(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long TGL.TO)
Transglobe Just Got Cheaper: Access to South Alamein Granted
I have followed Transglobe Energy (TGL.TO or TGA in the U.S.) for years, but have never owned it until recently. The company's operations are in Egypt, where they have operated since 2004 (note that Transglobe used to have assets in Yemen, but the company exited Yemen in 2015 to focus entirely on its Egyptian land base). In a nutshell, TGL produces around 11,000-12,000 bopd and has a market cap of CDN$185 million at its current trading price of CDN$2.55. Based on TGL's Q2 2016 financials, the company has net positive working capital of about CDN$85 million (net of its convertible debentures), which gives it an enterprise value of about CDN$100 million.
As of December 31, 2015 TGL's 1P (proven) reserves had an after-tax NPV10 of ~CDN$130 million, while its 2P reserves (i.e., proven plus probable) clocked in at ~CDN$260 million. This means that TGL currently trades at less than the value of its year-end 2015 1P reserves and at well under half of the value of its 2P reserves. The leverage in TGL's production base is pretty clear from its corporate slide deck as shown in the below figure.
I'll be honest, I didn't know what South Alamein was a week ago... but when the company announced that it had been granted access to its 100%-owned South Alamein concession last week, I had a quick look around to see what I could find in terms of details on the asset. As it turns out, TGL acquired the South Alamein asset back in 2012, but has not been allowed to operate there since due to military access restrictions. It would seem now that TGL has gained access to South Alamein and management stated that it "may be possible" to drill there by year-end (the words "appraise and develop" were used in the news release). The field to be "appraised and developed" is the Boraq field, where the Boraq-2x discovery well previously tested ~1,700 bopd from two zones. The entire South Alamein concession is covered by 3D seismic and the company has identified some 20 additional prospects on the block. There are 20 months remaining on the final exploration phase on the block, so TGL has some time to move other prospects forward as well.
For me, the South Alamein news was one of those news events where just a little bit of digging revealed what appears to be an overlooked gem. I have copied a slide from an outdated TGL presentation going back to 2012, but I suspect that not much has changed since then. In 2012, TGL had mapped 13 "development" locations on 160-acre spacing at the Boraq discovery and cited "project potential" of 7,000-10,000 bopd.
Any time I see a company start talking about an asset capable of adding 60-80% production upside through what appears to be a lower-risk (potential) development operation on an existing discovery, I tend to take notice. There's a lot of work to do before that Boraq production wedge is in the bag, but in light of TGL's already discounted valuation I decided to put on a position to see where this story ends up. I'll be digging into TGL further over the coming months while watching the company's execution at South Alamein and elsewhere. Sometimes I find it best not to overthink things too much when I'm bottom-fishing in the energy sector these days... in the meantime, my gut says that TGL is a good bet.