TransAtlantic Petroleum's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.14.14 | About: TransAtlantic Petroleum (TAT)

TransAtlantic Petroleum Ltd. (NYSEMKT:TAT)

Q4 2013 Earnings Conference Call

March 14, 2014 8:30 AM ET


Taylor B. Miele – Director-Investor Relations

Malone Mitchell – Chairman and Chief Executive Officer

Wil Saqueton – Vice President and Chief Financial Officer

Ian Delahunty – President


Neal D. Dingmann – SunTrust Robinson Humphrey

Curtis Trimble – Global Hunter Securities, LLC


Good day, ladies and gentlemen, and welcome to the TransAtlantic Petroleum’s Fourth Quarter 2013 Earnings Conference Call. At this time, all participants’ are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today’s conference, Taylor Miele, Director of Investor Relations. Please go ahead.

Taylor B. Miele

Welcome to TransAtlantic Petroleum’s fourth quarter and year-end 2013 earnings conference call. On the call today we will have Chairman and CEO, Malone Mitchell III; President, Ian Delahunty; and Vice President and Chief Financial Officer, Wil Saqueton.

During today’s call, we will make forward-looking statements which include statements regarding our belief, goals, expectations, forecast, projection and future performance and the assumptions underlying such statements.

Please note that there are numbers of factors that may cause actual results to differ materially from our forward-looking statements, including the factors identified and discussed in our earnings press release which we issued yesterday and the company’s SEC filings. Please recognize that except as required by applicable law, we undertake no duty to update any forward-looking statements, and you should not place undue reliance on such statements.

Now I will turn the call over to Malone Mitchell.

Malone Mitchell

Thank you Taylor and thank you for joining us on today’s call. Since the first of the year we’ve had several updates about the geological and activity nature. So in respect of your time, we don’t intend to repeat much of what has already been released.

Now in the last day or so, a video that goes through the presentation made of activities as well as questions-and-answers from the shareholders presents at the special shareholder meeting has been posted to our website and I would encourage you do view that video for some additional detail on operations and questions.

We have now commenced the redrilling operations on the Bahar-2 in our Molla area. This is the first operation of our Molla 3D, which result undertaken as a result of our Molla 3D. The next several wells on that project are going to be very important for the company all are used to get started on that.

I will now turn the call over to Wil Saqueton, our CFO to review financial and accounting activities.

Wil Saqueton

Thanks Malone. We are pleased to file our Form 10-K Annual Report in a timely manner. But before I discuss our financial results, I’d like to address the impact of the Turkish Lira devaluation on our company. We recorded our foreign operations assets, liabilities and transactions in low currency which for Turkey is the New Turkish Lira and for Bulgaria is the Bulgarian Lev.

For our consolidated reporting, we reported our financial results of all our entities in one common currency, the U.S. dollar. During 2013, the Turkish Lira devalued approximately 20% against the U.S. dollar. As a result, we reported our assets and liabilities in Turkey on December 31, 2013 at approximately 20% lower value than their value on December 31, 2012.

On the flipside, when the TL appreciate versus the U.S. dollar like it did in 2012. We reported our assets and liabilities in Turkey at a higher value. This change in value is reported as a Foreign Currency Translation Adjustment on our Consolidated Statements of Comprehensive Income and is 100% non-cash.

We also report foreign exchange, gains and losses on individual transactions that occur throughout the year. These gains and losses are reported on our Consolidated Statements of Comprehensive Income as foreign exchange gain or loss, and include both cash and non-cash components. The foreign exchange gains or losses arising from activities to develop and produce crude oil do not have a net cash impact due to the fact that our crude oil prices are fixed to the U.S. Dollar.

However, the FX gains or losses arising from activities to develop and produce natural gas do have a cash impact and for 2013, we estimate the total cash impact to be a cash loss of less than $500,000.

Now, on to our fourth quarter financial results. Fourth quarter revenues was $33.9 million up 5% from the third quarter driven by a net sales volumes increase. Our net loss from continuing operations was $14.4 million or $0.39 per share and included $7.5 million of seismic expenses.

