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Edited Transcript of TAT earnings conference call or presentation 13-Nov-19 1:30pm GMT

Q3 2019 TransAtlantic Petroleum Ltd Earnings Call

DALLAS Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of TransAtlantic Petroleum Ltd earnings conference call or presentation Wednesday, November 13, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael Paul Hill

TransAtlantic Petroleum Ltd. - Principal Financial Officer & CAO

* N. Malone Mitchell

TransAtlantic Petroleum Ltd. - Chairman & CEO

* Tabitha T. Bailey

TransAtlantic Petroleum Ltd. - VP, General Counsel & Corporate Secretary

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2019 TransAtlantic Petroleum Ltd. Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions) I would now like to hand the conference over to your speaker today, Tabitha Bailey, General Counsel. Please go ahead.

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Tabitha T. Bailey, TransAtlantic Petroleum Ltd. - VP, General Counsel & Corporate Secretary [2]

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Welcome to TransAtlantic Petroleum's Third Quarter 2019 Earnings Conference Call. On the call today, we have Malone Mitchell, our Chairman and Chief Executive Officer; Michael Hill, our Chief Accounting Officer; and myself.

During today's call, we will make certain forward-looking statements, which include statements regarding our beliefs, goals, expectations, forecasts, projections and future performance and the assumptions underlying such statements. Please note that there are a number of factors that may cause actual results to materially differ from our forward-looking statements, including the factors identified and discussed in our earnings press release, which we issued after the close of business yesterday and in our SEC filings.

Please recognize that except as required by law, we undertake no duty to update any forward-looking statements, and you should not place undue reliance on such statements.

Now I'll turn the call over to our Chairman and Chief Executive Officer, Malone Mitchell.

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N. Malone Mitchell, TransAtlantic Petroleum Ltd. - Chairman & CEO [3]

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Thank you, Tabitha, and good morning to everybody. At the beginning of last quarter's call, I addressed the recent decline in oil price, and I'm pleased to announce that oil prices have increased about $5 a barrel since that call in August. So we were down about $6 a barrel from the second to the third quarter, and we're now back up to close to where we were. So that's very helpful in our revenue.

Beginning in early October, the changes in U.S. operations in Syria resulted in media speculation and talk of reciprocal sanctions between the U.S. and Turkey. To date, we have been unaffected and do not expect actions to affect us. We do have some out-of-the-ordinary legal expenses incurred in the fourth quarter, and these were to review the proposed actions, and we will continue to monitor decrees from both governments to remain compliant with both government regulations.

We've now completed drilling the wells we had planned for 2019. If wellbore conditions allow, we may sidetrack and re-drill an additional well in our Goksu field before year-end. As previously reported, we successfully recovered cores in our Yeniev-4 and 5 wells in our Bahar-12 well. We had originally intended to process these cores at Turkish Petroleum's laboratory in Ankara. After receiving the initial results from the first well core, the Yeniev-4, we made a decision that required us to rebox and ship these cores to Houston for processing. This will result in about a 60 to 90 delay in completing the receipt of all of the results of our core analysis. This has slowed our completions in some cases and pushes later our reserves and well spacing to determine our 2020 work budget. At this time, I would think it will be near year-end or January before we will publish our 2020 budget and work plan.

Going forward with some specific updates on the wells drilled or completed since the last call. Yeniev-4 was very lightly completed and the Bedinan zone as a result of Turkish Petroleum's core analysis predicting that we would have 100% water production from the well. We just perforated the well, and the well has been producing by natural flow approximately 100 barrels of oil with no water on a daily basis. We will shortly stimulate this well and expect productive capacity will approximately double. Reservoir pressure indicates connectivity to other wells in the field, which is good for our ultimate total recovery from this reservoir. Our Yeniev-5 encountered significant oil shows and 2 intervals of the Mardin. We made the decision to stop drilling after these shows and attempt completion there rather than drilling onto the Bedinan in this well. New zone production was established in the Karababa C at approximately 25 to 30 barrels of oil a day, and that's a secondary zone. We're now completing the primary zone, the Bolluca zone and have established oil production there. We have not yet stimulated the well, and we do hope to have our core rock analysis back later this week to design and execute a stimulation as early as next week on this well.

