1. TransGlobe Energy (TSX:TGL)
February 2016
Done
This presentation is for educational purposes only. It is not intended to serve as a buy or sell recommendation on any security, investment product, and other financial product or service. Any views or opinions presented are solely those of the authors and may not be reflective of the investment council.

2. Portfolio Standing Purchase Price $4.00 / share Shares Held (Current)
9,375
Total Holding Value
$37,500
Total Cost-Basis Portfolio %
3.8%
Gain (Loss)
(31.85%)
Purchase Date
22 Nov 2014
Total Cash Dividend Received $

3. Transaction History Price-Volume Chart Buy (12.5k shares) Sell
DIV
DIV
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DIV
DIV

4. Agenda Industry Overview Company Overview Investment Theses Revisited
Risks & Catalysts
Recommendation
Done

5. 1
Industry Overview

6. Oil Industry Structure Oilfield Servicing Firms
Industry Overview
Oil Industry Structure
Upstream
Midstream
Downstream
Oilfield Servicing Firms
Exploration & Production
Transportation
Refining & sales
Services to industry suppliers at all levels
Explaining Reserves
1P Reserves: Proven Reserves
2P Reserves: Proved and Probable Reserves (1P + Probable)
3P Reserves: Proved, Probable and Possible Reserves ((1P + 2P) + Possible)

7. Industry Characteristics
Oil and gas market trends
Bearish oil market: crude oil collapsed by more by than 70% since 2014
Concerns of global supply glut and falling demand
Drastically reduced profit margins for oil producers
High volatility and price uncertainty
Regulatory restrictions
Oil and gas exploration require navigation through government regulations and associated uncertainties
Technological advancement
Improving recovery techniques (e.g. advanced seismic sensing, digital oilfield applications new drilling technology) facilitating exploration and development projects

8. 2
Company Overview

9. Company Overview TransGlobe Energy Corporation (TSX: TGL)
Independent international upstream oil and gas company
Engaged in the exploration and production of crude oil and natural gas in Egypt and Yemen.
Operations in two segments:
Arab Republic of Egypt (98.3% of sales)
Republic of Yemen (1.7% of sales)

10. Operations Overview Closely related with state governments
Production Sharing Contracts (PSC’s) with the Egyptian government
Company pays royalty (percentage of gross production)
Remaining revenue after royalty payment is used to cover costs (“cost oil”)
Remaining profit is split between government and company
100% of oil produced in Egypt is sold to the Egyptian government

11. Review of Investment Theses3
Review of Investment Theses

12. Original Investment Theses
TGL is underpriced due to 3 factors:
(1) Instability for Egypt is overstated
(2) Poor collection of accounts receivable
(3) Low crude oil prices

13. Investment Thesis #1: Instability in Egypt
Original Thesis
The Egyptian government is undergoing a transitional period and generating political risk, weighing down on the stock price
But TGL is protected from political risk due to a robust current ratio, large cash balance, and stable government contracts.
In addition, Egypt’s government credit rating has recently improved
The thesis is questionable
Egypt’s credit rating has been upgraded since 2014 by Moody’s and Fitch, but market trends have suggested falling confidence in the government’s financial capacity
Credit Default Swap (CDS) price on Egyptian 5Y secured government bonds increased by 99% since pitch (from $ to $528.88), signifying increased perceived risk
Update

14. Investment Thesis #2:Collection Uncertainties
Original Thesis
Investors fear the Egyptian government is unreliable in paying PSC-related payments, as noted in TGL’s high accounts receivable balance
But oil is essential to the Egyptian economy, and the government has made commitments to sustain production
TGL’s A/R collection has been increasing since 2012
The thesis holds
TGL’s A/R reduction trend has continued throughout 2015, reducing A/R balance by 59% by 2015 Q3
Update

15. Investment Thesis #3: Falling Oil Prices
Original Thesis
Falling crude prices (priced on Brent) have depressed the stock price
Company demonstrated robust FCF generation and strong working capital even with falling crude prices
These upsides have been masked by fears of falling oil price
As oil price increases, the market will react to drive the stock price up
The thesis does not hold
CF from operating activities decreased for the second year
Brent is 56% lower than at the time of pitch ($85/bbl vs. $35/bbl)
The timing and extent of the oil price increase is uncertain
Eventual oil price increase is possible, but it is uncertain whether it will reach previous levels
Update

16. ICE Brent Crude Futures
Current
($34.41)
Buy
($85.04)
Sell
($68.14)

17. 4
Risks and Catalysts

18. Risks (1) Prolonged depression of oil prices
Prolonged depression of oil prices will weigh down on revenues and earnings even with government contracts
(2) Emergence of new oil equilibrium
Even if oil price rises, it is uncertain whether it will return to the $85 level
Slowdown in China and emerging markets
Restructuring trends along the supply chain

19. Catalysts (1) Further reduction in A/R (2) M&A opportunities
Prolonged depression of oil prices will weigh down on revenues and earnings even with government contracts
(2) M&A opportunities
High cash balance, low debt, and relatively strong market positioning may open up opportunities for M&A once the oil market stabilizes

20. 5
Recommendation

21. Valuation
4 Public upstream oil & gas companies listed in North America with greater than 50% of assets based in Middle East / North Africa

22. Recommendation Hold Of the 3 theses: 1 shows conflicting evidence
1 does not hold
1 holds
The company is no longer undervalued
Recommendation is to avoid taking further exposure to TGL and wait until the oil market stabilizes