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TransGlobe Energy First Quarter 2020 Results

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   |    Tuesday,May 12,2020

TransGlobe Energy Corp. reported its Q1 2020 results.

Highlights:

  • First quarter production averaged 14,997 boe/d (Egypt 12,544 bbls/d, Canada 2,453 boe/d), a decrease of 365 boe/d (2%) from the previous quarter;
  • Production in April averaged ~14,351 boe/d (Egypt ~12,111 bbls/d, Canada ~2,240 boe/d), a decrease of 4% from Q1-2020;
  • Sales averaged 22,934 boe/d including one cargo lifting of 452.1 thousand barrels (“mbbls”) for net proceeds (inclusive of hedging gains) of $14.6 million (collected in April 2020) and 765.4 mbbls sold to EGPC for net proceeds of $37.0 million, in Q1-2020. Average realized price for Egyptian sales in Q1-2020 of $40.46/bbl;
  • Funds Flow from operations of $25.7 million ($0.35 per share) in the quarter;
  • First quarter net loss of $55.2 million ($0.76 per share), inclusive of a $73.5 million non-cash impairment loss and a $4.4 million unrealized gain on derivative commodity contracts;
  • Ended the first quarter with positive working capital of $53.3 million, including cash and cash equivalents of $23.8 million;
  • Drilled a Yusr development well at West Bakr in Egypt (HW-2A);
  • Drilled a 2-mile horizontal Cardium development well in the South Harmattan area of Canada;
  • The majority of the 2020 capital program has been executed with the capital spent in Q1;
  • In process of reducing monthly G&A costs across the business by a targeted ~35% through headcount reduction, universal salary rollbacks and reduction of discretionary expenditures;
  • Business continuity plans activated across all locations in response to COVID-19 with no health and safety impacts or disruption to production;
  • Subsequent to the quarter entered into costless Dated Brent collars ($30.00 / $40.70) for TransGlobe’s remaining unhedged forecasted 2020 Egypt entitlement oil production;
  • Negotiations continued throughout the quarter with the Egyptian government to amend, extend and consolidate the Company’s Eastern Desert concession agreements; and
  • TransGlobe continues to actively evaluate M&A opportunities, with a view to not only better position the Company to weather the current crisis but also rebound strongly once commodity prices begin to strengthen.

Q1 Summary

TransGlobe produced an average of 14,997 boe/d during the first quarter of 2020. Egypt production was 12,544 bbls/d and Canada production was 2,453 boe/d. Production for the quarter was 9% higher than the full year 2020 guidance of between 13,300 to 14,300 boe/d and 2% lower than the previous quarter, primarily due to natural declines.

TransGlobe’s Egyptian crude oil is sold at a quality discount to Dated Brent. The Company received an average price of $40.46 per barrel in Egypt during the quarter. In Canada, the Company received an average of $40.57 per barrel of oil and $1.61 per thousand cubic feet (“mcf”) of natural gas during the quarter.

During Q1-2020, the Company had funds flow from operations of $25.7 million and ended the quarter with positive working capital of $53.3 million, including cash and cash equivalents of $23.8 million. The Company had a net loss in the quarter of $55.2 million, inclusive of a $4.4 million unrealized derivative gain on commodity contracts which represents a fair value adjustment on the Company’s hedging contracts as at March 31, 2020. The net loss was also inclusive of a non-cash impairment loss of $40.0 million on the Company’s petroleum and natural gas (“PNG”) assets and a non-cash impairment loss of $33.5 million on the Company’s exploration and evaluation (“E&E”) assets. The Company recognized impairments on its PNG assets due to a significant decrease in crude oil pricing during the quarter and the resulting reduction in fair value of these assets. The Company recognized impairments on its E&E assets principally due to the scale of exploration results compared to investments to date and consideration of the uncertainly of the timing of additional exploration activities in these areas given the current economic environment.

In Egypt, the Company sold a 452.1 mbbls cargo of entitlement crude oil and 765.4 mbbls to EGPC during the quarter, and had 242.1 mbbls of entitlement crude oil inventory at March 31, 2020. The decrease in inventoried crude oil is attributed to a significant increase in sales and a slight decrease in production compared to the previous quarter. All Canadian production was sold during the quarter.

