TransGlobe Energy: Potential Upside with a Nice Price Floor

TransGlobe Energy (TGA) has two things that I really like to see in a stock – a price floor based on the value of its current oil reserves and potential upside due to its exploration program.

The Floor

I think there is a price floor for TGA built in as a result of its current proven and producing wells. The company has a NAV of about $5.00 based on $80 oil and using proven reserves, 70% probable reserves and 50% probable reserves (2.30 +2.00+.70 - see Jefferies June 30th report). Being conservative and slightly pessimistic, I’d say the floor for this stock is about $3.60.

The Potential Upside

TGA has 3 unexplored blocks in Yemen, 72, 75 and 84 (awaiting approval by parliament). TransGlobe Energy plans to begin drilling 72 by the end of the year and plans to get data on the other two blocks in the next year. Currently, there is not enough info to know with any sort of reasonable certainty how much these blocks are worth. Lucky for investors, they can’t be worth less than nothing!

Hedging – Trying to find Stability in a Volatile Oil Market

TransGlobe hedged about 26% of 2008 production at $82 a barrel – which accounted for Thursday’s 5.4 million dollar loss (20.4 million dollar derivative loss as contacts were marked to market). On a perhaps happier note, TransGlobe energy only hedged 12% of 2009 production – which can be seen as a bad thing if you are looking for stability or a good thing if you are trying to cash in on the extremely volatile price of oil. If you are looking for stability in the oil market might I suggest you try one of the integrated companies like Exxon (XOM).

TGA is for a different type of investor, the growth/speculative investor looking for a nice risk/reward ratio- not the super risk averse investor looking for dividend income and slow, steady capital appreciation.

The Numbers

Earnings came out Thursday and they were great. Debt was down from $98 million to $43 million on sale of Canadian assets, cash flow was up to a record $18.5 million, and average production was a nice 7,283 Bopd. The numbers on all the statements were good with the exception of the 20.4 million dollar derivative loss. But honestly, I think the long term impact of that unrealized loss will have very little or no impact on the company’s ability to continue to grow revenue and explore more wells- which is the name of the game.

Risks

Right now Yemen's government has a royalty interest of about 37%, but you know how fickle these foreign government types can be (see Russia, Kazakhstan, Mongolia). The government could want a larger share of the profits and that would significantly hurt TGA’s bottom line. Moreover, TGA operates in Egypt and Yemen, which are not exactly the safest places for foreigners to do business. But I feel that since TGA makes money for these foreign governments, the governments will not likely revoke any of the contracts in the near future.

In conclusion I like TGA because, at these prices, it’s like you are getting the potential finds at blocks, 72, 75, 84 for free. Think of a ball bouncing off a floor – once the ball hits the floor it can only go up.

Disclosure – Waiting for entry in TGA (will be long soon) .