CALGARY, ALBERTA -- 05/05/08 --
TransGlobe Energy Corporation ("TransGlobe" or the "Company") (TSX: TGL) (NASDAQ: TGA) is pleased to announce its financial and operating results for the three-month period ended March 31, 2008. All dollar values are expressed in United States dollars unless otherwise stated. The conversion to barrels of oil equivalent ("Boe") of natural gas to oil is made on the basis of six thousand cubic feet of natural gas being equivalent to one barrel ("Bbl") of crude oil. With the sale of TransGlobe's Canadian assets having closed on April 30, the results from the Canadian segment of operations are being presented as "discontinued operations" in this document.
HIGHLIGHTS
- Record production of 7,845 barrels of oil equivalent per day in the first quarter;
- Record cash flow from operations in the first quarter of $17.9 million ($0.30/diluted share);
- First quarter net income of $4.5 million ($0.07/diluted share);
- Completed acquisition of GHP, 900+ Bopd of production in West Gharib (Egypt), effective February 5, 2008;
- Year-to-date drilled four new oil wells, three on West Gharib and one on Block 32 in Yemen;
- Block 75 Production Sharing Agreement (Yemen) fully approved on March 8, 2008;
- Closed sale of Canadian assets April 30, 2008 for Cdn $56.7 million (effective January 1, 2008);
- Increased 2008 production guidance to average 7,300-7,500 Boepd;
- Increased 2008 cash flow from operations guidance to $68.0-$70.0 million.
- Moved from American Stock Exchange to NASDAQ Global Select Market effective January 18, 2008, retaining the trading symbol "TGA";
Corporate Summary
The first quarter of 2008 brought significant additional growth to TransGlobe, with production averaging a record 7,845 Boepd. The acquisition of approximately 900 barrels of oil per day ("Bopd") in the West Gharib area was completed on February 5, adding to the approximately 1,600 Bopd acquired on September 25, 2007. The Company has further increased production from the West Gharib fields by approximately 900 Bopd to approximately 3,400 Bopd since assuming operatorship. Based on the initial drilling success and the planned extensive development program, the production guidance for 2008 has now been increased to 7,300 to 7,500 Boepd (previous guidance: 6,900-7,100 Boepd). Total April production averaged 8,720 Boepd (7,270 Bopd from continuing operations).
The Company achieved record cash flow from operations in the quarter of $17.9 million. During the first quarter, oil prices averaged $96.90/Bbl for dated Brent, the benchmark price of TransGlobe's Middle East/North Africa production, representing a new historic high. Oil prices continued to rise throughout the month of April, setting new records. Accordingly, the Company has revised the budget price assumptions for dated Brent from $80.00/Bbl to $100.00/Bbl for the balance of the year. The revised production forecast and oil price assumptions result in an increased cash flow forecast for 2008 of $68.0 to $70.0 million (previous guidance called for $53.0 to $57.0 million).
Net income per share totaled $0.07 for the first quarter. The Company recorded total derivative losses for the period of $3.9 million. Of this amount, $1.5 million represents a cash expense and the balance of $2.4 million represents an unrealized loss on derivative contracts. TransGlobe's derivative contracts are a requirement under the bank lending facilities. These facilities were used to cover the costs of the initial West Gharib acquisition. Managing risk in commodity price fluctuations through derivative contracts is common practice in the oil and gas industry in order to protect cash flows.
With the acquisition of GHP, the sale of the Canadian assets, and organic growth achieved at West Gharib in a short period of time, TransGlobe has successfully transitioned to a pure Middle East/North Africa growth company. The Company is well underway to achieving its mid-term objective of "10 by 10" - 10,000 Boepd by 2010. An additional 10-12 wells are planned in Egypt for the balance of the year as well as enhanced recovery projects in West Gharib. In Yemen, a further six to eight wells are planned, which could increase both production and reserves.
Annual and Special Meeting of Shareholders
to be held on
Wednesday, May 7, 2008 at 3:00 p.m.
Calgary Petroleum Club (Viking Room)
319 - 5th Avenue S.W.
Calgary, Alberta
FINANCIAL AND OPERATING RESULTS
($000s, except per share, price, volume amounts and % change)
Three Months Ended March 31
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Financial 2008 2007 Change
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Oil and gas revenue 60,419 25,754 135%
Oil and gas revenue net of royalties and other 35,915 17,251 108%
Operating expense 5,780 2,408 140%
General and administrative expense 2,272 1,203 89%
Depletion, depreciation and accretion expense 10,713 5,692 88%
Income taxes 7,150 2,076 244%
Cash flow from operations(1) 17,873 12,010 49%
Basic per share 0.30 0.20
Diluted per share 0.30 0.20
Net income 4,458 5,980 (25)%
Basic per share 0.07 0.10
Diluted per share 0.07 0.10
Capital expenditures 7,405 10,209 (27)%
Corporate acquisition 44,218 -
Long-term debt 47,601 -
Common shares outstanding
Basic (weighted average) 59,712 59,538 0%
Diluted (weighted average) 60,567 60,497 0%
Total assets 249,401 118,981 110%
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(1) Cash flow from operations is a non-GAAP measure that represents cash
generated from operating activities before changes in non-cash working
capital.
