EX-1 2 a2015q2-financialsnotes.htm EXHIBIT 1 Exhibit
 


Condensed Consolidated Interim Statements of Earnings (Loss) and Comprehensive Income (Loss)
(Unaudited – Expressed in thousands of U.S. Dollars, except per share amounts)
 
 
 
Three Months Ended
 
 
Six Months Ended
 
 
 
 
June 30
 
 
June 30
 
 
Notes
 
2015

 
2014

 
2015

 
2014

 
 
 
 
 
 
 
 
 
 
REVENUE
 
 
 
 
 
 
 
 
 
Oil sales, net of royalties
4
 
$
33,960

 
$
76,040

 
$
63,533

 
$
154,406

Finance revenue
5
 
133

 
85

 
276

 
182

Other revenue

 
—

 
9,250

 
—

 
9,250

 
 
 
34,093


85,375


63,809


163,838

 
 
 
 
 
 
 
 
 
 
EXPENSES
 
 
 
 
 
 
 
 
 
Production and operating

 
14,188

 
19,025

 
29,653

 
38,603

Selling costs
6
 
806

 
—

 
3,897

 
—

General and administrative

 
6,019

 
6,844

 
13,937

 
13,852

Foreign exchange (gain) loss

 
1,173

 
3,121

 
(3,884
)
 
11

Finance costs
5
 
1,580

 
1,858

 
3,255

 
3,750

Exploration

 
6

 
227

 
27

 
665

Depletion, depreciation and amortization

 
12,397

 
12,233

 
23,921

 
25,398

Realized derivative loss on commodity contracts

 
—

 
—

 
688

 
—

Unrealized (gain) loss on financial instruments
12
 
7,754

 
(1,993
)
 
10,153

 
1,526

 
 
 
43,923


41,315


81,647


83,805

 
 
 
 
 
 
 
 
 
 
Earnings (loss) before income taxes
 
 
(9,830
)
 
44,060

 
(17,838
)
 
80,033

Income tax expense (recovery) - current
 
 
7,547

 
18,103

 
14,422

 
37,997

- deferred
 
 
(4,797
)
 
(242
)
 
(8,483
)
 
(855
)
 
 
 
2,750

 
17,861

 
5,939

 
37,142

NET EARNINGS (LOSS) AND COMPREHENSIVE
 
 
 
 
 
 
 
 
 
INCOME (LOSS) FOR THE PERIOD
 
 
$
(12,580
)
 
$
26,199

 
$
(23,777
)
 
$
42,891

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per share
16
 
 
 
 
 
 
 
 
Basic
 
 
$
(0.17
)
 
$
0.35

 
$
(0.32
)
 
$
0.57

Diluted
 
 
$
(0.17
)
 
$
0.35

 
$
(0.32
)
 
$
0.57

See accompanying notes to the Condensed Consolidated Interim Financial Statements.


Q2-2015
 
1
 


Condensed Consolidated Interim Balance Sheets
(Unaudited - Expressed in thousands of U.S. Dollars)
 
 
 
As at

 
As at

 
Notes
 
June 30, 2015

 
December 31, 2014

 
 
 
 
 
 
ASSETS
 
 
 
 
 
Current
 
 
 
 
 
Cash and cash equivalents
7
 
$
122,961

 
$
140,390

Accounts receivable

 
72,813

 
117,575

Prepaids and other

 
9,951

 
16,872

Product inventory
8
 
5,866

 
—

 
 
 
211,591

 
274,837

Non-Current
 
 
 
 
 
Restricted cash

 
1,549

 
1,548

Deferred financing costs
11
 
1,111

 
1,572

Intangible exploration and evaluation assets
9
 
120,736

 
100,594

Property and equipment

 
 
 
 
Petroleum properties
10
 
251,072

 
261,737

Other assets
10
 
5,505

 
5,590

Goodwill

 
8,180

 
8,180

 
   
 
$
599,744

 
$
654,058

 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
Current
 
 
 
 
 
Accounts payable and accrued liabilities

 
$
32,848

 
$
45,150

 
 
 
32,848

 
45,150

Non-Current
 
 
 
 
 
Convertible debentures
12
 
74,421

 
69,093

Deferred taxes

 
30,567

 
39,050

Other long-term liabilities

 
558

 
665

 
 
 
138,394

 
153,958

 
 
 
 
 
 
SHAREHOLDERS' EQUITY
 
 
 
 
 
Share capital
14
 
155,274

 
164,006

Contributed surplus

 
20,652

 
19,427

Retained earnings

 
285,424

 
316,667

 
 
 
461,350

 
500,100

 
 
 
$
599,744

 
$
654,058

See accompanying notes to the Condensed Consolidated Interim Financial Statements.
Approved on behalf of the Board:
Signed by:
“Ross G. Clarkson”
“Fred J. Dyment”
 
