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TransGlobe Energy Corp. (NASDAQ:TGA)

Q2 2014 Earnings Conference Call

August 13, 2014 11:00 A.M. ET

Executives

Ross G. Clarkson – President and CEO

Lloyd W. Herrick – Vice President and COO

Randall C. Neely – Vice President, Finance and CFO

Analysts

Shahin Amini - TD Securities

Pavel Molchanov - Raymond James

Gavin Wylie - Scotia Capital

Al Stanton - RBC Capital Markets

Ian Macqueen - Paradigm Capital

Victor Vallance - Edgecrest Capital

Operator

Good morning, ladies and gentlemen. And welcome to the TransGlobe Energy Corporation Conference Call and Webcast. This webcast includes certain statements that may be deemed to be forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.

All statements in this webcast other than statements of historical facts that address future 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 the forward-looking statements include oil and gas prices, well production performance, exploitation and exploration successes, continued availability of capital and financing, and general 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 G. Clarkson

Good morning, everyone. And welcome to TransGlobe Energy Corporation's second quarter 2014 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 of Finance and CFO.

As usual, we will start out with a summary of the financial and operating highlights, and then we'll move into a discussion of the drilling plans for the balance of the year. And this will be followed by a Q&A session. Randy Neely will review the financials and highlights of the quarter starting on the next slide.

Randall C. Neely

Thank you Ross, good morning everyone. The average realized sales prices per barrel for the quarter was $96.14, an increase of 1% over Q1 but down 6% from the prior year's quarter. Sales volumes for the quarter averaged 16,485 barrels a day, down 8% from the prior quarter and 11% from the prior year. Gross oil sales for the quarter were $144.2 million which was down 6% from Q1 and 6% from the prior year.

Fund flow from operations which includes the $9.25 million received on the termination of the Caracal transaction was $43.2 million. Excluding the $9.25 million termination fee, fund flow was up $1.5 million or 4% in Q2 over Q1 and a similar amount as compared to Q2 2013.

Royalties and taxes were down approximately 9% over the previous quarter and operating expenses were up 3% on a gross basis on the quarter over Q1. These increased operating expenses was chiefly a result of increased well servicing cost due to pump failures and our operating teams efforts to maintain production from the relocation of existing equipment.

Earnings of $26.2 million or $0.35 a share, which again includes the termination fee, excluding that amount our earnings for the quarter was approximately $17 million up approximately 1% from the prior quarter. This relatively flat earnings result is principally due to the recognition of cost from current and prior periods by EGPC and our cost recovery calculations. This resulted in the compression of the government royalties and taxes in the period.

During the quarter the company spent $17.1 million on exploration and development. We collected $45 million from EGPC and ended the quarter with approximately $110 million in cash and $271 million in positive working capital. As a result the company continues to have an exceptionally strong balance sheet which has allowed us to continue with our quarterly dividend of $0.05 a share which we have declared to be paid on September 30th for shareholders on record of September 15th.

The receivables, thus far in 2014 things in EGPC continued to be lumpy. Total collections to the end of Q2 were $74.5 million which is similar to the amounts collected in the first half of 2013 and 2012. In both of the last two years the company has collected over 60% of its total annual collections in the second half of the year and we expect 2014 to be the same.

We are now expecting total collections for the year to be in the $250 million range. To that end the company is still in discussions with EGPC to receive two or perhaps three additional full and part cargo listings in the remainder of the year. The first of which is a half cargo listing later this month.

These listings are complimentary with regular cash payments and offsets with government owned suppliers. Although there has been recently a lot of press on the possibility of a large up to $1.25 billion or $1.5 billion repayment of over dues to the international oil companies in Egypt in this year. We continue to manage our balance sheet under our baseline assumption of collections which we spoke about -- which I spoke about earlier.

As such at this time we are anticipating our accounts receivables to grow in the third quarter and then fall back to similar levels we had in Q1 in this past quarter to the range of $175 million to $185 million by the end of the year. If that large bullet payment materializes we will do much better than that.

I will now turn it over to Lloyd to talk about operating results.

Lloyd W. Herrick

Thanks Randy. The company production for Q2 was 16,112 barrels a day with an average sales rate of 16,485 barrels a day. The West Gharib production averaged 9987 barrels a day during the quarter down 10% from the previous quarter and in July production averaged 9422 barrels a day.

