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TransAtlantic Petroleum (NYSEMKT:TAT)

Q1 2013 Earnings Call

May 24, 2013 8:30 am ET

Executives

N. Malone Mitchell - Chairman and Chief Executive Officer

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

Ian Delahunty - President

Analysts

Jonathon Fite

Curtis Ryan Trimble - Global Hunter Securities, LLC, Research Division

Operator

Welcome, ladies and gentlemen, to the TransAtlantic Petroleum Limited First Quarter 2013 Earnings Conference Call. [Operator Instructions] On today's call, we have Chairman and CEO, Malone Mitchell III; Vice President and CFO, Wil Saqueton; President, Ian Delahunty; and Director, Investor Relations, Taylor Miele. After our prepared remarks, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] And as a reminder, this call is being recorded. I would now like to turn the conference over to Mr. Malone Mitchell. Please go ahead.

N. Malone Mitchell

Good morning. TransAtlantic has completed a thorough re-examination of our prior accounting, and we believe we have no further prior-period work ahead of us. We, along with our shareholders, are glad of that, and we look forward to less eventful future accounting announcements. In the first quarter, the company managed its finances prudently, and I will now turn the call over to Wil Saqueton, our CFO, for further comments.

Wil F. Saqueton

Thanks, Malone. For the first quarter of 2013, total revenue was $35.5 million as compared to revenue of $38 million in the fourth quarter of 2012. This revenue decline was driven by a reduction in our sales volume. Net income from continuing operations was $3 million or $0.01 per share, as compared to a net loss from continuing operations of $13.9 million or $0.04 per share in the fourth quarter.

Adjusted EBITDAX from continuing operations was $19.5 million, as compared to $22.4 million in Q4, and this reduction was driven by the revenue decline I mentioned earlier. For the first quarter of 2013, our adjusted discretionary cash flow was $18.4 million and our capital expenditures were $18.7 million. We ended the first quarter with $19.4 million of cash and approximately $20 million of net debt.

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

N. Malone Mitchell

Thanks, Wil. TransAtlantic has experienced a decline in production over the past several quarters. We have over 200 base wells, which decline, as every well does in the oil and gas business nearly everyday. Over much of our history, we have drilled over a lot of simple wells, which failed to materially impact our production. To reverse the trend of declining production, we felt that we needed to focus on the proven reservoirs that we've identified with increased use of horizontal drilling and multi-stimulation completions. This required a new group of people with prior experience and knowledge in executing those wells. That transition is ongoing and is largely complete.

Our activity level has been low for the past few months, as we have focused on becoming better at executing these more demanding wells and frankly, learning how drill some formations no one has previously attempted to horizontally drill. Activity dropped as low as 2 rigs and no new wells were completed in the southeast in the first quarter. We are learning and expect to increase our rig count to 5 to 6 rigs over the next few months.

Last Monday, we closed on the acquisition of 150,000 acres of adjacent lands from another Turkish company in the Southeast. We believe these lands have potential in all of the productive formations and are offsetting Arpatepe, Goksu and Bahar fields. We've just commenced the acquisition of over 800 square kilometers of 3D on the west side of our Molla area. This will cover our Goksu, Bahar and our just-acquired Molla fields. We expect this shoot will enable us to better understand and explore the development of these blocks. It will be the fourth quarter before we complete the acquisition that will likely be the first quarter of next year before we complete the interpretation of all of the shoot. However, we will interpret parts of it prior to completing the shoot.

I would now like to turn the call over to Ian Delahunty, our President, to discuss our current operations.

Ian Delahunty

Thank you, Malone. I'd like to take a few moments to provide an update of our current drilling activity, and also to provide an update on our near-term drilling and testing activity as well. I'll start out with the southeast of Turkey. We have just completed the drilling of Oba-1, which was formerly known Ombar-1. We had a name change there required by the Turkish government, GDPA. This was our third Mardin open-hole horizontal. It was drilled to a vertical depth of about 5,300 feet and to a total measured depth of about 9,600 feet. We're finished there. We drilled it within about 8 days under AFE, and we plan to be testing it within 10 days.