Our Yeniev-6 well was drilled and cased and encountered shows in the Mardin and Bedinan zone as expected on our geological prognosis. We are just beginning completion activities on this well, so it'll be another couple of weeks before that well comes online. Our Bahar-12 was drilled and fractured completed and 2 Bedinan intervals resulting in production by natural flow of 382 barrels of oil daily. Pressure test in both intervals indicate communication with offsetting wells. We will need the core results to determine the best well spacing for future wells in this reservoir in Bahar field. We expect the further analysis of the cores to delineate additional reserves and potentially additional horizons of the Hazro zone in Bahar field.

Lastly, we reentered the Bati-Yasince well, and we deepened it to the Hazro F3 formation. So far, the Hazro F3, F4 and Karababa C have tested nonproductive in the well. The Bolluca zone is now being completed.

During August, September and October, we had a shortage of rig crews and that limited our ability to schedule workovers and completions. So availability has resumed on that, and production was down a bit near the end of the quarter, and that was a result of mechanical, not reservoir conditions. As I said, availability has resumed on full pulling unit workover crews, and we continue to expect to exit 2019 at a higher production rate than we exited 2018.

I will now hand over the call to Michael Hill, our Chief Accounting Officer, to review the financials.

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Michael Paul Hill, TransAtlantic Petroleum Ltd. - Principal Financial Officer & CAO [4]

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Thanks, Malone, and good morning, everyone. As disclosed in our press release along with our 10-Q filed yesterday, I'll provide an update on our third quarter 2019 operating results. We reported net income of $1.1 million or $0.02 per share during the third quarter of 2019 compared to a net loss of $9,000 or $0.00 per share for the second quarter of 2019 and a net loss of $1.7 million or $0.03 per share for the third quarter of 2018. We reported operating income of $4.1 million during the third quarter of 2019 compared to operating income of $6.3 million for the second quarter of 2019, and operating income of $11 million for the third quarter of 2018.

Our 2019 third quarter revenues were $14.7 million, down 15% from the second quarter of 2019 and down 27% year-over-year. The decrease in our third quarter revenues as compared to the second quarter of 2019 was driven by a 9% decrease in our average realized price per BOE received and a 6% decrease in sales volumes. The decrease in revenues from the third quarter of 2018 was driven by a 21% decrease in our average realized price per BOE received, a 9% decrease in sales volumes.

Our 2019 third quarter G&A expenses were $2.5 million, down 7% from the second quarter of 2019 and down 1% from a year ago. The decrease in G&A from the second quarter of 2019 was due primarily to a decrease in accounting, tax consultancy and legal fees compared to the second quarter of 2019.

Our 2019 third quarter production expenses were $3.2 million, up 17% from the second quarter of 2019, and up 37% from a year ago. The increase in personnel expenses in the third quarter compared to the second quarter was primarily due to an increase in repairs and maintenance, utilities, trucking and diesel fuel consumption compared to the second quarter of 2019.

In the third quarter of 2019, we recorded approximately $500,000 in exploration and abandonment expense related to the previously announced write-off for the Deventci-R1 well in Bulgaria. These are additional costs incurred after the end of the second quarter of 2019.

I'll now move over to the balance sheet. During the third quarter, we paid down $5.8 million on our 2017 and 2018 term loans with DenizBank, which left our total gross debt balance with DenizBank at $25.5 million as of September 30, 2019.

Our total net debt at the end of the third quarter was $11.6 million compared to $17.5 million at the end of the second quarter and $12.1 million at the end of the fourth quarter of 2018. And as of today, our gross debt is approximately $23.5 million. As of September 30, 2019, our consolidated working capital was $3.5 million, an increase of $1.1 million from the fourth quarter of 2018.

