TransGlobe Energy Corporation (TSX: TGL) (NASDAQ: TGA)
("TransGlobe" or the "Company") is pleased to announce its
financial and operating results for the three month period ended
March 31, 2010. 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.
HIGHLIGHTS
- Record first quarter production averaged 9,694 Bopd, a 12%
increase over fourth quarter 2009;
- First quarter funds flow of $19.1 million ($0.29/share), a 97%
increase over fourth quarter 2009;
- First quarter net income of $11.6 million ($0.17/share), a
361% increase over fourth quarter 2009;
- New exploration project (East Ghazalat) added in Arab Republic
of Egypt's ("Egypt") prolific Western Desert;
- Oil tested on second East Ghazalat exploration well (Safwa
#1); follow-up well (Safwa NW #1) approved by partners;
- Successful West Gharib fracture stimulation program at Arta
(four wells frac'd), 800 Bopd of new production from Nukhul
formation in April; and
- Increased budget and guidance for 2010 powered by new
production and improved oil price differentials at West Gharib and
Arta success.
Corporate Summary
The Company made excellent progress during the first quarter of
2010. Production, funds flow from operations and net income all
increased significantly over the previous quarter. The West Gharib
project area continues to be a star performer in the Company's
portfolio and is expected to remain the focus for continued
production and reserves growth. The Republic of Yemen ("Yemen")
drilling program during the second half of 2010 is anticipated to
also provide low risk, development gains and very significant
exploration tests. A new exploration project was added in the
Western Desert area of Egypt and a new oil discovery was found in
only the second well. 2010 is expected to be the Company's most
active drilling year.
A conference call to discuss TransGlobe's first quarter results
presented in this report will be held on Thursday, May 6, 2010 at
2:30 p.m. Mountain Time (4:30 p.m. Eastern Time) and is accessible
to all interested parties by dialing 1-416-695-6616 or toll-free
1-800-355-4959 (see also TransGlobe's news release dated April 29,
2010). Online, the webcast may be accessed at
http://www.gowebcasting.com/1669.
Investor Presentation - Rodman & Renshaw
TransGlobe also announces that Mr. Ross G. Clarkson, President
and Chief Executive Officer, will make a presentation on the
Company's activities at the Rodman & Renshaw Annual Global
Investment Conference in London, England on Monday, May 17, 2010 at
7:00 a.m. Mountain Time (9:00 a.m. Eastern Time). Investors may
register directly for the live webcast at:
http://www.wsw.com/webcast/rrshq17/tga. The link to the webcast
will also be available on TransGlobe's Web site at
www.trans-globe.com.
Annual General and Special Meeting of the Shareholders
Tuesday, May 11, 2010 at 3:00 p.m. Mountain Time
Calgary Petroleum Club
319 5th Avenue S.W., Calgary, Alberta, Canada
FINANCIAL AND OPERATING RESULTS
(US$000s, except per share, price, volume amounts and % change)
Three Months Ended March 31
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Financial 2010 2009 % Change
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Oil revenue 61,651 28,379 117
Oil revenue, net of royalties and
other 37,404 19,060 96
Derivative loss on commodity
contracts (22) (200) 89
Operating expense 5,787 5,206 11
General and administrative expense 3,385 2,506 35
Depletion, depreciation and accretion
expense 7,343 12,017 (39)
Income taxes 8,620 3,174 172
Funds flow from operations(1) 19,073 8,641 121
Basic per share 0.29 0.14
Diluted per share 0.29 0.14
Net income (loss) 11,598 (4,954) 334
Basic per share 0.18 (0.08)
Diluted per share 0.17 (0.08)
Capital expenditures 13,447 8,926 51
Long-term debt, including current
portion 49,888 57,347 (13)
Common shares outstanding
Basic (weighted-average) 65,432 61,710 6
Diluted (weighted-average) 66,908 61,710 8
Total assets 248,446 238,145 4
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(1) Funds flow from operations is a non-GAAP measure that represents cash
generated from operating activities before changes in non-cash working
capital.
Operating
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Average production volumes (Bopd) 9,694 8,788 10
Average price ($ per Bbl) 70.66 35.88 97
Operating expense ($ per Bbl) 6.63 6.58 1
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OPERATIONS UPDATE
ARAB REPUBLIC OF EGYPT
West Gharib, Arab Republic of Egypt (100% working interest,
TransGlobe operated)
Operations and Exploration
Four oil wells were drilled during the first quarter at Hana
#20, Hana #21, North Hoshia #2 and Hoshia #8. Subsequent to
quarter-end, Hana #22 was drilled and completed as an oil well.
The Hana #20 well was drilled on the south end of the Hana field
to a total depth of 5,505 feet. The well was completed as a Kareem
oil well and is currently producing 400 Bopd.
The North Hoshia #2 well was drilled to a total depth of 5,430
feet, targeting the Nukhul and Thebes formations in the North
Hoshia pool. The well was completed as a Nukhul oil well in early
March. The Nukhul is producing a limited amount of oil and
stimulation options are being evaluated.
The Hoshia #8 step-out appraisal well was drilled to a total
depth of 3,920 feet and cased as a multi-zone (Rudeis/Nukhul) oil
well. The well was completed in the Nukhul formation and is
producing 80 Bopd. Hoshia #8 will be evaluated for a potential
fracture stimulation treatment similar the recent work on the Arta
field.
The Hana #21 well, located at the northern end of the Hana
field, was drilled to a total depth of 6,558 feet and was completed
as a Kareem producer at an initial rate of 200 Bopd in early
April.
The Hana #22 well was drilled at the south end of the Hana field
(offset to Hana #20) to a total depth of 5,503 feet. The well was
placed on production as a Kareem oil well at an initial rate of 150
Bopd in mid-April.
The Arta #13 well was drilled as a western extension to the Arta
Nukhul pool. The well will be cased and completed as a Nukhul oil
well. Following Arta #13, the drilling rig will move to East Arta
#2 to test an eastern extension to the Arta pool.
The contract for the existing 1,000 HP drilling rig has been
extended 12 months (at lower drilling rates) through July 2011 to
facilitate continuous drilling on the Nukhul project which is
primarily focused on the northern development leases (Arta, East
Arta, North Hoshia and South Rahmi).
A second drilling rig (1,500 HP) has been contracted to focus on
exploration/appraisal projects in the southern development leases
(Hana, Hoshia, West Hoshia and Fadl) which are typically deeper
tests. The new rig is currently moving to the Hana West #9 location
and is expected to commence drilling in mid-May. Hana West #9 is an
appraisal well targeting the Lower Rudeis, Kareem and Shagar oil
zones found in Hana West #8. The Hana West #8 Lower Rudeis
production has stabilized in the 350 Bopd range.
During the first quarter, the Company successfully fracture
stimulated ("frac'd") the Nukhul formation in Arta #9 during
February, followed by three additional fracture stimulations
("frac's") in mid-March at Arta #2, #4 and #8. The wells have been
placed on production and the early production rates indicate they
will stabilize in the 100-300 Bopd range per well which represents
a more than tenfold increase over the pre-frac rates. Total Arta
field production has increased from an average of 130 Bopd in
January 2010 to approximately 900 Bopd in April.
The next frac program includes a four-staged frac in the Arta
#12 horizontal well (drilled in Q4-2009) followed by a frac at Arta
#6 and Arta #13. The Arta #12 frac will be the first multi-stage,
horizontal well fracture stimulation in Egypt. This program is
scheduled for late May, subject to the arrival of specialty
equipment from Canada.
The Hoshia, North Hoshia and South Rahmy fields are also being
evaluated for potential Nukhul development drilling and fracture
stimulations.
Production
Production from West Gharib averaged 6,848 Bopd to TransGlobe
during the first quarter, an 18% (1,033 Bopd) increase from the
previous quarter. Production averaged 6,577 Bopd to TransGlobe
during April. Following a number of pump changes in April,
production has increased to approximately 7,400 Bopd during the
first week of May.
Quarterly West Gharib Production (Bopd)
2010 2009
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Q-1 Q-4 Q-3 Q-2
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Gross production rate 6,848 5,815 5,747 6,384
TransGlobe working interest 6,848 5,815 5,747 6,384
TransGlobe net (after royalties) 4,250 3,775 3,732 4,132
TransGlobe net (after royalties and tax)(1) 3,222 2,951 2,918 3,234
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(1) Under the terms of the West Gharib Production Sharing Concession,
royalties and taxes are paid out of the government's share of production
sharing oil.
East Ghazalat Block, Arab Republic of Egypt (50% working
interest)
On January 25, 2010, TransGlobe announced the signing of a
farm-out agreement with Vegas Oil & Gas SA ("Vegas") to earn a
50% interest in the East Ghazalat Concession in the Western Desert
of Egypt, subject to the approval of the Egyptian Government. The
East Ghazalat Concession is operated by Vegas, a privately owned
oil and gas company with extensive Egypt experience and
success.
The 858 km2 East Ghazalat Concession is located in the prolific
Abu Gharadiq basin of Egypt's Western Desert, approximately 250 km
west of Cairo. East Ghazalat was awarded to Vegas on June 5, 2007
and is currently in the first, three-year exploration period. There
are two additional exploration period extensions of two years each.
TransGlobe has committed to pay 100% of three exploration wells to
a maximum of $9.0 million to earn a 50% working interest in the
East Ghazalat Concession. To date, the operator has acquired 450 km
of 3-D seismic to complement the existing 1,548 km of 2-D seismic
and 218 km of 3-D seismic.
Operations and Exploration
Drilling commenced on the first of three planned exploration
wells on January 14, 2010. The first exploration well Gawad #1 was
drilled to total depth of 9,418 feet and subsequently
abandoned.
The second exploration well Safwa #1 was drilled to a total
depth of 5,700 feet cased as a potential oil well. An oil-bearing
interval in the Cretaceous section of the Safwa #1 well was logged
and oil samples were recovered during wireline testing. The well
was perforated and tested at a rate of 300 Bopd of 38o API oil
utilizing the drilling rig. The short-term test confirmed the
presence of a good reservoir and movable oil.
The third exploration well, Sahab #1, was drilled to a total
depth of 8,638 feet and subsequently abandoned in late April.
Pursuant to the terms of the farm-out agreement, the Company has
met the three well earning commitment at an estimated total
drilling cost of approximately $6.0 million (100% to TransGlobe).
