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TAT > SEC Filings for TAT > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for TRANSATLANTIC PETROLEUM LTD. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for TRANSATLANTIC PETROLEUM LTD.


7-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

In this Quarterly Report on Form 10-Q, references to "we," "our," "us" or the "Company," refer to TransAtlantic Petroleum Ltd. and its subsidiaries on a consolidated basis unless the context requires otherwise. Unless stated otherwise, all sums of money stated in this Quarterly Report on Form 10-Q are expressed in U.S. Dollars.

Executive Overview

We are an international oil and natural gas company engaged in acquisition, exploration, development and production. We have focused our operations in countries that have established yet underexplored petroleum systems, have stable governments, are net importers of petroleum, have an existing petroleum transportation infrastructure and provide favorable commodity pricing, royalty rates and tax rates to exploration and production companies. As of September 30, 2013, we held interests in approximately 3.9 million net onshore acres of developed and undeveloped oil and natural gas properties in Turkey and Bulgaria. As of September 30, 2013, approximately 40% of our outstanding common shares were beneficially owned by N. Malone Mitchell 3rd, our chief executive officer and chairman of our board of directors.

Financial and Operational Performance Highlights. Highlights of our financial and operational performance for the third quarter of 2013 include:

We reported a $4.8 million net loss from continuing operations for the three months ended September 30, 2013, which included a $2.2 million non-cash loss on our commodity derivatives and a $2.9 million foreign currency exchange loss, compared to net income from continuing operations of $0.5 million for the same period in 2012.

We derived 71.2% of our revenues from the production of oil and 23.9% of our revenues from the production of natural gas during the three months ended September 30, 2013.

Total oil and natural gas sales revenues decreased 2.9% to $31.6 million for the quarter ended September 30, 2013, from $32.6 million in the same period in 2012. The decrease was primarily the result of lower production of nine thousand barrels of oil equivalent ("Mboe"), which decreased revenues by $0.8 million, and a decrease in the average realized price per barrels of oil equivalent ("Boe"), which decreased revenues by $0.2 million.

Total net production was 230 thousand barrels ("Mbbls") of oil and 868 million cubic feet ("Mmcf") of natural gas, as compared to 229 Mbbls of oil and 928 Mmcf of natural gas for the same period in 2012.

For the quarter ended September 30, 2013, we produced an average of 4,076 net Boe per day, as compared to 4,174 net Boe per day for the same period in 2012.

For the quarter ended September 30, 2013, we incurred $34.0 million in capital expenditures, including license acquisition and seismic expenditures from continuing operations, as compared to $24.5 million for the quarter ended September 30, 2012.

As of September 30, 2013, we had $49.8 million in outstanding debt and no short-term borrowings, as compared to $32.8 million in outstanding debt and no short-term borrowings as of September 30, 2012.

Recent Developments

Bulgaria Farm-Out. In August 2013, our wholly owned subsidiary, TransAtlantic Worldwide, Ltd. (TransAtlantic Worldwide"), entered into a farm-out agreement with Koynare Development Ltd. ("KDL"), a private oil and natural gas investment company. Pursuant to the agreement, KDL will fund 75% of our initial $40 million work program in Bulgaria, and our wholly owned subsidiary, Direct Petroleum Bulgaria EOOD ("Direct Bulgaria"), will assign KDL a 50% interest in the Koynare Concession Area. Direct Bulgaria will also assign KDL 50% of its interest in the Stefanetz Concession Area in the event that the pending concession application is approved by the Bulgarian government.

Amendment of Purchase Agreement. In July 2013, TransAtlantic Worldwide entered into a second amendment (the "Amendment") to our purchase agreement (the "Purchase Agreement") with Direct Petroleum Exploration, LLC (formerly Direct Petroleum Exploration, Inc.) ("Direct"). Pursuant to the Amendment, we issued 3,510,743 common shares to Direct as partial payment of certain liquidated damages due under the Purchase Agreement. The parties also agreed that Direct is not eligible for any liquidated damages relating to the coring of the Etropole shale formation, which resulted in the reversal of a $5.0 million contingent liability recorded in 2011 during the three months ended June 30, 2013. The Amendment sets forth a new obligation to drill and test the Deventci-R2 well by May 1, 2014. In the event that we do not meet the drilling and testing obligations by May 1, 2014, the Amendment requires us to issue an additional $2.5 million in common shares (the "Additional Liquidated Damages") to Direct. In addition, the Amendment provides that we shall issue common shares to Direct in the amount of $7.5 million less the Additional Liquidated Damages, if any, if the Deventci-R2 well is a commercial success (as defined in the Purchase Agreement) on or prior to May 1, 2016.


