(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)
This morning before market open Transglobe Energy (TGL.TO, last at C$1.92) announced test results from the Boraq-5 appraisal well. In what comes as quite a surprise to me, Boraq-5 is a duster. Two zones were tested in the well, with one flowing water and the other too tight to flow. This is particularly surprising in light of the well's proximity to the proven discovery at Boraq-2 only about a kilometre away. It just goes to show that there's no such thing as a sure thing, even in the appraisal stage. Having said that, I would have bet 10 times out of 10 that the Boraq-5 well would be a success and would have set the stage for the first development at the South Alamein concession. There are multiple additional exploration targets at South Alamein and the company is evaluating what the 2018 program looks like for this block. As I've said before, I don't think anything was priced into the stock for South Alamein, but it doesn't mean the market can't sell the stock off on the removal of a potential catalyst. South Alamein is not dead, but it's certainly taken a punch in the gut.
Based on the figures in the company's latest presentation, Transglobe trades with an enterprise value of roughly US$160 million, which is a substantial discount to its 1P (proven) after-tax NPV10 of US$213 million and its 2P (proven plus probable) after tax NPV10 of US$338 million based on its year-end 2016 reserves. It's worth noting that no reserves or value were attributed to South Alamein in Transglobe's year-end 2016 reserves.
Transglobe is scheduled to report its quarterly results on Thursday November 9th, at which time I would expect additional information from the ongoing testing of the company's recent Cardium oil wells at Harmattan in Canada. I'd also expect an update on the 2018 exploration plans at South Ghazalat and NW Sitra in Egypt. Transglobe's Egyptian exploration portfolio continues to offer very attractive upside optionality, but in the near term the South Alamein disappointment is, well, a disappointment. From a valuation perspective, I think TGL remains attractive and it offers good leverage to Brent pricing, which has likely helped its share price performance lately. I'm not giving up on Transglobe, but given that I thought South Alamein would be the company's next step change of production growth, I am reducing my position until I see a discovery capable of bringing that "step change" or a suitably sexy exploration target that can conjure the animal spirits again.