TransAtlantic Petroleum Management Discusses Q4 2012 Results - Operating Results Call Transcript

| About: TransAtlantic Petroleum (TAT)

TransAtlantic Petroleum (NYSEMKT:TAT)

Q4 2012 Operating Results Call

March 19, 2013 10:00 am ET


N. Malone Mitchell - Chairman and Chief Executive Officer

Wil F. Saqueton - Chief Financial Officer, Principal Accounting Officer and Vice President

Ian Delahunty - President


Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division


Good day, ladies and gentlemen, and thank you for standing by. Welcome to the TransAtlantic Petroleum Ltd. Fourth Quarter 2012 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like hand the conference over to our host for today, Mr. Malone Mitchell, Chairman and CEO. Sir, please go ahead.

N. Malone Mitchell

Good morning, ladies and gentlemen. This is Malone Mitchell. I apologize. I'm sitting at the Customs at an airport [indiscernible] I'll try to speak loudly.

As you know, last Wednesday, we released some data in an expectation of filing our 10-K yesterday. Last Friday morning, we learned that, that would not be possible. Our Board and counsel did not feel an announcement could be accurately crafted within the time allotted after our meetings with our auditors on Friday, so that they could release it on Monday.

Now along with the normal topic [indiscernible] of current period audit issues, which require prior [indiscernible] income adjustment, we knew that our deferred tax liability needed approval and that the methodology of estimating our RSU forfeitures, which we had used as 10% of the total issued RSUs, was in error with just a little over 600,000, right about 500,000 units in the prior periods, but believed that this would fall below the materiality threshold.

We're also still tying our prior year property accounts forward to the satisfaction of ourselves and KPMG Dallas. Although they are the same firm [indiscernible] they succeeded KPMG [indiscernible]. We knew Saturday before last that we had some further required proofs on our property [indiscernible] can be reconciled. Unfortunately by Thursday night late and Friday morning, we found that [indiscernible] from 2009 and 2010 had not been properly depleted. Our current accounting group relies on prior audited property standards -- we simply [indiscernible] That this is a noncash entry, involves some [indiscernible] in 2010. We believe the total under-depleted adjustment is likely to be in the $2 million to $3 million range in noncash entry. This calculation will require [indiscernible] RSU that I mentioned and prior-period adjustment that we made in our third quarter 10-Q. It will require review of what KPMG calculated [indiscernible], which has not previously been involved in our 2012 audited 10-K, making filing them in time impossible. In the final calculation, the auditor will determine how long this takes to correct. In our current accounting staff is neither perfect nor is it complete but they do a very good job of completing the monthly [indiscernible] management accounting, the statutory local accounting and current-period regulatory accounting, marking from 2012 with in [indiscernible] filing. Now we have been chronically late. We have been chronically late because we have been late on prior filings.

For our accounting team, the cycle of starting to work in the current filing has always been impossible because all resources were required to remedy past issues in the past year. But this is how we're going to break this cycle. With 10-K recalculations continuing through the full second quarter of this year, we are hiring an outside research firm to do the prior-period work and provide additional resources. The current accounting team will move to the first quarter of 2013 accounting and filing, so that we can file that timely. We should have done this much sooner. And frankly, 2009 and 2010 were a mess and the lack of systems [indiscernible] from that time period in the [indiscernible] do not really give you [indiscernible] an accurate view of the current accounting team.

Now Wil Saqueton, our CFO, will discuss the limited financial data related to [indiscernible] prior period adjustments. Wil?

Wil F. Saqueton

Thanks, Malone. Until we file the 10-K, we can only provide limited financial information. We expect the fourth quarter net loss from continuing operations to be between $20 million to $25 million. The fourth quarter included exploration, abandonment and impairment charges of approximately $24 million, largely driven by dry holes on several high-risk exploration wells, including Konak-1 and Durakoy-1, as well as impairment of value on several of our unproved property licenses. We expect fourth quarter adjusted EBITDAX from continuing operations to be between $22 million to $24 million. As of December 31, 2012, our cash balance was $14.8 million, our long-term debt remained flat at $32.8 million, we continued to have no short-term debt and our availability on our credit facility stood at $26.9 million.