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Additionally, the Amendment provides that if the Bulgarian government issues a production concession over the Stefenetz Concession Area, Direct will be entitled to a payment of $10.0 million in common shares, or a pro rata amount if the production concession is less than 200,000 acres.

TBNG Credit Facility. On June 18, 2013, our wholly owned subsidiary, Thrace Basin Natural Gas (Turkiye) Corporation ("TBNG"), entered into a 78.8 million New Turkish Lira (approximately $38.7 million at September 30, 2013) unsecured line of credit with a Turkish bank, of which 60 million New Turkish Lira is available in cash for TBNG and 18.8 million New Turkish Lira is available in the form of non-cash bank guarantees and letters of credit for TBNG and several other of our wholly owned subsidiaries operating in Turkey. The interest rate will be established at the time of each borrowing, and each borrowing is expected to have a two-year term. As of September 30, 2013, there were no borrowings under this credit facility.

Acquisition of Additional Exploration Acreage in Southeastern Turkey. On May 20, 2013, we completed the acquisition of three exploration licenses from ARAR Petrol ve Gaz Arama Uretim Pazarlama A.S. The exploration licenses, which cover an aggregate of 150,000 acres, are located adjacent to our Molla exploration licenses in southeastern Turkey. We are the 100% owner and operator of the licenses.

Relinquishment of Sud Craiova Exploration License. In 2012, the Romanian government temporarily suspended unconventional exploration of hydrocarbons, including fracture stimulation, pending a government review of unconventional drilling and completion techniques. As a result, on May 10, 2013, we notified the Romanian government that we were relinquishing our Sud Craiova exploration license, covering approximately 500,000 net onshore acres in Romania.

Third Quarter 2013 Operational Update

During the third quarter of 2013, we continued to develop our oil fields in southeastern Turkey and our Thrace Basin natural gas fields in northwestern Turkey.

Turkey-Southeast

Molla. We drilled the Goksu-5H horizontal well to the Mardin zone at a vertical depth of 5,200 feet and a total measured depth of 7,200 feet. Upon completion of the Goksu-5H, the ensuing production was nearly all water and production was discontinued in October 2013. We plan to convert the Goksu-5H into a disposal well.

We completed the Oba-1H well and successfully isolated the toe of the well. We are preparing to put the Oba-1H on a long-term production test. We also drilled the Alibey-1 well, and are currently executing a remediation plan to isolate the water zones on the well.

We drilled the Tepe-1 well, but did not encounter hydrocarbons in the Bedinan zone. The Tepe-1 has been plugged back to the Mardin zone for testing. We are currently drilling the Ambarcik-2 well, a second vertical Bedinan exploration well, and expect to complete the well during the fourth quarter of 2013. We also expect to drill at least one vertical well in the Arpatepe field in the fourth quarter of 2013.

We expect to complete the remaining 314 square km of an 800 square km 3D seismic program over Molla and the surrounding areas by the end of 2013 and interpret the seismic data in the first half of 2014.

Selmo. We drilled a horizontal well targeting the MSD zone at a vertical depth of approximately 5,200 feet and are currently drilling a second horizontal MSD well. After encountering instability in the wellbore, we re-drilled the lower section of the second well. We expect to complete both wells in the fourth quarter of 2013.

Turkey-Northwest

In the third quarter of 2013, we completed seven new wells, including the BTD-4H, fracture stimulated four wells and recompleted 10 wells. The BTD-4H is our second horizontal well in the southern Thrace Basin and began producing in the third quarter of 2013 at a ten-day average rate of 3.2 Mmcf per day ("Mmcf/d"). We are preparing to spud the BTD-5H, our third horizontal well in southern Thrace Basin and an offset of the BTD-4H well.

