TransGlobe Energy Corporation Announces 2007 Year-End and Fourth Quarter Results
TransGlobe Energy Corporation (TSX: TGL) (NASDAQ: TGA) (“TransGlobe” or the “Company”) is pleased to announce its financial and operating results for the three and twelve months ended December 31, 2007. All dollar values are expressed in United States dollars unless otherwise stated. The calculations of barrels of oil equivalent (“Boe”) are based on a conversion rate of six thousand cubic feet (“Mcf”) of natural gas to one barrel (“Bbl”) of crude oil. Boes 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.
HIGHLIGHTS
– Cash flow for the year totalled $52 million compared with $47 million in 2006;
– In the fourth quarter of 2007, a loss of $0.7 million was recorded due to unrealized hedging losses totalling $7.1 million;
– Production in the fourth quarter averaged 6,837 Boepd, an increase of 25% over the prior-year reporting period;
– Production from the West Gharib leases in the fourth quarter of 2007 was 1,594 Bopd ;
– TransGlobe began trading on the NASDAQ Global Select Market under the symbol TGA effective January 17, 2008.
CORPORATE SUMMARY
Quarter-over-quarter, TransGlobe’s cash flow from operations grew 33%, a significant increase that resulted mainly from higher production volumes and increased oil prices. The dated Brent price per barrel of crude averaged $89.03 in the fourth quarter of 2007 and was $57.40 in the fourth quarter of 2006.
The Company recorded a loss of $0.7 million in the fourth quarter of 2007. This loss, due to hedged prices being lower than market prices at the end of the reporting period, is a non-cash event. Without the hedging losses totalling $7.1 million in the fourth quarter, the Company would have recorded earnings per share of $0.10.
We are very pleased to report significant production increases for the fourth quarter of 2007 compared with the fourth quarter of 2006. Production grew by 25%, averaging 6,837 Boepd. This production increase is a result of a number of successful wells drilled throughout the year and the September 2007 acquisition of two private companies with interests in the West Gharib concession in Egypt.
With the opening of the markets on January 17, 2008, TransGlobe’s trading switched from the American Stock Exchange to the NASDAQ Global Select Market (the “NASDAQ”), which is its highest-tiered trading platform. The decision to move to the NASDAQ was made to obtain greater visibility and liquidity for the Company following recent significant acquisitions and production increases in the third quarter.
FINANCIAL AND OPERATING UPDATE (000s, except-per share, price, volume amounts and % change) Three Months Ended Dec. 31 Year Ended Dec. 31 —————————————————– Financial 2007 2006 Change 2007 2006 Change —————————————————————————- Oil and gas revenue 47,699 27,032 76% 136,709 109,190 25% Oil and gas revenue, net of royalties 29,343 17,647 66% 87,911 70,097 25% Operating expense 5,326 3,719 43% 15,268 11,107 37% General and administrative expense 2,762 1,390 99% 6,743 4,674 44% Depletion, depreciation and accretion expense 8,623 5,370 61% 31,172 18,941 65% Income taxes 5,292 2,573 106% 12,675 9,392 35% Cash flow from operations(1) 13,944 10,448 33% 52,141 46,763 12% Basic per share 0.23 0.18 0.87 0.80 Diluted per share 0.23 0.17 0.86 0.77 Net income (719) 4,726 (115)% 12,802 26,195 (51)% Basic per share (0.02) 0.08 0.21 0.45 Diluted per share (0.01) 0.08 0.21 0.43 Capital expenditures 10,546 15,717 (33)% 37,015 51,555 (28)% Corporate acquisition – – 68,001 – Working capital 5,494 4,361 26% 5,494 4,361 26% Long-term debt 51,958 – 51,958 – Common shares outstanding Basic (weighted average) 59,590 58,769 1% 59,595 58,663 2% Diluted (weighted average) 60,488 60,524 0% 60,525 60,562 0% Total Assets 204,219 116,473 75% 204,219 116,473 75% Reserves (MMBoe) —————————————————————————- Total Proved 11.9 9.3 28% 11.9 9.3 28% Total Proved plus Probable 16.4 11.7 40% 16.4 11.7 40% Production and Sales Volumes —————————————————————————- Total production (Boepd) (6:1)(2) 6,837 5,475 25% 5,651 5,093 11% Total sales (Boepd) (6:1)(2) 6,837 5,313 29% 5,692 5,077 12% Oil and liquids (Bopd) 5,711 4,617 24% 4,660 4,377 8% Average price ($/Bbl) 82.69 57.40 44% 71.30 62.37 11% Gas (Mcfpd) 6,756 4,176 62% 6,193 4,204 47% Average price ($/Mcf) 6.71 6.85 (2)% 6.64 6.18 12% Operating expense ($/Boe) 8.47 7.61 11% 7.35 5.99 23% —————————————————————————- —————————————————————————- (1) Cash flow from operations is a non-GAAP measure that represents cash generated from operating activities before changes in non-cash working capital. (2) The differences in production and sales volumes result from inventory changes. A conference call and web cast to discuss the results will be held on March 10, 2008: Time: 2:30 p.m. Mountain Time (4:30 p.m. Eastern Time) Dial-in: 416-641-6134 or toll free at 1-866-226-1798 Web cast: http://events.onlinebroadcasting.com/transglobe/031008/index.php
Shortly after the conclusion of the call, a replay will be available by dialing 416-695-5800 or toll free at 1-800-408-3053. The pass code is 3252590#. The replay will expire at midnight (Eastern Time) on March 10, 2008. After March 10, 2008, a copy of the call can be accessed through a link on the Company’s Web site at www.trans-globe.com.
