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TransGlobe Energy Second Quarter 2020 Results

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TransGlobe Energy Corp. reported its Q2 2020 results.

Highlights:

• TransGlobe is focused on conserving cash to proactively manage its balance sheet in the current low commodity price environment. The Company ended the second quarter with positive working capital of $35.1 million, including cash and cash equivalents of $34.8 million;
• Second quarter production averaged 14,300 boe/d (Egypt 11,990 bbls/d, Canada 2,310 boe/d), a decrease of 697 boe/d (5%) from the previous quarter;
• Production in July averaged ~12,439 boe/d (Egypt ~10,145 bbls/d, Canada ~2,294 boe/d), a decrease of 13% from Q2-2020, in line with revised budget expectations due to natural declines;
• Sales averaged 12,470 boe/d including 312.6 mbbls sold to EGPC for net proceeds of $7.2 million in Q2-2020. Average realized price for Q2-20 sales of $21.63/boe; Q2-2020 average realized price on Egyptian sales of $23.96/bbl and Canadian sales of $11.01/boe;
• Full year 2020 production guidance range narrowed to 13,300 to 13,800 boe/d to reflect deferred well interventions in Egypt (previously 13,300 to 14,300 boe/d);
• Negative funds flow from operations of $2.8 million ($0.03 per share) in the quarter;
• Second quarter net loss of $13.4 million ($0.19 per share), inclusive of a $3.3 million unrealized loss on derivative commodity contracts;
• Consistent with the revised 2020 budget previously disclosed, there has been no drilling activity in Egypt or Canada during Q2-2020;
• Business continuity plans remain effective across our locations in response to COVID-19 with no health and safety impacts or disruption to production;
• Hedged TransGlobe’s remaining unhedged forecasted 2020 Egypt entitlement oil production with dated Brent collars (costless), protecting a floor price of $30.00 purchased puts against $40.70 sold calls;
• Despite restrictions on travel, constructive negotiations with EGPC to amend, extend and consolidate the Company’s Eastern Desert concession agreements continued throughout the quarter; and
• TransGlobe continues to actively evaluate M&A opportunities, with a view to not only better position the Company to weather the current downturn but also rebound strongly once commodity prices begin to strengthen.

Q2 Summary

TransGlobe produced an average of 14,300 barrels of oil equivalent per day (“boe/d”) during the second quarter of 2020. Egypt production was 11,990 barrels of oil per day (“bbls/d”) and Canada production was 2,310 boe/d. While production for the quarter was at the upper end of full year 2020 guidance of between 13,300 to 14,300 boe/d and 5% lower than the previous quarter, primarily due to natural declines, the Company has narrowed its full year 2020 guidance to 13,300 to 13,800 boe/d to reflect deferred well interventions in Egypt during low oil prices.

TransGlobe’s Egyptian crude oil is sold at a quality discount to Dated Brent. The Company received an average price of $23.96 per barrel in Egypt during the quarter. In Canada, the Company received an average of $14.32 per barrel of oil, $11.43 per barrel of NGL and $1.31 per thousand cubic feet (“mcf”) of natural gas during the quarter.

During Q2-2020, the Company had negative funds flow from operations of $2.8 million and ended the quarter with positive working capital of $35.1 million, including cash and cash equivalents of $34.8 million. The Company had a net loss in the quarter of $13.4 million, inclusive of a $3.3 million unrealized derivative loss on commodity contracts which represents a fair value adjustment on the Company’s hedging contracts as at June 30, 2020.

In Egypt, the Company sold 312.6 mbbls to EGPC during the quarter, and had 402.4 mbbls of entitlement crude oil inventory at June 30, 2020. In Canada, the Company put spare oil storage capacity into service of ~12,000 bbls at its Canadian producing locations during the quarter to take advantage of strength in the forward pricing curve and has retained optionality to bring on flush production in a higher commodity price environment with the deferral of completion operations on the South Harmattan well drilled in the first quarter of 2020. The Company ended the quarter with 6.3 mbbls of Canadian light crude oil inventory.

Consistent with the Company’s revised 2020 budget, there has been no drilling activity in Egypt or Canada during the second quarter.

Despite restrictions on travel, constructive negotiations with EGPC to amend, extend and consolidate the Company’s Eastern Desert concession agreements continued through the quarter. 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, the Company is increasingly confident that a successful conclusion will be reached in the near-term.

The Company remains forward looking and prepared to use its operational control to take advantage of any sustained upward movement in oil price. TransGlobe continues to be vigilant in its search for attractive M&A opportunities while steadfastly retaining its focus on shareholder value creation.

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 and continues to monitor general and administrative (“G&A”) cost reductions. The Company estimates that G&A reductions will reduce go-forward monthly G&A by approximately 35%, however, the Company incurred non-recurring restructuring charges that impacted Q2-2020 results.

Material operating cost reductions in Egypt require the assistance of the Company’s Egyptian joint venture partner, the Egyptian General Petroleum Corporation (“EGPC”). Discussions continue to further reduce operating expenditures.

