[Ross Clarkson:]

Our mandate really is not necessarily to completely diversify from Egypt, we have looked at a couple of projects in Egypt in the last year. We’ve also looked at many outside of Egypt, our primary focus is always on the netback on trying to find high netback operated projects if we can, and areas where we can really leverage off our current expertise, so most of these assets are in production. So that's kind of the thing we’re looking for and it all really relates to how much money do they make.

[Operator:]

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

[David Dudlyke:]

If I could starts on the cost front if I may, I know that your gross G&A was done, certainly materially it had some it done some 22% quarter-on-quarter from 8.3 million down to 6.5 million. So and then I also note on the OpEx cost front, you made the statement that you trimmed 1.3 million or 8% off quarter-on-quarter. Now I understand a bit that there is bare modest activity currently, but nevertheless can you speak to any further structural reduction in either G&A and OpEx cost that you see for the residual part of this year.

[Lloyd Herrick:]

Yes, David it’s Lloyd here. We are working sort of all the cost fronts. Certainly on the operating cost side, we’re still moving forward with reduction of rental cost and we’ve actually with our approved pump performance in West Bakr and West Gharib that we’ve stated we’ve enabled to put down to one work over rig and we do standby time and we’re going to kind of continue to push those efficiencies through but there is a limit as to how much you can do there. On the G&A side of the ledger, I mean you will see an impact coming through on significantly reduced insurance cost going forward just because the rates have come down in the activities, we continue to all parts of our business were looking at. So it’s really just working all of the details.

[Ross Clarkson:]

Yes, and some of that David is, I mean there is a bit of timing in Q1 versus Q2, and there is also, there is a significant change in FX between Q1 and Q2, I mean, lot of our G&A is born in Canadian dollars and pounds but from U.S. dollars and we’re going to see a pretty material change in that. But the combination of some timing things that you are not seeing in Q2 which you see in Q1 traditionally, FX is a big one and of course the big driver, of course is we’re driving towards the bottom line and everything that we are looking for opportunities to say across the board, so there myriad of things where we’ve reduced cost which in Q1 and Q2.

[David Dudlyke:]

Okay. But on I guess should I expect some further positive surprises any materiality going forward or is it just little bit here and as if…

[Ross Clarkson:]

Yes, from a G&A perspective we ground them pretty hard and I think we’re going to be able to hold the line and Lloyd highlighted our insurance cost will be down which we all recognize more in second half of the year than the first half of the year. But we won't see material changes between Q2 and Q3 and Q4 unless we make structural changes.

[David Dudlyke:]

Okay. And if I move on to the production, your production guidance for the quarter is 13.8, when I look at your July production for West Gharib, you made the point that you did some well servicing et cetera et cetera. And so notwithstanding natural declines my assumption is that post July or post that well servicing I did not know if actually complete as yet, the production there would rise, I look at U.S. backdrop with respect to 5-6 from the second quarter, again you sight pump upgrades and improvements in pump performance. And I am just trying to, notwithstanding the fact that obviously in the background you got natural decline. I am just trying to drive the production my modeling down [indiscernible] mystery there. So perhaps you could speak to whether I should expect some uptick in West Gharib production and whether I should expect West Bakr at the whole July level where it was a very reasonable assumptions?

[Lloyd Herrick:]

I mean it's a cautious guidance that we are giving out. We are not going to miss our targets again. But on the decline side, we have had some I will call flush production in the first half of the year from West Gharib because we did have a lot of those pump issues in the previous year, that's performed above our plan, but we are seeing signs of that starting to come on as we expected. So we are just being cautious in our view. We are hoping we can certainly be at that target, but that's really where we are at today.

[David Dudlyke:]

Okay. That's good point in terms of flush production. Thank you very much.

[Operator:]

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

[Pavel Molchanov:]

Thanks for taking the question. I know that the share count dropped by almost 1.5% in Q2, obviously you did some buyback. Are you still in the market or purchasing shares or have you pulled back on that?

[Ross Clarkson:]

Well, the entity is still active and we are looking at it relative to our capital programs and other expenditures. So it's something that's still under consideration.

[Pavel Molchanov:]

Okay. Understood. And you did declare that dividend earlier this week. So no change in the dividends policy?

[Ross Clarkson:]

Not at this time.

[Pavel Molchanov:]

Okay.

[Ross Clarkson:]

As you see we still have $123 million of cash even after acquiring back 4% of our shares in the last four months.

[Pavel Molchanov:]

Right. And then lastly on production, so obviously kind of a big downtick in Q3, is there a level of production below which you would not want to go?

[Ross Clarkson:]

That's a good question. We are going to continue to produce on the current decline curves and we do have some projects that we can bring on, but really at this point $49 Brent, does it really make sense to bring on a bunch of production or drill a bunch of wells? I would venture to say no.

