TransGlobe Energy EGPC receivables issue resolved Market update Oil & gas TransGlobe Energy (TGA) has announced a raft of measures aimed at seeing it through the current weak oil price environment, reducing capital investment for 2015 and focusing on costs. From an operational perspective, the focus near term shifts from exploration drilling to highgrading the prospect inventory; processing of the group s large Egyptian 3D seismic survey is ongoing. The effective resolution of TGA s EGPC payment issue adds material strength to the balance sheet. Having received US$140m in cash payments from EGPC in the fourth quarter, TGA now holds c US$140m in cash at an opportunistic time to carry out deals. Price Market cap Net cash (US$m) at 30 Sept 2014 (includes convertible debentures) 30 January 2015 US$2.76 US$208m 5.3 Shares in issue 75.2m Free float 72% Code TGA Year end Revenue (US$m) PBT* (US$m) EPS* (c) DPS (c) Capex (US$m) Net (debt)/ cash (US$m) 12/13 315.7 143.9 79 0 (132) 35 12/14e 304.0 138.3 92 20 (106) 59 12/15e 156.6 (7.0) (49) 20 (37) 118 12/16e 230.9 67.7 32 20 (19) 167 Note: *PBT is normalised, excluding intangible amortisation, exceptional items and sharebased payments. Primary exchange Secondary exchange Share price performance NASDAQ TSX EGPC makes significant receivables reduction TGA received several payments amounting to US$140.1m from EGPC in Q414, taking the total for payments received in 2014 to US$233.5m, reducing the receivables balance owed by EGPC to US$120m. On the basis of recent progress we expect this balance to be fully paid within the near-term. In addition, TGA has agreed a self-marketing agreement with EGPC, ensuring payments are received direct by the company going forward. Focus in Egypt shifts from seismic to drilling TGA has announced a reduced capital budget of US$37m for 2015, with just US$7m of this to be spent on drilling wells. Emphasis of operations in Egypt now shifts to high-grading of the prospect inventory, with gathering of seismic and interpretation operations ongoing. In addition to conserving cash flow, this strategy ensures the group has a commercial drilling inventory in preparation to restart investment in response to any stabilisation in the macro environment. Valuation: EGPC payment partly offsets weak macro Based on our DCF analysis we reduce our valuation for TGA from US$7.5/share to US$6.0/share (RENAV) reflecting the group s lower production estimates for 2014 and the weaker macro environment. In a sense check to this DCF valuation we assess the company s value on an absolute basis as at year-end 2014. Based on this analysis we see the shares as well supported with the group holding US$177.5m in net cash and receivables (US$2.4/share). Also, we see TGA as a solid value opportunity to those with a constructive view on long-term oil prices, trading at under 1x cash flow (0.84x) under our long-term US$80/bbl oil price scenario. % 1m 3m 12m Abs (24.5) (39.3) (63.3) Rel (local) (22.0) (40.5) (67.8) 52-week high/low US$8.58 US$2.86 Business description TransGlobe Energy (TGA) is an exploration and production company with producing assets in Egypt (16,000b/d) and Yemen (200b/d). In addition to significant production in Egypt, the group controls significant exploration acreage in the vicinity of existing facilities. Next event Full-year results March 2015 Analysts Peter Lynch +44 (0)20 3077 5731 Will Forbes +44 (0)20 3077 5749 Ian McLelland +44 (0)20 3077 5756 Elaine Reynolds +44 (0)20 3077 5713 Kim Fustier +44 (0)20 3077 5741 oilandgas@edisongroup.com Edison profile page TransGlobe Energy is a research client of Edison Investment Research Limited
2015 guidance and corporate update 2015 corporate guidance, balance sheet preservation On 9 January TGA gave a corporate update including updated guidance for 2015. A key theme of this announcement was the reduction in near-term capital investment and operating costs in response to the dramatic fall in crude oil prices. In addition, the group has lowered its estimates for 2015 production from Egypt, particularly West Gharib, due to ongoing pump reliability issues and reduced capital investment aimed at arresting naturally declining field production. On the positive side, TGA announced a major advance in resolving its EGPC payment issue in receiving US$140m in cash in Q4 in addition to agreeing with EGPC to self-market its own crude in the future, removing the receivables issue going forward. 