EX-3 4 a2013q2-mda.htm EXHIBIT 2013 Q2 - MD&A
MANAGEMENT'S DISCUSSION AND ANALYSIS

MANAGEMENT'S DISCUSSION AND ANALYSIS
August 9, 2013
The following discussion and analysis is management's opinion of TransGlobe's historical financial and operating results and should be read in conjunction with the unaudited Condensed Consolidated Interim Financial Statements for the Company for the three and six months ended June 30, 2013 and 2012 and the audited Consolidated Financial Statements and management's discussion and analysis ("MD&A") for the year ended December 31, 2012 included in the Company’s annual report. The Condensed Consolidated Interim Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board in the currency of the United States (except where otherwise noted). Additional information relating to the Company, including the Company’s Annual Information Form, is on SEDAR at www.sedar.com. The Company’s annual report on Form 40-F may be found on EDGAR at www.sec.gov.
READER ADVISORIES
Forward Looking Statements
Certain statements or information contained herein may constitute forward-looking statements or information under applicable securities laws, including, but not limited to, management’s assessment of future plans and operations, anticipated increases to the Company's reserves and production, the possible sale of the Company's assets in Yemen, collection of accounts receivable from the Egyptian Government, drilling plans and the timing thereof, commodity price risk management strategies, adapting to the current political situations in Egypt and Yemen, reserve estimates, management’s expectation for results of operations for 2013, including expected 2013 average production, funds flow from operations, the 2013 capital program for exploration and development, the timing and method of financing thereof, method of funding drilling commitments, and commodity prices and expected volatility thereof. Statements relating to "reserves" are deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described can be profitably produced in the future.
Forward-looking statements or information relate to the Company’s future events or performance. All statements other than statements of historical fact may be forward-looking statements or information. Such statements or information 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.
Forward-looking statements or information necessarily involve risks including, without limitation, risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, loss of markets, economic and political instability, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, inability to retain drilling rigs and other services, incorrect assessment of the value of acquisitions, failure to realize the anticipated benefits of acquisitions, delays resulting from or inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources. The recovery and reserve estimates of the Company's reserves provided herein are estimates only and there is no guarantee that the estimated reserves will be recovered. Events or circumstances may cause actual results to differ materially from those predicted, as a result of the risk factors set out and other known and unknown risks, uncertainties, and other factors, many of which are beyond the control of the Company.
In addition, forward-looking statements or information are based on a number of factors and assumptions which have been used to develop such statements and information in order to provide shareholders with a more complete perspective on the Company's future operations. Such statements and information may prove to be incorrect and readers are cautioned that such statements and information may not be appropriate for other purposes. Although the Company believes that the expectations reflected in such forward-looking statements or information are reasonable, undue reliance should not be placed on forward-looking statements or information because the Company can give no assurance that such expectations will prove to be correct. In addition to other factors and assumptions which may be identified herein, assumptions have been made regarding, among other things: the impact of increasing competition; the general stability of the economic and political environment in which the Company operates; the timely receipt of any required regulatory approvals; the ability of the Company to obtain qualified staff, equipment and services in a timely and cost efficient manner; drilling results; the ability of the operator of the projects which the Company has an interest in to operate the field in a safe, efficient and effective manner; the ability of the Company to obtain financing on acceptable terms; field production rates and decline rates; the ability to replace and expand oil and natural gas reserves through acquisition, development and exploration; the timing and costs of pipeline, storage and facility construction and expansion and the ability of the Company to secure adequate product transportation; future commodity prices; currency, exchange and interest rates; the regulatory framework regarding royalties, taxes and environmental matters in the jurisdictions in which the Company operates; and the ability of the Company to successfully market and receive payment for its oil and natural gas products.
Readers are cautioned that the foregoing list is not exhaustive of all factors and assumptions which have been used. As a consequence, actual results may differ materially from those anticipated in the forward-looking statements. Additional information on these and other factors that could affect the Company's operations and financial results are included in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com), EDGAR website (www.sec.gov) and at the Company's website (www.trans-globe.com). Furthermore, the forward-looking statements or information contained herein are made as at the date hereof and the Company does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.
The reader is further cautioned that the preparation of financial statements in accordance with IFRS requires management to make certain judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses. Estimating reserves is also critical to several accounting estimates and requires judgments and decisions based upon available geological, geophysical, engineering and economic data. These estimates may change, having either a negative or positive effect on net earnings as further information becomes available, and as the economic environment changes.



Q2-2013
 
1
MANAGEMENT'S DISCUSSION AND ANALYSIS


MANAGEMENT STRATEGY AND OUTLOOK
The 2013 outlook provides information as to management’s expectation for results of operations for 2013. Readers are cautioned that the 2013 outlook may not be appropriate for other purposes. The Company’s expected results are sensitive to fluctuations in the business environment and may vary accordingly. This outlook contains forward-looking statements that should be read in conjunction with the Company’s disclosure under “Forward-Looking Statements”, outlined on the first page of this MD&A.
2013 Production Outlook
Production Forecast
 
 
 
 
 
 
2013 Guidance
 
2012 Actual

 
% Change
Barrels of oil per day
19,000 - 20,000
 
17,496

 
9 - 14
2013 Updated Funds Flow From Operations Outlook
On June 20, 2013, the Company provided an update of its expected capital program, production and funds flow for 2013. Funds flow from operations guidance of $145.0 million ($1.92/share) is based on an average Dated Brent oil price of $100/Bbl (after Q2-2013) and assumes the mid-point of the production guidance. Variations in production and commodity prices during the remainder of 2013 could significantly change this outlook. An increase or decrease in the average Dated Brent oil price of $10/Bbl for the remainder of the year would result in a corresponding change in anticipated 2013 funds flow by approximately $8.2 million or $0.11/share.
Funds Flow Forecast
 