[Lloyd Herrick:]

Yes, and by the nature of the agreements, because they are very intense concession agreements there is some more challenging difficulty what is the optimal producing barrel, which ones get shot and which gets produced. And quite frankly, because it is a partnership with the government of Egypt we do not have the latitude of saying let's shut these and wait for better times. We are maintaining production as efficiently as we can and we will decline till we start putting more capital back in, but we are really focused on getting optimal barrels over the best net packs again in this price environment.

[Operator:]

Thank you. The next question is from Shahin Amini from TD Securities. Please go ahead.

[Shahin Amini:]

Just a follow up question on production, I suppose was more specific to Northwest Gharib, if I recall correctly your last mid-quarter OpEx mentioned that you may perceive towards the end of this year and we could see some production, obviously that looks to be off the table now but looking further heading into 2016, just wonder whether you could add a bit more color on your planning for Northwest Gharib and how you prioritize compared to your other commitments and obligations next year.

[Lloyd Herrick:]

Certainly the price oil is predominant decision making in all of these and that’s why we didn’t talk about at this time around, I mean how much brings rotated from even the mid-Q. So we have that flexibility, we’re still plans underway, so when prices hopefully improved we can move that forward in relatively quickly, we think we could probably have that the first project in North West Gharib up and running and probably four to five months time period. So for 2016, we’ll look at that as we sit down in the fall look at budget and see what the strip is on oil prices. Probably come on in 2016, we do have some timing considerations around declaration of commerciality and obligations under those contracts. But if does come on, it’ll probably be a pretty modest start without capital price is stable.

[Operator:]

[Operator Instructions] The next question is from David Popowich from CIBC. Please go ahead.

[David Popowich:]

Yes. I was kind of going to ask some more questions and what I was just asked. But I was just looking at your drilling commitments on the new Gharib blocks heading into next year and it looks like you guys have booked $20 million that you kind of have to spend next year there. I was just wondering if you thought that would be sufficient to keep corporate production flat or should we kind of expect flat to down in rate through 2016?

[Lloyd Herrick:]

I think flat were down for 2016, if that’s all we spent is the commitments only, because those are exploration commitments you’d need obviously development dollars tight into that as well. So we do have a number of projects sort of on the shelf that we could bring forward certainly in West Bakr and some other North West Gharib discoveries that is pretty easy to maintain current production I think for next year.

[Operator:]

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

[Al Stanton:]

It’s a quick, but it’s slightly anarchy question for Randy. Can you walk us through the cargos and a bit more detail? I mean, I’m just looking at you have got 250,000 barrels a day side that cargo, sorry 250,000 barrels side this ready to go into the next cargo. But I’m just keen to exactly understand what constitute the barrels ago into the cargo. Because I think, in the back to my mind, I had to entitlement and volumes has been a slowly pre-tax number but actually I assume your sales volumes are actually net of all taxes and there is probably the most post tax number but you can get. So is that a simplification of actually what happens in terms of there is no just the cost to all profitable volumes after tax?

[Randy Neely:]

Yes, that’s right. What we do is because we produce the oil essentially and delivered into the stream. So we’re delivering into the Ras Gharib blend. The government takes, we figure out based on sort of pricing and given that the current price environment we are basically matching out our entitlement production. So effectively in West Gharib, we’re taking 51% of the barrels and West Bakr we are taking 40.5% of the barrels because of the pricing environment. So as a result, you can calculate what your entitlement is all the 49% in West Gharib and 59.5% in West Bakr that’s all entitlement that’s delivered in kind to the government. So they’ve already taken it as soon as we delivered in the stream. Then our entitlement crude accumulates an inventory and then we left it periodically. So we lifted January, April, we’re going to lift in September and we expect we’ll lift in sometime in the fourth quarter. And by that time even as we look out we expect that we will have similar volumes in inventory even at the end of the year, which should mean but probably need to lift again in 2016.

[Al Stanton:]

Right. So just on the back on the envelope, if you roughly assume that you receive half of your working interest production, you’re getting whatever it is 600,000 barrels every quarter. And just in the cash, if the cash comes as far as the question is how concerned are you to get the delivery before the 13th of September or do you really care as to whether it falls into October and cash flow on a quarterly basis full short of what analyst want before costing.

[Ross Clarkson:]

Well, we carry in a sense that it’s nice to report those figures. On a financial statements, because on financial statements I have to go out for the periodically on this quarter-end. But reality is whether we receive a lifting on September 30, versus October 2, is kind of relevant to us from an operations perspective, we still operate business in the same way as we would otherwise. So it’s nice to have it booked and so we don't have to this big discussion about notional versus actual versus all but it doesn’t really change the way we operate the business.

