TransGlobe Energy Corp., known for operations in Egypt, is returning to Canada, snapping up west-central Alberta oil assets for $80-million in a bid to reduce political and economic risk.
This should come as some comfort to Alberta Premier Rachel Notley, whose New Democratic Party government has frequently taken flak from right-wing quarters of the domestic oil patch. The government has been accused of driving away investment over policies such as the coming climate tax and the re-examination of royalties.
Calgary-based TransGlobe had conducted a search for assets in oil-producing countries throughout the developed world before settling on a deal in its backyard.
TransGlobe said its acquisition in the Harmattan area of Alberta from Bellatrix Exploration Ltd. fits with its goal of diversifying its business into OECD countries as oil-market conditions improve. Its Egyptian business is made up of seven production-sharing contracts, which do not have the price-sensitivity of a tax and royalty regime that is more common in the West.
"In the current lower price environment, with our operations in Egypt in the $40-$50 [U.S.] [per barrel oil-price] range, it's tougher to make money. When prices go beyond that they make lots of money," Lloyd Herrick, chief operating officer, said. "We like these assets to balance out that economic risk, because it does feel like it's a lower-for-longer pricing scenario."
The Alberta oil patch appears to be in the early stages of a long-awaited recovery as both oil and gas prices climb. Last week's deal among Organization of Petroleum Exporting Countries to limit production has pushed up global crude prices by nearly 15 per cent. Mr. Herrick said the OPEC agreement is encouraging, but he doubts oil will rocket back up into the $80-$100 oil-price range soon.
"It's really about finding an area where we can continue to invest and make money in the current price environment," he said.
The Alberta assets produce 3,100 barrels of oil equivalent a day from light oil and liquids-rich gas reserves in the Cardium and Mannville formations. TransGlobe will finance the deal with $65-million of its own cash and a $15-million, 10-per-cent loan from the vendor.
TransGlobe stock has long been discounted because of perceived political risk in Egypt. The perception has been overblown, said Randall Neely, TransGlobe's chief financial officer.
"It's generally been a little worse than the reality. We've always been able to operate efficiently, even through the revolutions that have occurred over the last several years. But that perception, I think, has held us back from a valuation perspective," Mr. Neely said.
Investors were initially wary of the deal, though, driving the stock down nearly 5 per cent on the Toronto Stock Exchange on Monday.
"There are people saying, 'They are an international company coming back to Canada. It's wait-and-see mode.' I think that's fair," Mr. Neely said. "Our expectations were that the market would be somewhat neutral to it until they saw what we could do with the assets."
The company has a long-term goal of building its Canadian business up to the size of its Egyptian one, while also looking at other countries for potential acquisitions. The Alberta one will boost the company's overall output by more than 20 per cent, and its proved plus probable reserves by about 70 per cent.