TransGlobe Energy Corporation
Q4 2014 Earnings Call Transcript

Published: 5 Mar 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 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 fourth quarter 2014 conference call. This is Ross Clarkson, President and CEO; and with me I have Mr. Lloyd Herrick, Vice President and COO; 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 plans for the balance of the year. And then we’ll follow that with a Q&A session. Randy Neely will review the financials and highlights of the quarter starting in the next slide. Randy Neely Thanks, Ross, and good morning, everyone. For 2014, sales for the year averaged 16,161 barrels a day, which generated $120.5 million or $1.61 per share on a basic basis of fund-flow for the year. We earned $11.5 million including the deduction of $71.4 million for an impairment charge. $51.5 million of that charge was related to our decision to re-categorize our Yemen reserves to contingent due to the ongoing political strife and intermittent operational access. This was particularly relevant for Block S1. An additional $19.9 million of the impairment charge was taken in Egypt of which $16.6 million related to our East Ghazalat joint venture, which has experienced disappointing exploration results. And additional $3.3 million of the write-down was taken in West Bakr due to pricing. Some of you may recall that on the acquisition in 2011, the company booked a bargain purchase gain of $13.1 million on West Bakr. The impairment was offset by a large non-cash gain on foreign exchange in fair-value adjustments on the convertible debenture of $17.4 million. Overall for the year, the company stands at $107.5 million on capital projects. We ended the year with a $140.4 million in cash on hand and positive working capital just under $230 million, or approximately $160 million after debt, and as such we continue to sit in a very comfortable position from a balance sheet perspective. During the year, we collected $233.5 million in accounts receivable from EGPC. At this time our plan is to invoice EGPC on a go-forward basis for only East Ghazalat production, all other sales we will occur through the marketing of our crude oil from West Bakr and West Gharib directly to end-buyer. For the quarter, sales production for the fourth quarter averaged 15,139 barrels a day, which generated approximately $15.9 million in funds flow, or bode $0.19 a share on a basic basis. Realized oil prices averaged $66.91 a barrel, which was $20 over the average for the year, which was $86.99. We received 60% of our overall 2014 collections or approximately $140 million from EGPC in the fourth quarter. Through a combination of liftings, regular monthly cash payments and offsets as well as $50 million bullet payment made at the very end of the year. We’ve recognized the impairment charges as just discussed at the end of the year, once we made the determination to re-categorize the Yemen operations, and reserves and upon completion of our year-end reserve work. Ignoring the non-cash charges to income including impairment and the gains on foreign exchange in fair value of the debenture, the company would have achieved a small profit in the fourth quarter of approximately $7 million. As I just mentioned, we’re now marketing our crude oil through tanker liftings. We lifted our first tanker of approximately 545,000 barrels on January 22 to January 24, and sold it at the end of February. We expect to receive payment before the end of this month. That tanker lifting was exclusively dedicated to our West Gharib entitlement crude, that is our crude production after government take for royalty and taxes. As it turns out, our entitlement for the quarter is currently estimated to be in the range of 415,000 barrels, resulting in an over-lift of approximately 130,000 barrels. EGPC has agreed with us that the proceeds from those over-lifted barrels can be credited against outstanding accounts receivable. And so the AR balances repaid in full. Our second cargo lifting is scheduled for mid-April and it’s expected to be exclusively West Bakr entitlement production for the first half of the year. At quarter end we had under-lifted approximately 175,000 barrels of West Bakr entitlement crude. We expected to have 175,000 barrels under-lifted. Now because we are no longer selling oil, when it’s delivered to EGPC system but rather when it was sold through tanker liftings, both funds flow and income for any given period will be affected by the timing and the size of the liftings as well as the price, which as you are all the way has been extremely volatile lately. All of these factors will make it difficult for us to predict on a quarterly basis, what these amount will be. I’ll now turn it over to Lloyd for operations.