Adjusted EBITDAX from continuing operations was $20.9 million up 5% from the third quarter. Our discretionary cash flow $20 million or $0.54 per share. Our capital expenditures were $30.5 million down 10% from the third quarter and our total net cash consumed at $10.5 million was down 33% from the third quarter.

On to our annual results, 2013 revenues were $130.8 million down 9% from 2012, driven by a 6% decline in net sales volumes combined with a $5.3 million reduction in sales of purchased natural gas. Our net loss from continuing operations was $13.3 million or $0.36 per share and included approximately $14 million of seismic expenditures, which we expense due to our successful efforts in method of accounting.

Total company, net cash provided by operating activities adjusted for seismic expanses was $81 million up 69% from 2012. And to highlight, some notable three years trends from 2011 through 2013, our exploration abandonment and impairment expenses decreased from a level of $61 million in 2011 down to $40 million in 2012 and $27.3 million in 2013. Similarly, our G&A started at $36.3 million in 2011 down to $33.9 million in 2012 and $29 million in 2013. And lastly our cash paid for interest was $10.1 million in 2011, $5.6 million in 2012 and was at $3.1 million level in 2013.

With regards to liquidity at December 31, 2013, we had total debt outstanding of $69.8 million, which results in a leveraged ratio of 0.91x to 2013 EBITDAX. Our total debt includes short-term debt of $43.3 million comprised of $20 million from our TBNG credit facility and $23.3 million from our senior secured credit facility. The TBNG credit facility borrowings were executed on a one year term to obtain 115 basis points lower interest rates, resulting in an all in fixed rate of 4.6% and we expect to rollover these borrowings for an additional year of maturity.

We are well under the process of refinancing our senior secured credit facility. One of the current lenders, Standard Bank is pulling back it’s lending in Turkey in other emerging markets. Accordingly, we executed a mandate letter with two financial institutions in January, BNP Paribas and International Finance Corporation which is part of the World Bank group.

As of yesterday, we have obtained credit committee approval from both lenders and expect to complete the refinancing in the second quarter. Upon completion of the refinancing, our debt would mature in 2019 with commitment reductions beginning in 2016. And last but not least, we expect to generate positive free cash flow in 2014.

I’ll now pass the call on to Ian.

Ian Delahunty

Thank you, Wil. To begin with, I’d like to provide a brief update on our year-end reserves. We placed 135% of produced reserves in 1B category and 253% in the 2B category. This was based on strong results in Thrace Basin, higher than forecasted production performance on the existing wells there, and the horizontal well performance in the Selmo field.

On to an operations update, in Thrace Basin we’ve recently drilled two Mezardere horizontal wells. Both wells were drilled under AFC budget. We assimilated the first well with eight stages and have initial three clean out production of $1.5 million to $2 million cubic feet per day which is likely coming from the [indiscernible] stage which is one stage of the eight.

So, we expect the production rates there to increase by multiples of the stage one after we finished cleaning out the well. We plan to complete the second Mezardere horizontal well next week. That well is the TDR-11H. It was also drilled under budget. So we’re very happy with the drilling performance on both wells, which were the first two of the time in the basin. And as I say, we plan to complete that with 10 stages next week. We are able to do essentially all stages in one day. So we should have an announcement on that well.

With respect to the seismic shoot in Thrace station, we have completed shooting the remainder of the Tekirdag and Selmo, 3D seismic survey and we expect to have interpreted this data by May and we will have yield – we expect the data to yield further potential in the Shell Oil was mainly conventional play and further prospects in the Mezardere pipe and in field play.

Moving to the southeast of the country, at Selmo we are producing some four MSD horizontal wells and one LSD horizontal well. The MSD horizontals are producing on an average, water cut of rough 40% and outperforming as is forecasted.