The Company will pay its 50% share of future costs at East
Ghazalat.
The partners have approved a fourth well to appraise the Safwa
oil test. The Safwa NW #1 which is located approximately 2.5 km
north/northwest of Safwa #1 is currently drilling. The Safwa NW #1
well is targeting the Cretaceous formation which tested oil in
Safwa #1.
Nuqra Block 1, Arab Republic of Egypt (71.43% working interest,
TransGlobe operated)
Operations and Exploration
TransGlobe has identified several prospects for drilling in late
2010 which are similar to the Al Baraka field located immediately
west of the Nuqra Concession. The operator of the Al Baraka field
recently announced a test of 1,300 Bopd from Al Baraka #4 well,
representing a significant improvement from the previously reported
production rates of 200 Bopd/well.
The Company continues to discuss rig-sharing possibilities with
the adjacent operators to facilitate a late 2010 drilling
program.
YEMEN EAST- Masila Basin
Block 32, Republic of Yemen (13.81% working interest)
Operations and Exploration
No wells were drilled during the first quarter. The joint
venture partners have approved two development wells for the Godah
pool in 2010.
Production
Production from Block 32 averaged 4,948 Bopd (683 Bopd to
TransGlobe) during the quarter, representing a 4% decrease from the
previous quarter primarily due to natural declines.
Production averaged approximately 4,559 Bopd (630 Bopd to
TransGlobe) during April.
Quarterly Block 32 Production (Bopd)
2010 2009
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Q-1 Q-4 Q-3 Q-2
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Gross production rate 4,948 5,174 5,501 6,188
TransGlobe working interest 683 715 760 855
TransGlobe net (after royalties) 472 437 467 656
TransGlobe net (after royalties and tax)(1) 400 346 370 597
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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
The Block 72 joint venture partnership entered the second,
30-month exploration period in January 2009 which carries a
commitment of one exploration well. The Block 72 joint venture
partnership has entered into a letter of intent to farm-out a
portion of their interests in Block 72 to a third party, subject to
a formal farm-in agreement and approval by the Ministry of Oil and
Minerals. The farm-out will allow the Company to allocate more of
its 2010 budget to projects in Egypt. The exploration well planned
for the second half of 2010 is targeting a fractured basement
prospect on the northern portion of Block 72.
Block 84, Republic of Yemen (33% working interest)
Operations and Exploration
The Block 84 joint venture partners have elected to terminate
the Block 84 Production Sharing Agreement ("PSA") ratification
process. TransGlobe will reallocate the Block 84 budget funds into
its Egyptian projects.
YEMEN WEST- Marib Basin
Block S-1, Republic of Yemen (25% working interest)
Operations and Exploration
The Block S-1 and Block 75 joint venture partnerships approved a
2010 budget to drill up to eight horizontal development wells on
Block S-1 and one exploration well on Block 75. Subsequent to
year-end, the partners added a Block S-1 exploration well to the
2010 program. Drilling is expected to start during May or early
June and extend into the 2011 budget year.
Production
Production from Block S-1 averaged 8,652 Bopd (2,163 Bopd to
TransGlobe) during the quarter, essentially flat with the previous
quarter.
Production averaged approximately 7,991 Bopd (1,998 Bopd to
TransGlobe) during April.
Quarterly Block S-1 Production (Bopd)
2010 2009
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Q1 Q-4 Q-3 Q-2
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Gross field production rate 8,652 8,504 9,428 9,520
TransGlobe working interest 2,163 2,126 2,357 2,380
TransGlobe net (after royalties) 1,169 867 1,254 1,230
TransGlobe net (after royalties and tax)(1) 906 585 985 901
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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. The Block 75 3-D seismic acquisition program was
completed in August and processed by year-end 2009. The new 3-D is
currently being interpreted and mapped. One exploration well is
planned for 2010 as part of the Block S-1/75 drilling program. The
Block 75 exploration well is currently scheduled for the fourth
quarter of 2010.
MANAGEMENT'S DISCUSSION AND ANALYSIS
May 6, 2010
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, 2010 and 2009 and the audited
financial statements and MD&A for the year ended December 31,
2009 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 on SEDAR at www.sedar.com. The Company's
annual report and Form 40-F may be found on EDGAR at
www.sec.gov.
READER ADVISORIES
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. Such statements
relate to possible future events. All statements other than
statements of historical fact may be forward-looking statements.
Forward-looking statements are often, but not always, identified by
the use of words such as "seek", "anticipate", "plan", "continue",
"estimate", "expect", "may", "will", "project", "predict",
"potential", "targeting", "intend", "could", "might", "should",
"believe" and similar expressions. These statements involve known
and unknown risks, uncertainties and other factors that may cause
actual results or events to differ materially from those
anticipated in such forward-looking statements. Although
TransGlobe's forward-looking statements are based on the beliefs,
expectations, opinions and assumptions of the Company's management
on the date the statements are made, such statements are inherently
uncertain and provide no guarantee of future performance. Actual
results may differ materially from TransGlobe's expectations as
reflected in such forward-looking statements as a result of various
factors, many of which are beyond the control of the Company. These
factors include, but are not limited to, unforeseen changes in the
rate of production from TransGlobe's oil and gas properties,
changes in price of crude oil and natural gas, adverse technical
factors associated with exploration, development, production or
transportation of TransGlobe's crude oil and natural gas reserves,
changes or disruptions in the political or fiscal regimes in
TransGlobe's areas of activity, changes in tax, energy or other
laws or regulations, changes in significant capital expenditures,
delays or disruptions in production due to shortages of skilled
manpower, equipment or materials, economic fluctuations, and other
factors beyond the Company's control. TransGlobe does not assume
any obligation to update forward-looking statements, other than as
required by law, if circumstances or management's beliefs,
expectations or opinions should change and investors should not
attribute undue certainty to, or place undue reliance on, any
forward-looking statements. Please consult TransGlobe's public
filings at www.sedar.com and www.sec.gov for further, more detailed
information concerning these matters.
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 ("Mcf")
to one barrel ("Bbl") of crude oil. Boe's 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.
Non-GAAP Measures
Funds Flow from Operations
This document contains the term "funds flow from 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").
Funds flow from operations is a non-GAAP measure that represents
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. Funds
flow from operations may not be comparable to similar measures used
by other companies.
Reconciliation of Funds Flow from Operations
Three Months Ended
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($000s) March 31, 2010 March 31, 2009
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Cash flow from operating activities 4,254 7,889
Changes in non-cash working capital 14,819 752
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Funds flow from operations 19,073 8,641
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Debt-to-funds flow ratio
Debt-to-funds flow is a non-GAAP measure that is used to set the
amount of capital in proportion to risk. The Company's
debt-to-funds flow ratio is computed as long-term debt, including
the current portion, over funds flow from operations for the
trailing twelve months. Debt-to-funds flow may not be comparable to
similar measures used by other companies.
Netback
Netback is a non-GAAP measure that represents sales net of
royalties (all government interests, net of income taxes),
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.
TRANSGLOBE'S BUSINESS
TransGlobe is a Canadian-based, publicly traded, oil exploration
and production company whose activities are concentrated in two
main geographic areas, the Arab Republic of Egypt ("Egypt") and the
Republic of Yemen ("Yemen"). Egypt and Yemen include the Company's
exploration, development and production of crude oil. TransGlobe
disposed of its Canadian oil and gas operations in 2008 to
reposition itself as a 100% oil, Middle East/North Africa growth
company.
SELECTED QUARTERLY FINANCIAL INFORMATION
2010 2009
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($000s, except per share, price
and volume amounts) Q-1 Q-4 Q-3 Q-2
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Operations
Average sales volumes (Boepd) 9,694 8,656 8,864 9,619
Average price ($/Boe) 70.66 62.84 57.41 48.62
Oil and gas sales 61,651 50,044 46,818 42,557
Oil and gas sales, net of royalties
and other 37,404 28,788 28,495 26,462
Cash flow from operating activities 4,254 12,594 1,264 15,052
Funds flow from operations (i) 19,073 9,703 12,603 14,117
Funds flow from operations per share
- Basic 0.29 0.15 0.19 0.22
- Diluted 0.29 0.15 0.19 0.22
Net income (loss) 11,598 2,516 (1,618) (4,361)
Net income (loss) per share
- Basic 0.18 0.04 (0.02) (0.07)
- Diluted 0.17 0.04 (0.02) (0.07)
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Total assets 248,446 228,882 228,964 229,658
Cash and cash equivalents 18,845 16,177 14,804 23,952
Total long-term debt, including
current portion 49,888 49,799 52,686 52,551
Debt-to-funds flow ratio (ii) 0.9 1.1 1.3 1.2
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2009 2008
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($000s, except per share, price
and volume amounts) Q-1 Q-4 Q-3 Q-2
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Operations
Average sales volumes (Boepd) 8,788 6,893 6,935 7,706
Average price ($/Boe) 35.88 46.18 104.55 110.21
Oil and gas sales 28,379 29,285 66,707 77,283
Oil and gas sales, net of royalties
and other 19,060 18,272 36,577 41,629
Cash flow from operating activities 7,889 11,252 20,652 9,573
Funds flow from operations (i) 8,641 6,134 16,775 18,485
Funds flow from operations per share
- Basic 0.14 0.10 0.28 0.31
- Diluted 0.14 0.10 0.27 0.31
Net income (loss) (4,954) 7,640 24,790 (5,365)
Net income (loss) per share
- Basic (0.08) 0.14 0.41 (0.09)
- Diluted (0.08) 0.13 0.41 (0.09)
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Total assets 238,145 228,238 234,501 205,535
Cash and cash equivalents 22,041 7,634 8,593 11,673
Total long-term debt, including
current portion 57,347 57,230 57,127 42,197
Debt-to-funds flow ratio (ii) 1.1 1.0 0.9 0.7
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(i) Funds flow from operations is a non-GAAP measure that represents cash
generated from operating activities before changes in non-cash working
capital.
(ii) Debt-to-funds flow ratio is a non-GAAP measure that represents total
current and long-term debt over funds flow from operations for the
trailing 12 months.
