Macro Tsimmis

intelligently hedged investment

Transmeridian (TMY) update #17

Posted by intelledgement on Mon, 31 Mar 08

Our ailing Kazakhstan-based E&P, Transmeridian Exploration (TMY), made a bunch of news today and none of it was good.

First, the company nailed the coffin shut on the attempt by their CEO, Lorrie Olivier, to take the company private at $3/share. Apparently Mr. Olivier was not able to find investors willing to finance his further (mis)adventures, following a dismal track record of failing to get extract crude economically from Transmeridian’s South Alibek field over the past several years. In terminating the agreement following Mr. Olivier’s repeated failure to meet deadlines, the company does not incur any termination fee.

Apparently, discussions with a third party about acquiring Transmeridian have also ended unhappily. In previous press releases, management have mentioned that such discussions are ongoing, but this press release merely states: “Transmeridian will continue to seek proposals from other interested parties with respect to an acquisition of the company.” According to the press release, the company is also seeking financing.

And no wonder, as they also filed their 2007 10K with the SEC today and the picture is not a pretty one. Once again, the company fell far short of the 4000 BBLS/day of crude oil production that is the bare minimum needed to keep the doors open: Transmeridian produced an average of 2126 BBLS/day in 2007. As a consequence of this production shortfall, the company lost $74.1MM in 2007 (67 cents per share of red ink) as compared to a loss of $54.3MM in 2006 (58 cents per share). It would have been even worse had they not gotten a much better price: an average of $47.93/barrel in 2007, as compared with $34.54 in 2006.

The bottom line is that not only have they no money to spend on capital projects (i.e., drilling new wells), but it is not clear that they have the cash to continue their current operations, to say nothing of ramping up production from existing wells. Unsurprizingly, the company received a “going concern” note from their auditors. Most likely if they don’t strike a buyout deal soon, they will either have to sell more stock—if they even can find any buyers—or cease operations.

And speaking of prospective buyers, another negative development for any such to consider is that the company revised their reserves estimates downward from 67.2 MMBBLS as of the end of 2006 to 58.6 MMBBLS as of the end of 2007. No explanation as to how pumping 700,000 barrels of crude reduced the reserves by 9 MMBBLS.

This situation is looking more and more like a writeoff. The one positive consideration is that as the South Alibek field was shut in for the third quarter of the year due to a natural gas flaring dispute with the Kazakhstani government—not that that per se was positive—a more accurate estimate of their average daily production would be 2835 BBLS/day…still woefully short of the 4000 bar, although a significant improvement of the average 2038 BBLS/day they pumped in 2006, and not quite so large a gap to bridge…if a modest cash infusion enables them to improve production as much in 2008 as they did in 2007, they should be close to breakeven on operations. Where there’s life, there’s hope!

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