TransAtlantic Petroleum Announces Second Quarter 2020 Financial Results and Provides an Operations Update

Source Company Press Release
Company TransAtlantic Petroleum Ltd.
Tags Corporate: Corporate Results, Guidance, Overview/Strategy, Country: Bulgaria, Canada, Turkey, Financial - Costs & Metrics: Capital Expenditures, Hedging
Date August 12, 2020

TransAtlantic Petroleum Ltd. (TSX: TNP) (NYSE American: TAT) (the “Company” or “TransAtlantic”) today announced its financial results for the quarter ended June 30, 2020 and provided an operations update. Additional information can be found on the Company’s website at  transatlanticpetroleum.com.

Pending Merger and Loan Agreement

As previously disclosed, on August 7, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which an affiliate of a group of holders (the “Preferred Shareholder Group”) representing 100% of the Company’s outstanding 12.0% Series A Convertible Redeemable Preferred Shares (“Series A Preferred Shares”), would acquire all of the outstanding common shares of the Company for $0.13 per share in cash (the “Merger”).   

The members of the Preferred Shareholder Group are each member of the Mitchell Group, KMF Investments Partners, LP, West Investment Holdings, LLC, Randall I. Rochman, and Betsy Rochman.  The members of the Mitchell Group are Longfellow Energy, LP (“Longfellow”),  Dalea Partners, LP (“Dalea”), the Alexandria Nicole Mitchell Trust 2005, the Elizabeth Lee Mitchell Trust 2005, the Noah Malone Mitchell Trust 2005, and Stevenson Briggs Mitchell. Longfellow and Dalea are affiliates of the Chairman of the Company’s Board of Directors and Chief Executive Officer, N. Malone Mitchell 3rd.

The Merger is subject to approval by the Company’s common shareholders and holders of Series A Preferred Shares and the satisfaction of other customary closing conditions.  

On August 7, 2020, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Dalea Investment Group, LLC (the “Lender”), an entity controlled by the Preferred Shareholder Group. Pursuant to the Loan Agreement, the Lender committed to lend to the Company an aggregate principal amount of up to $8.0 million for working capital purposes pursuant to an approved budget.

Summary

  • Average daily net sales volumes were 2,185 barrels of oil equivalent per day (“BOEPD”) in the second quarter of 2020, as compared to 2,498 BOEPD in the first quarter of 2020 and 2,873 BOEPD in the second quarter of 2019.

  • Revenues were $6.5 million for the second quarter of 2020, as compared to $8.4 million for the first quarter of 2020 and $17.2 million for the second quarter of 2019.

  • Operating loss was $1.8 million for the second quarter of 2020, as compared to $22.1 million for the first quarter of 2020 and operating income of $6.3 million for the second quarter of 2019.

  • Net loss was $7.7 million for the second quarter of 2020, as compared to $24.0 million for the first quarter of 2020 and $0.01 million for the second quarter of 2019.

  • Adjusted EBITDAX was $0.8 million for the second quarter of 2020, as compared to $8.0 million for the first quarter of 2020 and $10.7 million for the second quarter of 2019.1

  • Outstanding debt was $11.3 million as of June 30, 2020, as compared to $10.6 million as of March 31, 2020. 

Second Quarter 2020 Results of Operations

  For the Three Months Ended   
  June 30, 2020      March 31, 2020      June 30, 2019   
Net Sales:                       
Oil (MBBL)    199        218        253   
Natural gas (MMCF)          56        48   
Total net sales (MBOE)    199        227        261   
Average net sales (BOEPD)    2,185        2,498        2,873   
Realized Commodity Prices:                       
Oil ($/Bbl unhedged)  32.60      37.18      66.57   
Oil ($/Bbl hedged)  31.70      67.68      66.57   
Natural gas ($/MCF)  5.46      4.30      5.41   

Total revenues were $6.5 million for the three months ended June 30, 2020, as compared to $8.4 million for the three months ended March 31, 2020 and $17.2 million for the three months ended June 30, 2019. The Company had a net loss of $7.7 million, or $0.12 per share (basic and diluted), for the three months ended June 30, 2020, as compared to $24.0 million, or $0.38 per share (basic and diluted), for the three months ended March 31, 2020, and $0.01 million, or $0.00 per share (basic and diluted), for the three months ended June 30, 2019. Capital expenditures and seismic and corporate expenditures totaled $0.6 million for the three months ended June 30, 2020, as compared to $2.9 million for the three months ended March 31, 2020 and $6.2 million for the three months ended June 30, 2019.

