TransGlobe Energy Corporation
Q3 2014 Earnings Call Transcript

Published: 12 Nov 2014

[Operator:]

Good morning, ladies and gentlemen. 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 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 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 projects and operations. And then 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.

[Randall Neely:]

Thanks Ross. Good morning everyone. Despite decreasing oil prices and continued challenges with our PCP pump and the resulted impact that it has on production the Company had a reasonably strong quarter from a financial perspective. We achieved $28.9 million in fund flow from operations or $0.35 a share on a basic basis. This is down from $0.58 a share in Q2 which included the $0.12 per share attributable to the Caracal brake fee. Adjusting for a quarter-over-quarter decrease in price at 9% and the Caracal brake fee, our funds flow as only 5% lower than Q2 despite having 14% lower volumes which was in line with guidance. We earned $19.2 million or $0.26 a share on a basic basis this is down from $0.35 a share in Q2 which again included the $0.12 per share attributable to the Caracal brake fee. We paid $0.05 a share dividend at the end of Q3 and we declared our regular quarterly dividend of $0.05 to be paid on December 31st. We ended the quarter with approximately $78 million in cash, $216 million in accounts receivable chiefly due from EGPC and $36 million in accounts payable and accrued short-term liabilities. The increase in ER and decrease in cash quarter-over-quarter is chiefly result of the rescheduling of cargo lifting from August to October which occurred a couple of weeks ago now. In total, we ended the quarter with working capital essentially unchanged from the prior quarter now at $259 million versus Q2 where it was sitting at $271 million. During the quarter, we spent $25.5 million on exploration and development activities which Lloyd will give more color on in a few minutes. We currently have not drawn any amounts under our RBL which we do use for letters of credit to support out commitments on our exploration blocks. The convertible debenture liability has been impacted by the recent weakness of the Canadian dollar and separately the conversion price of this convertible debenture has been adjusted to reflect the dividends paid to common shareholders. The next slide please. We saw given the recent fall off in the price of crude oil to be worth pointing to investors what we mean when we talk about PSCs acting like a bit of a shock absorber when prices contract. Unfortunately they also act as the governor when prices escalate but today I will focus on how they help offset price declines. This slide shows our actual results year-to-date on the far left breaking down our field net back on a per barrel basis. To the end of Q3, the company realized $25 per barrel after operating cost on every barrel sold. Our oil sale prices are references to dated brand. And to-date in 2014 our realized prices averaged $93.36 or a 12.4% discount from brand. The government take average 59.7% which we account for as both royalties and taxes. What this chart shows is notionally whether a netback with per barrel for the same period as production averaged $80 per barrel or $60 a barrel under existing PSCs and also what those netbacks would have been is the 59.7% government take realized year-to-date with a fixed percentage of revenue. What you can see but what we mean by shock absorber. As the price declines the government take decreases which of course helps protect our fund flow. Under the $80 scenario the PSC model provides per 21% higher field net back then under the fix government take comparison in fact under the $80 scenario we would have earned approximately $15 million higher fund flow under our PSC and under the fixed government take. Obviously this is going to be a pretty meaningful difference in this price environment. As for funds flow to the end of Q3 was 95.3 million which excluding the 9.25 million break fee or approximately 104 million including. Year-to-date to the end of Q3 the company has collected $93.4 million from EGPC and this is come from free sources the first and most important is the cargo lifting we assigned in the first nine month we received one half cargo assignment and one, one third cargo assignment. Subsequent to the end of the quarter, we have had a one half cargo assign to us lift on October 27 and we have a full of cargo lifting schedule for our next week on the 18. The proceeds of this lifting were received by us directly to our London account. The second towards the payment comes from regular cash payments in Cairo this amounts generally received in Egyptian pounds and are generally use to cover local Egyptian pound nominated expenditures. The third to us comes from offsetting expenses owe to government owned affiliate to provide services and supply to TransGlobe for example diesel. At this time excluding any amount we way received from EGPC as part they announce additional $1.5 billion special payment to foreign oil companies, which we have specifically being told we will receive a payment from. The company expects to receive in the range of $75 million to $80 million in Q4. This will put total annual collections in the range of $175 million again excluding any special payment we may receive. This would be lower than 2013 but slightly higher than 2012. We want to emphasize but the company is not satisfied with these delays and we continue to make collections of our expanding receivables from EGPC are highest in terms of priority and we are continuing to advance our plans to begin marketing and exporting crude oil entitlement. I’ll now pass you on to Llyod he will discuss operations.

