TransGlobe Energy Corporation
Q2 2013 Earnings Call Transcript

Published: 12 Aug 2013

[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 prediction, reserve potential, exploration drilling, exploitation activities and events or developments that the company expects are forward-looking statements. Although TransGlobe believes that 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 generational 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 second quarter 2013 conference call. This is Ross Clarkson, President and the 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 will move into a discussion of some of the drilling results in Q2 and our plans for the future and 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:]

Thanks Ross. Revenues of a 152.6 million for the quarter were down 5% from Q1 and up 3% over Q2 of 2012. Although production was up 4% on the quarter and 9% from the prior year lower prices resulted in slightly lower and essentially flat revenues from the comparable periods of Q1 and Q2 of the prior year. The company achieved a netback of 37.7 million which was down 10% from Q1 and 8% from the prior year; the decreases are principally a result of lower prices and higher operating cost combined with timing differences as it relates to the company's recognition of operating cost and net of EGPC for cost recovery purposes. Operating costs were up for the quarter due to higher diesel consumption and handling charges, as well as cost in Yemen with no revenues from Block S-1. We expect to see the government share of revenue to adjust for the majority of these increases in future periods. General and administrative costs and financing costs were down for the quarter both as compared to Q1 and prior year Q2 by 8% and 11% respectively. This is due to both lower growth and per barrel G&A and finance costs. Fund flow for the quarter of 32.9 million is down 9% from Q1 and 7% from the prior year quarter. This decrease is again due to lower prices and higher operating costs offset slightly by higher production and lower G&A and finance costs. Net income of 10.4 million was significantly impacted by the $19.7 million impairment charge taken in South Mariut as a result of the lack of exploration success achieved and the company and its partner’s decision to not proceed with the last exploration phase of the concession. The convertible debenture also had a significant impact on net income due to the decrease in the trading value of the convertible debentures resulting in a gain of 9.1 million and the decrease in the value the Canadian dollar also resulting in a foreign exchange gain of 2.9 million associated with convertible debenture. Removing both of these items, the impairment charge and the effects of the convertible debenture from net income would leave the company with a normalized if you will net income of approximately 18 million for the quarter comparing this figure to Q1 of 2013 which show net income of being approximately $2 million lower which again would be a result of lower prices higher offset by higher production and lower G&A. Now moving on to the next slide, our financial position at the end of the quarter. The Company held approximately 101 million in cash, 222 million in accounts receivable, 10 million in deposits and prepaids and owed approximately 47 million in accounts payable and accrued liabilities. This left the company with positive working capital of over 286 million at the end of the quarter. You can then deduct long-term debt of 97 million it would leave the company with positive working capital of approximately 189 million which is equivalent of approximately $2.57 a share. Given the company's recent trading value of around $7 per share, this leaves a market value of approximately $4.50 for our reserves and resources which would equate to approximately 50% of the value of our 2P reserves at the end of 2012 on an NPV10 basis. At the end of the quarter we've finalized an amendment to our borrowing base. We reestablished that facility at a $100 million and replaced BNP Paribas with IFC a division of the World Bank. Now a subject that is near and dear to all of our hearts accounts receivable and the collection of accounts receivable, during the quarter we collected 31.7 million bringing our two quarter collections to approximately 107 million. We continue to work with EGPC to finalize the payment schedule for the balance of 2013. We are now working towards the total payment plan that will have EGPC pay the company between 220 million and 250 million for the entirety of 2013. And while agreeing on a payment schedule is not necessarily a guarantee we would point out that in 2012 the company agreed on its payment schedule to EGPC for payments of 160 million and ultimately received approximately 157 million for 2012. Included in the current schedule our 1.5 cargo liftings, which have been allocated to the company in the second half of 2013 which would equate the payments of approximately 70 million to 75 million depending on the price. The balance of the amount to be collected in the second half of 2013 is expected to be received in either cash payments, expense offsets and potentially additional unallocated cargo liftings. I will now pass you on to Lloyd who will take you through the operating results for the period.

[Lloyd Herrick:]

