EX-3 2 managementsdiscusisonanaly.htm EXHIBIT Managements' Discusison & Analysis
 


MANAGEMENT'S DISCUSSION AND ANALYSIS
November 10, 2014
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 nine months ended September 30, 2014 and 2013 and the audited Consolidated Financial Statements and management's discussion and analysis ("MD&A") for the year ended December 31, 2013 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, the anticipated amount and timing of future dividend payments, the sustainability of future dividend payments, anticipated increases to the Company's reserves and production, 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 the remainder of 2014, including expected 2014 average production, funds flow from operations, the 2014 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.




Q3-2014
 
1
 


DIVIDENDS
On November 10, 2014, TransGlobe's Board of Directors approved and declared a quarterly dividend of $0.05 per share, payable in cash as follows:
Ex-dividend date
 
Record date
 
Payment date
 
Per share amount

December 11, 2014
 
December 15, 2014
 
December 31, 2014
 

$0.05


The initiation of a quarterly dividend payment program in the second quarter of 2014 is a key component of TransGlobe's objective to create value for its shareholders. The Company believes that it is well positioned to sustain a quarterly dividend payment, and intends to approve and declare regular quarterly dividends on a go-forward basis.
The actual amount of future quarterly dividends will be proposed by management and subject to the approval and discretion of the Board. The Board reviews proposed dividend payments in conjunction with their review of quarterly financial and operating results. Future dividend levels will be dependent upon economic factors including commodity prices, capital expenditure programs and production volumes, and will be evaluated regularly to ensure that dividend payments do not compromise the strong financial position or the growth of the Company.
The quarterly dividend declared on November 10, 2014 has been designated as an eligible dividend under the Income Tax Act (Canada).
MANAGEMENT STRATEGY AND OUTLOOK
The Q4-2014 outlook provides information as to management’s expectation for results of operations for Q4-2014. Readers are cautioned that the Q4-2014 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.
Q4-2014 Outlook
It is expected that fourth quarter production will be in the 15,000 Bopd range. Assuming 15,000 Bopd for the fourth quarter, total production for 2014 would average approximately 16,000 Bopd.
With average production at 16,000 Bopd for 2014, funds flow from operations would be approximately $122.5 million ($113.2 million excluding the $9.3 termination fee from Caracal) assuming an average Dated Brent oil price of $82.5/Bbl in the fourth quarter. The funds flow sensitivity to a $10/Bbl change in Brent for the balance of the year is approximately $3.5 million.
2014 Capital Budget
 
Nine Months Ended

 
2014

($ millions)
 
September 30, 2014

 
Capital Budget

Egypt
 
55.9

 
93.6

Yemen
 
1.4

 
6.4

Corporate
 
0.6

 
-

 
 
57.9

 
100.0

As at September 30, 2014 the Company had spent approximately 58% of the 2014 budget. The Company spent approximately $26.0 million on capital programs in the third quarter of 2014. The elevated spending in the third quarter as compared to the first two quarters was the result of the addition of a third drilling rig (late June) and the commencement of a large seismic acquisition program in the Eastern Desert in August.
Although the Company’s capital budget remains at $100.0 million, it is, expected that $85.0 - $90.0 million will be invested in Egypt during 2014, with minimal investment in Yemen due to tribal issues.
The 2014 capital program is split 68:32 between development and exploration, respectively. The Company now expects to drill approximately 42 wells in 2014. The Company will fund its entire 2014 capital budget through the use of working capital and cash generated by operating activities.

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 necessary to fund future growth through capital investment. Funds flow from operations may not be comparable to similar measures used by other companies.







2
 
Q3-2014
 

          Reconciliation of Funds Flow from Operations
 
 
 
 
 
 
 
Three Months Ended
September 30
 
 
Nine Months Ended
September 30
 
($000s)
2014

 
2013

 
2014

 
2013

Cash flow from operating activities
(3,123
)
 
22,035

 
33,555

 
90,282

Changes in non-cash working capital
32,008

 
11,448

 
71,002

 
12,093

Funds flow from operations*
28,885

 
33,483

 
104,557

 
102,375

* 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 12 months. Debt-to-funds flow may not be comparable to similar measures used by other companies.
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”).


