Macro Tsimmis

intelligently hedged investment

Transmeridian (TMY) update #5

Posted by intelledgement on Sun, 01 Jul 07

Ay yi yi!

Well…we got our dramatic production news already, and it isn’t even the third quarter…well it is today, but this was announced Friday after the market close…obviously, we should have been more careful in what we wished for…the news is that a dispute with Kazakhstani governmental authorities over gas flaring from South Alibek wells has prompted the company to “temporarily curtail production from the field for an estimated two weeks.” Apparently to the surprize of management, the government object to the practice of flaring off the natural gas and the objection is serious enough to close down operations. Management say they have worked out an agreement to sell the NG to a local manufacturing facility but won’t be able to actually do that until early November; consequently they have requested a waiver from the government to be allowed to continue flaring until then. If they don’t get the waiver, we will be shut down to November, or longer if there are any delays in the NG delivery project.

Management say that these gas flaring regs are being applied to everyone, but we don’t see the entire oil industry in Kazakhstan shutting down for up to four months. It seems likely that the government are signaling Transmeridian management that they are unhappy with the way the field has been managed…understandably so…and government authorities are willing to make life very hard for management as an incentive to for them to sell out.

Hopefully this will increase the chances of a deal being struck in 3Q07 without forcing management to cut and run at a fire sale price. (And while we are discussing our hopes, let’s specify that, should a gas flaring settlement be forthcoming in the next two weeks, we would be hoping for dramatic production news of a positive nature.)

Actually, we did get one positive bit of news: management announced that they can now deliver oil via pipeline, which should significantly cut delivery costs in the event they ever are allowed to pump any again.

Our experience with TMY is a good example of how badly things can go wrong with speculative equities, even when things look really good (e.g., a company with the rights to 7MM BBLS valued at $4/barrel with world market prices north of $60/barrel). We are still hoping for a buyout to bail us out here in the next quarter or two…failing that we may consider unloading this position in December as a capital gains tax sale.

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