The Company remains in constant communication with its lenders (Mercuria Energy Trading SA and ATB Financial) and does not anticipate deviating from its pre-crisis planned debt reduction schedule. The Company repaid $10.0 million on the $75.0 million prepayment facility agreement with Mercuria in April 2020, leaving $20.0 million drawn and outstanding of a revolving balance of up to $75.0 million.

Business continuity plans have been implemented in all our locations and operations continue as normal. The Company has had three reported cases of COVID-19 in its joint venture in Egypt, which were managed according to established Company, local and national quarantine guidelines. All three have recovered and returned to work with no onward infection spread reported.

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 revised 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 June 30, 2020, the Company had a working capital surplus of $35.1 million (December 31, 2019 – $32.2 million). The increase in working capital is primarily due to an increase in cash resulting from cash collections on accounts receivable in the period and an increase in accounts receivable due to increased sales to EGPC in 2020, partially offset by a corresponding decrease in crude oil inventory.

As at June 30, 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 June 30, 2020, amounts owing from EGPC were $14.7 million. The Company considers there to be minimal credit risk associated with amounts receivable from EGPC.

In Egypt, the Company sold 312.6 mbbls of crude oil to EGPC in Q2-2020 for net proceeds of $7.2 million. During the second quarter of 2020, the Company collected $21.7 million of accounts receivable from EGPC, an additional $2.0 million has been collected subsequent to the quarter. 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 June 30, 2020, crude oil held as inventory was 408.7 mbbls.

As at June 30, 2020, the Company had $86.0 million of revolving credit facilities with $27.4 million drawn and $58.6 million available. The Company has a prepayment agreement with Mercuria that allows for a revolving balance of up to $75.0 million, of which $20.0 million was drawn and outstanding as at June 30, 2020. During the six months ended June 30, 2020, the Company repaid $10.0 million on this prepayment facility. The Company also has a revolving Canadian reserves-based lending facility with ATB that was renewed and reduced as at June 30, 2020 from C$25.0 million ($18.4 million) to C$15.0 million ($11.0 million), of which C$10.0 million ($7.4 million) was drawn and outstanding. The reduction in the ATB facility is a result of lower forecasted commodity prices and the associated impact on asset value. During the six months ended June 30, 2020, the Company had drawings of C$0.2 million ($0.2 million) on this facility.

Egypt

Operations and Exploration

Consistent with the Company’s revised 2020 budget, there has been no drilling activity in the Eastern Desert during Q2 2020.

Production

Production averaged 11,757 bbls/d during the quarter, a decrease of 5% (586 bbls/d) from the previous quarter. This marginal decrease was primarily due to natural declines, with June production positively impacted by successful well maintenance in May and timing of production recognition. To reflect well intervention deferrals since May, production guidance, including South Ghazalat, has been narrowed for full year 2020 and is now 11,200 to 11,600 bbls/d.

Production in July 2020 averaged ~9,956 bbls/d.

Operations and Exploration

The SGZ-6x well continues to produce from the Upper Bahariya reservoir at a rate restricted to a field estimated 150-200 bbls/d light and medium crude to evaluate the well, manage the reservoir and optimize the separation of oil, gas and water.

Production

Production averaged 233 bbls/d during the quarter, an increase of 15% (31 bbls/d) from the previous quarter.

Production in July 2020 averaged ~189 bbls/d.

Sales

The Company sold all of its entitlement crude oil production of 8.0 mbbls in the quarter to EGPC.

Canada

Consistent with the Company’s revised 2020 budget, there has been no drilling or completion activity during Q2 2020.

The 2-mile horizontal 2-20 well, completed in Q4-2019 and de-risking the South Harmattan fairway, produced at field estimated rates of 140 boe/d (95 bbls/d light oil, 171 mcf/d gas, 17 bbls/d NGL) in July. The Company remains encouraged as the well continues to produce above expectations for this significant new resource play. The 2-20 well has de-risked 18.5 sections of land in the fairway representing 72 1-mile equivalent locations.

TransGlobe’s light oil production continued to be produced at a positive field netback, despite lower crude oil prices in Western Canada early in the quarter, further supported by continued relatively strong natural gas prices. The Company put spare oil storage capacity into service of ~12,000 bbls at our Canadian producing locations during the quarter to take advantage of strength in the forward pricing curve and has retained optionality to bring on flush production in a higher commodity price environment with the deferral of completion operations on the South Harmattan well drilled in the first quarter of 2020.

In Canada, production averaged 2,310 boe/d during the quarter, a decrease of 143 boe/d (6%) from the previous quarter. This marginal decrease was primarily due to natural declines. Production guidance has been narrowed for full year 2020 and is now 2,100 to 2,200 boe/d.

Ending light crude oil inventory in Canada was 6.3 mbbls at June 30, 2020.

Production in July 2020 averaged ~2,294 boe/d with ~667 bbls/d of oil.