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Edited Transcript of TGL.TO earnings conference call or presentation 13-Mar-19 2:00pm GMT

Q4 2018 TransGlobe Energy Corp Earnings Call

Calgary Mar 18, 2019 (Thomson StreetEvents) -- Edited Transcript of TransGlobe Energy Corp earnings conference call or presentation Wednesday, March 13, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edward D. Ok

TransGlobe Energy Corporation - VP of Finance & CFO

* Lloyd W. Herrick

TransGlobe Energy Corporation - VP & COO

* Randall C. Neely

TransGlobe Energy Corporation - President, CEO & Director

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Conference Call Participants

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* Stephane Guy Patrick Foucaud

GMP Securities L.P., Research Division - MD, Institutional Research

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the TransGlobe Energy's Q4 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 the expectations expressed in such forward-looking statements are based on reasonable assumptions, such statements are not guarantees of future performance, and actual results or developments may differ materially from those in the forward-looking statements. Factors that could cause actual results to differ materially from those in forward-looking statements include oil and gas prices, well production performance, exploitation and exploration successes, continued availability of capital and financing and general economic market or business conditions.

I would now like to turn the meeting over to Mr. Randy Neely, President and Chief Executive Officer. Please go ahead, Mr. Neely.

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Randall C. Neely, TransGlobe Energy Corporation - President, CEO & Director [2]

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Thank you. Good morning, and good afternoon to everyone. Thanks for joining us today for our 2018 year-end and Q4 webcast. We'll start with Eddie Ok, our CFO, who'll provide an overview of the financial results, followed by Lloyd Herrick, our COO, who will give an overview of the 2019 capital plans, 2018 year-end reserves and our current and recent production. I will then close off with a walk-through of our -- some of our highlights and what we're focused on in each area, and then we can wrap up with the Q&A session. Over to you, Eddie.

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Edward D. Ok, TransGlobe Energy Corporation - VP of Finance & CFO [3]

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Thanks, Randy. Good morning, everyone, and thanks for joining us on the call. I'll go to first slide. Average production volumes for the year were about 14,500 BOE per day versus 15,500 BOE in the year prior. Our total sales for the year exceeded production as we were able to draw down our inventory crude balance by about 200,000 barrels throughout the year. As the only inventory up depletion and OpEx costs, our inventory barrels with the royalties and taxes on the produced barrels expensed in the period produced, financial reporting periods with net gross on inventory tend to have a higher netback.

Our annual funds flow from operations were quite strong on a relative basis when compared to gains in the prior year, $63.3 million relative to $55.6 million in 2017. Despite lower produced and sold volumes this year, we had an approximate 14% improvement in funds flow due to higher Brent prices. Further impacting our results in Q4 was the decision made late in fall of 2018 to remove the ceiling on half of our 2019 hedge position and reset the 2020 ceilings to the $7 Brent.

Our strengthened results due to opportune sales of our Egyptian crude at good prices were partially offset by pricing weakness in Canadian dry gas and a portion of differential supplied to our liquids production in Canada. Oversupply and capacity constraints from our product purchases were hitting us with up to around $40 a barrel, discount on light oil at certain periods throughout the fall and winter.

In line with our discussion last quarter, annual OpEx for Egypt was $9.81 a barrel as Q4 OpEx was largely in line with the previous quarter and annual OpEx for Canada was $9.26, inclusive of our May turnaround.

G&A costs for the year were $3.55 of BOE higher than prior year as the additional costs related to AIM listing were averaged over lower production volumes year-over-year.

Net income was $15.6 million versus a $78 million loss in 2017. On an annual basis, these results included a $79 million impairment in '17 and a $14.5 million impairment in '18, all related to our 2012 and 2014 concession acquisitions and subsequent exploration campaigns.

We ended out the year with just under $52 million in cash and paid down about $18 million in long-term debt.

Next slide, please. Our '19 capital plan was prepared with the aim of maintaining production and maximizing free cash flow to direct towards growth activities. We budgeted $34 million in capital for '19, $24 million to Egypt and $10 million in Canada. We are actively managing our debt and capital allocation strategy and recently announced the $0.035 dividend payable to shareholders of record on March 29, '19.

I'll pass things over to Lloyd for some additional commentary on our '19 program.

