TransGlobe Energy Corporation
Q3 2015 Earnings Call Transcript

Published: 12 Nov 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 third quarter 2015 conference call. This is Ross Clarkson, President and CEO. 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. Sales volume for the quarter averaged 13,620 barrels per day, which was down 4% over Q2. This decrease is partly due to production being down slightly and also due to our tanker lifting in the quarter being about 4% smaller than our lifting in Q2. As a result, we increased our crude inventory by approximately 97,000 barrels or approximately 351,000 barrels at the end of the quarter The big story for us, as is for all oil and gas companies, is that oil prices were down significantly from a year ago. In our case, 56% from same period last year and about 19% from just the prior quarter. For us, this was due to both brent price decreasing in value and the West Gharib differential, which is a heavy oil differential, widening in Q3 versus the prior quarter. Fund flow for the quarter was negative $1.5 million which is chiefly a result of lower oil prices, but also slightly higher production cost versus Q2. Operating expenses were up 15% in the quarter over Q2, principally due to field staff bonuses paid in the quarter. Otherwise it would have remained relatively flat quarter-over-quarter. The company has made steady progress in the current year to improve operating costs. In particular, our recent disposals of both East Ghazalat and our remaining legacy Yemen assets are expected to save the company approximately $6.4 million per year in operating costs. These savings will begin to show up in the fourth quarter. In addition, the company has gone through great pains to decrease general and administrative costs this year and as you have probably noticed, those savings have started to show up in the third quarter. Year-to-date, our G&A expenditures are down $4.5 million over last year. These decreases come all across the board with the large savings which we can control, being realized from insurance, travel and payroll. We have also incurred savings from decreased stock based compensation and foreign exchange. The company had negative income of $46.6 million in the quarter due to the low operating results and an impairment charge $63.1 million offset by $24.4 million deferred tax recovery. The company remeasured its value of the company reserves, due principally to the dramatic decrease in oil prices. We used the September 30, 2015 reserve engineering price forecast to determine the impairment. We had a full quarter from a capital perspective only spending $3.6 million which was principally on facilities projects to improve water handling in the core areas and some seismic processing costs. The company continues to have a very strong balance sheet, ending the quarter with $126.9 million in cash, $166.2 million in positive working capital and no bank debt outstanding. The convertible debenture of CAD 97.8 million, or approximately $73.5 million remains outstanding and matures on March 31, 2017. Although we have the option to repay the debentures and shares in whole or in part on maturity, our intention is to pay this out in cash and we are retaining that ability by managing our capital expenditures and distributions. During the quarter we collected $42.6 million in accounts receivable from EGPC. The remaining AR balances made of amounts due from EGPC in the amount of approximately $30 million and approximately $17.7 million from a third-party which purchased our September tanker lifting which we collected in October. We now expect EGPC receivables to be in the range of $20 million by year-end. As a result of the continued lower oil price environment, the company determined despite our strong financial position that it would be prudent to decrease our dividend to reflect the approximate amount of forecasted fund flow remaining after we invest enough capital to maintain our production in 2016 equal to what we expect to exit 2015 at, while exploration expenditures can be financed from the company's existing working capital. We think it is in the best interest of our shareholders for us to ensure we remain in a strong financial position in even highly uncertain times. I will now turn it over to Lloyd who will discuss ops and the 2016 budget.

[Lloyd Herrick:]

Thanks, Randy. This graph shows daily production by producing concession. At West Gharib, shown in red, production averaged 8,520 barrels a day during the third quarter, which was down 6% from the previous quarter, principally due to natural declines and some well servicing. Out total production was on plan at 8,553 barrels a day. At West Bakr, shown in orange, production averaged 5,060 barrels a day during the third quarter, which was up 3% from the previous quarter. October production was on plan at 5,330 barrels. At East Ghazalat, shown in blue, production averaged 402 barrels a day during the this quarter, which is 9% lower than the previous quarter. The sale of East Ghazalat closed on October 13. Block S-1 in Yemen production remains shut-in during the quarter and has subsequently been sold. Quarterly production averaged 14,683 barrels a day during the third quarter and 14,028 barrels a day during October. It's expected that production will average approximately 13,800 barrels a day during the fourth quarter. May I have the next slide. This slide summarizes our planned 2016 capital program which is approximately 4% lower than the expected spend of $42.9 million in 2015. The 2016 program has $22.3 million allocated to exploration, representing 54% of the program. This year, the Eastern Desert exploration program is moving from the seismic acquisition and prospecting phase in the drilling phase targeting up to 22 of our newly generated Eastern Desert prospects. This program will satisfy all our Phase 1 commitments in the Eastern Desert. The $18.7 million 2016 development program includes $4.5 million for three development wells in the West Bakr K south field and $2.5 million for three development projects at North West Gharib which were discovered in the 2014 drilling program. The balance of the development budget is focused on a combination of optimization and development projects and maintenance projects in the West Bakr and West Gharib areas. With the proposed plan, its expected production can be maintained at the 2015 exit levels of 13,300 to 13,800 barrels a day over 2016. We did not include any production from the planned 2000 exploration drilling program in our 2016 production estimates. I will now turn the presentation over to Ross to talk about our 2016 projects in more detail.