I'll turn the call back over to you, Malone.

N. Malone Mitchell

Thank you, Wil. Now an area of confusion that has occurred and we've had a number of calls on since [indiscernible] our operational [indiscernible] last Wednesday and our partner Valeura's reserve data [indiscernible] between -- a little bit of a discrepancy between the 2 reserve numbers but we both utilize the [indiscernible] in Dallas through an independent [indiscernible]. We must put off work approximately 1 month early than is necessary for [indiscernible] filings. For Valeura [indiscernible] continuing working in the data [indiscernible] and [indiscernible] still confident [indiscernible] probable and possible reserves [indiscernible] for the Tekirdag Field Area structure. But we continued to a later cutoff date [indiscernible] the same results net to our interests, which is 31.5% working interest to Valeura's 30% working interest. To adjust these to the lower [indiscernible] resulted in approximately 11.1 Bcf or 2 million barrels, an additional probable 19.7 Bcf or 2.2 million barrels in additional possible reserves. Although we released [indiscernible] the contingent reserve report, we prepared contingent and prospective reserve estimates for either [indiscernible]. It has not been our practice to publish these publicly.

Now our management, we have nearly finished the additions and the changes in the technical management, which I believe and we believe was necessary to complete the more complex work programs we began this year. I feel good about these changes and I feel good about the people. Ian Delahunty, our President, will now [indiscernible] discuss our operations.

Ian Delahunty

Thank you, Malone. I'd like to provide an update on our current operation, our land and mergers and acquisition status, including an update on our joint venture process. And then I'll talk briefly about recent management changes and the team that we're building.

In Turkey at the moment, we're drilling the first of 6 Mardin horizontals, which is the Goksu-4H. This is per our 2013 announced CapEx budget. We're currently at about 15 days into the well and about to kick off. So the drilling performance is actually much better than the first well, which one would expect on an appraisal well. And we've seen something quite exciting in the shallower zones and we'll probably log before kicking off to go horizontal there.

Offsetting the Goksu, we're drilling the Bahar-2 horizontal well, which is an appraisal well to the discovery we announced in Q4 in the Bedinan. Bahar-2 will be horizontal through the Bedinan sand. It'll be cased and it'll be fractured in multiple stages. Very excited about what we see there so far and have TD-ed the vertical section of the well and look forward to kicking off and drilling horizontally there going forward.

In the Western Thrace Basin, we are drilling our second of a series of deep basin-center test wells, which is Hayrabolu-10. Again, where we've TD-ed this well and hope to have this logged and cased within a week.

We have announced or we've had a few successes in the fracture campaign in the west. We recently completed 3 fracture tests in the deep Teslimkoy sands between the Kesan and Teslimkoy interval and have seen encouraging results based on our dewatering efforts in the deltaic sections there.

Kazanci-5, which was the first frac well of the Hayrabolu campaign, had disappointing results in the deeper section. We believe we encountered a fault in the deeper section of the well and possibly breached and are moving uphole to test the potential on the shallower sections.

Moving on to land and our mergers and acquisition status. I'm pleased to announce that we've recently entered into a definitive agreement to purchase the rights to several exploration blocks in Southeast Turkey in the Dadas basin. The cost of the acquisition is nondilutive and it does not require additional financing. The purchase amount has been escrowed pending government approval of the acquisition. I will say this is a significant increase to our current Dadas acreage position and, based on how we see the development of that area of the country for the next several years, this marks a significant transition for us as a company.

We also have several pending applications for 4 additional exploration blocks in Southeast Turkey, 1 offsetting the Dadas basin, 3 within. And we continue to be excited about what we are learning from our drilling efforts in the Dadas basin. I look forward to presenting further information as we progress.

Now an update on the joint venture status. Following the year-end reserves report and the effort to delineate our [indiscernible] from Bahar, we remain committed to the joint venture process as a means to accelerate our activities in these exciting plays. We continue to discuss the JV project with several potential partners.