[Lloyd Herrick:]

Thanks Randy. The company production for Q3 was 15,109 barrels a day with an average sales rate of 15,132 barrels a day. At West Gharib production averaged 9992 barrels a day during the quarter down 9% from the previous quarter. In October, we averaged 8421 barrels a day and in November we’ve been averaging approximately 8700 barrels a day to date. Production declines are due to a combination of natural declines from continued PCP issues. We did make some progress on replacing fail pumps during August to September. However we have experience higher normal comparison on some of its larger replacement PCPs that arrived in Egypt in late Q3. Consequently, we reduce the rotational speed by approximately 25% below the optimum design rotation speed to extent the run lifetimes on all the replacement pumps that have installed to date. It’s estimated that approximately 800 barrels a day of oil production is currently being curtailed due to the reduced rotation speed. We are in constructive discussion with the manufacture to resolve this issue account about replacements of pumps. In addition, we anticipate receiving our 2015 PCP order with 46 pumps by year end from a new manufacturer. The 2015 PCP tender which was awarded in late Q2 of this year. For West Bakr production average 5,148 barrels a day during the quarter the quarter essentially flat with the previous quarter. In October production average 6,114 barrels a day in November we’ve been averaging approximately 6,315 barrels a day to date which is an uptick of about 20% from the previous quarter. Production increases are primarily attributed to new wells a successful worker over program on suspended wells and upgraded pumping equipment. At East Ghazalat production average 658 barrels a day to transport during the quarter down 16% from the previous quarter and October our share production average 581 barrels a day. Most production decreases are attribute to national decline in one calling well that is yet to have a pump installed one. The operator just finished a push horizontal development well in the field and it’s expected to it will on production this quarter. Production sales in Yemen averaged 234 barrels a day during the quarter from Block 32, Block S-1 has remain shut-in since February due to continued labor negotiations with local tribes. Those negotiations have been hampered by the ongoing private dispute [indiscernible] the operators ability to get in country next slide. The slide shows the daily production by concession at West Gharib shown in red highlighted area shows the impact with the frequent pump changes and the natural declines. Production was stabilizing in September as replacements pumps were installed and then impacted by early fair year of several of the larger pumps to see that depth in early October. Production late October November reflects the reduced rotation speed on the replacement to prolong run times. Our West Bakr shown in orange production is increased by approximately 20% since August is currently averaging well above 6,000 barrels a day. With the uncertainty associated with West Gharib and the unresolved labor issues in Yemen the company is estimating that Q4 production will be in the 15,000 barrel a day range, next slide. Production two to three quarters has averaged 16,400 barrels a day and is expected to be in the 15,000 barrel a range for the balance of ’14 due to the shut in issues in Yemen and West Gharib pump issues as was discussed in the previous slides. Assuming 15,000 barrels a day and Brent pricing of $82.50 a barrel for Q4 funds flow for 2014 are estimated at US$122.5 million or 113 million excluding the Caracal termination fee booked in the Q2. The 2014 funds flow sensitivity to $10 per barrel change in Brent for the quarter is approximately $3.5 million. The company added a third drilling rig and start the large 3D seismic acquisition program in Eastern Desert in Q3. It is expected that the total of 85 million to 90 million will be invested in Egypt with the minimal investment Yemen during 2014. I will now turn it over to Ross to talk about projects in more detail.

[Ross Clarkson:]

