TransGlobe Energy: this company is silly

The bulk of TransGlobe’s operation is in Egypt, where all oil production goes through the Egyptian General Petroleum Corporation (“EGPC”).  The problem is that the EGPC has not been paying oil companies on time and owes massive debts.  At YE2012 TransGlobe had $221M in accounts receivables (the majority of it is due from the EGPC).  At this point, some common sense should kick in.  Egypt is not a place where you want to do business.  The government will likely keep most of the oil profits… if not all of the profits.  Despite the obvious, TransGlobe continues to expand heavily in Egypt.

*Disclosure:  No position in TGA.  I have no intention of shorting it.

Not surprisingly for an independent oil and gas company, TransGlobe has been constantly raising capital and its accounting is aggressive.  The company assumes that all of the EGPC debts will be repaid in full.  It capitalizes many costs into its oil and gas properties (and into intangibles).

The options accounting strikes me as very aggressive.  The company uses a binomial model with a “suboptimal exercise factor” of 1.25X and an “expected forfeiture rate (non-executive employees)” of 8.48%.  I didn’t know what these things were and had to look it up.  This article on Investopedia explains everything.  The assumption of 1.25X for the suboptimal exercise factor is very aggressive as it assumes that employees will exercise their options early once the stock is at 1.25X of the option’s strike price.  (Personally I do not think that a suboptimal exercise factor should even be allowed.)  The forfeiture rate also seems to be aggressive as it is higher than the historical rate.

Bottom Line

The company looks no different than all the other promotional independent oil and gas junk out there.  I believe that the company’s earnings are distorted as the accounting does not take into account political risk.  But because I don’t understand the politics too well, I don’t think I will be shorting TransGloble.  I also don’t like shorting stocks that have gone up 20 times.

TransGlobe is a Canadian company listed on the Toronto Stock Exchange as TSL.  It has a secondary US listing on the NASDAQ as TGA.


The blog “Rebel Economy” has a good post on the EGPC and its debts.

3 thoughts on “TransGlobe Energy: this company is silly

  1. Pingback: How would a sociopath fleece investors in mining? | Glenn Chan's Random Notes on Investing

  2. Pingback: March 2014 portfolio update: Feeling the squeeze… | Glenn Chan's Random Notes on Investing

  3. Pingback: The situation in Egypt | Glenn Chan's Random Notes on Investing

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