[Ross Clarkson:]

Okay. We are on page six here. This is our zoomed-in map of the South K field and very detailed here, but you may recall that we were working on this over the last few years to get military approvals to drill in this area. We have finally achieved that and are now preparing to drill the first three wells which are three of the starred locations on the map. This is development drilling because there were several wells drilled by the previous operator many years ago, which actually define the pool. And then the area became off-limits for a number of years. So it was only produced by a couple of those wells. The dark green dot near the center of the structure up at the crest is the K 28 well which has produced over 1.2 million barrels of oil to-date. However, based on our 3D seismic and the well information we have mapped, approximately 55 million barrels in place in this pool and to-date only 5.8 million barrels or just over 10% has been produced from this particular load. And we believe that recovery should be well over 20% which is more typical of the pools in the area. And that would mean there could be upwards of over 5 million barrels sitting here that we just have gained access to now. And the economics of these wells is still very robust to today's oil price. And that is because the wells are only about 1.5 million to drill and they recovery in the order of 225,000 to 350,000 barrels. However a good well near the crest of the structure could well go over 1 million barrels of recovered oil. So we are excited to get started on this in January. On the next slide. This is the bigger map of the whole Eastern Desert exploration program that we are going to do in 2016. 22 wells are in the program in summary form on this slide. And we are targeting the higher productivity formations in three main play types. The red bed, which are like those found in our Arta field which have high productivity. The Miocene classic prospects are the same zones found in our Hana field and the HK and M fields. And then a new prospect in the Pre-Rift which are the same zones as those found in the offshore fields. This drilling program will commence in the second quarter and run through the balance of 2016 with two rigs operating on it. In general, we will start in the North, all the stars up in the North and then work our way down towards the South in the drilling program. The rift's statistical result assumes three or four successful discoveries out of 22 exploration wells with a statistical result of somewhere in the 8 million to 26 million barrel range. And that is using an average chance of success between 17% and 32% on those prospects. This is wildcat drilling in an oily area for play types that we know can work very well. However, the only way to know what is there is to get out and drill the wells, which we will do in 2016. The great thing about working in this area is the access to the export facilities on Tidewater. Anything we find can be bought on fairly quickly and can be exported easily under our contracts. Moving out to the Western Desert exploration, slide eight, takes us to our far Western Desert lands. And we completed the 3D seismic acquisition program on South Ghazalat in the first half of the year and are just now starting to see some of the processing on that seismic coming into our Calgary office. We plan additional 3D seismic over Northwest Sitra, the adjacent block either in late-2016 or early-2017. We will get started on the pre-work on this in 2016. Now I am going to break my rule and show a couple of seismic lines to give a feel of what we are seeing so far out on this new seismic shoot. So slide nine here, we are showing a dip line that crosses from south to north across the rift basin edge in South Ghazalat. This is excellent quality data with reflections right down into the Jurassic level. The basin margin fault is well imaged. We can see structural rollovers going into the fall. All the elements are there and the size of the structures is impressive. I think we are really excited about this. If you look at the next line, that's a strike line which is inside the rift basin running west to east. And once again, there are several rollover structures within the basin with a fixed caprock seal over them. And we are still going through the final processing and should have the mapping completed earlier in the New Year. We are planning to acquire the adjacent seismic to it on the Sitra blocks and then go into a four well drilling campaign in 2017. And that will save on mobilization costs to put all four wells together because it is a somewhat remote area. I am very excited with what I have seen so far and I can't wait to see the drilling results out here. These are really interesting structures. So finally, the company remains in a very strong financial position. We are well positioned to weather this downturn. We will continue to steward our capital programs, our debt levels and to reduce costs to maintain a strong balance sheet in 2016. We will continue to work on those cost reductions in every area of the business. We have an exciting program coming up in 2016, which could lead to significant reserves in production growth as we move through into 2017. Hopefully we are in a slightly better price environment by 2017. On the M&A front, we have worked through evaluations on several companies and continue to make offers to purchase other assets. Unfortunately we are still seeing that the divergence between sellers and buyers with unrealistic price expectations. Although we are starting to see more deals get done in the industry. And we simply won't overpay for any acquisition. But we will continue to work on it. We have actually strengthened our business development team recently by shifting some people around and we intend to put a lot of horsepower on that over the next nine months. That's all we have for updates right now. We will turn it back to the operator and see if there are any questions. Thank you.