 
 
 
 
($ millions)
2013 Guidance

 
2012 Actual

 
% Change

Funds flow from operations
145.0

 
153.5

 
(6
)
Dated Brent oil price ($ per Bbl)
100.00

 
111.56

 
(10
)

2013 Capital Budget
 
 
 
 
 
($ millions)
 
 
 
 
2013 Guidance

Egypt
 
 
 
 
75.0

Yemen
 
 
 
 
5.0

Total
 
 
 
 
80.0

The 2013 capital program is split 72:28 between development and exploration, respectively.  The Company plans to participate in 46 wells in 2013.  It is anticipated that the Company will fund its 2013 capital budget from funds flow from operations and working capital.
The Company's Yemen divestiture process has been extended until Block S-1 production is resumed.
ADDITIONAL MEASURES
Funds Flow from Operations
This document contains the term “funds flow from operations”, which should not be considered an alternative to or more meaningful than “cash flow from operating activities” as determined in accordance with IFRS. Funds flow from operations is a measure that represents cash generated from operating activities before changes in non-cash working capital. Management considers this a key measure as it demonstrates TransGlobe’s ability to generate the cash flow necessary to fund future growth through capital investment. Funds flow from operations may not be comparable to similar measures used by other companies.
          Reconciliation of Funds Flow from Operations
 
 
 
 
 
 
 
Three Months Ended June 30
 
 
Six Months Ended June 30
 
($000s)
2013

 
2012

 
2013

 
2012

Cash flow from operating activities
16,347

 
24,603

 
68,247

 
26,374

Changes in non-cash working capital
16,540

 
10,571

 
645

 
44,888

Funds flow from operations*
32,887

 
35,174

 
68,892

 
71,262

* Funds flow from operations does not include interest or financing costs. Interest expense is included in financing costs on the Condensed Consolidated Interim Statements of Earnings and Comprehensive Income. Cash interest paid is reported as a financing activity on the Condensed Consolidated Interim Statements of Cash Flows.
Debt-to-funds flow ratio
Debt-to-funds flow is a measure that is used to set the amount of capital in proportion to risk. The Company’s debt-to-funds flow ratio is computed as long-term debt, including the current portion, plus convertible debentures over funds flow from operations for the trailing twelve months. Debt-to-funds flow may not be comparable to similar measures used by other companies.
 

2
 
Q2-2013
MANAGEMENT'S DISCUSSION AND ANALYSIS


Netback
Netback is a measure that represents sales net of royalties (all government interests, net of income taxes), operating expenses and current taxes. Management believes that netback 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. Netback may not be comparable to similar measures used by other companies.
TRANSGLOBE’S BUSINESS
TransGlobe is a Canadian-based, publicly-traded, oil exploration and production company whose activities are concentrated in two main geographic areas: the Arab Republic of Egypt (“Egypt”) and the Republic of Yemen (“Yemen”).

SELECTED QUARTERLY FINANCIAL INFORMATION
 
 
2013
 
2012
 
2011
(000s, except per share, price and volume amounts)
 
Q-2

 
Q-1

 
Q-4

 
Q-3

 
Q-2

 
Q-1

 
Q-4

 
Q-3

Average production volumes (Bopd)
 
18,417

 
18,001

 
17,875

 
18,143

 
16,978

 
16,720

 
12,054

 
13,406

Average sales volumes (Bopd)
 
18,539

 
17,909

 
19,148

 
17,124

 
16,978

 
16,720

 
12,054

 
13,406

Average price ($/Bbl)
 
90.48

 
99.21

 
98.70

 
96.88

 
95.84

 
104.78

 
99.12

 
104.00

Oil sales
 
152,646

 
159,915

 
173,864

 
152,624

 
148,078

 
159,426

 
109,919

 
128,265

Oil sales, net of royalties
 
76,223

 
79,366

 
92,281

 
74,540

 
73,633

 
77,212

 
60,609

 
71,769

Cash flow from operating activities
 
16,347

 
51,900

 
65,250

 
2,368

 
24,603

 
1,771

 
2,330

 
3,456

Funds flow from operations*
 
32,887

 
36,005

 
46,839

 
35,397

 
35,174

 
36,088

 
26,469

 
37,980

Funds flow from operations per share
 
 
 
 
 
 
 

 

 

 

 

- Basic
 
0.45

 
0.49

 
0.63

 
0.49

 
0.48

 
0.49

 
0.36

 
0.52

- Diluted
 
0.40

 
0.44

 
0.57

 
0.47

 
0.43

 
0.48

 
0.35

 
0.51

Net earnings
 
10,397

 
24,878

 
34,836

 
11,774

 
30,149

 
10,975

 
30,519

 
26,110

Net earnings (loss) - diluted
 
(183
)
 
21,427

 
32,156

 
11,774

 
20,821

 
10,975

 
30,519

 
26,110

Net earnings per share
 

 

 

 

 

 

 

 

- Basic
 
0.14

 
0.34

 
0.48

 
0.16

 
0.41

 
0.15

 
0.42

 
0.36

- Diluted
 
—

 
0.26

 
0.39

 
0.16

 
0.25

 
0.15

 
0.41

 
0.35

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
670,996

 
672,675

 
653,425

 
635,529

 
620,937

 
648,012

 
525,806

 
465,262

Cash and cash equivalents
 
101,435

 
112,180

 
82,974

 
45,732

 
72,230

 
127,313

 
43,884

 
105,007

Convertible debentures
 
81,830

 
93,842

 
98,742

 
102,920

 
95,043

 
105,835

 
—

 
—

Total long-term debt, including
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
current portion
 
15,224

 
17,097

 
16,885

 
31,878

 
37,855

 
57,910

 
57,609

 
57,303

Debt-to-funds flow ratio**
 
0.6

 
0.7

 
0.8

 
1.0

 
1.0

 
1.2

 
0.5

 
0.5

* Funds flow from operations is a measure that represents cash generated from operating activities before changes in non-cash working capital and may not be comparable to measures used by other companies.
** Debt-to-funds flow ratio is measure that represents total long-term debt (including the current portion) plus convertible debentures over funds flow from operations from the trailing 12 months and may not be comparable to measures used by other companies.