Q3-2014
 
3
 


SELECTED QUARTERLY FINANCIAL INFORMATION
 
 
2014
 
2013
 
2012

(000s, except per share, price and volume amounts)
 
Q-3

 
Q-2

 
Q-1

 
Q-4

 
Q-3

 
Q-2

 
Q-1

 
Q-4

Average production volumes (Bopd)
 
15,109

 
16,112

 
18,067

 
18,519

 
18,197

 
18,417

 
18,001

 
17,875

Average sales volumes (Bopd)
 
15,132

 
16,485

 
17,932

 
18,213

 
18,109

 
18,539

 
17,909

 
19,148

Average price ($/Bbl)
 
88.59

 
96.14

 
94.89

 
96.10

 
97.18

 
90.48

 
99.21

 
98.70

Oil sales
 
123,317

 
144,208

 
153,140

 
161,035

 
161,900

 
152,646

 
159,915

 
173,864

Oil sales, net of royalties
 
67,848

 
76,040

 
78,366

 
81,196

 
78,531

 
76,223

 
79,366

 
92,281

Cash flow from operating activities
 
(3,123
)
 
33,467

 
3,211

 
109,226

 
22,035

 
16,347

 
51,900

 
65,250

Funds flow from operations*
 
28,885

 
43,185

 
32,487

 
36,743

 
33,483

 
32,887

 
36,005

 
46,839

Funds flow from operations per share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- Basic
 
0.38

 
0.58

 
0.44

 
0.49

 
0.45

 
0.45

 
0.49

 
0.63

- Diluted
 
0.35

 
0.57

 
0.43

 
0.49

 
0.44

 
0.40

 
0.44

 
0.57

Net earnings
 
19,162

 
26,199

 
16,692

 
6,893

 
16,344

 
10,397

 
24,878

 
34,836

Net earnings (loss) - diluted
 
14,934

 
26,199

 
16,692

 
6,893

 
16,344

 
(183
)
 
21,427

 
32,156

Net earnings per share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- Basic
 
0.26

 
0.35

 
0.22

 
0.09

 
0.22

 
0.14

 
0.34

 
0.48

- Diluted
 
0.18

 
0.35

 
0.22

 
0.09

 
0.22

 
—

 
0.26

 
0.39

Dividends paid
 
3,761

 
11,229

 
—

 
—

 
—

 
—

 
—

 
—

Dividends paid per share
 
0.05

 
0.15

 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
720,306

 
705,859

 
692,341

 
675,800

 
723,708

 
670,996

 
672,675

 
653,425

Cash and cash equivalents
 
77,939

 
110,057

 
107,607

 
122,092

 
128,162

 
101,435

 
112,180

 
82,974

Convertible debentures
 
83,229

 
88,814

 
87,765

 
87,539

 
85,300

 
81,830

 
93,842

 
98,742

Total long-term debt, including
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
current portion
 
—

 
—

 
—

 
—

 
39,040

 
15,224

 
17,097

 
16,885

Debt-to-funds flow ratio**
 
0.6

 
0.6

 
0.6

 
0.6

 
0.8

 
0.6

 
0.7

 
0.8

* 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.