Operating
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Total production (Boepd) (6:1)(1) 7,845 5,175 52%
Total sales (Boepd) (6:1)(1) 7,845 5,341 47%
Oil and liquids (Bopd) 6,698 4,312 55%
Average price ($ per Bbl) 90.32 56.45 60%
Gas (Mcfpd) 6,882 6,177 11%
Average price ($ per Mcf) 8.46 6.73 26%
Operating expense ($ per Boe) 8.10 5.01 62%
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(1) The differences in production and sales volumes result from inventory
changes.
Financial from Continuing Operations (excludes Canadian Operations)
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Oil and gas revenue from continuing operations 52,064 20,016 160%
Oil and gas revenue, net of royalties and
other, from continuing operations 29,348 12,603 133%
Operating expense from continuing operations 3,923 1,364 188%
Depletion, depreciation and accretion expense
from continuing operations 7,989 3,006 166%
Cash flow from continuing operations(1) 13,164 8,406 57%
Basic per share 0.22 0.14
Diluted per share 0.22 0.14
Net income from continuing operations 2,390 5,136 (53)%
Basic per share 0.04 0.09
Diluted per share 0.04 0.08
Capital expenditures 6,265 6,309 (1)%
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(1) Cash flow from continuing operations is a non-GAAP measure that
represents cash generated from continuing operating activities before
changes in non-cash working capital.
Operating from Continuing Operations (excludes Canadian Operations)
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Total production from continuing operations
(Boepd) (6:1) 6,322 3,892 62%
Total sales (Boepd) (6:1) 6,322 3,892 62%
Oil and liquids (Bopd) 6,322 3,892 62%
Average price ($ per barrel) 90.49 57.14 58%
Operating expense ($ per Boe) 6.82 3.89 76%
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OPERATIONS UPDATE
ARAB REPUBLIC OF EGYPT
West Gharib, Arab Republic of Egypt (100% working interest, TransGlobe operated)
Operations and Exploration
On February 5, 2008, TransGlobe Petroleum International Inc. ("TGPI", a wholly owned subsidiary of TransGlobe) acquired all of the shares of GHP for US$40.2 million, plus working capital adjustments with an effective date of September 30, 2007. GHP held a 30% working interest in the West Gharib Production Sharing Concession ("PSC"). The GHP acquisition added approximately 900 Bopd of production and 2.8 million barrels of proved plus probable reserves to TransGlobe on February 5, 2008.
Following the acquisition of GHP, TransGlobe holds a 100% working interest in the West Gharib PSC, which consists of nine development leases, including the East Hoshia development lease which was approved in January 2008. Eight of the nine development leases (excluding the Hana development lease) are encumbered with a 25% financial interest through an investment agreement between Dublin Petroleum (Egypt) Limited (a wholly owned subsidiary of TransGlobe) and a private company. The 25% financial interest is non-voting but otherwise is treated as a 25% participating interest partner.
Three wells have been drilled to date in 2008, resulting in three oil wells (two at Hana and one at Hoshia). The drilling rig is currently drilling at South Rahmi and is scheduled to drill continuously in West Gharib through 2009. In addition, a new 1,200 hp drilling rig has been contracted, which is scheduled to arrive from China in June of this year. It is expected that the new rig will be drilling at West Gharib by mid-July.
In addition to the planned drilling program (15+ wells in 2008), a new 300+ km2 3-D seismic acquisition program on the central/northern development blocks is scheduled for the third quarter of this year. Test lines are currently being acquired to assist in the final design of the new 3-D.
The Company has identified the Hana and Hoshia fields as water flood/enhanced recovery projects with pilot injection projects scheduled to commence mid-2008. Assuming the pilot projects support the early reservoir simulation work, it is expected that full field-enhanced recovery project(s) could be approved by year end. This could significantly increase the recoverable reserves assigned to the respective pools. Full field development would follow in 2009 and 2010.
Production
Production from West Gharib averaged 3,160 Bopd (2,432 Bopd to TransGlobe) during the quarter, representing a 53% increase to TransGlobe over the previous quarter. Production increases are primarily due to the acquisition of approximately 900 Bopd effective February 5 and drilling successes on the Hana field.
With the addition of three oil wells (two at Hana during Q-1 and one completed at Hoshia in April 2008), production from West Gharib averaged approximately 3,800 Bopd (approximately 3,350 Bopd to TransGlobe) in April, representing an increase of 30% on a gross field basis and an increase of 110% to TransGlobe since the fourth quarter of 2007.
Quarterly West Gharib Production (Bopd)
2008 2007
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Q-1 Q-4 Q-3(1)
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Gross field production rate 3,160 2,932 218
TransGlobe working interest 2,432 1,594 118
TransGlobe net (after royalties) 1,389 971 73
TransGlobe net (after royalties and tax)(2) 958 714 51
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(1) Production presented represents six days production averaged over the
quarter.
(2) Under the terms of the West Gharib PSC, royalties and taxes are paid
out of the government's share of production sharing oil.
