TransGlobe Energy Corporation Announces Third Quarter 2012 Financial and Operating Results

CALGARY, ALBERTA--(Marketwire - Nov 8, 2012) - TransGlobe Energy Corporation (TGL.TO) (TGA) ("TransGlobe" or the "Company") is pleased to announce its financial and operating results for the three and nine months ended September 30, 2012. All dollar values are expressed in United States dollars unless otherwise stated. 

HIGHLIGHTS

  • Increased production to an average of 18,143 Bopd (17,124 Bopd sales) for the quarter;
  • Third quarter funds flow of $35.4 million;
  • Third quarter earnings of $11.8 million (includes a $4.4 million unrealized loss on convertible debentures);
  • Spent $17.5 million on exploration, development and acquisitions during the quarter;
  • Drilled 9 wells in the quarter resulting in 6 oil wells and 3 dry holes;
  • Ended the quarter with $45.7 million in cash and cash equivalents; positive working capital of $252.2 million or $117.4 million net of debt (including convertible debentures);
  • Closed corporate acquisition of Cepsa on July 26, 2012, providing the remaining operated 50% working interest in the South Alamein concession; 
  • The Company''s first oil production in the Western Desert of Egypt;
  • The Company was the successful bidder on four concessions offered in the EGPC 2011 bid round (NW Gharib, SW Gharib, SE Gharib and S Ghazalat).

A conference call to discuss TransGlobe''s 2012 third quarter results presented in this news release will be held Thursday, November 8, 2012 at 9:00 AM Mountain Time (11:00 AM Eastern Time) and is accessible to all interested parties by dialing 1-416-981-9005 or toll-free 1-800-736-4610 (see also TransGlobe''s news release dated November 1, 2012). The webcast may be accessed at http://events.digitalmedia.telus.com/transglobe/110812/index.php

FINANCIAL AND OPERATING RESULTS

(US$000s, except per share, price, volume amounts and % change)

  Three months ended
 September 30
  Nine months ended
 September 30
 
Financial 2012 2011   %
Change
  2012   2011   %
Change
 
Oil revenue 152,624 128,265   19   460,128   339,875   35  
Oil revenue, net of royalties 74,540 71,769   4   225,385   187,145   20  
Derivative gain (loss) on commodity contracts - (13 ) -   (125 ) (599 ) 79  
Production and operating expense 11,622 9,762   19   35,024   26,404   33  
General and administrative expense 7,350 4,357   69   20,829   13,591   53  
Depletion, depreciation and amortization expense 11,005 10,300   7   34,516   26,263   31  
Income taxes 22,742 19,442   17   65,660   53,146   24  
Funds flow from operations* 35,397 37,980   (7 ) 106,659   93,507   14  
  Basic per share 0.49 0.52     1.46   1.29    
  Diluted per share 0.47 0.51     1.41   1.25    
Net earnings 11,774 26,110   (55 ) 52,898   50,873   4  
Net earnings - diluted 11,774 26,110   (55 ) 52,898   50,873   4  
  Basic per share 0.16 0.36     0.72   0.70    
  Diluted per share 0.16 0.35     0.70   0.68    
Capital expenditures 12,579 20,160   (38 ) 31,501   59,544   (47 )
Corporate acquisition 4,881 -   -   27,978   -   -  
Working capital 252,242 164,132   54   252,242   164,132   54  
Long-term debt, including current portion 31,878 57,303   (44 ) 31,878   57,303   (44 )
Convertible debentures 102,920 -   -   102,920   -   -  
Common shares outstanding            
  Basic (weighted-average) 73,450 72,993   1   73,249   72,358   1  
  Diluted (weighted-average) 75,621 75,371   -   75,501   74,906   1  
Total assets 635,529 465,262   37   635,529   465,262   37  
                       

* Funds flow from operations is a measure that represents cash generated from operating activities before changes in non-cash working capital and may not be comparable to measures used by other companies.   

Operating            
Average production volumes (Bopd) 18,143 13,406 35   17,284 12,158 42  
Average sales volumes (Bopd) 17,124 13,406 28   16,942 12,158 39  
Average price ($ per Bbl) 96.88 104.00 (7 ) 99.12 102.40 (3 )
Operating expense ($ per Bbl) 7.38 7.92 (7 ) 7.54 7.96 (5 )

Corporate Summary

TransGlobe Energy Corporation''s ("TransGlobe" or the "Company") total production increased to a record 18,143 barrels of oil per day ("Bopd") during the quarter. The increase in production over Q-2 was due to Block S-1 in Yemen coming back on production July 27th, production increases at West Bakr and new production at East Ghazalat. Total oil sales for the Company averaged 17,124 Bopd during the quarter, 1,019 Bopd less than production as Block S-1 production in Yemen was held in inventory and sold subsequent to quarter end.

The Safwa field in East Ghazalat was placed on production in mid-September and represents the Company''s first oil production in the Western Desert. The Safwa field is producing approximately 1,000 Bopd (500 Bopd to TransGlobe) from the four existing wells.

In the Eastern desert the Company continued drilling at West Gharib and West Bakr with a drilling rig on each concession. Concurrent with the drilling activities, the Company advanced a number of facility projects focused on the integration of the West Bakr and West Gharib assets to improve delivery of production to the Government-controlled ("GPC") processing and handling facilities. In early November the Company expects to move a portion of the Hana/Hana West production in West Gharib through the West Bakr system pipeline, which will partially alleviate some of the production constraints in West Gharib. The Company has approximately 300 Bopd of production shut-in and an additional 2,400 Bopd (12 Nukhul wells at 200 Bopd using the average 90 day Upper Nukhul production rate after completion and stimulation) of production behind casing at West Gharib due to facility constraints at the GPC receiving terminal. The Company commenced a six-well completion and stimulation program in October to evaluate new pools/extensions and to provide additional productive capacity; the remaining wells will be completed in 2013 as required. The Company expects to be able to bring on the shut-in production through the winter and bring on the additional behind casing production to off-set natural declines during 2013.