Our capital expenditures were $10.2 million during the third quarter of 2019 compared to $6.2 million in the second quarter of 2019 and $6.1 million in the third quarter of 2018. We expect our capital expenditures for the remainder of 2019 to range between $2.5 million and $5 million. However, this is subject to change at the discretion of the Board.

I'll continue with an update on adjusted EBITDAX. Third quarter 2019 adjusted EBITDAX was $7.8 million as compared to $10.7 million in the second quarter of 2019 and $13.9 million in the third quarter of 2018. The decrease in adjusted EBITDAX from the second quarter was due primarily to a decrease in revenues of $2.6 million and an increase in production expenses of $500,000. This was partially offset by a decrease in our G&A expenses of $200,000. The decrease in adjusted EBITDAX from the third quarter of 2018 was primarily due to a decrease in revenues of $5.5 million, an increase in our production expenses of $900,000, an increase in transportation expenses of $200,000, and this was partially offset by a decrease in our realized hedge settlements of $500,000.

I'll now hand the call back over to Malone.

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N. Malone Mitchell, TransAtlantic Petroleum Ltd. - Chairman & CEO [5]

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Thanks, Michael. We're now glad to address your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Paul Rabinovitch, private investor.

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Unidentified Shareholder, [2]

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Thank you for being more optimistic. I was very concerned because I've been an investor for 5 years. I've got a very large position. I had high hopes for you in years past and then low hopes. So here goes some questions. Number one, part of the reason the stock seems to tank was because you lost your reserves in the Selmo Basin when they came off the books with the license expiring in a few years. Will you be able to get those reserves back on your books, which should help the price of the stock, correct?

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N. Malone Mitchell, TransAtlantic Petroleum Ltd. - Chairman & CEO [3]

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Paul, that's -- as the current statute sets in Turkey, there production licenses go for 40 years. And Selmo was discovered in the 1960s by Mobil. So the 40 years at the end of all of the applicable licenses is in June of 2025. There are a number of wells that we can drill in the field as many as 40, but it requires a long enough time to make an investment and require and receive an adequate investment back on those. At this point in time, with the statute, where it sits, that's not possible. There's some effort to change the statutes within the country. I think it's still speculative at this point to be able to say with any kind of a measure of reasonable accuracy of what the percentage of success that, that might be or when that might be inactive. I think that it's most likely at -- it's maybe somewhere in the 50-50 range, and it's certainly over a year before we would know. But as it sits, that license will expire in 2025. At which time the state oil company would be required by the facilities and the producing facilities from us.

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Unidentified Shareholder, [4]

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Got it. Now to get the new one in the glory days, you were doing 4,000 to 5,000 barrels of production a day, you're down a lot from that. And that's probably one of the reasons why the stock is so low. How are you going to get production back to 4,000 or 5,000? Is it possible without the Selmo to get back to 4,000 or 5,000 barrels of production?

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N. Malone Mitchell, TransAtlantic Petroleum Ltd. - Chairman & CEO [5]

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Well, it is. Now, obviously, that's very dependent upon what our drilling budget is in 2020 in addition to a drilling program that we think will maybe not be far off what we did this year. We expect the initiation of the waterfloods in Arpatepe field, which we've already begun the testing and mechanical work in Arpatepe and work in the Yeniev, Bedinan zone. That's a fairly new reservoir, but it's got excellent qualities within the Bedinan reservoir to maintain pressure. And within the Hazro zones, we don't think the Bedinan zone in Bahar is probably a good candidate for secondary recovery. But we think pressure maintenance in those, we'll start seeing a fairly significant boost in production, probably by near the end of 2020. So do that and couple that with production. One of the other things that I would note is a lot of the drilling we've done over the past years, and I addressed this in the call last quarter, has been targeted toward the Bedinan, which is one of the deeper horizons. As we drill through that, when we drill through shallower horizons that we see oil shows in, but we typically complete and produce out of the deepest interval. So we think that there's some additional development that can be done shallower at far less cost than what we see typically on our Bedinan oils.