Q2-2013
 
3
MANAGEMENT'S DISCUSSION AND ANALYSIS


During the second quarter of 2013, TransGlobe has:
•
Maintained a strong financial position, reporting a debt-to-funds flow ratio of 0.6 at June 30, 2013;

•
Reported net earnings of $10.4 million, which includes an impairment loss of $19.7 million on the Company's South Mariut assets and a $9.1 million unrealized non-cash gain on convertible debentures;

•
Experienced a reduction in oil sales compared to Q1-2013 primarily as a result of reduced oil prices;

•
Achieved funds flow from operations of $32.9 million;

•
Experienced reduced cash flow from operating activities as compared to Q1-2013, which is mostly due to lower collections on accounts receivable balances; and

•
Spent $19.3 million on capital programs and acquisitions, which were funded entirely with cash on hand.
The accounting for the convertible debentures continued to have a significant impact on important components of the Company’s financial statements:
•
Reported an unrealized gain on convertible debentures of $9.1 million in the second quarter of 2013 (2012 - $8.8 million); and

•
Reported no diluted earnings per share in Q2-2013, which varies significantly from basic earnings per share of $0.14. The prescribed calculation resulted in a significant reduction in diluted earnings per share due to the effect of the convertible debentures. Diluted earnings per share prior to the dilutive effect of the convertible debentures was $0.14.


4
 
Q2-2013
MANAGEMENT'S DISCUSSION AND ANALYSIS


2013 TO 2012 NET EARNINGS VARIANCES
 
$000s

 
$ Per Share Diluted

 
% Variance

Q2-2012 net earnings*
30,149

 
0.40

 

Cash items
 
 
 
 
 
Volume variance
13,036

 
0.15

 
42

Price variance
(8,468
)
 
(0.10
)
 
(28
)
Royalties
(1,978
)
 
(0.02
)
 
(7
)
Expenses:

 
 
 
 
Production and operating
(6,093
)
 
(0.07
)
 
(20
)
Cash general and administrative
917

 
0.01

 
3

Exploration
40

 
—

 
—

Current income taxes
229

 
—

 
1

Realized foreign exchange gain (loss)
(27
)
 
—

 
—

Issue costs for convertible debentures
241

 
—

 
1

Interest on long-term debt
315

 
—

 
1

Other income
57

 
—

 
—

Total cash items variance
(1,731
)
 
(0.03
)
 
(7
)
Non-cash items
 
 
 
 
 
Unrealized derivative loss
1

 
—

 
—

Unrealized foreign exchange gain
435

 
0.01

 
1

Depletion, depreciation and amortization
(298
)
 
—

 
(1
)
Unrealized gain (loss) on financial instruments
260

 
—

 
1

Impairment loss
(19,709
)
 
(0.25
)
 
(65
)
Stock-based compensation
(447
)
 
(0.01
)
 
(1
)
Deferred income taxes
1,688

 
0.02

 
6

Deferred lease inducement
2

 
—

 
—

Amortization of deferred financing costs
47

 
—

 
—

Total non-cash items variance
(18,021
)
 
(0.23
)
 
(59
)
Q2-2013 net earnings
10,397

 
0.14

 
(66
)
 
 
 
 
 
 
Other items affecting diluted earnings per share
 
 
 
 
 
Convertible debentures
 
 
(0.14
)
 
(34
)
Q2-2013 net earnings per share - diluted
 
 
—

 
(100
)
* Diluted earnings per share for Q2-2012 is presented prior to the dilutive effect of the convertible debentures in that period.
Net earnings decreased to $10.4 million in Q2-2013 compared to $30.1 million in Q2-2012, which was mainly due to an impairment loss recognized on the Company's South Mariut assets in Q2-2013, combined with increased production and operating costs. The earnings impact of increased volumes were mostly offset by price reductions and increased royalties.
BUSINESS ENVIRONMENT
The Company’s financial results are significantly influenced by fluctuations in commodity prices, including price differentials. The following table shows select market benchmark prices and foreign exchange rates:
 
2013
 
2012
 
Q-2

 
Q-1

 
Q-4

 
Q-3

 
Q-2

Dated Brent average oil price ($/Bbl)
102.44

 
112.59

 
109.97

 
109.61

 
108.19

U.S./Canadian Dollar average exchange rate
1.023

 
1.009

 
0.991

 
0.995

 
1.006

The price of Dated Brent oil averaged 9% lower in Q2-2013 compared with Q1-2013. All of the Company’s production is priced based on Dated Brent and shared with the respective governments through PSCs. When the price of oil increases, it takes fewer barrels to recover costs (cost recovery barrels) which are assigned 100% to the Company. The contracts provide for cost recovery per quarter up to a maximum percentage of total revenue. Timing differences often exist between the Company's recognition of costs and their recovery as the Company accounts for costs on an accrual basis, whereas cost recovery is determined on a cash basis. If the eligible cost recovery is less than the maximum defined cost recovery, the difference is defined as "excess". In Egypt, the Contractor's share of excess ranges between 0% and 30% depending on the contract. In Yemen, the excess is treated as production sharing oil. If the eligible cost recovery exceeds the maximum allowed percentage, the unclaimed