During the first quarter of 2010, TransGlobe has:
- Maintained a strong financial position, reporting a
debt-to-funds flow ratio of 0.9 at March 31, 2010 (March 31, 2009 -
1.1);
- Funded capital programs entirely with funds flow from
operations;
- Increased production in Q1-2010 by 10% to 9,694 Bopd compared
with Q1-2009 production of 8,788 Bopd;
- Reported a 121% increase in funds flow from operations due to
a 97% increase in commodity prices along with a 10% increase in
sales volumes compared to Q1-2009; and
- Reported net income in Q1-2010 of $11.6 million (Q1-2009 -
$4.9 million net loss) mainly due to higher commodity prices and
higher production rates in the quarter compared with the same
period in 2009, along with lower depletion and depreciation expense
in Egypt.
2010 VARIANCES
$ Per Share
$000s Diluted % Variance
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Q1-2009 net loss (4,954) (0.08)
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Cash items
Volume variance 5,766 0.09 116
Price variance 27,506 0.41 555
Royalties (14,927) (0.22) (301)
Expenses:
Operating (581) (0.01) (12)
Realized derivative loss (1,136) (0.02) (23)
Cash general and administrative (982) (0.01) (20)
Current income taxes (5,446) (0.08) (110)
Realized foreign exchange gain 140 0.00 3
Interest on long-term debt 92 0.00 2
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Total cash items variance 10,432 0.16 210
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Non-cash items
Unrealized derivative gain 1,314 0.02 27
Depletion and depreciation 4,674 0.07 94
Stock-based compensation 103 0.00 2
Amortization of deferred financing
costs 29 0.00 1
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Total non-cash items variance 6,120 0.09 124
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Q1- 2010 net income 11,598 0.17 334
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Net income increased by $16.6 million in Q1-2010 compared to a
loss of $5.0 million in Q1-2009 due in part to a significant
increase in commodity prices and production volumes along with a
decrease in depletion and depreciation, which was partially offset
by higher royalties and income taxes.
BUSINESS ENVIRONMENT
The Company's financial results are significantly influenced by
fluctuations in commodity prices, including price differentials.
The following table shows select market benchmark prices and
foreign exchange rates:
2010 2009
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Q-1 Q-4 Q-3 Q-2 Q-1
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Dated Brent average oil
price ($/Bbl) 76.10 74.56 68.27 58.79 44.40
U.S./Canadian Dollar average
exchange rate 1.016 1.056 1.098 1.167 1.245
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The price of Dated Brent oil averaged $76.10/Bbl in Q1-2010, an
increase of 71% from the Q1-2009 price of $44.40/Bbl. We are
currently in a period of economic recovery with improved liquidity
and access to capital, in addition to strengthening oil prices.
TransGlobe's management believes the Company is well positioned to
take advantage of the improving economy due to its increasing
production, manageable debt levels, positive cash generation from
operations and the availability of cash and cash equivalents.
The Company designed its 2010 budget to be flexible, allowing
spending to be adjusted as commodity prices change and forecasts
are reviewed.
OPERATING RESULTS AND NETBACK
Daily Volumes, Working Interest Before Royalties and Other
(Bopd)
Three Months Ended
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March 31, March 31,
2010 2009 % Change
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Egypt - Oil sales 6,848 5,364 27
Yemen - Oil sales 2,846 3,424 (17)
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Total Company - daily sales volumes 9,694 8,788 10
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Netback
Consolidated Three Months Ended
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March 31, 2010 March 31, 2009
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(000s, except per Bbl amounts) $ $/Bbl $ $/Bbl
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Oil sales 61,651 70.66 28,379 35.88
Royalties and other 24,247 27.79 9,320 11.78
Current taxes 8,620 9.88 3,174 4.01
Operating expenses 5,787 6.63 5,206 6.58
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Netback 22,997 26.36 10,679 13.51
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Egypt Three Months Ended
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March 31, 2010 March 31, 2009
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(000s, except per Bbl amounts) $ $/Bbl $ $/Bbl
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Oil sales 42,030 68.20 15,396 31.89
Royalties and other 15,943 25.87 5,377 11.14
Current taxes 6,313 10.24 2,196 4.55
Operating expenses 3,642 5.91 2,787 5.77
----------------------------------------------------------------------------
Netback 16,132 26.18 5,036 10.43
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The netback per Bbl in Egypt increased 151% in the three months
ended March 31, 2010, compared with the same period of 2009, mainly
as a result of oil prices increasing by 114% and production volumes
increasing by 27%. During the three months ended March 31, 2010,
the average realized oil price for the West Gharib crude had a
gravity/quality adjustment of approximately $7.90/Bbl (10%) to the
average Dated Brent oil price versus a $12.51/Bbl (28%)
differential in the first quarter of 2009.
Royalties and taxes as a percentage of revenue increased to 53%
in the three months ended March 31, 2010, compared with 49% in the
same period of 2009. Royalty and tax rates fluctuate in Egypt due
to changes in the cost oil whereby the PSC allows for recovery of
operating and capital costs through a reduction in government
take.
Operating expenses for the three months ended March 31, 2010
remained relatively consistent with the same period in 2009,
increasing 2% to $5.91/Bbl (2009 - $5.77/Bbl).
Yemen Three Months Ended
----------------------------------------------------------------------------
March 31, 2010 March 31, 2009
----------------------------------------------------------------------------
(000s, except per Bbl amounts) $ $/Bbl $ $/Bbl
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Oil sales 19,621 76.60 12,983 42.13
Royalties and other 8,304 32.42 3,943 12.80
Current taxes 2,307 9.01 978 3.17
Operating expenses 2,145 8.37 2,419 7.85
----------------------------------------------------------------------------
Netback 6,865 26.80 5,643 18.31
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In Yemen, the netback per Bbl increased 46% in the three months
ended March 31, 2010, compared with the same period in 2009. These
increases are primarily a result of oil prices increasing by 82%
partially offset by higher royalty and tax rates.
Royalties and taxes as a percentage of revenue increased to 54%
in Q1-2010 compared with 38% in Q1-2009. 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 Production Sharing
Agreements ("PSAs") allow for the recovery of operating and capital
costs through a reduction in Ministry of Oil and Minerals' take of
oil production.
Operating expenses on a per Bbl basis for the three months ended
March 31, 2010 increased 7% to $8.37/Bbl (2009 - $7.85/Bbl) which
is mostly due to declining production.
DERIVATIVE 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 hedging program was expanded in Q1-2010 to protect
the cash flows from the added risk of commodity price exposure and
in order to comply with the covenants set forth by the Company's
lending institutions.
The estimated fair value of unrealized commodity contracts is
reported on the Consolidated Balance Sheets, with any change in the
unrealized positions recorded to income. The fair values of these
transactions are based on an approximation of the amounts that
would have been paid to, or received from, counter-parties to
settle the transactions outstanding as at the Consolidated Balance
Sheet date with reference to forward prices and market values
provided by independent sources. The actual amounts realized may
differ from these estimates.
In Q1-2010, the realized loss on commodity contracts relates to
the purchase of a new financial floor derivative commodity contract
for $0.4 million, compared with $0.8 million in realized gains for
the same period in 2009 as a result of depressed oil prices in the
first quarter of last year. The mark-to-market valuation of
TransGlobe's future derivative commodity contracts decreased from a
$0.5 million liability at December 31, 2009 to a $0.2 million
liability at March 31, 2010, thus resulting in a $0.3 million
unrealized gain on future derivative commodity contracts being
recorded in the period.
Three Months Ended
----------------------------------------------------------------------------
March 31, March 31,
($000s) 2010 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Realized cash (loss) gain on commodity contracts (i) (365) 771
Unrealized gain (loss) on commodity contracts (ii) 343 (971)
----------------------------------------------------------------------------
Total derivative gain (loss) on commodity
contracts (22) (200)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) Realized cash gain (loss) represents actual cash settlements or
receipts under the respective contracts.
(ii) The unrealized loss on derivative commodity contracts represents the
change in fair value of the contracts during the period.
If the Dated Brent oil price remains at the level experienced at
the end of Q1-2010, the derivative liability will be realized over
the next year. However, a 10% decrease in Dated Brent oil prices
would result in a $0.5 million decrease in the derivative commodity
contract liability, thus increasing the unrealized gain by the same
amount. Conversely, a 10% increase in Dated Brent oil prices would
decrease the unrealized gain on commodity contracts by $0.7
million. The following commodity contracts are outstanding at March
31, 2010:
Dated Brent
Pricing
Period Volume Type Put-Call
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Crude Oil
-----------
Financial
April 1, 2010-August 31, 2010 12,000 Bbls/month Collar $60.00-$84.25
Financial
April 1, 2010-August 31, 2010 9,000 Bbls/month Collar $40.00-$80.00
Financial
April 1, 2010-December 31, 2010 10,000 Bbls/month Floor $60.00
Financial
April 1, 2010-December 31, 2010 20,000 Bbls/month Floor $65.00
----------------------------------------------------------------------------
The total volumes hedged for the balance of 2010 and the following years
are:
Nine months
2010 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Bbls 375,000 -
Bopd 1,364 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
At March 31, 2010, all of the derivative commodity contracts were classified
as current liabilities.
GENERAL AND ADMINISTRATIVE EXPENSES ("G&A")
Three Months Ended
----------------------------------------------------------------------------
March 31, 2010 March 31, 2009
----------------------------------------------------------------------------
(000s, except per Bbl amounts) $ $/Bbl $ $/Bbl
----------------------------------------------------------------------------
----------------------------------------------------------------------------
G&A (gross) 3,436 3.94 2,899 3.67
Stock-based compensation 387 0.44 490 0.62
Capitalized G&A (433) (0.50) (877) (1.11)
Overhead recoveries (5) (0.01) (6) (0.01)
----------------------------------------------------------------------------
G&A (net) 3,385 3.87 2,506 3.17
----------------------------------------------------------------------------
----------------------------------------------------------------------------
G&A expenses (net) increased 35% (22% on a per Bbl basis) in
the first three months of 2010 compared with the same period in
2009 mostly due to a strengthening Canadian dollar which accounted
for approximately 60% of the increase as the majority of
TransGlobe's G&A costs are incurred in Canadian dollars. The
remainder of the increase was due to increased insurance, staffing
and reduced general and administrative capitalization.