And the other thing I would say is that a barrel of oil is worth more than a barrel of gas today. If you look back a number of years, a lot of that production was gas production from Thrace Basin Natural Gas, which we sold to Valeura. And the full production that we have currently is really not very far off of the higher end of the oil production we've had historically. So we do expect our oil production to probably exceed our historical oil production in 2020.

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Unidentified Shareholder, [6]

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Now as far as the Thrace Basin goes, you just mentioned you sold it to Valeura. I thought you were next door to Valeura. And as they've developed -- yes, go ahead.

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N. Malone Mitchell, TransAtlantic Petroleum Ltd. - Chairman & CEO [7]

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Well, we sold -- I'm sorry. Let me let you finish your question and address it.

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Unidentified Shareholder, [8]

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Well, because I thought you had the land right next to Valeura that the -- one of the -- again, one of the value propositions for the stock was Valeura was -- and their partner were going to do all of the work to develop the Thrace Basin. And you being next door would get increased value because you're right next door. And the assumption is you have the same production coming out of your land. But meanwhile, Valeura stock is tank bad. So is that a reflection on the basin not being very good. And do you, in fact, still have -- yes. So one is, is the basin still good too? Do you have land there?

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N. Malone Mitchell, TransAtlantic Petroleum Ltd. - Chairman & CEO [9]

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Well, you've asked 3 questions. First, yes, we still have land there. That's the last of your 3 questions. The first question, is -- there's a little bit of nuance to that is that there's shallower production. It's out of exactly the same zones that are being tested deeper in the basin. When we acquired the field from Thrace Basin Natural Gas, we recompleted and drilled a number of wells and gross production there was as high as 30 million cubic feet of gas per day. And attributable to our interest in that was as high as maybe close to 3,000 net barrels of oil a day on a conversion of 6:1. I think I looked at Valeura's press release this morning. I think they were producing net to them about a little over 3 million cubic feet of gas, so about 530 net barrels a day. And so that shallow production has largely depleted after producing significantly over the years.

Now the second part of your question is, yes, we continue to have acreage, and they continue to drill along with their partner or not drill complete along with their partner, Equinor, which used to be called Statoil, in the acreage immediately adjacent to us in the Thrace Basin. We continue to own small fields that are producing out of the shallow horizons and a pipeline system that connects those fields that runs through the middle of our block. And yes, we have taken the position of, basically, for the first time and probably the 10 years of the historical activity we've had in the country that there's -- that there are other companies doing significant work adjacent to us that we're not the company spending kind of the early hard experimental money. So they continue to complete the wells and try to understand what techniques are going to best produce production out of the multiple horizons.

The geology is very much like the Rocky Mountains, you drill on a vertical well through literally hundreds of individual sand stringers that have gas in them. And I think they're still trying to determine whether either drilling and completing a vertical well and combining all those zones produces the best economics or drilling a horizontal well in one of those intervals and doing multiple stage fracs produces the best economics. And right now, we are still in a position where we're fortunate to be able to essentially observe their work, and then plan our work around what they've come up with best practices at. We still hold about 125,000 acres adjacent to them, of which, we believe, 50,000 of those 125,000 acres has essentially, I would say, close to identical or equivalent geological properties as they're working in.

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Unidentified Shareholder, [10]

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And as they add to their reserves and production, that should impact the price of the stock, hopefully, correct? Our stock.

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N. Malone Mitchell, TransAtlantic Petroleum Ltd. - Chairman & CEO [11]

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You would think so, although in the -- I think I've been in the oil business for 34 years, and I don't know that I've ever seen sentiment quite exactly the same level that it is now. It seems like all oil companies, no matter what their size, have reverted to a just a pure cash flow multiple on producing properties as a valuation methodology rather than kind of a net asset value. Certainly, you would expect the entire industry to change its valuation at some point in time. But again, that's probably out of my realm of ability to speculate when that would occur.

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Unidentified Shareholder, [12]

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It seems like you've had trouble raising money. And maybe, I guess, it's because you're in Turkey. So you have to borrow money by the Turkish rules, and therefore -- because if you had the same assets in the Permian Basin, you could be rocking and rolling, drilling all kinds of wells. But because you're in Turkey, how is that limiting your ability to raise money?