Adjusted EBITDAX was $0.8 million for the three months ended June 30, 2020, as compared to $8.0 million for the three months ended March 31, 2020 and $10.7 million for the three months ended June 30, 2019.

Liquidity and Capital Resources

The Company’s primary sources of liquidity for 2020 were its cash and cash equivalents, cash flow from operations, the sale of assets and borrowings under the U.S. Paycheck Protection Program (“PPP”) loan. At June 30, 2020, the Company had cash and cash equivalents of $8.6 million, $11.3 million in short-term debt, and a working capital surplus of $1.0 million, compared to cash and cash equivalents of $9.7 million, $2.9 million in long-term debt, $17.1 million in short-term debt and a working capital surplus of $2.0 million at December 31, 2019.

In March 2020, crude oil prices declined to approximately $25 per barrel for Brent crude as a result of market concerns about the economic impact from the COVID-19 as well as the ability of OPEC and Russia to agree on a perceived need to implement further production cuts in response to weaker worldwide demand.  Since then, Brent crude prices have rebounded to approximately $45.00 per barrel as of August 10, 2020 and remain unpredictable.

As a result of the decline in Brent crude prices, the current near term price outlook and resulting lower current and projected cash flows from operations, the Company has reduced its planned capital expenditures to those necessary for production lease maintenance and those projecting a return on invested capital at current realized prices. In order to mitigate the impact of reduced prices on its 2020 cash flows and liquidity, the Company implemented cost reduction measures to reduce its operating costs and general and administrative expenses. In connection therewith, the Company intends to prioritize funding operating expenditures over general and administrative expenditures, whenever possible.

On March 9, 2020, the Company unwound its commodity derivative contracts with respect to its future crude oil production. In connection with these transactions, the Company received $6.5 million. In order to reduce future interest expense, the Company used these proceeds to pay down the Company’s $20.0 million term loan (the “2019 Term Loan”) with DenizBank, A.S. (“DenizBank”). On April 3, 2020, the Company entered into a new swap contract with DenizBank, which hedged approximately 2,000 barrels of oil per day. The swap contract is in place from May 2020 through February 2021, has an ICE Brent Index strike price of $36.00 per barrel, and is settled monthly. Therefore, DenizBank is required to make a payment to the Company if the average monthly ICE Brent Index price is less than $36.00 per barrel, and the Company is required to make a payment to DenizBank if the average monthly ICE Brent Index price is greater than $36.00 per barrel.

Türkiye Petrol Rafinerileri A.Ş. (“TUPRAS”), a privately-owned oil refinery in Turkey, purchases substantially all of the Company’s crude oil production. The price of substantially all of the oil delivered pursuant to the purchase and sale agreement with TUPRAS is tied to Arab Medium oil prices adjusted upward based on an  API adjustment, Suez Canal tariff costs, and freight charges. Between March 2020 and May 2020, there was a significant widening of the differential between the average monthly ICE Brent Index price and the Company’s realized oil prices. In 2018 and 2019, the average monthly ICE Brent Index Price exceeded the Company’s realized oil prices by $2.44 and $0.17 per barrel, respectively. The differential between the average monthly ICE Brent Index Price and the Company’s realized oil prices widened from $3.40 per barrel in March 2020 to $8.34 per barrel in May 2020. The widening of the differential between the average monthly ICE Brent Index Price and the Company’s realized oil prices rendered the Company’s hedges less effective, resulting in significantly lowered revenues from March 2020 through May 2020.  In June 2020, the differential between the average monthly ICE Brent Index Price and the Company’s realized oil prices contracted to $0.74 per barrel, and, in July 2020, the Company’s realized oil prices exceeded the average monthly ICE Brent Index Price by $3.71 per barrel. The differential between the average monthly ICE Brent Index Price and the Company’s realized oil prices remains unpredictable and may expand or contract in the future.