In Bulgaria, I'm pleased to announce that through our subsidiary, Direct Petroleum, we've entered in principle to term for a farm out of our Koynare production license. You recall that the Koynare production license concession was the first onshore production concession awarded in Bulgaria. It was a very successful effort led by our Vice President of Land, Will Bentley, and we look forward to providing further details as we progress with the farm out there.

Moving on to recent management changes. Q4 2012 marked a significant milestone for our company in redefining our operating strategy and also in defining our growth strategy. Following the discoveries of Bahar, Goksu and Alibey, a growth strategy centered around applying skill sets and management teams best suited for our emerging asset base has been at the forefront of our staffing and management decisions. Several examples are the recent organizational enhancements in the departments of drilling, completions, production and facilities.

Firstly, in order to drill the type of capital in horizontal campaign that we've laid out to the public, we hired a new VP of Drilling, Mitch Whatley. Mitch has quickly assembled a team of Eagle Ford and Haynesville drilling staff to enable us to efficiently and safely drill horizontal wells in our 3 primary plays, which are the Dadas basin and our horizontal play strategy at Selmo.

In recognizing the completion of designs associated with the play types, our VP of Engineering, Justin Davis, has brought on additional engineering staff to prepare for unconventional completion and production.

Thirdly, in recognizing the production bottleneck suffered by early movers into several of the liquids unconventional plays in North America, we see the need to design our facilities according to lessons learned in those shale plays in North America. Therefore, we've hired Darcy Dorscher as VP Production and Facilities to help build on the surface for our production growth.

We've seen a rapid change in our drilling performance and also our completions' performance, and I'm sure we'll see a rapid change in our facilities' design going forward. We've recently set 2 bit records in Turkey, both in the Southeast and in Thrace Basin, and we look forward to becoming the best driller in the country going forward with this team.

Thanks. Malone, back to you.

N. Malone Mitchell

Thank you. We are pleased to take your questions at this time.

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Neal Dingmann from SunTrust.

Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

For Ian, for Malone -- for you or Ian, just wanted, number one, how many rigs do you have running now? Ian kind of walked through and I know, between Thrace and then what you're doing in Selmo and then the new discoveries. I'm trying to get an idea of how many rigs you have running today and sort of what the plan? If you can walk a bit through the remainder of the year just sort of in broad terms of what you're kind of seeing as far as -- that kind of has built into that CapEx, what you're assuming the number of rigs running, Malone?

N. Malone Mitchell

Sure, Neal. We have in the Southeast, 2 rigs running, which are our only 2 large rigs we have in that area. Viking has purchased 6 additional 1,200 horsepower to 1,500 horsepower electric top-drive rigs that are being mobilized to the country. We expect to pick up a couple of those rigs. And frankly, part of that production decline has been, in addition to our reserves of natural gas in the Tekirdag shallow area, is the fact that we've had those rigs drilling onto what proved to be dry exploration wells for fairly extended periods of time. We've not been able to run our rig in the Selmo since June of last year due to the demands on those others. So we'll pick up a couple more rigs down there and part of that will be determined by this last acquisition. I would expect this to go to probably a full replace, sporadically defined in the southeast based upon the recent bids [indiscernible] acquisitions as well as their existing north program. In the northwest, we have 1 rig running right now and 1 rig on move [indiscernible], between wells. So actually 3, 1 moving; 1 in the Tekirdag area, on the continuous development program there and one in [indiscernible]. And we expect to pick up a shallow rig to go on exploitation program in some of our shallower licenses and then sporadically to use a rig on our joint venture with TPAO. But we expect that pace in the northwest to remain pretty much at 2 rigs, 1 in Alibey, 1 in Tekirdag and then just from sporadically or seasonally in the other areas.

Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then, maybe Malone again, either for you or Ian, just -- I liked the slideshow, where you talked about on the Molla, all the potential and sort of -- on sort of the discoveries and I see where you kind of list 2P reservist numbers and such. I'm just wondering now, when you look at sort of, I guess, the 2 or 3 discoveries there, what's sort of the timing behind bringing some of that on? And again, what type of -- are you assuming any kind of production this year or just kind of trying to get a sense of how large that overall area could be?