During the quarter TransGlobe acquired Cepsa Egypt SA B.V. which holds and is operator of the remaining 50% interest in South Alamein. TransGlobe now holds a 100% interest in the South Alamein concession. The Company is advancing an initial five-well drilling program at South Alamein which could commence prior to year end, depending upon the approval of the necessary well permits. In addition, the Company finalized the drilling plans for the Al Azayem #1 exploration well on South Mariut (60% operated interest). In October drilling commenced on the 14,500 foot Al Azayem #1 exploration well which represents the Company''s first operated well in the Western desert and the start of a significant exploration drilling program in the Western desert. 

Dated Brent oil prices were strong in the third quarter, averaging $109.61 per barrel. The West Gharib and West Bakr crude is sold at a quality discount to Dated Brent and received a blended price of $96.72 during the quarter. The Company had funds flow of $35.4 million and ended the quarter with positive working capital of $252.2 million or $117.4 million net of debt (including the convertible debentures). The Company''s accounts receivable balance, (net of excess cost oil due to Egyptian General Petroleum Company ("EGPC")), increased to $222.8 million. Subsequent to the quarter a tanker lifting of approximately 512,000 barrels allocated to the Company by EGPC, was completed October 24th to 26th. The proceeds of that lifting, estimated at $52.5 million, are due to be received in November directly from the purchaser. This payment is expected to bring the accounts receivable balance in-line with the historical average of five to eight months aging.

The Company had net earnings in the quarter of $11.7 million ($0.16/share), which included a $4.4 million ($0.06/share) non-cash unrealized loss on convertible debentures. The $4.4 million loss represents a fair value adjustment in accordance with IFRS, but does not represent a cash outflow or a change in the future cash outlay required to repay the convertible debentures.

In the Company''s view, the political environment in the Arab Republic of Egypt ("Egypt") continues to improve and business processes and operations are proceeding as normal. The Company has a strong financial position and continues to pursue business development opportunities both within and outside of Egypt.

ARAB REPUBLIC OF EGYPT

West Gharib, Arab Republic of Egypt (100% working interest, operated)

Operations and Exploration

The Company drilled five wells during the third quarter in the Arta/East Arta area resulting in three Nukhul oil wells (two new pools), one potential Thebes oil well (new pool) and one dry hole. A step-out well was drilled near the Fadl field subsequent to the quarter which encountered the target zone on the down-thrown side of a fault. The well has been plugged back to surface casing and suspended as a potential future sidetrack location. The drilling rig is currently drilling a step-out location at Hoshia. It is expected that the drilling rig will continue working in West Gharib throughout 2013.

Production

Production from West Gharib averaged 12,182 Bopd to TransGlobe during the third quarter, essentially flat (1% or 174 Bopd lower) with the previous quarter. The production gains to the 12,700 Bopd to 13,000 Bopd level that were achieved in the third quarter were offset by several issues. 

In August and early September production was lower due to performance issues associated with the incumbent trucking contractor during the tender process for a new trucking contract. A new trucking contract was awarded in the fourth quarter which has improved trucking operations. 

At the end of September, production was impacted by an 8-day illegal labor protest at the West Gharib field entrance which shut down crude oil trucking from West Gharib from September 30 to October 7. The labor protest involved subcontractor day-rate workers who were seeking full time employment. The protest was ruled illegal by the courts on October 7 and disbanded peacefully by the Ministry of Interior. It is estimated that approximately 100,000 barrels of production was deferred during the eight day protest, which will impact fourth quarter sales by approximately 950 Bopd. 

Production averaged 9,867 Bopd to TransGlobe during October, primarily due to the illegal labor protest. Current production in November is approximately 12,800 Bopd. 

Of the 21 wells drilled in 2012, 13 wells are awaiting completion and stimulation. The wells will be completed and brought on to production to offset natural declines and as additional sales capacity becomes available at the GPC terminal over the next 12 months. The Company commenced a six-well completion and stimulation program in mid-October to evaluate new pools and pool extensions.

Facility Projects

The Company has completed a number of facility projects and several more are underway at West Gharib and West Bakr to reduce the amount of water trucked with the oil from West Gharib and increase sales capacity at GPC. The larger facility projects completed and underway are summarized below:

  • South Arta Multi Well Battery ("MWB") completed December 2011;
  • Hoshi MWB completed May 2012;
  • Hana West Treater completed July 2012;
  • West Bakr K station offloading system for West Gharib production targeting Q-4 2012;
    • Initially trucking the Hana/Hana West production to K station completed early November 2012.
  • Initially trucking the Hana/Hana West production to K station completed early November 2012.
  • Hana Treater facility targeting Q-4 2012;
  • East Arta MWB in the northern portion of the field targeting Q-1 2013;
  • Arta Central Processing Facility ("CPF") Q-4 2013.
  • Expand tie-in facilities to allow West Gharib crude from Northern fields production (Hoshia, Arta, East Arta) to tie into the West Bakr pipeline facilities.

The Company continues to progress a number of longer term infrastructure projects in the West Gharib/West Bakr fields to deliver West Gharib production to GPC by pipeline and thereby eliminate oil trucking outside the West Gharib field area.

Quarterly West Gharib Production (Bopd)        
  2012 2011
  Q-3 Q-2 Q-1 Q-4
Gross production rate 12,182 12,356 12,065 11,280
TransGlobe working interest 12,182 12,356 12,065 11,280
TransGlobe net (after royalties) 6,757 6,847 6,581 6,255
TransGlobe net (after royalties and tax)* 4,741 4,805 4,536 4,358
* Under the terms of the West Gharib Production Sharing concession, royalties and taxes are paid out of the Government''s share of production sharing oil.

West Bakr, Arab Republic of Egypt (100% working interest, operated)

Operations and Exploration

The Company drilled two wells during the third quarter resulting in one oil well in the H field and one directional well in the K field (K27) which had to be abandoned prior to reaching the target zones due to drilling problems in a thick shale section. Subsequent to the quarter, the Company has drilled an oil well in the K field (K28) which will be completed and placed on production from one of the three oil zones encountered.