The price of the oil delivered pursuant to the purchase and sale agreement with TUPRAS is determined under the Petroleum Market Law No. 5015 under the laws of the Republic of Turkey. In November 2019,  TUPRAS filed a lawsuit seeking restitution from the Company for alleged overpayments resulting from a February 2019 amendment to the Turkish domestic crude oil pricing formula under Petroleum Market Law No. 5015 (the “Pricing Amendment”).  TUPRAS also claimed that the Pricing Amendment violates the Constitution of the Republic of Turkey and seeks to have the Pricing Amendment cancelled. Additionally, in April 2020,  TUPRAS notified the Company that it intends to extend payment terms for oil purchases by 60 days. The outcome of the  TUPRAS lawsuit and negotiations regarding the extension of payment terms is uncertain; however, a conclusion of the lawsuit in  TUPRAS’s favor or an extension of payment terms would reduce or delay the Company’s cash flow and decrease the Company’s cash balances.

In the second quarter of 2020, the Company borrowed approximately $626,000 pursuant to the PPP to cover certain payroll, benefit, and rent expenses. The Company has forecast that amounts borrowed or received pursuant to the PPP will be forgiven for cash flow purposes. New guidance on the criteria for forgiveness continues to be released, and the Company currently expects that it will meet the conditions for forgiveness for a majority of the loan. Additionally, in the second quarter of 2020, the Turkish government passed legislation permitting employers to reduce the working hours of employees, reducing payroll and benefit expenses, through the end of August 2020. The actual reduction in payroll and benefit expenses due to this legislation is approximately $533,000.  

As of June 30, 2020, the Company had $10.0 million of outstanding principal under the 2019 Term Loan. The 2019 Term Loan is payable in seven monthly installments of $1.4 million plus accrued interest from July 2020 through the maturity date in February 2021. In addition, dividends on the Company’s Series A Preferred Shares are payable quarterly at the Company’s election in cash, common shares, or a combination of cash and common shares at an annual dividend rate of 12.0% of the liquidation preference if paid in cash or 16.0% of the liquidation preference if paid in common shares. If paid partially in cash and partially in common shares, the dividend rate on the cash portion is 12.0%, and the dividend rate on the common share portion is 16.0%. In order to conserve cash, the Company elected to pay the 2020 second quarter dividend in common shares, and, as such, on July 30, 2020, the Company issued 5,819,908 common shares to holders of Series A Preferred Shares.

On August 7, 2020, to supplement its liquidity, the Company entered into an up to $8.0 million loan with an affiliate of Mr. Mitchell.  The loan is due August 7, 2021.  Even with this additional liquidity, as of the date hereof, based on cash on hand and projected future cash flow from operations, the Company’s current liquidity position is severely constrained.  As a result, substantial doubt exists regarding the Company’s ability to continue as a going concern. The Company’s management is actively pursuing improving the Company’s working capital position in order to remain a going concern for the foreseeable future.

Operational Update

Southeastern Turkey

Molla

During 2020, the Company plans to continue its recompletion, workover, and production optimization plans in its producing fields including Bahar, Yeniev, Goksu, Pinar, Southeast Bahar, Catak, and Karagoz.  Drilling additional wells will be dependent on oil prices.

Bahar Field

In the second quarter of 2020, the Company completed construction and began operations of the second phase of electrification of the Bahar field to replace diesel generated power with gas generated power.

Arpatepe Field

In the second quarter of 2020, the Company started the initial phase of a full field waterflood project of the Arpatepe field.  The Company plans to recomplete four wells in the field as water injection wells and one well as a water source well.  Additionally, the Company plans to build a central facility and gathering system to handle increased volumes.  Based on budget and partner considerations the timeline for full implementation is subject to change.

Selmo Field

During 2020, the Company plans to continue its recompletion, workover, and production optimization operations in the Selmo field.

Bulgaria

The Company is currently evaluating future activity in Bulgaria.

Conference Call

The Company will host a live webcast and conference call on Thursday, August 13, 2020 at 7:30 a.m. Central time (8:30 a.m. Eastern time) to discuss second quarter 2020 financial results and provide an operations update. Investors who would like to participate in the conference call should call (877) 878-2762 or (678) 809-1005 approximately ten minutes prior to the scheduled start time and ask for the TransAtlantic conference call. The conference ID is 8286967.