Production declines are due to a combination of continued PCP pump failures and natural declines. During the quarter it is estimated that approximately 800 to 1000 barrels a day was deferred due to pump issues and in July the number has increased to 1500 plus barrels a day. The PCP supplier has completed a detailed failure analysis and identified several manufacturing process changes. The supplier has manufactured replacement pumps and will provide 40 new pumps at no cost. 20 of the smaller pumps were shipped by air and arrived in the field in early August.

To date three of the new pumps have been installed, the remaining 20 large pumps were shipped by sea and should arrive in Egypt in late August or early September. In addition, nine pumps were special order from our previous supplier and are expected to arrive by sea later this month. It is expected that it could take until the end of the year to have all the replacement pumps installed and optimized and that's assuming that the replacement pumps perform as expected.

At West Bakr production averaged 5182 barrels a day during the quarter down 10% from the previous quarter. In July production averaged 4946 barrels a day. Production declines are due to increased well servicing and natural declines. The company contracted an additional work over rig accorded to conduct a 10 well remedial program on suspended high water cut wells.

The first well on H-field was placed on production in late July at an initial rate of 450 barrels a day. Concurrently the company has ordered 20 larger pump jacks for optimized production. The first three wells had an average increase of 60 barrels a day per well with additional gains expected when fully optimized. Three additional pump jacks have been received and are being installed. It is expected that all 20 high volume pump jacks will be installed by the end of 2014.

At East Ghazalat, production averaged 786 barrels a day during the quarter up 81% from the previous quarter. In July TG's share of production averaged 687 barrels a day. Production increases are attributed to the two development wells we are drilling in the Safwa field this year.

Production sales in Yemen averaged 529 barrels a day during the quarter which included 413 barrels a day of Block S-1 sales which is from production which occurred in the first quarter. Block S-1 has remained shut-in since February due to continued labor negotiations with local tribes. Some progress was made in Q2, the operator repaired the pipeline in early July, however, the pipeline was attacked a few days later and has remained shut in pending resolution of labor issues.

Next slide. This slide shows daily production by producing concession. At West Gharib shown in red the highlighted area shows the impact of frequent pump changes, natural declines, and the impact of an increasing number of shut in wells waiting replacement PC pumps. The company has begun installing the smaller pumps, however, the larger pumps are not expected to arrive until September. With the uncertainty associated with West Gharib and unresolved labor issues in Yemen, the company is estimating the Q3 production will be in the 15,000 barrel a day range.

Next slide. As discussed in the outlook section of the quarterly, production guidance is under review due to uncertainties associated with the production from West Gharib and Yemen which were discussed in previous slides. Production has averaged 17,200 barrels a day during the first half of 2014. The company is estimating the Q3 production will be in the 15,000 barrel a day range.

Should production remain in that 15,000 range for the balance of the year, funds flow for 2014 are estimated at $126.5 million or $117 million excluding the Caracal termination fees. This is assuming rent pricing of $100 a barrel for the balance of the year. The funds flow sensitivity to a $10 change in rent for the balance of the year is approximately $6 million.

The company has an approved capital program of $100 million for 2014 with $94 million originally planned for Egypt and 6 million for Yemen. To date the company has invested $32 million primarily in Egypt as of the end of Q2. The company has added a third drilling rig at the end of the second quarter and started a large 3D seismic acquisition program in Eastern Desert in Q3. It is expected that a total of $85 million to $90 million will be invested in Egypt with minimal investment in Yemen during 2014.

I will now turn the presentation over to Ross to discuss our projects in more detail.

Ross G. Clarkson

Thanks Lloyd, we will move to slide 9 which is the locator map for all of our Egypt land position and as usual we are going to start on the eastern side in the Gulf of Suez area and go through the projects there and then we will move over to the Western Desert properties after that.

So moving on to slide 9, this is the West Gharib and West Bakr assets which are our main producing assets and then the lighter colored lands around the outside are the newer lands that we just acquired. The focus of our budget this year is really mostly on the West Gharib area and West Bakr area with a shift in the latter half of the year into the Northwest Gharib new lands.

