TransGlobe Energy Corporation
Q1 2014 Earnings Call Transcript

Published: 7 May 2014

[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 the 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 2014 conference call. This is Ross Clarkson, President and CEO; and with me I have Mr. Lloyd Herrick, Vice President and COO; and Mr. Randy Neely, Vice President of Finance and CFO. As usual, we will start out with a summary of the financial and operating highlights, and then we'll move into a discussion of the drilling plans for the balance of the year. 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. Realized sales prices for the quarter averaged $94.89, which was down 1.3% from Q4 when prices averaged $96.10. Total sales volume for the company were 17,932 barrels of oil per day for the quarter, which was down 1.5% from the Q4 average of 18,213. Gross oil revenues were $153.1 million for the quarter, which was down approximately $8 million or 5% quarter-over-quarter. Despite that decrease in gross revenue, net revenue after royalties and taxes was approximately $58.5 million, which is almost unchanged from the fourth quarter when it was $59 million. This is a reflection of a lower overall government take which is occurring as a result of the higher operating costs that the company has been incurring. Total funds flow for the quarter were $32.5 million or $0.43 per share, which was down approximately $4.3 million or 11.5% from Q4. This is principally due to higher operating costs which averaged $12.13 a barrel on a corporate-wide basis. These higher than normal operating costs per barrel are reflective of the down time in Yemen where operating costs per barrel averaged $56.70, which is due to the shut in of operations there and also due to the increased costs in Egypt for workovers and downtime associated with pump issues we experienced in the quarter, which Lloyd will speak to in more detail in a few minutes. Earnings for the quarter were $16.7 million or $0.22, which is up from Q4 due to the impairment charge of $10.2 million taken on East Ghazalat in Q4. Removing that from the comparison, earnings are down approximately $400,000 quarter-over-quarter. The company spent $14.3 million in the quarter on development and exploration activities, which is consistent with our plans for the year. We ended the quarter with $107.6 million in cash, $258.9 million in positive working capital or $171.1 million net of our convertible debenture. During the quarter, we collected $29.4 million from EGPC and ended the quarter with an accounts receivable balance of $174 million. As you can see on this next slide, our accounts receivable balance has moved up during the quarter to an overall average of approximately eight months from our year-end balance of approximately six-and-a-half months. We are currently targeting collecting between $250 million and $300 million for the entire year, and similar to past years, we expect the bulk of the collections to occur in the second half of the year. In both 2012 and 2013, we collected 50% or more of our total collections in the year in the fourth quarter. We continue to work with EGPC to improve collection, the collection cycle, and we also continue to work on other initiatives that we hope will eventually lead to marketing of our crude production, which is permitted under all of our PSEs. So far this year, we have received two partial liftings, the most recent being a half lifting received just last week, and we continue to work with EGPC on an acceptable schedule for the remainder of the year. As I expect, you already are aware earlier this week the company declared a special dividend of US$0.10 per share, which is essentially a pass through of our reverse termination fee less our costs received when the Caracal arrangement agreement was terminated last month. And in addition, the company also declared our first quarterly dividend payable at the end of June at $0.05 a share. The special dividend will be payable on May 28. I will now like to pass the mike over to Lloyd who will provide an operations and guidance update.

[Lloyd Herrick:]