Q2-2013
 
5
MANAGEMENT'S DISCUSSION AND ANALYSIS


cost recovery is carried forward to the next quarter. Typically maximum cost recovery or cost oil ranges from 25% to 30% in Egypt and 50% to 60% in Yemen. The balance of the production after maximum cost recovery is shared with the respective governments (production sharing oil). Depending on the contract, the government receives 70% to 86% of the production sharing oil or profit oil. Production sharing splits are set in each contract for the life of the contract. Typically the government’s share of production sharing oil increases when production exceeds pre-set production levels in the respective contracts. During times of increased oil prices, the Company receives less cost oil and may receive more production sharing oil. For reporting purposes, the Company records the respective government’s share of production as royalties and taxes (all taxes are paid out of the Government’s share of production).
During the political change in Egypt, business processes and operations have generally proceeded as normal. While exploration and development activities have only been subjected to short-term interruptions, the Company has continued to experience delays in the collection of accounts receivable from the Egyptian Government due to the economic impact caused by the political and civil instability in the country. The Company is in continual discussions with the Egyptian Government to determine solutions to the delayed cash collections, and expects to recover the accounts receivable balance in full. During the first six months of 2013, the Company collected $106.9 million in accounts receivable from the Egyptian Government. The Company expects to receive approximately $115 million in the second half of 2013 through monthly cash payments and through an additional one and a half cargo liftings. These cargo liftings have a current estimated value of $70 million to $75 million depending on the prevailing oil price at the time of lifting. A typical full cargo lifting is approximately 510,000 barrels.
In late June civil protests in Egypt led to the Egyptian military removing the President from his office.  Immediately following his removal an interim government was appointed and a road map to new elections, that are expected to take place in early 2014, was announced.  These events have had no significant impact on the Company's current operations.  At this time it is not possible for TransGlobe to predict how the transition to a newly-elected government will impact the Company in the long-term.  However, the interim government officials appointed and the significant financial support pledged from neighboring countries are viewed as positive by TransGlobe. 
OPERATING RESULTS AND NETBACK
Daily Volumes, Working Interest before Royalties (Bopd)
Production Volumes
 
Three Months Ended June 30
 
 
Six Months Ended June 30
 
 
2013

 
2012

 
2013

 
2012

Egypt
18,111

 
16,586

 
17,890

 
16,505

Yemen
306

 
356

 
319

 
364

Total Company
18,417

 
16,942

 
18,209

 
16,869


Sales Volumes
 
Three Months Ended June 30
 
 
Six Months Ended June 30
 
 
2013

 
2012

 
2013

 
2012

Egypt
18,111

 
16,586

 
17,890

 
16,505

Yemen
428

 
392

 
335

 
345

Total Company
18,539

 
16,978

 
18,225

 
16,850


Netback
Consolidated
 
Six Months Ended June 30
 
2013
 
2012
(000s, except per Bbl amounts)
$ 

 
$/Bbl

 
$ 

 
$/Bbl

Oil sales
312,561

 
94.75

 
307,504

 
100.27

Royalties
156,972

 
47.59

 
156,659

 
51.08

Current taxes
44,116

 
13.37

 
44,582

 
14.54

Production and operating expenses
32,061

 
9.72

 
23,402

 
7.63

Netback
79,412

 
24.07

 
82,861

 
27.02








6
 
Q2-2013
MANAGEMENT'S DISCUSSION AND ANALYSIS


 
Three Months Ended June 30
 
2013
 
2012
(000s, except per Bbl amounts)
$ 

 
$/Bbl

 
$ 

 
$/Bbl

Oil sales
152,646

 
90.48

 
148,078

 
95.84

Royalties
76,423

 
45.30

 
74,445

 
48.18

Current taxes
21,042

 
12.47

 
21,271

 
13.77

Production and operating expenses
17,529

 
10.39

 
11,436

 
7.40

Netback
37,652

 
22.32

 
40,926

 
26.49


Egypt
 
Six Months Ended June 30
 
2013
 
2012
(000s, except per Bbl amounts)
$ 

 
$/Bbl

 
$ 

 
$/Bbl

Oil sales
306,034

 
94.51

 
300,412

 
100.01

Royalties
154,496

 
47.71

 
153,616

 
51.14

Current taxes
43,326

 
13.38

 
43,572

 
14.51

Production and operating expenses
28,081

 
8.67

 
19,042

 
6.34

Netback
80,131

 
24.75

 
84,182

 
28.02


 
Three Months Ended June 30
 
2013
 
2012
(000s, except per Bbl amounts)
$ 

 
$/Bbl

 
$ 

 
$/Bbl

Oil sales
148,545

 
90.13

 
144,222

 
95.55

Royalties
74,852

 
45.42

 
72,883

 
48.29

Current taxes
20,536

 
12.46

 
20,743

 
13.74

Production and operating expenses
15,350

 
9.31

 
9,094

 
6.03

Netback
37,807

 
22.94

 
41,502

 
27.49

The netback per Bbl in Egypt decreased 17% and 12%, respectively, in the three and six months ended June 30, 2013 compared with the same periods of 2012. The main reason for the decreased netback was the effect of a 6% and 5% reduction in realized oil prices, respectively, in the three and six months ended June 30, 2013 compared with the same periods of 2012. Production and operating expenses increased by $3.28/Bbl and $2.33/Bbl, respectively, which was principally a result of increased third party oil treatment fees, increased diesel consumption and pricing, and the addition of East Ghazalat production in the third quarter of 2012 which has higher operating costs on a per Bbl basis. The increase in production and operating expenses resulted in an increase in cost oil allocated to the Company, which reduced royalties and taxes on a per Bbl basis. The average selling price during the three months ended June 30, 2013 was $90.13/Bbl, which represents a gravity/quality adjustment of approximately $12.31/Bbl to the average Dated Brent oil price for the period of $102.44/Bbl.
Royalties and taxes as a percentage of revenue decreased slightly to 64% and 65%, respectively, in the three and six months ended June 30, 2013, compared with the 65% and 66% ratios reported in the same periods of 2012.