West Gharib current production is around 10,000 barrels a day of medium gravity oil and that sells for rent (ph) minus an average of 12%. There is one drilling rig working on West Gharib, finishing up the last well in a development program on the Hana West field and year-to-date TransGlobe has drilled seven oil wells and one dry well.

Most of the fields in the West Gharib area are pretty much drilled up at this stage and the focus is really working on optimization and enhancing productions through water floods and drainage. The rig that's currently working on West Gharib we will be moving over to the new lands in Northwest Gharib later this month.

Which brings me on to the Northwest Gharib slide on number 11. We started drilling on the light yellow lands that surround the fields and we have been developing those fields for the last five years so we have a very good understanding of the area. As you can see from the 18 highlighted locations, we are targeting a mix of field extensions and new structures in this northern area. We are able to start drilling early here because we already have 3D seismic and extensive well control that is identified in more than 70 locations in this area.

The first rig started drilling in June and the second rig that is working on the Hana West field will move over to Northwest Gharib number 10 which is the well on the far south later at the end of the month. We envisioned keeping two rigs working here for at least the next year probably longer. And we are driving to achieve new production and reserve here as soon as possible to make up for the declines on West Gharib.

The table provides some details on the 18 wells where we are targeting 58 million barrels of unrisked potential. That is an internally generated management number and the chances of success factors vary depending on the nature of the prospects. There is a mix of field extensions and wild cat exploration targets within that program.

Northwest Gharib number 1 encountered 33 feet of Lower Nukhul pay which is awaiting completion, so we are happy with that. That's just really an extension of the Arta field. Northwest Gharib number 2 had severe loss circulation problems and we had to plug back the hole prior to reaching the pay zones. We suspended the well and we will come back to it and drill a side-track down to the reservoirs in the near future. The rig is currently drilling on Northwest Gharib number 3 which is quite close to the number 2 location and then when the other rig gets moved off of Hana it will move onto the number 10 location in the south which is one of our bigger targets.

Moving on to the West Bakr lands as we move to the south, this is the new acquisition we did in 2011 and it is largely surrounded by the Northwest Gharib blocks. West Bakr has been an excellent acquisition and has a significant amount of development drilling and production optimization left to be done here. We will keep one rig working here until next year at least and then add rig maybe moving onto the new lands.

Just moving out and we are going to zoom out onto slide 13 where we can see the full extent of all of our land holdings here in the Eastern Desert. We have just started the 3D seismic acquisition work on the red outlined areas. The first one is up in the very northern area and then we will start moving from north to south through the various surveys over the next six months. We have one crew currently getting set up out there and doing survey work and then we have another crew coming in later this fall.

We expect these programs are going to identify a lot of additional drilling targets in the play types that we have been very successful on in the West Gharib and Bakr areas. So that is going to keep us busy for several years.

Moving out to slide 13, on the locator map just to get you oriented. We are moving out to the Western Desert now and I will jump over to slide 14 really talking about East Ghazalat which has been a more successful project recently since the new operator (inaudible) has taken over. We had a few successful development wells on the Safwa field which has raised our production up to 795 barrels a day for TransGlobe share and we have also reduced operating cost by moving out of rental equipment into owned equipment. So the project is now making more money.

In addition we filed a field development plan on the North Dabaa discovery and we are drilling an appraisal well there which should be completed shortly. And then the rig will move back into the Safwa field and drill a horizontal development well there. So this project is now moving along nicely.

Which takes me over to South Ghazalat, the fourth block that we won in the last bid round and this is adjacent to the East Ghazalat area but it is just to the west of it. And you can see there is a basin limit lying across that map so we are within the basinal area. We will -- but it is a largely unexplored area. We will shoot 3D out here but that will be the last 3D to be completed so it will be moving, it will start in 2015.

We reduced the size of this 3D acquisition program. It is a very difficult area to work in so it was quite costly when it came in so we are really focusing on a specific area of about 400 square kilometers of 3D work out here. And that will be a 2015 acquisition program.

That's about it for now. I am not going to talk about Yemen, there is not much to say there. So we will move on to the Q&A period. Could the operator please move us across.