TransGlobe’s annual report for 2007, including the full Management Discussion and Analysis, financial statements and notes will be available on SEDAR and EDGAR before March 31, 2008.
Our Annual and Special Meeting of Shareholders will be held on Wednesday, May 7, 2008 at the Calgary Petroleum Club, Viking Room, 319 – 5th Avenue SW, Calgary, Alberta, commencing at 3:00 p.m.
FORWARD-LOOKING STATEMENTS
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, 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
NON-GAAP MEASURES
This document contains the term “cash flow from operations”, which should not be considered an alternative to, or more meaningful than, “cash flow from operation activities” as determined in accordance with Generally Accepted Accounting Principles (“GAAP”). Cash flow from operations is a non-GAAP measure that represents cash generated from operating activities before changes in non-cash working capital. We consider this a key measure as it demonstrates our ability to generate the cash flow necessary to fund future growth through capital investment. Cash flow from operations may not be comparable to similar measures used by other companies. Net operating income is a non-GAAP measure that represents revenue net of royalties, operating expenses and current income taxes (paid through production sharing). Management believes that net operating income 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. Net operating income may not be comparable to similar measures used by other companies.
OPERATIONS UPDATE
ARAB REPUBLIC OF EGYPT (“Egypt”)
West Gharib (100% working interest, TransGlobe operated)
Acquisitions
On September 25, 2007, TransGlobe Petroleum International Inc.(“TGPI”), a wholly-owned subsidiary of TransGlobe Energy Corporation, acquired all of the shares of Dublin International Petroleum (Egypt) Limited (“Dublin”) and Drucker Petroleum Inc. (“Drucker”) for US$59.0 million, plus working capital adjustments, as at July 1, 2007. Dublin and Drucker together hold a 70% working interest in the West Gharib Production Sharing Concession (“PSC”). TransGlobe assumed operatorship of the West Gharib Concession Agreement on September 25, 2007.
The West Gharib PSC is located onshore in the western Gulf of Suez rift basin of Egypt. Major oil and gas discoveries have been made in this prolific basin. To date, eight billion barrels of oil and five trillion cubic feet of gas have been discovered. The eight approved West Gharib development leases encompass 178 square kilometres (approximately 44,059 acres) and are valid for 20 years. One additional development lease at East Hoshia was subsequently approved by the Egyptian Petroleum Minister on January 31, 2008. Eight of the nine development leases (excluding the Hana development lease) are encumbered with a 25% financial interest through an investment agreement between Dublin and a private company. The 25% financial interest is non-voting but otherwise is treated as a 25% participating interest partner.
On February 5, 2008, TGPI acquired all of the shares of GHP Exploration (West Gharib) Ltd. (“GHP”) for $40.2 million, plus working capital adjustments, as at September 30, 2007. GHP holds a 30% working interest in the West Gharib PSC.
With the acquisition of GHP, the Company holds a 100% working interest in the West Gharib PSC, with an effective working interest of 100% in the Hana development lease and an effective working interest of 75% in the eight non-Hana development leases.
Operations and Exploration
During the fourth quarter, the Company consolidated the TransGlobe Egypt and Dublin offices, hired Mr. Albert Gress as Country Manager in Egypt and expanded the Calgary head office technical team to focus on the West Gharib concession. Two wells were drilled during the fourth quarter resulting in a multizone oil well in the Hana lease and an exploration dry hole on the Hoshia lease. A new development oil well was drilled in the Hana lease subsequent to year end. The two new wells at Hana were placed on production in late February, increasing production by approximately 500 Bopd to TransGlobe. A development/appraisal well is currently drilling on the Hana field to assess a new zone.
The concession has two drilling rigs under long-term contracts. The larger, 1,500 hp rig has the depth capacity to drill all of the exploration and development prospects on the concession. TransGlobe plans to utilize this rig to drill continuously at a pace of eight to 12 wells per year, depending upon the depths drilled. The second, smaller drilling rig is capable of drilling shallow wells (up to 4,000 feet) and can be utilized when appropriate. The smaller rig is currently working for a non-owned concession on a farm-out basis, and will be available as required in 2008. The Company is finalizing a multi-year contract for a third drilling rig to accelerate the exploration and development program for the West Gharib area. Assuming the third rig commences operations in July 2008, 15 to 18 wells could be drilled in 2008 on the West Gharib leases.
Production
Production from West Gharib averaged 2,932 Bopd (1,594 Bopd to TransGlobe) during the fourth quarter of 2007, consistent with the expected 1,600 Bopd to TransGlobe at the time of the initial purchase of Dublin and Drucker. Production from West Gharib averaged 2,895 Bopd (1,636 Bopd to TransGlobe) in January and approximately 3,000 Bopd (2,550 Bopd to TransGlobe) in February with the acquisition of GHP’s 30% interest on February 5, 2008.
With the addition of the two new wells at Hana, it is expected that production will average approximately 3,400 Bopd (2,900 Bopd to TransGlobe) during March. This represents a 16% production increase in gross field production since the acquisition of the West Gharib assets in September 2007.
Quarterly West Gharib Production (Bopd) 2007 —————————————————————————- Q-4 Q-3(1) —————————————————————————- —————————————————————————- Gross field production rate 2,932 218 TransGlobe working interest 1,594 118 TransGlobe net (after royalties) 971 73 TransGlobe net (after royalties and tax)(2) 714 51 —————————————————————————- —————————————————————————- (1) Production presented represents six days’ production averaged over the quarter. (2) Under the terms of the West Gharib CSA, royalties and taxes are paid out of the government’s share of production sharing oil.