[Operator:]

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

[Al Stanton:]

Yes. Good morning guys. Just a quick question. I was wondering if you could tell us a bit more about the Yemen disposal, please?

[Ross Clarkson:]

Yes. Al, this is Ross. Yemen has been, of course, shut-in for over two years now and has been quite a drag on the balance sheet or on the profits. And we received a relatively minor offer and we decided it was time to move it off. There is a contingent payment that may come later, but it's really an inconsequential amount of money. And as you recall, we wrote it off at the beginning of the end of last year. So we just decided it was time to stop the bleeding on that.

[Al Stanton:]

Thank you. And then in terms of Egypt, obviously you have done a small deal there which has been written up elsewhere, but is that a typical deal or do you see the potential for a bit more activity in Egypt? Or when you are talking business development you are primarily looking elsewhere?

[Ross Clarkson:]

In our BD group, we are primarily looking elsewhere. I mean we do evaluate opportunities that come along here and there in Egypt, but right now we have been looking at generally speaking higher netback regimes.

[Al Stanton:]

Thank you.

[Operator:]

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

[Luana Siegfried:]

Hi. This is Luana Siegfried, in for Pavel. Thank you very much for the call. I have two quick questions. One, I wanted to talk about the drilling costs. We see it across the industry operators are reporting cost, down anywhere from $0.01 to over 30% versus years ago. To what extent are you seeing efficient gains in there?

[Lloyd Herrick:]

It's Lloyd here. We are just studying the market now. It's been almost two years since we have been drilling. We are seeing some reductions across the drilling, but I think it's fair to say that the Egypt drilling cost were pretty low to begin with. We expect to be drilling these Eastern Desert wells for under $1 million per well. So there is not a lot left to squeeze out of the drilling cost but we expect we will see some savings. It could be in the order of 10%, maybe 20% on some of the services. But in general the drilling cost structure on for Egypt was already pretty lean.

[Luana Siegfried:]

Okay. Perfect. And I certainly had another one is that you have for next year, 22 exploratory wells on that. Should we assume this target as fixed? Or is there in any sensitivity before your price and order results from the wells?

[Lloyd Herrick:]

I think I understand your question. The 2016 drilling, we don't see a lot of change in that program. Those are commitment wells. And we need to honor our commitments and we are excited to go drill these. We are only drilling 22 prospects. We have several others but that program we expect will get done irrespective of the fluctuations in oil prices. As far as our forecast go, we have not built any production from those drilling results into our 2016 forecast.

[Ross Clarkson:]

And I think if you are asking if they were contingent on one or another? No. The answer is, these wells are not contingent on, so if there is a dry hole on one, it doesn't wipe any of the others off the list.

[Lloyd Herrick:]

Yes. With that said, if we have a discovery, you may reallocate one of the wells to an appraisal phrase, but at the current time we are planning to drill up to 22 prospects.

[Luana Siegfried:]

Okay. Sounds great. Thank you.

[Operator:]

Thank you. The following question is from Darren Engels of FirstEnergy. Please go ahead.

[Darren Engels:]

Hi guys. Just a quick question on South K field drilling. What would make you go in a higher commodity price budget? With early success, could you get more aggressive and drill more than three wells during 2016?

[Lloyd Herrick:]

I guess that would depend more on the price of oil, I think. We could drill more wells, it would be later in the year as there is a permitting process that takes a bit of time. But depending on the price of oil, we would probably need to bring in a third rig to do that. But we are pretty much loaded up on the two rig program to meet our exploration drilling. But that certainly is a possibility.

[Darren Engels:]

Okay. And did you say the average cost is $1.2 million?

[Lloyd Herrick:]

Drill case complete and on stream, we are targeting $1.5 million.

[Darren Engels:]

$1.5 million. Thank you very much.

[Operator:]

Thank you. The following question is from David Popowich of CIBC. Please go ahead.

[David Popowich:]

Yes. Thanks guys. Can you hear me?

[Ross Clarkson:]

Yes.

[David Popowich:]

I was just wondering, how much storage you guys have at Ras Gharib? You guys reported a no-show on netback of about $4 per barrel and brent prices have dropped subsequent to the end of the quarter. So do you have any capacity to produce oil into storage and sell that when oil prices improve, hopefully at some in 2016? Or would you continue to sell at $45 brent?

[Randy Neely:]

David, it's Randy. The oil actually, the storage at Ras Gharib is somewhere north of 1 million barrels. It's not our. It's the government's storage. But effectively we are going into a paper storage scenario with the government. So we are putting it into the stream. Once it's in the tank, it's no longer West Gharib and West Bakr production, it's now a Ras Gharib blend. It's blended in with all the other oil that's coming in from the other producers. So yes, while it goes into storage, it's in the tanks, but the tanks are flowing with liftings from the government predominantly as we go along each week, each month. So we don't expect or want to go much north of 1 million barrels, because that's the capacity that they have there. But they are lifting on an ongoing basis.