Nuqra Block 1, Arab Republic of Egypt (50% working interest, TransGlobe operated)
Operations and Exploration
On the Nuqra Block, existing seismic data was remapped and several Cretaceous targets were identified for a future drilling program. One exploration well has been budgeted for 2008, on a contingency basis. The Company has discussed rig sharing possibilities with the adjacent operators to facilitate a potential 2008/2009 drilling program.
YEMEN EAST- Masila Basin
Block 32, Republic of Yemen (13.81087% working interest)
Operations and Exploration
Two wells have been drilled to date, resulting in one oil well (Godah #9) and one exploratory dry hole (Maleen #1). The drilling rig is scheduled to return to Block 32 in early June to drill an exploration well targeting a Qishn prospect east of Tasour.
Production
Production from Block 32 averaged 7,482 Bopd (1,033 Bopd to TransGlobe) during the quarter, essentially flat with the previous quarter. Production averaged approximately 7,580 Bopd (1,047 Bopd to TransGlobe) during April.
A six-inch gas pipeline connecting the Godah production facility to the Tasour Central Production Facility ("CPF") was constructed to supply associated gas production from the Godah pool to the Tasour CPF for fuel gas. It is expected that up to 60% of diesel being consumed for power generation can be replaced with natural gas, resulting in lower operating costs. The fuel-gas project is expected to be operational in the second quarter of 2008.
Quarterly Block 32 Production (Bopd)
2008 2007
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Q-1 Q-4 Q-3 Q-2
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Gross production rate 7,482 7,582 8,913 8,488
TransGlobe working interest 1,033 1,047 1,231 1,172
TransGlobe net (after royalties) 579 620 845 900
TransGlobe net (after royalties
and tax)(1) 455 478 722 819
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(1) Under the terms of the Block 32 PSA royalties and taxes are paid out of
the government's share of production sharing oil.
Block 72, Republic of Yemen (33% working interest)
Operations and Exploration
Field acquisition of 410 km2 of 3-D seismic and 100 km of 2-D seismic was completed at the end of March 2008. The new seismic data will be processed and mapped by mid-2008, with two exploration wells scheduled for the second half of 2008.
The Block 72 joint venture group has a remaining commitment of one exploration well during the first exploration period, which has been extended to January 2009.
Block 84, Republic of Yemen (33% working interest)
Operations and Exploration
The Production Sharing Agreement ("PSA") for Block 84 was signed with the Ministry of Oil and Minerals ("MOM") on April 13, 2008. The PSA has been sent to Parliament for final approval and ratification, which is expected to occur later this year. A 400+ km2 3-D seismic acquisition program is planned for late 2008 with exploration drilling to commence in 2009. The timing of the 3-D seismic acquisition program is contingent upon receiving final approval and ratification of the Block 84 PSA.
Block 84 encompasses 731 km2 (approximately 183,000 acres) and is located in the Masila Basin adjacent to the Canadian Nexen Masila Block where more than one billion barrels of oil have been produced to date. The Block 84 joint venture group has committed to carry out a 3-D seismic acquisition program and the drilling of four exploration wells during the first exploration period of 42 months.
YEMEN WEST- Marib Basin
Block S-1, Republic of Yemen (25% working interest)
Operations and Exploration
The operator is currently sourcing a drilling rig and services for Block S-1 and 75. It is expected that drilling will commence on Block S-1 by the fourth quarter of 2008.
Gas injection commenced in the western portion of the An Nagyah field during the first quarter to improve production performance and increase recoverable reserves. In addition, the operator of the Block S-1 Joint Venture group has initiated discussions with MOM regarding a potential development scheme to produce and sell known deposits of gas on S-1. At present, TransGlobe has not booked the significant gas reserves associated with the An Naeem discovery. An approved gas development plan is required to proceed with recognizing the reserves and with development.
A combined 3-D seismic program is planned to commence in late 2008 to define additional exploration drilling locations on the northwest portion of Block S-1 and the north portion of Block 75.
Production
Production from Block S-1 averaged 11,378 Bopd (2,844 Bopd to TransGlobe) during the first quarter, representing an increase of 6% over the previous quarter. Production averaged approximately 11,500 Bopd (2,875 Bopd to TransGlobe) during April.
The new expanded CPF at An Nagyah became fully operational in the fourth quarter of 2007 and is now capable of processing 20,000+ Bopd of oil production and associated gas production.
Quarterly Block S-1 Production (Bopd)
2008 2007
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Q-1 Q-4 Q-3 Q-2
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Gross field production rate 11,378 10,768 9,924 11,167
TransGlobe working interest 2,844 2,692 2,481 2,792
TransGlobe net (after royalties) 1,593 1,469 1,418 1,577
TransGlobe net (after royalties
and tax)(1) 1,253 1,153 1,162 1,264
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(1) Under the terms of the Block S-1 PSA royalties and taxes are paid out
of the government's share of production sharing oil.
Block 75, Republic of Yemen (25% working interest)
Operations and Exploration
The PSA for Block 75 was ratified and signed into law effective March 8, 2008. A combined 3-D seismic program (Block S-1 and Block 75) is planned to commence in late 2008, with exploration drilling to commence in 2009.