Yemen
 
Six Months Ended June 30
 
2013
 
2012
(000s, except per Bbl amounts)
$ 

 
$/Bbl

 
$ 

 
$/Bbl

Oil sales
6,527

 
107.64

 
7,092

 
112.95

Royalties
2,476

 
40.83

 
3,043

 
48.46

Current taxes
790

 
13.03

 
1,010

 
16.09

Production and operating expenses
3,980

 
65.64

 
4,360

 
69.44

Netback
(719
)
 
(11.86
)
 
(1,321
)
 
(21.04
)






Q2-2013
 
7
MANAGEMENT'S DISCUSSION AND ANALYSIS

 
Three Months Ended June 30
 
2013
 
2012
(000s, except per Bbl amounts)
$ 

 
$/Bbl

 
$ 

 
$/Bbl

Oil sales
4,101

 
105.29

 
3,856

 
108.10

Royalties
1,571

 
40.34

 
1,562

 
43.79

Current taxes
506

 
12.99

 
528

 
14.80

Production and operating expenses
2,179

 
55.95

 
2,342

 
65.65

Netback
(155
)
 
(3.99
)
 
(576
)
 
(16.14
)
In Yemen, the Company experienced negative netbacks per Bbl of $3.99 and $11.86, respectively, in the three and six months ended June 30, 2013. Production and operating expenses on a per Bbl basis remained elevated in Q2-2013 as a result of production being shut-in on Block S-1 for the entire quarter. While production volumes were down, the Company continued to incur the majority of the production and operating costs on Block S-1 which significantly increased production and operating expenses per Bbl. Block S-1 production and operating expenses contributed $12.88/Bbl and $27.30/Bbl, respectively, to the production and operating expenses per Bbl in the tables above for the three and six months ended June 30, 2013. After being shut-in for several months, when production resumed on Block S-1 in July 2012 and again in November 2012 all operating expenses accumulated during the shut-in period were recovered through cost oil within the first two months of production. Similarly, the Block S-1 production and operating costs incurred while shut-in during 2013 will be recovered from cost oil when production resumes.
Royalties and taxes as a percentage of revenue decreased to 51% and 50%, respectively, in the three and six months ended June 30, 2013, compared with 54% and 57% in the same periods of 2012.
GENERAL AND ADMINISTRATIVE EXPENSES (“G&A”)
 
Six Months Ended June 30
 
2013
 
2012
(000s, except per Bbl amounts)
$ 

 
$/Bbl

 
$ 

 
$/Bbl

G&A (gross)
12,706

 
3.85

 
12,881

 
4.20

Stock-based compensation
2,562

 
0.78

 
1,977

 
0.64

Capitalized G&A and overhead recoveries
(1,849
)
 
(0.56
)
 
(1,379
)
 
(0.45
)
G&A (net)
13,419

 
4.07

 
13,479

 
4.39


 
Three Months Ended June 30
 
2013
 
2012
(000s, except per Bbl amounts)
$ 

 
$/Bbl

 
$ 

 
$/Bbl

G&A (gross)
5,799

 
3.44

 
6,610

 
4.28

Stock-based compensation
1,284

 
0.76

 
837

 
0.54

Capitalized G&A and overhead recoveries
(764
)
 
(0.45
)
 
(656
)
 
(0.43
)
G&A (net)
6,319

 
3.75

 
6,791

 
4.39

G&A expenses (net) in the three and six months ended June 30, 2013 remained relatively consistent compared with the same periods in 2012. On a per Bbl basis, decreases of 15% and 7%, respectively, in the three and six months ended June 30, 2013 compared with 2012 are mainly the result of increased sales volumes in 2013.
FINANCE COSTS
Finance costs for the three and six months ended June 30, 2013 decreased to $2.2 million and $4.4 million, respectively (2012 - $2.8 million and $9.0 million, respectively). The Company incurred convertible debenture issue costs of $4.6 million during the six months ended June 30, 2012, which caused a significant increase in finance costs during that period. The decrease in finance costs during the first half of 2013 relates principally to the absence of the convertible debenture issue costs in the current year.
 