The rig is currently drilling on the M field targeting a new pool. The initial three-well drilling program for 2012 has been increased to eight wells (two wells in H, two wells in M and four wells in K). In addition to the planned eight-well drilling program, the West Bakr team has identified an additional 14 drilling targets. It is expected that the drilling rig will continue working in West Bakr throughout 2013.

Production

Production from West Bakr averaged 4,590 Bopd to TransGlobe during the third quarter, a 9% (360 Bopd) increase from the previous quarter. Production increases from new wells and recompletions were offset during the quarter by a number of unscheduled pump changes and some initial sand clean-outs on new producers. 

Production has averaged 4,863 Bopd in October primarily due to better pump performance. The Company expects to achieve improved pump performance similar to the West Gharib operations as equipment is repaired or replaced with better quality components over the balance of 2012.

Quarterly West Bakr Production (Bopd)        
  2012 2011
  Q-3 Q-2 Q-1 Q-4*
Gross production rate 4,590 4,230 4,358 138
TransGlobe working interest 4,590 4,230 4,358 138
TransGlobe net (after royalties) 1,268 1,244 1,239 45
TransGlobe net (after royalties and tax)** 939 941 926 35

*  Purchased December 29, 2011, includes three days of production.

**  Under the terms of the West Bakr Production Sharing concession, royalties and taxes are paid out of the Government''s share of production sharing oil.

East Ghazalat, Arab Republic of Egypt (50% working interest)

Operations and Exploration

During the third quarter the Company finished drilling the East Ghazalat 2x exploration well (Eradah prospect), which was abandoned.

Production

During the quarter the operator completed and equipped the four existing Safwa wells for production and installed production facilities at Safwa. First oil production started September 9th at 200 Bopd (100 Bopd to TransGlobe) from one of the four wells with the other three wells placed on production over the following 30 days. Production from East Ghazalat averaged 82 Bopd to TransGlobe during the third quarter. Production during October averaged 549 Bopd to TransGlobe, with the four Safwa wells on production.

Production is trucked to a receiving terminal at the Dapetco operated South Dabaa facility approximately 35 kilometers southwest of Safwa. 

Quarterly East Ghazalat Production (Bopd)        
  2012 2011
  Q-3 Q-2 Q-1 Q-4
Gross production rate 163 - - -
TransGlobe working interest 82 - - -
TransGlobe net (after royalties) 41 - - -
TransGlobe net (after royalties and tax)* 33 - - -

* Under the terms of the East Ghazalat Production Sharing concession, royalties and taxes are paid out of the Government''s share of production sharing oil.

South Alamein, Arab Republic of Egypt (100% working interest, operated)

TransGlobe now holds a 100% working interest in the South Alamein Production Sharing Concession ("PSC") through two, wholly-owned subsidiary companies. On June 7, 2012 the Company acquired a company from EP Energy LLC which holds a 50% interest in the South Alamein PSC. On July 26, 2012 the Company acquired a company from COMPANIA ESPANOLA DE PETROLEOS, S.A.U. which holds the remaining 50% working interest in the South Alamein PSC.

The South Alamein concession is located onshore in the Western Desert of Egypt and includes portions of the prolific Alamein and Tiba basins. The current size of this exploration concession is 1,423 square kilometers (355,832 acres), and is in the final two-year exploration phase. The concession includes an oil discovery well, Boraq-2X. The primary Cretaceous zone tested at a rate of 800 to 1,323 Bopd of 34 API oil with no water and a 13% pressure drawdown during a 28 hour drill stem test ("DST"). A secondary Cretaceous zone tested at a rate of 274 Bopd of 32-35 API oil and 4% water during a 23 hour DST. Test rates are not necessarily indicative of long-term performance but it is anticipated that the well should be capable of producing approximately 1,700 Bopd.

Operations and Exploration

No wells were drilled during the third quarter. The Company has scheduled a drilling rig to commence an initial five-well drilling program starting in December 2012 or early 2013 which is dependent on receiving the necessary well permits. The program will include two appraisal wells at Boraq and three exploration wells. It is expected that a drilling rig will remain in the South Alamein concession throughout 2013. The Company is targeting first production from the Boraq discovery in mid-2013.

South Mariut, Arab Republic of Egypt (60% working interest, operated)

The South Mariut concession is located in the Western Desert of Egypt and is onshore along the Mediterranean coastline, adjacent to prolific offshore hydrocarbon fields and southwest of the city of Alexandria. The current gross size of this exploration concession is approximately 3,350 square kilometers (828,000 acres). The South Mariut concession is in the first, three-year extension period which expires on April 5, 2013. A further two-year extension is available under the PSC.

Operations and Exploration

No wells were drilled during the third quarter. Subsequent to the quarter, drilling commenced on October 10th at Al Azayem #1. The well is targeting several stacked horizons with four-way closures identified on 3-D seismic, and drilling is expected to take approximately 90 days. The total depth is expected at approximately 14,500 feet in Jurassic reservoirs. In addition to the Al Azayem #1 well, the Company is in the process of finalizing the selection of two additional exploration prospects for drilling in early 2013. It is expected that the joint venture partners will finalize the second and third exploration locations prior to year-end.

Nuqra Block 1, Arab Republic of Egypt (71.43% working interest, operated)

Operations and Exploration

The Nuqra Block exploration concession expired on July 17, 2012 and was relinquished. All exploration commitments were met.

YEMEN WEST- Marib Basin

Block S-1, Republic of Yemen (25% working interest)

Operations and Exploration

No wells were drilled during the quarter.

Production

Production from Block S-1 re-commenced on July 27, 2012 following repairs to the Marib export pipeline to the Ras Eisa port on the Red Sea, which was damaged in October 2011. During the quarter TransGlobe''s sales production averaged 63 Bopd which represents the Company''s share of production for the last five days of July at 1,140 Bopd. The gross field production for the third quarter averaged 3,860 Bopd (965 Bopd to TransGlobe). In October gross field production averaged approximately 6,852 Bopd (1,713 Bopd to TransGlobe).