On the first Bedinan horizontal in the country, which is the Bahar-2H drill, we're currently drilling horizontally at about 1,100 and 100 feet and plan to be finished drilling within about a week. That well will be completed with a packet plus multi-stage frac stimulation system and we look to frac that well in late June.

After finishing these 2 wells, we will move to a 3-well program in the Southeast. The first well we plan to spud will be on -- in our West Molla License, and that well be [indiscernible]. This will be a deep Bedinan appraisal well of the Bahar discovery on the West Molla block.

Subsequent to spudding [indiscernible], we plan to drill the first horizontal in the Selmo oil field. This will be drilled to LSD formation, which is historically the most prolific formation in Selmo. And subsequent to the remodeling of our static model from the 3D and from the increased well control, we feel like we have a good handle on un-depleted fault blocks within the field and are pretty excited about Selmo-13H.

The third rig we'll be spudding on in Baglik-2, which is a Bedinan exploration well to the South of Goksu and our joint venture with Aladdin Middle East company. That is a fairly promising structure and has been on the lead inventory for about 2 years, so we're looking forward to spudding that.

Also in the Southeast, we've successfully completed the first horizontal multi-stage, pumped down [indiscernible] plug acid stimulation on the Alibey-1H. Some of you may remember, when we discovered all on Alibey last year, we tested the well at about 150 barrels a day out of the tow stage. We've come back, and now with the horizontal equipment required to test the well, added another 3 stages and are currently drilling out the plugs and hope to be flowing back within days.

As Malone mentioned, we commenced the Molla 3D shoot this week, which will be the largest 3D shoot, continuous 3D shoot that we've done in the country to date.

Moving to the West of Turkey to the Thrace basin following the frac results of Baglik, which IP-ed 2.5 million to 3 million cubic feet per day, we'll drill the DTD-19HK, which will be the first horizontal well in the Thrace Basin. It will be completed using [indiscernible] plus and it will be the first test in the Kesan formation with that system. After we drill the DTD-19HK well, we'll spud the BTBD-4H [ph] Teslimkoy horizontal, which will be the first horizontal drilled through the Teslimkoy to appraise successful frac results within that structure.

Concurrence to the work in the DTD TDR [ph] structure, we'll spud the [indiscernible] and our [indiscernible] in late June. This will be a vertical exploration well entry. And also commence our minimum well [ph] concept plan at Edirne and Tekirdag. Now this is something we've talked briefly about, but essentially, we have an inventory of shallow wells in Thrace Basin that we feel represents good access to quick cash flow and production. And with the application of efficient drilling practices, we should be able to access parts of the basin that have not been accessed before. We'll start that this summer and predict about 10 wells in the program following the completion of the Osmancik 3D seismic shoot we plan to add to that inventory.

Moving on to our testing plans. We're currently analyzing the core of the Hayrabolu-10 well. Now some of you may recall, that was a basin center test well based on the periphery of the kitchen. We've talked about -- a bit about at the IPAA, and you're welcome to look at the presentation for more info on that structure. Following the core analysis, we plan to test the well in late June, and are currently appraising the Yildirum discovery in the Temrez block. Yildirum IPed at about 1 million a day, and we are building a flow line for the production of the well now and plan to take appraisal locations to drill this summer, which will complete the 5-grade program. So as Malone mentioned, we've had a pretty steady sort of analysis of the 3-part strategy for Turkey over the past several months and now feel pretty comfortable moving to our 5-well -- 5-rig program, up from the 2-rig program.

Moving out of Turkey, I'll give a brief update on our operations in Bulgaria. We plan to spud the Koynare Deventci-R2 appraisal well within 60 to 90 days. Again, this is a hydrothermal dolomite play. We have a lot of experience with that type of play in Selmo. Again, this follows a successful acquisition of the first production concession in the history of the country, and we're pleased to finally get to the point to be able to drill in Bulgaria.