 
Ross G. Clarkson
Fred J. Dyment
Director
Director

2
 
Q2-2015
 


Condensed Consolidated Interim Statements of Changes in Shareholders’ Equity
(Unaudited – Expressed in thousands of U.S. Dollars)
 
 
 
Three Months Ended
 
 
Six Months Ended
 
 
 
 
June 30
 
 
June 30
 
 
Notes
 
2015

 
2014

 
2015

 
2014

 
 
 
 
 
 
 
 
 
 
Share Capital
 
 
 
 
 
 
 
 
 
Balance, beginning of period
14
 
$
164,305

 
$
161,531

 
$
164,006

 
$
160,561

Purchase of common shares
14
 
(9,031
)
 
—

 
(9,031
)
 
—

Stock options exercised
14
 
—

 
890

 
208

 
1,606

Transfer from contributed surplus on exercise of options
14
 
—

 
302

 
91

 
556

Balance, end of period
 
 
$
155,274

 
$
162,723

 
$
155,274

 
$
162,723

 
 
 
 
 
 
 
 
 
 
Contributed Surplus
 
 
 
 
 
 
 
 
 
Balance, beginning of period

 
$
20,104

 
$
16,310

 
$
19,427

 
$
15,692

Stock-based compensation expense
15
 
548

 
1,194

 
1,316

 
2,066

Transfer to share capital on exercise of options

 
—

 
(302
)
 
(91
)
 
(556
)
Balance, end of period
                       
 
$
20,652

 
$
17,202

 
$
20,652

 
$
17,202

 
 
 
 
 
 
 
 
 
 
Retained Earnings
 
 
 
 
 
 
 
 
 
Balance, beginning of period

 
$
301,707

 
$
340,629

 
$
316,667

 
$
323,937

Net earnings (loss) and total comprehensive income (loss)

 
(12,580
)
 
26,199

 
(23,777
)
 
42,891

Dividends
17
 
(3,703
)
 
(11,229
)
 
(7,466
)
 
(11,229
)
Balance, end of period
 
 
$
285,424

 
$
355,599

 
$
285,424

 
$
355,599

See accompanying notes to the Condensed Consolidated Interim Financial Statements.


Q2-2015
 
3
 


Condensed Consolidated Interim Statements of Cash Flows
(Unaudited - Expressed in thousands of U.S. Dollars)
 
 
 
Three Months Ended
 
 
Six Months Ended
 
 
 
 
June 30
 
 
June 30
 
 
Notes
 
2015

 
2014

 
2015

 
2014

CASH FLOWS RELATED TO THE FOLLOWING
 
 
 
 
 
 
 
 
 
ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OPERATING
 
 
 
 
 
 
 
 
 
Net earnings (loss) for the period
                 
 
$
(12,580
)
 
$
26,199

 
$
(23,777
)
 
$
42,891

Adjustments for:
 
 
 
 
 
 
 
 
 
Depletion, depreciation and amortization

 
12,397

 
12,233

 
23,921

 
25,398

Deferred lease inducement

 
(153
)
 
113

 
(52
)
 
218

Stock-based compensation

 
1,620

 
1,894

 
2,573

 
2,728

Finance costs
5
 
1,580

 
1,858

 
3,255

 
3,750

Income tax expense

 
2,750

 
17,861

 
5,939

 
37,142

Unrealized (gain) loss on financial instruments
12
 
7,754

 
(1,993
)
 
10,153

 
1,526

Unrealized (gain) loss on foreign currency translation

 
1,170

 
3,123

 
(3,887
)
 
16

Income taxes paid

 
(7,547
)
 
(18,103
)
 
(14,422
)
 
(37,997
)
Changes in non-cash working capital
19
 
17,332

 
(9,718
)
 
38,668

 
(38,994
)
Net cash generated by (used in) operating activities
 
 
24,323

 
33,467

 
42,371

 
36,678

 
 
 
 
 
 
 
 
 
 
INVESTING
 
 
 
 
 
 
 
 
 
Additions to intangible exploration and evaluation assets
9
 
(13,660
)
 
(2,506
)
 
(20,142
)
 
(3,702
)
Additions to petroleum properties
10
 
(8,413
)
 
(14,183
)
 
(15,780
)
 
(27,263
)
Additions to other assets
10
 
(264
)
 
(801
)
 
(516
)
 
(890
)
Changes in restricted cash

 
—

 
—

 
(1
)
 
(1
)
Changes in non-cash working capital
19
 
7,639

 
(2,854
)
 
(3,209
)
 
(2,539
)
Net cash generated by (used in) investing activities
 
 
(14,698
)
 
(20,344
)
 
(39,648
)
 
(34,395
)
 
 
 
 
 
 
 
 
 
 
FINANCING
 
 
 
 
 
 
 
 
 
Issue of common shares for cash
14
 
—

 
890

 
208

 
1,606

Purchase of common shares
14
 
(9,031
)
 
—

 
(9,031
)
 