During the third quarter of 2014, TransGlobe:
•
Maintained a strong financial position, reporting a debt-to-funds flow ratio of 0.6 at September 30, 2014;

•
Reported net earnings of $19.2 million, (includes $4.2 million foreign exchange gain and a $1.4 million non-cash unrealized gain on the convertible debentures);

•
Experienced a decrease in oil sales compared to Q2-2014 and Q3-2013 as a result of decreased sales volumes combined with lower oil prices;

•
Achieved funds flow from operations of $28.9 million, which represents a decrease from Q2-2014 and Q3-2013. In the current quarter, funds flow from operations has been negatively impacted by reduced sales volumes and lower oil prices as compared to Q2-2014 and Q3-2013. In addition, funds flow from operations was elevated in Q2-2014 due to the receipt of the reverse termination fee from Caracal in the amount of $9.3 million;

•
Experienced a decrease in cash flow from operating activities as compared to Q2-2014, which is mostly due to the reverse termination fee received from Caracal in Q2-2014 along with lower collections of accounts receivable balances in the current quarter;

•
Spent $26.0 million on capital programs, which was funded entirely with funds flow from operations and cash on hand; and

•
Paid a quarterly dividend of $3.8 million ($0.05/share) during the third quarter of 2014.


4
 
Q3-2014
 


2014 TO 2013 NET EARNINGS VARIANCES
 
$000s

 
$ Per Share Diluted

 
% Variance

Q3-2013 net earnings
16,344

 
0.22

 

Cash items
 
 
 
 
 
Volume variance
(25,210
)
 
(0.30
)
 
(154
)
Price variance
(13,373
)
 
(0.16
)
 
(82
)
Royalties
27,900

 
0.34

 
171

Expenses:
 
 
 
 
 
Production and operating
(1,322
)
 
(0.02
)
 
(8
)
Cash general and administrative
(628
)
 
(0.01
)
 
(4
)
Exploration
75

 
—

 
—

Current income taxes
7,816

 
0.09

 
48

Realized foreign exchange gain (loss)
111

 
—

 
1

Interest on long-term debt
666

 
0.01

 
4

Other income
33

 
—

 
—

Total cash items variance
(3,932
)
 
(0.05
)
 
(24
)
Non-cash items
 
 
 
 
 
Unrealized foreign exchange gain
5,923

 
0.07

 
36

Depletion, depreciation and amortization
347

 
—

 
2

Unrealized gain (loss) on financial instruments
3,054

 
0.04

 
19

Impairment loss
226

 
—

 
1

Stock-based compensation
(118
)
 
—

 
(1
)
Deferred income taxes
(2,678
)
 
(0.03
)
 
(16
)
Deferred lease inducement
(3
)
 
—

 
—

Amortization of deferred financing costs
(1
)
 
—

 
—

Total non-cash items variance
6,750

 
0.08

 
41

Q3-2014 net earnings
19,162

 
0.25

 
17

 
 
 
 
 
 
Other items affecting diluted earnings per share
 
 
 
 
 
Convertible debentures
 
 
(0.07
)
 
(35
)
Q3-2014 net earnings per share - diluted
 
 
0.18

 
(18
)
Net earnings increased to $19.2 million in Q3-2014 compared to $16.3 million in Q3-2013. The earnings impact of reduced volumes and lower oil prices was partially offset by reductions in royalty costs and current income taxes. The convertible debenture accounted for significant portions of the earnings variance from Q3-2013 to Q3-2014 as the majority of the foreign exchange gain in the current quarter is attributable to the convertible debenture, as is the unrealized gain on financial instruments.
BUSINESS ENVIRONMENT
The Company’s financial results can be significantly influenced by fluctuations in commodity prices, including price differentials. The following table shows select market benchmark prices and foreign exchange rates:
 
2014
 
2013
 
Q-3

 
Q-2

 
Q-1

 
Q-4

 
Q-3

Dated Brent average oil price ($/Bbl)
101.82

 
108.95

 
108.18

 
109.27

 
110.27

U.S./Canadian Dollar average exchange rate
1.089

 
1.091

 
1.103

 
1.050

 
1.039


The price of Dated Brent oil averaged 7% lower in Q3-2014 compared with Q2-2014. 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. Conversely, when oil prices decline it takes more 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, depending on the PSC, the Contractor's share of excess ranges between 0% and 30%. In Yemen, under the Production Sharing Agreements, the excess is treated as production sharing oil. If the eligible cost recovery exceeds the maximum allowed percentage, the unclaimed cost recovery is carried forward to the next quarter. For the Company, 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). In Egypt, depending on the contract, the government receives 70% to 86% of the production sharing oil or profit oil. In Yemen, the government receives 65% 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

