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TransGlobe Energy (NASDAQ:TGA)

Q3 2012 Earnings Call

November 8, 2012, 11:00 am ET

Executives

Ross Clarkson – President, CEO

Randy Neely – VP, Finance and CFO

Lloyd Herrick – VP, COO

Analysts

Craig Allardyce – First Asset

David Frisbie – First Energy Capital

Al Stanton – RBC

Victor Vallance – Fraser Mackenzie

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 means of the US 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 general economic market and business conditions.

During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded, Thursday, November 8, 2012. 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 third quarter 2012 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.

We're going to start out as we usually do with a summary of the financial and operating highlights and then we'll move into the discussion of some of the drilling results in Q3 and some of the bid round (lands) and other plans for the future and then we'll follow with a Q&A session.

Randy Neely will review the financials and highlights of the quarter starting on the next slide.

Randy Neely

Thanks, Ross. First off, I'd like everyone to note that all the dollar figures we speak of are in US dollars. Revenues for the quarter were $152.6 million, which is an increase of 19% over Q3 2011 and year-to-date revenues were just over $460 million, which is a 35% increase over 2011.

Revenues were up chiefly as a result of increased sales, which averaged 17,124 barrels a day for the quarter and 16,942 barrels a day for the first nine months of 2012. These figures represent a 28% and 39% increase over Q3 and the nine months ended 2011 respectively.

Noteworthy is that our production from S1 in Yemen, which came back on stream in Q3 was not sold until this quarter. That difference of approximately 1000 barrels a day of gross production was held in inventory at the end of Q3 and will generate approximately $6 million in net revenue in Q4.

Funds flow from operations for Q3 of $35.4 million were approximately the same as Q2 but down approximately 7% from Q3 2011. The decrease from prior year is due to a combination of factors, including that most of our Yemen production was not sold in the quarter and our realized prices were down approximately 7% from Q3.

On a year-to-date basis, fund flows were up 14% to $106.7 million, which is entirely due to higher production.

Net earnings were impacted again this quarter by the accounting for the convertible debenture, which on a mark-to-market basis resulted in a $4.4 million loss in the quarter versus the $8.8 million gain we had in Q2.

At the start of the quarter, the market price for the convertible debenture was $99 and at September 30th it was approximately $103.5, which means that the market value for the debentures increased and as a result the issuer, being TransGlobe, has to recognize the corresponding loss, which in this case was the $4.4 million mentioned earlier.

So while these fair value adjustments are made according with IFRS, they do not represent the cash expanse or an increase in future cash outlay required to pay the convertible debentures.

On a diluted basis, the company posted Q3 and nine months earnings per share of $0.16 and $0.70 respectively.

During the quarter, the average price received for oil sales was just under $97 at $96.88, which was down 7% from Q3 2011. On a nine month basis, the average price received was just over $99 at $99.12 compared to $102.40 during the first nine months of 2011.

For the first nine months of the year, our oil price received has been approximately 88% of rent versus 90% in 2011, which is due to a lower price being received for our (West Backer) crude versus (West Gear) crude principally.

TransGlobe continued to achieve very strong after tax operating net backs of $26.21 a barrel in the quarter and $26.75 for the nine months ended September 30th. These figures are down from Q3 2011 of $33.78 and nine months ended September 30th of $31.60 chiefly as the result of that 80% of our increased production in Egypt has come from (West Backer), which received a lower price and has a lower sharing of profit oil and also due to not having any sales from block S1 in Yemen so far in 2012.

ON the capital expenditure front, during the quarter we spent $17.5 million including the acquisition of additional interest in (South Alemine) through the acquisition of the subsidiary of (inaudible).

For the nine months ended September 30th, we have spent approximately $59.5 million on capital and acquisitions.

Our accounts receivable balance of $243.5 million at September 30th represents approximately 10 months of sales. For comparative purposes, our (inaudible) average has generally been between five and eight months, so from an aiding perspective, the balance is not that much different.

