wow
Between this article at SA predicting $8 stock price with the teens if the dividend is reinstated and the oil expert on CNBC a few minutes ago who said we will probably see over $100 oil by year end and possibly see $120 a barrel oil by August, TGA could finally take off. The SA article suggests S Alemien would add 6,000 bpd if we can get military approval in 2019.
https://seekingalpha.com/article/4175832-tran...s-dividend
Transglobe Energy: Management Talks Dividend
May 21, 2018 10:18 AM ET|
7 comments |
About: Transglobe Energy Corp (TGA)
Olsny Freitas
Olsny Freitas
Long/short equity, special situations, Deep Value, debt
(667 followers)
Summary
Investors reacted negatively to the 1Q18 earnings release. I explain why and why this is unjustified.
I highlight the biggest reason why TGA has become investable only recently, despite being a "deep value" and "net-net" stock for almost 4 years now.
Military rejection has pushed back plans in South Alamein to 2019 at the earliest.
Management is actively discussing reinstating the dividend and will discuss again in 2Q18, adding another catalyst and potentially another 200% upside since initiating coverage on the company.
Thesis
While most found Transglobe Energy's (TGA) seemingly unprofitable quarter disappointing, I disagree and believe that this quarter's information release actually contains another catalyst: a dividend. In my opinion, if the dividend is similar to what it was in 2014, we could see shares trade at $8.
Of course, not all was positive, as TGA's plans for South Alamein were rejected by the military. Even though South Alamein (or a dividend) is not part of my core thesis - which projects a $5 share price - success in South Alamein will boost production by over 50% and send shares in the high teens.
Summary
This article contains a discussion of the latest earnings report. The discussion is broken down very simply into ‘good’ and ‘bad’ news as seen from a shareholder's perspective. TGA had a relatively quiet quarter and thus I wondered whether it was really necessary to write an update. Still, the stock declined 12% following the next two days. After seeing some comments on Seeking Alpha, I thought it best to address the bearish sentiment. Also, I like to be consistent.
Note: This article expands on my first publication in which coverage on TGA was initiated and subsequent 4Q17 follow-up. Therefore, readers should consider reading the first publication to comprehend the entire thesis.
Net loss surprises investors
No doubt one of the biggest drivers for the negative sentiment was that TGA actually posted a loss for 1Q18 even though the price per barrel Brent averaged well above $60. This reality spawned the following comments:
“[D]oesn't look good, whatever is the market condition they always manage to lose money. till long [TGA] but this is very poor.”
To which another commenter replied:
“I agree that the past Q was disappointing but if they get 2 liftings in Q2, reduce their debt and slightly increase production, we can expect cash flow of over 10 cents in Q2 which is not bad. If they bring the divi back as well, the stock might get back to 3-4 where it was in 2015.”
To be fair, another commenter, Steelhead5, who’s been following TGA for a while disagreed and contended that this was merely relevant for quarterly optics. I wholeheartedly agree. On the conference call, management has confirmed that there will be two liftings booked in 2Q18:
“Jenny Xenos
So, am I correct in essentially assuming that there will be two liftings in Q2?
Ross Clarkson
Yes, that’s what we expect at this time.”
TGA posted a loss because the company did not manage to sell a tanker lifting due to weather issues. Instead of lifting the tanker at the end of March, it was done at the beginning of April and thus counts as a 2Q18 sale. Secondly, the company had communicated this clearly beforehand in their 4Q17 earnings call. The tanker lifting was worth $26.5 million while TGA posted a quarterly loss of $10 million which includes unrealized derivative losses of $6 million.
In other words, adjusted net income comes in closer to the $20 million range. With this cleared up, I’d like to explore how the tanker liftings directly connect with my main argument for being long TGA.
The core reason for my TGA long position
The more important point is what this says about the importance of the Mercuria deal. The Mercuria deal allows TGA to sell all of the oil it produces and this is done in the form of quarterly tanker liftings.
