Egypt has been a tough place to operate for oil and gas companies in recent years, especially western ones.
Markets are also wary given the political upheaval, but Toronto and NASDAQ-listed oil producer TransGlobe Energy Corporation (NASDAQ:TGA TSX:TGL) reckons the share price treatment it has received is just too harsh.
A lot of good financial news has come out of Egypt in recent months, says Ross Clarkson, president and chief executive, but markets, especially in North America are not interested.
AIM listing a possibility
Indeed, the combination of ‘energy, small cap and international’ is so out of favour with North American investors that the company is considering a listing on London’s AIM market.
The welcome in the UK and Africa has been much more encouraging, he says, with genuine surprise about how much oil TransGlobe is producing and that it is getting paid in full.
And those are two of the key points the market is missing, says Clarkson.
Payment on time
First, the company produces a lot of oil. In the quarter to June, output was close to 16,600 barrels per day of which 13,800 came from Egypt and 2,600 from Canada.
Second is that it gets paid on time.
Unlike nearly all other western companies that operate in Egypt, and due to an inability to refine its heavyish oil in-country, TransGlobe exports almost all it produces except for what it chooses to sell to the Egyptian state oil company (EGPC) for local currency purposes.
TransGlobe works on standard thirty day payment terms for export shipments.
For example, payment of US$18.5mln for a one tanker of oil lifted in June was received in July.
The group has carried out more than 8 cargo liftings over the past 30 months and plans two more in 2017, while it is also in talks with EGPC about increasing the lift frequency.
A US$75mln pre-paid marketing deal has been set up with oil trading group Mercuria to smooth working capital, while a C$30mln reserve based lending facility has also been set up for its Canadian operations.
Cashflow multiple a disconnect says CEO
TransGlobe estimates that at a price of US$50 per barrel, it can generate annual cashflow of approximately US$40mln.
That compares to a current market value of US$84mln at US$1.12.
Clarkson argues that a cashflow multiple of 2.1 times (84/40) leaves the company very undervalued, when majors that operate in the region can sell for 4- 6 times their cash generation.
Rapid returns in Egypt
TransGlobe knows Egypt, and the Middle East, well. It has been producing in Egypt, and before that the Yemen, for 20 years.
Clarkson makes no bones that a big chunk of that cash it is generating will be re-invested in the country to develop what he says are fantastic oil opportunities.
At present, production comes from three fields in the country: North West Gharib, West Gharib and West Bakr.
Clarkson has plans to drill "a number of wells" on NW Gharib, which is in the Eastern Desert, and also at South Alamein on its Western Desert licences.
Why? Because Clarkson says prospects are even better there than the assets currently in production.
NW Gharib is phenomenal, he says. “Wells come on at 700 barrels per day with incredible rates of return and quick payouts.”
South Alamein, too, saw the original exploration well test at 1600 barrels per day of light crude.
Testing on the second well is expected to take place in about two weeks. If things go as hoped, the Company could be trucking up to 2,000 barrels per day early in 2018, he says.
Clarkson points out that with low drill costs, US$40mln of cashflow gives scope for a lot of wells and the capital budget this year is between US$40-45mln.
Canada another option
That includes Canada, where, at the end of 2016, TransGlobe took advantage of what it saw as an overlooked asset in the Cardium formation in Western CA.
Traditionally a steady producer, no new wells had been drilled for three years due to the poor financial position of the previous owner.
TransGlobe is planning three wells this year and sees scope "materially to increase" current production of around 2,600 barrels equivalent including gas.
Western Canada will be a standalone operation funded out of its own cashflow, but, like Egypt, it will be relatively straightforward and much more economic now with the reduction of capital costs and advances in drilling and completion techniques.
“These are nice assets that had been missed. The owner was in trouble so had to sell it. It’s all conventional, fairly cheap drilling. You just tie it in and pull up a truck.”
Second quarter results to June included a big write-down on NW Gharib from the heady days when oil was US$108 per barrel, which pushed the group into a loss of US$55.6mln though there was an underlying profit of US$4.6mln.
That may help explain why TransGlobe is worth US$84mln or half its value a year ago though Clarkson isn’t buying it.
He says he is mystified by the market’s treatment, especially as TransGlobe has not issued any new shares since 2011. His emphasis on cashflow suggests he does not want to do so now.
Much depends on Egypt, but investment is returning and Clarkson believes developments by groups such as BP and ENI offshore are set to transform its energy sector.
If he’s right, a major re-rating for TransGlobe may be on the horizon.