TransGlobe Energy Corporation (NASDAQ:TGA) Q3 2018 Earnings Conference Call November 8, 2018 10:00 AM ET
Ross Clarkson – Chief Executive Officer
Randy Neely – President
Lloyd Herrick – Chief Operating Officer
Eddie Ok – Chief Financial Officer
Stephane Foucaud – GMP Securities
Al Stanton – RBC Capital Markets
Good morning, ladies and gentlemen, and welcome to the TransGlobe Energy's Q3 2018 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 that 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, Chief Executive Officer. Please go ahead, Mr. Clarkson.
Good morning, everyone, and welcome to TransGlobe Energy Corporation's third quarter 2018 conference call. This is Ross Clarkson, CEO. And with me, I have Mr. Randy Neely, President; Lloyd Herrick, COO; and Mr. Eddie Ok, Vice President, Finance and CFO. Randy is going to be assuming the President and CEO position from me on January 1. And I am going to stay in my board position.
We will be in good hands with Randy. And I am sure he will do great things at TransGlobe. As usual, we are going to start out with a summary of the financial and operating highlights. And then we move into a discussion of the plans for the balance of the year. And then, that will be followed by Q&A session. Eddie Ok will review the financials and highlights of the quarter starting on the next slides.
Thanks, Ross. Good morning to everyone and thanks for joining us on the call. Average production volumes for the quarter were about 14,300 Boe per day compared to just over 14,900 Boe per day in Q3 '17. Our sales for the period were matched quite closely with our production numbers. And we ended out the quarter with just under 500,000 barrels of Egyptian crude in inventory. We continue discussions with EGPC to schedule our fourth quarter listing.
Our funds flow from operations continued to stay resilient due to price strength across WTI and Brent though differentials in Canada have been impacting our sweep-through [ph] realized pricing. For the quarter, funds flow decreased by approximately 12% quarter-over-quarter, a little counterintuitive here given the over 30% pricing improvement in our liquids, but in Q3 2017, our Egyptian operations sold around 3000 barrels a day more than produced and royalty and taxes from those barrels recognizing prior quarters, hence the delta.
The boost to the company's results from commodity price rate were partially offset by continued pricing weakness in Canadian dry gas and higher than normal differentials applied to our liquids production also in Canada. Egypt's OpEx is stabilized at around 960 barrel consistent with last quarter. And Canada's OpEx has come in at $7.11 Boe, a significant improvement over the prior quarter as we had no turnarounds in Q3 that resulted in shutting production.
G&A in the period was up when compared quarter-over-quarter with the prior year. The largest component to the increase in G&A relates to a re-pricing of stock-based compensation liability. This non-cash adjustment was approximately $1.6 million. With one listing completed, we ended out Q3 with $63 million in cash and about $52 million in working capital.
Next slide please. Our capital plan was originally balanced to a $55 per Brent level -- per barrel Brent level. And we are now budgeting total capital spend for 2018 of $40.4 million. The decrease is primarily attributable to our deferral of the outpost well previously discussed that would have evaluated at the most recent land acquisition in Canada. Current differences on Canadian light oil and gas were the primary motivation for this deferral. We continue to actively manager our debt and capital allocation strategy with the intent of reducing debt through the remainder of 2018 and focusing on cash flow accretive investment decisions. We paid a $0.035 dividend on September 14th to shareholders of record on August 31, 2018.
I'll pass things over for additional detail on our outlook for the rest of the year.
Unidentified Company Representative
Thanks, Eddie. Just on the previous slide, the 2019 plan that we announced this morning is primarily focused to maximize free cash flow which we tend to direct at future development opportunities in Egypt and outside of Egypt.
Production guidance for '19 is set at 14,000 to 15,000 barrels a day with a midpoint of 14.5 with Egypt targeting a midpoint of around 11.9 and Canada about a 2.5 Boe in 2019. The total capital program for 2019 is set at $34 million, which I'll discuss on the next slide.