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Lloyd W. Herrick, TransGlobe Energy Corporation - VP & COO [4]

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Thanks, Eddie. Just a couple more comments on the plan. Production is averaging about 15,400 BOEs year-to-date, which is currently ahead of plan. Increased production is primarily driven by increased oil production from our West Bakr and North West Gharib concessions in Egypt. The 2009 (sic) [2019] production plan presented does not currently include any production from the South Ghazalat 6X oil discovery, which could be producing prior to year-end subject to government approvals and equipment availability. As Eddie mentioned, the capital plan is targeting $34 million.

We'll now go to the next slide. This table summarizes the capital program for 2019. The total program is $34 million, which is split about 70% to Egypt and just under 30% to Canada. In Egypt, we have several wells planned, consisting of 4 development wells and 3 exploration wells. 60% of the budget, about $14 million, is focused in the West Bakr concession where we plan to drill 3 development wells, 1 exploration well and conduct 10 well recompletions along with the base 3 expansion of the K station CPF panel additional volumes to sustain production and increase reserve recoveries. We've also planned for 2 North West Gharib wells, focused largely on development of lease #1, which we'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 develop the South Ghazalat 6 discovery, which is contingent on approvals.

In Canada, we have a 4-well Cardium horizontal plan for 3 development wells and 1 outpost well to evaluate the Harmattan South acreage that we acquired in 2018.

This slide summarizes our 2018 year-end reserves announced in January compared to the 2017 year-end reserves. On approved plus probable 2P basis, we ended 2018 with 44.1 million BOEs of reserves, which is about 4% lower than year-end 2017, primarily due to the 2018 production of 5.3 million BOEs.

During 2018, the company had positive reserve additions and revisions of 4.7 million BOEs on a proven or 1P basis and 3.5 million BOEs on approved plus probable 2P basis, representing a reserve replacement of 89% and 68% on a respective 1P and 2P basis. At year-end 2018, the net present value of 2P reserves using forecast pricing discounted at 10% was $339 million before tax and $323 million after tax.

This slide shows our daily production by major producing areas. Production in Egypt is currently above plan, primarily due to significant increases in the West Bakr area, which are primarily attributed to the 2019 well optimization recompletion programs in K and H field that are underway and production from new wells in M field, which continue to exceed forecast as the growing orange wedge on the graph.

In Canada, oil production increased in January, primarily due to the 2018 drilling program, which was tied in and equipped over year-end. The oil production increases in Canada were partially offset by an unplanned 2-week shut-in of the main oil battery to replace a burner in the main treater. The burner failure occurred in February, which coincided with below-normal temperatures during the month of February, which were in the minus 30 to minus 40 Celsius range. Extreme cold exacerbated the repair efforts and the restarting of production, which was restored by March. I would like to give a big shout out to the field staff and contractors for getting things repaired and back on production without any incidents under very difficult conditions.

The new wells have performed as expected; however, it is too early to measure against its production type curves due to the unplanned shut-in of the wells in February.

In addition, approximately 300 BOEs of ethane production was diverted to natural gas sales in January when the operator of the third-party gas processing plant shut down their deep cut ethane extraction plant, primarily due to low ethane prices and associated pipeline egress issues in Alberta. Despite the loss of up to 300 BOEs of ethane from the production numbers, the increased natural gas value and associated gas volumes are expected to generally offset loss of ethane revenue.

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Randall C. Neely, TransGlobe Energy Corporation - President, CEO & Director [5]

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Okay. Thanks, Lloyd.

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Lloyd W. Herrick, TransGlobe Energy Corporation - VP & COO [6]

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Got one more to go here. Sorry, go on.

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Randall C. Neely, TransGlobe Energy Corporation - President, CEO & Director [7]

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Okay. Thanks, Lloyd. You see, this is the map for lands in Egypt. In the Eastern Desert, we have 3 producing concessions with 11 development leases with varying expiries. One of our primary strategic objectives this year is to consolidate, amend and extend these concessions into one merged concession agreement. This is something that we've been working on for some time, and we are hopeful we concluded -- we can conclude it this year. In the Western Desert, we have 2 exploration concessions, although we have a discovery in South Ghazalat as well as in South Alamein. We've not yet moved into development. We are currently working with EGPC on a development proposal for South Ghazalat and expect to be moving into development sometime during 2019.