In Romania, with our partners, Sterling Energy, we've decided to relinquish the block into Craiova following the shallow gas analysis and the analysis of the deeper shale potential, and feel like our money is much better deployed in Bulgaria and also in Turkey.

Well, that concludes the ops update. I'll hand the call back to Malone.

N. Malone Mitchell

Thanks, Ian. Following on Ian's comments with regard to Romania, it's not our intention to leave the country, as we did in Morocco. We do believe that there is geology in the physical terms in the country, and we will continue to evaluate projects that may fit our economic and operational objectives. Shell has elected not to drill in the Sivas Basin of Turkey after review of the seismic and the airborne and other geological work that was conducted last year. For them, it is a matter of materiality and risk. We require less materiality, but we can probably tolerate less risk than shale. So we're evaluating that basin.

And as Ian said, we are excited to continue our drilling in Bulgaria after a long hiatus. We expect that to begin within this next 60 to 90 days. Remind you that there is substantial risk, but we are in a proven petroleum system with substantial historical success there.

Finally, I want to welcome Taylor Miele. We want to do a different job of communicating with you, our shareholders, and expect that you will see evidence of this soon. And I will turn it over now for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question is from Jonathon Fite of KMF Investments.

Jonathon Fite

I appreciate the update. I missed the first couple of minutes of the call, and so if this is redundant, I apologize. But did you make any comments around JV updates? I know that, that was a big goal of yours this year at the beginning of the year. I'm just wondering if you could comment on that.

N. Malone Mitchell

From JB? Can...

Jonathon Fite

Joint venture update.

N. Malone Mitchell

Oh, okay, JV. I thought you said JB. JV, we have negotiated a joint venture. We're in the process of finalizing the documentation in Bulgaria. We have not concluded one in Turkey. This current status was the partners, the 2 partners or the 2 prospective partners that we've been visiting with wanted confirmation of the results in both the Bahar and in the shallower Cretaceous intervals in the Southeast to substantiate the pricing that we were asking. We've accomplished that and actually, we'll go beyond that in the Cretaceous. Frankly, it's been a little more difficult to drill the Bahar-2 than we anticipated it would be, and it's the first time it's been drilled in the country, so we've got to provide kind of a second confirmation on that. But Bahar-1, on -- from a vertical single-stage frac, is still performing very well, and we've got to deliver that data. The most recent conversations we've had with the prospective partners was last week. So we're continuing that, but that's the current status. We have continued to feel that so long as we are adequately funded to conduct our program, that we were justified in asking what we felt was a full price for the JV. And I think they're probably justified in asking confirmation in order to pay that price. So as is been the case, a lot of things have rolled much, much slower than we would have anticipated in the country, but that's the current status. So...

Jonathon Fite

And with the drilling program, Malone, is that -- as far a confirmation data points, is that something that we would expect in the next quarter, next year? Kind of what's that -- the time frame?

N. Malone Mitchell

No. The second confirmation is -- would be the Bahar-2 well. And as Ian mentioned, we expect to complete that well with a multi-stage frac at the end of June. And then, as is always the case on these, then you get down to kind of -- you get down to, this is what they're asking, this is what the bid is and this is what the details or documentation are, so we viewed the JV as an important path for the company to be able to accelerate development in the Southeast. We have continued to utilize our cash flow to pursue the project plan that we have set forth, really. The shooting of the 3D, we think, is instrumental in us in being able to correctly place our horizontals and completely -- and do a better job of understanding the reservoir. But we're still pursuing that path of being able to accelerate funding and accelerate development for the company.

Jonathon Fite

Would the funding from a potential joint venture predominantly be or solely be used for accelerated drilling programs? Or would you be looking at asset utilization or asset acquisitions or delevering? I'm assuming that you have enough capacity with Viking that you don't need to then go build or acquire a rig with any JV funding.