The big difference, however, is that TransGlobe is now more than double the size since 2010 when our production in Egypt averaged 7259 barrels a day.

Subsequent to the end of the quarter at (Tanker Lifting), which had been allocated to the company early in 2012, was completed and we are now expecting payment of approximately $52.5 million later this month.

Now taking a quick look at our balance sheet, the company continues to maintain a very strong position with working capital standing at $252 million including cash of $45.7 million.

Our debt to trailing 12 month fund flow is equal to one time, which includes the convertible debenture and the debt balance.

TransGlobe effectively has zero debt position with working capital exceeding long-term debt and convertible debentures by $117 million. Our expectation is that all future capital expenditures in our existing operations will be funded out of cash flows.

I'll now turn it over to Mr. Herrick, who will present more detail on our operating activities.

Lloyd Herrick

Thanks, Randy. Q3 production increased 18,143 barrels a day, up 7% from Q2 primarily due to block S1 coming back on production in late July. Q3 sales averaged $17,124 during the quarter with approximately 1100 barrels a day put into inventory in Yemen due to the timing of (Tanker Liftings) for block S1 and block 32.

AS Randy mentioned, the Q3 inventory was lifted and sold subsequent to the quarter.

During Q3, Egypt production averaged 16,854 barrels a day. At (West Garab) we averaged 12,182 barrels a day during the quarter. That was partially impacted by trucking performance issues during the tender process for a new trucking contract which is now in place.

(West Backer) averaged about 4590 barrels a day during the quarter and (East Gazzelot) contributed 82 barrels a day which represents TransGlobe's first western desert oil production, which started in mid-September.

During Q3, Yemen produced an average of 1289 barrels a day and that's primarily up because block S1 was back on production in late July. In October, production averaged 17,330 barrels a day, approximately 4% lower than Q3 due to an illegal labor protest which shut in the (West Garab) production for approximately eight days in October. Currently in November, production is averaging just over 20,000 barrels a day.

This slide shows our daily production by major property for the past 12 months and there is a few trends I'd like to highlight.

(West Garab) production shown in red demonstrates the trucking impact in August, September and also the illegal labor strike in early October. Current (West Garab) production is approximately 12,700 barrels a day.

At (West Backer) production shown in yellow was partially impacted by a number of unscheduled pump changes during the quarter. Production in October and November has increased to the 4900 barrel a day level with improved pump performance.

We continue to upgrade the existing pumps and equipment as the pumps are repaired or replaced and we are scheduled to receive an additional parts and equipment this quarter which will further enhance our pump performance going forward.

These (inaudible) production shown in orange mark the first of our western desert production in September. TransGlobe's share of (East Gazzalot) is averaging approximately 500 barrels a day from the (inaudible) producers.

The return of block S1 shown in light green in late July has impacted – has been impacted, several shutdowns in early September due to additional tax on the export pipeline.

However, since early September, S1 has remained on production. When you combine it with block 32 in the dark green, they're producing just over 2000 barrels a day in Yemen. November total production's averaging 20,100 barrels a day.

We have updated our guidance for 2012. We expect production to average approximately 17,500 barrels a day for 2012, which represents a 44% increase over our 2011 production.

We expect funds flow for 2012 to be approximately $147 million or $1.96 per share assuming rent pricing of $100 a barrel for the balance of 2012. Funds flow would increase to approximately $151 million or just over $2 a share if rent averages $110 a barrel for the rest of the year.

Excluding acquisitions, we have reduced our capital program to $52 million for 2012, which represents a $26 million reduction from previous guidance. The reduction is primarily due to the timing of acquisition approvals in Egypt during 2012 which has delayed the start of the associated projects. These projects will be included in the 2013 capital program.

Egypt continues to be the company's primary focus with 97% of the 2012 capital program or $50 million dedicated to our Egypt projects. To date, the company spent an additional $28 million in 2012 on acquisitions in Egypt.