Okay. We’re on slide number nine now which is a locater map of TransGlobe’s Eastern Desert land position. And really the majority of our company’s production comes from this area. The northern lands contain the West Gharib and West Bakr fields. And then to the south and well in surrounding those fields and to the south are the unexplored lands where we are acquiring new seismic. And the red outlines are the 3D seismic acquisitions for 2014. As you can see on this map, there are several large oilfields adjacent to our new lands in the south and we are hoping that new seismic will provide us with a series of exploration targets for 2015 and 2016. Moving on to the next slide, West Gharib and West Bakr is on this map also where our main producing assets. West Gharib current production down around 9,000 barrels a day medium gravity oil that sells for Brent minus an average of 12%. In Q3 drilled the last two wells in the development program in the Hana and Hana West oilfields and year-to-date we drilled eight new oil wells in one dry well. Now most of the fields in West Gharib are essentially drilled up and defined so the focus really now is on well optimization, enhancing production for water floods and potentially ASP floods. And this requires some facility upgrades to handle the increased water cuts which are expected during water flooding days. Move on to the next slide which is the Northwest Gharib slide on and we started drilling here on the light yellow lands that surround our main fields that we’ve been developing for the past five years. We have 18 highlighted locations where we’re locations where targeting a mix of field extensions and new structures in this northern area. We could start here right away drilling because we have 3D seismic up in this area and quite as extensive well control. To-date we have three new oil discoveries at Northwest Gharib 1, 3 and 5 which are highlighted with the red circles on the map. The number of three wells the most interesting because it encountered in Lower Nukhul what we call a red bed sequence which was not in our original reserve estimates for drilling in this area. It’s a much better quality sand and so we’re quite optimistic about that one. We successfully appraised this discovery at the number 17 well which -- and then the number 16 well we drilled down structure on that and we came in low to the oil water contact on the number 16 well. We kind of have it bracketed to the east and the west. The structure is completely open to the north, and northwest, as we are only now getting the new seismic in for that area. The Northwest Gharib 3 pool will likely be one of the first new pools to come on production in 2015. We are currently drilling the first appraisal to the Northwest Gharib number 1 discovery and expect to have an appraisal also on the Northwest Gharib number 5 discovery done in the next few weeks. All this drilling is driving to achieve new production and reserves here as soon as possible to make up for the declines that we are experiencing in West Gharib. We expect to declare commerciality later in December and file development plans in Q1 2015. And then assuming quick approval of the development plans we could commence production as early as the first half of the year. The results to-date are in line with our expectations. There are several more exploration targets to be drilled in this Northern area and we are anxiously waiting on the interpretation of the new 3D seismic to identify those additional targets. Moving on to the south in the West Bakr lands which are also largely surrounded by the Northwest Gharib block. Productions really ramped up here recently with the successful drilling program resulting in nine new oil wells. And in addition we’ve been reentering some of the oil suspended wells and recompleting in areas of unswept oil where it hasn’t been produced. We’ve had some very nice surprises from the recompletion program and have several more wells to do this in campaign. So West Bakr has been really the savior for the last quarter. The sight there with the overview of the 3D seismic acquisition program shows where we’ve out in the field working. The blue areas have completed acquisition and the red area will be done in the next few weeks and we also have some 2D data acquired in the Western part of the Southernmost block and that’s a reconnaissance program in an un explored area. So this all of this program will be completed by year end and then go through processing interpretation by mid-year to third quarter will have start to have a list of prospects we want to drill specially in the Southern area. Next slides shows us really what the landscape is out like out here where we are acquiring seismic I put these photos in because we’re vibrating right now in one of the largest wind farms in the world and the Southern Block it have some challenges from a safety point of view but we are very pleased with the seismic contractors attention to detail while operating in this area. You can see most flat fairly easy operations in this area so it’s all viber [ph] size. On slide 16 we move into the our ’15 I guess we move into the Western Delter this is a very active for Apache, Shell, E&I and other majors. TransGlobe has built a strong land position here over the past few years and we’ll start on the Eastern most block and work our way across South Alamein being Eastern most block which we have currently in suspense with the government waiting on a decision from the military to move there shooting range so that we can access the Boraq Discovery and this is been raised of a highest level in Egyptian government. So we are hopeful for a decision on this in the near future. But it’s certainly the contract is not running out at this point. East Ghazalat has been a much more successful project recently since the new operators then have taken over. They have drilled a few successful development wells on the Safwa field and raised production to 658 barrels a day for TransGlobe share and they’ve reduced the operating cost so the projects are now making money. In addition, the North Dabaa 2 well tested gap and condensate from what we see as a fairly limited size of reservoir. The operator is assessing if there is sufficient gas in condensate to economically develop this discovery. Egypt is also reviewing the price of gas receive by contractors as it is currently only about 288 per MCF and that reduces the economics for small development. The next well I would hear will be the result sort of the horizontal well or drilling in the Safwa field which should be mostly on production by December we’re pretty optimistic about that horizontal well. The next two block South Ghazalat and North West Sitra were got South Ghazalat which was our fourth block that we won in the 2013 bid round and North West Sitra we won in 2014 bid round. All of that Eastern desert 3D seismic program will eventually move on to these lands in 2015 and we hope the North West Sitra license is ratified by the government shortly so that we can amalgamate the seismic acquisition over the two blocks and there by save some dollars. So we should continuously across on the North West Sitra from the South Ghazalat area. And that’s really the summary of the company at this stage. We remain in a very strong financial position and we are well position to whether the down turn in the oil to oil prices currently 25% down we’re treating at a four year low on Brent prices. The current oil price correction is really part of the normal commodity cycle we've seen many times over the company’s history TransGlobe’s management will continue to steward the capital programs and debt level to maintain a strong balance sheet in 2015. We will adjust our capital budget to max the expected oil price and we’ll always maintain a three to six months operating cash balance. This conservative approach should provide our shareholders with the assurance that wow a 30% reduction in oil price may cause some budget adjustments it will in no way put the company’s future in jeopardy. We see the Egyptian economy is improving and the Egyptian is certainly demonstrating a strong alignment with the foreign investors and we’ve been an active discussion about repaying that receivable. The Ministry of oil has indicated to me just recently of the few ago that a further reduction in our receivables through a cash payment may be forthcoming in the next few months. We really are focused on that receivable and we continue to make a lot of progress on directly marketing our oil. If we get that direct marketing will completely remove the receivable discussion from our next quarter. Now time to turn it over to the Q&A period.