The Company agreed to amend the Block S-1 marketing contract effective July 2012 from a monthly purchase contract to a tanker lifting sales contract. The unsold third quarter inventory was lifted and sold with October production in early November. Based on current production volumes it is anticipated that tanker liftings could occur approximately once per quarter from Block S-1. It is expected that sales production rates and the field production rates will vary quarter to quarter depending on the timing of tanker liftings during the respective quarter.

Quarterly Block S-1 Production and Sales (Bopd)        
  2012 2011
  Q-3 Q-2 Q-1 Q-4
Gross field production rate 3,860 - - 736
Gross sales production rate 252 - - 736
TransGlobe working interest 63 - - 184
TransGlobe net (after royalties) 41 - - 93
TransGlobe net (after royalties and tax)** 36 - - 69

* Partial quarter, production started July 27, 2012.

** Under the terms of the Block S-1 PSA, royalties and taxes are paid out of the Government''s share of production sharing oil.

Block 75, Republic of Yemen (25% working interest)

Operations and Exploration

The PSA for Block 75 was ratified and signed into law effective March 8, 2008. The first, three-year exploration phase has a work commitment of 3-D seismic and one exploration well. The 3-D seismic was acquired in 2009. One exploration well was planned as part of the 2011 Block S-1/75 drilling program however the drilling program was cancelled in the first quarter of 2011 due to logistics and security concerns.

YEMEN EAST- Masila Basin

Block 32, Republic of Yemen (13.81% working interest)

Operations and Exploration

One oil well was drilled in the Tasour field during the third quarter. The well was placed on production in early August and is producing approximately 380 Bopd.

Production

Production sales from Block 32 averaged 1,501 Bopd (207 Bopd to TransGlobe) during the quarter. The reported gross sales production rate represents the amount of oil that was lifted and sold during the quarter. It is expected that sales production rates and the field production rates will vary quarter to quarter depending on the timing of tanker lifting''s during the respective quarter.

The actual field production during the third quarter averaged 2,532 Bopd (350 Bopd to TransGlobe) which is approximately 2% lower than the previous quarter due to natural declines and a leak in the export pipeline that had curtailed sales for five days during September.

Field production averaged approximately 2,509 Bopd (346 Bopd to TransGlobe) during October.

Quarterly Block 32 Production and Sales (Bopd)        
  2012 2011
  Q-3 Q-2 Q-1 Q-4
Gross field production rate 2,532 2,575 2,704 3,276
Gross sales production rate 1,501 2,839 2,151 3,276
TransGlobe working interest 207 392 297 452
TransGlobe net (after royalties) 123 232 166 254
TransGlobe net (after royalties and tax)* 96 179 120 188

* Under the terms of the Block 32 PSA, royalties and taxes are paid out of the Government''s share of production sharing oil.

Block 72, Republic of Yemen (20% working interest)

Operations and Exploration

No new wells were drilled during the quarter. In July the joint venture partners met and approved the Gabdain #3 well, subject to the resolution of logistic/security issues in the area. The current exploration phase of the PSA has been extended to October 12, 2013.

Gabdain #3 is targeting a large fractured basement prospect originally drilled at Gabdain #1 in 2010. Gabdain #1 tested approximately 170 Bopd light oil from the Kholan formation with 85% drawdown (which overlies the basement) during a two-day production test. Test rates are not necessarily indicative of long-term performance. The basement fractures at Gabdain #1 were tight and non-productive. The Gabdain #3 well is located approximately five kilometers from Gabdain #1 and is targeting fractures in the basement. It is expected that the 3,500 meter (11,500 feet) exploration well will cost approximately $11.5 million ($2.3 million to TransGlobe). 

November 6, 2012

Management''s discussion and analysis ("MD&A") should be read in conjunction with the unaudited Condensed Consolidated Interim Financial Statements for the three and nine months ended September 30, 2012 and 2011 and the audited financial statements and MD&A for the year ended December 31, 2011 included in the Company''s annual report. Additional information relating to the Company, including the Company''s Annual Information Form, is on SEDAR at www.sedar.com. The Company''s Form 40-F may be found on EDGAR at www.sec.gov.

READER ADVISORIES

Forward Looking Statements

Certain statements or information contained herein may constitute forward-looking statements, or information under applicable securities laws, including management''s assessment of future plans and operations, drilling plans and the timing thereof, commodity price risk management strategies, adapting to the current political situations in Egypt and Yemen, reserve estimates, the resolution of potential litigation and claims and impact on the Company of the costs and resolutions, management''s expectation for results of operations for 2012, including expected 2012 average production, funds flow from operations, the 2012 capital program for exploration and development, the timing and method of financing thereof, method of funding drilling commitments, commodity prices and expected volatility thereof and the use of proceeds from recent financings.

Forward-looking statements or information relate to the Company''s future events or performance. All statements other than statements of historical fact may be forward-looking statements or information. Such statements or information are often but not always identified by the use of words such as "seek", "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "project", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe" and similar expressions.

Forward-looking statements or information necessarily involve risks including, without limitation, risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, loss of markets, economic and political instability, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, inability to retain drilling rigs and other services, incorrect assessment of the value of acquisitions, failure to realize the anticipated benefits of acquisitions, delays resulting from or inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources. The recovery and reserve estimates of the Company''s reserves are estimates only and there is no guarantee that the estimated reserves will be recovered. Events or circumstances may cause actual results to differ materially from those predicted, as a result of the risk factors set out and other known and unknown risks, uncertainties, and other factors, many of which are beyond the control of the Company.

In addition, forward-looking statements or information are based on a number of factors and assumptions which have been used to develop such statements and information in order to provide shareholders with a more complete perspective on the Company''s future operations. Such statements and information may prove to be incorrect and readers are cautioned that such statements and information may not be appropriate for other purposes. Although the Company believes that the expectations reflected in such forward-looking statements or information are reasonable, undue reliance should not be placed on forward-looking statements or information because the Company can give no assurance that such expectations will prove to be correct. In addition to other factors and assumptions which may be identified herein, assumptions have been made regarding, among other things: the impact of increasing competition; the general stability of the economic and political environment in which the Company operates; the timely receipt of any required regulatory approvals; the ability of the Company to obtain qualified staff, equipment and services in a timely and cost efficient manner; drilling results; the ability of the operator of the projects which the Company has an interest in to operate the field in a safe, efficient and effective manner; the ability of the Company to obtain financing on acceptable terms; field production rates and decline rates; the ability to replace and expand oil and natural gas reserves through acquisition, development and exploration; the timing and costs of pipeline, storage and facility construction and expansion and the ability of the Company to secure adequate product transportation; future commodity prices; currency, exchange and interest rates; the regulatory framework regarding royalties, taxes and environmental matters in the jurisdictions in which the Company operates; and the ability of the Company to successfully market and receive payment for its oil and natural gas products.