Here's the 2019 capital program, total of $34 million, which is split approximately 70% to Egypt and just under 30% to Canada. In Egypt, we have six wells planned consisting of four development wells and two expiration wells in the eastern desert from 60% of the budget of the Egypt budget or $14 million is focused in the West Bakr concession, where we plan to drill three development wells, one expiration well, conduct up to 10 well completion operation optimization programs along with the Phase 3 expansion of the case station which we have to handle additional volumes to sustain production and increase reserve recoveries. We also have two wells planned for the Northwest Gharib, concession focused largely in development lease number one, which I'll discuss in more detail later in the presentation.
In the Western Desert, we've allocated $3.5 million for South Ghazalat to appraise and potentially develop the South Ghaz, six discovery, which is currently being prepared for testing. In Canada, we scaled back the original 2019 plant to four wells due to recent light oil differential headwinds associated with pipeline egress constraints currently in the western [indiscernible] system.
We have the next slide. This slide shows our daily production by major producing assets. October production was approximately 14,700 Boe with Egypt contributing approximately 86% of production. I'll draw your attention to the orange wedge which represents the West Bakr concession and is demonstrating the most growth due to the increased investment during 2018 and that's an area we'll be focusing on in 2019 as well.
Next slide; Slide 7 is a locator map of Egypt assets where there are two focus areas, the Eastern Desert is where we will -- are producing all of our oil at this time and the Western Desert has three concessions South Alamein, South Ghaz and our Northwest Sitra concession. The term Eastern and Western Desert refers to -- anything east of the Nile is considered Eastern Desert and everything west of the Nile is the Western Desert.
We'll now move into the Eastern Desert areas. This slide shows our Eastern Desert assets and summarizes the 2018 program and the 2019 plan. During 2018, we drilled eight wells, resolving in seven oil wells and one planned water injection well. The 2019 plan includes four development wells, three in West Bakr, one in Northwest Gharib and two exploration wells with one in West Bakr and one in Northwest Gharib.
Let's move onto the next slide to look at the projects in more detail. This slide is a map of the M Field on the western side of the K-block offsetting Meseda field on the GPC lands to the west. In 2018, we reached an agreement with GPC to drill two wells each inside the 250-meter buffer zone which we weren't permitted to drill in due to offset restrictions.
In Q3 we drilled our two wells, M-North and M-South resulting in two very good wells which are currently producing about 800 barrels a day each. We also plan to recomplete the M-19 well which has an Acyl A formation behind -- we'll get to that later this quarter. And in 2019, we planned to twin the M-10 well -- which is a bit further south [indiscernible] has a potential Acyl A and producer and ultimately will be used as a water injection well to support the pool.
Over to next slide; this slide shows our Northwest Gharib development lease number one. Well, we were primarily focused on the M Northwest Gharib 38 a pool which is under appraisal and development. This red bed [ph] pool was put on production a few years ago and was demonstrating pressure depletion due to limited aquifer support. To conserve pressure, we shut in the 38-A1 well which was producing around 200 barrels a day and drilled two wells to the south in search of a potential injector.
The first one fortunately encountered oil, which was placed on production and it's currently doing around 80 barrels a day on reduced grades. The second well, we drilled further down the structure to the south is just being completed and we believe we do have our injector. The 2019 plan will be to get the injection underway and establish pressure support for our Northwest Gharib pool.
Once that's established, we will bring back on a 38-A1 well and start to optimize the existing producers. We then plan in probably Q2 to commence some drilling. The first well we will drill will be a 38-A development well further up the pool to the north and then we will take expiration well down in Northwest Gharib 43 which will test the separate 12 block immediately north of the 38-A pool.
Next slide, I guess, I'll turn over to Ross to talk…
Yes, this is Slide 14, I'm going to take over and talk about a new discovery in the Western Desert. Because the first two cretaceous wells didn't work, we reassessed our plans and decided to move to a different location for our third cretaceous test.