N. Malone Mitchell

In our overall area, we now have -- and with the acquisition that we've contracted, and again that's just [indiscernible] formal sign [indiscernible] from the [indiscernible] a little over 400,000 contiguous acreage there. Over 300,000 of those being 100% inoperated [indiscernible] if we were to get to that. [indiscernible] and truthfully in that area, we don't know if saturations go all the way to the bottom of structures. Once we're in the [indiscernible] pressured [indiscernible] the limited [indiscernible] structures. So we do expect some -- one of the things Ian said, they were [indiscernible] 28 degrees, probably 9 1/3 [ph] an hour on our Goksu #4 well this morning. We have just set our 7-inch well -- yes, the start of our current -- and so we'll be drilling our 6-inch in our Bahar wells. I think that it's probably premature to be able to say that there are dozens or whether there are in excess of 1,000 of these wells to drill. Our next well in Bahar is going to be drilled reasonably off structure. Our year-end reserves were really only to see single well [indiscernible]. There are 2 offsets and then probably [indiscernible] one more location offsetting those. So it's still a fairly small subset of drill rigs [indiscernible] within the reserves [indiscernible]. Now obviously we had studies that [indiscernible] a much greater area that would lead us to believe that there's potential to drill more. I think what's important is we've got very, very good results on a fairly short horizontal in Goksu and Alibey, so we're going to be drilling longer horizontals there. And if we can [indiscernible] work continuously in that area and we'll put a rig back continuously in Selmo. In Bahar, again, so far in this well the sections that we've drilled up [indiscernible], the holes [indiscernible] that's kind of what is known as [indiscernible] just as the Bahar [indiscernible]. They're basically flat [indiscernible] the structure. So we're not expecting a lot of surprises there. What we're trying to do there, is overall plainly on that over 600 barrels [indiscernible] a day after a single frac and has leveled off [indiscernible] drilling our gas [indiscernible] 303 [ph] barrels [indiscernible] this morning. So our intent here [indiscernible] and one of the reasons we got [indiscernible] for the management groups, is we need to drill 4,000- to 5,000-foot [indiscernible] wells and [indiscernible] at least in excess of 10 fracs. That's our objective. And if we do that, we think that, that will allow us to build production well relatively significantly from the a different kind of results out of simple semi-fracs [indiscernible]. So based on our prior frac modeling, we have a fairly good idea that these fracs are elongated and it's not a circular type. It's a [indiscernible] type [indiscernible].

Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

Okay. Then lastly -- just lastly, Malone, what about the frac spread? Will you just have the 1 spread running or is there a thought about adding another one or so?

N. Malone Mitchell

Well, Neal, we've got 1 -- actually Viking has ordered 2 additional frac spreads and so did another large cool-tubing unit. Cool-tubing units we have in country's pretty small. It was really used to [indiscernible]. So those additional frac spreads -- now we will re-mobilize all the way from the plays we'll -- as soon as we get our [indiscernible] done, they're such critical roles to us that we will mobilize the frac [indiscernible] down 800 [ph] miles [indiscernible] a simple frac, just because of the importance of that -- both the importance of that well to both our production profile and understanding. And again, we expect to continue running rigs on both of those lines this year. Now the [indiscernible], they came on flowing 500 barrels a day actually, without stimulation, so I'm not quite sure exactly what we need there. We'll evaluate the flow as we go, we'll decide whether, figure, natural or [indiscernible] or frac is needed on this. So we got 1 [indiscernible] and we have 2 more of the order. Realistically it will be summer before those. We'll have frac equipment stationed continuously in the southeast and in the northwest. So after middle of this year, we'll no longer have, kind of, a great [indiscernible], where we have to shift equipment 800 miles between the 2 sites.


[Operator Instructions] We also have a question now from the line of Doug Treggle [ph], a private investor.

Unknown Attendee

Had a question. On the last conference call that we had, you were a little bit more doubtful with regards to the frac-ability and drilling in Selmo. Could you give us a little more granularity on what's changed your opinion off of that with regards to the seismic that you received there?