Block 75 encompasses 1,050 km2 (approximately 262,500 acres) and is located in the Marib Basin adjacent to Block S-1. The Block 75 joint venture group has committed to carry out a 3-D seismic acquisition program and the drilling of one exploration well during the first exploration period of 36 months.
CANADA
Operations and Exploration
In December 2007, the Company announced the strategic decision to sell the Canadian division to fund and focus on growth opportunities in the Middle East/North Africa region. Early in 2008, the Company retained Tristone Capital as financial advisor to assist in the divestment of the Canadian properties. On April 16, 2008, the Company announced the signing of a purchase and sale agreement with Direct Energy Marketing Limited to sell all of TransGlobe's Canadian properties, including current production of approximately 1,450 Boepd, for Cdn$ 56.7 million with an effective date of January 1, 2008.
Closing occurred on April 30, 2008, resulting in an adjusted net payment of Cdn$52.0 million to TransGlobe at closing. The closing price was adjusted for net revenues and expenditures from January 1 through April 30, 2008 and other customary adjustment and closing conditions. Concurrently, the Company reduced its total debt by $55.0 million to the current level of $43.0 million. This translates in to a debt-to-forward-cash-flow ratio of less than 0.7:1 and debt-to-market-capitalization ratio of less than 20%.
Production
Production averaged 1,523 Boepd during the first quarter of 2008, essentially flat with the previous quarter. Production averaged approximately 1,450 Boepd in April.
Quarterly Canadian Production (Boepd)
2008 2007
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Q-1 Q-4 Q-3 Q-2
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TransGlobe working interest 1,523 1,504 1,397 1,389
TransGlobe net (after royalties) 1,197 1,250 1,175 1,144
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MANAGEMENT'S DISCUSSION AND ANALYSIS
May 5, 2008
Management's discussion and analysis ("MD&A") should be read in conjunction with the unaudited interim financial statements for the three months ended March 31, 2008 and 2007 and the audited financial statements and MD&A for the year ended December 31, 2007 included in the Company's annual report. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada in the currency of the United States (except where otherwise noted). Additional information relating to the Company, including the Company's Annual Information Form, is available on SEDAR at www.sedar.com. The Company's annual report on Form 40-F can be found in the Electronic Data Gathering, Analysis and Retrieval ("EDGAR") database at www.sec.gov.
Forward-Looking Statements
This MD&A may include 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 interim report, 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, but are not limited to, oil and gas prices, well production performance, exploitation and exploration successes, continued availability of capital and financing, and general economic, market or business conditions.
Non-GAAP Measures
This document contains the term "cash flow from operations" and "cash flow from continuing operations", which should not be considered an alternative to, or more meaningful than "cash flow from operating activities" as determined in accordance with Generally Accepted Accounting Principles (GAAP). Cash flow from operations and cash flow from continuing operations are non-GAAP measures that represent cash generated from operating activities before changes in non-cash working capital. Management considers this a key measure as it demonstrates TransGlobe's ability to generate the cash flow necessary to fund future growth through capital investment. Cash flow from operations and cash flow from continuing operations may not be comparable to similar measures used by other companies.
Discontinued Operations
During 2008, TransGlobe committed to a plan to dispose of its Canadian segment of operations to allow the Company to focus its continuing operations on the development of its Middle East/North Africa assets. Accordingly, the Canadian segment has been reclassified as discontinued operations in the Consolidated Financial Statements. This is further discussed in the MD&A section entitled "Operating results from discontinued operations".
Reconciliation of Cash Flow from Operations and Cash Flow from Continuing
Operations
Three Months Ended March 31
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(000s) 2008 2007
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Cash flow from operating activities $ 16,316 $ 11,529
Changes in non-cash working capital from continuing
operations 1,645 1,105
Changes in non-cash working capital from
discontinued operations (88) (624)
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Cash flow from operations 17,873 12,010
Less: Cash flow from discontinued operations 4,709 3,604
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Cash flow from continuing operations $ 13,164 $ 8,406
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Netback is a non-GAAP measure that represents revenue net of royalties, operating expenses and current taxes. Management believes that netback is a useful supplemental measure to analyze operating performance and provide an indication of the results generated by the Company's principal business activities prior to the consideration of other income and expenses. Netback may not be comparable to similar measures used by other companies.
Use of Barrel of Oil Equivalents
The calculation of barrels of oil equivalent ("Boe") is based on a conversion rate of six thousand cubic feet of natural gas to one barrel ("Bbl") of crude oil. Boes may be misleading, particularly if used in isolation. A Boe conversion ratio of 6 Mcf:1 Bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
OUTLOOK
TransGlobe has projected a 2008 capital budget of $58.6 million (excluding acquisitions).
- In Q1-2007, the Company spent $7.4 million of the capital budget, before acquisition.
The Company has increased production guidance to average 7,300-7,500 Boepd for 2008 (previously 6,900-7,100 Boepd).
- Production volumes were 7,845 Boepd in Q1-2008. Production volumes from continuing operations were 6,322 Boepd in Q1-2008.
- Production volumes averaged approximately 8,720 Boepd in April, comprised of 7,270 Bopd from continuing operations and 1,450 Boepd from the Canadian assets.