We drilled six shallow, vertical natural gas wells in the Edirne field after negotiating a low cost, group rate drilling and completion package. One well was a dry hole, and we completed the remaining five wells in October 2013. Four of these wells are producing an average of 750 Mmcf/d each.

We drilled the Karanfiltepe-5 well and are currently running logs to identify completion targets to test for the presence of hydrocarbons. We also spud the Yildirim-3 well targeting the Osmancik formation in September 2013.

We began a 234 square km 3D seismic program in the Osmanli area of southern Thrace Basin and expect to complete this seismic program in the fourth quarter of 2013.


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Planned Operations

We continue to actively explore and develop our existing oil and natural gas properties in Turkey and Bulgaria. Our success will depend in part on discovering additional hydrocarbons in commercial quantities and bringing these discoveries into production. For the remainder of 2013, we are focused on accomplishing the following objectives:

Increase Production. We plan to continue to increase our oil and natural gas production in Turkey through exploration and development on our Molla, Thrace Basin, Selmo and Arpatepe licenses and production leases, including the application of fracture stimulation techniques and horizontal drilling.

Continue to Expand Fracture Stimulation Program. In 2013, we have continued to expand our use of hydraulic fracturing technology to complete otherwise low productive formations in Turkey. The evolution of fracturing fluids and stimulation designs has yielded very positive results in both northwestern and southeastern Turkey. For the remainder of 2013, we plan to continue optimizing our hydraulic fracturing techniques to improve well performance and economics.

Expand the Use of Horizontal Drilling. During 2013, we have expanded our use of horizontal drilling, which achieved successful results in the Selmo, Molla and Thrace Basin areas. During the fourth quarter of 2013, we anticipate our drilling in southeastern Turkey will include extensive use of horizontal drilling techniques, including one well on our Molla licenses and five wells at Selmo. We also plan to drill two horizontal wells on our Thrace Basin licenses.

Accelerate Through Partnerships. In an effort to increase the pace of exploration activity, share exploration risk, and reduce our share of the capital commitments necessary to carry forward the exploration of our extensive acreage positions, we are currently seeking joint venture partners for our exploration acreage in Turkey and plan to continue this effort during the remainder of 2013. We recently entered into a farm-out agreement with KDL in which KDL will fund 75% of our initial $40 million work program in Bulgaria in exchange for 50% of our interest in the Koynare Concession Area and 50% of our interest in the Stefanetz Concession Area in the event that the pending concession application is approved by the Bulgarian government.

Capital expenditures, including seismic expenditures, for the fourth quarter of 2013 are expected to range between $35.0 million and $50.0 million. Approximately 75% of these anticipated expenditures will occur in southeastern Turkey, devoted to drilling developmental and exploratory oil wells and acquiring seismic data at Molla, Selmo, Arpatepe and Gaziantep. Most of the remaining 25% of these anticipated expenditures will occur in the Thrace Basin, devoted to developing conventional and unconventional natural gas production, building infrastructure and acquiring seismic data. Our projected 2013 capital budget is subject to change, and if cash on hand, borrowings from our amended and restated senior secured credit facility (as amended, the "Amended and Restated Credit Facility") with Standard Bank Plc ("Standard Bank") and BNP Paribas (Suisse) SA ("BNP Paribas") and TBNG credit facility, and cash flow from operations are not sufficient to fund our capital expenditures, we will either curtail our discretionary capital expenditures or seek other funding sources.

We currently plan to execute the following drilling and exploration activities during the fourth quarter of 2013:

Turkey. We plan to continue our three-part strategy in Turkey: (i) the Molla program, (ii) the Selmo field redevelopment program, and (iii) the Thrace Basin development program. We plan to drill approximately 11 gross wells, eight of which are expected to be drilled horizontally and five of which are expected to be fracture stimulated. We also plan to construct the infrastructure necessary to produce and sell oil and natural gas from the productive wells we drill.