First LSD well we drilled as you recall was Selmo-13H, it’s performing in line with forecast. We recently drilled few additional LSD wells and are taking delivery on artificial lift equipment this week to complete both of those. We have also converted two wells to injectors in preparation for waterflood pilot in two pilot areas of the field.

Moving on to the Molla area, we have begun operations as Malone commented on, on the Bahar-2 side-track and anticipate being in the Bedinan reservoir within 30 days. This will be the first well drilled opposite of newly interpreted Molla 3D and we are excited to see what we have in the Bedinan there. We like so far what we’re seeing out of the 3D interpretation.

Outside of Turkey we are continuing to experience completion delays in our Bulgaria well, the Deventci-R2. This is due to the fact that the packer assembly has both crusher maintenance equipment above the packer and crusher control equipment below the packer. It’s not uncommon to experience operational delays in dealing with this type of completion configuration.

We anticipate testing the open-hole section and two zones which are behind pipe that has significant shales during drilling within the next several weeks. We are going to mobilize a completion unit to finish the completion of that well.

With that, I will thank you and hand the call back over to Malone.

Malone Mitchell

Thank you, Ian and Wil. We would now be happy to take and further answer questions from the listening audience.

Question-and-Answer Session


Thank you. (Operator Instructions) And our first question comes from Neal Dingmann from SunTrust. Please go ahead.

Neal D. Dingmann – SunTrust Robinson Humphrey

Good morning gentlemen. Actually, it may be for you Ian, just wanted to know about Selmo. After you complete the seven additional horizontal wells this year, how many more locations do you have there just for this quarter really?

Ian Delahunty

Well, we drill the Selmo-2H in the southern part of the field which we’ve actually fairly undrilled and that well is producing essentially 100% oil. And in terms of the forward block mapping, we did in the 3D model it is breadth. So the number of locations have grown.

At the moment we anticipate an additional 10 wells based on Phase 1 work. We anticipate further wells following completion of those depending on how we delineate the play going to the point. So I think this area that we’ve drilled in the southwest of the field which is Selmo-2 – Selmo-92 or improve up quite a bit in terms of additional locations to drill. At this point we can probably only commit to, say 10 well Phase 1 program.

Neal D. Dingmann – SunTrust Robinson Humphrey

Okay and then, I’m sorry.

Malone Mitchell

I think we published – there is also map published that kind of shows the intended PUD wells, and kind of how development on that would go. I think we fully delineated the LSD wells that we would intend to drill under the structure because the area, that field, it is about oil-water contact line. It’s smaller in the LSD than it is in the MSD. So we continue to define additional locations as Ian said as we proven now or have on the outer levels of the field.

Neal D. Dingmann – SunTrust Robinson Humphrey

All right, it’s great. And then Malone and Ian, as far as on that waterflood portfolio, tell me the sense of timing and when that potentially could start coming on and a degree to, I guess I’m just trying to press with upside potential of how big you play waterflood program could be?

Ian Delahunty

Well, we expect to be injecting water actually, fairly soon. In terms of the resulting waterflood I think timing is roughly six months from now. In terms of the size of the waterflood we converted two wells injectors and anticipate converting few more. So at the moment, we’ve identified four pilot locations. And we will evaluate the results of the pilot programs, prior to expanding through a both yield floods.

Neal D. Dingmann – SunTrust Robinson Humphrey

Okay and then just last, I’m sorry.

Malone Mitchell

Because of the nature of the field, I think that it likely will have uneven results were some fill blocks flood well, and some will flood less, well or even the [indiscernible] release the results out.

Neal D. Dingmann – SunTrust Robinson Humphrey

Okay, and then just lastly, in the Molla areas, you answered that the Bahar-2H was shut-in and then I think was pointed out, I think was producing around 50 a day. What are you intending to see, I mean is it a, I guess what I am getting is Molar is a totally different formation. You think now you will see once the shoot and the analysis the shooter, what are you looking at I guess, in fact that I think, it’s the period that there is still big potential there. Just wondering what different kind of formations here you’re looking at?