Readers are cautioned that the foregoing list is not exhaustive of all factors and assumptions which have been used. As a consequence, actual results may differ materially from those anticipated in the forward-looking statements. Additional information on these and other factors that could affect the Company''s operations and financial results are included in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com), EDGAR website (www.sec.gov) and at the Company''s website (www.trans-globe.com). Furthermore, the forward-looking statements or information contained herein are made as at the date hereof and the Company does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.

The reader is further cautioned that the preparation of financial statements in accordance with IFRS requires management to make certain judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses. Estimating reserves is also critical to several accounting estimates and requires judgments and decisions based upon available geological, geophysical, engineering and economic data. These estimates may change, having either a negative or positive effect on net earnings as further information becomes available, and as the economic environment changes.

Additional Measures

Funds Flow from Operations

This document contains the term "funds flow from operations", which should not be considered an alternative to or more meaningful than "cash flow from operating activities" as determined in accordance with IFRS. Funds flow from operations is a measure that represents cash generated from operating activities before changes in non-cash working capital. Management considers this a key measure as it demonstrates TransGlobe''s ability to generate the cash flow necessary to fund future growth through capital investment. Funds flow from operations may not be comparable to similar measures used by other companies.

Reconciliation of Funds Flow from Operations      
  Three Months Ended
 September 30
Nine Months Ended
 September 30
($000s) 2012 2011 2012 2011
Cash flow from operating activities 2,368 3,456 28,742 61,300
Changes in non-cash working capital 33,029 34,524 77,917 32,207
Funds flow from operations* 35,397 37,980 106,659 93,507

* Funds flow from operations does not include interest or financing costs. Interest expense is included in financing costs on the Condensed Consolidated Interim Statements of Earnings and Comprehensive Income. Cash interest paid is reported as a financing activity on the Condensed Consolidated Interim Statements of Cash Flows.

Debt-to-funds flow ratio

Debt-to-funds flow is a measure that is used to set the amount of capital in proportion to risk. The Company''s debt-to-funds flow ratio is computed as long-term debt, including the current portion, plus convertible debentures over funds flow from operations for the trailing twelve months. Debt-to-funds flow may not be comparable to similar measures used by other companies.

Netback

Netback is a measure that represents sales net of royalties (all government interests, net of income taxes), operating expenses and current taxes. Management believes that netback is a useful supplemental measure to analyze operating performance and provide an indication of the results generated by the Company''s principal business activities prior to the consideration of other income and expenses. Netback may not be comparable to similar measures used by other companies.

TRANSGLOBE''S BUSINESS

TransGlobe is a Canadian-based, publicly-traded, oil exploration and production company whose activities are concentrated in two main geographic areas, the Arab Republic of Egypt ("Egypt") and the Republic of Yemen ("Yemen"). Egypt and Yemen include the Company''s exploration, development and production of crude oil.

BUSINESS ACQUISITIONS

On July 26, 2012, the Company completed a Share Purchase Agreement to acquire 100% of the common shares of Cepsa Egypt SA B.V. ("Cepsa Egypt"), a wholly-owned subsidiary of Compania Espanola De Petroleos, S.A.U. ("Cepsa"), a company registered in Spain. Cepsa Egypt holds an operated 50% working interest in the South Alamein Production Sharing concession ("PSC") in Egypt. As a result, the Company now holds a 100% working interest in the South Alamein concession through two wholly-owned subsidiaries. The Cepsa transaction was structured as an all-cash deal, effective July 1, 2012, funded through working capital. Total consideration for the transaction was $4.9 million, which represents the initial $3.0 million base purchase price plus $1.9 million in consumable drilling equipment inventory (which is classified as exploration and evaluation assets), working capital and other closing adjustments.

On June 7, 2012, the Company completed a Share Purchase Agreement to acquire 100% of the common shares of a wholly-owned subsidiary of EP Energy LLC which holds, though wholly-owned subsidiaries, a non-operated 50% interest in the South Alamein PSC in Egypt and an operated 60% working interest in the South Mariut PSC in Egypt. The South Alamein concession covers an area of 355,832 acres, and an extensive 3-D seismic covers the entire area. There is currently one oil discovery well in South Alamein. The South Mariut concession covers an area of approximately 828,000 acres and includes the approval of a 14,500 foot exploration well which began drilling on October 10, 2012. The transaction was structured as an all-cash deal, effective April 1, 2012, funded through working capital and the proceeds of the issuance of convertible debentures. Total consideration for the transaction was $23.3 million, which represents the initial $15.0 million base purchase price plus $8.3 million in consumable drilling equipment inventory (which is classified as exploration and evaluation assets), working capital and other closing adjustments.