Thanks Randy. Company production for Q1 was 18,067 barrels a day with an average sales of 17,932 barrels a day, which just Randy said is essentially flat with the previous quarter. At West Gharib , production averaged 11,100 barrels a day during the quarter, down 7% from the previous quarter, and in April it was down to an average of 10,230 barrels a day. These productions declines are due to a combination of premature failures of our PCP pumps provided by a new supplier in 2013 and also natural declines. The PCP pump failures have impacted production by approximately 1,000 barrels a day and is expected to continue to impact production until sometime into the fourth quarter when it's expected that the problem pumps would have been replaced with more reliable pumps. At West Bakr, production averaged 5,757 barrels a day in the quarter, up 4% from the previous quarter. April production averaged 5,240 barrels a day. April production is lower due to combination of workovers and some natural declines. At East Ghazalat, production averaged 434 barrels a day to TransGlobe during the quarter, up 30% from the previous quarter and in April TransGlobe’s share production averaged 790 barrels a day. These production increases at East Ghazalat are from two new development wells which were drilled at Safwa this year. Production in Yemen continues to be sporadic due to ongoing negotiations with respective tribes. Block S-1 produced a portion of Q4 and Q1 but has remained shut-in since mid-February due to pipeline attacks associated with local tribal and employment issues. Negotiations are progressing, and it is hoped that a lasting resolution can be reached over the coming months. Block 32 production has been partially impacted by limited access to diesel and other services in 2014. However, in early May, production from the (inaudible) field which is above [900 barrels] (ph), 130 barrels TransGlobe was restored. This slide shows our daily production by producing concession. At West Gharib which is shown in red, the highlighted area shows the daily impact of the pump changes and the decline in production into April, which is attributed to the pumps and to some natural declines. With the current uncertainties associated with the West Gharib PCPs and the Yemen tribal issues, the company is estimating that Q2 production will be in the 16,500 to 17,000 barrel a day range for the quarter. As discussed in detail in the quarterly press release, the company has lowered 2014 guidance to a range of 17,000 to 19,000 barrels a day with a mid-point of 18,000 barrels a day, which is essentially flat with 2013. Guidance is based on the current producing properties and does not include any potential production from the North-West Gharib or the South Alamein projects. Subject to drilling results and development approvals, we could see first oil production from North-West Gharib this year, but it is not expected to materially impact 2014 guidance. Start of the South Alamein development remains subject to receiving military access approvals. Based on the mid-point of guidance, funds flow for 2014 are estimated at $125 million or $1.66 a share using $100 Brent for the remaining three quarters of the year. A $10 per barrel increase in Brent for the balance of the year would increase funds flow to approximately $136 million, which is similar to 2013. During 2013 and year-to-date 2014, Brent has averaged approximately at $108 a barrel. Capital guidance for 2014 remains at $100 million, which is approximately 80% of the forecasted funds flow. Capital spending will increase through the balance of 2014 with the addition of a rig in the Eastern desert and the large seismic acquisition program which is scheduled to kick off in the third quarter of this year. I will now turn the presentation over to Ross to discuss our projects in more detail.

[Ross Clarkson:]