N. Malone Mitchell

Well, Viking is a completely separate company from TransAtlantic. They have a contractual relationship over the next 4 years. So there would be no call upon TransAtlantic for financing any service equipment. That's handled separately. The purposes of doing a JV and the use of funds would include accelerating development. It would include other general corporate purposes or balance sheet or stock structuring, as well as possible acquisitions. As you see, we executed an acquisition on Monday that we had felt was compelling value for our company and compelling opportunity for our company. But I think that anything we would at would fall along the same lines that we know there's a little there. We believe that utilizing technology and capital in formations that we've found to have commercial resources and adequate payouts would be targeted. So we are shifting ourselves and are going to stay away from what we would consider some of the rank exploration or [indiscernible] ventures we've seen over the last couple of years that we've virtually not had much success with. They're trying to stay focused on, on focusing on going where we already know there's oil and just applying technology and focus to be able to produce reserves.

Jonathon Fite

Great. Just 2 more quick questions. Do you guys still plan to pursue and publish an interim reserve report?

N. Malone Mitchell

We're looking at -- we're having some work done on a number of the fields that we have. We're not doing it on the entire property base, so we will not be and we're using that as much for credit support or for confirmation on that. And frankly, we believed we would have had the Bahar-2 finished by now and we would have had more definitive results on the deeper horizons at Hayrabolu. And because that time has taken longer, it's not been meaningful to update those areas until we get results out. There would be no change without that. So that's a status we're at right now. We need to complete operations in those in order to -- in order for it to make sense to do an overall, but we are doing work on a number of the fields.

Jonathon Fite

And just finally, to kind of wrap up. If we look over the last couple of years, Malone, and kind of review some of your comments, there was a period of time when you were extremely involved in kind of day-to-day things. You were able to establish kind of a management structure underneath you and it seems like you were able to pull away. A lot of some of the commentary and interview that you gave at the end of 2012, early '13 seemed to kind of indicate that you were going to be much less involved in some of the day-to-day activities. How would you kind of describe your involvement, kind of your role today in relation to kind of what you've been doing over the last couple of years?

N. Malone Mitchell

My role has changed, and I think it's falling back in the direction of -- probably the direction of Chairman. Ian has picked up a tremendous amount of responsibility for the direction of the company's operational activities. He is responsible for having built much of the engineering team that's executing and doing the work associated with kind of our current strategy of trying to focus mostly on horizontal multi-stimulation wells. At the current time, my input is continuing to be around. I think, we still have some fill-in and some additions we need to make in our geology department. And so my focus is probably helping him evaluate some of the candidates and some of the structure for that. Ian is in -- Ian has called this morning. He is in Istanbul, and he's largely completed a lot of that. I still focus, probably, because I think, despite the time it's taken up, as I look at opportunities, I still think that the opportunity to grow this company and to grow our shareholding value in this company exceeds anything else that I am involved in. We're actively involved in U.S. operations. But as I've said before, we don't typically find well profiles in the United States that have the type of payouts and that look like they have the potential for repeatability that we see. In Turkey, we don't see the physical terms. So naturally, I still spend a lot of my time interested in focusing on the operations of TransAtlantic. But the day-to-day direct line of communication and authority now flows through Ian and through Wil to me versus directly from myself to a little further into the operating group.

Jonathon Fite

And do you -- with this structure, Malone, I mean do see very specific milestones that would be drivers of a more clear alignment between kind of intrinsic value of the business and kind of the current market valuation? It seems that there's a fairly large dislocation, but you've chosen a path of not necessarily driving production, but expanding the reserve base, right? And those seem like it's kind of being the strategic choice. They have got the PV 1 value much higher than -- or PV-10 proved reserve value much higher than the current market value. How -- what do you see between your role or Ian and Wil's role of converging those to valuation?