The Company has increased cash flow from operations guidance for 2008 to $68.0-$70.0 million (previously $53.0-$57.0 million), based on an average dated Brent oil price of $100.00/Bbl (previously $80.00/Bbl) for the balance of 2008.
- Cash flow from operations in Q1-2008 was $17.9 million.
- As of March 31, 2008, the year-to-date dated Brent oil price has averaged $96.90/Bbl and TransGlobe's realized gas price has averaged C$8.46/Mcf.
SELECTED QUARTERLY FINANCIAL INFORMATION
2008 2007
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($000s, except per share,
price and volume amounts) Q-1 Q-4 Q-3 Q-2 Q-1
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Total Operations
Average production
volumes (Boepd)(1) 7,845 6,837 5,227 5,353 5,175
Average sales volumes
(Boepd)(1) 7,845 6,837 5,227 5,353 5,341
Average price ($/Boe) 84.63 75.83 67.04 63.68 53.58
Oil and gas sales 60,420 47,699 32,240 31,016 25,754
Oil and gas sales, net
of royalties 35,915 29,343 20,764 20,553 17,251
Cash flow from
operations(2) 17,873 13,944 13,373 12,814 12,010
Cash flow from
operations per share
- Basic 0.30 0.23 0.22 0.22 0.20
- Diluted 0.30 0.23 0.22 0.21 0.20
Net income (loss) 4,458 (719) 5,198 2,343 5,980
Net income (loss) per
share
- Basic 0.07 (0.02) 0.09 0.04 0.10
- Diluted 0.07 (0.01) 0.08 0.04 0.10
Total assets 249,401 204,219 202,718 125,664 118,981
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Continuing Operations
Average production
volumes (Boepd)(1) 6,322 5,333 3,830 3,964 3,892
Average sales volumes
(Boepd)(1) 6,322 5,333 3,830 3,964 3,892
Average price from
continuing operations
($/Boe) 90.49 83.14 74.72 69.42 57.14
Oil and gas sales 52,064 40,788 26,326 25,041 20,016
Oil and gas sales, net
of royalties 29,348 23,600 15,793 15,632 12,603
Cash flow from
continuing operations (2) 13,164 9,334 9,257 9,072 8,406
Cash flow from
continuing operations
per share
- Basic 0.22 0.16 0.16 0.15 0.14
- Diluted 0.22 0.15 0.15 0.15 0.14
Net income (loss) 2,390 (2,260) 4,205 1,453 5,136
Net income (loss) per
share
- Basic 0.04 (0.04) 0.07 0.02 0.09
- Diluted 0.04 (0.04) 0.07 0.02 0.08
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(1) The differences in production and sales volumes result from inventory
changes.
(2) Cash flow from operations and cash flow from continuing operations are
non-GAAP measures that represent cash generated from operating
activities and continuing operating activities, respectively, before
changes in non-cash working capital.
Cash flow from operations and net income increased to $17.9 million and $4.5 million, respectively, in Q1-2008 compared with Q4-2007 mainly as a result of a 15% increase in sales volumes and a 12% hike in average commodity prices.
CORPORATE ACQUISITION
The Company further expanded its Egyptian operations in the first quarter through a corporate acquisition financed through bank debt of $40.0 million, plus cash on hand. The Company acquired all the shares of GHP Exploration (West Gharib) Ltd. ("GHP") for total consideration of $40.2 million, plus transaction costs and working capital adjustments, effective September 30, 2007. GHP holds a 30% working interest in the West Gharib Concession area in the Arab Republic of Egypt ("Egypt"). With the acquisition of GHP, the Company holds a 100% working interest in the West Gharib Production Sharing Concession ("PSC"), with a working interest of 100% in the Hana development lease and an effective working interest of 75% in the eight non-Hana development leases. TransGlobe is the operator of the West Gharib Concession.
The adjustment date of the acquisition is September 30, 2007, with all changes in working capital to February 5, 2008 (the closing date), including oil production from September 30, 2007 to February 5, 2008, recorded as a purchase price adjustment. Oil produced after February 5, 2008 is recorded as TransGlobe production.
2008 VARIANCES
$ Per
Share %
$000s Diluted Variance
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Q1-2007 net income 5,980 0.10
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Cash items
Volume variance 20,368 0.34 341
Price variance 11,681 0.19 195
Royalties (15,303) (0.25) (256)
Expenses:
Operating (2,560) (0.04) (43)
Realized derivative loss (1,504) (0.02) (25)
Cash general and administrative (996) (0.02) (17)
Current income taxes (5,230) (0.09) (87)
Realized foreign exchange loss (63) - (1)
Interest on long-term debt (1,681) (0.03) (28)
Other income 46 - 1
Cash flow from discontinued operations 569 0.01 10
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Total cash items variance 5,327 0.09 90
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Non-Cash items
Unrealized derivative loss (2,448) (0.05) (41)
Depletion, depreciation and accretion (4,983) (0.08) (83)
Stock-based compensation (46) - (1)
Amortization of deferred financing costs (27) - -
Non-cash income from discontinued
operations 655 0.01 11
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Total non-cash items variance (6,849) (0.12) (114)
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Q1-2008 net income 4,458 0.07 (24)
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Net income decreased 24% in Q1-2008 compared with Q1-2007 mainly as a result of a $2.4 million unrealized derivative loss in the quarter.