Bulgaria. We spud the Deventci-R2 well on our Koynare Concession Area on October 5, 2013, and plan to drill and complete the well in the fourth quarter of 2013.

Discontinued Operations in Morocco

In June 2011, we decided to discontinue our Moroccan operations. We have substantially completed the process of winding down our operations in Morocco. We have presented the Moroccan segment operating results as discontinued operations for the three and nine months ended September 30, 2013 and September 30, 2012, and they are not included in results from continuing operations.

Discontinued Operations of Oilfield Services Business

In June 2012, we closed the sale of our oilfield services business, which was substantially comprised of our wholly owned subsidiaries Viking International Limited ("Viking International") and Viking Geophysical Services, Ltd. ("Viking Geophysical"). We have presented the oilfield services segment operating results as discontinued operations for the three and nine months ended September 30, 2013 and September 30, 2012, and they are not included in results from continuing operations.


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Significant Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"). The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. Our significant accounting policies are described in "Note 3. Significant accounting policies" to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012 and are of particular importance to the portrayal of our financial position and results of operations and require the application of significant judgment by management. These estimates are based on historical experience, information received from third parties, and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no changes to the significant accounting policies disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standard Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02, New Disclosures for Items Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"). ASU 2013-02 requires reclassification adjustments for items that are reclassified out of accumulated other comprehensive income to net income to be presented in the statements where the components of net income and the components of other comprehensive income are presented or in the footnotes to the financial statements. Additionally, the amendment requires cross-referencing to other disclosures currently required for other reclassification items. The amendments were effective for interim and annual reporting periods beginning after December 15, 2012. The adoption of ASU 2013-02 did not have a material impact on our consolidated financial statements.

We have reviewed recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on our results of operations, financial position and cash flows. Based on that review, we believe that none of the recent pronouncements will have a significant effect on current or future earnings or operations.

Results of Operations-Three Months Ended September 30, 2013 Compared to Three
Months Ended September 30, 2012

Our results of operations for the three months ended September 30, 2013 and 2012
were as follows:



                                                      Three Months Ended September 30,                                       Change
                                               2013                                      2012                              2013-2012
                                                (in thousands of U.S. dollars, except per unit prices and production  volumes)
                                                                                (as adjusted)
Production:
Oil (Mbbl)                                                  230                                       229                                1
Natural gas (Mmcf)                                          868                                       928                              (60 )
Total production (Mboe)                                     375                                       384                               (9 )
Average daily production
(Boe/day)                                                 4,076                                     4,174                              (98 )
Average prices:
Oil (per Bbl)                       $                    103.04               $                    105.81             $              (2.77 )
Natural gas (per Mcf)               $                      9.16               $                      8.14             $               1.02
Oil equivalent (per Boe)            $                     84.39               $                     84.90             $              (0.51 )
Revenues:
Oil and natural gas sales           $                    31,648               $                    32,603             $               (955 )
Sales of purchased natural
gas                                                       1,511                                     1,883                             (372 )
Other                                                       144                                       329                             (185 )
Costs and expenses:
Production                                                4,591                                     4,542                               49
Exploration, abandonment
and impairment                                            2,243                                     2,104                              139
Cost of purchased natural
gas                                                       1,437                                     1,862                             (425 )
Seismic and other
exploration                                               5,052                                     1,725                            3,327
General and administrative                                6,367                                     6,744                             (377 )
Depletion                                                10,925                                     7,794                            3,131
Depreciation and
amortization                                                562                                       353                              209
Interest and other expense                                  919                                     1,086                             (167 )
Foreign exchange loss                                     2,923                                       133                            2,790


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                                                                      Three Months Ended September 30,                                             Change
                                                            2013                                           2012                                  2013-2012
                                                                  (in thousands of U.S. dollars, except per unit prices and production  volumes)
                                                                                                  (as adjusted)
Loss on commodity derivative
contracts:
Cash settlements on commodity
derivative contracts                              $                    (919 )                    $                    (853 )                $                (66 )
Non-cash change in fair value on
commodity derivative contracts                                       (2,218 )                                       (6,293 )                               4,075

Total loss on commodity derivative
contracts                                         $                  (3,137 )                    $                  (7,146 )                $              4,009
Oil and natural gas costs per Boe(1):
Production                                        $                   10.72                      $                   10.37                  $               0.35
Depletion                                         $                   25.53                      $                   20.32                  $               5.21

(1) We have recalculated the oil and natural gas costs per Boe for the three months ended September 30, 2012 based on working interest volumes before royalty deductions to conform to current year presentation.