—

Interest paid

 
(160
)
 
(209
)
 
(2,738
)
 
(4,056
)
Dividends paid
17
 
(3,703
)
 
(11,229
)
 
(7,466
)
 
(11,229
)
Increase (decrease) in other long-term liabilities

 
126

 
(140
)
 
—

 
(270
)
Net cash generated by (used in) financing activities
 
 
(12,768
)
 
(10,688
)
 
(19,027
)
 
(13,949
)
Currency translation differences relating to cash and cash equivalents
 
 
3

 
15

 
(1,125
)
 
(369
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
 
(3,140
)
 
2,450

 
(17,429
)
 
(12,035
)
 
 
 
 
 
 
 
 
 
 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
 
 
126,101

 
107,607

 
140,390

 
122,092

 
 
 
 
 
 
 
 
 
 
CASH AND CASH EQUIVALENTS, END OF PERIOD
               
 
$
122,961

 
$
110,057

 
$
122,961

 
$
110,057

See accompanying notes to the Condensed Consolidated Interim Financial Statements.

4
 
Q2-2015
 


NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at June 30, 2015 and December 31, 2014 and for the periods ended June 30, 2015 and 2014
(Unaudited - Expressed in U.S. Dollars)
1. CORPORATE INFORMATION
TransGlobe Energy Corporation is a publicly listed company incorporated in Alberta, Canada and its shares are listed on the Toronto Stock Exchange (“TSX”) and NASDAQ Exchange (“NASDAQ”). The address of its registered office is 2300, 250 – 5th Street SW, Calgary, Alberta, Canada, T2P 0R4. TransGlobe Energy Corporation together with its subsidiaries (“TransGlobe” or the “Company”) is engaged primarily in oil exploration, development and production and the acquisition of properties.
2. BASIS OF PREPARATION
Statement of compliance
These Condensed Consolidated Interim Financial Statements have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting using accounting policies consistent with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) effective as of June 30, 2015. These Condensed Consolidated Interim Financial Statements do not contain all the disclosures required for full annual financial statements and should be read in conjunction with the December 31, 2014 Consolidated Financial Statements.
These Condensed Consolidated Interim Financial Statements were authorized for issue by the Board of Directors on August 11, 2015.
Basis of measurement
The accounting policies used in the preparation of these Condensed Consolidated Interim Financial Statements were the same as those used in the preparation of the most recent Annual Financial Statements for the year ended December 31, 2014.
The Company prepared these Condensed Consolidated Interim Financial Statements on a going concern basis, which contemplates the realization of assets and liabilities in the normal course of business as they become due. Accordingly, these Condensed Consolidated Interim Financial Statements have been prepared on a historical cost basis, except for cash and cash equivalents and convertible debentures that have been measured at fair value.
Functional and presentation currency
In these Condensed Consolidated Interim Financial Statements, unless otherwise indicated, all dollar amounts are presented and expressed in United States (U.S.) dollars, which is the Company’s functional currency. All references to $ are to United States dollars and references to C$ are to Canadian dollars and all values are rounded to the nearest thousand except when otherwise indicated.

3. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Fair Values of Financial Instruments
The Company has classified its cash and cash equivalents as assets at fair value through profit or loss and its convertible debentures as financial liabilities at fair value through profit or loss, which are both measured at fair value with changes being recognized through earnings. Accounts receivable and restricted cash are classified as loans and receivables; accounts payable and accrued liabilities, and long-term debt are classified as other liabilities, all of which are measured initially at fair value, then at amortized cost after initial recognition.
Carrying value and fair value of financial assets and liabilities are summarized as follows:
 
 
June 30, 2015
 
 
December 31, 2014
 
 
 
Carrying

 
Fair

 
Carrying

 
Fair

Classification (000s)
 
Value

 
Value

 
Value

 
Value

Financial assets at fair value through profit or loss
 
$
122,961

 
$
122,961

 
$
140,390

 
$
140,390

Loans and receivables
 
74,362

 
74,362

 
119,123

 
119,123

Financial liabilities at fair value through profit or loss
 
74,421

 
74,421

 
69,093

 
69,093

Other liabilities
 
32,848

 
32,848

 
45,150

 
45,150

Assets and liabilities at June 30, 2015 that are measured at fair value are classified into levels reflecting the method used to make the measurements. Fair values of assets and liabilities included in Level 1 are determined by reference to quoted prices in active markets for identical assets and liabilities. Assets and liabilities in Level 2 include valuations using inputs other than quoted prices for which all significant inputs are observable, either directly or indirectly. Level 3 valuations are based on inputs that are unobservable and significant to the overall fair value measurement.
The Company’s cash and cash equivalents and convertible debentures are assessed on the fair value hierarchy described above. TransGlobe’s cash and cash equivalents and convertible debentures are classified as Level 1. Assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement within the fair value hierarchy level. There were no transfers between levels in the fair value hierarchy in the period.