Question-and-Answer Session

Operator

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

Shahin Amini - TD Securities

Good morning. Looking at West Gharib and assuming that the changeover of your pumps will take until end of this year and you have moderate success as per your expectations, what do you expect could be your exit rates for Q3 and for 2014?

Lloyd W. Herrick

Yeah, Shahin it is Lloyd here. I think the exit rate for Q3 is going to be little -- it is not going to be that much higher than where we are at today. We think we should be in that -- it is all in the timing issues that is why it is so difficult. Probably in that 9000 to 9500 barrels a day at West Gharib.

Certainly by the end of the year we would hope to get that number up into the 9500 to 10,000 but it will depend on the performance of those pumps and of course you are fighting a normal decline of something in the order of 23% to 25%. So, what we have had to do because of all these pump failures, we have used up every possible pump we had available, so they have mismatched through the wells. We are now really starting, if you look back on the daily curve, we are starting to see the impact of not having replacement pumps to run in the whole of well slow down.

So first priority will be to get those ones going and then work our way through. And this all assumes that the new pumps are going to work in an expected fashion and we have every belief that they will. We think that we are optimistic they have solved their process.

Shahin Amini - TD Securities

Okay, thank you. Although I had other question, but maybe for now just get out of the way and let others ask theirs. Thank you.

Operator

Thank you. The next question is from Pavel Molchanov from Raymond James. Please go ahead.

Pavel Molchanov - Raymond James

Thanks for taking my question guys. I wanted to ask about the policy environment in Egypt. You alluded to the fuel price hikes back in July, what do you think the practical impact will be of those fuel price hikes on your ability to get timely payments from the EGPC?

Ross G. Clarkson

Well, it certainly is one of the biggest drains on the economy has been the subsidies that they have been carrying for a lot of years. They have addressed those subsidies partially with these fuel price hikes. They have moved for instance, the price of a gallon of gasoline has gone up from $0.15 a liter to about $0.25 a liter. So it seems like a large increase but that's still very, very cheap.

That will make EGPC more solvent and we do believe that will translate through into better payments for us but it is going to take a little time. Right now they are talking about a significant amount of pay down on the overall -- the growth numbers for the industry from some $5.2 billion they are hoping to have that totally reduced to zero in two and a half to three years. If they do move on that we would be very happy.

Pavel Molchanov - Raymond James

Okay and what are the odds that you might be able to start marketing your own crude in Egypt beyond the confines of the EGPC process?

Randall C. Neely

Pavel, it is Randy speaking. You know, we definitely have the legal right to do that. It really is an issue that we have spoken to before with other folks that are on the phone. It is about having the right infrastructure in place. We are having continued discussions with the very highest levels at EGPC on this and we are working on a project today with them that should see us ultimately exporting our own crude. I can't tell you it is going to happen later this year but if based on the tone of the conversations and the work that's being done both by ourselves and by EGPC we do see that happening in the foreseeable future perhaps by the end of next year.

Pavel Molchanov - Raymond James

Okay, understood. Appreciate the color guys.

Operator

Thank you. The next question is from Gavin Wylie from Scotia Bank. Please go ahead.

Gavin Wylie - Scotia Capital

Hey guys, I had three fairly quick questions here. Number one was just around the pump replacement and just the frequency in which you can accomplish that. Basically the question is how many pumps can you do per quarter? Second one just around West Bakr, original expectations were that field deliverability would be around 6000 to 9000 barrels a day. Given the context of what you are seeing currently, have you changed or revised that outlook and really what I am driving at is kind of what would you think would be a good run rate for 2015 in terms of production assuming that you kind of go forward with a more successful plan as you have outlined? And then the last one just around Northwest Gharib in terms of that production, when would you anticipate that would commence and I know that there is some approvals that have to be in place before you can actually stimulate those wells, but what would you be thinking in terms of timelines around that starting out?

Lloyd W. Herrick

Okay, I will go back to the first one which is the frequency in which we can replace the pumps. Typically to round trip the pumps and rods and get them all installed it’s a one to two day kind of process depending on the well and the issues. Of course in the backdrop of all that we have our regular rod changes and pump changes from a conventional pump so it is going to take a while to get work through all of that. So, I mean if you were doing nothing but running new pumps, you could probably get them all in the hole and over a period of two or three months but what we don’t know is when they are all going to arrive.