[Lloyd Herrick:]

Thanks, Randy. This graph shows daily production by producing concession. At West Gharib, showing in red production averaged 8,440 barrels a day during the fourth quarter, which was 6% lower than the previous quarter due to continued issues with effect to PCP pumps and natural declines. By December, we did receive a shipment of PCP pumps from a new vendor, and began replacing failed pumps. The new PCP pumps are performing as designed and we are optimistic that we will get back to a more traditional run-life of one to two years on our PCP pumps. Production at West Gharib increased to 9,372 barrels a day in January and 9,109 barrels a day in February. At West Bakr shown in orange, production averaged 5,963 barrels a day during the fourth quarter, which was a 16% increase over the previous quarter, primarily due to new wells and successful work over program. However, production in early 2015 was impacted by significantly reduced well servicing program during January and February. In early January, we released our service rig, due to continued performance and safety issues and contracted new service rig, which we brought into service in mid-February following extensive acceptance testing associated with brand new service rig. Production did drop to 4,942 barrels a day in January, and further to 4,480 in February due to the increasing number of wells, which were shut and waiting on servicing. Production in early March has been restored to 5,100 to 5,200 barrels a day range and it’s expected that the majority of well servicing backlog and new completions will be addressed in March. At East Ghazalat, shown in blue, production averaged 558 barrels a day to the company during the fourth quarter, which was 15% lower than the previous quarter. Production averaged 573 barrels a day in January and 526 barrels a day in February to TransGlobe. In Yemen, production averaged 210 barrels a day to the company during the fourth quarter approximately 200 barrels a day year-to-date in 2015. This was all coming from Block 32, which the company has relinquished its rights to effective March 31, 2015. Corporately, production averaged 16,103 barrels a day during 2014 and averaged 15,172 barrels a day during the fourth quarter. Production oils 15,092 barrels a day in January and 14,316 in February. It is expected that production will average about 14,500 barrels a day during the quarter, against the guidance of 14,000 in first quarter. With relinquishment of Block 32 in the Yemen - and the currently approved 2015 capital budget, it’s expected that corporate production will average approximately 13,300 barrels a day during the second quarter due to natural declines and a minimal new investment. Next slide? In early January we announced our 2015 capital plan, which has been reduced significantly in response to the current low oil price environment. This year, the focus is on production and operating expense optimization, restocking our exploration prospect inventory and progressing our development projects, so that we can be early movers when oil prices recover. Concurrently, we will be focused on reducing our cost structure and retendering a number of key contracts. In addition, as Randy discussed, we continue to maintain a healthy balance sheet, which will allow us to be opportunistic on the M&A front. Next slide? In 2015, capital budget for exploration and development has set at $37.5 million, which is above 35% of our 2014 program. $19 million or just over 50% of the budget is allocated exploration, which includes the balance of our large 2014, 2015 seismic acquisition program and the signature bonus for our newly acquired North West Sitra concession in the Western Desert. The 2015 plan is close to a zero drilling budget, which includes five wells, which we’ll drill early in the first quarter, prior to the releasing the rigs. The balance of the funds, are a variety of development projects over existing producing assets. I will now turn the presentation over to Ross, to go through our projects.

[Ross Clarkson:]