Zooming in on South Ghazalat, where we had the discovery last fall, highlighted on the map with the red star. In November, we announced that we'd drilled and tested the second South Ghazalat exploration well at a rate of just over 3,800 barrels of oil per day. This is a combined rate from 2 zones. Based on this positive test results, we filed a declaration of commerciality with EGPC in December and the development plan in late February. We expect to conclude negotiations and receive approval of a development lease in the next few months. Assuming our plan is approved, we should be able to begin the delineation of the existing discovery and begin early development and production later this year.

Concurrently, we will be merging and processing 2 existing 3D seismic surveys in the discovery area to firm up additional drilling locations for 2020.

In Eastern Desert, we have provided 2019 full year production guidance in a range of 11,500 barrels to 12,400 barrels of oil per day. As Lloyd just mentioned, we are currently running above guidance, but at this time, we are not revising our full year estimates. Post consolidation of the PSCs, we anticipate that we will be able to advance additional work in the Eastern Desert with a focus on introducing horizontal drilling and completions in the Nukhul formation, increase the application of water flooding and eventually pursue tertiary recovery applications, including polymer and possibly ASP flooding. We don't expect, given the expected time line, to approval of a merger of the concessions to advance these projects until 2020 beyond the desktop technical work that would be necessary.

For any of you on the line, who are new to TransGlobe, we bought West Bakr, these assets in late 2011. The fields have been producing consistently since the early 1980s between 3,000 and 4,000 barrels a day. Since we took them over in 2011, we have more than doubled the average daily production. This is exactly the type of opportunity we are looking for from an M&A perspective, underloved and underdeveloped or underexploited opportunities. For 2019, we'll continue to focus on maintaining and optimizing production through a combination of recompletions and 3 additional drills as well as facilities and pumping upgrades.

As Lloyd discussed earlier, production at West Bakr has exceeded plan due to positive results from our K and H well optimization programs that are underway and the performance of our newly drilled M wells have continued to exceed forecast.

In December, we commenced drilling the M-10 Twin well to replace the original M-10 well, which had to be abandoned last year due to casing integrity issues encountered during the remedial water shutoff program. The M-10 Twin or replacement well was placed on production from the main Asl A sand in late February and is currently producing 495 barrels a day.

We also have 1 exploration well in the plan for 2019, which we drilled in the second quarter. It's highlighted by the far west pink dot on the map in the Northern development block. This well will be targeting the formation that is proven to be successful by neighboring company. So we are cautiously optimistic about our chances of having a discovery here in 2019.

Up in North West Gharib, we again ended up drilling another oil well at North West Gharib 38AA, while we were looking for a potential water injector. The well was drilled further down the structure as a potential water injector to provide pressure support on the 38A field. This well is currently being completed, and depending on the results, may be converted to an injector. As a result of this development, the planned exploration well to the north of the 38A pool may be deferred to next year to accommodate an additional well in the 38A pool in 2019.

Now let's take a look at our Canadian assets. In 2018, we drilled 6 horizontal wells in the Cardium. All -- 5 of them were 1-mile horizontals, and we drilled our first 2-mile horizontal well in 2018. All 6 wells were drilled from a common pad. The wells were completed and fracked in the fourth quarter and equipped and tied in over the year-end. As Lloyd just discussed, we had some terrible winter weather in Canada this year and this did not allow us to fully optimize the initial production as early as expected, but we're now getting on track. And so far, the wells are performing as expected.

On a high-level basis, the real challenge in Canada, besides weather, is pricing. The curtailments of liquids production in Alberta to improve prices, which certainly helped, also had a ripple effect throughout the industry. This includes leaving ethane in the gas stream rather than knocking it out and while this will have an impact on production rates, it will not have a material impact on revenue as ethane prices have been under significant price pressure for many months with no end in sight.

Despite the headwinds in Canada, we are very pleased with the technical performance of our Canadian assets and plan to drill 4 Cardium horizontal wells in 2019, including an outpost well to begin evaluating the South Harmattan acreage acquired in 2018.

In addition, importantly, the learnings from our Canadian program are being integrated into our plans for development of our Nukhul pools in the Eastern Desert in Egypt.