Q3-2014
 
5
 


oil. During times of lower oil prices, the Company receives more cost oil and may receive less profit 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) which will increase during rising oil prices and will decrease in declining oil prices..
Egypt has been experiencing significant political changes over the past three years and while this has had an impact on the efficient operations of the government in general, business processes and the Company’s operations have generally proceeded as normal. While exploration and development activities have generally been uninterrupted, the Company has continued to experience delays in the collection of accounts receivable from the Egyptian Government. The Company is in continual discussions with the Egyptian Government to improve the delayed cash collections, and expects to recover the accounts receivable balance in full. During the first nine months of 2014, the Company collected $93.4 million in accounts receivable from the Egyptian Government.
The Egyptian government recently implemented higher gasoline, diesel and natural gas prices, effectively reducing the subsidies carried by the government. These price increases are expected to have a material impact on Egypt’s current budget deficit and are also expected to enable the Egyptian government to make more timely payments for its purchases of oil and gas from international oil companies. Given the political sensitivity of the reduction of fuel subsidies, it is extremely encouraging to see the Egyptian Government take decisive action in this regard. The fact that the newly formed government is willing to take actions that may not be popular from a political perspective to improve the Egyptian economy is viewed as very positive by TransGlobe.
In an effort to expand the Company’s exploration opportunities in Egypt, TransGlobe submitted a bid on the NW Sitra exploration block on July 3, 2014 in the EGPC bid round. On September 3, 2014, it was announced that TransGlobe was the successful bidder on the NW Sitra concession, and the ratification approval process could be complete by late 2014.

OPERATING RESULTS AND NETBACK
Daily Volumes, Working Interest before Royalties (Bopd)
Production Volumes
 