N. Malone Mitchell

I think my role is to effect and to work with the Board of Directors in order to provide what we believe is the proper financial framework for the company, what's the proper leverage levels, what's the proper focus with regard to production focus versus exploration focus, new ventures versus current properties. Ian's role and Wil's role is to develop the teams to execute those strategies. And the milestones, we frankly were not successful over a long period of time, trying to generate the work level and the execution plan that we find is common for a North American resource play when we were doing that work solely out of the Istanbul. So as we've previously mentioned, we've moved that. We moved that process, to a large degree, back to the United States. And as we said, we're continually seeing now, with exception of the Bahar, but that's the very first horizontal well drilled there, we're having -- learning how to drill without a Shell is a process. We're far, far ahead of what Shell is doing on their joint well with TPAO, but that's no consolation. We would rather -- that's a fairly low bar. I think that I'm pleased when I see our -- as Ian mentioned, our drill times coming in under AFE, under budget. We're mentioning we're seeing significant reductions in well costs. And as I said, it seems like the teams are starting to execute. It's incredibly more challenging to geologically steer horizontal wells. It's a lot more work. It's a lot more active than it is to pick a vertical well, you drill it and then see what you have. In drilling a horizontal well, you're lap steering that the whole time, and that's part of the reason that we need to add to our geological team with regard to that. As those well costs drop and as we do a better and better job sustaining target, and as I said, we just -- it's not insignificant that we just completed our first multi-stage horizontals stimulation at Alibey. As those things that have never ever been done over there before get -- as we get to where we're doing it more and more, I think we can accelerate that. But that, I think, is much better handled by experienced engineers and experienced professionals that -- including Ian and the other teams of engineers. And I think my role and the board's role is far better at saying, this is the proper amount of leverage or this is the proper amount of risk we should be taking with it. I think that's the proper role of the Chairman and the proper role of the board. We've -- viewed in the prism of most U.S. resource companies, are fairly slow. In the prism of most European small companies that are trying to execute a strategy associated with the development of unconventional resources, really, there are only our sales and Bankers Petroleum that are -- have had any results and are actually executing the plan. So we do expect that, over time, as we get faster, better -- and obviously, we have to grow our production. I think we've done a good job on our G&A costs and our other costs so that as we add production, most of that will fall to our bottom line. The physical terms in the country are excellent. We continue to look around and we don't find, really, peers do that fiscal term. So people are looking for production growth and people are looking for free cash flow growth. And as we start accomplishing that, we think the value of the company will move to recognize that.

Operator

[Operator Instructions] Our next question in queue is from Curtis Trimble of Global Hunter.

Curtis Ryan Trimble - Global Hunter Securities, LLC, Research Division

I was just hoping to get a little bit of an idea on the terms of the acreage acquisition, and then also the expected investment in the 3D seismic acquisition.

N. Malone Mitchell

Yes. We have chosen not to disclose the terms of the acquisition. It was 100% working interest and no retention and override or any net profits interest. We made the acquisition for cash. It was not material to the company's balance sheet. Therefore, we were not required to disclose that. We made that decision, we believe, because we continue to look at additional opportunities and think that disclosing that would probably made or impact us positively or negatively on other negotiations that we have pending, including acquisitions and JV. Our budget will shift somewhat to that particular license, in addition to the other licenses down there. And we got approval on that on Monday by the government, so I don't think we're quite ready to define what our budget is for that. And as we mentioned in our deal, we have a number of the wells that we can immediately recomplete. There is an existing vertical oil field on the license that we expect to further develop with horizontal wells. So we believe we'd rather wait and present a little more data associated with that in a subsequent presentation.

Curtis Ryan Trimble - Global Hunter Securities, LLC, Research Division

I understand. So I take it there were some, at least, 2P reserves associated with this, if not 1P reserve?

N. Malone Mitchell

Not in our transaction. We just did a cash transaction and we did not chosen to book any reserves to that at this point.

