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Why TransGlobe Is Well-Positioned for the Long Run

January 26, 2015 | About:

TransGlobe (NASDAQ:TGA) is acquiring fresh seismic in the regions surrounding the West Bakr and West Gharib fields. These new seismic acquisitions are believed to offer TransGlobe several exploration objectives for 2015 and 2016.

Making smart moves

In third quarter, TransGlobe drilled the final two wells in the exploration program in the Hana West and Hana oilfields and year-to-date it has drilled eight innovative oil wells in a single dry well. It is primarily focusing on optimizing the wells, improving production for water floods and the expected ASP floods.

The new well acquisitions are estimated to bring in considerable business for the drilling major and thus significant revenue streams, enhancing the shareholder returns, going forward.

Looking at Northwest Gharib site, TransGlobe has installed 3D seismic in the area and has a wider well control. To date, it has identified three innovative oil discoveries at Northwest Gharib 1, 3 and 5.

The first unique and innovative pool to initiate production in 2015 is expected to be the Northwest Gharib 3 pool. At present, TransGlobe is drilling the initial review to the Northwest Gharib finding number 1 and estimate to have a review too on the Northwest Gharib finding number 5 expected to be concluded in the coming few weeks. These new drilling activities are believed to balance the key declines witnessed in the West Gharib.

TransGlobe has recently enhanced the production by successfully implementing the drilling leading to nine other oil wells. Further, it is considering the drilling at some oil suspended wells and concluding the drilling in unswept oil areas where the drilling has not started.

Opportunities

The significant drilling opportunities highlighted above are forecast to expand the company operations significantly and drive sustainable shareholder returns.

TransGlobe plans on sorting out the issue with the government for the extreme Eastern block to explore the Boraq finding.

East Ghazalat is believed to the highly successful project since operations started by other new operators. TransGlobe has drilled some solid exploratory wells on the Safwa field and increased production to 658 barrels a day by reducing the operating costs. Further, the operations are expected to accelerate at the North Dabaa 2 well.

TransGlobe announced third quarter 2014 production of 15,109 barrels a day having average sales rate of 15,132 barrels a day. The production at West Gharib totalled 9,992 barrels a day for the quarter, 9% below the last quarter.

The starting of the new operations at the North Dabaa 2 well, Safwa field and east Ghazalat are expected to enhance the company’s production significantly coupled with the already robust production performance at West Gharib.

The analysts have provided a fundamental rating of Hold for the stock considering some key factors such as poor growth indicators highlighting extremely tough operating conditions and doubtful outlook. However, the stock’s valuation looks attractive for the long-term investors with the stock trading at nearly 4.01 times forward earnings estimates for the coming four quarters, greater than its trailing P/E ratio but poorer to the S&P 500's forward P/E of 15.20. Therefore, the investors see more value in the overall market for the short term but looking at the solid company fundamentals, TransGlobe could be seen as a long-term investment opportunity. Also, the company has improved profitability and significant free cash flows.

Conclusion

The company’s P/E ratio of 7.5 looks comparable to the industry’s average of 12.76 and the stock seems to be undervalued with significant growth potential. TransGlobe Energy has solid operating margin of 45.85% and profit margin of 22.72% as compared to peers. For instance, Pioneer Natural Resources Co. (NYSE:PXD) has a negative operating income for FY 2013 and Devon Energy Corporation (NYSE:DVN) has an operating margin of merely 5.8%.

Greater operating and profit margins represent higher operating efficiency compared to peers. In addition, TransGlobe has a solid cash position with total cash of $77.94 million with total debt of just $83.23 million which should definitely support the expanding operations of the company. Hence, looking at the company’s current undervaluation and supreme net cash position TransGlobe Energy seems to be an attractive investment option. There’s huge growth potential looking at a vast valuation gap of the stock as compared to peers. This stock is suitable for investors having a comparatively higher risk appetite.


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