[David Popowich:]

And so you guys wouldn't have any capacity to dictate when your crude gets sold? You book the tanker months in advance and it would be delivered when the tanker arrives?

[Randy Neely:]

Yes. I mean that's the whole. But the expectation is, the government would probably like to push us off as often much as they could and in some ways we are starting to think, if we see oil prices recovering later rather than sooner, we could take our liftings later rather than sooner.

[David Popowich:]

Okay. Thanks guys.

[Operator:]

[Operator Instructions]. The following question is from Soheil Sharifi of TD Securities. Please go ahead.

[Soheil Sharifi:]

Hi guys. Can you hear me?

[Ross Clarkson:]

Yes.

[Soheil Sharifi:]

Good morning. So I just had two questions for you. The first one being regarding your 2016 exploration program. It seems like most of your money is going to be going towards the Northwest Gharib block, where you had a mixed result from your last May's drilling campaign there? Has anything changed versus geophysical and geological studies there that's given you more cause as to keep spending more there?

[Ross Clarkson:]

Well, last year we had three discoveries out of what, 17, 18 wells. So that's kind of about the percentage odds you should expect in any drilling program in this region. If you can retrieve 20% success, I think you should be pretty happy with that. We have spent a lot more time on working these prospects, of course, because we took the entire year to go through all of the data and ranked them and risk them really get to a better result. And we are also drilling a number of -- the Miocene prospects are a little different and hopefully higher productivity. So we are focusing on the higher productivity wells and not the nook ones.

[Lloyd Herrick:]

Yes. The other aspect of this is that these prospects are on the new seismic that we acquired through 2014 and 2015. So these are lands that we didn't have coverage on before. So that's why we see a lot of opportunities up in that area and it's also tied to the number of commitments. As you recall, we bid a number of commitment wells in Northwest Gharib. So it's certainly closer into the projects and existing production that we understand. So we are pretty excited about it.

[Soheil Sharifi:]

Okay. That's great. I also had a question, just looking at what you put out, it seems like there may be one prospect that might account for more than half of your predrilled perspective resource estimate. Is this the Northwest Gharib? And if it is, could you give us some more details on it?

[Ross Clarkson:]

Well, I don't think there is any particular prospect that would rank that highly.

[Lloyd Herrick:]

Nowhere close.

[Ross Clarkson:]

Nowhere close. It's pretty evenly distributed group of prospects.

[Soheil Sharifi:]

Okay. Fair enough. Thank you. Just really quickly as well, regarding your operating cost trend, you said Q3 was going to be a bit of an outlier given the bonus paid out. Could you give us a rough idea of what you expect to average for operating cost in Q4 2015 as well as throughout 2016?

[Randy Neely:]

Well, we don't expect, given the age of the fields, we are not expecting to get operating cost per barrel down significantly from where they are today. For the quarter, I think we were at $12.60 and we are expecting to try to hold that line. You are fighting increased water production which is part of what the capital is going towards is dealing with them, more and more water coming. So we have, even though we can hold production flat from an oil perspective, we are actually having increased water production. So that's the battle that you are fighting in older fields like this.

[Soheil Sharifi:]

Okay. Great. And then just really quickly, would you be able to give us a rough indicative profile of using of your 2015 capital spend across the year with regards to timing?

[Randy Neely:]

It's pretty evenly distributed through the year. We are basically running two rigs through the year and effectively that basically is going to be -- each quarter is going to be relatively equal.

[Soheil Sharifi:]

Okay. Perfect. And then just really quickly, my last question for you. Just regarding the dividend cut, I know you [indiscernible] in the past but your cash flow from operations should be covering your development of sustaining CapEx. Looking at what you guys are going into for 2016, we are just curious as to why you are looking at keeping dividend at all? Do you feel that this was just the first cut on the way to phasing it out entirely?

[Ross Clarkson:]

Well, the dividend is important to our shareholders and it is important from a capital perspective in terms of internal capital competition perspective. And we feel that we can maintain the dividend, given we have $126 million plus in cash today. We are budgeting based on what we see as fund flow for next year. For funds flow and dividend and CapEx, we think we can manage it. But we just felt it prudent to cut it in order to meet that for coming year.

[Soheil Sharifi:]

Okay. Wonderful. That's it for me. Thank you very much, guys.

[Operator:]

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

[Ross Clarkson:]

Well, thank you everyone for participating in TransGlobe's Q3 conference call and for the great questions. We look forward to 2016 to hopefully improving oil prices and an exciting drilling program. Good morning, everyone.

[Operator:]

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