INTEREST ON LONG-TERM DEBT
Interest expense for the three months ended March 31, 2010
decreased to $0.5 million (2009 - $0.6 million). Interest expense
includes interest on long-term debt and amortization of transaction
costs associated with long-term debt. In the quarter, the Company
expensed $0.1 million of transaction costs (2009 - $0.1 million).
The Company had $49.9 million of debt outstanding at March 31, 2010
(March 31, 2009 - $58.0 million). The long-term debt bears interest
at the Eurodollar rate plus three percent.
DEPLETION AND DEPRECIATION ("DD&A")
Three Months Ended
----------------------------------------------------------------------------
March 31, 2010 March 31, 2009
----------------------------------------------------------------------------
(000s, except per Bbl amounts) $ $/Bbl $ $/Bbl
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Egypt 5,278 8.56 9,473 19.62
Yemen 2,014 7.86 2,501 8.12
Corporate 51 - 43 -
----------------------------------------------------------------------------
7,343 8.42 12,017 15.19
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In Egypt, DD&A decreased 56% on a per Bbl basis for the
three months ended March 31, 2010 due to significant increases to
Proved reserves at year-end 2009.
In Yemen, DD&A decreased 3% on a per Bbl basis for the three
months ended March 31, 2010 due to reserve additions at year-end
2009.
In Egypt, unproven properties of $12.2 million (2009 - $10.0
million) relating to Nuqra ($7.9 million), West Gharib ($1.8
million) and East Ghazalat ($2.5 million) were excluded from the
costs subject to DD&A in the quarter. In Yemen, unproven
property costs of $11.7 million (2009 - $7.5 million) relating to
Block 72 and Block 75 were excluded from the costs, subject to
DD&A in the quarter.
CAPITAL EXPENDITURES
Three Months Ended
----------------------------------------------------------------------------
($000s) March 31, 2010 March 31, 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Egypt 12,714 7,309
Yemen 679 1,545
Corporate 54 72
----------------------------------------------------------------------------
Total 13,447 8,926
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In Egypt, total capital expenditures in the first three months
of 2010 were $12.7 million (2009 - $7.3 million). The Company
drilled six wells, resulting in two oil wells at Hana, one oil well
at Hoshia, and one oil well at North Hoshia in West Gharib, in
addition to one oil well and one dry hole at East Ghazalat.
In Yemen, total capital expenditures in Q1-2010 were $0.7
million (2009 - $1.5 million). The Company did not drill any wells
in Yemen in Q1-2010.
OUTSTANDING SHARE DATA
As at March 31, 2010, the Company had 65,446,639 common shares
issued and outstanding.
The Company has received regulatory approval to purchase, from
time-to-time, as it considers advisable, up to 6,116,905 common
shares under a Normal Course Issuer Bid which commenced September
7, 2009 and will terminate September 6, 2010. During the three
months ended March 31, 2010 and during the year ended December 31,
2009, the Company did not repurchase any common shares.
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 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.
A key measure that TransGlobe uses to measure the Company's overall
financial strength is debt-to-funds flow from operating activities
(calculated on a 12-month trailing basis). TransGlobe's
debt-to-funds flow from operating activities ratio, a key
short-term leverage measure, remained strong at 0.9 times at March
31, 2010. This was within the Company's target range of no more
than 2.0 times.
The following table illustrates TransGlobe's sources and uses of
cash during the periods ended March 31, 2010 and 2009:
Sources and Uses of Cash
Three Months Ended
----------------------------------------------------------------------------
($000s) March 31, 2010 March 31, 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash sourced
Funds flow from operations(1) 19,073 8,641
Exercise of options 130 80
Issuance of common shares, net of share
issuance costs - 15,146
----------------------------------------------------------------------------
19,203 23,867
Cash used
Capital expenditures 13,447 8,926
----------------------------------------------------------------------------
13,447 8,926
----------------------------------------------------------------------------
Net cash from operations 5,756 14,941
Changes in non-cash working capital (3,088) (534)
----------------------------------------------------------------------------
Increase in cash and cash equivalents 2,668 14,407
Cash and cash equivalents - beginning of
period 16,177 7,634
----------------------------------------------------------------------------
Cash and cash equivalents - end of period 18,845 22,041
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Funds flow from 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 was provided by
funds flow from operations. The Company expects to fund its
approved 2010 exploration and development program of $63.0 million
($49.6 million remaining) and contractual commitments through the
use of working capital and cash generated by operating activities.
The use of new financing during 2010 may also be utilized to
finance new opportunities. Fluctuations in commodity prices,
product demand, foreign exchange rates, interest rates and various
other risks may impact capital resources.
Working capital is the amount by which current assets exceed
current liabilities. At March 31, 2010, the Company had a working
capital deficiency of $5.8 million (December 31, 2009 - deficiency
of $11.8 million). The working capital deficiency at the end of
Q1-2010 is primarily the result of the reclassification of
long-term debt as a current liability. Increases to working capital
in 2010 are mainly the result of cash and cash equivalents
increasing due to the collection of certain accounts receivable,
and increased accounts receivable due to higher oil prices and
higher sales volumes. These receivables are not considered to be
impaired; however, to mitigate this risk, the Company has entered
into an insurance program on a portion of the receivable
balance.
At March 31, 2010, TransGlobe had a $60.0 million Revolving
Credit Agreement of which $50.0 million was drawn. Amounts drawn
under the Revolving Credit Agreement are due September 25, 2010.
The Company is in discussion on a new bank line and expects to
enter into a new facility in the second quarter of 2010.
($000s) March 31, 2010 December 31, 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revolving Credit Agreement 50,000 50,000
Unamortized transaction costs (112) (201)
----------------------------------------------------------------------------
49,888 49,799
----------------------------------------------------------------------------
Current portion of long-term debt (net of
unamortized transaction costs) 49,888 49,799
----------------------------------------------------------------------------
Long-term debt - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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)
----------------------------------------------------------------------------
Recognized More
in Financial Contractual Less than 1-3 4-5 than
Statements Cash Flows 1 year years years 5 years
----------------------------------------------------------------------------
Accounts payable
and accrued
liabilities Yes-Liability 22,583 22,583 - - -
Long-term debt:
Revolving Credit
Agreement Yes-Liability 50,000 50,000 - - -
Derivative
commodity
contracts Yes-Liability 170 170 - - -
Office and
equipment leases No 1,353 587 766 - -
Minimum work
commitments(3) No 9,781 4,828 4,953 - -
----------------------------------------------------------------------------
Total 83,887 78,168 5,719 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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, 2010 exchange rates.
3 Minimum work commitments include contracts awarded for capital projects
and those commitments related to exploration and drilling obligations.
TransGlobe has entered into a farm-out agreement and has
committed to pay 100% of three exploration wells to a maximum of
$9.0 million to earn a 50% working interest in the East Ghazalat
Concession in the Western Desert of Egypt, subject to the approval
of the Egyptian Government. The Company has completed drilling two
of the three exploration wells during this quarter and the third
exploration well was drilled in April 2010.
Pursuant to the Concession agreement for Nuqra Block 1 in Egypt,
the Contractor (Joint Venture Partners) has a minimum financial
commitment of $5.0 million ($4.4 million to TransGlobe) and a work
commitment for two exploration wells in the second exploration
extension. The second, 36-month extension period commenced on July
18, 2009. The Contractor has met the second extension financial
commitment of $5.0 million in the prior periods. At the request of
the Government, the Company provided a $4.0 million production
guarantee from the West Gharib Concession prior to entering the
second extension period.
Pursuant to the PSA for Block 72 in Yemen, the Contractor (Joint
Venture Partners) has a minimum financial commitment of $2.0
million ($0.7 million to TransGlobe) to drill one exploration well
during the second exploration period. The second, 30-month
exploration period commenced on January 12, 2009.
Pursuant to the PSA for Block 75 in Yemen, the Contractor (Joint
Venture Partners) has a remaining minimum financial commitment of
$3.0 million ($0.8 million to TransGlobe) for 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 August 18, 2008 asset purchase agreement for a
25% financial interest in eight development leases on the West
Gharib Concession in Egypt, the Company has committed to paying the
vendor a success fee to a maximum of $7.0 million if incremental
reserve thresholds are reached in the East Hoshia (up to $5.0
million) and South Rahmi (up to $2.0 million) development leases,
to be evaluated annually. As at December 31, 2009, no additional
fees are due in 2010.
In the normal course of its operations, the Company may be
subject to litigations and claims. Although it is not possible to
estimate the extent of potential costs, if any, management believes
that the ultimate resolution of such contingencies would not have a
material adverse impact on the results of operations, financial
position or liquidity of the Company.
MANAGEMENT STRATEGY AND OUTLOOK FOR 2010
The 2010 outlook provides information as to management's
expectation for results of operations for 2010. Readers are
cautioned that the 2010 outlook may not be appropriate for other
purposes. The Company's expected results are sensitive to
fluctuations in the business environment and may vary accordingly.
This outlook contains forward-looking statements that should be
read in conjunction with the Company's disclosure under
"Forward-Looking Statements", outlined on the first page of this
MD&A.
2010 Outlook Highlights
- Production is expected to average between 10,000 and 10,500
Bopd (mid-point: 10,250), a 14% increase over the 2009 average
production;
- Exploration and development spending is budgeted to be $63.0
million, a 77% increase from 2009 (allocated 77% to Egypt and 23%
to Yemen) funded from funds flow from operations and cash on hand;
and
- Using the mid-point of production expectations and an average
oil price assumption for the remainder of the year of $65.00/Bbl,
funds flow from operations is expected to be $70.0 million for the
year.
2010 Production Outlook
TransGlobe's production guidance for 2010 is expected to average
between 10,000 and 10,500 Bopd, representing a 14% increase over
the 2009 average production of 8,980 Bopd. This target includes
increased production from Hana, Hana West, Hoshia, Arta and East
Arta in Egypt, and production from the development drilling program
on Block S-1 in Yemen. Production from Egypt is expected to average
approximately 7,550 Bopd during 2010, with the balance of
approximately 2,700 Bopd coming from the Yemen properties.
Production Forecast
2010 Guidance 2009 Actual % Change(1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Barrels of oil per day 10,000 - 10,500 8,980 14
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) % growth based on mid-point of outlook.
2010 Funds Flow From Operations Outlook
This outlook was developed using the above production forecast
and an average Dated Brent oil price of $65.00/Bbl for the
remainder of the year.