N. Malone Mitchell

Well I didn't say we were going to frac in Selmo. We have gained confidence over the last 2 years of drilling the S curves off on some good parts [indiscernible]. We drill out [indiscernible] probably deviated section and then go straight down. We drilled, which is part of the adjustment in our reserves, we drilled 2 wells that were basically below the [indiscernible], which is part of the reason we had a bit of a draw-down in our reserves. So we stopped and we entered very expensive program of using 3D and using the well control we had and remapping Selmo. One of the things that surprised us a great deal, the most productive part of Selmo is actually the lower [indiscernible] dolomite. And we had only drilled 2 wells in the lower [indiscernible] dolomite. I believe that's correct, it's either 2 or 3. But we drilled them in a structural position that today is below the oil-water contact line. And at the time when we first bought the field, so many of the completions were open hole, it was very difficult to tell what was coming from there. We've gone through and squeezed off a lot of that and tried to understand where our production is coming from. One of the interesting things we found as we remapped the structures, there's actually a fairly significant amount of the structure where the lower [indiscernible] dolomite, in addition to the [indiscernible] dolomite, are well above what we believe the current oil-water contact line is. So we'll drill these wells horizontally. And this year, we're going to drill 4 initial -- we should have more time to do more but it felt like we needed to drill 4 to see what our results were in the [indiscernible] dolomite. And from a, kind of, a production budgeting standpoint, we pro forma those drills to only do what a vertical well would do. Now we're not really that certain whether, once we've drilled those [indiscernible] -- once we've finished [indiscernible] whether we'll need to complete those [indiscernible] with acid or whether we'll need to frac those in the end. If you're the first one doing some of this, it's a little less certain. We got to kind of see what the rock tells us. And then we feel like, with 4 wells, we'll have sufficient enough data to be able to go ahead and determine whether we want to continue that program on an ongoing basis. We are also drilling at least 1 well this year in the lower [indiscernible] dolomite, which is a very, very prolific section of the rock, it's very karstic dolomite. And we projected that well to be dry actually and, if it is, we'll come around and come up and reposition the laterals in the middle [indiscernible] dolomite. So what I can tell you is that, for the wells we forecast, we forecast them to do no better than a vertical well. And I think they're a bit uncertain. I think that the horizontal exposure that maybe -- I'm not sure that we're going to have to frac those wells; maybe acid might be the correct methodology. We intend to use a open-hole [indiscernible] plus [indiscernible] type of completion method on it, so that we can do the least amount of invasion to the rock that we have to. An interesting thing that Neal had asked is [indiscernible] were these Bahar wells in our projections? We basically have projected all those wells to be dry. So we obviously think that there's a reasonable amount of expectation that they're not going to be dry [indiscernible]...


Thank you, and I have no further questions in the queue at this time.

N. Malone Mitchell

Ladies and gentlemen, I appreciate it. I will promise you that we are far, far more frustrated. Certainly [indiscernible] is frustrated; the Board is frustrated; I'm frustrated with the delays, as I see it. I wish that we had started 1.5 years ago, building some additional research and [indiscernible] the accounting that's turned out today, on our current periods, is very good. It's useful for management. Nevertheless, this has become kind of a Groundhog event. And we feel like we do have a process to end that by not having the current group work backwards and start late on -- from the first quarter, so that they can perpetuate cycle. Also [indiscernible], given the level of knowledge we have today about the acreage positions in some of the wells that we have been down over the first course -- first half of this year. As we see the results of these deals, we'll have a lot better understanding of what [indiscernible] activity and production that we're going to see down [indiscernible]. And then, by the end of the year, we'll probably have a lot better answer as to the scope of how wide [indiscernible] develops are.

So I appreciate your following. I appreciate your participation, the shareholders. I do feel good about the new management group. Most of them are located in Dallas now and we are making decisions for you, where research development is common versus in Istanbul, where it's a little less common. And I would encourage you to call us, encourage you to come by and visit us and take a look at your company for yourself and I think you will feel good about where we sit today. So I wish all of you a good week and thank you for your [indiscernible].


Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a good day.

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