Q2-2015
 
5
 


Credit risk
Credit risk is the risk of loss if the counterparties do not fulfill their contractual obligations. The Company’s exposure to credit risk primarily relates to cash equivalents and accounts receivable, the majority of which are in respect of oil operations. The Company generally extends unsecured credit to these parties and therefore the collection of these amounts may be affected by changes in economic or other conditions. The Company has not experienced any material credit losses in the collection of accounts receivable to date.
Trade and other receivables are analyzed in the table below. The majority of these receivables are due from the Egyptian General Petroleum Corporation ("EGPC"). The political transition and resultant economic malaise in the country that began in 2011 has resulted in irregular collection of accounts receivable from EGPC and generally a larger receivable balance, which has increased TransGlobe's credit risk. Despite these factors, the Company expects to collect in full all outstanding receivables.
In January 2015, TransGlobe began direct sales of Eastern Desert entitlement production to international buyers. The Company completed its second direct crude sale to a third party buyer during the second quarter of 2015. Going forward, the Company anticipates that direct sales will continue to reduce outstanding accounts receivable and credit risk in future periods.
(000s)
 
Trade receivables at June 30, 2015
 
Neither impaired nor past due
$
1,563

Impaired (net of valuation allowance)


Not impaired and past due in the following period:

Within 30 days
268

31-60 days
307

61-90 days
357

Over 90 days
70,318

The Company manages its credit risk on cash equivalents by investing only in term deposits with reputable Canadian and international banking institutions.
4. OIL REVENUE
 
Three Months Ended June 30
 
 
Six Months Ended June 30
 
(000s)
2015

 
2014

 
2015

 
2014

Oil sales
$
62,647

 
$
144,208

 
$
116,898

 
$
297,348

Less: Royalties
28,687

 
68,168

 
53,365

 
142,942

Oil sales, net of royalties
$
33,960

 
$
76,040

 
$
63,533

 
$
154,406

In January 2015, TransGlobe began direct sales of Eastern Desert entitlement production to international buyers. The Company completed its second direct crude sale to a third party buyer during the second quarter of 2015. Going forward, the Company anticipates that direct sales will continue to reduce outstanding accounts receivable and credit risk in future periods.

5. FINANCE REVENUE AND COSTS
Finance revenue relates to interest earned on the Company’s bank account balances and term deposits.
Finance costs recognized in earnings were as follows:
 
Three Months Ended June 30
 
 
Six Months Ended June 30
 
(000s)
2015

 
2014

 
2015

 
2014

Interest expense
$
1,354

 
$
1,579

 
$
2,793

 
$
3,195

Amortization of deferred financing costs
226

 
279

 
462

 
555

Finance costs
$
1,580

 
$
1,858

 
$
3,255

 
$
3,750




6
 
Q2-2015
 


6. SELLING COSTS
Selling costs include transportation and marketing costs associated with the direct sale of the Company's Egyptian crude oil production to third party buyers. The Company completed its second direct crude sale to a third party buyer during the second quarter of 2015.
7. CASH AND CASH EQUIVALENTS
(000s)
 
June 30, 2015

 
December 31, 2014

Cash
 
$
102,961

 
$
140,390

Cash equivalents
 
20,000

 
—

 
 
$
122,961

 
$
140,390

8. PRODUCT INVENTORY
Product inventory consists of crude oil held in storage, which is valued at the lower of cost or net realizable value. Cost includes operating expenses and depletion associated with the crude oil that is held in storage as determined on a concession by concession basis.
9. INTANGIBLE EXPLORATION AND EVALUATION ASSETS
(000s)
 
Balance at December 31, 2014
$
100,594

Additions
20,142

Balance at June 30, 2015
$
120,736

10. PROPERTY AND EQUIPMENT
(000s)
Petroleum Properties

 
Other Assets

 
Total

Balance at December 31, 2014
$
523,833

 
$
13,204

 
$
537,037

Additions
15,780

 
516

 
16,296

Balance at June 30, 2015
$
539,613

 
$
13,720

 
$
553,333

 
 
 
 
 
 
Accumulated depletion, depreciation, amortization and impairment losses at
$
262,096

 
$
7,614

 
$
269,710

December 31, 2014
 
 
Depletion, depreciation and amortization for the period
26,445

 
601

 
27,046

Balance at June 30, 2015
$
288,541

 
$
8,215

 
$
296,756

 
 
 
 
 
 
Net Book Value
 
 
 
 
 