Malone Mitchell

Well, there is big potential there. We drilled the number two originally to be a horizontal well from the beginning. So we turned that way and what we found is we encountered – we didn’t encounter the Bedinan formation where we expected it. So we had day and after we were already out drilling lateral – they turned our back downward, so we will find it and wound up being a couple 100 below. We see all the others where we drill up fair.

But in order to drill horizontal wells, we have to be able to predict within the early literally 20 feet or 33 feet where we are going to encounter the formations. It’s not good enough to encounter within a couple hundred feet.

The high drill formation that we plug back and we’re producing on it, as it is easier to Molla, and it’s broader. We are battling after obviously in addition to the Bedinan. So what we’ve done is we are going back to approximately 8,000 feet which is below the Cretaceous and above the high drill. We’ll encounter the Hazro again and encounter the Bedinan. Now what we are expecting out of these next two vertical wells and when I say vertical the Bahar-2, it’s actually drilled at about 25 degree angle two displace itself about 2,100 feet to be in the same fault block as the Bahar-1. But we expect to encounter these formations within 20 feet to 30 feet of where we predict them out from our 3D.

If we do that with both of these two wells than our next wells we would expect to become high drill. So we would target both the Bedinan and the Hazro for horizontal development. And again if we do that we currently prove up a very nice amount of hole and that yield and that just becomes one of always so there is many, many structures throughout that area.

Neal D. Dingmann – SunTrust Robinson Humphrey

It’s great. We look forward to activity. Thanks Malone.

Malone Mitchell



Thank you. And our next question comes from Curtis Trimble from Global Hunter. Please go ahead.

Curtis Trimble – Global Hunter Securities, LLC

Thank you, good morning everyone. Just hoping to get a little bit of an opinion and insight on the macro situation with respect to the Ukraine turmoil and any perspective impact on Turkish gas prices possibly Bulgarian gas prices in any phenomena that you would see affecting those prices in the future cost?

Wil Saqueton

For Curtis, if I can really answer those questions accurately, I would quit my job and just become commodity traders. I think that it is abundantly clear to Europe now that probably they need additional reserve to develop their own resources because it’s high content and exposed to completely being depended upon gas. So in Turkey we’ve had a constant gas price now for over a year. But gas price should go up, but there is elections coming up in Turkey and we would expect that gas processing to be somewhat determined by how we see the election results in Turkey. It’s safe to say that every quarter there is got change going on. I think that the overall trend with regard to gas security has got to lead to higher prices because of the increased perception of risk and being solely depended on Russian supply, that being said we think that’s an overall positive. They are translating it into something that happens next week or next month or next quarter. Those probably are a little bit hard to predict.

Curtis Trimble – Global Hunter Securities, LLC

Yeah, but you haven’t seen much of any volatility. Obviously you said that prices are being fairly stable to very stable over the last year or so. In terms of transport interruptions anything like that nothing material.

Malone Mitchell

No and of course we sell our gas domestically in Turkey. Turkey only produces about 30% of its total demand. So we don’t need to export that. We also likewise expect to sell all of our Bulgarian production domestically. So again we are focused on not the export of product, but the internal consumption of products. Now it is legal and it is easy and available to export gas, but frankly there is a strong domestic market. So we intend to continue doing that.

Curtis Trimble – Global Hunter Securities, LLC

Good deal and now switching gears and – sorry go ahead.

Malone Mitchell

We are in the middle of political seasons and frankly a lot of the headlines mimicked, I have been gone for the entire month of February and when I returned to the U.S. to catch a glimpse of all of the political ads on television, it’s just not much different worldwide on what you see on political.

Curtis Trimble – Global Hunter Securities, LLC

Sure, good I appreciate it. Looking at the tray spacing in the two horizontals that you completed and seem to be completed, between the BTD-2H and the TDR-11H, did you see much in the way of variability in the target horizontal? Can you talk a little bit about just expand beyond the number of savings? How the wells were completed in terms of proppant et cetera?

