TransGlobe's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Transglobe Energy (TGA)

TransGlobe Energy Corporation (NASDAQ:TGA)

Q4 2013 Results Earnings Conference Call

March 5, 2014 11:00 AM ET

Executives

Ross Clarkson - President and CEO

Lloyd Herrick - Vice President and COO

Randy Neely - Vice President, Finance and CFO

Analysts

Christopher Brown - Canaccord

Gerry Donnelly - FirstEnergy Capital

David Popowich - Macquarie

Operator

All participants please standby, your conference 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 maybe 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 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 fourth quarter and year end 2013 conference call. This is Ross Clarkson, President and CEO, and with me I have Mr. Lloyd Herrick, Vice President and COO; and 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 will move into an overview of the properties and our plans for 2014. 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. Well, 2013 was definitely a challenging year for the company. However, we were able to increase production modestly in the year to 18,284 barrels a day. This is up our historical growth rates of over 20% which had been achieved in prior years but still in achievement at 5% giving the ongoing political change and economic challenges facing Egypt, which tend to way on the efficiency of EGPC, particularly, as it deal with new projects which in our case related to South Alamein and the eventual ratification of our newly awarded blocks.

Production results were impacted by a block S-1 and Yemen being off-line for all about seven weeks of the year. Fund flow was down 9% on the year due to lower realized oil prices and higher operating costs. In particular, operating cost accruals in Egypt.

The company and EGPC concluded that renewal of handling fee arrangements in Eastern desert late in year, which resulted in higher cost being accrued for the entire year. These costs, however, cannot be put into cost recovery until they are paid which didn't occur in 2013.

When they are eventually paid, they will be recovered through cost oil to the tune of 200% in West Bakr and 70% in West Gharib, which in total should adjust royalties and taxes by approximately $4 million in 2014.

Net earnings were down approximately 33% in 2013, which is for the most part as a result of the two impairment losses incurred in South Mariut and East Ghazalat, and some unrealized gains on the convertible debenture, fair market value and foreign exchange being offset by increased operating expenses that we just mentioned.

On to the quarter, in the fourth quarter, we achieved funds flow from operations of $36.7 million, a 10% increase over Q3. This amount is very consistent with prior quarters. During the quarter we collected and settled 46% of our total collection and settlements for the year of AR.

We received $77 million in cash during the quarter, the bulk of that through one full and one partial lifting. In addition, we offset another $50 million, including the offset for the four new blocks just mentioned that were ratified in early November.

Oil prices were consistent in the quarter with the prior quarter at $96.10, which is down slightly from Q3 but consistent for the entire year. Net earnings of $6.9 million were impacted significantly in Q4 due to the impairment of the East Ghazalat production sharing contract, resulting from the revision of the assigned reserves there.

Going on to the next slide, our balance sheet, we continue to hold a very strong balance sheet with over $242 million in net working capital at the end of 2013. This included $122 million in cash and $148 million in accounts receivable, offset by $38 million in accounts payable.

During 2013, we collected and settled over $275 million in our outstanding receivables with EGPC a 75% increase over our collections in 2012. This led to a significant decrease in our outstanding and overdue receivables from EGPC. At the end of the year, our net accounts receivable balance from EGPC was approximately $147 million or about six months past due, which brought back the accounts receivable to pre-revolution overdue amount.

During the first quarter, we have been active -- in an active dialogue with EGPC to establish scheduled payments for 2014 while at the same time working to advance our discussion surrounding self-exporting. During February, we had a partial lifting allocated to us which will be paid in March. For 2013, we invested a total of $130 million in capital projects, including $42.5 million in the ratification -- related to the ratification of our new blocks in Egypt, which was paid through an offset to accounts receivable just mentioned.

As a result of our continued strong balance sheet and capital programs that are less than our expected fund flow, it is now the company's intention to implement a sustainable quarterly dividend program, comparable to most E&P companies which pay a dividend and design to enable the company to both return value to shareholders while at the same time enabling the company to pursue growth opportunities both within and outside of Egypt. The formal declaration of the dividend which we expect to be $0.05 per share per quarter which equates to current yield of approximately 2.7% will occur upon receipt of lender and regulatory approvals.

I will now pass it over to Lloyd who will provide brief operations update.