Now can you repeat your question on the West Bakr.

Gavin Wylie - Scotia Capital

Yeah, just wondering, the original expectation in terms of productive capacity that was about 6000 to 9000 barrels a day, kind of looking at what you are seeing currently on the field, some of the declines that you have been battling and maybe some of the initial, some of the more recent drilling results on H-field in particular, has that revised that expectation probably more to the down or the lower end of that. And then what kind of is your expectation for 2015 around productive contribution from that area.

Lloyd W. Herrick

Yeah, when we revised guidance back in May I believe it was, we dropped the target range for West Bakr down into the low end of that. So we are probably looking in the 5000 to 6000 range for West Bakr realistically for this year. We really haven’t set numbers for next year. Some of that will depend on our drilling results and this remedial program that we have kicked off. So, I would think that we would look to hold a similar range for next year. Just as a rough number we haven’t really worked that through yet.

And I think your third question related to Northwest Gharib and the timing. I think that realistically the timing we would love to get some of the wells on before the end of this year but it is not going to make a material impact in production this year. We do have to file development plans and get those approved which current government has been moving to quite quickly. So we are encouraged we can do that. But we have to drill the wells, the appraisal wells, file the applications, and get the equipment hooked up and start trucking oil. So we would have probably some minimal production by the end of the year. But it won't really change the 2014 numbers. The objective would be to try and ramp that up to 2015. Difficult to put a number down on that until we actually get the drilling results at this time.

Gavin Wylie - Scotia Capital

Appreciate it, thanks.

Operator

Thank you. The next question is from Al Stanton from RBC. Please go ahead.

Al Stanton - RBC Capital Markets

Yes, good morning guys. I have very similar question to Gavin's actually in terms of how you are managing cash flow and production expectations. If you are reducing spending in West Gharib I would expect your entitlement volumes to fall and then if in Northwest Gharib there is spending but a lag on production, I can see cash inflow and outflow getting a little bit out of kilt, so I am just wondering whether that is going to require a material review of your debt needs and also your cash flow through 2015 and 2016?

Lloyd W. Herrick

Sure Al, it is Lloyd here. With respect to West Gharib, yes we are winding down the drilling there. We are on our last well. We are looking at a small program, maybe next year with two wells. But really that capital was amortized over a period of four years. So there is not going to be a big step function as far as cost recovery goes. Each quarter is designed and rolls off four years later. So, that is pretty muted so I don't see that update change in what we get in the way of our net backs from West Gharib over time.

Northwest Gharib that will take a little longer to ramp up those cost pools, so we will initially albeit not full cost recovery it's kind of an unusual concession. Normally on an exploration concession you have a bunch of seismic and some exploration wells and other cost in your pools long before you actually go to production. We think that we have the potential to go into production maybe by the end of the year. So, we want to build up a lot of those cost pools by the time we are actually on production. But we will be ramping up spending there and those cost pools will certainly build going forward.

Ross G. Clarkson

And maybe Lloyd I will just add to that. Al, you know the other aspect of what we are always quite conscious of is the fact that our payments from EDPC are quite lumpy and that's one of the reason why we maintain such a large cash balance. It is that we don't have complete transparency at this time what our collections is going to be like in 2015, similar to how we didn't know what they are going to look like in 2014, last year at this time. So, we want to continue to develop the field and we want to continue to spend the capital. We do complete confidence in ultimately being paid in Egypt and obviously we would be doing something else. But we do want to maintain a very healthy balance sheet and a very healthy cash balance. With respect to the debt, we don't anticipate meeting any additional debt to finance our program.

Al Stanton - RBC Capital Markets

And then if I may just one follow-on question on the drilling campaign, in terms of the problems you had at Northwest Gharib 2, I was just wondering if you expect those to be very local and then finally on the 10 wells, is it the size of the prospect that's got you going down there or do you see, some real follow-on potential to make that a hot area?