[Operator:]

(Operator Instructions) Your first question is from Christopher Brown of Canaccord. Please go ahead.

[Christopher Brown:]

Thanks Ross. Quick question, actually two of them, the first one is on the reserve booking basis. Just for clarity if you do declare commerciality in Northwest Gharib region in December, you even though the development plans would not be approved by the government January or February. Will your auditors still respect the reserve bookings that you would hopefully be able to claim for 2014 year?

[Lloyd Herrick:]

Christopher it’s Lloyd here. We think there will be some bookings that we’d get on the books because of the similarities to what we’re producing next door I don’t think there is any question as to the commerciality of it. And that’s often the concerned. I think once we have our declaration we feel we will get some of the reserves on the books of course. It will be a limited number of wells so they’re pretty stingy on how many spacing units they give you per discovery. But we think there is a strong case in bringing on some of the reserves on in year end.

[Christopher Brown:]

Okay, thanks Lloyd. And the second question Northwest Gharib well location 10 that you have indicated there was the indication of faulting but then there is positive indication of oil saturations. Is there a net take we can sort of imply from the existing data to say whether we should be increase our probabilities of success on the re-drill in 2015 or decrease in so as far as the negative of the potential faulting of rich fields they get the positive oil indications in the well, any comments that you could add to that maybe.

[Ross Clarkson:]

It’s Ross here. We came in a little to the east of the structure and came in 600 feet low to structure because we passed through a fault and midst that the Horse Block. We did see some oil standing as we went through some of those sands, we know oil is migrated through those sands. But we’re not worried about fault breaching there is plenty of seal here. But given that we now run the FMI logs and we’ve seen the faults in the wellbore we can get a better sense of where the structure is. So between that work that’s being done and the new 3D which is now acquired and going through processing, we’ve decided that we’ll go back and re-look at that location and probably shift the rig or come back to it and re-drill that structure. Yes, maybe the risk is a little bit lower now because we have a better handle on where the structure is actually located.

[Operator:]

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

[Gavin Wylie:]

I had couple of questions, one is just a follow up on Northwest Gharib 10, given the results for that first well. How do you see that impacting your assessment of total closure or areal extent? Just trying to dig through, is it too early to say what you think that that five might come down by I mean if you have 33 million pre-drilled and whatever the number was. What would be a realistic expectation for the remaining, for the next well?

[Ross Clarkson:]

Gavin it’s a little too early to say that. I’d like to get the new seismic process interpreted. We don’t it’s necessarily reduced the size. But it’s probably too early to give you a number. But it’s within range of those all of the targets in the south there. They range in that 10 million to 40 million range, so it’s not -- we don’t expect any difference.

[Gavin Wylie:]

Understandable. And then the other one just was in the MD&A that you guys were talking about releasing the West Bakr rig in ’15, in February 15, is that to imply that for the remainder of ’15 you will not be drilling wells on Bakr or am I missing something there?

[Ross Clarkson:]

Yes, that’s correct. There is a couple of factors there, we drilled out most of the locations that we’ve identified. We want to spend a little time looking at where to go next. The other factor of course is oil prices. We’re going to lay that rig down.

[Operator:]

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

[Shahin Amini:]

Good morning. Follow up question on Northwest Gharib. You were reporting perspective resources of about 6.9 million barrels. So in the light of your drilling results today and what sort of number do you think would be the right assumption to have at this point? And bearing in mind that you still have your 3D seismic interpretation undergoing. And in terms of incremental production that you would expect on the base of the current data that could potentially a bit shaping through to the next year? Thanks.

[Ross Clarkson:]

Yes, the production definitely will be next year it’s not going to be this year. Reserves, that 6.9 was only for Upper Nukhul the carbonate sand that Lower Nukhul in NWG 3 was not in that 6 million barrels of perspective resources I mean we didn’t assume that we were going to find one of those. So, we’re reassessing those numbers at this point Shahin.

[Lloyd Herrick:]

The other aspect it’s Lloyd here is that the 6.9 that was a combination of those Nukhul prospects and I think we weighted it around the 40% chance of success which is kind of where we’re running right now. So, I’d say it’s in line with what we were showing but we haven’t reworked the numbers because we’re going to wait the year end reserve assessments.