We do expect to provide 2013 guidance on production, funds flow and capital in our mid-December mid-Q press release. I will now turn it over to Ross.

Ross Clarkson

We're on Slide 10 here, which is our land position. We've got a nicer looking slide this time. You can see that the (new per block) is gone. We let that expire in July but we've also picked up a significant land position in the western desert over the past year.

And the new bid round lands are shown in gray on either side, either on the eastern desert or the western desert. These lands will proceed through parliament and the upper host approvals next year and we expect to start working on them in 2014.

I'm going to start o the eastern desert slide on Slide 11. So on Slide 11, the (West Garab) and (West Backer) assets in the center are our main producing assets and are the focus for the majority of our 2012 capital budget and will also comprise a significant portion of the 2013 budget.

The combined current production in this area is about 17,700 barrels a day of medium gravity oil that sells for rent minus and average of 12%. There are two drilling rigs working here, primarily on development drilling and there is a large focus on integrating facilities and reducing production bottlenecks to allow all the new oil wells we've drilled to be placed on production and that work is going to be ongoing over the next year.

The rust colored area surrounding our yellow lands is the northwest Arab block that we just won in the bid round and I'll talk about it in a few more minutes.

Going on to Slide number 12, it really shows the drilling results to date in the eastern desert and they've been very good results with 21 oil wells and just two DNAs in Q3 and in Q4 we've completed one oil well and one DNA that will probably be sidetracked later.

The rigs are now drilling on the (Amifield), which is the field down in the southern – southwest corner of the (West Backer) area and up on the (hose ship) field and we'll keep the rigs going there through most of 2013.

Moving over to the western desert, we've successfully added near-term development and high impact exploration to our portfolio with the Q3 closings of the El Paso and (inaudible) acquisitions. We now operate a new oil development project in South (Alamine) along with operatorship in a high impact exploration well in the (inaudible) concession with our new partner RWE.

We've moved into the western desert in Egypt due to the potentially larger reward (sightings). The western desert is where many majors and large independents operate. And as you can see on the slide, there are numerous pipelines criss crossing our concession areas, so our ability to move oil to the market is made that much easier.

Jumping over to each property, we'll go to Slide 14 and (East Gazzelot). This is our only non-operated property in Egypt. The operator brought the south block field into production I September during the quarter and completed all of the four original oil wells that we drilled for production and we started producing at about 1000 barrels a day gross or 500 barrels a day to TransGlobe.

They need to get out there and drill some additional development wells and secure additional facility capacity and we hope to see that happen through 2013.

Jumping through to South (Alamine), this is the project where we closed two transactions in June and July to bring this project to 100% working interest. Our Cairo team is now getting well license approval so we can start drilling appraisal wells on (Borak) and exploration wells on other parts of the project later this year. Well, probably early next year is when we'll get the rig started.

We see a lot of exploration potential on this block beyond the (Borak) development, so we expect to keep the rig busy here for quite a while and we expect that this will be our second producing area in the western desert with production starting up later in 2013 from the (Borak) development.

On South (Mariou), Slide 16, we spotted the (El Eziam) well on October 10th, which his a 14,500 foot, $9.6 million well that will test multiple horizons from 7000 feet on down. If the drilling proceeds smoothly, we should see results in January. It's a 90-day well.

Following (El Eziam), we have selected two additional locations that will be tested back to back in early 2013. One of them is up to the north in (Eziam) and then one is out on the coastal area further to the west.

Now for the bid round; two days ago we announced the results of the bid rounds. We won all four blocks that we submitted bids on. Three bids were for land areas immediately surrounding our (West Garab) and (West Backer) production and to the south as shown on the slide.

Clearly Northwest (Garab) onshore area, the block to the north, was the most important to us and to Egypt as we can immediately chase new reserves and get them on production in an expedited manner due to our existing operations and infrastructure in the area.

