Macro Tsimmis

intelligently hedged investment

Transmeridian (TMY) update #25

Posted by intelledgement on Tue, 12 Aug 08

Transmeridian, our lingering Kazakhstani-focused E&P, filed their 2Q08 10-Q with the SEC today, and it includes fresh cause for concern about the company’s ability to survive if they don’t close their deal with United Energy Group.

In short, the company continues to produce less oil and lose money doing it.

Production for the quarter came in at an average 1676 BBLS/day, as compared with an average of 2451 BBLS/day a year ago. For the first six months of 2008, production averaged 1874 BBLS/day, as compared with an average of 2979 BBLS/day for the first six months of 2007. 

Fortunately, the price of oil has risen dramatically: the company has collected $82/barrel so far in 2008, compared with only $39/barrel in 2007. Thus the company has realized more revenue than last year, even though production declined: $13.6 million in 2Q08 compared to $11.2 million a year ago and $28.9 million for the first six months of 2008 compared to $18.4 million in 2007.

Alas, despite a 37% reduction in production, the cost of producing the oil actually rose 7% in dollar terms (a resoundingly depressing 70% on a per barrel basis). No big surprise here, as TMY are operating 17 wells now, as compared with eight last year. In effect, they are setting new standards for inefficiency that dwarf even their own previous impressive achievements in this regard. “Average daily production…decreased, due primarily to the lack of acid stimulation on newly completed wells, deferred workovers on existing wells and the delay of a pressure maintenance project because of a lack of sufficient operating funds. As a result, management believes that wells have not flowed at their optimal levels in the second quarter of 2008,” the 10-Q allows. Do tell.

Bottom line, on an operating basis, the company was still in the red, albeit the loss was trimmed from $11 million in 2007 to $2 million for the first six months of 2008. Still worse, however, was the toll for interest payments: $33 million for 1H08 as compared to $22 million a year ago. Overall, the company has lost $37 million so far in 2008, as compared with $32 million of red ink by this time last year. 

So, one might wonder, why are we still here? Good question. Primarily, we are here because China needs oil and Chinese money is on the way to finance serious and proper development of the potentially huge South Alibek field (although a delay in the completion of the transfer transactions that are prerequisites to closing the deal with UEG was announced last Thursday). So we still have hopes of getting a bigger fraction of our $3/share back. Also as we been lucky and good overall with this speculative portfolio, it’s philosophically appropriate to keep a failure around as a reminder of the risks of investing in individual stocks (which as a general policy for individual investors, we eschew in favor of ETFs).

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