Nuqra Block 1 (50% working interest, Operator)
Operations and Exploration
The successful identification of a 460-meter (1,500 foot) interval of mature source rocks in the shallower Cretaceous section of the Narmer #1 exploration well and the discovery of oil on a non-owned block by Dana Gas in the Cretaceous section of Al Baraka #1 on the west side of the Nile has encouraged the Company to continue with additional exploration drilling on the Nuqra Block.
The existing seismic data was remapped and several Cretaceous targets were identified on the Nuqra Block for a future drilling program. Currently, the Company is discussing rig-sharing possibilities with the adjacent operator to facilitate a potential 2008 drilling program. TransGlobe has significantly increased its operating presence in Egypt with the acquisition of the West Gharib concession which should facilitate cost-effective exploration in the Nuqra Block.
REPUBLIC OF YEMEN (“Yemen”)
YEMEN EAST – Masila Basin
Block 32 (13.81% working interest)
Operations and Exploration
Three wells were drilled during the fourth quarter resulting in a producing oil well at Godah and two exploration dry holes. The Godah development well was completed as a Qishn oil producer and placed on production at the end of December 2007 at an initial rate of approximately 750 Bopd.
Production
Production from Block 32 averaged 7,582 Bopd (1,047 Bopd to TransGlobe) during the fourth quarter of 2007. The Godah field contributed 2,215 Bopd during the quarter, with the balance coming from the Tasour field (5,367 Bopd). Production from Block 32 averaged approximately 7,475 Bopd (1,032 Bopd to TransGlobe) in January and February of 2008.
A six-inch gas pipeline connecting the Godah production facility to the Tasour central production facility (“CPF”) was constructed to supply associated gas production from the Godah pool to the Tasour CPF for fuel gas. It is expected that up to 60% of diesel being consumed for power generation can be replaced with natural gas, resulting in lower operating costs. The gas project is expected to be operational in the second quarter of 2008.
Quarterly 2007 Block 32 Production (Bopd) —————————————————————————- Q-4 Q-3 Q-2 Q-1 —————————————————————————- —————————————————————————- Gross production rate 7,582 8,913 8,488 9,842 TransGlobe working interest 1,047 1,231 1,172 1,359 TransGlobe net (after royalties) 620 845 900 983 TransGlobe net (after royalties and tax)(1) 478 722 819 867 —————————————————————————- —————————————————————————- (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 (33% working interest)
Operations and Exploration
A seismic acquisition program consisting of 410 km2 of 3-D and 98 km of 2-D seismic commenced in the fourth quarter of 2007. The acquisition program is expected to be completed by the end of the first quarter of 2008. An exploration well is expected to commence drilling in the second half of 2008 following the interpretation of the new seismic data. Two firm exploration wells are planned for 2008, plus one contingent well. The first exploration phase of Block 72 was extended 12 months to January 2009.
Block 84 (33% working interest)
Operations and Exploration
In December 2006, the Ministry of Oil and Minerals (“MOM”) selected the Joint Venture group comprised of DNO ASA (operator at 34%), TG Holdings Yemen Inc. (33%) and Ansan Wikfs (Hadramaut) Limited (33%) as the successful bidder for Block 84 in the Third International Bid Round for Exploration and Production of Hydrocarbons. TG Holdings Yemen Inc. is a wholly-owned subsidiary of TransGlobe Energy Corporation. The Production Sharing Agreement is proceeding through the government approval and parliamentary ratification process, which is expected to be completed in 2008. Block 84 encompasses 731 km2 (approximately 183,000 acres) and is located in the Masila Basin adjacent to the Nexen Masila Block where more than one billion barrels of oil have been discovered. The Block 84 Joint Venture group plans to carry out a 400 km2 3-D seismic acquisition program and drill four exploration wells during the first exploration period of 42 months.
YEMEN WEST – Marib Basin
Block S-1 (25% working interest)
Operations and Exploration
Gas injection has commenced in the western portion of the field to improve production performance and increase recoverable reserves. It has been proposed to the Ministry of Oil and Minerals (“MOM”) that natural gas from the An Naeem #1 well be used to augment this injection. The Block S-1 Joint Venture group is also considering possibilities for a gas sales agreement utilizing known deposits of gas on S-1. At present, TransGlobe has not booked the significant gas reserves associated with the An Naeem discovery. An approved gas development plan is required to proceed with recognizing the reserves and proceed with development.
The operator is preparing tenders to support additional drilling and work-over/completion activities in Block S-1. The Joint Venture group approved a 2008 budget to work over and test existing wells at Osaylan, convert several vertical An Nagyah oil wells to short-radius horizontal producers, and drill several infill wells. The work-over program could commence in the second or third quarter of 2008 depending upon the work-over-rig availability. Drilling could commence in the third or fourth quarter of 2008, depending upon the availability of a drilling rig.
A combined 400 km2 3-D seismic program is planned for early 2008 to define additional exploration drilling locations on the northwest portion of Block S-1 and the north portion of Block 75. The commencement of the seismic program is contingent upon the approval of the Block 75 PSA, which is currently before parliament.