A live webcast of the conference call and replay will be available through the Company’s website at transatlanticpetroleum.com. To access the webcast and replay, click on “Investors,” select “Events and Presentations,” and click on “Listen to webcast” under the event list. The webcast requires IOS, Microsoft Windows Media Player, or RealOne Player.

A telephonic replay of the call will be available through August 15, 2020 and may be accessed by dialing (855) 859 -2056 or (404) 537-3406. The conference ID is 8286967.

TransAtlantic Petroleum Ltd.
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(U.S. Dollars and shares in thousands, except per share amounts)

  For the Three Months Ended      For the Six Months Ended   
  June 30, 2020      June 30, 2019      June 30, 2020      June 30, 2019   
Revenues:                               
Total revenues  6,500      17,215      14,860      36,256   
Costs and expenses:                               
Production    2,380        2,712        5,899        5,214   
Transportation and processing    961        1,221        2,121        2,540   
Exploration, abandonment and impairment    –        666        20,338        5,779   
Seismic and other exploration    –        108        45        185   
General and administrative    2,394        2,690        4,746        5,744   
Depreciation, depletion and amortization    2,517        3,442        5,506        7,158   
Accretion of asset retirement obligations    44        49        97        101   
Total costs and expenses    8,296        10,888        38,752        26,721   
Operating (loss) income    (1,796      6,327        (23,892      9,535   
Other (expense) income:                               
Loss on sale    –        –        (10,128      –   
Interest and other expense    (2,396      (2,753      (4,608      (5,231 
Interest and other income    292        221        413        395   
Loss on commodity derivative contracts    (3,217      (323      4,296        (433 
Foreign exchange loss    (356      (115      (484      (1,388 
Total other expense    (5,677      (2,970      (10,511      (6,657 
(Loss) income before income taxes    (7,473      3,357        (34,403      2,878   
Income tax (expense) benefit    (261      (3,366      2,704        (6,789 
Net loss    (7,734      (9      (31,699      (3,911 
Other comprehensive loss:                               
Foreign currency translation adjustment    (1,245      (416      6,676        (4,642 
Comprehensive loss  (8,979    (425    (25,023    (8,553 
                               
Net loss per common share                               
Basic net loss per common share  (0.12    (0.00    (0.51    (0.07 
Weighted average common shares outstanding    62,502        52,529        62,406        52,506   
Diluted net loss per common share  (0.12    (0.00    (0.51    (0.07 
Weighted average common and common equivalent shares outstanding    62,502        52,529        62,406        52,506   


TransAtlantic Petroleum Ltd.
Summary Consolidated Statements of Cash Flows (Unaudited)
(in thousands of U.S. Dollars)           

  For the Six Months Ended June 30,   
  2020      2019   
Net cash provided by operating activities  10,261      10,622   
Net cash used in investing activities    (2,179      (15,726 
Net cash (used in) provided by financing activities    (8,782      10,103   
Effect of exchange rate changes on cash    (366      (1,184 
Net (decrease) increase in cash, cash equivalents, and restricted cash  (1,066    3,815   


TransAtlantic Petroleum Ltd.
Summary Consolidated Balance Sheets
(in thousands of U.S. Dollars, except share data)