Thanks Randy. Company production was 18,417 barrels a day second quarter up 2% from the previous quarter. At West Gharib production averaged 12,829 barrels a day in Q2 which was essentially flat with the previous quarter. West Gharib production was impacted in May and June by several unrelated labor disputes which restricted our ability to truck oil to the GPC truck [terminal] [ph] and also by natural declines which were not offset by new wells, as originally planned due to a prolonged contract approval process for a well stimulation contract. Contract (inaudible) June and we kicked off a multi-well stimulation program at the end of June. We have completed seven wells over the last six weeks, which are being brought on production and cleaning up post stimulations. On the additional 12 wells we’re not counting planned future [growths] [ph]. In fact West Gharib will be producing in the 13,000 to 14,000 barrel a day range in Q3, Q4 as the undeployed wells are brought on production and cleaned up. At West Bakr production averaged 4,889 barrels a day for Q2 which was up 16% from previous quarter primarily due to new wells. Recent production has been in the 5000 barrel a day range and is expected to increase to 5,500 to 6,000 barrel a day range in the near-term as new wells are brought on production. At East Ghazalat production averaged 393 barrels a day for TransGlobe during Q2, up 16% from the previous quarter primarily due to the [inflation] [ph] of a pump on a well which had ceased to flow naturally, also with the addition of a couple of new wells. July production was impacted by the [shut in] [ph] well waiting on a pump replacement. [Inaudible] mobilized the workover [inaudible] field, and expect the well will be back on production shortly which should contribute an additional 350 barrels a day, or175 to TransGlobe. Yemen production represents our share production from Block 32 as Block S-1 remains shut in due to prolonged labor negotiations with the local tribes [who’ve been] [ph] awarded service contracts. It’s difficult to predict when negotiations will be concluded and the production will be restored. For planning purposes we have assumed that production will be resumed by Q4 of this year. Next slide, this slide shows our daily production by concession for the past 12 months. Production graph shows the impact of production disruptions caused by unrelated labor disputes at West Gharib during the quarter and also the impacts of natural declines which impacted production in Q2 and in July. Late July early August, we are just starting to see the contributions of the recent well completion and stimulation program which has reversed the trend. We did not experience any additional labor disruption since May and June. The production is in the 18,000 barrel a day range and we expect to increase throughout the quarter as new wells are brought on production in West Gharib and West Bakr Next slide, in late June, the company revised guidance for 2013 primarily due to approval delays in Egypt for access to West – to South Alamein and for contracts in addition to the prolonged labor negotiations in Block S-1. 2013 production guidance is estimated at 19,000 to 20,000 barrels a day with a midpoint of 19.5. Guidance assumes that Block S-1 will be on production for Q4 of 2013 which on an annualized basis would contribute just over 400 barrels a day to 2013. Based on the midpoint of guidance and $100 per barrel Brent pricing for the second half of 2013, funds flow of our forecast to be 145 million or a $1.92 per share. The fund flow sensitivity pricing over the second half of 2013 is approximately $8.2 million or $0.11 a share for a $10 per barrel change in Brent pricing. Capital guidance was lowered to 80 million from the original budget of a 129 in 2013 primarily due to the delays in Egypt. The $80 million 2013 capital program represents approximately 55% of the 2013 funds flow. I will now turn the presentation over to Ross who will discuss our projects in more detail.

[Ross Clarkson:]

Okay. Slide nine locate our map which shows our land position in Egypt and we have acquired or won in the recent bid round a significant land position in the Eastern and Western desert over the past year. Our total gross land position increased and now has decreased after dropping Mariut to 1.3 million acres, still makes us a very significant holder of land in Egypt. Our drilling and production operations on these blocks continues pretty much as normal and is largely unaffected by the political events in Cairo. We have experienced some delays in approvals from the Ministry of Oil and EGPC due to a distracted government right now. However, the new interim government appears to be placing a greater emphasis on getting the economy working and we are hoping to see some benefits from that renewed focus. For instance the ratification process for the new PSEs is moving along and the Minister of Oil has made them a priority and informed us, he hopes to have them fully ratified before the end of the year. In our business plan, we are still assuming we will commence work on the new licenses sometime in 2014. Let's move on the Eastern Desert on slide 10. So, the West Gharib and West Bakr assets are still our main producing assets and are really still the focus of our majority of our 2013 capital budget. The combined current production is around 18,000 barrels a day of medium gravity oil that sales for Brent minus and average of about 12%. And the West Gharib portion is currently around 12,000 barrels a day just over 12 and there are two drilling rigs working here, primarily on development drilling. The dark green blobs are the producing oil fields and the light green areas are exploration prospects. In Q2, we drilled five oil wells and in the first half of the year we've drilled 11 oil wells and one D&A well. As Lloyd mentioned we started our well stimulation program in late June that program was delayed by almost six months due to our protracted bidding and contract approval process and by the end of the June we had almost 15 wells in the stimulation list which did hurt our production in the first half of 2013. That stimulation program is now fully underway and we should see a bump in production as we move through the second half of 2013. In 2013 there is also a large focus on integrating facilities and reducing production bottlenecks this facility work will be ongoing over the next year to increase our handing capacity towards the 25,000 and ultimately hopefully to 30,000 barrels a day. On the next slide 11, is zoom in on the West Bakr assets and we drilled four new oil wells in Q2 including two exploration wells on structures adjacent to the H and M fields. We have 15 wells planned for 2013 on this area and one rig dedicated to working here. We have a lot more work to do in this area and expect to see a continuous drilling and facility work program until the end of 2014. The drilling successes to-date have confirmed our initial evaluation work indicating that this really was a great acquisition. We have increased reserves and we’re starting to see the increased production as we put new wells on stream and rework older wells and replace worn out equipment. The facility work is also ongoing with the ultimate goal to have all of our production moving through the pipeline and eliminate trucking to our coastal stations. And then moving on to slide 12 I believe is the newly Eastern Desert Blocks that we won in the bid round and we hope to see those ratified by year-end as I mentioned before. There are not a lot of blocks on the two Southerly blocks because we need to shoot 3D seismic down there. The Northwest Gharib block is currently the biggest near term production opportunity for the company although, that may change after we get new 3D data in the South. A key factor here is having control over such a large area and will there be synergies with common facilities and drilling and production equipment and the staff. All of our oil from the Syria is exported from the coastal station at West Gharib which is about little pointed land there on the East side of the pipeline and in the center of the map. And we hope to be in a position to directly export and sell some of our crude in the future as we expand our operations in the area. So we'll move out to the Eastern Desert, slide 13, sorry, Western Desert, that's our first Western Desert block East Ghazalat and this is our only non-operated block. We have a 50% working interest here. Production commenced in September 2012 from four wells on the Safwa structure and the operator has been drilling on a five well program two of the development wells Safwa 3 and Sabbar 2 were case to small oil wells and then the exploration well at North Dabaa encountered a thin oil zone in the Cretaceous and a gas (inaudible) zone in the Jurassic. The operator’s just completing flow testing on the Jurassic zone and we should have an announcement on that in the next week or two. It's difficult to see the extent of the Jurassic discovery on the seismic so we will require additional drilling to determine how big it is. It is possible that it extends on to our new PSE located to the west of East Ghazalat. Slide 14, South Alamein which is the project we acquired from Cepsa in El Paso in July 2012. And we have a planned eight well program approved by EGPC but we’re held up with surface access approvals from the military. We’re receiving lots of co-operation and assistance from EGPC to move these approvals along and we have received approvals for two of the exploration locations at West Manar and Taef and hope to get the remaining approvals before the end of the year. We are currently sourcing a rig to commence drilling the West Manar and Taef locations potentially in Q4 of this year and hopefully we'll be able to continue drilling on Boraq and other locations into 2014 with the additional approvals. The production start-up will slide the production start-up into the end of first half of 2014. The next slide shows the South Ghazalat block in the Western Desert which we won in the new bid round, pure exploration once again, but it is in the right neighborhood. On the right side of the map, we've highlighted the new oil and gas condensate discovery at East Ghazalat that may extend on to the new lands. Apache and others have drilled a lot of big discoveries out here, so we're optimistic that the 3D will show us where to go. The new blocks are an excellent exploration inventory and contribute to our five year drilling plan. And then on the next slide is Yemen. We haven't had a Yemen slide in this presentation for quite a while, because there was not much going on. But DNL currently has a rig drilling and basement exploration test on Block 32 and recently finished drilling a development well on the Godah Field in Block 32. Block S1 continues to be shut-in; although we’re optimistic it may be on production by Q4 of this year. And that really is the conclusion of the overview of the properties and financial. So we'll open it up to the Q&A period if we could.