[Al Stanton:]

And then just one final question. I mean in terms of the lining curve and direct sales do you think you are right the way up or other partnerships another ways of improving it further?

[Ross Clarkson:]

Well, that's true, we do think ultimately, we have seen benefit by marketing in terms of our pricing that we’re getting for West Bakr, I mean you don't really see it in our numbers because oil are prices so low, but if oil prices have stated $100 you would see a pretty material change in what we’re realizing on West Bakr. I think overtime our expectation is that we can do things to that crude and the blend, more specifically that will realize higher prices. Now again that will be more relevant in a better price environment than it is today.

[Al Stanton:]

Thank you.

[Ross Clarkson:]

Yes, just to add that in our first lifting because of the timing, which we received it and the environment that we’re rein in January of course we took that, we made the choice to sell that CIF, put across the way out [indiscernible] demerged charges and cost and insurance cost, and a whole bunch of other things and of course marketing cost that we didn’t have a lot of time to negotiate marketing cost at that time. So we had very high selling cost we think over the long term we’ll be able to drive those selling cost down, because we’re just be more established in doing this.

[Operator:]

Thank you. The next question is from Gavin Wylie from Scotia Bank. Please go ahead.

[Gavin Wylie:]

Yes thanks guys just had a quick question. Apologies if you have given clarity I joined the call a little bit late here, just on the so K-Field in the progression that you making there, as I understood in the last update we had, there is military approvals that you are waiting for now just wondering if those had been received or timelines around that, has it would appear to me that kind of given the fact those wells can IP at around 300 barrels a day and fairly cheap to drill those would be really economic adds even at current oil prices. So the question is two-fold, as one, where you are with the permits and approvals and your ability to get going on that drilling program and the second side is really at what oil price do you think that you accelerate of the K-Field development specifically?

[Lloyd Herrick:]

We’re progressing on those approvals we’ve got heads of agreement, some engineering work down, we’re looking at moving some government shooting ranges and stuff and we’re getting some cost estimates. So that's all in hand and getting approved, we expect to have that all hopefully sorted sometime when the fourth quarter, yes you are right, those are on a future investment basis, those are economic, even at these prices, but our view is that we’re producing some high quality barrels out still at a very deep discount, when you look at oil prices. So we’d look to have a stronger, stronger strip that we have now before we start putting money into our producers those easy barrels at relatively no netback. So I’m not sure, what the exact threshold would be for pricing, but I’m thinking it’s got to more than $60 brand before we start spending money to accelerate production.

[Gavin Wylie:]

Okay. That make sense maybe a more strategic question for Ross. When you look at the current strip, I mean it’s pretty [indiscernible] for at least a couple of years now recognize that it’s not a great predictor future pricing over a longer term basis, but you talk about this lower oil prices in your unwillingness to accelerate in and I understand that at least in the shorter term, but at what point do you kind of take a look at your business and say what’s the reality is that we’re 60 brand and that's going to carry at for least two years, do you still have the same use that you do today or do you actually looking say okay, we now have to redevelop and maybe we look at a 5% growth model or something like that have you thought about that, I’m sure you have and what can you kind of say to that?

[Ross Clarkson:]

Certainly $60 of branch is much different from this morning at $49. So you’re talking a 20% plus increase in the current price. So that would be a difficult outlook and we probably would start to accelerate some projects and build that 5% growth model. But that’s not where we said today.

[Operator:]

The following question is from Shahin Amini from TD Securities. Please go ahead.

[Shahin Amini:]

Question on the security, it seems that we’ve had [indiscernible] in Egypt, so it was [indiscernible] Cairo. Do you think that as one-off or do you have concerns, is going to have an impact on new security arrangements and your activities?

[Lloyd Herrick:]

Yes, certainly we’re concerned, we’re always concerned that is an escalation is that a one-off or is that a trend, we don’t know at this point. Our view that was targeted pretty much to rain on president celebrating of the opening of the new Suez canal I mean it was announced on the eve of the big national celebration is there more to come. We don’t know, we’ve certainly taking security cautious we’ve change some of our travel things, but first and foremost we’re concerned about the safety of all our steps. So we’ll keeping careful eye on it, these things are difficult to predict. But we know certainly that the government of Egypt is made security a big priority or they recognize investment is tight to secure and stable place to work. So we think we get true, but yes, we’re certainly concerned about it.

[Operator:]

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

[Ross Clarkson:]

Well, thank you for attending our conference call and for all the excellent questions. We had a great number of questions this call. And we’ll be letting you know if we do deal or certainly for the Q3 report. Thank you.

[Operator:]

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