In the Eastern Desert, the Company drilled the HW-2A development well at West Bakr. The well was drilled to a total depth of 1,639 meters and completed in April 2020 as a Yusr producer. In the Western Desert, SGZ-6X well is producing from the Upper Bahariya reservoir at a rate restricted to a field estimated 250 – 300 bbls/d light and medium crude to evaluate the well, manage the reservoir and optimize the separation of oil, gas and water.

Discussions with EGPC, the Company’s joint venture operating partner, are ongoing to reduce operating expenditures. Any material operating cost reductions in Egypt will require the assistance of EGPC to implement. Further constructive negotiations with EGPC to amend, extend and consolidate the Company’s Eastern Desert concession agreements have continued through the period, with both parties recognizing the attractiveness of a revised agreement to stabilize and ultimately improve investment in production, following a return to a more sustainable commodity price environment.

In Canada, a 2-mile Cardium development well has been successfully drilled and the rig released. Stimulation and equipping for production will await improved oil prices. Prudently extending the well allowed TransGlobe to cost effectively secure future upside potential in South Harmattan. Crude oil prices in Western Canada have been significantly impacted by the current oversupply into the market exacerbated by the COVID-19 related demand contraction. The Company is exploring all avenues with its contractors and suppliers to reduce operating costs in its Canadian operations.

TransGlobe continues to actively evaluate M&A opportunities, with a view to not only better position the Company to weather the current crisis but also rebound strongly once commodity prices begin to strengthen.

Crisis Mitigation Measures

TransGlobe is focused on conserving cash to proactively manage its balance sheet in the current low commodity price environment. The Company has successfully implemented the previously announced 80% reduction in the 2020 capital program. The Company has also undertaken a general and administrative (“G&A”) cost reduction exercise across all locations through staff reductions, salary rollbacks and reducing all discretionary expenditures. This also includes a rollback of non-executive director remuneration of 10%. The Company estimates that these actions will reduce on-going monthly G&A by approximately 35%, but there were non-recurring restructuring charges that have impacted Q1-2020 results and will continue to impact Q2-2020 results.

The Company remains in constant communication with its lenders (Mercuria Energy Trading and ATB Financial) and does not anticipate deviating from its pre-crisis anticipated debt reduction schedule.

In early March, the Company recognized the potential for an extended period of price uncertainty, and acted to expeditiously finalize sales arrangements for the recent build in Egyptian crude oil inventory.

TransGlobe continues to review its price exposure in the current crude oil price environment and, subsequent to the quarter, entered into additional 2020 hedges to provide further downside protection against a protracted near-term, low price environment. The Company entered into costless Dated Brent collars for its remaining unhedged forecasted 2020 Egypt entitlement oil production. An additional 800 mbbls (100 mbbls monthly from May-December) have been price-protected with a purchased put of $30.00/bbl and a sold call of $40.70/bbl. The Company has and will continue to update its economic thresholds for shutting in production in both Canada and Egypt. All operations including what would normally be routine operations, are subject to a thorough economic review prior to expenditures being approved. At this time the Company has not shut-in any material production but this is continually being monitored.

The Company has had no reported cases of COVID-19 among its staff, contractors or joint venture partners. Business continuity plans have been implemented in all our locations and operations continue as normal.

Liquidity & Capital

Liquidity describes a company’s ability to access cash. Companies operating in the upstream oil and gas industry require sufficient cash in order to fund capital programs that maintain and increase production and reserves, to acquire strategic oil and gas assets and to repay current liabilities and debt and ultimately to provide a return to shareholders. TransGlobe’s capital programs are funded by its existing working capital and cash provided from operating activities. The Company’s cash flow from operations varies significantly from quarter to quarter depending on the timing of oil sales from cargoes lifted in Egypt, and these fluctuations in cash flow impact the Company’s liquidity. TransGlobe’s management will continue to steward capital and focus on cost reductions in order to maintain balance sheet strength through the current volatile oil price environment.

Funding for the Company’s capital expenditures is provided by cash flow from operations and cash on hand. The Company expects to fund its 2020 exploration and development program through the use of working capital and cash flow from operations. The Company also expects to pay down debt and explore business development opportunities with its working capital. Fluctuations in commodity prices, product demand, foreign exchange rates, interest rates and various other risks may impact capital resources and capital expenditures.