At December 31, 2014
$
261,737

 
$
5,590

 
$
267,327

At June 30, 2015
$
251,072

 
$
5,505

 
$
256,577


11. LONG-TERM DEBT
The Company’s interest-bearing loans and borrowings are measured at amortized cost. As at June 30, 2015, the only significant interest-bearing loans and borrowings is related to the Borrowing Base Facility, under which the Company has borrowing capacity of $71.0 million. The Borrowing Base Facility has a term that extends to December 31, 2017, and is secured by a pledge over certain bank accounts, a pledge over the Company’s subsidiaries and a fixed and floating charge over certain assets. The credit facility bears interest at the LIBOR rate plus an applicable margin, which ranges from 5.0% to 5.5% and is dependent on the amount drawn. The Company incurs standby interest charges on amounts available but not drawn under the Borrowing Base Facility, which significantly impacts the effective interest rate in periods when there are small or no borrowings under the facility. The amount of the Borrowing Base may fluctuate over time and is determined principally by the net present value of the Company’s Proved and Probable reserves over the term of the Borrowing Base Facility, up to a pre-defined commitment amount which is subject to pre-determined semi-annual reductions in accordance with the terms of the Borrowing Base Facility. Accordingly, for each balance sheet date, the timing of repayment is estimated based on the most recent redetermination of the Borrowing Base and repayment schedules may change in future periods.
Deferred financing costs related to the Borrowing Base Facility have been presented as an asset on the Company's Condensed Consolidated Interim Balance Sheets as at June 30, 2015 and December 31, 2014 since there were no amounts drawn on the Borrowing Base Facility as at these dates. Deferred financing costs are amortized based on the borrowing capacity available in the Borrowing Base Facility.



Q2-2015
 
7
 

12. CONVERTIBLE DEBENTURES
(000s)
 
Balance at December 31, 2014
$
69,093

Fair value adjustment
10,153

Foreign exchange adjustment
(4,825
)
Balance at June 30, 2015
$
74,421

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$14.04 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$17.55 per common share). 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 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.
The convertible debentures are classified as financial instruments at fair value through profit or loss, and as such are measured at fair value with changes in fair value included in earnings. Fair value is determined based on market price quotes from the exchange on which the convertible debentures are traded as at the period end date. As at June 30, 2015 the convertible debentures were trading at a price of C$94.97 for a C$100.00 par value debenture. This represents an increase of $12.97 since December 31, 2014, and as a result the Company has recognized a net expense of $10.2 million for the six months ended June 30, 2015.
13. COMMITMENTS AND CONTINGENCIES
The Company is subject to certain office and equipment leases.
Pursuant to the PSC for North West Gharib in Egypt, the Company had a minimum financial commitment of $35.0 million ($9.7 million remaining) and a work commitment for 30 wells and 200 square kilometers of 3-D seismic during the initial-three year exploration period, which commenced on November 7, 2013. As at June 30, 2015, the Company had expended $25.3 million towards meeting that commitment.
Pursuant to the PSC for South East Gharib in Egypt, the Company had a minimum financial commitment of $7.5 million ($2.3 million remaining)and a work commitment for two wells, 200 square kilometers of 3-D seismic and 300 kilometers of 2-D seismic during the initial three-year exploration period, which commenced on November 7, 2013. As at June 30, 2015, the Company had expended $5.2 million towards meeting that commitment.
Pursuant to the PSC for South West Gharib in Egypt, the Company had a minimum financial commitment of $10.0 million ($5.1 million remaining)and a work commitment for four wells and 200 square kilometers of 3-D seismic during the initial three-year exploration period, which commenced on November 7, 2013. As at June 30, 2015, the Company had expended $4.9 million towards meeting that commitment.

Pursuant to the PSC for South Ghazalat in Egypt, the Company had a minimum financial commitment of $8.0 million and a work commitment for two wells and 400 square kilometers of 3-D seismic during the initial three-year exploration period, which commenced on November 7, 2013. As at June 30, 2015, the Company had met its financial commitment.
Pursuant to the PSC for North West Sitra in Egypt, the Company had a minimum financial commitment of $10.0 million ($9.9 million remaining) and a work commitment for two wells and 300 square kilometers of 3-D seismic during the initial three and a half year exploration period, which commenced on January 8, 2015. As at June 30, 2015, the Company had expended $0.1 million towards meeting that commitment.
In the normal course of its operations, the Company may be subject to litigations 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, 2015.


8
 
Q2-2015
 


14. SHARE CAPITAL
Authorized
The Company is authorized to issue an unlimited number of common shares with no par value.
Issued
 
 
       Six Months Ended
 
 
Year Ended
 
 
 
June 30, 2015
 
 
December 31, 2014
 
000’s
 
Shares

 
Amount

 
Shares

 
Amount

Balance, beginning of period
 
75,240

 
$
164,006

 
74,600

 
$
160,561

Purchase of common shares
 
(2,270
)
 
(9,031
)
 