The other land additions to the south expand our exploration opportunities in the region that we are really getting to know very well. The west competition, especially for the two northern blocks – but that's really thanks to our success; we're not unnoticed in the region.

The other bid is not shown on a map. It's out on the – it's an exploration block out on the western desert. You can see that on Slide 10. It's to the left of (Gazzalot) and we hope to explore in that region. It's really an exploration block. We beat out Apache and (Sea Patrol) on that block.

These plans will provide TransGlobe with a size year drilling portfolio and really firmly establishes TransGlobe as one of the top Egyptian E&D companies.

On Slide 18, this is the Yemen slide. We're now back on production, as Lloyd mentioned, from block S1 and block 32 contributing about 2000 barrels a day to the company and there are plans by both operators to drill on blocks 32 and 72 in 2013.

Which brings me to Slide 19, this is our roadmap to 40,000. There are many pieces to this chart and some luck involved in the upper parts of it, in the exploration drilling. But the real key message here is that the TransGlobe team continues to execute in the field and corporately and the growth from the assets in Egypt has been phenomenal.

And the recent acquisitions have provided a land base and a development project and a list of exploration prospects that make this 40,000 target a possibility. The interesting thing about this chart is that we are not really projecting a growth rate that differs from our historical success rate. We've done it before and we hope to continue to do it.

You can see that we've moved the 2012 bid round lands down one level to account for the award of the Northwest (Garab) lands. And this is because we see that as a lower risk development project and the upper purple layer represents higher risk portion of our portfolio such as South (Mariou) and the new exploration lands from the bid round.

And we hope to continue to add layers onto this as we go through additional bid rounds in 2013.

With that, I'm going to turn it over to the operator for the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Craig Allardyce – First Asset.

Craig Allardyce – First Asset

I was looking at the receivables from the EGPC. So I guess net of the November shipment that'll be a 20% increase, do you see that topping out? Is there a cap we could think about? As your production goes up, will that number go up in a linear fashion?

Ross Clarkson

I think at this point in time our view is that we're working hard with EGPC to maintain our receivables about the level they were earlier in the year. And from that we're working with them to try to line up additional liftings next year. We're really just in the beginning of those discussions in terms of what liftings we may get next year and what sort of payment schedule we'll get next year.

But EGPC is very aware that they need to pay us. We obviously have come out as the lead bidder on the land sales and we're very important to them from an export position basis in the eastern desert.

So our view is we should – we hope to maintain it at this level and over time work it down in terms of months outstanding.

Craig Allardyce – First Asset

So if they're successful with the IMF loan that they're negotiating now, do you think that could possibly make it easier for them to pay that down quicker?

Ross Clarkson

Well, we think every little bit helps but I don't think we could tie any one event to necessarily a change automatically in our receivable balances. But again, we have a very good working relationship with EGPC and we'll continue to work with them as we move forward and I think we just demonstrated – earlier in the year I think we told everyone we were going to get 1.5 liftings and we got 1.5 liftings and we've continued to collect amounts in between those time periods as well, albeit smaller amounts.

Craig Allardyce – First Asset

So with respect to (inaudible) ratifying that latest round, what is the status with that because they're being the – I guess the military government is on the way out. Is there an official time when they're going to sit again?

Lloyd Herrick

Well, what has to happen – right now they're just finalizing a constitutional rewrite. That will – within I think four weeks then they have to hold another election for parliament just to redo the election they had last spring, so they've got an interim government in place.

We expect that potentially in Q1, so the next sitting will be in probably Q2 or Q3. But realistically, we don't expect to see these contracts ratified and through the upper house and signed off until the end of next year, so we've projected them in our plans as a 2014 expenditure and 2014 start of production on northwest (Garab).

Operator

(Operator Instructions) Your next question comes from the line of David FRisbie – First Energy Capital.

David Frisbie – First Energy Capital

I have two questions. The first one is on East (Gazzalot). What kind of prediction can we expect for the end of 2013? And my second question is about the new blocks. What is the (second prize) in terms of potential predictable sources? What are your estimates of the resources from these new concessions?