So to sum up, from an investment proposition perspective, TransGlobe is positioned with a very healthy balance sheet, a long history of consistent operating performance, production guidance of 14,000 to 15,000 barrels of oil equivalent per day, leverage to Brent oil and in a very good position to go through acquisitions by leveraging our expertise and strong reputation.

So please stay tuned as we are working very hard to add both cash flow and value per share in the coming years.

One final note is to welcome Geoff Probert, our incoming COO, who stepped into the very big shoes of Lloyd Herrick, who will shift his focus to Corporate and Business Development. We'd also like to extend a welcome to 2 new board members, Ms. Carol Bell and Mr. Ed LaFehr, both highly experienced industry professionals, who've joined us to help guide us through what we hope are some exciting times ahead for TransGlobe.

Thanks very much. We'll now turn it over for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Stephane Foucaud with GMP.

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Stephane Guy Patrick Foucaud, GMP Securities L.P., Research Division - MD, Institutional Research [2]

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Two production questions from me and 1 exploration. First on the production side, West Bakr, as you said, runs very strongly. Excluding any potential shutdown this year, do you see that production continuing trending up over the remaining part of the year, flat or down a bit? And likewise, at West Gharib, the decline rates that we have seen over the last few quarters continuing trending like the same at the same pace of 2019. And my third question is around the exploration well at West Bakr. Could you give sort of -- order of magnitude of the size? Are we talking hundred of thousands of barrels, million of barrels, billions of barrels, probably not?

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Lloyd W. Herrick, TransGlobe Energy Corporation - VP & COO [3]

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Okay. So to your first question, I think, I got the full question there, Stephane. As far as the production trending, I think we're expecting to be trending above guidance. We have moved some of the program earlier in the year. So it's more front-end loaded, but I think starting well above the curve puts us in good shape for the year. So we expect to be on the strong side of guidance based on what we've seen so far. I'm sorry, the second question was around?

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Stephane Guy Patrick Foucaud, GMP Securities L.P., Research Division - MD, Institutional Research [4]

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West Gharib going -- the decline rate at West Gharib that we have seen over the past -- the recent quarter.

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Lloyd W. Herrick, TransGlobe Energy Corporation - VP & COO [5]

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Yes, in West Gharib, we had one of our key wells go down on us and it was -- we tried a recompletion that didn't work. We've restored it back up just the other day, so it's back doing 200 or 300 barrels a day, which will flatten out some of that decline, but there's not a lot of work planned in West Gharib. So it's a pretty mature field until we get the consolidations done on the Eastern Desert and then start drilling back in the Nukhul for horizontals, which hopefully will be next year. West Gharib is probably going to continue at a similar decline rate. With respect to the West Bakr exploration well, the target on that one, it's a bit challenging to give you a whole prospect size on that. We do know that the wells to the south, there's a pull down there that is producing something in the order of 2,500 barrels a day from 3 wells. So we're optimistic we're going to get a positive well if it extends that far north. Typically, those wells would recover in the 300,000 to 500,000 barrels per well range, but until we test the structure, it's hard to say.

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Stephane Guy Patrick Foucaud, GMP Securities L.P., Research Division - MD, Institutional Research [6]

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And you said for West Bakr, you expect production to keep going up. Is that what you said or just above guidance?

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Lloyd W. Herrick, TransGlobe Energy Corporation - VP & COO [7]

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It's continuing to climb. I think we will continue to climb here in the first half. And then as we finish up our capital program, I would think Mother Nature will kick in and we'll see some declines along with that. But right now, as you can see from the production curve, it's on a pretty good growth rate. We blew through 8,000 barrels a day, and we're quite a bit above that early in March. So I'm optimistic we're off to a good start.

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Operator [8]

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(Operator Instructions) There are no further questions registered on the phone lines at this time. So I'd like to turn the meeting back over to Mr. Neely.

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Randall C. Neely, TransGlobe Energy Corporation - President, CEO & Director [9]

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Okay, well, great. Thanks, everybody, for joining in this morning, and thanks, Stephane, for the question. We look forward to a great year here with a lot of excitement hopefully on both consolidation of our Eastern Desert PSCs and hopefully some mergers and acquisitions in our future. And it's well with a good start to the year in terms of production. We're very excited. Stay tuned. Thanks, everybody.

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Operator [10]

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Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you all for your participation.