  June 30, 2020      December 31, 2019   
ASSETS  (unaudited)           
Current assets:               
Cash and cash equivalents  8,598      9,664   
Accounts receivable, net               
Oil and natural gas sales    6,796        13,299   
Joint interest and other    1,106        1,218   
Related party    478        561   
Prepaid and other current assets    12,497        12,375   
Note receivable - related party    3,492        –   
Derivative asset    10        –   
Inventory    3,249        7,091   
Total current assets    36,226        44,208   
Property and equipment:               
Oil and natural gas properties (successful efforts method)               
Proved    120,915        167,948   
Unproved    10,414        12,978   
Equipment and other property    13,136        10,202   
    144,465        191,128   
Less accumulated depreciation, depletion and amortization    (89,529      (106,610 
Property and equipment, net    54,936        84,518   
Other long-term assets:               
Other assets    3,524        3,827   
Note receivable - related party    –        3,951   
Total other assets    3,524        7,778   
Total assets  94,686      136,504   
LIABILITIES, SERIES A PREFERRED SHARES AND SHAREHOLDERS' EQUITY               
Current liabilities:               
Accounts payable  1,611      4,555   
Accounts payable - related party    5,120        4,262   
Accrued liabilities    13,993        15,244   
Derivative liability    3,227        966   
Loans payable    11,269        17,143   
Total current liabilities    35,220        42,170   
Long-term liabilities:               
Asset retirement obligations    3,505        4,749   
Accrued liabilities    9,455        10,370   
Deferred income taxes    17,721        22,728   
Loans payable    –        2,857   
Total long-term liabilities    30,681        40,704   
Total liabilities    65,901        82,874   
Commitments and contingencies               
Series A preferred shares, $0.01 par value, 100,000 shares authorized; 100,000 shares issued and outstanding with a liquidation preference of $50 per share as of June 30, 2020 and December 31, 2019    5,000        5,000   
Series A preferred shares-related party, $0.01 par value, 821,000 shares authorized; 821,000 shares issued and outstanding with a liquidation preference of $50 per share as of June 30, 2020 and December 31, 2019    41,050        41,050   
Shareholders' equity:               
Common shares, $0.10 par value, 200,000,000 shares authorized; 62,759,347 shares and 62,230,058 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively    6,276        6,223   
Treasury stock    (970      (970 
Additional paid-in-capital    582,484        582,359   
Accumulated other comprehensive loss    (140,671      (147,347 
Accumulated deficit    (464,384      (432,685 
Total shareholders' equity (deficit)    (17,265      7,580   
Total liabilities, Series A preferred shares and shareholders' equity  94,686      136,504   

 Reconciliation of Net Loss to Adjusted EBITDAX (Unaudited)
(in thousands of U.S. Dollars)

  For the Three Months Ended      For the Six Months Ended   
    June 30, 2020      March 31, 2020      June 30, 2019      June 30, 2020      June 30, 2019   
  Net loss  (7,734    (23,965    (9    (31,699    (3,911 
  Adjustments:                                       
  Interest and other, net    2,104        2,091        2,532        4,195        4,836   
  Income tax expense (benefit)    261        (2,965      3,366        (2,704      6,789   
  Exploration, abandonment, and impairment          20,338        666        20,338        5,779   
  Seismic and other exploration expense          45        108        45        185   
  Foreign exchange loss    356        128        115        484        1,388   
  Share-based compensation expense    114        115        77        229        179   
  Loss (gain) on commodity derivative contracts    3,217        (7,513      323        (4,296      433   
  Cash settlements on commodity derivative contracts    (79      6,547              6,468         
  Accretion of asset retirement obligation    44        53        49        97        101   
  Depreciation, depletion, and amortization    2,517        2,989        3,442        5,506        7,158   
  Loss on sale          10,128              10,128         
  Adjusted EBITDAX  800      7,991      10,669      8,791      22,937   

Adjusted EBITDAX (“Adjusted EBITDAX”) is a non-GAAP financial measure that represents net loss plus interest and other income, net, income tax (benefit) expense, exploration, abandonment, and impairment, seismic and other exploration expense, foreign exchange loss, share-based compensation expense, (gain) loss on commodity derivative contracts, cash settlements on commodity derivative contracts, accretion of asset retirement obligation, depreciation, depletion, and amortization and loss on sale.

The Company believes Adjusted EBITDAX assists management and investors in comparing the Company’s performance on a consistent basis without regard to depreciation, depletion, and amortization, impairment of oil and natural gas properties, exploration expenses, and foreign exchange gains and losses among other items, which can vary significantly from period to period. In addition, management uses Adjusted EBITDAX as a financial measure to evaluate the Company’s operating performance. 

Adjusted EBITDAX is not a measure of financial performance under GAAP. Accordingly, it should not be considered as a substitute for net income prepared in accordance with GAAP. Net income may vary materially from Adjusted EBITDAX. Investors should carefully consider the specific items included in the computation of Adjusted EBITDAX.

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