Ross G. Clarkson

Yeah, we have not had that many problems with drilling wells in the whole region. I think we probably only lost two or three out of 100. So, it's an unusual event. There is loss circulation up in that northern area, where it is more faulted up, but I would say this is more of an unusual event than normal. So, we can't get control of these wells. Northwest Gharib 10 is -- as you move to the south targets get larger because you are dealing with thicker reservoirs and higher productivity reservoirs, so you are getting better recovery factors. So that's why we are focusing down there. Certainly we had a little bit of data down there to encourage us to drill on Northwest Gharib 10. We don't have that much data on the other parts of the southern blocks which is why we are shooting all the 3D. But we do anticipate we will come up with a number of new targets down there just based on some very limited, very old 2D data. So, we have a lot of optimism about the southern area.

Al Stanton - RBC Capital Markets

Thanks guys.

Operator

Thank you, the next question is from Ian Macqueen from Paradigm Capital. Please go ahead.

Ian Macqueen - Paradigm Capital

Hi guys, just a follow-up mostly to Gavin's question on West Bakr. My expectations obviously were a little bit higher for West Bakr but if you are in the kind of 5 to 6 range for 2014 and 2015 will that have a negative impact on your two key reserves that you are expecting to get out of West Bakr. And I guess the question really is, is it more a question of things aren't turning out as well as expected from a drilling perspective as far as development or is it a little bit of exploration, what is it exactly that has caused a decline in expected production rates?

Lloyd W. Herrick

Yeah, good question Ian. There is couple of factors, number of factors, certainly on the drilling side we don't see that this is going to change our reserves. We are carrying on it. A number of these wells were carried as proven or probably undeveloped on the books. Certainly the wells multi zone ones, where we take the wells deep down along the fall to intersect some deeper horizons, smaller ones but deeper, we start at the bottom and work our way up.

So, some of those factors we are producing from the shale (ph) for the deeper zones. Those zones tend to be a little thinner and they are also structurally closer to water contact. So some of those give you a nice early production and then the water starts to come in pretty quickly. As you can appreciate, the government is very hesitant to let us move up the haul to better producing zones when you are still making oil out of the lower zones. So, some of that is just the timing issue. The actual production we had some different kinds of pumps and facility issues, we are bringing in as we said 20 some pumps to replace some aged old smaller ones that aren't really property size, really it's a combination of things.

Ian Macqueen - Paradigm Capital

Okay, there is still is expectations that there could eventually be additional growth out of West Bakr or is it kind of more flat in the near term.

Lloyd W. Herrick

Yeah, I think we were optimistic we could make some really big initial gains. It is probably going to be more muted as opposed to quick ramp up in -- with a steeper decline and it's going to be more shallow or broadened, the actual reserves, we don't see that changing.

Ian Macqueen - Paradigm Capital

Okay, appreciate that, thanks very much. Actually one follow-up if there I realized that you are talking about 15% kind of chance to success in Northwest Gharib number 10 well. But if there was to be success in that well, what's the likelihood because you will have issues I believe with testing and you could clear the oil a bit, what's the likelihood of being able to book reserves at that location.

Lloyd W. Herrick

If we had a discovery in September, we probably drill on the price of well before the end of the year and file our development plan. We believe we can call it reserve once the plan is filed. So it would be a modest booking with just a couple of wells into it. The reserve consultants are going to look for more wells and we have as Ross said on that prospect, we have a lot of reasons why we want to drill it now, but we don't have extensive 3D coverage, so I think it would be not as big a booking at year end as it would ultimately be the next year.

Ian Macqueen - Paradigm Capital

Okay, thanks very much, appreciate it.

Operator

Thank you. (Operator Instructions) And your next question is from Victor Vallance from Edgecrest Capital. Please go ahead.

Victor Vallance - Edgecrest Capital

Sure, good morning gentlemen. Just want to get a better handle on cost going forward, the operating cost. I noticed year-over-year it's up 24% in Egypt, now you did mention that large part of its related to the well servicing cost, but going forward do you see that kind of trend or do you see that moderating or can you even possibly just keep a lid on cost or even reduce them going forward.

Lloyd W. Herrick

Yeah, those costs have crept up. Similarly some that is increased well servicing and frequency which cuts expense. There is an operating cost. The other aspect was the handling fees and the charges that we are paying in government owned EGPC process and handle our crude sales. Both have jumped up quite a bit over the last few years. We see that -- we will see some continued cost pressure on that but not at the same level.