Three Months Ended June 30
 
 
Six Months Ended June 30
 
(000s)
2013

 
2012

 
2013

 
2012

Interest expense
$
1,929

 
$
2,244

 
$
3,869

 
$
3,761

Issue costs for convertible debentures
—

 
241

 
—

 
4,630

Amortization of deferred financing costs
283

 
330

 
545

 
630

Finance costs
$
2,212

 
$
2,815

 
$
4,414

 
$
9,021


8
 
Q2-2013
MANAGEMENT'S DISCUSSION AND ANALYSIS


The Company had $18.5 million ($15.2 million net of unamortized deferred financing costs) of long-term debt outstanding at June 30, 2013 (June 30, 2012 - $40.0 million). On June 11, 2013, the Company finalized an amendment to the Borrowing Base Facility, which re-established the borrowing base at $100.0 million and extended the term of the facility to December 31, 2017. The long-term debt that was outstanding under the Borrowing Base Facility at June 30, 2013 bore interest at LIBOR plus an applicable margin that varies from 5.0% to 5.5% depending on the amount drawn under the facility.
In February 2012, the Company sold, on a bought-deal basis, C$97.8 million ($97.9 million) aggregate principal amount of convertible unsecured subordinated debentures with a maturity date of March 31, 2017. The debentures are convertible at any time and from time to time into common shares of the Company at a price of C$15.10 per common share. The debentures are not redeemable by the Company on or before March 31, 2015 other than in limited circumstances in connection with a change of control of TransGlobe. After March 31, 2015 and prior to March 31, 2017, the debentures may be redeemed by the Company at a redemption price equal to the principal amount plus accrued and unpaid interest, provided that the weighted-average trading price of the common shares for the 20 consecutive trading days ending five trading days prior to the date on which notice of redemption is provided is not less than 125 percent of the conversion price (or C$18.88 per common share). Interest of 6% is payable semi-annually in arrears on March 31 and September 30. At maturity or redemption, the Company has the option to settle all or any portion of principal obligations by delivering to the debenture holders sufficient common shares to satisfy these obligations.
DEPLETION AND DEPRECIATION (“DD&A”)
 
Six Months Ended June 30
 
2013
 
2012
(000s, except per Bbl amounts)
$ 

 
$/Bbl

 
$ 

 
$/Bbl

Egypt
22,430

 
6.93

 
22,864

 
7.61

Yemen
634

 
10.46

 
449

 
7.15

Corporate
176

 
—

 
198

 
—

 
23,240

 
7.05

 
23,511

 
7.67


 
Three Months Ended June 30
 
2013
 
2012
(000s, except per Bbl amounts)
$ 

 
$/Bbl

 
$ 

 
$/Bbl

Egypt
11,540

 
7.00

 
11,563

 
7.66

Yemen
432

 
11.09

 
201

 
5.63

Corporate
88

 
—

 
(2
)
 


 
12,060

 
7.15

 
11,762

 
7.61

In Egypt, DD&A decreased 9% on a per Bbl basis for the three and six month periods ended June 30, 2013 compared to 2012. This decrease is mostly due to proved plus probable reserve additions during the third and fourth quarters of 2012.
In Yemen, DD&A increased 97% and 46%, respectively, on a per Bbl basis for the three and six month periods ended June 30, 2013 compared to 2012. These increases are due to a smaller reserve base over which capital costs are being depleted and increased future development costs in the first six months of 2013 as compared to 2012.

IMPAIRMENT OF EXPLORATION AND EVALUATION ASSETS

On the South Mariut block, the Company drilled two exploration wells during the first quarter of 2013 and one exploration well during the second quarter of 2013, all of which were dry. The Company and its joint interest partner fulfilled their commitments under the terms of the South Mariut Concession Agreement, and elected not to commit to the second and final two-year extension period and subsequently relinquished the block. Because the Company and its partners have no plans for further exploration in the South Mariut block, the Company recorded an impairment loss on the South Mariut exploration and evaluation assets in the amount of $19.7 million during the second quarter of 2013. The impairment relates to all intangible exploration and evaluation asset costs carried at South Mariut as at June 30, 2013.

CAPITAL EXPENDITURES
 
Six Months Ended June 30
 
($000s)
2013

 
2012

Egypt
36,093

 
18,467

Yemen
1,377

 
373

Acquisitions
—

 
23,097

Corporate
18

 
82

Total
37,488

 
42,019



Q2-2013
 
9
MANAGEMENT'S DISCUSSION AND ANALYSIS


In Egypt, total capital expenditures in the first six months of 2013 were $36.1 million (2012 - $18.5 million). During the first six months of the year, the Company drilled ten wells at West Gharib (seven oil wells at Arta, one oil well at Hana, along with one oil well and one dry hole at East Arta). The Company also drilled eight oil wells at West Bakr, two oil wells and one dry hole at East Ghazalat, and three dry holes at South Mariut.
OUTSTANDING SHARE DATA
As at June 30, 2013, the Company had 73,894,138 common shares issued and outstanding and 7,000,101 stock options issued and outstanding, which are exercisable in accordance with their terms into a maximum of 7,000,101 common shares of the Company.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity describes a company’s ability to access cash. Companies operating in the upstream oil and gas industry require sufficient cash in order to fund capital programs necessary to maintain and increase production and reserves, to acquire strategic oil and gas assets and to repay debt. TransGlobe’s capital programs are funded principally by cash provided from operating activities. A key measure that TransGlobe uses to evaluate the Company’s overall financial strength is debt-to-funds flow from operations (calculated on a 12-month trailing basis). TransGlobe’s debt-to-funds flow from operations ratio, a key short-term leverage measure, remained strong at 0.6 times at June 30, 2013 (December 31, 2012 - 0.8). This is within the Company’s target range of no more than 2.0 times.
The following table illustrates TransGlobe’s sources and uses of cash during the periods ended June 30, 2013 and 2012:
Sources and Uses of Cash
 
 
 
 
Six Months Ended June 30
 
($000s)
2013

 
2012

Cash sourced
 
 
 
Funds flow from operations*
68,892

 
71,262

Transfer from restricted cash
—

 
807

Issue of convertible debentures
—

 
97,851

Exercise of stock options
500

 
1,522

Other
—

 
168

 
69,392

 
171,610

Cash used
 
 
 
Capital expenditures
37,488

 
18,922

Deferred financing costs
2,205

 
—

Transfer to restricted cash
1

 
—

Acquisitions
—

 
23,097

Repayment of long-term debt
—

 
20,000

Finance costs
3,558

 
6,023

Other
1,517

 
329

 
44,769

 
68,371

 
24,623

 
103,239

Changes in non-cash working capital
(6,162
)
 