Production
Production from Block S-1 averaged 10,767 Bopd (2,692 Bopd to TransGlobe) during the fourth quarter of 2007, representing an 8% increase from the third quarter which was impacted by scheduled and unscheduled plant shutdowns at the An Nagyah CPF. The new expanded CPF at An Nagyah became fully operational in the fourth quarter and is now capable of processing 20,000+ Bpd of oil production and associated gas production. The average production during January and February was 11,117 Bopd (2,779 Bopd to TransGlobe).
Quarterly 2007 Block S-1 Production (Bopd) —————————————————————————- Q-4 Q-3 Q-2 Q-1 —————————————————————————- —————————————————————————- Gross field production rate 10,768 9,924 11,167 10,132 TransGlobe working interest 2,692 2,481 2,792 2,533 TransGlobe net (after royalties) 1,469 1,418 1,577 1,471 TransGlobe net (after royalties and tax)(1) 1,153 1,162 1,264 1,198 —————————————————————————- —————————————————————————- (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 (25% working interest)
Operations and Exploration
TG Holdings Yemen Inc., a wholly-owned subsidiary of TransGlobe Energy Corporation, holds a 25% working interest in Block 75. Occidental Petroleum Corporation (“Oxy”) is the operator of Block 75 with a 75% working interest. The PSA was signed with the MOM on March 31, 2007 and is now before the Yemen parliament for final approval and ratification. The Block 75 joint venture group plans to carry out a 3-D seismic acquisition program and the drilling of one exploration well during the First Exploration Period of 36 months. The combined seismic program for Block 75 and S-1 is approximately 400 km2. The timing of the 3-D seismic acquisition program and subsequent drilling is contingent upon receiving final approval and ratification of the Block 75 PSA.
CANADA
Divestitures
In December 2007, the Company announced the strategic decision to sell the Canadian division to fund and focus on growth opportunities in the Middle East North Africa (“MENA”) region. Subsequent to year-end, the Company retained Tristone Capital as financial advisor to divest the Canadian properties. In the current divestiture schedule, bids are due by March 13, 2008, with an anticipated closing date of late April/early May, subject to an acceptable price being achieved.
Operations and Exploration
The Company drilled two (0.7 net) gas wells and 10 (2.0 net) Horseshoe Canyon coalbed methane wells in the Thorsby and Morningside areas during the fourth quarter.
Production
Production averaged 1,504 Boepd during the fourth quarter of 2007, up 8% from the third quarter. The average production during January and February was approximately 1,492 Boepd.
Quarterly 2007 Canadian Production (Boepd) —————————————————————————- Q-4 Q-3 Q-2 Q-1 —————————————————————————- —————————————————————————- TransGlobe working interest 1,504 1,397 1,389 1,283 TransGlobe net (after royalties) 1,250 1,175 1,144 1,148 —————————————————————————- —————————————————————————-
Management Strategy and Outlook for 2008
In 2008, TransGlobe’s strategy is to focus on expanding its international asset base. Historically, TransGlobe has experienced higher growth rates and a higher return on investment from its international properties. To enhance this trend, the Company will allocate all its capital and human resources to explore and develop its international properties and to increase its international asset base. Accordingly, management has decided to divest of the Canadian assets and re-deploy the capital into new international ventures.
2008 Outlook Highlights
– Production is expected to average between 6,900 and 7,100 Boepd, a 24% increase over 2007.
– Exploration and development spending is budgeted to be $58.6 million, a 40% increase over 2007 (allocated 60% to Egypt and 40% to Yemen).
– Based on price assumptions of $80.00/Bbl of Brent oil and C$7.00/Mcf of natural gas, cash flow from operations is expected to be between $53.0 million and $57.0 million.
– In February 2008, the Company acquired a further 30% interest in the West Gharib PSC for $40.2 million plus working capital adjustments. The acquisition added approximately 900 Bopd of production to the Company’s total output.
– In February 2008, the Company commenced the sale process for its Canadian assets, with an anticipated sale date early in the second quarter of 2008. Subject to a satisfactory price being achieved The Company has engaged Tristone Capital as financial advisor.
2008 Production Outlook
The production forecast for 2008 is an average of between 6,900 and 7,100 Boepd, including the recent acquisition of an additional 900 Bopd of production in the West Gharib Production Sharing Concession (“PSC”). A number of projects are underway that are anticipated to increase oil production during 2008. The 2008 forecast incorporates the divestment at April 1, 2008 of TransGlobe’s Canadian production totalling approximately 1,400 Boepd. TransGlobe is planning to participate in a total of 28 exploration and development wells in Egypt and Yemen during the year. Also included in the forecast are anticipated production increases from development wells in West Gharib. However, the Company has not included any assumptions of production increases from any exploration success. The Company will update its 2008 forecast quarterly or upon completion of significant facilities and/or developments.
Production Forecast 2008 2007 Change (1) —————————————————————————- —————————————————————————- Barrels of oil equivalent per day 6,900-7,100 5,651 24 —————————————————————————- —————————————————————————- (1) % growth based on mid-point of guidance 2008 Cash Flow From Operations Outlook This outlook was developed using the above production forecast, a dated Brent oil price of $80.00/Bbl and a natural gas price of C$7.00/Mcf. 2008 Cash Flow From Operations Outlook ($ million) 2008 2007 Change (1) —————————————————————————- —————————————————————————- Cash flow from operations(2) 53.0 – 57.0 52.1 6% —————————————————————————- —————————————————————————- (1) % growth based on mid-point of guidance. (2) Cash flow from operations is a non-GAAP measure that represents cash generated from operating activities before changes in non-cash working capital. (3) Working interest before royalties.