Thank you, Lloyd. We're on Slide 9, which is just the locator map of our Egypt land position and we're going to start out in the Eastern Desert, Gulf of Suez area for the next few slides and then we move over to the Western Desert properties after that. So on the next slide, slide 10, this is the West Gharib and West Bakr assets which are our mean producing assets and are really the focus of the majority of the 2014 capital budget. West Gharib current production is approximately 11,100 barrels a day, medium gravity oil that sells for Brent minus an average of 12%. We currently have one drilling rig working on this area, primarily on development drilling in the Arta field with a little bit of drilling in the Hana Field, and most of the fields in West Gharib are essentially drilled up at this stage and defined, so the focus really has been on optimization and enhancing productions for water floods. We've got six water floods under way right now. The rig that is currently drilling on West Gharib in the Arta area will be moving over to the new [liasons] (ph) on North-West Gharib which is the pale yellow lands that surround everything in July, which brings me over to the North-West Gharib slide on 11. And we're just about to start drilling on the light yellow lands that surround the fields that we've been developing over the past five years now, and as you can see from the nine highlighted locations, we are targeting a mix of field extensions and new structures in this Northern area. We are able to start drilling early here because we already have the 3D seismic and extensive well control that have identified more than 70 locations in this area. This has been a little delayed in getting started up, but we're finally getting going. Our plan is for the new rig to come in and start drilling in June, and then the rig as I mentioned that is working on the Arta Fields will move over to the North-West Gharib in July. (Inaudible) will keep us busy with two rigs working here for at least the next year, probably over the next two years. We are driving to achieve new production here as soon as possible to make up for the declines in the issues we've had on the West Gharib fields. Moving over to the West Bakr, which is further south here, these lands are also largely surrounded by the North-West Gharib block. West Bakr has been an excellent acquisition and has a significant amount of development drilling and production optimization left to be done here, so we will keep one rig working here until next year at least and then that rig may start moving over on to the other new lands. Zooming out on to slide 13, we can see the extent of our Eastern Desert landholdings, and we have a dominant position out here. We have just opened the 3D seismic bids and hope to award that very shortly and then start seismic acquisition work on the red outlined seismic programs by third quarter -- towards the end of third quarter. We fully expect these programs will identify additional drilling targets in play type that we've been so successful on in the West Gharib and Bakr areas, and that should keep us busy for several years to come. Moving out into the Western Desert, South Alamein, which has been a difficult project for us to get access to due to a military tank shooting range over this area. We are in discussions to get that range moved and we will move it if we can, so that we can access the Boraq Discovery. But right now, EGPC is working with us on it and indicative of that is they’ve suspended the clock on the production sharing contract. That really gives us the time to do all the negotiations with the military until we get access approval. And then once we start -- restart the clock, we will have more than adequate time to develop the discovery when we do get access sometime in the future. On East Ghazalat, this project has been more successful recently due to the new operators (inaudible) that was just recently taken over. They have drilled a few successful development wells on the Safwa field and have raised production most recently to over 1700 barrels a day gross, which we own 50% of that, and they've also reduced the operating cost on the project, so the project's now making money. So we're quite pleased to see that. In addition, they filed a development plan on the North Dabaa discovery, that's the gas condensate discovery we made last year, and they plan to start drilling an appraisal well on that in the second half of this year. It's really great to see this project finally making some positive gains. The other project we have in Egypt in South Ghazalat, which is on Slide 16. That's the fourth block that we won in the last bid round. This Eastern desert 3D seismic program, when we finish up on that will continue on with the seismic cruise out into there and shoot that red outlined area with 3D in 2015, so we won't be drilling that until at least late 2015. With that I'm going to turn it over to the operator for Q&A session and we'll go through some of the discussion.

[Operator:]

Thank you. (Operator instructions). We do have a question from Chris Brown of Canaccord Genuity. Please go ahead.

[Christopher Brown:]

Thank you for taking my call guys. Just a quick question on our inventory assessment now for Eastern Desert. In the latest presentation, there's sort of an appraisal on development potential drilling locations of 87 and exploration inventory of 46. Does any of the recent drilling results that we've seen either at West Gharib or West Bakr make us re-evaluate the inventory numbers that we've been dealing with for the foreseeable future or are you still maintaining that with all the issues that we're dealing with on productivity and water cuts. Those were somewhat expected, that may have been a bit earlier than anticipated type of thing?

[Ross Clarkson:]

Yeah Christopher, that hasn’t changed our minds at all on anything there. This is normal for what we are seeing in the fields. I mean, we always -- when you're doing a water flood project, you do expect eventually water to breakthrough on those. All of the structures that are sitting on that one map that shows all of the exploration opportunities, those still exist and certainly all the development opportunities still are there. So, we don't really see any change in that inventory.

[Christopher Brown:]

Excellent, thank you.

[Operator:]

Thank you. (Operator Instructions). There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Clarkson.

[Ross Clarkson:]

Okay, thank you. Yes, TransGlobe has faced some production challenges over the past six months. But for the most part, those are mechanical issues that we can overcome. The replacement pumps are being manufactured and air freighted from Canada into Cairo, and we expect by the fourth quarter we will see a turnaround. We are also working to get North-West Gharib drilled and into production just as soon as we can, which will start to move the numbers in 2015. Thank you very much for participating in our Q2 conference call.

[Operator:]

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