Three Months Ended September 30
 
 
Nine Months Ended
September 30
 
 
2014

 
2013

 
2014

 
2013

Egypt
14,898

 
17,878

 
16,038

 
17,886

Yemen
211

 
319

 
379

 
319

Total Company
15,109

 
18,197

 
16,417

 
18,205


Sales Volumes
 
Three Months Ended September 30
 
 
Nine Months Ended
September 30
 
 
2014

 
2013

 
2014

 
2013

Egypt
14,898

 
17,878

 
16,038

 
17,886

Yemen
234

 
231

 
467

 
300

Total Company
15,132

 
18,109

 
16,505

 
18,186


Netback
Consolidated
 
Nine Months Ended September 30
 
2014
 
 
2013
(000s, except per Bbl amounts)
$ 

 
$/Bbl

 
$ 

 
$/Bbl

Oil sales
420,665

 
93.36

 
474,461

 
95.57

Royalties
198,411

 
44.03

 
240,341

 
48.41

Current taxes
52,747

 
11.71

 
66,682

 
13.43

Production and operating expenses
56,848

 
12.62

 
48,984

 
9.87

Netback
112,659

 
25.00

 
118,454

 
23.86


6
 
Q3-2014
 


 
Three Months Ended September 30
 
2014
 
 
2013
 
(000s, except per Bbl amounts)
$ 

 
$/Bbl

 
$ 

 
$/Bbl

Oil sales
123,316

 
88.59

 
161,900

 
97.18

Royalties
55,468

 
39.84

 
83,369

 
50.04

Current taxes
14,750

 
10.60

 
22,566

 
13.54

Production and operating expenses
18,245

 
13.11

 
16,923

 
10.16

Netback
34,853

 
25.04

 
39,042

 
23.44



Egypt
 
Nine Months Ended September 30
 
2014
 
 
2013
 
(000s, except per Bbl amounts)
$ 

 
$/Bbl

 
$ 

 
$/Bbl

Oil sales
407,066

 
92.97

 
465,574

 
95.35

Royalties
195,496

 
44.65

 
237,311

 
48.60

Current taxes
51,749

 
11.82

 
65,695

 
13.45

Production and operating expenses
47,904

 
10.94

 
42,921

 
8.79

Netback
111,917

 
25.56

 
119,647

 
24.51

 
Three Months Ended September 30
 
2014
 
 
2013
 
(000s, except per Bbl amounts)
$ 

 
$/Bbl

 
$ 

 
$/Bbl

Oil sales
121,102

 
88.36

 
159,540

 
97.00

Royalties
55,774

 
40.69

 
82,815

 
50.35

Current taxes
14,596

 
10.65

 
22,369

 
13.60

Production and operating expenses
15,612

 
11.39

 
14,840

 
9.02

Netback
35,120

 
25.63

 
39,516

 
24.03

The netback per Bbl in Egypt increased 7% and 4%, respectively, in the three and nine months ended September 30, 2014 compared with the same periods of 2013. Production and operating expenses increased by $2.37/Bbl and $2.15/Bbl, respectively, which was principally a result of increased well servicing costs relating to faulty progressive cavity pumps at West Gharib, along with increased costs at West Bakr associated with replacing pump jacks that are at the end of their life cycles. The increase in production and operating expenses resulted in a decrease in the amount of royalties and current taxes as a percentage of revenue per Bbl for the three and nine months ended September 30, 2014 as compared to the same periods in 2013. The decrease in oil prices also contributed to the reduced royalties and current taxes as a percentage of revenue as a result of the terms of the Company's PSCs. When oil prices fall it takes more barrels to recover costs, thereby reducing excess cost oil barrels, the majority of which are allocated to the government. Total government take (royalties and current taxes) as a percentage of revenue was 58% and 61%, respectively, for the three and nine months ended September 30, 2014 compared with 66% and 65%, respectively, for the same periods of 2013.
The average selling price during the three months ended September 30, 2014 was $88.36/Bbl, which was $13.46/Bbl lower than the average Dated Brent oil price of $101.82/Bbl for the period. This difference relates to a quality/gravity adjustment for West Gharib, East Ghazalat and Yemen and an additional marketing difference for West Bakr. The appropriateness of the marketing difference is being discussed with EGPC as part of the broader export discussions occurring between the Company and EGPC.

Yemen
 
Nine Months Ended September 30
 
2014
 
 
2013
 
(000s, except per Bbl amounts)
$ 

 
$/Bbl

 
$ 

 
$/Bbl

Oil sales
13,599

 
106.67

 
8,887

 
108.51

Royalties
2,915

 
22.86

 
3,030

 
37.00

Current taxes
998

 
7.83

 
987

 
12.05

Production and operating expenses
8,944

 
70.15

 
6,063

 
74.03

Netback
742

 
5.83

 
(1,193
)
 
(14.57
)



Q3-2014
 
7
 


 
Three Months Ended September 30
 
2014
 
 
2013
 
(000s, except per Bbl amounts)
$ 

 
$/Bbl

 
$ 

 
$/Bbl

Oil sales
2,214

 
102.84

 
2,360

 
111.05

Royalties
(306
)
 
(14.21
)
 
554

 
26.07

Current taxes
154

 
7.15

 
197

 
9.27

Production and operating expenses
2,633

 
122.31

 
2,083

 
98.01

Netback
(267
)
 
(12.41
)
 
(474
)
 