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N. Malone Mitchell, TransAtlantic Petroleum Ltd. - Chairman & CEO [13]

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Well, certainly, and you're exactly right. In the United States, we would have a far, far larger credit availability than we have. And I think the primary reason is that Turkey imports 97%, 98% of its energy. So most of the energy industry, as understood by Turkish banks, is import trading not necessarily reserves production base. So the local banks are more focused upon assets other than oil and gas reserves because they just don't really have oil and gas reserve departments within the banks the same way, maybe some of the other larger international banks would have. Now we're continually making an effort to source or change that availability. But of course, there's always, as you pointed out, a view of doing business in Turkey, and certainly, the activities that occurred during October with the tensions between the U.S. and Turkey and speculation of that did not help the view of U.S. banks with regard to credit extension into Turkey. But I've come to believe that actually, the risk profile of Turkish assets may be lower than the risk profile of U.S. assets with regard to legal perception.

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Unidentified Shareholder, [14]

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So you'll be able to borrow all the money you need to do all the drilling you need to do?

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N. Malone Mitchell, TransAtlantic Petroleum Ltd. - Chairman & CEO [15]

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No, I did not say that.

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Unidentified Shareholder, [16]

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Can I ask just one? So we may have -- well, we have trouble getting the money that we need to drill all the wells that you are planning?

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N. Malone Mitchell, TransAtlantic Petroleum Ltd. - Chairman & CEO [17]

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We have been unable to secure the credit that we've needed to really run a program of drilling that we think is appropriate to the asset base we have since 2015, since the price decline in 2015. And you couple that with the amortization, the amortization of the loans has been essentially immediate, which further constrains really the availability. There really is no such thing as a revolver-based loan in the Turkish banking structure. So no, we have not been able to secure that. And to a certain degree, that's been limiting as I tend to use the phrase, we've been more or less stuck in an orbit, we're able to stay where we're at. But we've been able to -- we've had a hard time accessing the capital to achieve escape velocity from the circular orbit. And I think we're inching our way that way. I think the money that we'll be able to spend on initiating floods and pressure maintenance is relatively low. We spent the money this year. We've spent a couple of million dollars in costs on wells coring and doing analysis, and some of that money is still yet to be spent. But that's the money necessary to give us basically the science to be able to implement these pressure maintenance. And we think that the dollars in relative to reserves and dollars out is very favorable equation for us. But that's in the upcoming year or 2 years, not in -- that's not something that's a major capital campaign over multiple years.

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Unidentified Shareholder, [18]

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Can you -- in years past, you've given what you thought was a fair value for the stock. What -- I mean, the price of the stock is ridiculous. This is a 2-part question. One, I'd like to see you step-up to the plate you were buying a lot of stock between $0.75 and $1. The price is pathetic and it hurts. Will you be taking advantage of this low price? And what do you now think is the fair value?

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N. Malone Mitchell, TransAtlantic Petroleum Ltd. - Chairman & CEO [19]

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Two comments. One, I'm not going to comment on my purchasing. We -- you'll just have to wait for filings if they occur on that. The second thing is, in years past, I was able to opine on a valuation associated with a NAV valuation of the company. At this point in time, I clearly think, as I stated, that companies are not being valued on an NAV basis. So you can -- which is net asset value, which is kind of a compilation of your reserves and things like that, if the acronym is not familiar to everybody listening. I do think that oil companies have been revalued based on a multiple of free cash flow. So I cannot opine other than to look at the multiples that other peer companies are trading at, and we're trading at approximately the same valuation as they are, as I addressed, and as I addressed in the last conference call for the second quarter.

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Unidentified Shareholder, [20]

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I mean the stock, it's been all over the place, $0.42, $0.60, $0.75. You're not saying that 42% -- $0.42 is a fair value. I mean I know it is what the price is. But just before the whole Turkish crisis, it was a lot higher. Just to get a sense because it's been all over the place, is $0.75, $1, any way of properly pricing the stock?