Malone Mitchell

Sure, I can take that question. The two wells we’ve just drilled are in what we label these plays within the [indiscernible]. Now we’re not seismic over that area. So we have mapped the play. We generally target two benches within the play although there are two additional benches which we’ve had success from. And generally when we enter the wells vertically or enter the play vertically, we target the upper two benches and typically the upper two benches when stimulated will produce anywhere from 1 million cubic feet to 5.5 million cubic feet per day.

I think the average or I know the IP 30 average the last 13 recompletions was 1.1 million cubic feet per day. So it’s a fairly safe estimate to do real quite to a horizontal well. So we didn’t see a lot of variability and that’s due to the fact that it’s relatively shallow play, it has decent well controls on the wells which we drilled and the area as vertical producers and the mapping has been fairly straightforward.

So what we’re doing in those two wells is essentially fracking in with a bit more tight spacing than we were in the [indiscernible] and that is because the permeability is a big lower and so for the first well we had eight stages which as I said were completed in one day. The second well will be stimulated to ten stages and then cleaned out and so I think it’s reasonable to assume that we should see multiple of the one phase results from the vertical recompletions which we announced throughout the four quarters.

Curtis Trimble – Global Hunter Securities, LLC

Very good, I appreciate it.


Thank you. (Operator Instructions) Our next question comes from [indiscernible]. Please go ahead.

Unidentified Analyst

Hi, couple of questions. Just wanted to again I’d say on the [indiscernible]. I was wondering what kind of data point should we be watching for this year either from yourself or other operators in that shell. And then the second one, just getting back to the Molla area in the southeast of Turkey, outside of the wells you drilled so far, I was wondering from the seismic have you seen initial interpretation. Can you give some idea with the number of structures that you’ve mapped so far? How many of these you could potentially drill this year and some kind of idea of the size of the prospects.

Ian Delahunty

Yes, okay and…

Malone Mitchell


Ian Delahunty

Malone, would you like to go ahead?

Malone Mitchell

And actually Ian and I are both in London, but based on the phone call we are in separate rooms, call lines, we can’t speak to each other well. On the data shale oil and TPAO have landed their lateral on their first Dadaş well and obviously that’s tight hold, but I am optimistic that particularly TPAO will release information on that. We do know that they expect to complete that well within the next 30 days. So that’s probably the next major data point, Shell Oil is drilling an additional well now and a campaign of well. As it is in the case of any of the U.S., resource basins it takes a number of wells generally before we can evaluate and understand success.

And we see oil and gas shales in some cases very abundant oil and gas shales drilling through this formation. Now we are delighted. So much of what we’ve had do over here we have had to shoulder a 100% of the activity associated with learning it. Right now, we don’t have on our budget for this year any shale activity, because we were quite delighted to watch the state old company to be Shell Oil help move the knowledge of that formation alone.

And hopefully as I said, we will have more information on that but since we don’t control those wells, that’s going to be possibly depended upon their decision to release any of that information. That formation we do approve on the way to Bedinan and we are targeting the Bedinan. It’s a sandstone or we are targeting the Asilah sandstones and carbonates above and below the Dadaş and as I said, it’s we’ll let them work, Horizon in the middle.

I would tell you that the only structure that we would say, we are confident at completely at this point of time, is the Bahar structure. The Bahar structure we put out some data on previous maps, it is a multi royal fairly substantial structure, There are structures immediately adjacent to it. And the seismic that we’ve received and now that we’re confident in our processing we will just wait until we get kind of the final product on our next box.

We do expect to get our mix in block of seismic within the next 45 days to 65 days, and the initial block we see, we see structures that we’d probably see 40 to 50 additional sheets of sand and again it’s not though, we’re liking it more to sheet of glass laying on the ground that you drop the rock or something on and the glasses broken and then it falls. The point in that glass or the sheets are – it’s not all structurally complex, it’s just understanding where the falls are and where the sand is format.

