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TransGlobe Energy Corporation (
TSX.TGL,
OTC: TGA,
Forum) is a Calgary-based energy company engaged in oil and natural gas exploration, development & production, and the acquisition of properties. The company has two geographical segments…namely Egypt and Canada. It generates maximum revenue from the Egyptian region, and its focus is principally on onshore oil fields with high individual per well productivity and reserves.
TransGlobe's strategy is to identify and acquire overlooked and underdeveloped opportunities in the Middle East and North African region, then apply proven technology and operating practices to extract additional value, while maintaining a conservative approach to financing and cash management.
In this intriguing vodcast, Stockhouse’s Dave Jackson caught up with Randy Neely, Chief Executive Officer of TransGlobe to discuss the company’s new operational developments, its Egyptian oil exploration and production programs, investment highlights, and all things TransGlobe Energy.
TRANSCRIPT BELOW:
SH: To start off, can you update our investor audience and your T-G-L shareholders on any new operational developments, especially in the wake of the COVID-19 pandemic?
RN: Well, actually, from a COVID-19 perspective, we've had very little disruption. I mean, we've had to manage with decreased workforce and of course all the safety protocols that go along with it. But from an operational perspective, we've been able to manage quite well through the year and have not seen any significant impacts of COVID-19 on our operations.
SH: The Company just announced its 2021 Capital Budget for both its Canadian and Egyptian operations. Can you walk us through the highlights?
RN: Sure. For the year we're currently planning to spend about $27 million, which would be split about 16 and a half in Egypt and 10 and a half in Canada. In Egypt, we intend to drill 12 wells, all developmental wells. And in Canada, we intend to drill three wells in our South Harmattan property that will be made up of a one, two-mile horizontal and an additional two, one-mile horizontal wells. That will be the bulk of the projects for the year. We'll do a little facility work and some of the non-productive work, but for the most part, it will be drilling wells in the current year.
SH: You’ve also recently released a detailed operational update for shareholders and investors. Can you elaborate on that, as well?
RN: The biggest component of that {announcement} was that we reminded people of our announcement in early December on our agreement with the Egyptian government to consolidate our three production sharing contracts. We also updated everyone in terms of our production for the year. We ended up averaging about 13 and a half thousand BOE per day for the year, which is about midpoint of our guidance. And further we updated our cash position. We ended the year above US$30 million, even though we paid back an additional US$5 million in the last quarter of the year on our debt facilities. Beyond that, we had started doing some work in South Ghazalat (located in the Western Dessert of Egypt), which includes facilities to handle more fluids as we look to recomplete that well into the lower Bahariya, which was a zone that we tested at about 2,400 barrels a day back in 2018.
SH: For our audience that might not be that familiar with the Egyptian oil exploration and production sector, can you give us a brief overview?
RN: Yes. absolutely. Egypt has a long history in the oil business and has been producing oil for many, many years. That was one of the things that attracted TransGlobe to the country in the first instance, back in 2004. It has a very well-developed service and supply industry. On a scale wise, it's not really that big. The country produces about 700,000 barrels of oil per day and another equivalent of about 600,000 Boepd in gas, although that's growing. So, Egypt is small, but a mature business from a perspective of the oil business worldwide. The country is very well-established, has lots of services, lots of suppliers, and we've been able to do quite well because of that.
SH: Well, let's pivot to your Canadian operations and a little bit of the detail there, as well.
RN: In Canada, unlike Egypt where we are a medium sized fish, we're very much a minnow. We have a little over 2,000 Boepd of production in Canada, and the Canadian oil industry, as you well know, as your listeners know, is quite large. So, we're very much a small minnow. But those operations provide us with a lot of insight into new technologies and approaches, which we not only apply in Canada, but we can also transport to Egypt and use there, which plays quite well with the government there as we bring technology, technology transfer and learning, et cetera to Egypt because of that.
SH: Can you also give us an update on the contractual changes in Egypt that you say will allow the Company to generate twice the funds flow from operations?
RN: This was the big deal for us. This is something that we had been working on for many years. We have been talking about this with the government for over three years, and the negotiation with the government culminated last year. And of course, with the rise in the pandemic last spring, it really delayed getting that finished, but we did eventually agree to terms with the government. We announced that in December. What we did, simply put, is restructure three existing contracts, the legacy contracts. Some of these contracts date back to 1980 and were designed in a period of time that didn't match the product that we had today. We have brownfield operations now. So, the concessions are developed, but there's still a large resource base that can be produced from those formations. It just now is a different approach. It isn't drilling big exploration wells.
It's really about what we call blocking and tackling. So, from that, we were able to improve our economics by taking a larger share, of the net oil. The Egyptian government would take a smaller share, but what it effectively does is open up a larger resource that we can then try to exploit. In effect, simply put, we're just making the pie larger. We get a larger piece, which allows us to invest more and try to develop the large resource in place. So effectively, both parties win. We get a larger piece, but we would go after a much larger pie. And so, as an effect, when we look at US$50 Brent oil for example, we more than doubled what we call our netback. So that would be what we'd get in the field after the government take and the operating costs. So just point blank, we double our netback, but that allows us to reinvest faster and try and chase those additional barrels.