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N. Malone Mitchell, TransAtlantic Petroleum Ltd. - Chairman & CEO [21]

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Yes. Paul, I don't think I can make a comment on that. As I said, when I look at the other stocks and other oil companies, it seems as though -- I would generally say that in terms of multiple of cash flow relative to company values, the entire energy industry appears to be very lowly valued relative to its historic norms, whether that persists through the election, whether that persists through a longer period of time, it's hard for me to speculate on. But the entire energy industry appears to be at a very low multiple relative to its cash flow earnings or assets relative to what it's been historically valued at, not just our company.

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Operator [22]

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Our next question comes from the line of James Balas, private Investor.

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Unidentified Participant, [23]

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My question is regarding the Yeniev field. It seems like that's kind of [been yours] growth driver or maintenance driver. And I was just kind of wondering if you could provide some color on how you're developing the field? I mean, are you just stepping out one location at a time? Do you have any idea how many locations there are there?

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N. Malone Mitchell, TransAtlantic Petroleum Ltd. - Chairman & CEO [24]

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James, thank you for your call. Yeniev field has been -- we've -- yes, it's true, we drilled more wells on the Yeniev this year. We've typically do our early drilling on the basis of stepping out really approximately 2 locations at a time. And we have imaged that from a 3D seismic standpoint, where we have a structure. We were really happy with the Yeniev-4 well confirmed that a higher indicated image was actually, in fact, are Bedinan sand and that it was in communication with the other sands. So that the entire reservoir is a single working reservoir. I think it's a little premature. One of the things we're trying to do with pressure analysis we've done and what we're trying to do with the core analysis, what we've done is to get a better handle on exactly what the size of the fields are and how many wells we would put in them to appropriately develop them.

The early data we have tells us that the quality of the reservoir at Yeniev is really good and it also is telling us across these reservoirs that the porosity that we have in the reservoirs is more because of secondary porosity than what we're able to measure off electric logs because that's -- if you go back to Bahar, that's been a question for us for a period of time as to -- we seem to be getting more oil out of an area than we had originally calculated. And we were a little bit confused as to whether we were either draining a bigger area or whether there was somehow our calculations of oil in place were incorrect. And we're getting some answers out of our core analysis on that. One of the things at Yeniev is there's more sand that we think now is probably productive than what we originally did when we first started completing the field. So some of the early wells, we've only got a small portion of sand completed.

So that is exactly the reason that we went through spending the money, cutting cores. And I'll really say there was a lot of opportunity for mechanical problems. And during this entire drilling program this year with the cores, everything really turned out well. We had beefed up our staff and drilling and kind of doubled up on that at a very modest cost in terms of people, but it paid off, I think, and reduced the mechanical difficulty we had. So much as I would like to give you an exact answer. I think that I'm going to have to, as I said on the call, wait until about the end of the year until we get some results in. And I think at that point in time, we'll really be able to maybe give some answers with some precision instead of speculation. At this point in time, there's certainly more wells yet to be drilled in Yeniev than we've already drilled. But as far as how many there are, that's still a speculation on our part.

I will point out, and maybe it's less apparent. I think I've made the point and probably a quarter or 2 ago, we do believe that the structures that are Karagoz well and that our Southeast Bahar well in are potentially larger in areal extent than the Yeniev or than the Bahar field. So we think that the extent of those structures may be larger. And those structures have received just very little. They just have single wells in them at this point in time, but we believe we're at the bottom of the reservoir rather than the top of the structure.

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Operator [25]

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(Operator Instructions) And we have no further questions at this time. I would now turn the call back to Malone Mitchell, CEO and Chairman, for closing remarks.

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N. Malone Mitchell, TransAtlantic Petroleum Ltd. - Chairman & CEO [26]

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Well, thank you, everyone, for the time and attention this morning to TransAtlantic's Third Quarter Earnings Call. Again, I would encourage you if you have questions, address them to us at the office. And then we're always willing to visit or talk with you on that. And we appreciate it, and hope you have a continuing good week this week. Thank you.

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Operator [27]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.