—

 
—

Stock options exercised
 
70

 
208

 
640

 
2,562

Share-based compensation on exercise
 
—

 
91

 
—

 
883

Balance, end of period
 
73,040

 
$
155,274

 
75,240

 
$
164,006

On March 25, 2015, the Toronto Stock Exchange ("TSX") accepted the Company's notice of intention to make a Normal Course Issuer Bid ("NCIB") for its common shares. Under the NCIB, the Company may acquire up to 6,207,585 common shares, which is equal to 10% of the public float. The NCIB commenced on March 31, 2015, and will terminate on March 30, 2016 or such earlier date on which TransGlobe completes its purchases of common shares under the NCIB or terminates the NCIB at its option.
During the three and six months ended June 30, 2015, the Company repurchased 2,269,990 common shares. All common shares acquired were cancelled and the cost of shares repurchased (including transaction costs) was applied directly against share capital. Subsequent to the end of the second quarter, the Company repurchased an additional 833,802 common shares.
15. SHARE-BASED PAYMENTS
Stock option plan
The Company operates a stock option plan to provide equity-settled share-based remuneration to directors, officers and employees. The number of Common Shares that may be issued pursuant to the exercise of options awarded under the stock option plan and all other Security Based Compensation Arrangements of the Company is 10% of the common shares outstanding from time to time. All incentive stock options granted under the Plan have a per-share exercise price equal to the weighted average trading price of the common shares for the five trading days prior to the date of grant. Each tranche of an award with different vesting dates is considered a separate grant for the calculation of fair value and the resulting fair value is amortized over the vesting period of the respective tranches.
The following table summarizes information about the stock options outstanding and exercisable at the dates indicated:
 
 
Six Months Ended
 
 
Year Ended
 
 
 
June 30, 2015
 
 
December 31, 2014
 
 
 
 
 
Weighted-

 
 
 
Weighted-

 
 
Number

 
Average

 
Number

 
Average

 
 
of

 
Exercise

 
of

 
Exercise

(000s except per share amounts)
 
Options

 
Price (C$)

 
Options

 
Price (C$)

Options outstanding, beginning of period
 
6,027

 
9.58

 
5,871

 
9.51

Granted
 
1,024

 
4.99

 
1,208

 
7.34

Exercised
 
(70
)
 
3.64

 
(640
)
 
4.48

Forfeited
 
(572
)
 
9.66

 
(412
)
 
10.92

Expired
 
(550
)
 
7.61

 
—

 
—

Options outstanding, end of period
 
5,859

 
9.07

 
6,027

 
9.58

Options exercisable, end of period
 
3,428

 
10.60

 
3,193

 
10.35

Compensation expense of $1.3 million was recorded in general and administrative expenses in the Condensed Consolidated Interim Statements of Earnings and Comprehensive Income and Changes in Shareholders’ Equity during the six month period ended June 30, 2015 (2014 - $2.1 million) in respect of equity-settled share-based payment transactions. The fair value of all common stock options granted is estimated on the date of grant using the lattice-based trinomial option pricing model.
All options granted vest annually over a three-year period and expire five years after the grant date. During the six month period ended June 30, 2015, employees exercised 70,000 (2014 – 332,000) stock options. The fair value related to these options was $0.1 million, (2014 - $0.6 million) at time of grant and has been transferred from contributed surplus to share capital. As at June 30, 2015 and December 31, 2014, the entire balance in contributed surplus was related to previously recognized share-based compensation expense on equity-settled stock options.
Restricted share unit, performance share unit and deferred share unit plans
In May 2014, the Company implemented a restricted share unit ("RSU") plan, a performance share unit ("PSU") plan and a deferred share unit ("DSU") plan. RSUs may be issued to directors, officers and employees of the Company, and each RSU entitles the holder to a cash payment equal to the fair market value of a TransGlobe common share on the vesting date of the RSU. All RSUs granted vest annually over a three-year period, and all must be settled within 30 days of their respective vesting dates.

Q2-2015
 
9
 


PSUs are similar to RSUs, except that the number of PSUs that ultimately vest is dependent on achieving certain performance targets and objectives as set by the board of directors. Depending on performance, vested PSUs can range between 50% and 150% of the original PSU grant. All PSUs granted vest on the third anniversary of their grant date, and all must be settled within 60 days of their vesting dates.
DSUs are similar to RSUs, except that they become fully vested on the date of grant and may only be issued to directors of the Company. Distributions under the DSU plan do not occur until the retirement of the DSU holder from the Company's board of directors.
The number of RSUs, PSUs and DSUs outstanding as at June 30, 2015 is as follows:
 
Restricted

 
Performance

 
Deferred

 
Share

 
Share

 
Share

(000s, except per share amounts)
Units

 
Units

 
Units

Units outstanding, beginning of period
367

 
294

 
149

Granted
430

 
445

 
107

Exercised
(89
)
 
—

 
—

Forfeited
(16
)
 
(29
)
 