While production is forecast to grow by 24% year-over-year, cash flow is only increasing by 6% mainly as a result of higher interest charges resulting from an elevated debt level and lower average netbacks received from the West Gharib medium-gravity oil production. Variations in production and commodity prices during 2008 could significantly change this outlook. An estimate of the price sensitivity on the production forecast is shown below. On average, for each dollar of change in dated Brent oil prices, TransGlobe’s annual cash flow changes by approximately $0.4 million. During January and February 2008, the dated Brent oil price averaged $93.52/Bbl, and the AECO price for natural gas averaged $7.23/Mcf.
2008 Capital Budget ($MM) 2008 —————————————————————————- —————————————————————————- Egypt 33.3 —————————————————————————- Yemen 23.8 —————————————————————————- Canada 1.5 —————————————————————————- Total 58.6 —————————————————————————- —————————————————————————-
Total capital expenditures of $58.6 million will be applied to the drilling of up to 16 development wells in Egypt and up to 12 wells in Yemen, evenly divided into development wells and exploration wells. The Company attaches a significantly higher risk to the exploratory wells. The 2008 capital budget is expected to be funded from cash flow and working capital. The Company may use additional debt or equity financing in the future to accelerate existing projects or to finance new opportunities.
SUMMARY OF OPERATING AND FINANCIAL RESULTS
This summary of operating and financial results should be read in conjunction with the unaudited interim financial statements for the three and twelve months ended December 31, 2007 and 2006 and the audited financial statements and management’s discussion and analysis for the year ended December 31, 2006 included in the Company’s annual report. All dollar values are expressed in United States dollars unless otherwise stated.
Selected Annual Information ($000s, except per-share, price and volume amounts and % % % change) 2007 Change 2006 Change 2005 —————————————————————————- —————————————————————————- Average production volumes (Boepd)(1) 5,651 11 5,093 2 4,991 Average sales volumes (Boepd)(1) 5,692 12 5,077 2 4,959 Average price ($/Boe) 65.80 12 58.92 18 49.92 Oil and gas sales 136,709 25 109,190 21 90,350 Oil and gas sales, net of royalties and other 87,911 25 70,097 19 58,911 Cash flow from operations(2) 52,141 12 46,763 23 38,077 Cash flow from operations per share – Basic 0.87 0.80 0.66 – Diluted 0.86 0.77 0.63 Net income 12,802 (51) 26,195 32 19,850 Net income per share – Basic 0.21 0.45 0.34 – Diluted 0.21 0.43 0.33 Total assets 204,219 75 116,473 35 86,286 Long-term debt 51,958 – – Reserves(3) Total Proved (MMBoe) 11.9 27 9.3 19 7.8 Total Proved plus Probable (MMBoe) 16.4 41 11.7 11 10.5 —————————————————————————- —————————————————————————- (1) The differences in production and sales volumes result from inventory changes. (2) Cash flow from operations is a non-GAAP measure that represents cash generated from operating activities before changes in non-cash working capital. (3) Working interest before royalties
Cash flow from operations increased by 12% in 2007 compared with 2006, mainly as a result of higher realized prices, larger production volumes in Canada, and from the September 2007 acquisition of Egyptian assets (the “Egypt Acquisition”), offset by higher royalties, operating costs and taxes paid.
2007 Variances $ Per Share % $000s Diluted Variance —————————————————————————- —————————————————————————- 2006 Net Income 26,195 0.43 —————————————————————————- Cash items Volume variance 14,772 0.24 56 Price variance 12,747 0.21 49 Royalties (9,705) (0.16) (37) Expenses: Operating (4,161) (0.07) (16) Realized derivative gain (loss) (881) (0.01) (3) Cash general and administrative (2,177) (0.04) (8) Current income taxes (3,501) (0.06) (13) Realized foreign exchange gain (loss) (17) – – Settlement of asset retirement obligations (149) – (1) Interest on long-term debt (1,450) (0.02) (6) Other income (100) – – —————————————————————————- Total cash items variance 5,378 0.09 21 —————————————————————————- Non-cash items Unrealized derivative gain (loss) (7,015) (0.12) (27) Depletion, depreciation and accretion (12,231) (0.19) (47) Future income taxes 218 – 1 Stock based compensation (non-cash) 82 – – Settlement of asset retirement obligations 149 – 1 Amortization of deferred financing costs 26 – – —————————————————————————- Total non-cash items variance (18,771) (0.31) (72) —————————————————————————- 2007 Net Income 12,802 0.21 (51) —————————————————————————- —————————————————————————-
Net income for 2007 decreased 51% from 2006 mainly due to higher depletion, depreciation and accretion costs resulting from the write-down necessitated by two dry wells drilled in the Nuqra Block in Egypt; higher per-unit-of-production charges in Canada and Yemen; and a $7.1 million non-cash unrealized derivative loss on commodity contracts.
Business Environment
The Company’s financial results are significantly influenced by fluctuations in commodity prices, including price differentials, and the U.S./Canadian dollar exchange rate. The following table shows select market benchmark prices and foreign exchange rates:
% % 2007 Change 2006 Change 2005 —————————————————————————- —————————————————————————- Dated Brent average oil price ($/Bbl) 72.60 12 64.88 19 54.57 WTI average oil price ($/Bbl) 72.27 9 66.09 17 56.46 Edmonton Par average oil price (C$/Bbl) 77.06 5 73.30 6 69.29 AECO average gas price (C$/MMBtu) 6.45 (1) 6.51 (25) 8.73 U.S./Canadian Dollar year-end exchange rate 0.9913 (15) 1.1654 – 1.1630 U.S./Canadian Dollar average exchange rate 1.0740 (5) 1.1343 (6) 1.2114 —————————————————————————- —————————————————————————-
World crude oil prices continued to increase significantly in 2007 with global demand for oil remaining very strong and outpacing supply increases. Also, geopolitical concerns, mainly in Iraq, Nigeria and Venezuela continued to affect supply uncertainties.