We were drilling on the far left corner of the map, really attempting to extend the productive basin westward and for the third well we decided we'd move east in the third cretaceous test and that's centered in the midst of all of those oil fields and that's at the South Ghazalat 6 location. That prospect was drilled in October and we found light oil in three zones in the Bahariya Sands and these are good sands, high porosity and permeability.
We recovered and light oil and sample testing and now I have the testing equipment for a full blown test onsite and we're getting underway on that and we should have test results to announce in about two weeks. So we're pretty excited about all of this.
There are several additional small structures on this piece of land on the east side. So we will probably continue to drill there next year. We are definitely following the bear tracks now. So keep an eye on this project. The takeaway for the oil is only 12 kilometers away so it will take very little oil to get to an economic project.
Let's go to the next slide.
Okay. Thanks, Ross. This is a summary of our Canadian assets just north of Calgary out in the Harmattan area. In Canada, we drilled our six horizontal Cardium wells from a common pad which included five one-mile wells and our very first two-mile well or as people here call it, extended-reach-horizontals.
We just finished running the last casing yesterday and we will be moving the drilling rig off and then mobilizing the frac crews to get in there stimulate those wells. We're targeting to have that production rating to put on on-stream probably December of this year, certainly by the end of the year. Of the initial targeted production, when we started up will be a bit dependent on where we're at on the light oil differentials. We may defer that a little bit. These differentials stay as wide as they are, we expect them to improve in which case we put those on production.
In 2019, we have a four-well program all focused on the Cardium, three development wells in the main Harmattan and one outpost well to the south where we acquired additional lands earlier this year that we're calling Harmattan South. Certainly, these locations, we can easily and purely develop through existing locations and spool up as prices improve.
Unidentified Company Representative
Okay. Thanks, Lloyd. To end, we need to do a combination of hard work and improved Brent prices. You know that we are in an enviable position now to take advantage of the growing acquisition cycle in the industry, that currently did effectively net debt free with strong cash flows and a quick collection cycle.
In fact, the best collection cycle that the company's had for many years, which we continue to work hard to maintain. As we have said before, we are focused on growing the value of our shares for both internal growth and acquisition, a clear focus on NAV growth and cash flow growth or production growth to improve shareholders. Internally we are working on studies to prove the additional expectation and development to potential to Eastern Desert assets to potential new development Gulf of Suez Western Desert will give us additional running room that we have not estimated into 2019 guidance.
Externally, we continue to see go under looked and under developed asset to Suez similar to the West back or Western assets. So with that the current volatility in the oil price environment particularly at these favorable prices will lead to additional transaction that reasonable prices and that our aim listing since June, as we opened up the potential investor buyer markets significantly and with team that demonstrated to be much improved liquidity in our shares over the last six to eight months.
I'll now turn it over to the operator for questions.
Thank you. [Operator Instructions] The first question is from Stephane Foucaud with GMP. Please go ahead.
Hi, guys. Two questions from me, first on South Ghazalat, so this discovery, you talk about the upcoming test program, I wonder whether you can give us an indication of what to expect, I mean what would you consider as a good result, a very good result, a disappointing result, to give us some sense of what to look for and perhaps an idea of how much so far you think you might have found?
My second question around South Alamein, so I noticed that one of the important location that we're hoping to get approved [indiscernible] and I'm wondering therefore what's the way forward, is this a scenario here where when the license expires, you just walk, and that's it for South Alamein. Thank you.
Yes, Stephane it's Lloyd here. Certainly on the South Ghazalat discovery, it's a bit early to make projections on what we really got here, but the early logging indicates some nice quality stands. We expect to get a pretty decent rate. We're just going to give it a short flow test and then up in test hold with zones. Some of the offsetting fields that's seen testing is Bahariya formation, anywhere from 200 to 2,000 barrels a day. There are not super fixed zones, but they appear to be fairly high quality, so we are optimistic. As we said, we should have those results out in certainly in the next couple of weeks, and we do have plans where we can take the world market. It's about 10, 15 kilometers to nearest truck loading station. So we could look at a pretty rapid development and get the encouragement that we think is there. So we probably won't put out any size numbers. It's certainly not going to be in the tens and millions, it's probably in the one, two's of millions kind of oil and place numbers, but that work needs to be finished before we can put on a hard target.