SELECTED QUARTERLY FINANCIAL INFORMATION

    2012   2011   2010
($000s, except per share, price and volume amounts)   Q-3   Q-2   Q-1   Q-4   Q-3   Q-2   Q-1   Q-4
                                 
Average production volumes                                
(Bopd)   18,143   16,978   16,720   12,054   13,406   11,826   11,218   10,789
                                 
Average sales volumes (Bopd)   17,124   16,978   16,720   12,054   13,406   11,826   11,218   10,789
Average price ($/Bbl)   96.88   95.84   104.78   99.12   104.00   105.57   97.06   79.83
Oil sales   152,624   148,078   159,426   109,919   128,265   113,615   97,995   79,240
Oil sales, net of royalties   74,540   73,633   77,212   60,609   71,769   62,513   52,863   45,198
Cash flow from operating activities   2,368   24,603   1,771   2,330   3,456   54,354   3,490   17,010
Funds flow from operations *   35,397   35,174   36,088   26,469   37,980   30,597   24,930   19,355
Funds flow from operations per share                                
  - Basic   0.49   0.48   0.49   0.36   0.52   0.42   0.35   0.29
  - Diluted   0.47   0.43   0.48   0.35   0.51   0.40   0.34   0.28
Net earnings   11,774   30,149   10,975   30,519   26,110   21,874   2,889   8,932
Net earnings - diluted   11,774   20,821   10,975   30,519   26,110   21,874   2,889   8,932
Net earnings per share                                
  - Basic   0.16   0.41   0.15   0.42   0.36   0.30   0.04   0.13
  - Diluted   0.16   0.25   0.15   0.41   0.35   0.29   0.04   0.13
                                 
Total assets   635,529   620,937   648,012   525,806   465,262   420,956   404,184   345,625
Cash and cash equivalents   45,732   72,230   127,313   43,884   105,007   122,659   86,353   57,782
Convertible debentures   102,920   95,043   105,835   -   -   -   -   -
Total long-term debt, including current portion   31,878   37,855   57,910   57,609   57,303   56,998   56,731   86,420
Debt-to-funds flow ratio **   1.0   1.0   1.2   0.5   0.5   0.6   0.7   1.1

* Funds flow from operations is a measure that represents cash generated from operating activities before changes in non-cash working capital, and may not be comparable to measures used by other companies.

** Debt-to-funds flow ratio is a measure that represents total long-term debt (including current portion) and convertible debentures over funds flow from operations for the trailing 12 months, and may not be comparable to measures used by other companies.

During the third quarter of 2012, TransGlobe has:

  • Maintained a strong financial position, reporting a debt-to-funds flow ratio of 1.0 at September 30, 2012;
  • Reported net earnings of $11.8 million;
  • Reported net earnings of $16.1 million prior to the unrealized fair value adjustment on convertible debentures;
  • Achieved funds flow from operations of $35.4 million; and
  • Spent $17.5 million on capital programs and acquisitions, which were funded entirely with cash on hand.

The accounting for the convertible debentures continued to have a significant impact on important components of the Company''s financial statements:

  • Reported a decrease in net earnings of $18.4 million from the second quarter of 2012. This decrease was due in large part to the unrealized gain on convertible debentures of $8.8 million recognized in the second quarter of 2012, combined with an unrealized loss of $4.4 million recognized on the convertible debentures in the third quarter of 2012; and
  • Reported a decrease in net earnings of $14.3 million or 55% in the third quarter of 2012 compared to the third quarter of 2011, which was also due partly to an unrealized loss on convertible debentures of $4.4 million in the second quarter of 2012.
2012 VARIANCES      
  $000s $ Per Share Diluted % Variance
Q3-2011 net earnings 26,110   0.35    
Cash items      
Volume variance 32,780   0.44   126  
Price variance (8,421 ) (0.11 ) (32 )
Royalties (21,588 ) (0.29 ) (82 )
Expenses:      
  Production and operating (1,860 ) (0.02 ) (7 )
  Cash general and administrative (2,237 ) (0.03 ) (9 )
  Exploration 202   -   1  
  Current income taxes (1,298 ) (0.02 ) (5 )
  Realized foreign exchange gain (113 ) -   -  
  Interest on long-term debt (1,614 ) (0.02 ) (6 )
Other income (48 ) -   -  
Total cash items variance (4,197 ) (0.05 ) (14 )
Non-cash items      
Unrealized derivative gain 13   -   (1 )
Unrealized foreign exchange gain (2,812 ) (0.04 ) (11 )
Depletion, depreciation and amortization (705 ) (0.01 ) (3 )
Unrealized gain (loss) on financial instruments (4,361 ) (0.06 ) (17 )
Impairment loss 68   -   -  
Stock-based compensation (762 ) (0.01 ) (3 )
Deferred income taxes (2,002 ) (0.03 ) (8 )
Deferred lease inducement 6   -   -  
Amortization of deferred financing costs 416   0.01   2  
Total non-cash items variance (10,139 ) (0.14 ) (41 )
Q3-2012 net earnings 11,774   0.16   (55 )

Net earnings decreased to $11.8 million in Q3-2012 compared to $26.1 million in Q3-2011, which was mainly due to an unrealized loss on financial instruments (convertible debentures) combined with increases in deferred tax expense and cash general and administrative expenses in Q3-2012. The earnings impact of increased volumes were mostly offset by price reductions and increases in royalties, income taxes, operating costs and foreign exchange fluctuations. Increased expenses were a result of the increased volumes.

The non-cash unrealized loss on financial instruments (convertible debentures) has arisen because the Company has elected to carry the convertible debenture liability at fair value on its Condensed Consolidated Interim Balance Sheets. Fair value is determined based on the quoted market price of the convertible debentures as at the period end date. Based on quoted market prices, a $4.4 million increase to the convertible debenture liability was recorded as at September 30, 2012, with a corresponding loss recorded on the Condensed Consolidated Interim Statement of Earnings and Comprehensive Income. As the market price of the convertible debentures fluctuates from period to period, so will the fair value of the convertible debenture liability, and therefore so will the unrealized gain or loss on financial instruments (convertible debentures). This fair value adjustment has had a significant impact on net earnings in the first three quarters of 2012, and, depending on the magnitude of fluctuations in the trading price of the convertible debentures in future periods, could have a material impact on the Company''s net earnings in future periods. While this fair value adjustment is made in accordance with IFRS, it does not represent a cash gain or loss or a change in the future cash outlay required to redeem the convertible debentures.

