Macro Tsimmis

intelligently hedged investment

Transmeridian (TMY) update

Posted by intelledgement on Tue, 06 Mar 07

Transmeridian (TMY) issued an update today and the news was…well lukewarm. The best news is that the company has achieved 5100 bpd of production, which exceed our target of 4000 bpd in 1Q07. Unfortunately, it is not yet clear whether that level of production is sustainable, as the average production in January was 3700 bpd and in February it actually declined to 3500 bpd. (According to the press release, “production was curtailed during the last two weeks of February due to storage capacity limits and other technical issues related to the startup of pipeline deliveries”). Still, compared to a 2006 estimated average of 2200 bpd, the vector looks good. But not great, given that we need 4000 bpd just to sustain ongoing operations and to service the debt and pay for the additional drilling needed to access the remaining 92% of the company’s proven reserves, we need 6000-to-8000 bpd.

There was also drilling news, and it too was good but not great. The first horizontal drilling project is complete: a workover of a marginal well SA-5H, which previously had been producing a measly 100 bpd. After acid stimulation—deemed only partially effective due to not having equipment optimal for acid stimulation of lateral horizontal wells—the workover project boosted production here tenfold to 1000 bpd. Decent enough…if it holds at that level. If past experience is any guide, there will probably be some dropoff. Two other wells were completed and put into production in early February and two more are nearing completion. TMY plan to drill and complete four more wells in 2007, for a total of eight.

Finally, there was unmitigated good news on the pipeline front: TMY are now delivering oil to market via the nearby KazTransOil pipeline system utilizing third-party processing facilities at the Alibekmola field with a capacity of 4500 bpd, increasable to 9000 bpd. Management expect to switch over to their own treating and pipeline delivery system by late summer of 2007 (initial capacity of 15000 bpd). In either case, the end of the truck-to-train delivery chain should improve the bottom line starting this quarter.

Overall, The Street was decidedly underwhelmed by this news, which was released just after 1pm. The stock was down 13% today on heavy volume. Still, at $3.46 it is north of where we bought in and the potential upside here is still very high. So we are standing pat.


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