(74,510
)
Increase in cash and cash equivalents
18,461

 
28,729

Cash and cash equivalents – beginning of period
82,974

 
43,884

Cash and cash equivalents – end of period
101,435

 
72,613

* Funds flow from operations is a measure that represents cash generated from operating activities before changes in non-cash working capital.
Funding for the Company’s capital expenditures was provided by funds flow from operations. The Company expects to fund its 2013 exploration and development program, which is estimated at $80.0 million ($42.5 million remaining), and contractual commitments through the use of working capital and cash generated by operating activities. Fluctuations in commodity prices, product demand, foreign exchange rates, interest rates and various other risks including timely collections of accounts receivable from the Egyptian Government may impact capital resources.
Working capital is the amount by which current assets exceed current liabilities. At June 30, 2013, the Company had working capital of $286.8 million (December 31, 2012 - $262.2 million). The increase to working capital in Q2-2013 is principally the result of an increase in cash and cash equivalents. The majority of the Company’s accounts receivable are due from Egyptian General Petroleum Company ("EGPC"), and the continued political changes in the country have increased EGPC's credit risk, which has increased the Company’s credit risk. The Company is in continual discussions with EGPC and the Egyptian Government to determine solutions to the delayed cash collections, and expects to recover the entire accounts receivable balance in full. In addition to receiving variable monthly cash payments, the Company is scheduled to receive one and a half cargo liftings in the second half of 2013 at an estimated value of $70 million to $75 million depending on the prevailing oil price at the time of lifting. A typical full cargo lifting is approximately 510,000 barrels.

10
 
Q2-2013
MANAGEMENT'S DISCUSSION AND ANALYSIS


At June 30, 2013, TransGlobe had $100.0 million available under a Borrowing Base Facility of which $18.5 million was drawn. As repayments on the Borrowing Base Facility are not expected to commence until 2017, the entire balance is presented as a long-term liability on the Condensed Consolidated Interim Balance Sheets. Repayments will be made as required according to the scheduled reduction of the facility.
($000s)
June 30, 2013

 
December 31, 2012

Bank debt
18,450

 
18,450

Deferred financing costs
(3,226
)
 
(1,565
)
Long-term debt (net of deferred financing costs)
15,224

 
16,885


COMMITMENTS AND CONTINGENCIES
As part of its normal business, the Company entered into arrangements and incurred obligations that will impact the Company’s future operations and liquidity. The principal commitments of the Company are as follows:
($000s)
 
 
 
 
Payment Due by Period1,2
 
Recognized
 
 
 
 
 
 
 
 
 
 
 
in Financial
 
Contractual

 
Less than

 
 
 
 
 
More than

 
Statements
 
Cash Flows

 
1 year

 
1-3 years

 
4-5 years

 
5 years

Accounts payable and accrued
Yes-Liability
 
47,031

 
47,031

 
—

 
—

 
—

liabilities
 
 
 
 
 
Long-term debt
Yes-Liability
 
18,450

 
—

 
—

 
18,450

 
—

Convertible debentures
Yes-Liability
 
81,830

 
—

 
—

 
81,830

 
—

Office, equipment and drilling rig leases
No
 
18,346

 
11,328

 
2,638

 
2,030

 
2,350

Minimum work commitments3
No
 
750

 
750

 
—

 
—

 
—

Total
 
 
166,407

 
59,109

 
2,638

 
102,310

 
2,350

1 
Payments exclude ongoing operating costs, finance costs and payments made to settle derivatives.
2 
Payments denominated in foreign currencies have been translated at June 30, 2013 exchange rates.
3 
Minimum work commitments include contracts awarded for capital projects and those commitments related to exploration and drilling obligations.
The Company is subject to certain office, equipment and drilling rig leases.
Pursuant to the PSA for Block 75 in Yemen, the Contractor (Joint Interest Partners) has a remaining minimum financial commitment of $3.0 million ($0.8 million to TransGlobe) for one exploration well in the first exploration period, which has been extended to March 9, 2014.
Pursuant to the August 18, 2008 asset purchase agreement for a 25% financial interest in eight development leases on the West Gharib concession in Egypt, the Company has committed to paying the vendor a success fee to a maximum of $2.0 million if incremental reserve thresholds are reached in the South Rahmi development lease to be evaluated annually. Based on the Company's annual Reserve Report effective December 31, 2012, no additional fees were due in 2013.
Pursuant to the June 7, 2012 and July 26, 2012 share purchase agreements for a combined 100% operated interest in the South Alamein concession in Egypt, the Company has a commitment to drill one well (all financial commitments have been met) prior to the termination of the final two-year extension period, which expires on April 5, 2014.
In the normal course of its operations, the Company may be subject to litigation proceedings and claims. Although it is not possible to estimate the extent of potential costs, if any, management believes that the ultimate resolution of such contingencies would not have a material adverse impact on the results of operations, financial position or liquidity of the Company.
The Company is not aware of any material provisions or other contingent liabilities as at June 30, 2013.