2010 Funds Flow From Operations Outlook
($ million, except % change) 2010 Guidance 2009 Actual % Change(1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Funds flow from operations(2) 70.0 45.1 55
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) % growth based on mid-point of outlook.
(2) Funds flow from operations is a non-GAAP measure that represents cash
generated from operating activities before changes in non-cash working
capital.
Due in part to higher expected prices and higher production,
funds flow from operations is expected to increase by 55% in 2010.
One of the key factors in the increased funds flow in 2010 is due
to a better expected oil price differential to average Dated Brent
benchmark price in Egypt. In 2009, the Company had been
experiencing Egypt price differentials to average Dated Brent in
the 24% range, while in 2010 these differentials have narrowed to
the 10% range. Variations in production and commodity prices during
2010 could significantly change this outlook. An increase in the
Dated Brent oil price of $10.00/Bbl for the remainder of the year
would increase anticipated funds flow by approximately $8.0 million
for the year, while a $10.00/Bbl decrease in the Dated Brent oil
price would result in anticipated funds flow decreasing by
approximately $6.0 million.
2010 Capital Budget Three Months Ended
March 31, 2010 2010
($ million) Actual Annual Budget
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Egypt 12.7 48.7
Yemen 0.7 14.1
Corporate 0.1 0.2
----------------------------------------------------------------------------
Total 13.5 63.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The 2010 capital program is split 68:32 between development and
exploration, respectively. The Company plans to participate in 37
wells in 2010. It is anticipated the Company will fund its entire
2010 capital budget from funds flow and working capital. The
Company has designed its 2010 budget to be flexible, allowing
spending to be adjusted as commodity prices change and forecasts
are reviewed.
CHANGES IN ACCOUNTING POLICIES
New Accounting Policies
The Company adopted a share appreciation rights plan in March
2010. Under the share appreciation rights plan, all liabilities
must be settled in cash and, consequently, are classified as
liability instruments and measured at their intrinsic value less
any unvested portion. Unvested share appreciation rights accrue
evenly over the vesting period. The intrinsic value is determined
as the difference between the market value of the Company's common
shares and the exercise price of the share appreciation rights.
This obligation is revalued each reporting period and the change in
the obligation is recognized as stock-based compensation expense
(recovery).
New Accounting Standards
a) Business Combinations
In December 2008, the CICA issued Section 1582, Business
Combinations, which will replace CICA Section 1581 of the same
name. Section 1582 establishes principles and requirements of the
acquisition method for business combinations and related
disclosures. This statement applies prospectively to business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after January 2011 with earlier application permitted. The Company
is currently evaluating the impact of this change on its
Consolidated Financial Statements.
b) Non-Controlling Interests
In December 2008, the CICA issued Sections 1601, Consolidated
Financial Statements, and 1602, Non-Controlling Interests. Section
1601 establishes standards for the preparation of consolidated
financial statements. Section 1602 provides guidance on accounting
for a non-controlling interest in a subsidiary in consolidated
financial statements subsequent to a business combination. These
standards are effective on or after the beginning of the first
annual reporting period beginning on or after January 2011 with
earlier application permitted. These standards currently do not
impact the Company as it has full controlling interest of all of
its subsidiaries.
c) International Financial Reporting Standards ("IFRS")
On February 13, 2008 the Canadian Accounting Standards Board has
confirmed that effective for interim and annual financial
statements related to fiscal years beginning on or after January 1,
2011, IFRS will replace Canada's current GAAP for all publicly
accountable profit-oriented enterprises.
The Company commenced its IFRS transition project in 2008 and
has completed the project awareness and engagement phase of the
IFRS transition project. Corporate governance over the project has
been established and a steering committee and project team have
been formed. The steering committee is comprised of members of
management and executive and is responsible for final approval of
project recommendations and deliverables to the Audit Committee and
Board of Directors. Communication, training and education are an
important aspect of the Company's IFRS conversion project. Internal
and external training and education sessions have been carried out
and will continue throughout each phase of the project.
The Company has completed the diagnostic assessment phase by
performing comparisons of the differences between Canadian GAAP and
IFRS and is currently assessing the effects of adoption and
finalizing its conversion plan. The Company has determined that the
most significant impact of IFRS conversion is to property and
equipment. IFRS does not prescribe specific oil and gas accounting
guidance other than for costs associated with the exploration and
evaluation phase. The Company currently follows full cost
accounting as prescribed in Accounting Guideline 16, Oil and Gas
Accounting - Full Cost. Conversion to IFRS may have a significant
impact on how the Company accounts for costs pertaining to oil and
gas activities, in particular those related to the pre-exploration
and development phases. In addition, the level at which impairment
tests are performed and the impairment testing methodology will
differ under IFRS. IFRS conversion will also result in other
impacts, some of which may be significant in nature. The Company
continues to focus on analyzing and developing implementation
strategies and processes for the key IFRS transition issues
identified. Where applicable, key IFRS transition alternatives are
being considered and evaluated. The Company continues to perform
preliminary accounting assessments on less critical IFRS transition
issues and has commenced analysis of IFRS financial statement
presentation and disclosure requirements. These assessments will
need to be further analyzed and evaluated throughout the
implementation phase of the Company's project. At this time, the
impact on the Company's financial position and results of
operations is not reliably determinable or estimable.
In July 2009, the International Accounting Standards Board
("IASB") approved additional exemptions that will allow entities to
allocate their oil and gas asset balance as determined under full
cost accounting to the IFRS categories of exploration and
evaluation assets and development and producing properties. Under
the exemption, exploration and evaluation assets are measured at
the amount determined under an entity's previous GAAP. For assets
in the development or production phases, the amount is also
measured at the amount determined under an entity's previous GAAP;
however, such values must be allocated to the underlying IFRS
transitional assets on a pro-rata basis using either reserve values
or reserve volumes as of the entity's IFRS transition date. This
exemption will relieve entities from significant adjustments
resulting from retrospective adoption of IFRS. The Company intends
to utilize this exemption. The Company is also evaluating other
first-time adoption exemptions and elections available upon initial
transition that provide relief from retrospective application of
IFRS.
Concurrently, the project team is working on the design,
planning and solution development phase. In this phase, the focus
is on determining the specific qualitative and quantitative impact
the application of IFRS requirement has on the Company. The project
team members continue to work with representatives from the various
operational areas to develop recommendations including first-time
adoption exemptions available upon initial transition to IFRS. The
results from the consultations with the various operational areas
are used to draft accounting policies. One of the sections in each
of the draft accounting policies is the disclosure section which
includes the financial statements disclosure as required by IFRS.
First-time adoption exemptions were analyzed by the project team
and a schedule is being drafted for the steering committee to
review and evaluate the exemptions. A detailed implementation plan
and timeline has been developed, which also includes the
development of a training plan.
Additionally, the Company is monitoring the IASB's active
projects and all changes to IFRS prior to January 1, 2011 and will
be incorporated as required.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
TransGlobe's management has designed and implemented internal
controls over financial reporting, as defined under National
Instrument 52-109 Certification of Disclosure in Issuers' Annual
and Interim Filings, of the Canadian Securities Administrators.
Internal controls over financial reporting is a process designed
under the supervision of the Chief Executive Officer and the Chief
Financial Officer and effected by the Board of Directors,
management and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with Canadian generally accepted accounting principles,
including a reconciliation to U.S. generally accepted accounting
principles, focusing in particular on controls over information
contained in the annual and interim financial statements. Due to
its inherent limitations, internal controls over financial
reporting may not prevent or detect misstatements on a timely
basis. A system of internal controls over financial reporting, no
matter how well conceived or operated, can provide only reasonable,
not absolute, assurance that the objectives of the internal
controls over financial reporting are met. Also, projections of any
evaluation of the effectiveness of internal control over financial
reporting to future periods are subject to the risk that the
controls may become inadequate because of changes in conditions, or
that the degree of compliance with policies or procedures may
deteriorate.
As at the date of this report, management is not aware of any
change in the Company's internal control over financial reporting
that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial
reporting.