[Shahin Amini:]

And in terms of production it’s so early to..

[Ross Clarkson:]

I think there is a better rate -- we’re not planning to give 2015 production because we’re still going through our capital programs. But we definitely plan to be on production in the North West Gharib area I could give you a broad range but it’s a bit early.

[Operator:]

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

[Pavel Molchanov:]

Thanks for taking my questions guys. To follow on one of the comments you made about South marketing you said you are making progress. I think you guys use pretty similar language three months ago. So is there any substantive movement between August and today in terms of negotiating that.

[Ross Clarkson:]

Yes there has been some movement we’re in as of even in this morning we are in active discussion with the government because they are now tendering next year tanker lifting. So we’re in that process with them. And that’s about all I could say at this point yes there has been a lot of movement there has been a lot of movement although the Egyptian government with us.

[Pavel Molchanov:]

Okay and then on CapEx, you are running below kind of original in vision CapEx for the year I think partially I suppose because of Yemen. But in terms of setting plans for next year irrespective of commodity prices are you going to continue to kind a live the Yemen component at close to zero same as this year’s level or do you envision of back up there.

[Ross Clarkson:]

Yes it’s unlikely there would be very much other than maintenance capital spent in Yemen.

[Pavel Molchanov:]

Okay any sense today on what the aggregate number might be for next year.

[Ross Clarkson:]

That would be a little early we’re running which oil price should, we run out I guess my question back to you.

[Pavel Molchanov:]

Okay fair enough I’ll leave it there. Thanks.

[Operator:]

(Operator Instructions) Following question is from Victor Vallance of Edgecrest Capital. Please go ahead.

[Victor Vallance:]

Yes, good morning gentleman a couple of question. With regards to the North West Sitra concession is been awarded I imagine you will have to pay a signature bonus and if you do so will that be paid out of receivables the more to what was done previously with North West or have any other concessions?

[Ross Clarkson:]

Yes Vic that is a very minimal signature bonus. But we would most likely just offset that against the other receivables as we have done in the past.

[Victor Vallance:]

Okay and then one final question. With regards to the mechanics and calculating the cash flow per diluted share I noticed for this quarter in the nine months the number of diluted shares was about 82.4 million which was up from the 75 million that was used when the calculation was done last quarter. Just wondering why that big change and what and why was that done.

[Randy Neely:]

Vic its Randy the principal reason was the shift in the Canadian dollar. We had the Canadian dollar weaken over the quarter causing us to have a material gain on that liability. So when you do the math you then have to add back in the potential impact of the conversion and deduct the gain if the prior quarter didn’t have gained we wouldn’t have a diluted impact that’s the change. I know it’s bit goofy but that what’s we have to account for.

[Victor Vallance:]

Okay so just to get some idea going forward what kind of number would you use for the year and actually going out to 2015 assuming to dollar stay flat to that is that 82 million number?

[Ross Clarkson:]

I think we would probably be somewhere between 76 million with basic and 82 million would be diluted.

[Victor Vallance:]

Okay thanks.

[Operator:]

Thank you. The following question is from David Phung of Credit Suisse. Please go ahead.

[David Phung:]

Good morning guys. Just following up on the question at what Bakr and laying down the ridge with now wells drilled beyond February. Just curious how is that plan compares to what you laid out in your reserve report at the end of last year in terms of pace of drilling. Production rates and what I am getting out here is there any potential risk of reserve position at the end of this year? Thanks.

[Lloyd Herrick:]

Yes David its Lloyd here. No, we don’t see that’s going to impact anything in way of reserves we try drilling that rig down. We’re also going to be focusing a lot on the reentry and recompletion program particularly in the K-field we’ve always identified a large under performance so we are seeing that big pool oil something a new order of 116 million barrels in place. And the recovery factors never really matched the expectations. We’ve had good success going into a bunch of all suspended water doubt wells recompleting that into new zone or additional that has been on swept so that is going to be a big part of the focus its more capital effective and I think given the lower price of thing that is the right approach for 2015.

[Operator:]

Thank you there are no further questions registered at this time I like to turn the meeting back over to Clarkson.

[Ross Clarkson:]

Well, thank you everyone for participating in our third quarter conference call. The next news will be the 2015 budget plans and forecast which we’ll probably release either late December or early January just because we want to be a little more cautious. This is later than usual but we want to see how oil prices move through year end and see if that bottoms out. And we’ll adjust our budget accordingly to the oil price. Thank you very much.

[Operator:]

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