Netback: The profit that is made after getting a barrel of oil out of the ground and sold to the market. Profit after royalties, taxes, production, and selling costs. i.e Net profit per barrel.
Executive Summary:
TGA’s agreement was ratified in the Egyptian Parliament. At current Brent crude prices, their Egyptian operations alone could bring in close to $100M per year in Netback (TGA Market Cap ~$200m.)
The effective date for the ratification is Feb 2020 which leaves further room for surprise.
I haven’t included their Canada operations (profitable) in my analysis.
On March 9, 2021, I posted an article on Transglobe Energy here. Since then the stock is up to some 80% thanks to oil rallying.
I still feel like this company is completely undervalued, and the misunderstanding comes from the ratification that was successfully passed through in December last year. Link here.
The ratification agreement was one of the biggest risks going into this trade, and now it has been passed with an effective date of Feb 2020.
Here’s a little recap of Transglobe Energy
Most of their production happens in Egypt.
But their original agreement with the Eygptian government meant the government took almost half (50%) of what they sold! (see Royalties below).
What can we expect now from Transglobe Energy:
We can expect their netback to double at current energy prices. If we only look at their production from Egypt this is how it will change:
Pre-ratification: (This is already a netback of 25% on their current Market Cap - BEFORE ratification).
Graph below:
Y-Axis : $Netback
X-Axis: $Brent crude price
Notice their new netback is double what it was, and Brent is currently trading at above $80 a barrel.
This is a huge deal.
I have shown you a conservative estimate of what they are producing per day, in Q3 2021 they were producing around 13,000 barrels per day. I used 10,000 barrels in my calculation.
I have only shown you their production from Egypt, their production in Canada is way more profitable than Egypt.
The market hasn’t seen proper disclosures of what their new netback will look like, the only material on their new netbacks was in the PowerPoint done in 2020.
The ratification agreement and new investment deal were made when oil prices were low. The terms of the agreement; for Transglobe to invest $15m per year for 5 years is a drop in the ocean for what they will be earning in Netbacks at current prices.
Their price barely budged when the ratification deal went through…(the market is not watching the ratification, it could be a surprise).