—

Reinvested
14

 
13

 
5

Units outstanding, end of period
706


723


261

Compensation expense of $1.3 million was recorded in general and administrative expenses in the Condensed Consolidated Interim Statements of Earnings and Comprehensive Income and Changes in Shareholders' Equity during the six month period ended June 30, 2015 (2014 - $0.7 million) in respect of share units granted under the three plans described above. The expense related to the share units granted under these plans is measured at fair value using the lattice-based trinomial pricing model and is recognized over the vesting period, with a corresponding liability recognized on the Condensed Consolidated Interim Balance Sheet. Until the liability is ultimately settled, it is re-measured at each reporting date with changes to fair value recognized in earnings.
16. PER SHARE AMOUNTS
In calculating the earnings per share, basic and diluted, the following weighted average shares were used:
 
Three Months Ended
 
 
Six Months Ended
 
 
June 30
 
 
June 30
 
(000s)
2015

 
2014

 
2015

 
2014

Weighted average number of shares outstanding
74,236

 
74,826

 
74,747

 
74,732

Dilutive effect of stock options
—

 
831

 
—

 
936

Weighted-average number of diluted shares outstanding
74,236

 
75,657

 
74,747

 
75,668


In determining diluted earnings per share, the Company assumes that the proceeds received from the exercise of “in-the-money” stock options are used to repurchase common shares at the average market price. In calculating the weighted average number of diluted common shares outstanding for the three and six month periods ended June 30, 2015, the Company excluded 4,834,400 and 5,858,400 stock options (2014 – 4,466,700 and 4,201,700, respectively) as their exercise price was greater than the average common share market price in the respective periods.
The convertible debentures are dilutive in any period in which earnings per share is reduced by the effect of adjusting net earnings for the impact of the convertible debentures, and adjusting the weighted-average number of shares outstanding for the potential shares issuable on conversion of the convertible debentures. The convertible debentures were not dilutive for the three and six months ended June 30, 2015 or June 30, 2014.
17. DIVIDENDS
During the six months ended June 30, 2015, TransGlobe paid cash dividends as follows:
Ex-dividend date
 
Record Date
 
Payment Date
 
Per Share Amount

March 12, 2015
 
March 16, 2015
 
March 31, 2015
 

$0.05

June 11, 2015
 
June 15, 2015
 
June 30, 2015
 

$0.05


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.


10
 
Q2-2015
 


18. SEGMENTED INFORMATION
The Company has two reportable operating segments: the Arab Republic of Egypt and the Republic of Yemen. The Company, through its operating segments, is engaged primarily in oil exploration, development and production and the acquisition of properties.
In presenting information on the basis of operating segments, segment revenue is based on the geographical location of assets which is also consistent with the location of the segment customers. Segmented assets are also based on the geographical location of the assets. There are no inter-segment sales.
The accounting policies of the operating segments are the same as the Company’s accounting policies.
 
Egypt
 
 
Yemen
 
 
Total
 
 
Six Months Ended
 
 
Six Months Ended
 
 
Six Months Ended
 
 
June 30
 
 
June 30
 
 
June 30
 
(000s)
2015

 
2014

 
2015

 
2014

 
2015

 
2014

Revenue
 
 
 
 
 
 
 
 
 
 
 
Oil sales, net of royalties
$
62,554

 
$
146,242

 
$
979

 
$
8,164

 
$
63,533

 
$
154,406

Finance revenue
132

 
5

 
1

 
—

 
133

 
5

Total segmented revenue
62,686

 
146,247

 
980

 
8,164

 
63,666

 
154,411

 
 
 
 
 
 
 
 
 
 
 
 
Segmented expenses
 
 
 
 
 
 
 
 
 
 
 
Production and operating
25,778

 
32,292

 
3,875

 
6,311

 
29,653

 
38,603

Selling costs
3,897

 
—

 
—

 
—

 
3,897

 
—

Depletion, depreciation and amortization
23,704

 
24,030

 
—

 
1,150

 
23,704

 
25,180

Realized derivative loss on commodity contracts
688

 
—

 
—

 
—

 
688

 
—

Income taxes – current
14,380

 
37,153

 
42

 
844

 
14,422

 
37,997

Income taxes – deferred
(8,483
)
 
(1,913
)
 
—

 
1,058

 
(8,483
)
 
(855
)
Total segmented expenses
59,964

 
91,562

 
3,917

 
9,363

 
63,881

 
100,925

 
 
 
 
 
 
 
 
 
 
 
 
Segmented earnings
$
2,722

 
$
54,685

 
$
(2,937
)
 
$
(1,199
)
 
(215
)
 
53,486

 
 
 
 
 
 
 
 
 
 
 
 
Non-segmented expenses (income)
 
 
 
 
 
 
 
 
 
 
 
Total non-segmented expenses
 
 
 
 
 
 
 
 
23,562

 
10,595

 
 
 
 
 
 
 
 
 
 
 
 
Net earnings for the period
 
 
 
 
 
 
 
 
$
(23,777
)
 
$
42,891

 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
 
 
 
 
 
 
 
 
 
 
Exploration and development
$
36,302

 
$
30,445

 
$
—

 
$
984

 
$
36,302

 
$
31,429

Corporate

 