Okay. We’re Slide 9, which we wanted to detail some of the development opportunities that we currently have in inventory, and we are evaluating these opportunities to see, which ones we will bring on first, depending on the economics and timing of approvals on them. And each of these have the potential to add between 1,000 and 2,000 barrels a day of additional production. Moving at the top of the list there, we’re moving on the North West Gharib discovery through the development approval process and should be in a position to start up production at year-end assuming stronger oil prices. We really don’t want to bring on flush production from these new developments in a low price environment. The South K-Field extension, which is really just a very low risk extension that I feel we already have some wells down in there, that was subject to some military approvals and we seem to have that sorted out. So we are now working on well location permits for when we restart drilling. Items such as the work over programs and water flood optimizations really require very little capital and time, and will probably be some of the first things we get after. The bottom two, South Alamein development and reactivation of Block S-1 production require external approvals or agreements and we’re actively pursuing them, because they have significant economic impact to the company. These projects will allow us to stabilize our production base and maintain a steady cash flow, while we’re out exploring on the higher risk exploration lands over the next few years, which brings me to the next slide, Slide 10. And you can see the extent of our Eastern Desert land holdings, we completed all of the 3D seismic acquisition work on the red outline seismic programs in December, and they are now going through processing, the northern one is nearing completion. So we’ll start mapping on that very soon. Mapping of all of this data will take place from April through September this year, and by fall we expect to have a risp [ph] and ranked prospect list, and be ready to start drilling. We fully expect these programs will identify additional drilling targets in the play types we’ve been so successful on in West Gharib and Bakr. And that should keep us busy for several years. As Lloyd mentioned, we have several development projects in inventory that we can bring forward if oil prices improve. They are located on the new discoveries at North West Gharib at the north end, and on West Bakr. And we’re preparing all the government permitting for these projects, so that we can move quickly to get them on production when we want to. One Slide 11, that shows the three North West Gharib discoveries, that they’ve been talking about, where we’re getting the development plans prepared. We should have those completed over the next six months. And these developments are immediately adjacent to our current operations. So we have some benefit from the infrastructure we’ve already got in place up there. So we can get them on relatively quickly once we start. Moving out to the Western Desert, we’re now working closely with the Minister of Oil and engaging the military to try and get access to the South Alamein oil discovery. If we get approval, we could move this into the 2015 budget, but it’s kind of an unknown at this stage. And then further to the West, we have the South Alamein and North West Sitra blocks. And the next slide shows a zoomed inversion of those two blocks. And we’re now in the far Western Desert area, where we’re mobilizing the seismic crew, as we speak into the South Ghazalat license. That’s a 400 square kilometer program that should be acquired by midyear and through processing by the fall, and we expect to be ready to drill on the South Alamein block in 2016 - South Ghazalat, sorry. North West Sitra is a new block that we picked up in the 2014 bid ground, and it was ratified in early January. We’re preparing for a 3D acquisition program on that block also and it could be drilling there so by 2017. And I guess, the idea that should be apparent from all of these slides is that TransGlobe has a significant producing base with several low-risk development projects in inventory to backfill and grow production. And then we layer on to that producing base a significant exploration land base that is covered by the new 3D seismic. And that land base should provide a multi-year exploration drilling inventory. The company remains in a strong financial position and is well positioned to weather the downturn and world oil prices. The current oil price production is certainly part of what we’ve seen as a normal commodity cycle many times in our history. TransGlobe’s management will continue to steward our capital programs and debt levels to remain in a very strong balance sheet position in 2015. We adjusted our capital budgets and match expected oil prices, and we’ll always maintain a three to six-month operating cash balance. This conservative approach should provide our shareholders with the assurance, while a 50% reduction in oil prices may cause some budget adjustments it will in no way put the company’s future in jeopardy. I will turn it over to the operator now for a Q&A period and if anybody has any questions.

[Operator:]

Thank you. We will now take questions from the telephone lines. [Operator Instructions] Our first question is from Christopher Brown from Canaccord. Please go ahead. Mr. Brown, your line is open. Please proceed.

[Christopher Brown:]

Good morning. Just a couple of quick questions, Ross, and probably more towards Lloyd as well. The first relates to your hurdle [ph] price structure you sort of referenced, but we don’t know exactly what that number is going to be. Do you have a range that you’re looking for, for 2015 for price to sort of achieve and sustain? And if so how long does it have to stay at that level before drill bit hits the ground?

[Ross Clarkson:]

Well, it varies for different projects and different things we’re working on. Certainly, we start getting into the 65 to 75 range, we can move on certain projects into the budget. So we’ll look to adjust as we things. It probably is going to be in the summer time before we see that I would expect.

[Christopher Brown:]

Okay. And then second question just having to do with the inventory count. If we are looking at just the pure number of prospects you have for existing, what is that count? And what is that - if you separate that what is your lead count that you’re sort of driving to-date, and I know that 3D help convert those to prospects, do you have a sort of a number for each of those?

[Ross Clarkson:]

Well, we haven’t the mapped the - the 3D that’s still in processing Christopher.

[Christopher Brown:]

Well, I meant the 2D lines that may have been through the region that you may have had some indication of a lead on from previous year…?

[Ross Clarkson:]

Oh. Well, yes, on the two old 2D lines we have some leads, they are not anywhere near prospects at this stage. I think we put a few blocks on the map, there is a half-a-dozen blocks there. But I wouldn’t characterize them as prospects at this stage.

[Christopher Brown:]

Okay. And then just a final question on Ghazalat, I keep asking questions, essentially what - can you give us just quick status update on Egypt, I think that’s always good information to have?

[Ross Clarkson:]

Well, the political situation in Egypt, I guess, in the last six to eight months has improved dramatically. And so as their economic situation, we’re much happier, both the way things are going there. We’re getting much better cooperation from the government, they are much more business focused. We’re getting approvals faster. We only have to look at North West Sitra and how quickly that was approved. And so overall, we’re quite pleased with the macro situation in Egypt now.

[Christopher Brown:]

Great. Excellent, Ross. Thank you very much.