BUSINESS ENVIRONMENT

The Company''s financial results are significantly influenced by fluctuations in commodity prices, including price differentials. The following table shows select market benchmark prices and foreign exchange rates:

  2012 2011
  Q-3 Q-2 Q-1 Q-4 Q-3
Dated Brent average oil price ($/Bbl) 109.61 108.19 118.49 109.31 113.44
U.S./Canadian Dollar average exchange rate 0.995 1.006 1.001 1.023 0.980

The price of Dated Brent oil averaged 3% lower in Q3-2012 compared with Q3-2011. All of the Company''s production is priced based on Dated Brent and shared with the respective governments through Production Sharing Agreements. When the price of oil goes up, it takes fewer barrels to recover costs (cost recovery barrels) which are assigned 100% to the Company. The contracts provide for cost recovery per quarter up to a maximum percentage of total revenue. Typically maximum cost recovery or cost oil ranges from 25% to 30% in Egypt and 50% to 60% in Yemen. Generally the balance of the production is shared with the respective governments (production sharing oil). Depending on the contract, the government receives 70% to 86% of the production sharing oil or profit oil. Production sharing splits are set in each contract for the life of the contract. Typically the government''s share of production sharing oil increases when production exceeds pre-set production levels in the respective contracts. During times of increased oil prices, the Company receives less cost oil and may receive more production sharing oil. For reporting purposes, the Company records the respective government''s share of production as royalties and taxes (all taxes are paid out of the Government''s share of production).

During the political change in Egypt, business processes and operations have generally proceeded as normal. The Company continues to expand its footprint in Egypt as evidenced by the closing of recent business acquisitions. While exploration and development activities have been uninterrupted for the most part, the Company has experienced delays in the collection of accounts receivable from the Egyptian Government due to the economic impact caused by instability in the country. The Company is in continual discussions with the Egyptian Government to determine solutions to the delayed cash collections, and still expects to recover the accounts receivable balance in full. Yemen is still unsettled, however, the Company''s production from Block S-1, which was shut-in on October 8, 2011, was back on production as of July 27, 2012. Production from Block S-1 averaged 965 Bopd to TransGlobe during Q3-2012. The Company''s historic crude marketing agreements for Block S-1 production have changed. Post re-start of Block S-1 the Company will now be paid on crude vessel liftings rather than on a monthly basis. As a result, sales production will no longer equate to physical production. Sales volumes versus production volumes will vary during the quarters depending on the timing of tanker liftings in the respective quarters.

OPERATING RESULTS AND NETBACK

Daily Volumes, Working Interest before Royalties (Bopd)

Production Volumes

  Three Months Ended
 September 30
Nine Months Ended
 September 30
  2012 2011 2012 2011
Egypt 16,853 11,138 16,622 10,419
Yemen 1,290 2,268 662 1,739
Total Company 18,143 13,406 17,284 12,158

Sales Volumes

  Three Months Ended
 September 30
Nine Months Ended
 September 30
  2012 2011 2012 2011
Egypt 16,853 11,138 16,622 10,419
Yemen 271 2,268 320 1,739
Total Company 17,124 13,406 16,942 12,158

Netback

Consolidated

   Nine Months Ended September 30
   2012  2011
(000s, except per Bbl amounts) $ $/Bbl $ $/Bbl
Oil sales 460,128 99.12 339,875 102.40
Royalties 234,743 50.57 152,730 46.02
Current taxes 66,216 14.26 55,827 16.82
Production and operating expenses 35,024 7.54 26,404 7.96
Netback 124,145 26.75 104,914 31.60
     Three Months Ended September 30
   2012  2011
(000s, except per Bbl amounts) $ $/Bbl $ $/Bbl
Oil sales 152,623 96.88 128,265 104.00
Royalties 78,083 49.56 56,496 45.81
Current taxes 21,634 13.73 20,336 16.49
Production and operating expenses 11,622 7.38 9,762 7.92
Netback 41,284 26.21 41,671 33.78

Egypt

   Nine Months Ended September 30
   2012  2011
(000s, except per Bbl amounts) $ $/Bbl $ $/Bbl
Oil sales 450,374 98.89 288,426 101.40
Royalties 230,649 50.64 129,665 45.59
Current taxes 64,890 14.25 49,350 17.35
Production and operating expenses 29,552 6.49 19,930 7.01
Netback 125,283 27.51 89,481 31.45
  Three Months Ended September 30   
   2012  2011
(000s, except per Bbl amounts) $ $/Bbl $ $/Bbl
Oil sales 149,961 96.72 104,780 102.25
Royalties 77,032 49.68 47,044 45.91
Current taxes 21,318 13.75 17,783 17.35
Production and operating expenses 10,510 6.78 7,065 6.89
Netback 41,101 26.51 32,888 32.10

The netback per Bbl in Egypt decreased 17% and 13% respectively, in the three and nine months ended September 30, 2012 compared with the same periods of 2011, mainly as a result of a 5% and 2% decrease in the selling price on a per Bbl basis. The average selling price during the three months ended September 30, 2012 was $96.72/Bbl, which represents a gravity/quality adjustment of approximately $12.89/Bbl to the average Dated Brent oil price for the period of $109.61/Bbl.

Royalties and taxes as a percentage of revenue increased to 66% in the three and nine months ended September 30, 2012, compared with 62% in the same periods of 2011. This increase is due to the fact that the three and nine month periods ended September 30, 2011 included only West Gharib production, whereas 2012 includes West Gharib and West Bakr production. West Bakr production is subject to higher Government takes according to the West Bakr Production Sharing concession. 

Operating expenses decreased slightly on a per Bbl basis for the three and nine month periods ended September 30, 2012 compared with the same period of 2011. This is due to the inclusion of West Bakr in the 2012 figures. West Bakr has slightly lower operating costs on a per Bbl basis than West Gharib, which is due mostly to lower oil handling fees per Bbl along with the absence of trucking costs in West Bakr.