Curtis Ryan Trimble - Global Hunter Securities, LLC, Research Division

Okay. So if anything, that will be incremental in terms of recompletion, picking up low-hanging fruit, et cetera?

N. Malone Mitchell

I hope so. Look, the acreage blocks sits -- it sits more into the Petroleum Basin. So it sits on the crack. It's north of our Arpatepe and immediately to the east of our Molla Licenses. We will be -- I will be presenting at SunTrust Conference in New York on Thursday or Wednesday -- Thursday, I'm sorry. And we expect -- and to update the presentation. Taylor has only been with us for a little over a week. So she's working on the presentation updates there that will put a little better definition of where this acreage is. And it sits within 3 miles of the largest oil field in the country. And it triangulates -- it sits between that field, the Raman Bati field, our Arpatepe fields, our Bahar and our Goksu fields. So we certainly believe it's the right route and the right place, and we believe that it ultimately prove to be a good track for us.

Curtis Ryan Trimble - Global Hunter Securities, LLC, Research Division

Good deal. And then the 3D acquisition cost expectation?

N. Malone Mitchell

3D acquisition costs in the area and that we have a joint acquisition with -- we're joint acquisition with Perenco over part of their blocks on the north, and joint acquisitions with AME over the northwest part of our Arpatepe and budget for our portion of the budget in that area is approximately $15 million. And that's been part of our budget for the entire year. The shoot has expanded, but the shoot has expanded to a large degree because of participation of some of the adjoining operators. That's great news for us and for them. It'll give us better imaging over -- like the Kestil [ph] field, which is a field that will produce about $1.5 billion of oil out of the Cretaceous on about 2,300 acres, and being able to image that and being able to look across the block to find additional, additional structures, we think, is a good thing. So our budget is around $15 million for our portion of the shoot.

Curtis Ryan Trimble - Global Hunter Securities, LLC, Research Division

Good enough. Can you give me just us an idea of the drilling difficulties on the Bahar-1 well? And I take it, the seismic will help you stay in zone a little better and probably able to overcome those. Are those fluid [ph] related? Just help me understand a little better there.

N. Malone Mitchell

Well, that you -- you're basically are turning your lateral through the Dadas shale, which has got both overpressure from a hydrocarbon footprint standpoint and also from a tectonic stress standpoint. And our -- frankly, our job has been both to correctly steer the well to stay and encounter the Bedinan sands, which is our primary objective and also to just deal with making the curves in that. We drilled -- as we will on a number of these wells, because we don't have 3D yet, we drilled a vertical pilot hole and then we back up from the vertical pilot hole and drill and kick off from there. Dadas shale has got a lot of pressure and a lot of stress on it. So that's -- it's requiring over 14-pound mud to hold both the -- to hold both pressure and the stress at this point, and that just makes for slow drilling.

Curtis Ryan Trimble - Global Hunter Securities, LLC, Research Division

Understand. And a pretty good frac barrier, I'm going to hazard [ph] to guess there, as well?

N. Malone Mitchell

Not different than we experienced on the Bedinan-1. Our decision on this was to set our path and then to leave the Dadas open hole while we were drilling it rather than land in the Bedinan sands, and that may change on subsequent wells. We may choose to land our curve. At this point, we've got our curve open through that. And as I said, since, again, if it's -- the first one that's ever been done, you get to learn a few things on that, that you'll change in subsequent well designs.

Operator

And with that, I'm showing no further questions in queue. I'd like to turn it back for the Mr. Malone Mitchell for any further comments.

N. Malone Mitchell

Very good. We appreciate it, and we expect you could expect to see more frequent communication information across our website. And I would encourage you to call Taylor or any of the management team and to join us for our Annual Meeting in our Dallas offices on June 24. So thank you for your attention this morning, and we wish you a good and safe Memorial Day weekend. Thank you.

Operator

And again, thank you, ladies and gentlemen, for joining today's conference. You may now disconnect. Have a great day.

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