OPERATING RESULTS AND NETBACK
Daily Volumes, Working Interest Before Royalties and Other
March 31, March 31,
2008 2007 % Change
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Egypt - Oil sales(1) Bopd 2,432 - -
Yemen - Oil sales Bopd 3,890 3,892 -
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Total continuing operations - daily
sales volumes Bopd 6,322 3,892 62
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Canada - Oil and liquids Bopd 376 420 (11)
- Gas sales Mcfpd 6,882 6,177 11
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Canada Boepd 1,523 1,449 5
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Total Company - daily sales volumes Boepd 7,845 5,341 47
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(1)Egypt includes the operating results of GHP for the period February 5,
2008 to March 31, 2008. In that period, production averaged 1,009 Bopd
for a quarterly average of 621 Bopd.
Total Netback
Consolidated
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March 31, 2008 March 31, 2007
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(000s, except per Boe amounts) $ $/Boe $ $/Boe
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Oil and gas sales 60,419 84.63 25,754 53.58
Royalties and other 24,504 34.32 8,503 17.69
Current taxes 7,232 10.13 2,002 4.16
Operating expenses 5,781 8.10 2,408 5.01
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Netback 22,902 32.08 12,841 26.72
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Netback from Continuing Operations
Consolidated
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March 31, 2008 March 31, 2007
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(000s, except per Boe amounts) $ $/Boe $ $/Boe
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Oil and gas sales 52,064 90.49 20,016 57.14
Royalties and other 22,716 39.48 7,413 21.16
Current taxes 7,232 12.57 2,002 5.72
Operating expenses 3,923 6.82 1,364 3.89
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Netback 18,193 31.62 9,237 26.37
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Segmented Net Operating Results
In Q1-2008 the Company had producing continuing operations in two geographic areas, segmented into Egypt and the Republic of Yemen ("Yemen"), and producing operations in Canada, which are held for sale. The MD&A for the continuing operations will follow. Please refer to "Operating Results from Discontinued Operations" for the MD&A on the Canadian segment.
Egypt
March 31, 2008 March 31, 2007
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(000s, except per Boe amounts) $ $/Boe $ $/Boe
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Oil and gas sales 17,626 79.63 - -
Royalties and other 7,561 34.16 - -
Current taxes 3,124 14.11 - -
Operating expenses 711 3.21 - -
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Netback 6,230 28.15 - -
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The netback for Egypt for Q1-2008 includes average quarterly production of 621 Bopd from the GHP acquisition that closed on February 5, 2008 and 1,811 Bopd from the acquisition of Dublin International Petroleum (Egypt) Limited ("Dublin") and Drucker Petroleum Inc. ("Drucker") that was completed in Q3-2007. The average selling price during that period for this production was $79.63/Bbl, which represents a gravity/quality adjustment of approximately $17.27/Bbl to an average dated Brent price for the period of $96.90/Bbl.
Yemen
March 31, 2008 March 31, 2007
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(000s, except per Boe amounts) $ $/Boe $ $/Boe
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Oil and gas sales 34,438 97.29 20,016 57.14
Royalties and other 15,155 42.81 7,413 21.16
Current taxes 4,108 11.60 2,002 5.72
Operating expenses 3,212 9.07 1,364 3.89
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Netback 11,963 33.81 9,237 26.37
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In Yemen, netback increased 30% in the first three months of 2008 compared with the same period of 2007 primarily as a result of oil sales increasing by 72%. The increase in sales was mainly due to oil prices growing by 70% over Q1-2007. Sales volumes remained constant in Q1-2008 compared with Q1-2007.
- Royalty and current income tax costs increased 86% mainly as a result of higher commodity prices. Royalties and taxes as a percentage of revenue increased to 56% in Q1-2008 compared with 47% in Q1-2007. Royalty and tax rates fluctuate in Yemen due to changes in the amount of cost sharing oil, whereby the Block 32 and Block S-1 PSAs allow for the recovery of operating and capital costs through a reduction in MOM take of oil production.
- Operating expenses on a Boe basis increased 133% to $9.07/Bbl in Q1-2008 compared with $3.89/Boe in Q1-2007 mainly as a result of declining production in the Tasour field and 2006 adjustments made by the Block S-1 Operator, reflected in the March 31, 2007 operating expenses.
COMMODITY CONTRACTS
TransGlobe uses hedging arrangements as part of its risk management strategy to manage commodity price fluctuations and stabilize cash flows for future exploration and development programs. The Company has fair-valued these hedging transactions. As at March 31, 2008, the estimated fair value of the unrealized hedging transactions is a liability of $9.5 million, which results in an unrealized $2.4 million loss being recorded to the income statement for the quarter ended March 31, 2008 (2006 - $0.04 million gain). The estimated fair market value at March 31, 2008 was based on a dated Brent oil price of $100.30/Bbl.