In 2007, TransGlobe sold approximately 95% of its crude oil at dated Brent minus the selling price differentials and the remaining 5% at the Edmonton Par price less quality differentials.
Demand for natural gas was relatively weak during the year, and natural gas prices remained relatively flat over 2006. In 2007, TransGlobe sold its natural gas at AECO Index-based pricing and fixed pricing.
SELECTED QUARTERLY INFORMATION 2007 2006 ——————————————————– ($000s, except per share, price and volume amounts) Q-4 Q-3 Q-2 Q-1 Q-4 Q-3 Q-2 Q-1 —————————————————————————- —————————————————————————- Average production volumes (Boepd)(1) 6,837 5,227 5,353 5,175 5,475 4,952 4,915 5,026 Average sales volumes (Boepd)(1) 6,837 5,227 5,353 5,341 5,313 4,952 5,522 4,515 Average price ($/Boe) 75.83 67.04 63.68 53.58 55.30 61.88 62.17 55.93 Oil and gas sales 47,699 32,240 31,016 25,754 27,032 28,190 31,238 22,730 Oil and gas sales, net of royalties and other 29,343 20,764 20,553 17,251 17,647 18,542 18,600 15,308 Cash flow from operations(2) 13,944 13,373 12,814 12,010 10,448 12,662 12,356 11,297 Cash flow from operations per share – Basic 0.23 0.22 0.22 0.20 0.18 0.22 0.21 0.19 – Diluted 0.23 0.22 0.21 0.20 0.17 0.21 0.20 0.19 Net income (719) 5,198 2,343 5,980 4,726 7,366 7,246 6,857 Net income per share – Basic (0.02) 0.09 0.04 0.10 0.08 0.13 0.12 0.12 – Diluted (0.01) 0.08 0.04 0.10 0.08 0.12 0.12 0.11 —————————————————————————- —————————————————————————- (1) The differences in production and sales volumes result from inventory changes. (2) Cash flow from operations is a non-GAAP measure that represents cash generated from operating activities before changes in non-cash working capital.
Net income decreased 114% in the fourth quarter of 2007 compared with the prior quarter mainly as a result of an unrealized derivative loss on commodity contracts of $7.1 million ($0.12 per diluted share).
Comparing the second quarter of 2007 with the first quarter of that year, net income decreased 61% due to the write-off in the second quarter of Egypt capital related to the costs of drilling two dry holes at Nuqra ($0.06 per diluted share).
Fourth Quarter Financial Results
OPERATING RESULTS
Daily Volumes, Working Interest Before Royalties and Other
Three Months Ended Twelve Months Ended December 31 December 31 —————————————————————————- 2007 2006 2007 2006 —————————————————————————- —————————————————————————- Egypt – Oil sales(1) Bopd 1,594 – 432 – —————————————————————————- —————————————————————————- Yemen – Block 32 Bopd 1,047 1,756 1,202 1,429 – Block S-1 Bopd 2,692 2,452 2,624 2,617 —————————————————————————- Yemen – Oil sales Bopd 3,739 4,208 3,826 4,046 —————————————————————————- Canada – Oil and liquids Bopd 378 409 402 331 – Gas sales Mcfpd 6,756 4,176 6,193 4,204 —————————————————————————- Canada Boepd 1,504 1,105 1,434 1,031 —————————————————————————- Total Company – daily sales volumes Boepd 6,837 5,313 5,692 5,077 —————————————————————————- —————————————————————————- (1) Egypt operating results for the twelve months ended December 31, 2007 represent the period of September 25, 2007 to December 31, 2007. In that period, production averaged 1,607 Bopd for a yearly average of 432 Bopd.
In Egypt, oil sales amounted to 1,594 Bopd in Q4-2007 as a result of the acquisition of Dublin and Drucker on September 25, 2007.
In Yemen, sales volumes decreased 11% in Q4-2007 to 3,739 Bopd from 4,208 Bopd in Q4-2006. Block 32 production averaged 1,047 Bopd during Q4-2007 compared with 1,756 Bopd during Q4-2006; this drop in production is a result of natural declines in the mature Tasour field. Block S-1 production averaged 2,692 Bopd in Q4-2007 compared with 2,452 Bopd in Q4-2006.
In Canada, sales volumes increased 36% in Q4-2007 to 1,504 Boepd from 1,105 Boepd in Q4-2006 (production grew by 19% to 1,504 Boepd).