Lloyd Herrick

Thanks, Randy. This chart shows our company’s growth approximately past 10 years. We had an average compound growth rate of about 22%. As Randy mentioned, the 18,300 produced in 2013 represents about a 5% increase over the previous year. Production in 2014 is forecasted to be between 20,000 and 21,000, which represents an increase of 9% to 15% over 2013 respectively.

To the next slide, this slide shows our daily production by projects for the past 12 months. Just a couple of items that I want to draw attention to. On West Gharib production, which is shown in red.

February was impacted by a number of pump changes [and exacerbated by], well, we had a mechanical failure on our service rig, which shouldn’t happen to coincide with pump that is on two of our larger wells of about 3,500 barrels a day and you can see that dip in the middle of the February month while we were down.

The rig wasn’t in clearance. We’re currently working through the backlog of routine pump and rod changes in March. We did bring in a second rig. However, it didn’t house our safety inspection, so we had full production in February. But West Gharib is back in a 11,700 barrel a day range and we have several wells shown in and waiting on servicing probably something in the order of 500 to 800 barrels a day.

At West Bakr, shown in yellow, continues to grow, its new wells and zones are brought on production. Current production is in 6,100 barrel a day range. Block S-1, which is shown in green, continues to be erratic and that’s been on production greater than 50% of the time since the major labor contract issues were resolved in November of 2013. We are currently shutdown but in discussions with the operator on S-1 to rebuild the other, probably at the end of this repairing that pipeline.

So I will now turn the presentation over to Ross to talk about our upcoming projects.

Ross Clarkson

Okay. Well, just over to the locator map on slide 9, which shows our land holdings in Egypt and it really will be focusing mostly on the Gulf of Suez region onshore, which is where the majority of our current production comes from. So that’s on the next few slides.

In this current slide here, West Gharib is our first project in the region and is shown in the darker yellow lands. In 2014, we plan nine wells, mainly on Arta and East Arta areas, which are the Northwest lands with the green oilfields on them. We’ve completed three of the nine wells and are just finishing up on the fourth one. And so we will be finished out here some time around April-May, and then we will move that rig over to the lighter yellow lands surrounding our Northwest Gharib, our Gharib block into Northwest Gharib which we won in last year’s bid round. We’ve also got a lot of facility work and secondary and even a pilot tertiary recovery project underway on these fields.

Shifting over to Slide 11, we are looking at the West Bakr lands in the orange color. We purchased these lands in 2011 and they are working out very well for us. Reserves and production have increased and we expect these fields will contribute more in 2014. We have one rig dedicated to this project in 2014 for a plan 17 wells. These wells are higher productivity, usually coming on in the 300 to 500 barrel a day range. Similar to West Garib, we also have facilities expansions and water floods underway on West Bakr.

On Slide 12, you will see the reason for all these facilities expansions and all this work on the various pipelines and facilities. All the light yellow lands surrounding our existing assets and extending further to the south are the newly acquired concessions ratified last November. These lands are highly prospective for explorations, specifically for the new play concept we identified in the Arta and East Arta fields on West Garib, and also for the same zones found in the fields to the south and east of the two southern blocks.

There is an enormous seismic acquisition project commencing shortly on these lands, and that will cover the majority of the area with state-of-the-art 3D seismic. And we believe this new data will help to identify a significant prospect inventory for our next exploration campaign.

Slide 13 shows a little more detail on the structures that we've already identified on the northern block of Northwest Garib. We have considerable 3D coverage here already, so this area is already where the initial drilling campaign will kickoff in April with the one rig that's moving over from Garib and with a second rig expected to arrive in June-July period.

And the initial campaigns, which are the black dots on the map, will focus on field extensions from our West Gharib fields. It should be noted that we did not book any 3P or any reserves on the perspective resources on these lands in 2013, because the ratification of the contracts was delayed until November and we are only just getting started now on the drilling campaign.

We also did not include any production from these lands in our 2014 production estimates. There is the potential to get these areas on production in 2014, if everything works smoothly with the government approvals for the development leases. And that really takes us -- we are talking about development leases on to the next slide we rode in the Ghazalat license and that’s seen on Slide 14.

The operator, there applied for and got a very quick approval of a development lease area of six blocks surrounding the North Dabaa gas condensate discovery and this is where we own 50%. They have an appraisal well planned for the third quarter and are identifying a tie-in point for the gas and the liquids in one of the two gas processing plants to the southwest of that discovery.