SH: It would be remiss of me not to mention your stock has had a very nice bump over the last six months…nearly tripling in value since early November. Yet you’ve said that there’s a real value discrepancy with TransGlobe’s share price. What can you tell our investor audience regarding the current valuation of your stock and why you think it’s still a good buy right now?
RN: Well, I think, for the most part and people do see a stock go from, I think 40 cents at some time in November to where it is today. I'm talking, US pricing. But we've effectively tripled since that time. So, people are like, how much more room is there left? I think that the key thing to understand is because of where we were with the contracts in Egypt, and the pricing. If you look back at oil prices all of last year, kind of in that $45 range, as an average $50 up and down, if you look at what TransGlobe made on a netback basis, we're barely breaking even at that amount. So, from a value of what those assets are, unless you expect rising prices there, they really were impaired in effect. I don't mean that in an accounting sense, but it's hard to reinvest and grow that base. You're looking for select opportunities to try to do that. Now, all of a sudden, the contract is renegotiated, and the netback is double that, as we just spoke about. We have doubled that capacity of generating cashflow. You know, you're not getting necessarily just a small factor increase in the underlying value. It's a significant bump to the underlying value. So effectively, as I said earlier, with the netback doubling, the cashflow doubles for the company too. And if you look at the cashflow potential, the earning potential, and even the underlying net asset value relative to the existing reserves, as well as the potential in the contingent resources, there's still a significant amount of headroom left in the valuation.
And I / we have been laying low, if you will, from a marketing perspective for a few years, as we tried to negotiate and complete this, because it was hard to talk about negotiating. As well, with $50 oil the assets themselves were challenged. As a result, we've just really kind of opened up this opportunity and we haven't even really talked about the potential in Canada. The potential in Canada is our South Harmattan property, which we internally believe that the asset will eventually prove this is worth more than the entire company. So, you could look at it, you could buy the stock and pay for Canada, and you get Egypt free, or you could buy the stock for Egypt and get Canada for free, either way. Our view is there's quite a bit of room left in valuation.
SH: For company shareholders and potential investors, what kind of new development can we expect moving through 2021 at your Egyptian and Canadian operations?
RN: Well in Egypt, it's going to be a kind of a return to more normal operations because we had been for the last few years, again, challenged, economically to invest. And so now with the change in terms, we can now begin to reinvest, and that's what we're gearing up to do with this year's program drilling the 12 wells. We are going to see basically a reversal of the declines that we saw in production and growing our production in Egypt. We'll see a lot of that starting to come in the latter half of the year. It's just the way it works, planning, getting the wells drilled, tied in, et cetera. So, we'll see the benefits of that starting to mature towards the end of the year. Going beyond 2021, it'll be more the same, it'll be maturing those contingent resources, getting them drilled, and then moving forward with plans to grow that base business.
We believe that we can get back to a production level that we had two, three years ago, which is, in the range of, three to 5,000 barrels per day higher than it is today.
In Canada, we're going to be drilling three wells in the South Harmattan area, this is a project that we announced just over a year ago. We drilled a well in South Harmattan that came on production, basically exceeded our expectation by two times. And we believe that this whole area is going to be producible in a very similar fashion to the first well, and we'll have those wells drilled and completed in the third quarter this year. So again, it's more of an end of the year reaction, but what that does is, because it's a resource play, we're really trying to decrease uncertainty across the landmass.
We have a second wheel drilled in the middle of South Harmattan, but we didn't complete it. We'll put that well on production. hopefully by the end of the first quarter, and then we're going to drill the three additional wells. So, we're now going to have five wells across an area that's probably, North to South somewhere in the neighborhood of seven to 10 miles. So, it's a pretty big landmass. We’ll have decreased the uncertainty of that production rate across that area. In total, we have probably close to a 20 mile range from North to South. And so, there's more lands to the South. They'll take some more drilling to decrease uncertainty there, but that's what we'll see, sort of initial drilling, bringing on some additional production. And then as we march into 2022 and beyond in that area alone, we have something in the neighborhood of 86, one-mile locations. They will be drilled differently than one mile. That'd be partially two miles, one and a half miles and one mile, but there's quite a few locations to develop there.
SH: Thanks again, Randy, for taking the time to speak with us today at Stockhouse. Is there anything further to you would like to add?
RN: Well, I think the one thing that I think is top of investors’ minds these days is ESG practices. And I'd like to just reassure, the listeners and viewers that, that is certainly top of mind for us as well. I think what's been great, one of the great things that's coming out of this consolidation of our assets in Egypt, is it now gives us a timeline - we now have 15 to 20 years. So, investing in those properties in order to decrease our carbon footprint, it actually becomes feasible. Whereas with the very short timeframe, we weren't able to put those investments into electrification and other elements that we can do - which will be beneficial for the environment obviously, and benefits for the community. I just want to continue to reassure people that it is actually top of mind.
For more information, please visit
www.trans-globe.com
FULL DISCLOSURE: This is a paid article produced by Stockhouse Publishing