(22.30
)
In Yemen, the Company experienced a negative netback per Bbl of $12.41 in the three months ended September 30, 2014, and a positive netback per Bbl of $5.83 in the nine months ended September 30, 2014. Production and operating expenses remain at elevated levels on a per Bbl basis in 2014 as a result of production shut-ins on Block S-1 and Block 32 during the first nine months of the year. While production volumes were down, the Company continued to incur the majority of the operating costs which significantly impacted operating expenses per Bbl. These operating costs will be recovered from cost oil when production resumes. In the interim the Company is discussing with its partner how to decrease these fixed operating costs while not on production.
Royalties and taxes are in a credit position for the three months ended September 30, 2014 as a result of over-accrued royalties in prior periods that have been reversed in the current period. Royalties and taxes as a percentage of revenue decreased to 29% in the nine months ended September 30, 2014, compared with 45% in the same period of 2013. The reduced government take is the result of the reversal of prior period over-accruals combined with recovery of cost pools that were built up during periods when production was shut-in.

GENERAL AND ADMINISTRATIVE EXPENSES (“G&A”)
 
Nine Months Ended September 30
 
2014
 
 
2013
 
(000s, except per Bbl amounts)
$ 

 
$/Bbl

 
$ 

 
$/Bbl

G&A (gross)
22,577

 
5.01

 
19,328

 
3.89

Stock-based compensation
4,308

 
0.96

 
4,024

 
0.81

Capitalized G&A and overhead recoveries
(5,318
)
 
(1.18
)
 
(2,967
)
 
(0.60
)
G&A (net)
21,567

 
4.79

 
20,385

 
4.10


 
Three Months Ended September 30
 
2014
 
 
2013
 
(000s, except per Bbl amounts)
$ 

 
$/Bbl

 
$ 

 
$/Bbl

G&A (gross)
7,869

 
5.65

 
6,622

 
3.97

Stock-based compensation
1,580

 
1.13

 
1,462

 
0.88

Capitalized G&A and overhead recoveries
(1,734
)
 
(1.25
)
 
(1,118
)
 
(0.67
)
G&A (net)
7,715

 
5.53

 
6,966

 
4.18

G&A expenses (net) increased 11% and 6%, respectively, in the three and nine months ended September 30, 2014 compared with the same periods in 2013. G&A (gross) was elevated in the three and nine months ended September 30, 2014 mostly due to an increase in banking fees associated with the letters of credit ($60.2 million) required to backstop the Company's financial commitments under the PSCs that were ratified in late 2013 in Egypt. These banking fees were capitalized in their respective concessions, which is the reason for the increased capitalized G&A. Stock-based compensation has increased in both the three and nine months periods ended September 30, 2014 compared to the same periods in 2013 mostly as a result of the issuance of restricted share units, performance share units and deferred share units during Q2-2014.

FINANCE COSTS
Finance costs for the three and nine months ended September 30, 2014 were $2.0 million and $5.7 million, respectively (2013 - $2.6 million and $7.1 million, respectively). Interest expense on the convertible debentures for the three and nine-month periods ended September 30, 2014 were $1.4 million and $4.0 million, respectively (2013 - $1.4 million and $4.3 million, respectively). The decrease in this portion of the interest expense is due to foreign exchange fluctuations, as the interest on the convertible debentures is paid in Canadian dollars. The remaining decrease in interest expense is due to lower amounts drawn on the Company's Borrowing Base Facility thus far in 2014 as compared to 2013, and due to the capitalization of interest costs incurred on outstanding letters of credit in 2014.
 
Three Months Ended September 30
 
 
Nine Months Ended
September 30
 
(000s)
2014

 
2013

 
2014

 
2013

Interest expense
$
1,691

 
$
2,357

 
$
4,886

 
$
6,226

Amortization of deferred financing costs
282

 
281

 
837

 
826

Finance costs
$
1,973

 
$
2,638

 
$
5,723

 
$
7,052


8
 
Q3-2014
 


The Company had no long-term debt outstanding under the Borrowing Base Facility as at September 30, 2014 (September 30, 2013 - $42.0 million). The term of the facility extends to December 31, 2017 and the borrowing base is currently $100.0 million. The Borrowing Base Facility bears interest at LIBOR plus an applicable margin that varies from 5.0% to 5.5% depending on the amount drawn or utilized under the facility. The unutilized portion of the facility bears interest at 50% of the applicable margin.
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$14.67 per common share. Under certain circumstances the debentures may also be redeemed by the Company. The conversion price of the convertible debentures will adjust for any amounts paid out as dividends on the common shares of the Company, provided that the dividend payment causes the conversion price to change by an accumulative 1% or more. 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”)
 
