Model Portfolio rmcduff:RMG1

by Randolph McDuff, m100 member

Marketocarcy: "Kazakhstan oil has been a good place to invest for us. Petrokazakhstan was a double in just a few months and Chaparral Resources (OTC: CHAR) was an interesting play until it abruptly agreed to merge with Lukoil this March.

An even better play is Transmeridian Exploration, Inc. (amex: TMY), an early stage oil company without the partnership issues. TMY has been a 23 bagger for m100 member, Randy McDuff since he first bought TMY in his Marketocracy model portfolio 3 years ago. He has proven himself to be one of the best traders of TMY so I asked him why he thinks TMY could still double over the next two years. Heres what he has to say:"

Transmeridian is a junior driller in the difficult to value transition stage from discovery to oil production. Revenues arent there yet so TMY does not show up on many radar screens. Production ramp is taking longer than normal so it looks to most investors that their fields wont be successful. But, Kazakhstan complexities have elongated the process. Even though TMYs market cap has risen spectacularly to $500M, obscurity during this transition gives us the opportunity to buy while there is still a double or more.

Three attributes set TMY apart: 1) large resource base not fully delineated so depletion rates will be low; 2) 100% effective interest so TMY can focus on production growth for the benefit of shareholders; 3) reserve base is highly concentrated, so economies of scale will kick in as production grows.

Doing business in Kazakhstan can be tricky and both Petrokazakhstan and Chaparral had difficult partners that eventually caused a less than expected value sale. In late 2005, TMY bought out its Kazakhstan partners so now they have complete control to optimize operations for long-term value.

TMY has been in the early stages of figuring out production methods and proving its reserves in a brand new Kazakhstan field called South Alibek. From 2003-05 TMY has tried a variety of completion techniques, fracture methods and stimulation techniques with mixed results. Production was just 1100 bpd in Dec. 05. Recently, TMY stimulated a new well with production in the range of 1400 bpd. Armed with this information, TMY has budgeted $200 million of capex through 2007 and contracted a 5-rig fleet and 1 completion rig. Exit 2006 production rates may surpass 10,000 bpd.

South Alibek is open on 3 sides and reserves have been extrapolated from 8500 acres of the 14,000-acre concession. Peak production is expected to be 40-50,000 bpd. At year-end 2005, South Alibek had an estimated 202 million barrels of 2P (proven and probable) reserves. At a rough price of between $5-10/barrel for 2P reserves, TMY could have a projected value in the range of $1-2 Billion.

2007 should be TMYs breakout year. Assuming another 24 wells are drilled with an 85% success rate, average production rates may exceed 15,000 bpd. If TMY receives $50 per barrel, 2007 EBITDA may exceed $178 million, supporting at least a double in the stock price.

With 100% ownership of a large, highly concentrated, and slowly depleting oil field, TMY will make an attractive acquisition target. And as production increases and reserves get proved it will be more difficult for potential acquirers not to pull the trigger and buy - something we can do today.