Summary
The company initiated a $.10 semiannual dividend.
The negative net debt position allows considerable financial flexibility not available to many competitors.
The new contract is far more profitable than the old one.
Higher commodity prices and the new contract will combine to dramatically increase cash flow.
Further profitable growth is not priced into the current stock price at all.
This idea was discussed in more depth with members of my private investing community, Oil & Gas Value Research. Learn More »
imaginima/E+ via Getty Images TransGlobe Energy (NASDAQ: TGA ) just announced a big improvement over what the company had been reporting in the past. That improvement is likely to continue into the first quarter of fiscal year 2022 because commodity prices are far stronger.
Management announced the initiation of a semi-annual dividend of $.10 per share. Given the new more profitable contract with Egypt, this dividend may have more staying power than the dividends of the past. The conservative management correctly valued a strong balance sheet and financial flexibility instead of paying a dividend that would potentially be in excess of cash flow.
As a result, this company enters the current recovery from the coronavirus demand destruction in far better financial shape than is the case with a lot of competitors. TransGlobe Energy Financial and Production Summary (TransGlobe Energy March 2022, Corporate Presentation) Management reported cash flow in excess of $40 million. Most of the business is in Egypt with a little bit in Canada for this Canadian based company that reports using United States dollars. But the new contract is likely to report in far more cash flow when the much stronger commodity prices are considered.
The negative net debt position shown above gives the company a lot of options when considering how to participate in the industry recovery. Clearly the intended capital program shows an optimistic vision that has been absent for the last few years.
This is a company that basically withdrew from all but minimal operating commitments while much of the industry struggled tremendously in the last five years or so. Now management clearly has a growth vision for the future of the company. TransGlobe Energy Details New Contract With Egyptian Government (TransGlobe Energy March 2022, Corporate Presentation) The new contract is basically a “license to print money” in the current business environment. The company has a far better cost recovery arrangement that allows for more recovery to make larger projects feasible.
TransGlobe Energy is a secondary recovery company. This enables management to avoid competing with the “big boys” when bidding for leases. Many of the leases were discarded by larger players or players looking for a more profitable proposition. A company like TransGlobe can actually make a little more money because secondary recovery is just not worth the time of a lot of industry competitors. TransGlobe Energy Eastern Desert New Contract Arrangements And Production (TransGlobe Energy March 2022, Corporate Presentation) TransGlobe Energy management consolidated the leases and extended the lease terms in the new agreement. This allowed the consideration of some expensive secondary recovery prospects as well as horizontal drilling combined with “modern completion techniques”. Previously, these methods were not suitably covered by the old contract to make them viable.
Egypt has a lot of vertical well potential. But the government certainly appreciates the extra dollars a company like this earns for the government by exporting a little more production.
TransGlobe Energy, for its part, needed a little incentive to produce the remaining heavy oil in place. Heavy oil is a discounted product, and that discount can widen during periods of economic weakness. In the past management responded to that weakness by doing the minimal amount of work necessary. The new contract allows for more activity during times of pricing weakness. That allows for a reasonable company profit and more money earned by the Egyptian government when commodity prices are low. All the parties are winning on this deal.
As a result of this, the production of these old leases is likely to grow for the foreseeable future. Now management gave rather conservative growth guidance. That is likely to be because the secondary recovery projects often involve investment in one year and growth from that investment in later years. That may mean that investors could see years of growth on fairly low capital investments once the expensive “setup phase” is over with. No promises of course.
The nice part about the niche occupied by TransGlobe Energy is the large producers in Egypt like APA Corporation ( APA ) are frankly […]
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