With respect to South Alamein, yes, our primary focus was getting the 24x drastic [ph] target growth within that substantial target, and unfortunately [indiscernible] we had a green light from military when we actually got the written final approval that continue to be [indiscernible] location. So we do not plan to drop the concession at this point to let it lapse. We certainly are in discussions with EGPC for further extensions and way forward. We hope to have some clarity around that in the coming month. We certainly need to get that addressed prior to the official expiry, which is January, but we've had a good relationship with EGPC in this area. They understand the difficulties, and trying to get approvals, so we're optimistic that will be able to find a solution to preserve this concession, and ultimately we hope to get access to this location.
Thank you. [Operator Instructions] The next question is from Al Stanton with RBC. Please go ahead.
Yes, good afternoon. I want to just two topics if I may, the first one is so on, on sales I was wondering if you can give us any guidance as to whether there's been any local sales in Q4 today and also on with respect to export by the time the agreement of the cargo is agreed and then the payment process is fulfilled. I was wondering when will we know that, that will with wanted to be a Cargo this year what's the sort of if you haven't agreed something by the middle of November is unlikely you will get paid before January, can you try some color on those topics?
Yes, our monthly or periodic sales EGPC through the third quarter we just didn't see the need for given where a cash position was that, right now to-date we may know was sales EGPC from a local standpoint again cash position is such that we don't see the need and we're trying to balance our crude inventory with the possibility that fourth quarter crude listing. In terms of timing, you're right I mean there is some lead time on marketing the cargo but we've got a little bit of time yet here so, there is the possibility that we get something in by the end of the year or it could shifted to January.
Okay and then the second topic was acquisitions I mean you just now that you're still looking to be counted cyclical, which kind of well might suggest you do a deal in Canada. Is that a possibility?
Al Stanton, it's Randy. The short answer to that is we don't have any aspirations at this point time to grow in Canada through an acquisition. The Canadian assets I think we would continue to look for ways to into land around them as those opportunities present themselves we're not actively looking for acquisition in Canada. We think the opportunity set for us is best to in our general region of expertise which we would describe it a Middle East Africa, potential Eastern Europe as, the opportunities that there is small but we also believe the competition is more. And I think our skill set is best suited for that type of acquisition rather than here in Western Canada, the Canadian asset acquisition was done very counter cyclical. We've had differential like although expectation is differentials for next 12 to 18 months and that's quite an asset that we have there, so we're not really overly concerned about the Canadian situation but we don't think that expends in Canada really suites our scope set.
Okay, can I just ask a follow on question then I mean you go bitten by the differential because they bite you again and year end. This is going to be the next systematic probably more fuel payers than ourselves that year end oil prices results in reserved than great.
We don't think there'll be a material change in the reserve book from the current oil price differentials because I think everybody sees in the team fairly temporary.
Yes, just on that note I mean we've run the numbers at the current differential and certainly the future development on the Cardium, all those projects still make sense. They're not very robust at the current differential and that's why skill back, still cash flow positive we fully expect those to remain on the book. It just may have a different profile to it and then we dial back remember wells over proposed in this year versus our original plans with a little bit more and those locations are just get shifted out a year when we expect the pipeline address situation to get in a better shape.
Very clear, thank you.
Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Clarkson.
I'm going to turn it over to Randy Neely because he's the new guy.
Okay, well thanks everybody for joining us today. We appreciate it, appreciate your interest and your support and as always managements generally available for questions offline as well, so please join us next time and we'll see you soon.
Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.