Before TGA had this deal, it was common for the company to sell only 50% of its production, while incurring almost all of the production cost (cost of revenue) and a very substantial part of the operational expenditures. It was impossible for the company to turn a profit under these conditions. This made the company uninvestable even though TGA looked very attractive on paper before this deal; a net-net stock, sizeable cash position, very little debt and a solid balance sheet.
If you have a look on the internet, you’ll find many articles billing TGA as the perfect value stock from the end of 2014 all the way up until 2016 based on the value of the balance sheet. Meanwhile, the stock lost 80%-90% of its value in the same period. Of course, the bearish oil market also had its hand in that.
I dislike discussing previous stock prices, but I believe it’s extremely important to understand why TGA is investable now and what would make it immediately uninvestable: the Mercuria deal and the loss of this deal.
As is obvious now, without the deal, even $65 Brent doesn’t help and $70 barely helps. In my first write-up, I discussed several possible catalysts, but mentioned this deal as the true catalyst:
“The true catalyst, the marketing agreement with Mercuria, has already occurred.”
To be sure, there is no reason to believe that the deal is in jeopardy and, in fact, the deal has improved as TGA now plans to do 4 liftings instead of the 3 it did in 2017.
Disappointment
While I do not regard the net loss as a disappointment, there were certainly some issues. The most important part is that the military has rejected the company’s plans in South Alamein. The company is still in talks, but this means that any exploration activity will be delayed to at least 2019. For those who do not recall, South Alamein can add 12,000 barrels per day, and currently, there is a well with more than 1,000 barrels per day waiting for additional wells to be drilled so it is economically viable.
Management is hopeful that an agreement will eventually be reached, but clearly states that it is very difficult for them to project whether the military will approve the second plan. One big reason for this is because the plan is rejected without communicating why the plan was rejected.
Success in South Alamein would do away with the “the company is bad at drilling” narrative. Given the current value proposition, this narrative is quite irrelevant to me; however, it would serve as a significant catalyst, and when it comes to stock returns, more is simply more. I continue to view success in South Alamein as a major game changer (+10k bpd or +66% of current production) and it would send shares in the double-digit territory, but it is not needed to see shares trade at roughly $5.
Highlight – an additional catalyst emerges
Now that oil prices have rebounded sharply, analysts and investors can’t help but wonder about the dividend. At the beginning of this write-up, I quoted a commentator as saying that a dividend would bring the share price to $3-$4. Obviously, I don’t think a dividend is needed for that. However, it does illustrate what investors are looking out for.
In the conference call, the question relating to reinstatement of the dividend was answered quite positively, albeit in a speculative way. Here are the CEO’s thoughts on the dividend:
“We have had discussions on both share buyback and dividend and when do we reinitiate something on the dividend if we as you know we used to pay a dividend. And I think that discussion will probably be more realistically addressed in the second quarter reports in around August because we get a few months of higher prices behind us. I think we will have a lot more confidence in where we are going. So all of the things are being considered both expansion of budget share buyback and dividend as well as our planned debt reduction.”
Based on his wording and on my Brent oil price base case target for 2018 and 2019 (averages of $70 and $80, respectively), I believe that TGA will most likely reinstate a dividend some time in 2019.
My price target of ~$5 per share does not include a dividend, but it is likely that the company will reinstate the dividend in 2019. The size of the dividend remains questionable. Much of this will be based on the strength of the oil market.
TGA’s dividend in 2014, the year it reinstated the dividend, was $19 million. Unfortunately for shareholders, this didn’t boost the stock price for long as turmoil in Egypt was the main worry.
However, if TGA does reinstate its $19 million dividend, I believe it should trade at a 3% yield given that turmoil in Egypt is no longer an issue. This creates a current upside of 250%. Based on my purchase price in January, this would mean a return of 450% with TGA trading just below $8.
Conclusion
All in all, the quarter reinforces the long thesis yet again. After already delivering 50% since my 100% price target, TGA continues to be my Top Idea for 2018. In fact, I have raised my target from 100% to roughly 250% (based on the price in January).
If oil prices remain strong and TGA decides to reinstate its $19 million dividend, returns could total 450% from my initial write-up, which is 250% based on today’s price ($2.23).