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Income (Loss) and Retained Earnings
(Unaudited - Expressed in thousands of U.S. Dollars, except per share
amounts)
Three Months Ended March 31
2010 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
REVENUE
Oil sales, net of royalties and other $ 37,404 $ 19,060
Derivative loss on commodity contracts
(Note 12) (22) (200)
----------------------------------------------------------------------------
37,382 18,860
----------------------------------------------------------------------------
EXPENSES
Operating 5,787 5,206
General and administrative 3,385 2,506
Foreign exchange loss 164 304
Interest on long-term debt 485 607
Depletion and depreciation (Note 3) 7,343 12,017
----------------------------------------------------------------------------
17,164 20,640
----------------------------------------------------------------------------
Income (loss) before income taxes 20,218 (1,780)
Income taxes - current 8,620 3,174
----------------------------------------------------------------------------
NET INCOME (LOSS) 11,598 (4,954)
Retained earnings, beginning of period 80,013 88,430
----------------------------------------------------------------------------
RETAINED EARNINGS, END OF PERIOD $ 91,611 $ 83,476
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) per share (Note 10)
Basic $ 0.18 $ (0.08)
Diluted $ 0.17 $ (0.08)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited - Expressed in thousands of U.S. Dollars)
Three Months Ended March 31
2010 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) $ 11,598 $ (4,954)
Other comprehensive income - -
----------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ 11,598 $ (4,954)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
Consolidated Balance Sheets
(Unaudited - Expressed in thousands of U.S. Dollars)
As at As at
March 31, December 31,
2010 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents $ 18,845 $ 16,177
Accounts receivable 45,815 35,319
Prepaids and other 2,204 1,909
----------------------------------------------------------------------------
66,864 53,405
----------------------------------------------------------------------------
Goodwill (Note 4) 8,180 8,180
Property and equipment (Note 3) 173,402 167,297
----------------------------------------------------------------------------
$ 248,446 $ 228,882
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES
Current
Accounts payable and accrued liabilities $ 22,583 $ 14,879
Derivative commodity contracts (Note 12) 170 514
Current portion of long-term debt (Note 5) 49,888 49,799
----------------------------------------------------------------------------
72,641 65,192
----------------------------------------------------------------------------
Commitments and contingencies (Note 13)
SHAREHOLDERS' EQUITY
Share capital (Note 6) 66,277 66,106
Contributed surplus (Note 8) 7,037 6,691
Accumulated other comprehensive income
(Note 9) 10,880 10,880
Retained earnings 91,611 80,013
----------------------------------------------------------------------------
175,805 163,690
----------------------------------------------------------------------------
$ 248,446 $ 228,882
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
Approved on behalf of the Board:
Signed by:
"Ross G. Clarkson" "Fred J. Dyment"
Ross G. Clarkson, Director Fred J. Dyment, Director
Consolidated Statements of Cash Flows
(Unaudited - Expressed in thousands of U.S. Dollars)
Three Months Ended March 31
2010 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
CASH FLOWS RELATED TO THE FOLLOWING
ACTIVITIES:
OPERATING
Net income (loss) $ 11,598 $ (4,954)
Adjustments for:
Depletion and depreciation 7,343 12,017
Amortization of deferred financing costs 89 117
Stock-based compensation (Note 7) 387 490
Unrealized (gain) loss on commodity contracts (344) 971
Changes in non-cash working capital (14,819) (752)
----------------------------------------------------------------------------
4,254 7,889
----------------------------------------------------------------------------
FINANCING
Issue of common shares for cash (Note 6) 130 16,392
Issue costs for common shares (Note 6) - (1,166)
Changes in non-cash working capital - (1,086)
----------------------------------------------------------------------------
130 14,140
----------------------------------------------------------------------------
INVESTING
Exploration and development expenditures (13,447) (8,926)
Changes in non-cash working capital 11,731 1,304
----------------------------------------------------------------------------
(1,716) (7,622)
----------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,668 14,407
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 16,177 7,634
----------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,845 $ 22,041
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow
Information
Cash interest paid $ 396 $ 490
Cash taxes paid 8,620 3,174
Cash is comprised of cash on hand and
balances with banks 18,845 10,154
Cash equivalents - 11,887
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at March 31, 2010 and December 31, 2009 and for the periods
ended March 31, 2010 and 2009
(Unaudited - Expressed in U.S. Dollars)
1. BASIS OF PRESENTATION
The interim consolidated financial statements include the
accounts of TransGlobe Energy Corporation and its subsidiaries
("TransGlobe" or the "Company"), as at March 31, 2010 and December
31, 2009 and for the three month periods ended March 31, 2010 and
2009, are presented in accordance with Canadian generally accepted
accounting principles ("Canadian GAAP" or "Cdn. GAAP") on the same
basis as the audited consolidated financial statements as at and
for the year ended December 31, 2009 except as outlined in Note 2.
These interim consolidated financial statements do not contain all
the disclosures required for annual financial statements.
Accordingly, these interim consolidated financial statements should
be read in conjunction with the consolidated financial statements
and the notes thereto in TransGlobe's annual report for the
year-ended December 31, 2009. In these interim consolidated
financial statements, unless otherwise indicated, all dollars are
in United States (U.S.) dollars. All references to US$ or to $ are
to United States dollars and references to C$ are to Canadian
dollars.
2. CHANGES IN ACCOUNTING POLICIES
New Accounting Policies
The Company adopted a share appreciation rights plan in March
2010, which is described in Note 7. Under the share appreciation
rights plan, all liabilities must be settled in cash and,
consequently, are classified as liability instruments and measured
at their intrinsic value less any unvested portion. Unvested share
appreciation rights accrue evenly over the vesting period. The
intrinsic value is determined as the difference between the market
value of the Company's common shares and the exercise price of the
share appreciation rights. This obligation is revalued each
reporting period and the change in the obligation is recognized as
stock-based compensation expense (recovery).
New Accounting Standards
a) Business Combinations
In December 2008, the CICA issued Section 1582, Business
Combinations, which will replace CICA Section 1581 of the same
name. Section 1582 establishes principles and requirements of the
acquisition method for business combinations and related
disclosures. This statement applies prospectively to business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after January 2011 with earlier application permitted. The Company
is currently evaluating the impact of this change on its
Consolidated Financial Statements.
b) Non-Controlling Interests
In December 2008, the CICA issued Sections 1601, Consolidated
Financial Statements, and 1602, Non-Controlling Interests. Section
1601 establishes standards for the preparation of consolidated
financial statements. Section 1602 provides guidance on accounting
for a non-controlling interest in a subsidiary in consolidated
financial statements subsequent to a business combination. These
standards are effective on or after the beginning of the first
annual reporting period beginning on or after January 2011 with
earlier application permitted. These standards currently do not
impact the Company as it has full controlling interest of all of
its subsidiaries.
c) International Financial Reporting Standards ("IFRS")
On February 13, 2008, the Canadian Accounting Standards Board
has confirmed that effective for interim and annual financial
statements related to fiscal years beginning on or after January 1,
2011, IFRS will replace Canada's current GAAP for all publicly
accountable profit-oriented enterprises.
The Company has determined that the most significant impact of
IFRS conversion is to property and equipment. IFRS does not
prescribe specific oil and gas accounting guidance other than for
costs associated with the exploration and evaluation phase. The
Company currently follows full cost accounting as prescribed in
Accounting Guideline 16, Oil and Gas Accounting - Full Cost.
Conversion to IFRS may have a significant impact on how the Company
accounts for costs pertaining to oil and gas activities, in
particular those related to the pre-exploration and development
phases. In addition, the level at which impairment tests are
performed and the impairment testing methodology will differ under
IFRS. IFRS conversion will also result in other impacts, some of
which may be significant in nature. The Company is in the process
of evaluating the impact on the Company's Consolidated Financial
Statements.
3. PROPERTY AND EQUIPMENT
The Company capitalized general and administrative costs
relating to exploration and development activities during the three
months ended March 31, 2010 of $0.4 million in Egypt (2009 - $0.8
million) and $0.1 million in Yemen (2009 - $0.1 million).
Unproven property costs in the amount of $12.2 million in Egypt
(2009 - $10.0 million) and $11.7 million in Yemen (2009 - $7.5
million) for the three months ended March 31, 2010 were excluded
from costs subject to depletion and depreciation.
Future development costs for Proved reserves included in the
depletion calculations for the three months ended March 31, 2010
totaled $2.3 million in Egypt (2009 - $2.1 million) and $12.3
million in Yemen (2009 - $11.1 million).
4. GOODWILL
Changes in the carrying amount of the Company's goodwill, arising from
acquisitions, are as follows:
Three Months Ended Year Ended
(000s) March 31, 2010 December 31, 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, beginning of period $ 8,180 $ 8,180
Changes during the period - -
----------------------------------------------------------------------------
Balance, end of period $ 8,180 $ 8,180
----------------------------------------------------------------------------
----------------------------------------------------------------------------
5. LONG-TERM DEBT
As at As at
(000s) March 31, 2010 December 31, 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revolving Credit Agreement $ 50,000 $ 50,000
Unamortized transaction costs (112) (201)
----------------------------------------------------------------------------
49,888 49,799
----------------------------------------------------------------------------
Current portion of long-term debt (net
of unamortized transaction costs) 49,888 49,799
----------------------------------------------------------------------------
$ - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at March 31, 2010, the Company has a $60.0 million Revolving
Credit Agreement of which $50.0 million is drawn. The Revolving
Credit Agreement expires on September 25, 2010 and is secured by a
first floating charge debenture over all assets of the Company, a
general assignment of book debts, security pledge of the Company's
subsidiaries and certain covenants. The Revolving Credit Agreement
bears interest at the Eurodollar Rate plus three percent. During
the three months ended March 31, 2010, the average effective
interest rate was 3.13% (March 31, 2009 - 4.34%).
The future debt payments on long-term debt, as of March 31, 2010, are as
follows:
(000s)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2010 (due September 25, 2010) $ 50,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6. SHARE CAPITAL
Authorized
The Company is authorized to issue an unlimited number of common shares with
no par value.
Three Months Ended Year Ended
March 31, 2010 December 31, 2009
----------------------------------------------------------------------------
(000s) Shares Amount Shares Amount
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, beginning of period 65,399 $ 66,106 59,500 $ 50,532
Share issuance - - 5,798 16,312
Stock options exercised 48 130 101 266
Stock options surrendered for cash
payments - - - (13)
Stock-based compensation on
exercise - 41 - 213
Share issue costs - - - (1,204)
----------------------------------------------------------------------------
Balance, end of period 65,447 $ 66,277 65,399 $ 66,106
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company has received regulatory approval to purchase, from
time to time, as it considers advisable, up to 6,116,905 common
shares under a Normal Course Issuer Bid which commenced September
7, 2009 and will terminate September 6, 2010. During the three
month period ended March 31, 2010, the Company did not repurchase
any common shares. During the year-ended December 31, 2009, the
Company did not repurchase and cancel any common shares.
7. STOCK OPTION PLAN
Stock option plan
The Company adopted a stock option plan in May 2007 (the
"Plan"). The number of Common Shares that may be issued pursuant to
the exercise of options awarded under the Plan and all other
Security Based Compensation Arrangements of the Company is 10% of
the common shares outstanding from time to time. All incentive
stock options granted under the Plan have a per-share exercise
price not less than the trading market value of the common shares
at the date of grant. Effective February 1, 2005, all new grants of
stock options vest one-third on each of the first, second and third
anniversaries of the grant date. Options granted expire five years
after the grant date.
The following table summarizes information about the stock options
outstanding and exercisable at the dates indicated:
Three Months Ended Year Ended
March 31, 2010 December 31, 2009
----------------------------------------------------------------------------
Weighted- Weighted-
Number Average Number Average
of Exercise of Exercise
(000s, except per share amounts) Options Price (C$) Options Price (C$)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Options outstanding, beginning of
period 5,478 4.12 5,600 4.20
Granted 234 4.27 815 3.45
Exercised (48) 2.83 (101) 2.92
Exercised for cash - - (80) 3.26
Forfeited (436) 4.19 (756) 3.91
----------------------------------------------------------------------------
Options outstanding, end of period 5,228 4.12 5,478 4.12
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Options exercisable, end of period 2,242 4.74 2,335 4.72
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Stock-based compensation
Compensation expense of $0.4 million has been recorded in
general and administrative expenses in the Consolidated Statements
of Income (Loss) and Retained Earnings for the three months ended
March 31, 2010 (March 31, 2009 - $0.5 million). The fair value of
all common stock options granted is estimated on the date of grant
using the lattice-based binomial option pricing model. The weighted
average fair value of options granted during 2010 and the
assumptions used in their determination are as follows:
2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted-average fair market value per option (C$) 1.75
Risk free interest rate (%) 2.80
Expected life (years) 5
Expected volatility (%) 51.80
Dividend per share 0.00
Expected forfeiture rate (non-executive employees) (%) 12
Early exercise (Year 1/Year 2/Year 3/Year 4/Year 5) 0%/10%/20%/30%/40%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Share appreciation rights plan
In addition to the Company's stock option plan, the Company also
issues share appreciation rights under the share appreciation
rights plan, which was adopted in March 2010. Share appreciation
rights are similar to stock options except that the holder does not
have the right to purchase the underlying share of the Company.
