Oil & TransGlobe Energy Corporation

As most of us already know, oil prices have dropped drastically since 2014 and thus for value investors, this might be a good opportunity to look for some good bargains in companies related to oil with a nice margin of safety. Of course, the weaker companies will be forced into liquidation and the stronger companies will be doing M&A deals (e.g. Halliburton and Baker Hughes) to increase their market share of the oil market. I believe we will see the bottom when signs of highly leveraged companies go bust and a flurry of deals are made by the major oil companies to increase their market dominance and as of now, price will remain sideways for 2015.

 

 

I believe we are seeing a consolidation phase as highlighted by the rectangular box and I believe we will see lower prices as the global economy seems to be rather sluggish with weaker PMI reports coming from major countries that are oil importers like China, Japan and India.

TransGlobe Energy Corporation

I happen to come across a small cap company which happen to be ranked #30 in Fortune Magazine's 100 Fastest-Growing Companies of 2012 and its stock price went from a bottom of $1.51 in 2008 to up to $18.74 in 2010.

 

Business Summary

 

TransGlobe Energy Corporation acquires, explores, develops, and produces oil and gas properties. The company operates through two segments, the Arab Republic of Egypt and the Republic of Yemen. It holds interests in nine production sharing concessions (PSCs), including West Gharib, North West Gharib, South West Gharib, South East Gharib, West Bakr, South Alamein, South Ghazalat, North West Sitra, and East Ghazalat located in Egypt; and four PSCs comprising Block 32, Block S-1, Block 72, and Block 75 located in Yemen. As of December 31, 2014, the company had total proved reserves of 22.1 million barrels of oil (MMBbl); and total proved plus probable reserves of 33.5 MMBbl. TransGlobe Energy Corporation was founded in 1968 and is headquartered in Calgary, Canada.

 

Reasons for the Bearish Sentiment and Price Plunge

 

Political unrest in Egypt in 2012, multiple governments in less than 3 years, declining production and reserves and the recent fall in oil prices were all very bearish indicators for TGA.

However, this stock has tremendous hidden value. The future of TGA seems to be turning the corner because of the new pro-business government in place in Egypt. This government is willing to bring in and encourage foreign investors in Egypt. Furthermore, its pristine balance sheet, which is almost debt free, a favorable royalties system and helmed a strong management team.

 

I have initiated a long position in December 2014 when the price was in the low $3 range. Strong support can be seen in the chart as indicated by the arrows and price seems to be bouncing off from the support of $2.70 - $2.85 range.

 

Balance sheet



 

According to the latest annual report, TGA has over $140MM in cash and cash equivalents and over $117MM of accounts receivable, most of them is cash due from the Egyptian government.

TGA has a long term debt of $69MM in the form of convertible debentures with interest of 6%, payable semi-annually.

TGA has a current ratio of 6.09 (that's a shitload of cash!) There is no doubt that the company is able to pay its short term liabilities.

TGA has a high level of cash and low level of debt. This is the greatest way to benefit from the current oil market because of future mergers and acquisitions opportunities. In fact on March 15th 2014, Transglobe Energy (TGA) and Caracal Energy (LON:CRCL) announced plans to merge. TGA was selling for around $7.30 at that time but that deal didn't materialise due to Caracal receiving an unsolicited cash offer to acquire all of the outstanding shares of Caracal from Glencore Xstrata plc.

Honestly when I bought into TGA, I was anticipating either another round of M&A deal or a share buyback programme due to its high cash pile and as a shareholder, you obviously want to see some form of returns in higher dividends or unlocking value in the company.

 

Viola!

 

On 26th March 2015, TGA initiates a normal course issuer bid which basically means that it plans to buy up 10% of its outstanding shares in the market from now till 30th March 2016. The announcement can be found here: http://www.trans-globe.com/news/release?id=1932452

As with every investment, managing risk and knowing your margin of safety is very important hence a few key risks to highlight:

 

Risks associated with TGA

1. Political and business environment in Egypt. As noted in this article, the willingness of the Egyptian government to let TGA export its oil without any middle man and repay the accounts receivable lead to think that this government makes the opening of its economy and foreign investments a priority.
2. Oil price. Although TGA can withstand pressure from lower oil price because of favorable royalties and low costs, the oil price could seriously decrease the cash the business can generate in the future.

Summary

1. TGA has a pristine balance sheet, with very low debt and high levels of cash and assets.
2. New government in place in Egypt is pro-business and favorable to foreign investors.
3. Discounted cash flow indicate a value of $6.81 per share, or more than 100% upside.
4. Net assets and oil reserves indicate a value of $10.77 per share, or more than 225% upside.
5. The 6% dividend is a nice bonus to help you wait until the market realize the tremendous value in TGA.