Consolidated Net Operating Results Consolidated —————————————————————————- Twelve Months Ended Twelve Months Ended December 31, 2007 December 31, 2006 —————————————————————————- (000s, except per Boe amounts) $ $/Boe $ $/Boe —————————————————————————- Oil and gas sales 136,709 65.80 109,190 58.92 Royalties and other 48,798 23.49 39,093 21.09 Current income taxes 12,630 6.08 9,129 4.93 Operating expenses 15,268 7.35 11,107 5.99 —————————————————————————- Net operating income 60,013 28.88 49,861 26.91 —————————————————————————- —————————————————————————- Consolidated —————————————————————————- Three Months Ended Three Months Ended December 31, 2007 December 31, 2006 —————————————————————————- ($000s, except per Boe amounts) $ $/Boe $ $/Boe —————————————————————————- —————————————————————————- Oil and gas sales 47,699 75.83 27,032 55.30 Royalties and other 18,365 29.18 9,385 19.20 Current taxes 5,306 8.43 2,511 5.14 Operating expenses 5,326 8.47 3,719 7.61 —————————————————————————- Net operating income 18,711 29.75 11,417 23.35 —————————————————————————- —————————————————————————- Segmented Net Operating Results In 2007 the Company operated in three geographic areas, segmented into Egypt, Yemen and Canada. The following will discuss each segment separately. Egypt Twelve Months Ended Twelve Months Ended —————————————————————————- December 31, 2007 December 31, 2006 —————————————————————————- ($000s, except per Boe amounts) $ $/Boe $ $/Boe —————————————————————————- —————————————————————————- Oil sales 10,731 68.13 – – Royalties and other 4,202 26.67 – – Current income tax 1,735 11.02 – – Operating expenses 722 4.59 – – —————————————————————————- Net operating income 4,072 25.85 – – —————————————————————————- —————————————————————————- Three Months Ended Three Months Ended December 31, 2007 December 31, 2006 —————————————————————————- ($000s, except per Boe amounts) $ $/Boe $ $/Boe —————————————————————————- —————————————————————————- Oil sales 10,114 68.97 – – Royalties and other 3,964 27.03 – – Current taxes 1,622 11.06 – – Operating expenses 697 4.75 – – —————————————————————————- Net operating income 3,831 26.13 – – —————————————————————————- —————————————————————————- Yemen Twelve Months Ended Twelve Months Ended December 31, 2007 December 31, 2006 —————————————————————————- (000s, except per Boe amounts) $ $/Boe $ $/Boe —————————————————————————- —————————————————————————- Oil sales 101,440 72.64 93,189 63.10 Royalties and other 40,341 28.89 36,353 24.62 Current income tax 10,895 7.80 9,129 6.18Operating expenses 10,334 7.40 8,108 5.49 —————————————————————————- Net operating income 39,870 28.55 39,599 26.81 —————————————————————————- —————————————————————————- Three Months Ended Three Months Ended December 31, 2007 December 31, 2006 —————————————————————————- ($000s, except per Boe amounts) $ $/Boe $ $/Boe —————————————————————————- —————————————————————————- Oil sales 30,674 89.18 22,550 58.25 Royalties and other 13,224 38.45 8,565 22.12 Current taxes 3,683 10.71 2,511 6.49 Operating expenses 3,497 10.17 2,856 7.38 —————————————————————————- Net operating income 10,270 29.85 8,618 22.26 —————————————————————————- —————————————————————————- In Yemen, operating costs increased 22% on a per-barrel basis from Q4-2006. Canada Twelve Months Ended Twelve Months Ended December 31, 2007 December 31, 2006 —————————————————————————- (000s, except per Boe amounts) $ $/Boe $ $/Boe —————————————————————————- —————————————————————————- Oil sales 5,147 66.82 3,178 58.45 Gas sales ($ per Mcf) 15,018 6.64 9,478 6.18 NGL sales 3,954 56.49 3,266 49.24 Other sales 419 – 79 – —————————————————————————- 24,538 46.85 16,001 42.51 Royalties and other 4,255 8.12 2,740 7.28 Operating expenses 4,212 8.04 2,999 7.97 —————————————————————————- Net operating income 16,071 30.69 10,262 27.26 —————————————————————————- —————————————————————————- Three Months Ended Three Months Ended December 31, 2007 December 31, 2006 —————————————————————————- ($000s, except per Boe amounts) $ $/Boe $ $/Boe —————————————————————————- —————————————————————————- Oil sales 1,464 82.23 1,004 52.83 Gas sales ($ per Mcf) 4,168 6.71 2,631 6.85 NGL sales 1,196 70.30 827 44.38 Other sales 83 – 19 – —————————————————————————- 6,911 49.93 4,481 44.09 Royalties and other 1,168 8.44 819 8.07 Operating expense 1,133 8.18 863 8.49 —————————————————————————- Net operating income 4,610 33.31 2,799 27.53 —————————————————————————- —————————————————————————-
In Canada, revenue net of royalties and other in Q4-2007 increased 57% compared with Q4-2006 due to a 36% increase in sales volumes.
COMMODITY CONTRACTS
TransGlobe uses financial derivatives as part of its risk management approach to manage commodity price fluctuations and stabilize cash flows for future exploration and development programs. The Company has fair valued these financial derivative contracts. As at December 31, 2007, the estimated fair value of these contracts is a liability of $7.1 million, which results in an unrealized loss of $7.1 million being recorded to the income statement for the year ended December 31, 2007 (2006 – $0.1 million). The estimated fair market value at December 31, 2007 was based on a dated Brent oil price of $96.02/Bbl.