2015 drilling programme reduced in favour of seismic For 2015, TGA has guided a reduced capital investment programme for the year at US$37m, which is based on TGA s realistic US$50/bbl oil price assumption for the first quarter. The US$37m is split US$19m for exploration and US$18m for development. Within the US$18m development spend only US$7m is allocated to the drilling of five new wells, with the remaining US$11m allotted to facilities. Within the US$19m exploration spend, US$17m is scheduled for seismic acquisition and processing, all within Egypt. In an effort to reduce ongoing drilling costs in Egypt, following completion of the five planned wells in Q115, all rigs operating on behalf of TGA in Egypt will be released, with the intention of re-contracting them at lower rates going forward. As you would expect, given the prevailing low crude price environment, TGA s outlined work programme for 2015 favours the less capital intensive seismic processing and interpretation over drilling activity. On this basis, in Egypt TGA is focusing on its G&G work programme, aimed at working up new prospects in addition to high-grading the existing prospect inventory. As well as conserving cash flow, this strategy ensures the group has a commercial drilling inventory in preparation to restart investment in response to any stabilisation in the macro environment. Exhibit 1: Egypt, Western desert seismic programme currently underway Source: TransGlobe Energy TransGlobe Energy 30 January 2015 2
TGA s total seismic programme for 2014/15 consists of 1,000km 2 of 3D and 325km of 2D in the Eastern desert, and 400km 2 of 3D in the Western desert (shown in Exhibit 1). The Eastern desert programme was completed in December; this survey is in processing with interpretation and working-up of prospects expected to begin in Q215. In the Western desert the seismic programme is underway, with completion expected by May 2015. TGA s combined Eastern and Western desert seismic programmes are extensive and should be commercially rewarding, given they focus on acreage proximal to existing discoveries and production. Hence, any discoveries should be quickly brought to market. Material payments in Q414 cuts receivables by 50% As we highlighted in our November TransGlobe initiation note Egyptian focus, asset-backed plus growth, we saw an improving political landscape in Egypt, with the fledgling government financially backed by well-funded Middle East nations and committed to repaying foreign oil company debt. At the point of our initiation note, EGPC s debt to TGA stood at c US$216.3m and as such represented a major question mark over TGA s valuation. Exhibit 2: EGPC accounts receivable showing a material reduction in Q414 Source: TransGlobe Energy In what has been a sharp turnaround of this issue, TGA received a material payment of US$140.1m from EGPC in Q414, taking the total for payments received in 2014 to US$233.5m. This US$140m payment comprised of one and a half cargo liftings in the fourth quarter in addition to a lump sum payment of US$50m received on 31 December. The significant progress on payments from EGPC leaves TGA s outstanding receivables balance at just US$120m. A further reduction in this US$120m is expected in the near term, with TGA receiving over lift payments. This is where a tanker loading consisting of EGPC crude in addition to TransGlobe crude is sold; rather than pay EGPC their share, the money is retained by TGA and used to further reduce EGPC s $120m receivables balance. Self-marketing agreement eliminates receivables issue going forward As announced in its corporate update of 9 January, TGA now has an agreement in place with EGPC to self-market its own crude. This allows the group to directly negotiate crude shipments with international buyers, negating the risk that an oil sales receivables debt to TGA would regenerate. The first shipments under this agreement are scheduled for late January and April 2015. TransGlobe Energy 30 January 2015 3
