TransGlobe Energy Corporation
Q1 2013 Earnings Call Transcript

Published: 7 May 2013

[Operator:]

To all participants, thank you for standing by. The conference call is ready to begin. 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 U.S. Private Securities Litigation Reform Act of 1995. All statements in this webcast other than the statements of historical fact 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 that the expectations expressed in such forward-looking statement 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 forward-looking statements include oil and gas prices, well production performances, exploitation and exploration success, continued availability of capital and financing and general economic and market or business conditions. I would 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 2013 conference call. This is Ross Clarkson, President and CEO; and with me, I have Mr. Lloyd Herrick, Vice President and CEO; and Mr. Randy Neely, Vice President Finance and CFO. We’ll start out as usual with a summary of the financial and operating highlights and then we’ll move into a discussion of some of the drilling results in Q1 and our plans for the future. This 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:]

Overall, Q1 ‘13 was a consistent quarter from a financial perspective. Production shrinks slightly in Q1 versus Q4 as a result of decreased production in Yemen, but that was slightly offset by a growth in West Gharib. Lloyd will give you more details on production in a moment. For the first quarter the Company achieved fund [ph] flow of $36 million or $0.44 a share. This is essentially unchanged from Q1 2012 but down from Q4 ‘12. And again, this decrease is a result of no sales having been realized on Block S-1 and Yemen during the quarter principally due to a labor dispute. On the earnings front, the Company achieved Q1 earnings of $24 million or $0.26 a share, and again, this is down from Q4 earnings of $32.2 million or $0.39 a share as a result of Yemen, the decreased sales in Yemen but also a result of the fair value adjustments made on the convertible debenture in Q4; although recovery of sales in West Gharib helped us at that lost revenue. As compared to net earnings in Q1 2012, the Company realized an increase of over 100%. The Company also continued to main [ph] a very healthy working capital position of $278 million, which is up from a year end of $252 million due to increased AR collections over revenues during the quarter. Crude sales, net of royalties and taxes in the quarter were $56 million. While the Company’s net collections from the quarter from EGPC which included a half tanker lifting exceeded $75 million during the quarter. As a result, AR outstanding from EGPC decreased during the quarter from approximately $220 million at the end of 2012 to $204 million as of March 31st, 2013. The balance sheet remains unlevered with only 17 million now outstanding under our current reserve base loan and 94 million outstanding under the convertible debenture. This convertible debenture value reflects the fair value adjustments as required under IFRS. The face value of outstanding remains at CAD97.75 million which carries a 6% coupon. The second semiannual convertible debenture interest payment of approximately $3 million was made on March 30th, 2013. The next payment is due September 30th. Our working capital balance of $278 million at March 31st includes $112 million in cash, $205 million in accounts receivable, approximately $6 million in inventory prepaids which is offset by $45 million in accounts payable. After deduction of debt both bank and convertible debentures the Company has net after debt working capital of $167 million which equates to $2.25 a share. I’ll now pass it over to Lloyd to give you the operation’s update.

[Lloyd Herrick:]

Thanks, Randy. West Gharib production has steadily increased in 2013 averaging 12,970 barrels a day in the quarter and almost 13,800 barrels a day in April. We have a backlog of completion stimulation candidates that we’re planning to progress this quarter which will move up production into the 15,000-barrel-a-day range. West Bakr production averaged 4,359 barrels a day during the quarter which was an 8% decrease from the previous quarter. This is primarily due to a higher than normal number of sand cleanouts and pump changes in the January, February period when production was in the 4,200-barrel-a-day range. Production in March and April increased to the 4,700-barrel-a-day range. We expect West Bakr production to grow to the 5,500 to 6,000-barrel-a-day range in the near term based on recent drilling results. At East Ghazalat, production averaged 338 barrels a day to TransGlobe during the quarter and increased to 423 barrels a day in April primarily due to the installation of a pumping equipment on the Safwa 2 well which initially have been producing as a flowing oil well and had declined over the initial period. Yemen production represents our share of production sales from Block 32 only as Block S-1 remains shut in primarily due to labor and contractor negotiations. The operators reached an agreement with field staff and is in the process of awarding new contract for field services. It is difficult to predict when productions will resume from Block S-1, however, we are cautiously optimistic that production will start sometime in the second quarter. This slide shows our daily production by concession for the past 12 months and just a couple of items to note. Continued growth in the West Gharib production through 2013 and the improved production from West Bakr over the past couple of months. On a production basis, we produced over 20,000 barrels a day in early April from West Gharib and West Bakr combined. With these higher production levels from both concessions and improved water separation in West Gharib and trucking a portion of Hana/Hana West to K station in West Bakr, we’ve been able to successfully deliver well over 21,000 barrels a day into the GPC receiving system, so we expect to be able to handle the new crude oil production which is coming in the next quarter. I will now turn it over to Ross to talk about our projects in more detail.