[Operator:]

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

[Pavel Molchanov:]

Thanks for taking the question, guys. So first on the guidance, the sequential drop in Q2, you mentioned kind of some of the activity delays. Do you expect your Q2 exit rate to be higher or lower than the quarterly average?

[Lloyd Herrick:]

It’s Lloyd here. I would expect it to be a bit lower than the quarterly average. Effectively, what we’ve done is, we’re taking where we’re at now. We’ve looked at our natural declines and assumed initially a zero investment budget. So that’s pretty much where you end up.

[Pavel Molchanov:]

Okay. And again it’s kind of along those lines, is there a minimum production level that you would not be comfortable following beneath, or are you just saying that these oil prices doesn’t make sense to produce?

[Lloyd Herrick:]

And really, that’s where we’re at in the early part of 2015, when you look at the - what we get for our crude oil referenced to our brand with the heavier differentials. There is not a lot of compelling reasons to drive production higher at this point. We’ll maintain our plan to make sure that we probably properly funded for sort of going forward, but there is little incentive there to accelerate and bring things up quicker.

[Pavel Molchanov:]

Okay. But you wouldn’t go as far as to actually shut in existing wells?

[Lloyd Herrick:]

Well, we have gone through a process to look at the more marginal wells that have been suspended into very low producers and high water cut type wells. The guys in the field have gone through and said, yes, if this one goes down, we’re not going to put any money in to bring it back on, those sort of, but it doesn’t change at a huge amount. The bigger wells, of course, we move quickly to maintain those and keep those on production.

[Pavel Molchanov:]

All right. I appreciate guys.

[Operator:]

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

[David Popowich:]

Yes, thanks for taking my questions, guys. I just had kind of an administrative question just on the estimates. You guys spent a lot more than I’d expected in the fourth quarter. In your third quarter, you indicated that your 2014 investment niche, it was likely to be between $85 and $90 million, but by math you guys spent about $105 million. So I was just wondering if there is a good explanation for that and if - if that potentially impacts your Q1 2015 spending if there was a spend in the [indiscernible] fourth quarter there?

[Randy Neely:]

Hey, David, it’s Randy. A couple of things that impacted that, one is, we accelerated a number of wells in the fourth quarter because of just rig schedules and we were laying down rigs. So we were filling up the schedule with wells that may have otherwise been drilled in 2015, as well as inventory bringing in pumps early just basically arriving early relative to what the schedule was for them coming into 2015. Those were probably the two biggest things and, of course, East Ghazalat, we had a well in East Ghazalat that are partnered field that went significantly over budget. So those three things were principally the reason why that number was higher than what was expected. In terms of changing things in Q1, not significantly from where our expectations were, I think, the most significant impact to Q1 could be the timing of our seismic kicking of the seismic, which is, I think, we originally planned to kick off in February, now it looks like we’re going to kick off this month.

[David Popowich:]

Okay. Thanks, Randy. And I just had a second question just about the timing of your crude sales for your first shipment there. Just in the press release it says in one place that was delivered to the end buyer in late February, but I think in other place, it says it’s going to be delivered in early March. So I was just…

[Randy Neely:]

Yes.

[David Popowich:]

…wanting to know if that has been delivered and if it’s highly certain that payment will be received in late March?

[Randy Neely:]

Yes, that’s right. Originally, the buyer indicated they could - they wouldn’t be up to take it until early March, but as time progress that we were able to get the shipment to them earlier. We actually delivered to them, I think around the February 22. So yes, our expectation is 30-days payment from that, so we should be receiving it in a couple of weeks.

[David Popowich:]

Great. Thanks, guys.

[Operator:]

Thank you. [Operator Instructions] Our next question is from Victor Vallance from Edgecrest Capital. Please go ahead.

[Victor Vallance:]

Good morning, gentlemen. Just a couple of questions, first off, I was wondering with respect to the receivables, whether the government EGPC is giving you indications that they’re planning to pay down additional receivables this year and do you have a target in mind?

[Randy Neely:]

Vic, it’s Randy. We don’t have a target in mind, but yes, they continue to pay us on a regular basis for past amounts, just like they’ve always had for the last several years. They pay us almost weekly smallish amounts, plus we do offset - we continue to do offsets for things that we procure from the government. Our expectation is that we’ll continue to play out throughout the year. So far it’s - January and February payments were just like November and March, excluding the bullets, sorry, November and December.