Units granted under the share appreciation rights plan vest
one-third on each of the first, second and third anniversaries of
the grant date. Share appreciation rights granted expire five years
after the grant date.
Three Months Ended
March 31, 2010
----------------------------
Weighted-
Number Average
of Exercise
(000s, except per share amounts) Units Price (C$)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Continuity of share appreciation rights
Outstanding, beginning of period - -
Granted 60 4.61
Exercised - -
Forfeited - -
----------------------------------------------------------------------------
Outstanding, end of period 60 4.61
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Exercisable, end of period - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at March 31, 2010, all share appreciation rights granted had
an exercise price of C$4.61.
The mark-to-market liability for the share appreciation rights
plan as at March 31, 2010 was included in accounts payable and
accrued liabilities on the Consolidated Balance Sheet.
8. CONTRIBUTED SURPLUS
Three Months Ended Year Ended
(000s) March 31, 2010 December 31, 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contributed surplus, beginning of
period $ 6,691 $ 4,893
Stock-based compensation expense 387 2,011
Transfer to common shares on
exercise of options (41) (213)
----------------------------------------------------------------------------
Contributed surplus, end of period $ 7,037 $ 6,691
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9. ACCUMULATED OTHER COMPREHENSIVE INCOME
The balance of accumulated other comprehensive income consists of the
following:
Three Months Ended Year Ended
(000s) March 31, 2010 December 31, 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated other comprehensive
income, beginning of period $ 10,880 $ 10,880
Other comprehensive income - -
----------------------------------------------------------------------------
Accumulated other comprehensive
income, end of period $ 10,880 $ 10,880
----------------------------------------------------------------------------
----------------------------------------------------------------------------
10. PER SHARE AMOUNTS
In calculating the net income (loss) per share, basic and diluted, the
following weighted-average shares were used:
Three Months Ended
----------------------------------------------------------------------------
(000s) March 31, 2010 March 31, 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted-average number of shares
outstanding 65,432 61,710
Dilutive effect of stock options 1,476 -
----------------------------------------------------------------------------
Weighted-average number of diluted
shares outstanding 66,908 61,710
----------------------------------------------------------------------------
The treasury stock method assumes that the proceeds received
from the exercise of "in-the-money" stock options are used to
repurchase common shares at the average market price. In
calculating the weighted-average number of diluted common shares
outstanding for the three month period ended March 31, 2010, the
Company excluded 2,222,000 options as their exercise price was
greater than the average common share market price in this period.
In calculating the weighted-average number of diluted common shares
outstanding for the three month period ended March 31, 2009, the
Company excluded all stock options outstanding because there was a
net loss in the period.
11. CAPITAL DISCLOSURES
The Company's objectives when managing capital are to ensure the
Company will have the financial capacity, liquidity and flexibility
to fund the ongoing exploration and development of its oil and gas
assets. The Company relies on cash flow to fund its capital
investments. However, due to long lead cycles of some of its
developments and corporate acquisitions, the Company's capital
requirements may exceed its cash flow generated in any one period.
This requires the Company to maintain financial flexibility and
liquidity. The Company sets the amount of capital in proportion to
risk and manages to ensure that the total of the long-term debt is
not greater than two times the Company's funds flow from operations
for the trailing twelve months. For the purposes of measuring the
Company's ability to meet the above-stated criteria, funds flow
from operations is defined as the net income or loss before any
deduction for depletion, depreciation and accretion, amortization
of deferred financing charges, non-cash stock-based compensation,
and non-cash derivative (gain) loss on commodity contracts. Funds
flow from operations is a non-GAAP measure and may not be
comparable to similar measures used by other companies.
The Company defines and computes its capital as follows:
As at As at
(000s) March 31, 2010 December 31, 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Shareholders' equity $ 175,805 $ 163,690
Long-term debt, including the current
portion (net of unamortized transaction
costs) 49,888 49,799
Cash and cash equivalents (18,845) (16,177)
----------------------------------------------------------------------------
Total capital $ 206,848 $ 197,312
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company's debt-to-funds flow ratio is computed as follows:
12 Months Trailing
----------------------------------------------------------------------------
(000s) March 31, 2010 December 31, 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Long-term debt, including the current
portion (net of unamortized transaction
costs) $ 49,888 $ 49,799
----------------------------------------------------------------------------
Cash flow from operating activities $ 33,164 $ 36,799
Changes in non-cash working capital 22,332 8,265
----------------------------------------------------------------------------
Funds flow from operations $ 55,496 $ 45,064
----------------------------------------------------------------------------
Ratio 0.9 1.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company's financial objectives and strategy as described
above have remained substantially unchanged over the last two
completed fiscal years. These objectives and strategy are reviewed
on an annual basis. The Company believes that its ratios are within
reasonable limits, in light of the relative size of the Company and
its capital management objectives.
The Company is also subject to financial covenants in its
revolving credit agreement. The key financial covenants are as
follows:
- Interest coverage ratio of greater than 3.5 to 1.0, calculated
as EBITDAX to interest expense, for the immediately preceding four,
consecutive fiscal quarters. For the purposes of the financial
covenant calculations, EBITDAX shall mean Consolidated Net Income
before interest, income taxes, depreciation, depletion,
amortization, and accretion, unrealized derivative losses on
commodity contracts and stock based compensation expense.
- Indebtedness to EBITDAX is less than 2.0 to 1.0. For the
purposes of the financial covenant calculation, indebtedness shall
mean the balance of the Revolving Credit Facility, letters of
credit and any amounts payable in connection with a realized
derivative loss.
- Current ratio (current assets to current liabilities,
excluding the current portion of long-term debt) of greater than
1.0 to 1.0.
The Company is in compliance with all financial covenants at
March 31, 2010.
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Carrying Values and Estimated Fair Values of Financial Assets
and Liabilities
The Company has classified its cash and cash equivalents as
assets held for trading and its derivative commodity contracts as
financial assets or liabilities held for trading, which are both
measured at fair value with changes being recognized in net income.
Accounts receivable are classified as loans and receivables;
accounts payable and accrued liabilities, and long-term debt are
classified as other liabilities, all of which are measured at
amortized cost.
Carrying value and fair value of financial assets and liabilities are
summarized as follows:
(000s) March 31, 2010
----------------------------------------------------------------------------
Classification Carrying Value Fair Value
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Financial assets held-for-trading $ 18,845 $ 18,845
Loans and receivables 45,815 45,815
Financial liabilities held-for-trading 170 170
Other liabilities 72,471 72,583
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Assets and liabilities at March 31, 2010 that are measured at
fair value are classified into levels reflecting the method used to
make the measurements. Fair values of assets and liabilities
included in Level 1 are determined by reference to quoted prices in
active markets for identical assets and liabilities. Assets and
liabilities in Level 2 include valuations using inputs other than
quoted prices for which all significant inputs are observable,
either directly or indirectly. Level 3 valuations are based on
inputs that are unobservable and significant to the overall fair
value measurement.
The Company's cash and cash equivalents and risk management
contracts have been assessed on the fair value hierarchy described
above. TransGlobe's cash and cash equivalents are classified as
Level 1 and risk management contracts as Level 2. Assessment of the
significance of a particular input to the fair value measurement
requires judgment and may affect the placement within the fair
value hierarchy level.
Credit Risk
Credit risk is the risk of loss if the counter parties do not
fulfill their contractual obligations. The Company's exposure to
credit risk primarily relates to accounts receivable, the majority
of which are in respect of oil operations, and derivative commodity
contracts. The Company generally extends unsecured credit to these
parties and therefore the collection of these amounts may be
affected by changes in economic or other conditions. Management
believes the risk is mitigated by the size and reputation of the
companies to which they extend credit and an insurance program on a
portion of the receivable balance. The Company has not experienced
any material credit loss in the collection of accounts receivable
to date.
Trade and other receivables are analyzed in the table below.
With respect to the trade and other receivables that are not
impaired and past due, there are no indications as of the reporting
date that the debtors will not meet their payment obligations.
(000s)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Trade and other receivables at March 31, 2010
----------------------------------------------------------------------------
Neither impaired nor past due $ 18,043
Impaired (net of valuation allowance) -
Not impaired and past due in the following period:
Within 30 days 7,381
31-60 days 5,200
61-90 days 4,662
Over 90 days 10,529
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In Egypt, the Company sold all of its 2010 production to one
purchaser. In Yemen, the Company sold all of its 2010 Block 32
production to one purchaser and all of its 2010 Block S-1
production to one purchaser. Management considers such transactions
normal for the Company and the international oil industry in which
it operates.
Market Risk
Market risk is the risk or uncertainty arising from possible
market price movements and their impact on the future performance
of a business. The market price movements that the Company is
exposed to include oil prices (commodity price risk), foreign
currency exchange rates and interest rates, all of which could
adversely affect the value of the Company's financial assets,
liabilities and financial results.
a) Commodity Price Risk
The Company's operational results and financial condition are
partially dependent on the commodity prices received for its oil
production. Commodity prices have fluctuated significantly during
recent years.