Q115 cash flow affected by low oil prices As previously mentioned, TGA has adopted a US$50/bbl Q115 oil price assumption for planning purposes. Under this scenario the group would generate positive cash flow of US$1m in the period; hence we assume US$50/bbl is roughly break-even level for these assets. In terms of cash flow sensitivity beyond US$50/bbl, TGA suggests that at US$60/bbl the group would generate an additional US$4.7m in cash flow. Hence, if the macro environment does improve into 2015, we would expect the group to increase capital investment from the increased cash flow generated. Pump reliability continues to affect production Driving the above cash flow forecast for the first quarter is TGA s new production guidance over the same period. The group suggests production will average 14mb/d in the first quarter of 2015, comprised of 13.8mb/d from Egypt and 200b/d from Yemen. This is lower than production in Q414 of 15,183b/d, which had been negatively affected by PCP pump reliability issues in Egypt. These pump issues remain ongoing at West Gharib (the group s main Egyptian producing licence) where replacement pumps are on-site and will be installed and optimised during 2015. According to management, TGA currently holds c 1mbbl/d of production behind pipe, thought to be the three discoveries made as part of the 2014 drilling programme, which are due to be tied-in in the short term. It seems sensible the group is not scrambling to replace pumps and increase output under the current macro environment. Valuation: Reduction in receivables partly offsets weak macro As shown in Exhibit 3, our valuation for TransGlobe is reduced from US$7.5/share to US$6.0/share, reflecting our weaker outlook for oil prices in 2015 and 2016. For 2015 and 2016 we reduce our crude price forecasts to US$52.5/bbl and US$72.5/bbl respectively. Longer term we retain our US$80/bbl forecast. In addition to the weaker macro environment, we reflect TGA s lower production and capex guidance for 2015. Exhibit 3: TransGlobe valuation summary Asset Country Diluted WI Recoverable reserves Net Risked Value per share CoS Gross Net NPV/boe value risked Unrisked % % mmboe mmboe US$/boe US$m US$/share US$/share Net (Debt) Cash 100% 100% 57 0.8 0.8 SG&A 100% 100% (31) (0.4) (0.4) Receivables NPV 107 1.4 1.4 Production West Gharib Egypt 100% 100% 19.4 19.4 10.3 200 2.7 2.7 West Bakr Egypt 100% 100% 6.6 6.6 6.0 40 0.5 0.5 East Ghazalat Egypt 50% 100% 0.8 0.4 5.6 2 0.0 0.0 Producing *Yemen Block 32 / Yemen 14% / 50% N/A N/A N/A 27 0.4 0.7 Block S-1 25% Core NAV 402 5.4 5.7 Exploration NWG #10 Egypt 100% 15% 32.6 32.6 4.9 24 0.3 2.1 NWG #6 Egypt 100% 15% 11.8 11.8 3.8 7 0.1 0.6 NWG #1-5, 8,9,11 Egypt 100% 25% 11.8 11.8 4.9 15 0.2 0.8 Exploration NAV 1.8 45 0.6 2.1 RENAV 448 6.0 7.8 Source: Edison Investment Research. *Note: In valuing Yemen we adopt the company s carrying value for this asset ($53.3m) and then risk this value by 50%. TGA s progress in reducing its EGPC receivables balance has partly mitigated the valuation impact of the weaker macro environment. TGA received a material US$140.1m in cash payments against its EGPC receivables balance in Q414. We had previously assumed this debt would be paid over TransGlobe Energy 30 January 2015 4
three years, and as such our valuation featured a DCF of our estimated schedule of payments over this period. Given TGA has now a direct marketing agreement in place for its crude, we assume the remainder of the receivables balance (US$120m) is received in 2015, which is again supportive to valuation. Absolute value sense check shows TGA trading at <1x cash flow at US$80/bbl As a sense check to our DCF valuation we have assessed TGA s absolute value as at the end of 2014. We estimate TGA held US$58.8m in net cash at year-end 2014, comprised of a US$140.5m gross cash balance offset by debt of c US$82m (corporate bond, end Q314). In addition to US$58.8m in net cash, the group holds a receivables balance of US$120m owed by EGPC. Given the recent progress on payments from EGPC, we value this debt with no discount. Combining these elements results in a net cash and cash equivalent asset value for TGA of US$177.3m. Netting this US$177m cash balance off against TGA s current market capitalisation of US$228m (at US$3.04/share) implies an EV for the group s operating assets of US$50.7m. It is worth noting as support for the shares that TGA s cash and cash equivalent assets represent US$2.4 of the current US$3 share price. To put this US$50.7m in to context, we note that based on the company s guidance of cash flow sensitivity to oil prices, TGA would generate US$60m in funds flow per year from its Egyptian assets in an US$80/bbl crude price environment. Hence, at the current share price of $3, TGA is trading at less than 1x cash (0.84x) assuming a recovery in crude prices to US$80/bbl. Exhibit 4: TGA valuation sense check TGA valuation 'sense check' US$m US$ per share Net cash (Q414) 59 0.78 EGPC receivables balance 120 1.60 Cash 'equivalent' total 179 2.38 Market capitalisation (at $3/share) 228 3.04 Implied EV 49 0.65 Estimated funds flow, assuming US$80/bbl 60 0.80 EV cash flow multiple, assuming US$80/bbl 0.84 Source: Edison Investment Research On this