[Ross Clarkson:]

Okay, we’re on slide 8 which is the locator map of Egypt’s land position or TransGlobe’s Egypt land position. We acquired or won in the recent bid round a significant land position in both Eastern and Western desert areas over the past year. Our total gross land position is currently 2.1 million acres which places us in the top 10 in the country, although we will probably be dropping South Mariut here in the near future which will take off about 800,000 acres. I’m going to start in Easter desert slide on slide 9. And we’ll talk about West Gharib first. Our West Gharib and West Bakr assets are really the main producing assets in the Company accounting for about 80% of the Company at this stage. And that’s really the focus of most of our 2013 capital budget. The combined current production is approximately 19,000 barrels a day of medium gravity oil that sells for Brent minus and average of about a 12% discount to Brent, but it does all tie to Brent pricing. The West Gharib portion is currently just around 14,000, just under 14,000, and there are two drilling rigs working here, primarily on development drilling – one on the East Arta area and one down in the West Bakr area. And the dark green blocks on this are the producing fields and the light-green areas are exploration prospects most of which are on the new Block, the Northwest Gharib Block which surrounds all our current lands. In Q1, we drilled 7 oil wells including two new discoveries which I will describe in a little bit more detail later on. In 2013, there’s really a big focus on integrating facilities and reducing production bottlenecks which Lloyd talked about, really to allow a lot of our new oil wells that we’ve drilled to be placed on production. We recently completed multi-well batteries, one up at the Northwest corner of East Arta and a truck-receiving terminal at the K station in West Bakr; and this facility work will be ongoing, more expansions going on through the next year to increasing our handling capacity towards 25,000 and ultimately we’d like to get it up towards 30,000 barrels a day of capacity here. And that’s really a result of winning the Northwest Gharib Block, we need to expand our capacity because we see a lot of drilling coming up there. Slide 10, this points out the two new discoveries we made in the lower nuchal at the far Northern edge of East Arta and then at Arta West. The new pool, the North end is a thick sandstone and conglomerate with similar reservoir properties to the large lower nuchal pool we found to the south in 2011. Much of this pool appears to extend on to the newly won Northwest Gharib Block. This block is expected to be ratified late this year or early next year and we have, really, a very large inventory of development and appraisal locations now identified on both our current lands and on the newly-won lands. The Arta West discovery which is on the south part there and on the west side of Arta is also a lower nuchal pool and as well as an upper nuchal pool. And the limits of this pool are still unknown unless we have to drill some additional wells really to define the edges. We have got 3D seismic around here but it takes quite a bit more drilling to figure that out. These new discoveries and the four discoveries we made in Q4 last year really demonstrate just how valuable these lands are. We see the ability to take this area from the current, approximately 19,000 to approximately 20,000, maybe as much as 24,000 later this year or early in 2014. And then onward, over the course of the next year and a half, to 30,000 barrels a day roughly in 2014 and 2015. And that’s really because we have an inventory of over 150 locations both the prior result [ph] and exploration. Moving on to slide 11, this is a zoom in on the West Bakr assets and these are the oil fields and facilities we purchased from several Japanese companies at the end of 2011. We’ve drilled 5 new wells on the K, H, and M fields. That’s really the – they’re all in that K and M are on the South and H is in the North. The latest well on the K field came in yesterday with 148 feet [ph] of oil – net oil pay; it was really a great well. We have 15 wells planned for 2013 on this area with one rig dedicated to West Bakr. This is another area where we are expanding our facilities. We are now moving the Hana crude which on West Gharib over to K station on West Bakr in the south and then shipping that crude with the Bakr crude through the pipeline to the coast. And this has really freed up some additional trucking capacity at the coastal receiving station allowing for more Arta crude to be trucked. The ultimate goal is to have all our production moving through the pipeline and eliminate trucking to the coastal station, but that’s going to take the better part of a year or year and a half. We will still have some trucking within the field areas as we continue to drill up new wells. Just a quick slide on the new concessions, this is the same slide we’ve used before, slide 12, it shows the lands in the Eastern Desert Area which we expect to be ratified by year-end or early in 2014; and as I mentioned before, there’s really not a lot of blobs [ph] on the 2 southern [ph] blocks because we need to shoot 3D seismic down there. But the Northwest Gharib Block in the north end is currently the biggest production opportunity for the Company, and that may change after we get new data in the south but right now we have a very large drilling inventory up in the north. Slide 13, South Alamein, not much has changed here. We acquired these lands from Sepsa and El Paso in July 2012. We have an eight-well program that’s approved by EGPC but it’s held up with surface access approvals from the military. We are receiving lots of cooperation and assistance from EGPS to move the approvals along but unfortunately we have not received those approvals yet and although we are told it could happen imminently. We hope to proceed with both exploration and development drilling shortly. Our forecast has Borax [ph] starting production in the fourth quarter although that may slide now into 2014; in our forecast it really only contributed 490 a day on the annual average basis, but that may slide into 2014. East Ghazalat, on slide 14, which is our first Western Desert Block; that’s our only none operated block. We have a 50% interest in the Company called Vegas Oil operates it. Production commenced in September 2012 from 4 wells on the southwest structure and the operator now has two rigs in the area drilling on a 5-well program. Two will be appraisal development wells on the southwest structure and other three are exploration test of adjacent structures. The first development well was Safwa 3 which was cased as an oil well and we’re now drilling another well there on the Safwa as well as an exploration well to the south. The next slide shows the South Ghazalat Block that we won in the Western Desert on the – we beat Apache on that one and others. And it’s a pure exploration block once again but it –definitely in the right neighborhood, certainly lots of oil fields around it and there’s a lot of big discoveries out here. So we are optimistic that when we shoot 3D on this, it will show us where to go. The new blocks are really great inventory, exploration inventory and build out our five-year drilling plan. And with that – that was a quick overview of the properties and the financials. I think it’s probably time that we should open up to the Q&A period.

[Operator:]

(Operator instructions) Mr. Clarkson, we have no questions at this time, sir.

[Ross Clarkson:]

Okay, a pretty straightforward quarter so we didn’t really expect a lot of questions on it. There really wasn’t a lot there that was new. The next update will be a mid-quarter, mid-second quarter update sometime in June. And thank you very much for participating in our Q1 conference call.

[Operator:]

Thank you, the conference call has now ended, please disconnect your lines at this time. Thank you for your participation.