And we are just finishing up on a development well on the Safwa field, which should provide a small increase in production levels for Safwa. Safwa production has been disappointing and we rode down some of the reserves here. It just has not been developed as aggressively as we would've liked to have seen. But the new operator is moving forward with more wells in 2014.

Then, we kind of move over to the last slide on the Egypt, which shows the large 3D seismic acquisition program, which will start in late 2014 or early 2015, after we complete the Eastern Desert programs. And we believe this southern portion of this block is ideally positioned on the edge of the Abu Gharadig Basin, so the 3D seismic should turn up some interesting prospects out there.

Moving on to Yemen on Slide 16, Yemen has been on and off production as Lloyd mentioned in 2014, but we have only budgeted 50% uptime due to all the strife going on there. Throughout the plan for 2014, all in the Eastern areas and DNO will drill an appraisal well on the Salsala discovery and start work on development there on Block 32. But this is really a relatively small portion of our portfolio.

And that concludes the overview of the results and the 2014 plan. Let’s turn it over to the Q&A session now.

Question-and-Answer Session

Operator

(Operator Instructions) the first question is from Christopher Brown with Canaccord. Please go ahead.

Christopher Brown - Canaccord

Thanks very much. Couple of quick questions. On the North West Gharib, I just missed your comment on the first rig arrival is expected on time and was it April, May timeline did you state?

Ross Clarkson

Yeah, we've got a nine-well program plan for West Gharib and we’re just finishing up number four now. So that program will probably end around some time in April.

Lloyd Herrick

No, unfortunately it’s flipped.

Ross Clarkson

It flipped around.

Lloyd Herrick

We’re going to be drilling our West Gharib probably into June or so. And that’s we’ve quicken up the second rig for end of April or first part of May. So we’ll start drilling April, May on North West Gharib. And then when we finish up, whenever we don’t have program on West Gharib, we’ll test that rig across the fence over to North West Gharib. So that will probably happen in June, July, depends on when we actually get the wells finished up.

Christopher Brown - Canaccord

Okay. That’s what I misunderstood. Could be the second rig was going to arrive in June and July but it will be to pricing out. So that make sense. So still timeline for strict rig count is April, May for the first rig and then June, July for the second rig to kick things off. And then the timing, so that will align well with what your expectations are for government approval timeline if it comes a bit late, maybe you are pushed off into time of May spud date for the North West Gharib properties. Is that a good estimate?

Lloyd Herrick

Yeah. I think so I mean we’ve certainly got everything ready to go. We’ve done all the applications and it’s really the approval process of when we can get started. It always takes a little longer on a new concession. So we think optimistically, it might take on in April but probably closer to May to get the first well going. But once we get that process going, we’ve got 18 wells in there right now for approvals. So we’ll be able to just keep it rolling.

Christopher Brown - Canaccord

Right. And then future approvals for incremental wells, you could smite those pretty quickly and those are about what we anticipate for as you hired the incremental wells for the program pending successful for the first 18 month. Does that make a 6-month approval process that we should expect?

Ross Clarkson

No. Once you get going, it’s more in the order of two to three months by the time you get the location built. So we’ll just keep adding locations. We’ve got 79 identified. We’re going to factor in the results. We’ll move some around but we’ve got lots in the hoppers. We should be able to keep two rigs working there comfortably. In the past, if you look at what we did in West Gharib, at one time, we had three rigs running. So it’s very doable.

Christopher Brown - Canaccord

That’s excellent. I appreciate your emphasis about the recognized reserve aspect loss. I think that was very important to emphasize as nothing has been booked on these new concessions. You do have some 3D which clearly outlines good prospects. But I think the market right now is down about 5% on the market today, on the release. And I think the -- may be if you could elaborate on production down time, these are the questions I have been getting today on what’s our concerns about the service issues and these rig equipment issues, mechanical issues.

Could you elaborate little bit just to help out to get clarity on how much of that’s been factored into future of your guidance for this year and sort of things that you account for all, every quarter, these pump replacements. I think it will be good to hear your thoughts or statements on how you guys manage your pump replacements quarter-over-quarter as well?

Lloyd Herrick

Yeah, it’s Lloyd here.

Christopher Brown - Canaccord

Lloyd, sure.