basis, we see value in TransGlobe shares for the long-term investor willing to look through the temporary oversupply dominating the crude oil market, particularly as the operating backdrop in Egypt continues to improve. Supporting our constructive view of the shares, we retain our US$80/bbl long-term price forecast for 2017 onwards, as we see material production cuts underway in the industry and reduced investment combining to support higher prices as early as 2016. Balance sheet strength suggests deals are possible Given the Egyptian government s renewed commitment to repay its foreign company debts, we estimate the remaining balance owed to TGA will be fully paid by the end of 2015. Hence, with TGA holding c US$140m in gross cash and seeking to diversify its assets outside of Egypt, we see nearterm M&A activity as highly likely. However, we stress that future deals will likely be geared towards exploiting the group s competence in applying secondary recovery techniques as with Egypt, rather than targeting outsized, high-risk exploration. Given the weak oil price environment we would view this as an opportune time to carry out deals. TransGlobe Energy 30 January 2015 5
Exhibit 5: Financial summary $'000s 2012 2013 2014e 2015e 2016e Dec IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 317,993 315,678 304,034 156,643 230,860 Operating Expenses (52,367) (65,791) (78,299) (84,147) (83,353) Gross Profit 265,626 249,887 225,736 72,496 147,508 EBITDA 236,656 202,407 194,236 48,846 124,458 Operating Profit (before amort. and except.) 189,710 152,993 145,935 697 75,440 Intangible Amortisation 0 0 0 0 0 Exceptionals 0 0 0 0 0 Other 0 0 0 0 0 Operating Profit 189,710 152,993 145,935 697 75,440 Net Interest (13,901) (9,130) (7,684) (7,684) (7,705) Profit Before Tax (norm) 175,809 143,863 138,252 (6,987) 67,735 Profit Before Tax (FRS 3) 175,809 143,863 138,252 (6,987) 67,735 Tax (88,075) (85,351) (69,149) (29,823) (44,026) Profit After Tax (norm) 87,734 58,512 69,102 (36,810) 23,710 Profit After Tax (FRS 3) 87,734 58,512 69,102 (36,810) 23,710 Average Number of Shares Outstanding (m) 73.4 74.0 75.1 75.1 75.1 EPS - normalised (c) 119.6 79.1 92.1 (49.0) 31.6 EPS - normalised fully diluted (c) 116.2 65.0 92.1 (49.0) 31.6 EPS - (IFRS) (c) 119.6 79.1 92.1 (49.0) 31.6 Dividend per share (c) 0 0 20 20 20 Gross Margin (%) 83.5 79.2 74.2 46.3 63.9 EBITDA Margin (%) 74.4 64.1 63.9 31.2 53.9 Operating Margin (before GW and except.) (%) 59.7 48.5 48.0 0.4 32.7 BALANCE SHEET Fixed Assets 342,621 395,439 428,759 417,610 387,352 Intangible Assets 48,414 89,991 102,970 120,730 129,734 Petroleum Properties 280,895 288,756 309,295 280,386 241,123 Other 13,312 16,692 16,495 16,495 16,495 Current Assets 310,804 280,361 272,535 234,361 283,365 Stocks 0 1,525 864 864 864 Debtors 221,017 148,284 120,000 22,500 22,500 Cash 82,974 122,092 142,002 201,328 250,332 Other 6,813 8,460 9,669 9,669 9,669 Current Liabilities (48,587) (38,392) (35,734) (35,734) (35,734) Creditors (48,587) (38,392) (35,734) (35,734) (35,734) Short term borrowings 0 0 0 0 0 Long Term Liabilities (168,978) (137,218) (131,905) (131,905) (131,905) Long term borrowings (115,627) (87,539) (83,229) (83,229) (83,229) Other long term liabilities (53,351) (49,679) (48,676) (48,676) (48,676) Net Assets 435,860 500,190 533,655 484,332 503,078 CASH FLOW Operating Cash Flow 93,992 199,508 148,859 111,340 82,777 Net Interest 0 0 0 0 0 Tax 0 0 0 0 0 Capex (PPE) (45,386) (66,703) (66,857) (19,240) (9,755) Capex (Intangible) (57,390) (65,252) (38,834) (17,760) (9,004) Financing 3,333 1,301 2,479 0 0 Dividends 0 0 (18,743) (15,014) (15,014) Other 86,091 (11,286) (6,585) 0 0 Net Cash Flow 80,640 57,568 20,319 59,326 49,005 Opening net debt/(cash) 113,293 32,653 (34,553) (58,773) (118,099) HP finance leases initiated 0 0 0 0 0 Other 0 9,638 3,901 0 (0) Closing net debt/(cash) 32,653 (34,553) (58,773) (118,099) (167,103) Source: Edison Investment Research, company accounts TransGlobe Energy 30 January 2015 6
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Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE s express written consent. Frankfurt +49 (0)69 78 8076 960 TransGlobe Schumannstrasse 34b Energy 30 January 280 High Holborn 2015 245 Park Avenue, 39th Floor Level 25, Aurora Place Level 15, 171 Featherston St 7 60325 Frankfurt Germany London +44 (0)20 3077 5700 London, WC1V 7EE United Kingdom New York +1 646 653 7026 10167, New York US Sydney +61 (0)2 9258 1161 88 Phillip St, Sydney NSW 2000, Australia Wellington +64 (0)48 948 555 Wellington 6011 New Zealand