Nine Months Ended September 30
 
2014
 
2013
(000s, except per Bbl amounts)
$ 

 
$/Bbl

 
$ 

 
$/Bbl

Egypt
35,401

 
8.09

 
34,109

 
6.99

Yemen
1,321

 
10.36

 
869

 
10.61

Corporate
342

 
—

 
275

 
—

 
37,064

 
8.23

 
35,253

 
7.10


 
Three Months Ended September 30
 
2014
 
2013
(000s, except per Bbl amounts)
$ 

 
$/Bbl

 
$ 

 
$/Bbl

Egypt
11,371

 
8.30

 
11,679

 
7.10

Yemen
171

 
7.94

 
235

 
11.06

Corporate
124

 
—

 
99

 
—

 
11,666

 
8.38

 
12,013

 
7.21

In Egypt, DD&A increased 17% and 16%, respectively, on a per Bbl basis for the three and nine month periods ended September 30, 2014 compared to the same periods in 2013. This increase is mostly due to a lower reserve base over which to deplete costs in Egypt along with increased future capital costs at West Bakr.
In Yemen, DD&A decreased 28% and 5%, respectively, on a per Bbl basis for the three and nine months ended September 30, 2014 compared to the same periods in 2013. DD&A expense in Yemen varies from period to period due to the movement of DD&A costs in and out of product inventory, which fluctuates with the timing of production and tanker liftings.

CAPITAL EXPENDITURES
 
Nine Months Ended September 30
 
($000s)
2014

 
2013

Egypt
55,851

 
57,070

Yemen
1,384

 
2,706

Corporate
632

 
130

Total
57,867

 
59,906

In Egypt, total capital expenditures in the first nine months of 2014 were $55.9 million (2013 - $57.1 million). During the first nine months of the year, the Company drilled nine wells at West Gharib (four oil wells and one dry hole at Arta, one oil well at East Arta, two oil wells at Hana and one oil well at Hana West). The Company also drilled nine oil wells at West Bakr and three oil wells and one dry hole at East Ghazalat.
On the NW Gharib exploration block, the Company commenced a seismic acquisition program and drilled four wells (two oil wells and two dry holes) during the third quarter of 2014.



Q3-2014
 
9
 


OUTSTANDING SHARE DATA
As at September 30, 2014, the Company had 75,218,161 common shares issued and outstanding and 6,117,100 stock options issued and outstanding, which are exercisable in accordance with their terms into a maximum of 6,117,100 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 September 30, 2014 (December 31, 2013 - 0.6). This is within the Company’s internal guideline of no more than 2.0 times.
The table below illustrates TransGlobe’s sources and uses of cash during the periods ended September 30, 2014 and 2013:
Sources and Uses of Cash
 
 
 
 
Nine Months Ended September 30
 
($000s)
2014

 
2013

Cash sourced
 
 
 
Funds flow from operations*
104,557

 
102,375

Increase in long-term debt
—

 
23,550

Exercise of stock options
2,479

 
719

 
107,036

 
126,644

Cash used
 
 
 
Capital expenditures
57,867

 
59,906

Dividends paid
14,990

 
—

Deferred financing costs
—

 
2,221

Transfer to restricted cash
2

 
467

Finance costs
6,011

 
7,670

Other
983

 
1,560

 
79,853

 
71,824

 
27,183

 
54,820

Changes in non-cash working capital
(71,336
)
 