That’s more or like what you have. We’re going to focus our drilling for successful with these first wells and being able, the number one, one of the most critical binds being able to pick, where we encounter, the horizons we are going to continue drilling out and generally working out in adjacent blocks, because the probability of having that oil and gas is greater, when you’re drilling immediately next to where you know you have oil and gas.

And it is to jump up ten miles, and we will do that and plan on mocking the rig count up. Step number one is to be able to hit those zones where we project the map and it took a lot but we are processing now are processing and the reflectors that coincide with the formations now match the actual results of the three wells we drilled up in here. Again it unlike the U.S., it’s a very lightly drilled area, where we have to rely on seismic now rather than having any well control to be able to work on flow.

I think that captures your various questions and we won’t really start trying to quantify what is in those other blocks and tail though the number one step is to make sure that we can actually call our shots on our wells because in that area, prior to the seismic we were having this as best of the 100 feet based on today, including 2012 and today.

Unidentified Analyst

And just in terms of your existing fields, I just want to get some kind of sense of how at the moment how many wells you got planned on Bahar and Göksu and also some idea with what’s the potential kind of the leaseholds that you think is in each of those?

Malone Mitchell

Well, in Bahar alone our internal estimates again if we developed it on vertical, vertical are drainage so far and Ian can correct me if I may additional correction. Ian is an engineer and I am not, is that after over a 100,000 barrels produced out of the Bahar-1 that we believe we are going at approximately 71 acres and the Bedinan sequence and we’ve not yet began producing the #well sequence and the production that we had on the Bahar-2 given the very light asset, was a very vertical at. Literally in the first week it was essentially flat there after.

So our estimate, if we drilled it all on verticals is that it takes us 20 wells or greater in each horizon in order to develop and drain it. And when you back into that and then you add some pressure maintenance over time, we feel that accumulation alone. And this is not a third party to go in and then we feel internally that that piece alone is in excess of 10 million barrels recoverable. And then you continue to go out familiar with additional – gain back into all of those additional spectrums and sand and separate blocks we see in. And then we would expect that this seismic box will receive 40 days through our hand significant inventory to that.

Every block may or may not have complete oil saturation. They may have water legs and we cannot say. But based on what we know from where we at in oil-water contact, which we do not have any water production as you had in our Bahar-1. We think the potential of each one of those top player. The Bahar structure is a couple of sections within that one fall block.

Ian Delahunty

And if I would add one comment to Malone answer, no and this probably goes back to your question on the Dadaş. The return on the Bedinan and Bahar-1 and also the production profile from the Hazro at Bahar-2 are much more endpoints that decline through our performance associated with conventional type reservoirs. It’s true that the Bedinan is higher occur than some other conventional plays in the region but it’s certainly not a tight rock, and the definition of the work in North America.

So Bahar-1 production curve which I think that we published is, if we take a lookout at it, it’s actually more radial flows, it’s more conventional. And for the return, either joined vertically or horizontally are much greater, because it’s draining, it’s a much greater area from a single well. And that’s primarily why we’ve continued to focus and deploy capital for the Bedinan play and for the Hazro play and for the Mardin play and why we continue to remain in a holding pattern on the Dadaş.

Unidentified Analyst

Thanks. And so just the – based upon in terms of number of wells on each this year?

Malone Mitchell

We approved at a board level, we’ve approved six wells in Bahar field, and the Bahar field area, but we expect we are seeing success. We expect at a board level to increase activity there in the second half of the year.

Unidentified Analyst

Great. Thanks very much.


Thank you and I’m not showing any further questions at this time. I would like to turn the call back to Malone Mitchell for further remarks.

Malone Mitchell

Again thank you for joining the call, again many of the topics covered this morning and a number of questions, both related to corporate as well as activity level were discussed in a broader format in the shareholders meeting and that, video is up. So we would wish you a good weekend and thank you for joining the call. Good bye.


Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.

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TransAtlantic Petroleum (TAT): Q4 EPS of -$0.39 Revenue of $33.9M (-10.8% Y/Y)