 

 

 
136

 
426

Total capital expenditures
 
 
 
 
 
 
 
 
$
36,438

 
$
31,855



Q2-2015
 
11
 


 
Egypt
 
 
Yemen
 
 
Total
 
 
Three Months Ended
 
 
Three Months Ended
 
 
Three Months Ended
 
 
June 30
 
 
June 30
 
 
June 30
 
(000s)
2015

 
2014

 
2015

 
2014

 
2015

 
2014

Revenue
 
 
 
 
 
 
 
 
 
 
 
Oil sales, net of royalties
$
34,178

 
$
72,321

 
$
(218
)
 
$
3,719

 
$
33,960

 
$
76,040

Finance revenue
52

 
—

 
—

 
—

 
52

 
—

Total segmented revenue
34,230

 
72,321

 
(218
)
 
3,719

 
34,012

 
76,040

 
 
 
 
 
 
 
 
 
 
 
 
Segmented expenses
 
 
 
 
 
 
 
 
 
 
 
Production and operating
12,778

 
15,985

 
1,410

 
3,040

 
14,188

 
19,025

Selling costs
806

 
—

 
—

 
—

 
806

 
—

Depletion, depreciation and amortization
12,288

 
11,660

 
—

 
448

 
12,288

 
12,108

Income taxes – current
7,563

 
17,718

 
(16
)
 
385

 
7,547

 
18,103

Income taxes – deferred
(4,797
)
 
(421
)
 
—

 
179

 
(4,797
)
 
(242
)
Total segmented expenses
28,638

 
44,942

 
1,394

 
4,052

 
30,032

 
48,994

 
 
 
 
 
 
 
 
 
 
 
 
Segmented earnings
$
5,592

 
$
27,379

 
$
(1,612
)
 
$
(333
)
 
3,980

 
27,046

 
 
 
 
 
 
 
 
 
 
 
 
Non-segmented expenses (income)
 
 
 
 
 
 
 
 
 
 
 
Total non-segmented expenses
 
 
 
 
 
 
 
 
16,560

 
847

 
 
 
 
 
 
 
 
 
 
 
 
Net earnings for the period
 
 
 
 
 
 
 
 
$
(12,580
)
 
$
26,199

 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
 
 
 
 
 
 
 
 
 
 
Exploration and development
$
22,269

 
$
16,529

 
$
—

 
$
550

 
$
22,269

 
$
17,079

Corporate

 

 

 

 
68

 
411

Total capital expenditures
 
 
 
 
 
 
 
 
$
22,337

 
$
17,490




12
 
Q2-2015
 


The carrying amounts of reportable segment assets and liabilities are as follows:
June 30, 2015
 
 
 
 
 
(000s)
Egypt

 
Yemen

 
Total

Assets
 
 
 
 
 
Segmented assets
489,042

 
3,571

 
492,613

Non-segmented assets
 
 
 
 
107,131

Total assets
 
 
 
 
$
599,744

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Segmented liabilities
53,653

 
2,713

 
56,366

Non-segmented liabilities
 
 
 
 
82,028

Total liabilities
 
 
 
 
$
138,394

 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
(000s)
Egypt

 
Yemen

 
Total

Assets
 
 
 
 
 
Segmented assets
597,475

 
3,493

 
600,968

Non-segmented assets
 
 
 
 
53,090

Total assets
 
 
 
 
$
654,058

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Segmented liabilities
74,277

 
3,940

 
78,217

Non-segmented liabilities
 
 
 
 
75,741

Total liabilities
 
 
 
 
$
153,958




Q2-2015
 
13
 


19. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in non-cash working capital consisted of the following:
 
Three Months Ended
 
Six Months Ended
 
June 30
 
June 30
(000s)
2015

 
2014

 
2015

 
2014

Operating activities
 
 
 
 
 
 
 
(Increase) decrease in current assets
 
 
 
 
 
 
 
Accounts receivable
$
18,615

 
$
(8,688
)
 
$
44,762

 
$
(34,440
)
Prepaids and other
3,463

 
355

 
7,053

 
(2,548
)
Product inventory
(905
)
 
2,238

 
(2,741
)
 
499

Increase (decrease) in current liabilities
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
(3,841
)
 
(3,623
)
 
(10,406
)
 
(2,505
)
 
$
17,332

 
$
(9,718
)
 
$
38,668

 
$
(38,994
)
 
 
 
 
 
 
 
 
Investing Activities
 
 
 
 
 
 
 
(Increase) decrease in current assets
 
 
 
 
 
 
 
Prepaids and other
$
—

 
$
(66
)
 
$
—

 
$
394

Increase (decrease) in current liabilities
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
7,639

 
(2,788
)
 
(3,209
)
 
(2,933
)
 
$
7,639

 
$
(2,854
)
 
$
(3,209
)
 
$
(2,539
)


14
 
Q2-2015