Any movement in commodity prices would have an effect on the
Company's financial condition. Therefore, the Company has entered
into various financial derivative contracts to manage fluctuations
in commodity prices in the normal course of operations. The
following contracts are outstanding at March 31, 2010:
Dated Brent
Pricing
Period Volume Type Put-Call
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Crude Oil
----------
April 1, 2010-
August 31, 2010 12,000 Bbls/month Financial Collar $60.00-$84.25
April 1, 2010-
August 31, 2010 9,000 Bbls/month Financial Collar $40.00-$80.00
April 1, 2010-
December 31, 2010 10,000 Bbls/month Financial Floor $60.00
April 1, 2010-
December 31, 2010 20,000 Bbls/month Financial Floor $65.00
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The estimated fair value of unrealized commodity contracts is
reported on the Consolidated Balance Sheet, with any change in the
unrealized positions recorded to income. The Company assessed these
instruments on the fair value hierarchy and has classified the
determination of fair value of these instruments as Level 2, as the
fair values of these transactions are based on an approximation of
the amounts that would have been paid to, or received from,
counter-parties to settle the transactions outstanding as at the
Consolidated Balance Sheet date with reference to forward prices
and market values provided by independent sources. The actual
amounts realized may differ from these estimates.
When assessing the potential impact of commodity price changes
on its financial derivative commodity contracts, the Company
believes 10% volatility is a reasonable measure. The effect of a
10% increase in commodity prices on the derivative commodity
contracts would decrease the net income by $0.7 million for the
three months ended March 31, 2010. The effect of a 10% decrease in
commodity prices on the derivative commodity contracts would
increase the net income, for the three months ended March 31, 2010,
by $0.5 million.
b) Foreign Currency Exchange Risk
As the Company's business is conducted primarily in U.S. dollars
and its financial instruments are primarily denominated in U.S.
dollars, the Company's exposure to foreign currency exchange risk
relates to certain cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities denominated in Canadian
dollars. When assessing the potential impact of foreign currency
exchange risk, the Company believes 10% volatility is a reasonable
measure. The Company estimates that a 10% increase or decrease in
the value of the Canadian dollar against the U.S. dollar would have
an insignificant impact on the financial results for the three
months ended March 31, 2010. The Company does not utilize
derivative instruments to manage this risk.
c) Interest Rate Risk
Fluctuations in interest rates could result in a significant
change in the amount the Company pays to service
variable-interest,
U.S.-dollar-denominated debt. No derivative contracts were
entered into during 2010 to mitigate this risk. When assessing
interest rate risk applicable to the Company's variable-interest,
U.S.-dollar-denominated debt the Company believes 1% volatility is
a reasonable measure. The effect of interest rates increasing by 1%
would decrease the Company's net income by $0.1 million for the
three months ended March 31, 2010. The effect of interest rates
decreasing by 1% would increase the Company's net income $0.1
million for the three months ended March 31, 2010.
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to
meet its financial obligations as they become due. 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.
The Company actively maintains credit facilities to ensure it
has sufficient available funds to meet current and foreseeable
financial requirements at a reasonable cost. The following are the
contractual maturities of financial liabilities at March 31,
2010:
(000s) Payment Due by Period(1)(2)
----------------------------------------------------------------------------
Recognized More
in Financial Contractual Less than 1-3 4-5 than
Statements Cash Flows 1 year years years 5 years
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accounts
payable and
accrued
liabilities Yes-Liability $ 22,583 $ 22,583 $ - $ - $ -
Long-term
debt:
Revolving Yes-Liability
Credit
Agreement 50,000 50,000 - - -
Derivative
commodity
contracts Yes-Liability 170 170 - - -
Office and
equipment
leases No 1,353 587 766 - -
Minimum work
commitments
(3) No 9,781 4,828 4,953 - -
----------------------------------------------------------------------------
Total $ 83,887 $ 78,168 $ 5,719 $ - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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, 2010 exchange rates.
(3) Minimum work commitments include contracts awarded for capital projects
and those commitments related to exploration and drilling obligations.
The Company actively monitors its liquidity to ensure that its
cash flows, credit facilities and working capital adequately to
support these financial liabilities, in addition to the Company's
capital programs.
The existing banking arrangement at March 31, 2010 consists of a
Revolving Credit Facility of $60.0 million of which $50.0 million
is drawn. The Company is in discussion on a new bank line and
expects to enter a new facility in the second quarter of 2010.
The table above shows cash outflow for financial derivative
instruments based on forward-curve prices for Dated Brent oil of
$78.76/Bbl at March 31, 2010. Amounts due may change significantly
due to fluctuations in the price of Dated Brent oil.
13. COMMITMENTS AND CONTINGENCIES
The Company is subject to certain office and equipment leases
(Note 12).
TransGlobe has entered into a farm-out agreement and has
committed to pay 100% of three exploration wells to a maximum of
$9.0 million to earn a 50% working interest in the East Ghazalat
Concession in the Western Desert of Egypt, subject to the approval
of the Egyptian Government. The Company has completed drilling two
of the three exploration wells during this quarter and the third
exploration well was drilled in April 2010.
Pursuant to the Concession agreement for Nuqra Block 1 in Egypt,
the Contractor (Joint Venture Partners) has a minimum financial
commitment of $5.0 million ($4.4 million to TransGlobe) and a work
commitment for two exploration wells in the second exploration
extension. The second, 36-month extension period commenced on July
18, 2009. The Contractor has met the second extension financial
commitment of $5.0 million in the prior periods. At the request of
the Government, the Company provided a $4.0 million production
guarantee from the West Gharib Concession prior to entering the
second extension period.
Pursuant to the PSA for Block 72 in Yemen, the Contractor (Joint
Venture Partners) has a minimum financial commitment of $2.0
million ($0.7 million to TransGlobe) to drill one exploration well
during the second exploration period. The second, 30-month
exploration period commenced on January 12, 2009.
Pursuant to the PSA for Block 75 in Yemen, the Contractor (Joint
Venture Partners) has a remaining minimum financial commitment of
$3.0 million ($0.8 million to TransGlobe) for 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 August 18, 2008 asset purchase agreement for a
25% financial interest in eight development leases on the West
Gharib Concession in Egypt, the Company has committed to paying the
vendor a success fee to a maximum of $7.0 million if incremental
reserve thresholds are reached in the East Hoshia (up to $5.0
million) and South Rahmi (up to $2.0 million) development leases,
to be evaluated annually. As at December 31, 2009, no additional
fees are due in 2010.
In the normal course of its operations, the Company may be
subject to litigations and claims. Although it is not possible to
estimate the extent of potential costs, if any, management believes
that the ultimate resolution of such contingencies would not have a
material adverse impact on the results of operations, financial
position or liquidity of the Company.
14. SEGMENTED INFORMATION
Egypt Yemen Total
----------------------------------------------------------------------------
Three Months Ended March 31
(000s) 2010 2009 2010 2009 2010 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue
Oil sales,
net of
royalties and
other $ 26,087 $ 10,019 $ 11,317 $ 9,041 $ 37,404 $ 19,060
Segmented
expenses
Operating
expenses 3,642 2,787 2,145 2,419 5,787 5,206
Depletion and
depreciation 5,278 9,473 2,014 2,501 7,292 11,974
Income taxes 6,313 2,196 2,307 978 8,620 3,174
----------------------------------------------------------------------------
Total
segmented
expenses 15,233 14,456 6,466 5,898 21,699 20,354
----------------------------------------------------------------------------
Segmented
income (loss) $ 10,854 $ (4,437) $ 4,851 $ 3,143 15,705 (1,294)
----------------------------------------------------------------------------
Non-segmented
expenses
Derivative
loss on
commodity
contracts
(Note 12a) 22 200
General and
administrative 3,385 2,506
Interest on
long-term
debt 485 607
Depreciation 51 43
Foreign
exchange loss 164 304
----------------------------------------------------------------------------
Total
non-segmented
expenses 4,107 3,660
----------------------------------------------------------------------------
Net income
(loss) $ 11,598 $ (4,954)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Capital
expenditures
Exploration
and
development $ 12,704 $ 7,309 $ 689 $ 1,545 $ 13,393 $ 8,854
Corporate 54 72
----------------------------------------------------------------------------
Total capital
expenditures $ 13,447 $ 8,926
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Mar. 31 Dec. 31 Mar. 31 Dec. 31 Mar. 31 Dec. 31
2010 2009 2010 2009 2010 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Property and
equipment $ 126,505 $ 119,079 $ 46,161 $ 47,486 $ 172,666 $ 166,565
Goodwill 8,180 8,180 - - 8,180 8,180
Other 52,576 41,347 12,441 5,877 65,017 47,224
----------------------------------------------------------------------------
Segmented
assets $ 187,261 $ 168,606 $ 58,602 $ 53,363 245,863 221,969
Non-segmented
assets 2,583 6,913
----------------------------------------------------------------------------
Total assets $ 248,446 $ 228,882
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cautionary Statement to Investors:
This news release 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. Such
statements relate to possible future events. All statements other
than statements of historical fact may be forward-looking
statements. Forward-looking statements are often, but not always,
identified by the use of words such as "seek", "anticipate",
"plan", "continue", "estimate", "expect", "may", "will", "project",
"predict", "potential", "targeting", "intend", "could", "might",
"should", "believe" and similar expressions. These statements
involve known and unknown risks, uncertainties and other factors
that may cause actual results or events to differ materially from
those anticipated in such forward-looking statements. Although
TransGlobe's forward-looking statements are based on the beliefs,
expectations, opinions and assumptions of the Company's management
on the date the statements are made, such statements are inherently
uncertain and provide no guarantee of future performance. Actual
results may differ materially from TransGlobe's expectations as
reflected in such forward-looking statements as a result of various
factors, many of which are beyond the control of the Company. These
factors include, but are not limited to, unforeseen changes in the
rate of production from TransGlobe's oil and gas properties,
changes in price of crude oil and natural gas, adverse technical
factors associated with exploration, development, production or
transportation of TransGlobe's crude oil and natural gas reserves,
changes or disruptions in the political or fiscal regimes in
TransGlobe's areas of activity, changes in tax, energy or other
laws or regulations, changes in significant capital expenditures,
delays or disruptions in production due to shortages of skilled
manpower, equipment or materials, economic fluctuations, and other
factors beyond the Company's control. TransGlobe does not assume
any obligation to update forward-looking statements if
circumstances or management's beliefs, expectations or opinions
should change, other than as required by law, and investors should
not attribute undue certainty to, or place undue reliance on, any
forward-looking statements. Please consult TransGlobe's public
filings at www.sedar.com and www.sec.gov/edgar.shtml for further,
more detailed information concerning these matters.
Contacts: TransGlobe Energy Corporation Scott Koyich Investor
Relations 403.264.9888 investor.relations@trans-globe.com
www.trans-globe.com
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