STRONG BUY
Disclosure: I am/we are long TGA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
Like this article
Between this article at SA predicting $8 stock price with the teens if the dividend is reinstated and the oil expert on CNBC a few minutes ago who said we will probably see over $100 oil by year end and possibly see $120 a barrel oil by August, TGA could finally take off. The SA article suggests S Alemien would add 6,000 bpd if we can get military approval in 2019.
https://seekingalpha.com/article/4175832-tran...s-dividend
Transglobe Energy: Management Talks Dividend
May 21, 2018 10:18 AM ET|
7 comments |
About: Transglobe Energy Corp (TGA)
Olsny Freitas
Olsny Freitas
Long/short equity, special situations, Deep Value, debt
(667 followers)
Summary
Investors reacted negatively to the 1Q18 earnings release. I explain why and why this is unjustified.
I highlight the biggest reason why TGA has become investable only recently, despite being a "deep value" and "net-net" stock for almost 4 years now.
Military rejection has pushed back plans in South Alamein to 2019 at the earliest.
Management is actively discussing reinstating the dividend and will discuss again in 2Q18, adding another catalyst and potentially another 200% upside since initiating coverage on the company.
Thesis
While most found Transglobe Energy's (TGA) seemingly unprofitable quarter disappointing, I disagree and believe that this quarter's information release actually contains another catalyst: a dividend. In my opinion, if the dividend is similar to what it was in 2014, we could see shares trade at $8.
Of course, not all was positive, as TGA's plans for South Alamein were rejected by the military. Even though South Alamein (or a dividend) is not part of my core thesis - which projects a $5 share price - success in South Alamein will boost production by over 50% and send shares in the high teens.
Summary
This article contains a discussion of the latest earnings report. The discussion is broken down very simply into ‘good’ and ‘bad’ news as seen from a shareholder's perspective. TGA had a relatively quiet quarter and thus I wondered whether it was really necessary to write an update. Still, the stock declined 12% following the next two days. After seeing some comments on Seeking Alpha, I thought it best to address the bearish sentiment. Also, I like to be consistent.
Note: This article expands on my first publication in which coverage on TGA was initiated and subsequent 4Q17 follow-up. Therefore, readers should consider reading the first publication to comprehend the entire thesis.
Net loss surprises investors
No doubt one of the biggest drivers for the negative sentiment was that TGA actually posted a loss for 1Q18 even though the price per barrel Brent averaged well above $60. This reality spawned the following comments:
“[D]oesn't look good, whatever is the market condition they always manage to lose money.
To which another commenter replied:
“I agree that the past Q was disappointing but if they get 2 liftings in Q2, reduce their debt and slightly increase production, we can expect cash flow of over 10 cents in Q2 which is not bad. If they bring the divi back as well, the stock might get back to 3-4 where it was in 2015.”
To be fair, another commenter, Steelhead5, who’s been following TGA for a while disagreed and contended that this was merely relevant for quarterly optics. I wholeheartedly agree. On the conference call, management has confirmed that there will be two liftings booked in 2Q18:
“Jenny Xenos
So, am I correct in essentially assuming that there will be two liftings in Q2?
Ross Clarkson
Yes, that’s what we expect at this time.”
TGA posted a loss because the company did not manage to sell a tanker lifting due to weather issues. Instead of lifting the tanker at the end of March, it was done at the beginning of April and thus counts as a 2Q18 sale. Secondly, the company had communicated this clearly beforehand in their 4Q17 earnings call. The tanker lifting was worth $26.5 million while TGA posted a quarterly loss of $10 million which includes unrealized derivative losses of $6 million.
In other words, adjusted net income comes in closer to the $20 million range. With this cleared up, I’d like to explore how the tanker liftings directly connect with my main argument for being long TGA.
The core reason for my TGA long position
The more important point is what this says about the importance of the Mercuria deal. The Mercuria deal allows TGA to sell all of the oil it produces and this is done in the form of quarterly tanker liftings.
Before TGA had this deal, it was common for the company to sell only 50% of its production, while incurring almost all of the production cost (cost of revenue) and a very substantial part of the operational expenditures. It was impossible for the company to turn a profit under these conditions. This made the company uninvestable even though TGA looked very attractive on paper before this deal; a net-net stock, sizeable cash position, very little debt and a solid balance sheet.