Working capital is the amount by which current assets exceed current liabilities. As at March 31, 2020, the Company had a working capital surplus of $53.3 million (December 31, 2019 – $32.2 million). The increase in working capital is primarily the result of an increase in accounts receivable due to the increase in sales in Q1-2020, partially offset by a corresponding decrease in crude oil inventory, and a decrease in cash due to the funding of the 2020 capital program to date.

As at March 31, 2020, the Company’s cash equivalents balance consisted of short-term deposits with an original term to maturity at purchase of one month or less. All of the Company’s cash and cash equivalents are on deposit with high credit-quality financial institutions.

Over the past 10 years, the Company has experienced delays in the collection of accounts receivable from EGPC. The length of delay peaked in 2013, returned to historical delays of up to six months in 2017, and has since fluctuated within an acceptable range. As at March 31, 2020, amounts owing from EGPC were $29.4 million. The Company considers there to be minimal credit risk associated with amounts receivable from EGPC.

In Egypt, the Company sold one crude oil cargo in Q1-2020 for total proceeds of $14.6 million (inclusive of hedging gains), the proceeds of which were collected in April 2020. The Company sold an additional 765.4 mbbls of crude oil to EGPC for net proceeds of $37.0 million in the quarter. As at March 31, 2020 the company had collected $13.9 million, subsequent to the quarter an additional $3.0 million has been collected. The Company incurs a 30-day collection cycle on sales to third-party international buyers. Depending on the Company’s assessment of the credit of crude oil purchasers, they may be required to post irrevocable letters of credit to support the sales prior to the cargo lifting. As at March 31, 2020, the Company held 242.1 mbbls of entitlement crude oil as inventory.

As at March 31, 2020, the Company had $92.6 million of revolving credit facilities with $37.0 million drawn and $55.6 million available. The Company has a prepayment agreement with Mercuria that allows for a revolving balance of up to $75.0 million, of which $30.0 million was drawn and outstanding. The Company also has a revolving Canadian reserves-based lending facility with ATB totaling C$25.0 million ($17.6 million), of which C$9.9 million ($7.0 million) was drawn and outstanding. During the three months ended 2020, the Company had drawings of C$0.1 million ($0.1 million) on this facility. Subsequent to the quarter end the Company re-paid $10.0 million on the $75.0 million prepayment facility.

Egypt Ops Update

West Gharib, West Bakr, and North West Gharib (100% working interest, operated)

During the first quarter of 2020, the Company drilled a development oil well in the Eastern Desert at West Bakr. The HW-2A development well was drilled to a total depth of 1,639 meters. Due to stuck pipe, only the Yusr-B reservoir was fully logged and evaluated with an internally estimated 0.3 meters of net oil pay on this reservoir. The other Yusr reservoirs and the upper Bakr reservoir, though all exhibiting good oil shows, were not logged at this time. HW-2A was completed in April 2020 as a producer on 5.4 meters of oil bearing Yusr-C reservoir observed on the mud logs. The SHAMS-2 rig was demobilized following the completion of HW-2A.

The Company has initiated discussions with EGPC, our joint venture operating partner, to reduce operating expenditures.

All well interventions and repairs following failure are assessed for economic viability prior to execution, with the postponement of those activities unable to carry their repair and operating cost at current oil prices. At this time no material impact to 2020 production expectations has resulted from activities deferred in this way. The Company will continue to update its economic thresholds for shutting in production.

Constructive negotiations with EGPC to amend, extend and consolidate the Company’s Eastern Desert concession agreements have continued through the period, with both parties recognizing the attractiveness of a revised agreement to stabilize and ultimately improve investment in production, following a return to a more sustainable commodity price environment.

Production

Production averaged 12,343 bbls/d during the quarter, a decrease of 4% (488 bbls/d) from the previous quarter. This decrease is primarily due to natural declines, with March production being impacted by severe weather in Egypt. Production guidance remains unchanged for fiscal 2020 of 11,300 to 12,100 bbls/d.

Production in April 2020 averaged ~11,854 bbls/d.