Dated Brent
Period Volume Type Pricing Put-Call
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Crude Oil
September 1, 2007
-August 31, 2008 15,000 Bbls/month Financial Collar $60.00-$78.55
January 1, 2008
-December 31, 2008 12,000 Bbls/month Financial Collar $60.00-$81.20
January 1, 2009
-December 31, 2009 12,000 Bbls/month Financial Collar $60.00-$82.10
November 1, 2007
-March 31, 2008 5,000 Bbls/month Financial Collar $65.00-$89.35
September 1, 2008
-January 31, 2009 11,000 Bbls/month Financial Collar $60.00-$88.80
February 1, 2009
-December 31, 2009 6,000 Bbls/month Financial Collar $60.00-$86.10
January 1, 2010
-August 31, 2010 12,000 Bbls/month Financial Collar $60.00-$84.25
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The hedging program was expanded significantly in September 2007 to protect the cash flows from the added risk of commodity price exposure following a marked increase in TransGlobe's debt levels resulting from the Dublin and Drucker acquisitions.
The total volumes hedged per year are listed below:
9 months
2008 2009 2010
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Bbls 227,000 221,000 96,000
Bopd 825 605 263
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GENERAL AND ADMINISTRATIVE EXPENSES (G&A)
March 31, 2008 March 31, 2007
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(000s, except Boe amounts) $ $/Boe $ $/Boe
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G&A (gross) 2,509 3.51 1,471 3.07
Stock-based compensation 314 0.44 268 0.56
Capitalized G&A (508) (0.71) (478) (1.00)
Overhead recoveries (43) (0.06) (58) (0.13)
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G&A (net) 2,272 3.18 1,203 2.50
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General and administrative expenses increased 89% (27% increase on a sales Boe basis) in the first three months of 2008 compared with the same period in 2007. The G&A per Boe is higher mainly as a result of increased production from the West Gharib acquisitions. Higher staffing levels and higher fees caused by increased compliance requirements also contributed to rise in total G&A expense for the Company.
DEPLETION, DEPRECIATION AND ACCRETION
March 31, 2008 March 31, 2007
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(000s, except per Boe amounts) $ $/Boe $ $/Boe
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Egypt 4,927 22.26 12 -
Yemen 3,062 8.65 2,994 8.55
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7,989 13.89 3,006 8.55
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In Egypt, depletion, depreciation and accretion ("DD&A") increased to $4.9 million in Q1-2008 due to DD&A charges on new production from the West Gharib PSC in Egypt. The high DD&A costs per Boe result from the fact that DD&A is depleted on proved reserves, while the purchase price for the Egypt acquisitions was based on proved plus probable reserves. This DD&A rate per Boe will decrease as the probable reserves are converted to proved reserves.
In Yemen, DD&A on a Boe basis remained essentially flat in Q1-2008 over Q1-2007.
In Egypt and Yemen, unproven property costs of $9.9 million and $6.5 million, respectively, were excluded from costs subject to depletion and depreciation.
CAPITAL EXPENDITURES/DISPOSITIONS
Q1-2008 Q1-2007
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(000s) $ $
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Egypt 3,318 2,189
Yemen 2,947 4,120
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6,265 6,309
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Acquisition 36,601 -
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Total 42,866 6,309
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In Egypt, the Company drilled two wells at Hana in the West Gharib area during the quarter. In February 2008, the Company acquired the shares of GHP that holds a 30% working interest in the West Gharib PSC and valued the property, plant and equipment of GHP at $36.6 million. Goodwill of $3.4 million was recorded.
In Yemen, the Company drilled two wells on Block 32 and completed a 3-D seismic program on Block 72 in the quarter.
OUTSTANDING SHARE DATA
As at March 31, 2008, the Company had 59,766,539 common shares issued and outstanding.
LIQUIDITY AND CAPITAL RESOURCES
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 necessary to maintain and increase production and proved reserves, to acquire strategic oil and gas assets and to repay debt. TransGlobe's capital programs are funded principally by cash provided from operating activities.
The following table illustrates TransGlobe's sources and uses of cash during the periods ended March 31, 2008 and 2007:
Sources and Uses of Cash
Three Months Ended March 31
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($000s) 2008 2007
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Cash sourced
Cash flow from continuing operations (1) 13,164 8,406
Increase in long-term debt 40,000 -
Exercise of options 402 333
Other 7 (33)
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53,573 8,706
Cash used
Exploration and development expenditures 6,265 6,309
Acquisition 44,218 -
Bank financing costs 1,148 -
Options surrendered for cash payments 256 -
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51,887 6,309
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Net cash from continuing operations 1,686 2,397
Net cash from discontinued operations 1,719 850
Changes in non-cash working capital (4,199) (5,007)
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Increase (decrease) in cash and cash equivalents (794) (1,760)
Cash and cash equivalents -- beginning of period 12,729 8,836
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Cash and cash equivalents -- end of period 11,935 7,076
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(1) Cash flow from continuing operations is a non-GAAP measure that
represents cash generated from operating activities before changes in
non-cash working capital.
Funding for the Company's capital expenditures and the GHP Acquisition in the first quarter of 2008 was provided by cash flow from operations, working capital and long-term debt.
