Model Portfolio rmcduff:RMG1

Several weeks ago, I was provided with an opportunity to outline my views on TMY, via the Marketscope newsletter.

At that time, my views were bullish. TMY had recently announced the successful completion of a 1400 bpd producer and had intimated that a second well was testing in the range of 400 bpd. The first formal brokerage recommendation of the stock in the United States had just been issued by a mid market firm called Jefferies Group. Management was guiding investors and analysts to anticipate exit 2006 production of up to 10,000 bpd.

Unfortunately, subsequent developments have now called into question the validity of my bullish call on Transmeridian.

My original thesis for owning TMY for during past 5 years has been centered around the development of a large reserve base. While production from the South Alibek field had been erratic, the possibility of owning up to a 200 million barrel 2P reserve was sufficiently enticing to keep me focused upon the prize. With the hiring of staff from a competitor who has specialized in a technically challenging field adjacent to TMY's South Alibek, it appeared that production obstacles had been overcome.

Sadly, it appears that Transmeridian has far more work ahead in the next 6 months to prove that they can successfully operate the South Alibek field.

In the quarterly conference call completed today, TMY has confirmed that 100 million barrels of their 2P reserves are contained within a zone called KT1. At this time, the firm has not yet drilled a successful well targeting only this zone. This makes an assertion of 100 million barrels of 2P reserves, shall I say, optimistic.

TMY also confirmed that the 1400 bpd well has shown a production decline of approximately 450 bpd within the first 8 weeks of production. A second well has been brought on stream with a production rate of merely 150 bpd. Dusters do occur in the oilpatch, and are to be taken as part and parcel of the business. However, the wells that Transmeridian drills are quite deep, technically complex, and are very expensive to drill. While some firms would be quite happy to find an oil well that produces 150 bpd, when well costs routinely exceed $7 million to complete, a 150 bpd producer is a money loser.

Furthermore, the reserve reports at the end of 2005 indicated that new wells would produce an average of at least 400 barrels per day, and show annual declines of approximately 30%. Since the 7 wells presently on production are producing less than 328 bpd (including the 2 wells just brought on stream), it is becoming more and more possible, to envision an oil reserve writedown by year end.

What has become apparent to me, is that TMY has an extremely challenging field to develop. While major firms have the capital and internal expertise to develop larger fields that carry challenges, junior firms from time to time, do get in over their heads. I now suggest that this is may be one such case.

Thus, while Transmeridien Exploration may hold great promise in the long term, I cannot make an investment case for it in my Marketocracy portfolio any longer.

Consequently, this morning, I sold off my entire position in Transmeridien Exploration for my RMG#1 account. In real life, I also disposed of my entire personal holdings.

I do regret having to make a bullish call and reverse that outlook so quickly. However, it is very important to me, that investors be made aware of my changed view, and that I no longer hold TMY.