Ross Clarkson

Yes, the – I'll start with the first question – or the second part as far as the potential on the new blocks. Certainly Northwest (Garab), we've come out and said we've got 45 development locations to drill on that and I think you could take an average upper (nukle) well on that and work that out.

As for the other three blocks, they are purely exploration at this stage. We have to shoot 3D seismic and really come up with a plan for those. So we have not put out any numbers, so we think they're on trend with other exploration areas that have been successful. But to put a number around it would be a little difficult at this stage.

Lloyd Herrick

This is Lloyd here on your question on East (Gazzalot). We're not expecting much change by the end of this year. 2013, it's hard to predict. We've yet to meet with the operator and firm up a capital program for 2013. We're hoping to do that later this month.

We would like to see a pretty aggressive drawing program but we have to work with our partners on that. But we see a lot of potential to grow the existing gross 1000 barrels a day and start increasing that.

So they wanted to see how the wells are performing. The wells have been performing pretty well, so we're optimistic that we'll get to a common drawing program for next year. We'll have some guidance out on that in December.

Operator

(Operator Instructions) Your next question comes from the line of Al Stanton – RBC.

Al Stanton – RBC

I think I'm combining the two topics everyone's asking about is the receivables and the new acreage. Was there any interaction in the two? Were you able to negotiate around repayment of the receivables to get better terms or is perhaps the $!00 million that you're committed to in programs actually a met figure having reduced or can that figure actually be reduced in some way wheeling and dealing with the receivables?

Randy Neely

Yes, Al, obviously that is a potential negotiation point but that won't be entered into until we see ratification and I don't think we're going to discuss negotiations with EGPC on this venue.

Al Stanton - RBC

Then in terms of other opportunities, do you want more to put on your plate because there are obviously other rounds coming?

Ross Clarkson

Yes, there are. Well, they're supposedly around being announced end of next week for quite a few new blocks, I think 40 new blocks and there's also in our discussions with EGPC they're mentioning another round coming up in Q1.

So given that there's quite a bit of activity there, we'll certainly be looking at everything but can't predict whether we'll be bidding on anything because we haven't seen all of them yet.

Operator

Your next question comes from the line of Victor Vallance – Fraser Mackenzie.

Victor Vallance – Fraser Mackenzie

With regards to (Borak), if you're successful with these appraisal wells, do you have to then apply for a production license? And if that's the case, is there a risk of seeing a delay in receiving the production license because of the issues with getting approvals with the Egyptian government?

Lloyd Herrick

Yes, Rick, that's – I guess the approval process always has potentials for delays but you actually apply for a development lease and we're looking to do that early on, possibly concurrently with the appraisal drilling. We feel confident enough to move forward.

So we're hoping we can fast track that. Certainly it's in Egypt's best interest to get new developments going, so I think they will be quite supportive, so we're not anticipating a lot of delays in that.

Victor Vallance – Fraser Mackenzie

So you're pretty confident about that ramp in the back half of 2013 with a good portion of that coming from the (Borak) and South (Alamine) block, right.

Lloyd Herrick

Yes, things can slide a quarter, Vic, but we're pretty comfortable with what our plans are that we should be on production next year.

Victor Vallance – Fraser Mackenzie

And will most of that production be initially trucked?

Lloyd Herrick

We expect it will, yes.

Operator

(Operator Instructions) Mr. Clarkson, there are no further questions at this time. I will turn the conference back to you. Please continue with your presentation or closing remarks.

Ross Clarkson

Thank you, everyone. The next update that we'll have out will be a mid-quarter Q4 report, probably early to mid-December where we're going to outline our 2013 budget and targets for 2013.

And then of course in January we'll be talking about some well results. That’s all for now. Thank you for participating in our Q3 conference call.

Operator

Thank you, ladies and gentlemen. That does conclude the conference call for today. We thank you for your participation and ask that you …

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