Working capital is the amount by which current assets exceed current liabilities. At March 31, 2008 the Company had working capital of $15.4 million (December 31, 2007 - $5.5 million) including discontinued operations. Accounts receivable increased due primarily as a result of the GHP Acquisition in Q1-2008 and revenue receivable in Egypt. These receivables are not considered to be impaired. Accounts payable increased due to the GHP Acquisition and increased drilling activity in Egypt. The current portion of long-term debt includes the $48.0 million Term Loan that is to be repaid with the proceeds resulting from the disposition of the Canadian assets.
During February 2008, the Company increased its Term Loan of $8.0 million to $48.0 million. At March 31, 2008, the Revolving Credit Agreement of $50.0 million was fully drawn and $48.0 million was drawn against the Term Loan.
March 31, December 31,
($000s) 2008 2007
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Revolving Credit Agreement 50,000 50,000
Term Loan Agreement 48,000 8,000
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98,000 58,000
Unamortized transaction costs (2,399) (1,315)
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95,601 56,685
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Current portion of long-term debt 48,000 4,727
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Long-term debt 47,601 51,958
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The Company expects to fund its approved 2008 exploration and development program of $58.6 million ($7.4 million incurred to March 31, 2008) through the use of working capital and cash flow. The use of additional debt or equity financing during 2008 may also be utilized to accelerate existing projects or to finance new opportunities. Fluctuations in commodity prices, product demand, foreign exchange rates, interest rates and various other risks may impact capital resources.
Subsequent to March 31, 2008, the Company repaid $55.0 million of the long-term debt with the proceeds from the disposition of the Canadian assets and cash on hand.
COMMITMENTS AND CONTINGENCIES
As part of its normal business, the Company entered into arrangements and incurred obligations that will impact the Company's future operations and liquidity. The principal commitments of the Company are as follows:
($000s) Payment Due by Period(1,2)
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Recognized More
in Financial Contractual Less than 1-3 4-5 than 5
Statements Cash Flows 1 year years years years
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Accounts
payable and
accrued
liabilities Yes-Liability 10,342 10,342 - - -
Long-term
debt:
Revolving
Credit
Agreement Yes-Liability 50,000 - 50,000 - -
Term Loan
Agreement Yes-Liability 48,000 48,000 - - -
Office and
equipment
leases No 869 339 530 - -
Minimum work
commitments (3) No 12,900 500 5,800 6,600 -
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Total 122,111 59,181 56,330 6,600 -
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(1) Payments exclude ongoing operating costs related to certain leases,
interest on long-term debt and payments made to settle derivatives.
(2) Payments denominated in foreign currencies have been translated at
March 31, 2008 exchange rates.
(3) Minimum work commitments include contracts awarded for capital
projects and those commitments related to exploration and drilling
obligations.
Pursuant to the East Hoshia Development Lease in Egypt, the Company and its partners have committed to drilling three exploration wells and submitted a letter of production guarantee for $4.0 million as security (expiring June 1, 2009).
Pursuant to the PSA for Block 72, Yemen, the Contractor (joint venture partners) has a minimum financial commitment of $4.0 million ($1.3 million to TransGlobe) during the first exploration period. The remaining commitment to TransGlobe is $0.5 million. This period has been extended to January 12, 2009 and applies to exploration work consisting of seismic acquisition (completed) and one remaining exploration well.
Pursuant to the bid awarded for Block 75, Yemen, the Contractor (joint venture partners) has a minimum financial commitment of $7.0 million ($1.8 million to TransGlobe) for the signature bonus and first exploration period work program consisting of seismic acquisition and one exploration well. The first 36-month exploration period commenced March 8, 2008. The Company issued a $1.5 million letter of credit (expiring November 15, 2011) to guarantee the Company's performance under the first exploration period. The letter is secured by a guarantee granted by Export Development Canada.
Pursuant to the bid awarded for Block 84, Yemen, the Contractor (joint venture partners) has a minimum financial commitment of $20.1 million ($6.6 million to TransGlobe) for the signature bonus and first exploration period work program consisting of seismic acquisition and four exploration wells. The first 42-month exploration period will commence when the PSA has been approved and ratified by the government of Yemen, anticipated to occur in 2008.
Upon the determination that proved recoverable reserves are 40 million barrels or greater for Block S-1 in Yemen, the Company will be required to pay a finders' fee to third parties in the amount of $0.3 million.
OPERATING RESULTS FROM DISCONTINUED OPERATIONS
The following represent results of operations from Canadian assets which have been designated as discontinued operations.
Net Operating Results
Canada
March 31, 2008 March 31, 2007
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(000s, except per Boe amounts) $ $/Boe $ $/Boe
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Oil sales 1,632 91.18 1,079 52.36
Gas sales ($ per Mcf) 5,300 8.46 3,742 6.73
NGL sales 1,362 83.65 810 47.26
Other sales 61 - 107 -
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8,355 60.30 5,738 44.00
Royalties and other 1,788 12.91 1,090 8.36
Operating expenses 1,858 13.40 1,044 8.01
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Netback 4,709 33.99 3,604 27.63
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The netback in Canada increased 31% in the three months ended March 31, 2008 compared with the same period in 2007 primarily as a result of a 46% increase in sales offset by higher royalty costs; and higher operating costs per Boe in Canada,