Q2-2013
 
11
MANAGEMENT'S DISCUSSION AND ANALYSIS


CHANGES IN ACCOUNTING POLICIES
New accounting policies
IFRS 10 (new) "Consolidated Financial Statements"
In May 2011, the IASB issued IFRS 10 to replace SIC-12, "Consolidation - Special Purpose Entities", and parts of IAS 27, "Consolidated and Separate Financial Statements". IFRS 10 establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 is effective for annual periods beginning on or after January 1, 2013; accordingly, the Company has adopted this standard for the year ending December 31, 2013. The adoption of this standard had no material impact on the Condensed Consolidated Interim Financial Statements.
IFRS 11 (new) "Joint Arrangements"
In May 2011, the IASB issued IFRS 11 to replace IAS 31, "Interests in Joint Ventures", and SIC-13, "Jointly Controlled Entities - Non-monetary Contributions by Venturers". IFRS 11 requires entities to follow the substance rather than legal form of a joint arrangement and removes the choice of accounting method. IFRS 11 is effective for annual periods beginning on or after January 1, 2013; accordingly, the Company has adopted this standard for the year ending December 31, 2013. The adoption of this standard had no material impact on the Condensed Consolidated Interim Financial Statements.
IFRS 12 (new) "Disclosure of Interests in Other Entities"
In May 2011, the IASB issued IFRS 12, which aggregates and amends disclosure requirements included within other standards. IFRS 12 requires entities to provide disclosures about subsidiaries, joint arrangements, associates and unconsolidated structured entities. IFRS 12 is effective for annual periods beginning on or after January 1, 2013; accordingly, the Company has adopted this standard for the year ending December 31, 2013. The adoption of this standard had no material impact on the Condensed Consolidated Interim Financial Statements.
IFRS 13 (new) "Fair Value Measurement"
In May 2011, the IASB issued IFRS 13 to clarify the definition of fair value and provide guidance on determining fair value. IFRS 13 amends disclosure requirements included within other standards and establishes a single framework for fair value measurement and disclosure. IFRS 13 is effective for annual periods beginning on or after January 1, 2013; accordingly, the Company has adopted this standard for the year ending December 31, 2013. The adoption of this standard had no material impact on the Condensed Consolidated Interim Financial Statements.
IAS 1 (revised) “Presentation of Financial Statements”
In June 2011, the IASB issued amendments to IAS 1 to require separate presentation for items of other comprehensive income that would be reclassified to profit or loss in the future from those that would not. These amendments are effective for annual periods beginning on or after July 1, 2012; accordingly, the Company has adopted these amendments for the year ending December 31, 2013. These amendments had no material impact on the Condensed Consolidated Interim Financial Statements.
IAS 19 (revised) “Employee Benefits”
In June 2011, the IASB issued amendments to IAS 19 to revise certain aspects of the accounting for pension plans and other benefits. The amendments eliminate the corridor method of accounting for defined benefit plans, change the recognition pattern of gains and losses, and require additional disclosures. These amendments are effective for annual periods beginning on or after January 1, 2013; accordingly, the Company has adopted these amendments for the year ending December 31, 2013. These amendments had no material impact on the Condensed Consolidated Interim Financial Statements.
IAS 28 (revised) “Investments in Associates and Joint Ventures”
In May 2011, the IASB issued amendments to IAS 28 to prescribe the accounting for investments in associates and set out the requirements for applying the equity method when accounting for investments in associates and joint ventures. These amendments are effective for annual periods beginning on or after January 1, 2013; accordingly, the Company has adopted these amendments for the year ending December 31, 2013. These amendments had no material impact on the Condensed Consolidated Interim Financial Statements.
Future changes to accounting policies
As at the date of authorization of the Condensed Consolidated Interim Financial Statements the following Standards and Interpretations which have not yet been applied in the Condensed Consolidated Interim Financial Statements have been issued but are not yet effective:
IFRS 9 (revised) "Financial Instruments: Classification and Measurement"
In November 2009, the IASB issued IFRS 9 as part of its project to replace IAS 39, "Financial Instruments: Recognition and Measurement". In October 2010, the IASB updated IFRS 9 to include the requirements for financial liabilities. IFRS 9 replaces the multiple rules in IAS 39 with a single approach to determine whether a financial asset is measured at amortized cost or fair value. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. IFRS 9 is effective for annual periods beginning on or after January 1, 2015. The Company is currently evaluating the impact of this standard on its Condensed Consolidated Interim Financial Statements.

12
 
Q2-2013
MANAGEMENT'S DISCUSSION AND ANALYSIS


IFRS 10 (revised) "Consolidated Financial Statements"
In October 2012, the IASB issued amendments to IFRS 10 to define investment entities, provide an exception to the consolidation of investment entities by a parent company, and prescribe fair value measurement to measure such entities. These amendments are effective for annual periods beginning on or after January 1, 2014. The Company is currently evaluating the impact of these amendments on its Condensed Consolidated Interim Financial Statements.
IFRS 12 (revised) "Disclosure of interests in other entities"
In October 2012, the IASB issued amendments to IFRS 12 to prescribe disclosures about significant judgments and assumptions used to determine whether an entity is an investment entity as well as other disclosures regarding the measurement of such entities. These amendments are effective for annual periods beginning on or after January 1, 2014. The Company is currently evaluating the impact of these amendments on its Condensed Consolidated Interim Financial Statements.
IAS 32 (revised) “Financial Instruments: Presentation”
In December 2011, the IASB issued amendments to IAS 32 to address inconsistencies when applying the offsetting criteria. These amendments clarify some of the criteria required to be met in order to permit the offsetting of financial assets and financial liabilities. These amendments are effective for annual periods beginning on or after January 1, 2014. The Company is currently evaluating the impact of these amendments to its Condensed Consolidated Interim Financial Statements.

INTERNAL CONTROLS OVER FINANCIAL REPORTING
TransGlobe's management designed and implemented internal controls over financial reporting, as defined under National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings, of the Canadian Securities Administrators and as defined in Rule 13a-15 under the US Securities Exchange Act of 1934. Internal controls over financial reporting is a process designed under the supervision of the Chief Executive Officer and the Chief Financial Officer and effected by the Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS, focusing in particular on controls over information contained in the annual and interim financial statements. Due to its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements on a timely basis. A system of internal controls over financial reporting, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the internal controls over financial reporting are met. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
No changes were made to the Company’s internal control over financial reporting during the period ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, the internal controls over financial reporting.

Q2-2013
 
13