(9,632
)
Increase in cash and cash equivalents
(44,153
)
 
45,188

Cash and cash equivalents – beginning of period
122,092

 
82,974

Cash and cash equivalents – end of period
77,939

 
128,162

* 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 cash generated by operating activities. The Company will fund its 2014 exploration and development program of an estimated $85.0 - $90.0 million including 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 September 30, 2014, the Company had working capital of $269.1 million (December 31, 2013 - $242.0 million). The increase to working capital in Q3-2014 is principally the result of an increase in accounts receivable combined with a decrease in accounts payable, which was partially offset by a decrease 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.
To date, the Company has experienced no difficulties with transferring funds abroad.
At September 30, 2014, TransGlobe had $100.0 million available under a Borrowing Base Facility of which no amounts were drawn, however, the Company was utilizing $60.2 million of the facility in the form of letters of credit.


10
 
Q3-2014
 


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
 
35,734

 
35,734

 
—

 
—

 
—

liabilities
 
 
 
 
 
Convertible debentures
Yes-Liability
 
83,229

 
—

 
83,229

 
—

 
—

Office, equipment and drilling rig leases
No
 
15,261

 
10,030

 
2,197

 
1,864

 
1,170

Minimum work commitments3
No
 
48,897

 
750

 
48,147

 
—

 
—

Total
 
 
183,121

 
46,514

 
133,573

 
1,864

 
1,170

1 
Payments exclude ongoing operating costs, finance costs and payments made to settle derivatives.
2 
Payments denominated in foreign currencies have been translated at September 30, 2014 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 PSC for North West Gharib in Egypt, the Company has a minimum financial commitment of $35.0 million ($25.1 million remaining) and a work commitment to drill 30 wells and acquire 200 square kilometers of 3-D seismic during the initial-three year exploration period, which commenced on November 7, 2013.
Pursuant to the PSC for South East Gharib in Egypt, the Company has a minimum financial commitment of $7.5 million ($6.7 million remaining) and a work commitment to drill two wells, acquire 200 square kilometers of 3-D seismic and acquire 300 kilometers of 2-D seismic during the initial three-year exploration period, which commenced on November 7, 2013.
Pursuant to the PSC for South West Gharib in Egypt, the Company has a minimum financial commitment of $10.0 million ($9.1 million remaining) and a work commitment to drill four wells and acquire 200 square kilometers of 3-D seismic during the initial three-year exploration period, which commenced on November 7, 2013.
Pursuant to the PSC for South Ghazalat in Egypt, the Company has a minimum financial commitment of $8.0 million ($7.2 million remaining) and a work commitment to drill two wells and acquire 400 square kilometers of 3-D seismic during the initial three-year exploration period, which commenced on November 7, 2013.
Pursuant to the PSC 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, 2015.
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 September 30, 2014.

CHANGES IN ACCOUNTING POLICIES
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; accordingly, the Company adopted this standard for the year ending December 31, 2014. The adoption of this standard had no material impact on the 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; accordingly, the Company adopted this standard for the year ending December 31, 2014. The adoption of this standard had no material impact on the Condensed Consolidated Interim Financial Statements.

Q3-2014
 
11
 


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; accordingly, the Company has adopted this standard for the year ending December 31, 2014. The adoption of this standard had no material impact on the Condensed Consolidated Interim Financial Statements.
IFRIC 21 (new) "Levies"
In May 2013, the IASB issued IFRIC 21, "Levies", which was developed by the IFRS Interpretations Committee ("IFRIC"). IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. The interpretation also clarifies that no liability should be recognized before the specified minimum threshold to trigger that levy is reached. IFRIC 21 is effective for annual periods beginning on or after January 1, 2014; accordingly, the Company has adopted this standard for the year ending December 31, 2014. The adoption of this standard had no material impact on the 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 September 30, 2014 that have materially affected, or are reasonably likely to materially affect, the internal controls over financial reporting.

12
 
Q3-2014