Seeking Alpha
Profile| Send Message|
( followers)  
Yakshemash! Welcome to Kazakhstan!

Transmeridian Exploration (TMY) is engaged in the business of development and production of oil and gas properties. Its activities are primarily focused on the Caspian Sea region of the former Soviet Union and its principal property, the South Alibek Field, is located in Kazakhstan. It focus on fields they believe have high potential upside with little risk.

This is not a stock to put money in if you can't stomach volatility. I have done pretty extensive research on this stock from everything to management to expected barrel value, to political concerns, to simple location. Given all this information, I can say with confidence that this stock has some huge potential.

BACKGROUND:

Kazakhstan is located at a central intersection between Europe, India, and China. India and China are massive importers of oil, which should continue to rise at a steady 2-3% rate over the next decade. Matthew Simmons, an energy investment banker and a former adviser to US president George W. Bush believes that oil production in Saudi Arabia will soon peak, meaning it will not be able to supply the world's growing energy needs. Someone must step in. To add to that point, Kazakhstan is expected to be come the fifth largest exporter of oil over the next decade. In this case, the top five would likely be Saudi Arabia, Venezuela, Russia, Iran, and Kazakhstan. That will put Kazakhstan in front of Kuwait, Iraq, Nigeria, and all other major oil exporting countries.

Mentioned above, Transmeridian has projects in Russia. Unfortunately, Russia has become known for their nationalization of foreign owned companies in the last 3 years. On July 27, 2007, it has come up that Russia is trying to nationalize a $3.5 million project in Russia 50% owned by Transmeridian due to “environmental problems”. The report has been denied by the company, and says the government has not officially contacted them. While a concern, the contract seems to say that each entity will be reimbursed if nationalization occurs, though nationalization does not seem likely at this point.

Another potential concern for some may be the Kazakhstan government, where so much of its value lies. Not to worry. The poor condition of Kazakhstan has left the government without "Venezuela Syndrome." Kazakhstan is begging for Western help, as they have neither the finances nor expertise to turn Kazakhstan into the oil powerhouse that it will become.

An interesting area in the valuation of Transmeridian Exploration is how Europe wants to move over to another source for importing oil, fearing dependence on Russia will make them vulnerable. To solve this growing concern, Europe is looking increasingly towards Kazakhstan. This will bring the western oil companies (Chevron has 20% of oil in Kazakhstan), sending the price of oil fields up.

Now to throw in India and China. Each has an insatiable demand for oil and needs a closer provider that can deliver oil and gas by pipes, not by tankers, which are becoming more and more expensive. Also, given the Chinese’s dependence on Iranian oil, one believes China would want a "Plan B," if something happens to Iran over the nuclear program. Just look at Iraq. The oil is still there, but no one can get it because Saddam blew up the pipelines as his army retreated. It will take billions of dollars and many years to get Iraq up to speed, keeping the price of oil high.

In the competition between these 3 areas, I believe India has the most to benefit from a Kazakhstan oil field. I think that Russian-Chinese relations are not in any jeopardy, opposed to Europe, where tensions are rising with Putin's regime. Should China choose, it can get its oil from pipelines from Russia. However, the West has many oil companies with operations all over the world, and probably does not feel as desperate for another source of oil as India. Mittal Steel and the Indian Government have a joint venture (ONGC Videsh), which is eyeing Kazakhstan as a possible area, and is supposedly looking at Transmerdian. However, a representative from ONGC Videsh would neither confirm nor deny a bid on Transmeridian Exploration. Transmeridian Exploration has put itself on the selling block since April 2007.

MANAGEMENT:

Looking at major holders, I am impressed that the largest shareholder is the CEO, owning 20% of the company. Two insiders also have recently added more to their positions on July 20, 2007 and July 23, 2007. I don't know all the problems they have faced, but how can this company be losing money in this high oil price market with such obvious demand for their biggest oil field's location? While they are expected to have positive earnings next year (maybe even quarter), it remains an interesting question if there is something management is not releasing. This may be what is keeping the stock priced at a fraction of its value. It has put them in a position where they need to be bought out, as they do not seem to be able to fix whatever problem is going on internally.

VALUATION:

Of the other valuations I have read, valuation has been pegged at anywhere from 400 million USD to the upwards of 1.5 BILLION USD. The most reliable source seems to have it pegged at 600 million USD. Given that this company is trading (at the time of my writing) sub-200, that gives one anywhere from a 50-87% safety margin.

On to metrics. Another varying figure I have come across is how much proven oil reserves Transmeridian actually has. Numbers vary between 72,000,000 or 211,000,000 barrels. Given the reliability of yahoo, I am leaning toward 72 million barrels, but I do not know how 211,000,000 barrels was calculated, as I know both stated it has around 108-124 million barrels of probable recovery. Completely ignoring the value of the probable reserves, this 185 million dollar Houston-based company is being valued at $2.56/barrel on 72 million barrels.

If it has 211 million barrels, it is trading at $.89/barrel. Both valuations are very good by any standard. While the value of a proven reserve changes from company to company, the value of their field is greatly decreased by their slow extraction. However, given that this company will likely be bought with in the next 3 months (most likely the next three weeks), their value lies not with how fast Transmeridian Exploration can get the oil out, but how fast a potential suitor can. Given this, a multiple of 5.36/barrel is fair, not including the convenience of Kazakhstan location, which I would peg at anywhere around $1 dollars extra a proven barrel. This gives us a valuation of 6.36/barrel, making the proven reserves of 72,000,000 barrels worth $450 million.

On to probable reserves. 115 million barrels is a close estimate, lying in between the two estimates. For probable reserves, a multiple of $2 is generally accepted, adding an additional 230 million onto the valuation. This brings Transmeridian's value up to 680 million dollars, a 340% return to book value.

Errors in number of barrels, price of proven and/or probable recovery oil, and the extra value given to the closeness of Kazakhstan to the three major interest areas will affect the price significantly.

A 600 million valuation gives it a value of $5.88/share; $680 million - $6.67/share; $1.5Billion - $14.71/share

In a worst case scenario, I give this stock a bottom at $1.30/share if it fails to be acquired within the next 6 months.

Disclosure: Author is long TMY

Source: Transmeridian Exploration: Attractive E&P Player From Kazakhstan