Macro Tsimmis

intelligently hedged investment

Transmeridian (TMY) update #2

Posted by intelledgement on Thu, 15 Mar 07

Transmeridian (TMY) held their 4Q04 and year end results conference call this morning. The results themselves were an anticlimax…we already knew they spent a lot more money than they brought in in 2006 as they focused on infrastructure to enable them to wring some production out of their first class properties in Kazakhstan. The actual numbers (announced yesterday) showed a near-doubling of production over 2005 (from 1100 bpd to 2000 bpd) and tripling of revenues, but the gain was more than offset by increased operations expenses and at the end of the day, TMY lost $54.3MM in 2006 as compared with $21.6MM in 2005. No surprizes there.

But what we really wanted to hear was their progress on ramping up production. This is a critical issue because the company had enough cash to last through the first quarter at their current (aggressive) level of CAPEX/production enhancement spending. Transmeridian needs about 4000 bpd of production just to keep the lights on, 6500 bpd to maintain a modest CAPEX program reworking existing wells and drilling a handful of new ones, and 8000 bpd of production to be comfortable.

Well, the bad news is that they aren’t going to make it. Company management stated that current production is running around 4000 bpd, which is better than the numbers in February or January, but disappointingly down from just a week ago (5100 bpd as of 6 March).

So, with only $15MM cash on hand—most of which is earmarked for a looming interest payment—the other bad news is that management have no choice but to throw in the towel and seek an additional $15MM-to-$22MM in equity-funded cash, which means more dilution for the likes of us existing shareholders. 😦

So what’s the good news? Well…they completed their first horizontal-lateral well, and management believe that this approach will prove the key to unlocking their reserves, which flow freely through a series of fractures…the theory is that digging vertical wells is dicey because it is easy to miss or only tangentially plug into the fractures but horizontal-lateral drilling is much more likely to intersect fractures, potentially at multiple points and this is a better approach for getting more oil out of the ground. Unfortunately, this first horizontal well started out strong at 1000 bpd but (as predicted here earlier this month) has lapsed down to 400 bpd now. Management believe but are not certain that acid stimulation deployed in this new well failed to make it into the lateral drilled region but was confined to the original vertical area, and that once they deliver acid stimulation to the lateral areas of this and subsequent wells, it will help with the efforts to tap into the fractures and boost production. Perhaps it would be more accurate to say that these are “good expectations” rather than “good news.”

Another good expectation is that with the new wells being drilled now plus the reworking of existing wells also underway, management project reaching 8000 bpd of production by mid-May. By then they also expect to be selling nearly 100% of their output on the international market—the figure in 2006 was 57%—which provides a better price than the Kazakhstan domestic market. They also appear to be near completion on their pipeline infrastructure project, which should provide them with the capacity to move up to 30000 bpd more economically. This projected combo of higher production, better prices, and lower costs should not only make Transmeridian self-funding, but push it into the black.

The stock surged today, up as high as $3.74 before closing at $3.02, up 4%. But it was not in reaction to this sunny scenario, which has been described before (and indeed was supposed to have arrived already). The surge was in set off by management’s announcement prior to the open that they were “considering strategic alternatives” due to disappointment with the market valuation of the company and a desire to maximize shareholder value. Management stated that there have been inquiries and that non-disclosure agreements have been signed and that they are providing corporate data to interested third parties. They stated they would be open to any alternatives, from partnership to partial sale of the South Alibek field to a buyout.

If management truly believe they are two months away from black ink (following years of ever-increasing losses), the timing for solciting bids seems curious. Wouldn’t it make more sense to wait a few weeks and then deal from a position of greater strength? It is likely that this is primarily a tactical manuever designed to pump up the value of the stock in order to obtain a better deal on their forthcoming funding deal. (The bears might say that management have concluded that cracking the complex geography of the South Alibek field is beyond their limited means and they genuinely want out.)

In any event, we are hanging on here to allow management the rope they say they need to get to 8000 bpd. The prospect of a profitable E&P sitting on 67MMBBLS of proved (down from last year’s estimate of 73MMBBLS, another little disappointment) and 140MMBBLS of probable reserves is too good to give up on this close to potential fruition. We will, however, be watching closely to ensure that management achieve their goal of producing sufficient crude at a low enough price to both fund their CAPEX and show a profit. Failing that, we should be looking for a buyout, here, too…not the sort requiring the buyers to sign NDAs.


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