[Operator:]

Thank you Mr. Clarkson (Operator Instructions). The first question is from Shahin Amini with TD Securities. Please go ahead.

[Shahin Amini:]

I was encouraged to hear that EGPC is very positive and then cooperating on getting the new concessions ratified [inaudible] but it's a surprise as well. I have heard it was all a parliamentary process which in the light of the current turmoil nothing is happening. Could you shed more light on that process?

[Ross Clarkson:]

Well, we have just got a new minister of oil who is very pro-business and he has informed us that it can be moved through their cabinet and signed by the Interim President and made into law and he is currently working on moving some of the ones that were awarded prior to the last bid round through the process. That's what we’re hearing from the government, it's in power right now, that they can get these ratified and moved ahead much more quickly.

[Operator:]

(Operator Instructions). The next question is from Al Stanton with RBC. Your line is now open. Please go ahead.

[Al Stanton:]

I was just looking at the OpEx in Egypt I see it’s $9.30 which is, I think it's higher than it's ever being. I was wondering what the read through is for the second half and then also I suppose as you look to pipe rather than truck more exports what the longer term outlook would be for operating cost?

[Lloyd Herrick:]

The $9 I think as we pointed out in the MD&A there is a portion of that, there was some cost we carried in from 2012 in the way of an adjusted processing fee. So, there is a bit of [baulk] [ph] in the current quarter that you wouldn’t normally see. We expect our cost to be probably more in that $8 range as an average. Part of that influence is also the East Ghazalat production that’s in now at a fairly high cost in that the operator is renting most of that equipment as opposed to purchased. We expect that to change and those costs to come down. But we expect to be in general the cost to be probably around that $7.50 to $8 a barrel range. We have a number of increases most of those cost though we do recover majority of those back through the cost recovery process. It just hasn't shown up this quarter in the cost recovery as there are some timing delays in when we book it or accrue it versus when they run through the cost recovery.

[Al Stanton:]

And if I may can I ask a follow-up question. In terms of new ventures are you always looking at anything that we should expect to hear about in the near term?

[Ross Clarkson:]

Well, we are looking at several things and moving along through evaluation processes and discussions with other people. But there is nothing I can really give you right now.

[Operator:]

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

[Ross Clarkson:]

Okay. Thank you, everyone for participating in our Q2 call. The next update will be a mid-quarter report and an update on the testing program on the Dabaa Discovery on East Ghazalat probably in a few weeks’ time. Thank you all for participating in our Q2 conference call.

[Operator:]

Thank you, Mr. Clarkson. The conference call has now ended. Please disconnect your line at this time. Thank you for your participation.