Yemen

   Nine Months Ended September 30
      2012     2011
(000s, except per Bbl amounts) $   $/Bbl   $ $/Bbl
Oil sales 9,754   111.25   51,449 108.37
Royalties 4,094   46.69   23,065 48.58
Current taxes 1,326   15.12   6,477 13.64
Production and operating expenses 5,472   62.41   6,474 13.64
Netback (1,138 ) (12.97 ) 15,433 32.51
             
   Three Months Ended September 30
   2012  2011
(000s, except per Bbl amounts) $ $/Bbl $ $/Bbl
Oil sales 2,662 106.77 23,485 112.55
Royalties 1,051 42.15 9,452 45.30
Current taxes 316 12.67 2,553 12.24
Production and operating expenses 1,112 44.60 2,697 12.93
Netback 183 7.35 8,783 42.08

In Yemen, the Company experienced an 83% netback reduction on a per Bbl basis in the three months ended September 30, 2012 compared with the same period of 2011, and a negative netback of $12.97 per Bbl in the nine months ended September 30, 2012. Operating expenses on a per Bbl basis increased substantially (245% and 358%, respectively) in the three and nine months ended September 30, 2012 compared to the same periods in 2011 as a result of production being shut-in on Block S-1 from the beginning of the year until July 27, 2012. While production volumes were down, the Company continued to incur the majority of the operating costs on Block S-1 which significantly increased operating expenses per Bbl.

Royalties and taxes as a percentage of revenue were 51% and 56%, respectively, in the three and nine months ended September 30, 2012, which is consistent with the comparative percentages of 51% and 57%, respectively, from the same periods of 2011.

Production and operating expenses associated with the production of unsold crude oil held in storage have been recorded as product inventory and are therefore not included in the netback calculations. The per Bbl figures in the netback calculations are based on sales volumes.

Production from Block S-1 recommenced on July 27, 2012 after having been shut-in following an attack on the oil export pipeline on October 8, 2011. The Block S-1 operating expenses incurred during the shut-in period are recoverable through cost oil on future production.

DERIVATIVE COMMODITY CONTRACTS

TransGlobe uses hedging arrangements from time to time as part of its risk management strategy to manage commodity price fluctuations and stabilize cash flows for future exploration and development programs. The hedging program is actively monitored and adjusted as deemed necessary to protect the cash flows from the risk of commodity price exposure.

As there are no outstanding derivative commodity contracts at September 30, 2012, no assets or liabilities have been recognized on the Condensed Consolidated Interim Balance Sheet for the current period. As at September 30, 2012, no production is hedged in future periods.

GENERAL AND ADMINISTRATIVE EXPENSES ("G&A")

   Nine Months Ended September 30 
   2012    2011  
(000s, except per Bbl amounts) $   $/Bbl   $   $/Bbl  
G&A (gross) 18,993   4.09   13,138   3.94  
Stock-based compensation 3,477   0.75   2,139   0.64  
Capitalized G&A and overhead recoveries (1,641 ) (0.35 ) (1,686 ) (0.51 )
G&A (net) 20,829   4.49   13,591   4.07  
                 
   Three Months Ended September 30 
   2012    2011  
(000s, except per Bbl amounts) $   $/Bbl   $   $/Bbl  
G&A (gross) 6,112   3.88   4,588   3.72  
Stock-based compensation 1,500   0.95   797   0.65  
Capitalized G&A and overhead recoveries (262 ) (0.17 ) (1,028 ) (0.83 )
G&A (net) 7,350   4.66   4,357   3.54  

G&A expenses (net) increased 69% (32% on a per Bbl basis) and 53% (10% on a per Bbl basis) in the three and nine months ended September 30, 2012, compared with the same period in 2011. The increase is principally due to increased staffing, administration and insurance costs associated with West Bakr, along with increased costs associated with recent acquisitions (South Alamein and South Mariut).

The increase in stock-based compensation is due partly to an increase in the total value of new options awarded during 2012 as compared to those issued during 2011, combined with an increase in the expense recorded on share appreciation rights in the nine months of 2012 as a result of share price increases.

FINANCE COSTS

Finance costs for the three and nine months ended September 30, 2012 increased to $2.5 million and $11.5 million, respectively (2011 - $1.3 million and $3.8 million, respectively). Finance costs include interest on long-term debt and convertible debentures, issue costs on convertible debentures and amortization of transaction costs associated with long-term debt. The overall increase in finance costs is due to higher debt levels combined with the costs of issuing the convertible debentures.

    Three Months Ended
September 30
    Nine Months Ended
September 30
(000s)   2012     2011     2012     2011
Interest expense $ 2,144   $ 963   $ 5,905   $ 2,886
Issue costs for convertible debentures   -     -     4,630     -
Amortization of deferred financing costs   323     306     953     884
Finance costs $ 2,467   $ 1,269   $ 11,488   $ 3,770

The Company had $33.7 million of long-term debt outstanding at September 30, 2012 (September 30, 2011 - $60.0 million). The long-term debt that was outstanding at September 30, 2012 bore interest at LIBOR plus an applicable margin that varies from 3.75% to 4.75% depending on the amount drawn under the facility.

In February 2012, the Company sold, on a bought-deal basis, C$97.8 million ($97.9 million) aggregate principal amount of convertible unsecured subordinated debentures with a maturity date of March 31, 2017. Transaction costs of $4.6 million relating to the issuance of the convertible debentures were expensed in the nine months ended September 30, 2012. The debentures are convertible at any time and from time to time into common shares of the Company at a price of C$15.10 per common share. The debentures are not redeemable by the Company on or before March 31, 2015 other than in limited circumstances in connection with a change of control of TransGlobe. After March 31, 2015 and prior to March 31, 2017, the debentures may be redeemed by the Company at a redemption price equal to the principal amount plus accrued and unpaid interest, provided that the weighted-average trading price of the common shares for the 20 consecutive trading days ending five trading days prior to the date on which notice of redemption is provided is not less than 125 percent of the conversion price (or C$18.88). Interest of 6% is payable semi-annually in arrears on March 31 and September 30. The first semi-annual interest payment was made on September 30, 2012 which included 39 days prior to March 31, 2012. At maturity or redemption, the Company has the option to settle all or any portion of principal obligations by delivering to the debenture holders sufficient common shares to satisfy these obligations.

DEPLETION AND DEPRECIATION ("DD&A")

...
  Nine Months Ended September 30
  2012 2011
(000s, except per Bbl amounts) $ $/Bbl $ $/Bbl
Egypt 33,570 7.37 22,746 8.00
Yemen 645 7.36 3,166 6.67
Corporate