If you have a look on the internet, you’ll find many articles billing TGA as the perfect value stock from the end of 2014 all the way up until 2016 based on the value of the balance sheet. Meanwhile, the stock lost 80%-90% of its value in the same period. Of course, the bearish oil market also had its hand in that.
I dislike discussing previous stock prices, but I believe it’s extremely important to understand why TGA is investable now and what would make it immediately uninvestable: the Mercuria deal and the loss of this deal.
As is obvious now, without the deal, even $65 Brent doesn’t help and $70 barely helps. In my first write-up, I discussed several possible catalysts, but mentioned this deal as the true catalyst:
“The true catalyst, the marketing agreement with Mercuria, has already occurred.”
To be sure, there is no reason to believe that the deal is in jeopardy and, in fact, the deal has improved as TGA now plans to do 4 liftings instead of the 3 it did in 2017.
Disappointment
While I do not regard the net loss as a disappointment, there were certainly some issues. The most important part is that the military has rejected the company’s plans in South Alamein. The company is still in talks, but this means that any exploration activity will be delayed to at least 2019. For those who do not recall, South Alamein can add 12,000 barrels per day, and currently, there is a well with more than 1,000 barrels per day waiting for additional wells to be drilled so it is economically viable.
Management is hopeful that an agreement will eventually be reached, but clearly states that it is very difficult for them to project whether the military will approve the second plan. One big reason for this is because the plan is rejected without communicating why the plan was rejected.
Success in South Alamein would do away with the “the company is bad at drilling” narrative. Given the current value proposition, this narrative is quite irrelevant to me; however, it would serve as a significant catalyst, and when it comes to stock returns, more is simply more. I continue to view success in South Alamein as a major game changer (+10k bpd or +66% of current production) and it would send shares in the double-digit territory, but it is not needed to see shares trade at roughly $5.
Highlight – an additional catalyst emerges
Now that oil prices have rebounded sharply, analysts and investors can’t help but wonder about the dividend. At the beginning of this write-up, I quoted a commentator as saying that a dividend would bring the share price to $3-$4. Obviously, I don’t think a dividend is needed for that. However, it does illustrate what investors are looking out for.
In the conference call, the question relating to reinstatement of the dividend was answered quite positively, albeit in a speculative way. Here are the CEO’s thoughts on the dividend:
“We have had discussions on both share buyback and dividend and when do we reinitiate something on the dividend if we as you know we used to pay a dividend. And I think that discussion will probably be more realistically addressed in the second quarter reports in around August because we get a few months of higher prices behind us. I think we will have a lot more confidence in where we are going. So all of the things are being considered both expansion of budget share buyback and dividend as well as our planned debt reduction.”
Based on his wording and on my Brent oil price base case target for 2018 and 2019 (averages of $70 and $80, respectively), I believe that TGA will most likely reinstate a dividend some time in 2019.
My price target of ~$5 per share does not include a dividend, but it is likely that the company will reinstate the dividend in 2019. The size of the dividend remains questionable. Much of this will be based on the strength of the oil market.
TGA’s dividend in 2014, the year it reinstated the dividend, was $19 million. Unfortunately for shareholders, this didn’t boost the stock price for long as turmoil in Egypt was the main worry.
However, if TGA does reinstate its $19 million dividend, I believe it should trade at a 3% yield given that turmoil in Egypt is no longer an issue. This creates a current upside of 250%. Based on my purchase price in January, this would mean a return of 450% with TGA trading just below $8.
Conclusion
All in all, the quarter reinforces the long thesis yet again. After already delivering 50% since my 100% price target, TGA continues to be my Top Idea for 2018. In fact, I have raised my target from 100% to roughly 250% (based on the price in January).
If oil prices remain strong and TGA decides to reinstate its $19 million dividend, returns could total 450% from my initial write-up, which is 250% based on today’s price ($2.23).
STRONG BUY
Disclosure: I am/we are long TGA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
Like this article