The Company has entered into the following financial derivative contracts: Dated Brent Pricing Period Volume Type Put – Call —————————————————————————- —————————————————————————- Crude Oil ——— May 1, 2007- December 31, 2007 15,000 Bbls/month Financial Collar $57.50-$79.80 September 1, 2007- August 31, 2008 15,000 Bbls/month Financial Collar $60.00-$78.55 January 1, 2008- December 31, 2008 12,000 Bbls/month Financial Collar $60.00-$81.20 January 1, 2009- December 31, 2009 12,000 Bbls/month Financial Collar $60.00-$82.10 November 1, 2007- March 31, 2008 5,000 Bbls/month Financial Collar $65.00-$89.35 September 1, 2008- January 31, 2009 11,000 Bbls/month Financial Collar $60.00-$88.80 February 1, 2009- December 31, 2009 6,000 Bbls/month Financial Collar $60.00-$86.10 January 1, 2010- August 31, 2010 12,000 Bbls/month Financial Collar $60.00-$84.25 Natural Gas ———– April 1, 2007- October 31, 2007 2,500 GJ/day Physical fiscal C$6.97 —————————————————————————- —————————————————————————- The total volumes hedged per year are listed below: 2008 2009 2010 —————————————————————————- —————————————————————————- Bbls 323,000 221,000 96,000 Bopd 885 605 263 General and administrative expense Twelve Months Ended Twelve Months Ended December 31, 2007 December 31, 2006 —————————————————————————- ($000s, except Boe amounts) $ $/Boe $ $/Boe —————————————————————————- G&A (gross) 7,971 3.84 5,914 3.19 Stock-based compensation 1,086 0.52 1,168 0.63 Capitalized G&A (1,947) (0.94) (1,999) (1.08) Overhead recoveries (367) (0.18) (409) (0.22) —————————————————————————- G&A (net) 6,743 3.24 4,674 2.52 —————————————————————————- —————————————————————————- Three Months Ended Three Months Ended December 31, 2007 December 31, 2006 —————————————————————————- ($000s, except Boe amounts) $ $/Boe $ $/Boe —————————————————————————- —————————————————————————- G&A (gross) 3,516 5.59 1,696 3.47 Stock-based compensation 201 0.32 256 0.52 Capitalized G&A (781) (1.24) (430) (0.88) Overhead recoveries (174) (0.28) (132) (0.27) —————————————————————————- G&A (net) 2,762 4.39 1,390 2.84 —————————————————————————- —————————————————————————- The increased expenses relate to higher fees caused by increased staffing levels and compliance requirements (Sarbanes-Oxley). Depletion, depreciation and accretion expense Twelve Months Ended Twelve Months Ended December 31, 2007 December 31, 2006 —————————————————————————- ($000s, except per Boe amounts) $ $/Boe $ $/Boe —————————————————————————- —————————————————————————- Egypt 3,144 19.96 37 – Write-off of dryhole costs (Nuqra Block) 4,111 – – – Yemen 12,157 8.71 11,623 7.87Canada 11,760 22.45 7,281 19.34 —————————————————————————- 31,172 12.40 18,941 10.22 —————————————————————————- —————————————————————————- Three Months Ended Three Months Ended December 31, 2007 December 31, 2006 —————————————————————————- ($000s, except per Boe amounts) $ $/Boe $ $/Boe —————————————————————————- —————————————————————————- Egypt 2,926 19.95 12 – Yemen 2,613 7.60 3,285 8.49 Canada 3,084 22.28 2,073 20.39 —————————————————————————- 8,623 13.71 5,370 10.99 —————————————————————————- —————————————————————————- Depletion, depreciation and accretion increased in Q4-2007 compared with Q4-2006 due to depletion, depreciation and accretion charges on new production from the West Gharib PSC in Egypt. Income taxes ($000s) 2007 2006 —————————————————————————- —————————————————————————- Current income tax – Egypt 1,735 – – Yemen 10,895 9,129 —————————————————————————- 12,630 9,129 Future income tax – Canada 45 263 —————————————————————————- 12,675 9,392 —————————————————————————- —————————————————————————-
Current income tax expense in 2007 represents income taxes incurred and paid under the laws of Egypt pursuant to the West Gharib PSC and Yemen pursuant to the PSAs on Block 32 and Block S-1. The increase in Egypt is the result of the addition of the West Gharib concession in 2007. The income tax in Egypt as a percent of Egypt revenue was 16% in 2007. The year-over-year increase in Yemen is primarily the result of higher revenue from that country. The income tax expense in Yemen as a percent of Yemen revenue was 11% in 2007 and 10% in 2006. No income tax was paid in Canada in 2007. At December 31, 2007, the Company has C$54 million in Canadian tax pools.
The future income expense relates to a non-cash expense for taxes to be incurred in the future as Canadian tax pools reverse.
FINDING AND DEVELOPMENT COSTS AND FINDING, DEVELOPMENT AND NET ACQUISITION COSTS
Canadian National Instrument 51-101 (“NI 51-101″), Standards of Disclosure for Oil and Gas Activities, specifies how finding and development (“F&D”) costs should be calculated. NI 51-101 requires that exploration and development costs incurred in the year along with the change in estimated future development costs be aggregated and then divided by the applicable reserve additions. The calculation specifically excludes the effects of acquisitions and dispositions on both reserve and costs. TransGlobe believes that the provisions of NI 51-101 do not fully reflect TransGlobe’s ongoing reserve replacement costs. Since acquisitions can have a significant impact on TransGlobe’s annual reserve replacement cost, to not include these amounts could result in an inaccurate portrayal of TransGlobe’s cost structure. Accordingly, TransGlobe has also reported finding, development and acquisition (“FD&A”) costs that will incorporate all acquisitions net of any dispositions during the year.
Proved ($000s, except volumes and per Boe amounts) 2007 2006 2005 —————————————————————————- —————————————————————————- Total capital expenditure 37,015 51,555 32,654 Acquisitions (including