TransGlobe Energy Sees Egypt Growth as Shorts Swirl

TransGlobe Energy Corp., the most-shorted energy stock in Canada, said a plan to double oil output within three years won’t be derailed by unrest in Egypt, its largest source of revenue.

“Our production and drilling is carrying on as normal” at desert facilities hundreds of miles from clashes between the military-backed government’s forces and Islamist protesters in Cairo, Ross Clarkson, chief executive officer of the Calgary-based company, said in an Aug. 14 interview. Approval from Egypt’s interim government to expand drilling operations is expected by the end of the year, he said.

TransGlobe is trading at about half its net asset value because of the turmoil in Egypt, Vancouver-based investment adviser Salman Partners Inc. said. The stock has dropped 28 percent this year amid protests that led to the July 3 ouster of Egyptian President Mohamed Mursi. A crackdown on Mursi supporters has spurred the government to declare a state of emergency and the U.S. to cancel planned joint military exercises next month.

Egypt is the largest non-OPEC oil producer in Africa. Output fell 0.7 percent last year to average 720,000 barrels a day, according to the U.S. Energy Information Administration. Mursi was the first president elected after Hosni Mubarak was ousted in 2011 amid protests.

Seeing Opportunity

TransGlobe, which boosted production sixfold from 2003, plans to more than double output to 40,000 barrels a day in 2016. As much as 38 percent of that will come from lands in Egypt’s western and eastern deserts that the company won rights to develop last year, according to TransGlobe’s website. Egypt’s interim Oil Minister Ismail Sherif said the four licenses may be approved by the end of September, Clarkson said.

Efforts to reach the Egyptian Ministry of Petroleum by phone and e-mail outside of normal business hours on Aug. 16 were unsuccessful.

The company, which also has operations in Yemen, got 93 percent of $318 million of sales from Egypt last year. TransGlobe stock, which has eight buy, three hold and no sell recommendations from analysts, is trading at about a third of its December 2010 high of C$19.45 in Toronto. The shares fell 0.9 percent to C$6.75 at the close, giving it a market value of C$498.8 million ($482.3 million).

The company reported adjusted per-share earnings of 16 cents in the second quarter, down 2 cents from the year-earlier period and 2 cents more than the average of five analysts’ estimates compiled by Bloomberg.

‘Twice as Big’

“You have a company twice as big trading for half what it was a few years ago,” Gordon Currie, an analyst at Salman Partners in Calgary who rates TransGlobe a buy, said in an Aug. 14 phone interview. “That feels like opportunity to me.”

A military government in Egypt may provide the best outcome for TransGlobe because it creates stability, Currie said.

TransGlobe was the energy company with the largest proportion, 25 percent, of shares available to the public shorted by investors as of July 31, according to data compiled by Bloomberg. Short sellers profit from price declines by selling borrowed securities and repurchasing them at cheaper levels.

“TransGlobe is picked on because it’s so focused on Egypt,” Christopher Brown, an analyst at Canaccord Genuity Corp. in Calgary who rates the stock a buy, said in an Aug. 14 phone interview. “It is a target of those that want to short the situation in Egypt.”

Supply Disruptions

While TransGlobe’s field operations haven’t been hit, medium-term growth may be slower, David Dudlyke, an analyst at Dundee Securities Corp. in London, said in an Aug. 14 note after reducing his recommendation to the equivalent of a hold. The company may face supply-chain disruptions and delays receiving government approvals and payments from the state-controlled Egyptian General Petroleum Corp., he wrote.

Dudlyke didn’t return a message seeking additional comment.

The current period of “extraordinary political change” and macroeconomic challenges in Egypt may affect the predictability of TransGlobe’s business, the company said in an Aug. 12 statement. Growth in 2013 is slower than originally planned due to approval delays, it said.

The company has 100 employees in Egypt and provides work for another 600 people at field operations for joint-venture projects.

“We’re part of the solution for the government,” Clarkson said.