[Ross Clarkson:]

Yes, Vic, this is Ross here. The minister has been making some noise in the press recently about having it all paid off by August and clearly he wants to clear the books off for all of the oil companies. So that would entail another bullet payment but we don’t count on those. We now have a mechanism through the lifting to grind down the receivable to zero. So we think the credit risk on the receivable is essentially zero now because we do have a mechanism to get it off.

[Victor Vallance:]

Okay. Good. And then with the over-lifting this quarter, you mentioned it will go towards paying down the receivables and it’s a fair amount of oil. And if I calculate that I come up with a number around $50 million to $60 million; would that be a fair number to use?

[Ross Clarkson:]

No, 100,000 barrels, 115,000…

[Randy Neely:]

Yes, it’s a - the overlifting is 130,000 barrels, yes. It should be around $5 million.

[Victor Vallance:]

$5 million.

[Randy Neely:]

Yes.

[Victor Vallance:]

Sorry, it’s my math that is wrong. Okay. And then finally by selling directly, can you see that differential for the West Bakr crew that you used to receive or get from EGPC, would that be narrow at all so you’ll get a better price?

[Randy Neely:]

Yes. Yes, our expectation is it will come down to be much - very similar to West Gharib, not quite as good as West Gharib, it’s a little heavier and has a little bit more sulphur in it. But once we complete our discussions with EGPC on what that exact pricing should be we should see it very much like West Gharib pricing.

[Victor Vallance:]

Okay. Okay. Thank you very much.

[Operator:]

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

[Al Stanton:]

Yes, good morning, guys. This is probably going to be one of the questions analysts ask and you don’t answer. But I’ll go ahead with it anyway. I mean, the oil price is being painted as the villain in this scenario and you’re unwilling to invest at current oil prices. But just looking at some of your numbers, I’m under the impression that you’re probably maxing out your cost oil, your - probably your profit oil allocation is running at its most efficient level. Sure, direct sales gives you better cash flow, but you’ve got a $140 million in the bank. You don’t really need more cash if there is such a thing. So is there actually something you’re not telling us? Are you keeping the powder dry for something else? And in terms of, if you go through the course of this year, will TransGlobe look the same at the end of the year than it does now?

[Ross Clarkson:]

Yes, we are keeping our powder dry. We do believe that this current environment is going to create quite a few M&A opportunities. And so I mean, we did need to take a break anyway, Al, because we had all the seismic coming in. We pretty much drilled up everything in Gharib and we have a few wells to drill in Bakr, but we needed to take a break anyhow to get the seismic analyzed before we could get back to drilling.

[Al Stanton:]

Okay. Cool. Thank you. That was it. Thanks, guys.

[Operator:]

Thank you. The next question is a follow-up question from Pavel Molchanov from Raymond James. Please go ahead.

[Pavel Molchanov:]

Yes, hey, guys. When you reported the Yemen write-down a few weeks ago you mentioned that you would be looking to sell, monetize that asset if the operator a moves forward. Do you have any sense of what the operator’s plans in Yemen are?

[Lloyd Herrick:]

Yes, it’s - the current plan is clearly to get the labor situation negotiated with the tribes and get that field back on production. That can be done relatively quickly once we get resolution. That has the ability to generate quite a bit of cash even at the reduced prices. So I think that’s the first objective. As far as beyond that goes, you’d have to ask Occidental what their plans are. But I suspect, they would be interested in a possible monetization as well, but I can’t really speak for them.

[Pavel Molchanov:]

And if such a sale does move forward, would you essentially just piggyback off of that at whatever the price is or which should be more price sensitive?

[Ross Clarkson:]

It depends on the price and the buyer.

[Lloyd Herrick:]

Yes, that’s a tough one. We have stated over the last several years that we’d be interested in selling our interest, but it’s difficult to sell a project that’s not producing at any kind of reasonable valuation. So first objective is get it on production and start returning cash flow instead of creating negative cash flow in a way of continued operating costs for standby. So that’s job one and then after that we’ll see what the appetite in the market is. It’s always been a good project from a cash generation point of view, if we can keep it on production.

[Pavel Molchanov:]

Okay. Appreciate it guys.

[Operator:]

Thank you. We have no further questions at this time. I’d like to return the meeting back to Mr. Clarkson.

[Ross Clarkson:]

Well, that concludes our conference call. The annual report is up on the website for additional details. If you want them, the first quarter interim report will be released in early May and thank you everyone for participating in our fourth quarter conference call.

[Operator:]

Thank you. The conference call has now ended. Please disconnect your lines at this time and we thank all who participated.