Lloyd Herrick

Yeah. We have ongoing service program. I mean these are heavy oil wells. And mainly rod pumps are PCP pumps. So they are continually changing pumps that get worn out or rods need that replacement. So in attempts of coming back, just that we try and manage the service rig such that we’ve got out a good cover. You don’t want too many rigs around and you are paying a lot of extra service time. So standby times.

So just happened this past month that we got caught and our main service rig went down with a big mechanical issue. And it just happened to coincide with couple of big wells going down. So it was worse than normal. We plan for these things and we did try and bring in the second rig. It just didn’t meet our safety inspection. So once we got North West Gharib opening up and running, we’re planning to have master service agreements where we can move the rigs back and forth across all our business. So it gives us a little more flexibility.

Christopher Brown - Canaccord

That’s perfect. Thanks a lot. That’s end of my questions.

Operator

Thank you. The next question is from Gerry Donnelly with FirstEnergy Capital. Please go ahead.

Gerry Donnelly - FirstEnergy Capital

Good morning, gents. Just a quick question regarding the previous color regarding kind of pump failure or mechanical issues in West Gharib. These have been going on for some time and again I am getting some questions with regard to, you’ve mentioned that these were forecast. These were scheduled, if they were scheduled I guess why weren’t they tackled earlier and if they weren’t scheduled, well how much CapEx over and above what was guided, is needed to resolve these?

Ross Clarkson

Okay. Gerry, actually they are not scheduled. You plan for them, we can’t predict when the pumps or the rods are going to fail. You just know in time they do wear out. You don’t replace until they quit. We do keep a big supply of all that equipment around and you try and manage it with right resources given your historical levels.

And sometimes you have additional sand cleanouts. So we have been struggling with some of the sand cleanouts when we’re in West Bakr where we have a little more sand production with a little more prolific wells but West Gharib is well understood. We just got caught this month, I’ll call a perfect storm.

Gerry Donnelly - FirstEnergy Capital

Yes. Just on the CapEx side, may be Randy could provide some guidance on that?

Randy Neely

Well most of these work over is, Gerry, are actually operating expenses, not capital unless we are going to improve the recovery that goes into operating expenses.

Gerry Donnelly - FirstEnergy Capital

Okay. So you are not actually replacing the pumps then?

Randy Neely

Yes, these are small, I mean these are quite expensive pumps. These are rod...

Gerry Donnelly - FirstEnergy Capital

Okay.

Randy Neely

Few thousand dollars, its more the downtime.

Gerry Donnelly - FirstEnergy Capital

Okay.

Randy Neely

Its managing the service rigs and equipments such that you are not paying a lot of standby when you don’t have pump failures. So it’s finding that right balance between up time and standby.

Gerry Donnelly - FirstEnergy Capital

Okay. Okay. Thank you.

Operator

Thank you. (Operator Instructions) The next question is from David Popowich with Macquarie. Please go ahead.

David Popowich - Macquarie

Yeah. I just had a question with respect to how quickly you guys can produce at Northwest Garib. You said, you had to apply for development lease, but is there any provision for either a short-term or a long-term production test, or if you unitize the discovery that's already at West Arta? I mean, can you bring that early production faster I’m just kind of curious how the application process will go?

Lloyd Herrick

Yeah. David, it is Lloyd here. No, you have to go through the process. You have to have a development lease. Until you follow development plan and it’s approved, even if you did early production testing it would be all the government’s oil. So you must have a development lease. Unitization would be some that would be well down the road. You have to have wells on both sides. You convince that there is a need to unitize, so really -- we don’t think it’s going to be a problem.

Historically, these development leases can take anywhere from three to six months. But we are encouraged that they just did apply and get a very quick turnaround on the development lease in East Ghazalat. And that’s consistent with what we are seeing from the current minister and the Head of EGPC. There is a very big recognition and push to get new projects on stream, so we are being a little cautious in our forecast. But if things are lined up, as Ross said yeah, we could probably get some wells on production in the fourth quarter.

David Popowich - Macquarie

All right. Thanks, guys.

Operator

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

Ross Clarkson

Well, that concludes the overview of the results and the 2014 plans. That's all we have for this year and really we are very excited about the new exploration program. I think that's going to really give us what we want to, in terms of growth but it’s going to be back-end waited for the year, that’s really where we are going to see the biggest up tick in our activity levels. Thank you very much. That's all we have for today.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.

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