Oil and Natural Gas Sales. Total oil and natural gas sales revenues decreased $1.0 million to $31.6 million for the three months ended September 30, 2013, from $32.6 million realized in the same period in 2012. Of this decrease, $0.8 million resulted from a decrease in production volumes of nine Mboe. Additionally, we realized a lower average realized price per Boe, which resulted in lower revenues of $0.2 million. For the three months ended September 30, 2013, our average realized price was $84.39 per Boe, as compared to $84.90 per Boe for the same period in 2012.

Production. Production expenses for the three months ended September 30, 2013 increased to $4.6 million, from $4.5 million for the same period in 2012.

Exploration, Abandonment and Impairment. Exploration, abandonment and impairment costs for the three months ended September 30, 2013 increased $0.1 million to $2.2 million, from $2.1 million for the same period in 2012. Of the $2.2 million of exploration, abandonment and impairment costs, approximately $1.8 million was cash spent during the third quarter. During the three months ended September 30, 2013, there were write-offs of two wells for an average of $0.4 million per well. During the three months ended September 30, 2012, there were write-offs of four wells for an average of $0.5 million per well. Additionally, during the three months ended September 30, 2013, we recorded $1.2 million of impairment charges on our unproved properties.

Seismic and Other Exploration. Seismic and other exploration costs increased to $5.1 million for the three months ended September 30, 2013, as compared to $1.7 million for the same period in 2012. The increase was primarily due to seismic acquisition activities conducted on our West Molla license during the three months ended September 30, 2013.

General and Administrative. General and administrative expense was $6.4 million for the three months ended September 30, 2013, as compared to $6.7 million for the same period in 2012. The decrease was primarily due to a $0.1 million decrease in employee-related costs resulting from a reduction in head count and a $0.2 million decrease in accounting and consulting expenses.

Depreciation, Depletion and Amortization. Depreciation, depletion and amortization increased to $11.5 million for the three months ended September 30, 2013, as compared to $8.1 million in the same period of 2012. The increase was primarily due to additions to proved properties during the three months ended September 30, 2013.

Interest and Other Expense. Interest and other expense decreased to $0.9 million for the three months ended September 30, 2013, as compared to $1.1 million for the same period in 2012.

Foreign Exchange Loss. Foreign currency exchange loss increased to $2.9 million for the three months ended September 30, 2013, as compared to $0.1 million for the same period in 2012. This increase was primarily due to the devaluation of the New Turkish Lira as compared to the U.S. Dollar.

Loss on Commodity Derivative Contracts. During the three months ended September 30, 2013, we recorded a loss on commodity derivative contracts of $3.1 million, as compared to a loss of $7.1 million for the same period in 2012. We recorded a $2.2 million unrealized loss and a $0.9 million realized loss on our derivative contracts for the three months ended September 30, 2013, as compared to a $6.3 million unrealized loss and a $0.8 million realized loss for the three months ended September 30, 2012. Unrealized gains and losses are attributable to changes in oil and natural gas prices and volumes hedged from one period end to another. We are required under our Amended and Restated Credit Facility to hedge a portion of our oil production in Turkey.


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Other Comprehensive Loss (Income). We record foreign currency translation adjustments from the process of translating the functional currency of the financial statements of our foreign subsidiaries into the U.S. Dollar reporting currency. Foreign currency translation adjustment for the three months ended September 30, 2013 decreased to a loss of $10.6 million from a gain of $3.1 million for the same period in 2012 due to the devaluation of the New Turkish Lira as compared to the U.S. Dollar.

Discontinued Operations. All revenues and expenses associated with our Moroccan operations and our oilfield services business for the three months ended September 30, 2013 and 2012 have been included in discontinued operations.

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