Sales

The Company sold 758.5 mbbls of inventoried entitlement crude oil to EGPC during the quarter and a cargo of 452.1 mbbls of Gharib blend crude, which was lifted in mid-March.

Quarterly Eastern Desert Production (bbls/d) 2020   2019  
  Q-1   Q-4   Q-3   Q-2  
Gross production rate1   12,343     12,831     13,750     14,663  
TransGlobe production (inventoried) sold   7,937     (674 )   (1,821 )   (967 )
Total sales   20,280     12,157     11,929     13,696  
                         
Government share (royalties and tax)   6,977     7,250     7,795     8,320  
TransGlobe sales (after royalties and tax)2   13,303     4,907     4,134     5,376  
Total sales   20,280     12,157     11,929     13,696  

1   Quarterly production by concession (bbls/d):
West Gharib – 3,664 (Q1-2020), 3,857 (Q4-2019), 4,003 (Q3-2019), and 4,256 (Q2-2019)
West Bakr – 8,277 (Q1-2020), 8,489 (Q4-2019), 8,978 (Q3-2019), and 9,389 (Q2-2019)
North West Gharib – 402 (Q1-2020), 485 (Q4-2019), 769 (Q3-2019), and 1,018 (Q2-2019)
2   Under the terms of the Production Sharing Concession Agreements, royalties and taxes are paid out of the Government’s share of production sharing oil.

Western Desert

South Ghazalat (100% working interest, operated)

At South Ghazalat, the SGZ-6X well is currently producing from the Upper Bahariya reservoir at a rate restricted to a field estimated 250-300 bbls/d light and medium crude to evaluate the well, manage the reservoir and optimize the separation of oil, gas and water.

With the continued postponement of both appraisal and exploration drilling at South Ghazalat in 2020, production from SGZ-6X alone at current and near-term oil prices is insufficient to cover its operating costs. The Company is working with EGPC to further cut western desert operating costs to generate positive cash flow from SGZ-6X operations, however, if this is not possible, the Company is considering suspending South Ghazalat operations until either oil prices improve or production off the lease can be increased through new wells or a recompletion of SGZ-6X.

Production

Production averaged 201 bbls/d during the quarter, with March production being impacted by severe weather in Egypt. This was the first full quarter of production at South Ghazalat.

Production in April 2020 averaged ~257 bbls/d.

Sales

The Company sold all of its entitlement crude oil production of 6.9 mbbls in the quarter to EGPC.

Canada Ops Update

During the quarter, a 2-mile Cardium development well was successfully drilled and the rig was released. Stimulation and equipping for production will await improved oil prices. By extending the well trajectory by a further 218 meters into an adjacent section, this well holds an additional 7.5 sections of land in the South Harmattan fairway. Prudently extending the well allowed TransGlobe to cost effectively secure future upside potential in South Harmattan.

The 2-mile horizontal 2-20 well, completed in Q4 2019 and de-risking the South Harmattan fairway, continued to produce at field estimated rates of 234 boe/d (197 bbls/d light oil, 119 mcf/d gas, 18 bbls/d NGL) prior to being shut-in in mid-March to drill a well from same location. The Company is very encouraged that production performance remains in line with Company expectations for this significant new resource play.

Crude oil prices in Western Canada have been significantly impacted by current oversupply into the market exacerbated by the COVID-19-related demand contraction. During the quarter TransGlobe’s light oil production continued to be produced at a positive field netback. In addition, natural gas prices were relatively strong through the first quarter averaging $1.43/MMBtu. Nonetheless, the Company is exploring all avenues with its contractors and suppliers to reduce operating costs in its Canadian operations and will consider shutting in production if the economics of shutting in are superior to producing and selling.

In the event the Company decides to suspend or limit oil sales, it will be able to produce oil to tanks for approximately one month at currently forecasted production, before needing to shut-in the production.

Production

In Canada, production averaged 2,453 boe/d during the quarter, a decrease of 78 boe/d (3%) from the previous quarter. This marginal decrease was primarily due to natural declines and the shut-in of the 2-20 well while drilling a well from the same location.

Production in April 2020 averaged ~2,240 boe/d with ~797 bbls/d of oil.


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