The other aspect of your cost of course are even though oil production is flat to down, you do have increasing water lifting cost as those fields mature. Production declines you tend to produce more water with the oil, so you still have to move to those barrels. So, all our energy we use there is diesel driven generators, in those fields so, we will continue to see increased cost but I don't see it going out of control or anything like that. And the other thing to remember is that all these operating costs are totally cost recoverable in the quarter that they are incurred.

Ross G. Clarkson

Yeah, just to add to that, we are insensitive to operating cost to a large degree because we are in full cost recovery, we have excess cost oil, so operating cost go up two bucks, it just means that our net backs go up. I mean it really doesn't affect us that much.

Victor Vallance - Edgecrest Capital

Alright, okay. And then I just wondered if you are not putting out any guidance right now, are you going to put out any guidance for the remainder of the year, when you get a better handle on this -- on timing or just say forget it for this year and look to next year?

Ross G. Clarkson

Yeah, we just aren't comfortable putting a number up at this point given all the uncertainties about the pay, the timing, and delivery of these pumps and actually their new one's performance. We are optimistic they are going to perform as designed but I won't know that until they produce for a few months. So we have just taken the approach that funds go wide if we hold to 15,000 barrels a day number for the balance of the year. We certainly have more than enough funds flow to manage our program to go forward. So, unfortunately by the time we can give you a revised guidance, we would probably got close to the end of the year. We will review it certainly and we think it's appropriate we will provide additional guidance at that time.

Victor Vallance - Edgecrest Capital

Okay, thanks.

Operator

Thank you, the next question is from Shahin Amini from TD Securities. Please go ahead.

Shahin Amini - TD Securities

Hello again. What are the planned spot dates for NWG 6 and NWG 10, what is the expected time to TV on both of those wells.

Lloyd W. Herrick

I don't have an exact one on 6 Shahin, but not necessarily being drilled in the number sequence that will get probably drilled sometime in Q4 number is 6 well. The number 10 well is a little more visible because that's the first well that the rig on West Gharib is going to. We are getting near TV on that well and following some logging and testing and stuff, we are optimistic we will have that rig over on Northwest Gharib 10 by the end of this month. Drilling time on that well is a little deeper probably going down around that 8000 feet. It will a little bit longer and then, when we are actually done we will -- the actual drilling time is probably only 3 weeks or 4 weeks maybe less. It will really depend on what kind of additional testing or what we need to do with the well, so realistically we may have something at the end of September to talk about, early October.

Shahin Amini - TD Securities

Okay. And one more question if I may on the oil price. I mean, we have seen a lot of flash points in the Middle East but the Brent seems to be very weak in recent few days, management can send about offering for oil price any plans to hedge?

Ross G. Clarkson

Generally no Shahin. Because of the way that PSC's work, there is -- we have kind of a governor on all this money we can make on the upside but also what happens on the downside. So from our perspective we feel pretty comfortable in the current range anywhere from $90 to $110. I don't think we will be considering hedging once we start seeing some visibility on a going south of 90. We start to look at it more seriously but today we wouldn't be. And the other thing that is an issue for us that we have to consider is that, our production that we produce this month, we may not get paid for six or eight months.

So, in dealing with the hedging you don't have a matching on your payments.

Shahin Amini - TD Securities

Okay, alright thanks.

Operator

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

Ross G. Clarkson

Well, thank you everyone. TransGlobe has faced some production challenges over the past six months. But for the most part, these are mechanical issues that we can overcome overtime. The replacement pumps are arriving in the field and still some of them -- more of them are coming and we expect by fourth quarter we will see a turnaround on that. We are working to get Northwest Gharib drilled and into production just as soon as we can, which will start to move the numbers in to early 2015.

We do see a continued improvement in the political situation in Egypt and the economic situation, some of that was the addressing of the subsidies and there is quite a bit of discussion about additional dollars coming from the government to pay down their debt. If we see additional dollars then we will look to apply some of that, sort of windfall to new projects or potentially share buybacks. But we are not going to consider those until we get more clarity on the Egyptian government's position on paying down their debts. But that's all we have for now, thank you very much for participating in our Q2 conference call.

Operator

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

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Source: TransGlobe Energy's (TGA) CEO Ross Clarkson on fgfQ2 2014 Results - Earnings Call Transcript
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