(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)
Today Transglobe Energy (TGL.TO, last at C$2.00) announced a third-quarter operational update that gave a few clues as to the company's next leg of growth. With the concessions in the Eastern Desert more or less delineated (look for low-risk development wells starting in Q4), Transglobe is starting to get active on its next development area in the Western Desert at South Alamein. The historic Boraq-2 discovery was opened up and flowed from one of two zones at a rate of 1,140 barrels per day of 35-degree light oil over a short test. The purpose of the test was to confirm the historic results and ". . . to re-establish oil production prior to filing a development plan for the Boraq area." Testing on the recently-drilled Boraq-5 where two zones have log-indicated oil pay is set to start soon and be completed by mid-November. Should test results support the decision, Transglobe has indicated that South Alamein can be brought on-stream relatively quickly once a 20-year development lease has been granted. Nothing was said about the South Ghazalat and NW Sitra exploration concessions (also in the Western Desert), but prior guidance has been to look for exploration wells on those concessions in 2018... and those could be some sizeable targets.
As I've said before, I think that very little is priced into the stock for South Alamein development or for any of the exploration upside at South Ghazalat and NW Sitra concessions. South Alamein also has the potential to yield additional exploration discoveries on a number of mapped structures around the Boraq discovery. The real kicker in a South Alamein development scenario is the $80 million cost pool that Transglobe has on that concession. That cost pool would further enhance what I believe will be a very robust economic case for Boraq development. The market will surely look forward to Boraq-5 test results (mid-November) and any indication of the timing of any development program, so stay tuned.
In Canada, the company completed three new horizontal wells with more than double the stages and proppant used by the prior owner. Translgobe says that the initial rates from those wells are "very encouraging", but the company is waiting for 30 and 60-day rates before saying much more about the results. The theory is that new drilling and completion methods have the potential to increase the production rates and ultimate recoveries on the Harmattan asset. With well costs coming in at CDN$2.2 million per well, relative to initial estimates of $2.7 million, it would seem that Transglobe is on track to make believers of those who doubted the acquisition late in 2016. Results from the new Harmattan wells should be out sometime in Q4 2017.
With both WTI and Brent oil prices on the move lately, Transglobe is well positioned not only to ride the wave of any commodity price move but also to deliver value creation through the drill bit in both Egypt and Canada. TGL's stock is up over 50% since its September gift-like lows, but at $2, I still think the company is grossly undervalued and I look forward to additional updates over the next couple of months which should set the stage for 2018 and beyond. Today's update isn't an Earth-mover, but it should serve as a reminder that Transglobe's quiet nature doesn't mean that there isn't a lot more to the story than the valuation would indicate.