Kazakh second-tier oil drilling: small – not always beautiful/I

They came to Central Asia more or less simultaneously with the world-scale multinationals. Of course, some of them used to dream of becoming part of that stratospheric world. Today, caught in the middle, they have to help opening as many oil taps as possible with on the other end of the line cash taps getting tighter and tighter. At least one, Transmeridian, appears to have succumbed.

by Charles van der Leeuw, KZW senior contributor

Kazakh second-tier oil drilling: small - not always beautifulIt looks an awful lot like the story of Emile Zola’s L’argent, in which cash-for-paper wizards in and around Paris’ sizzling XIXth Century stock exchange lure fund providers into profit dreams of exotic dimensions and seductive proportions. The trick used to be – and still is: get hold of an asset, usually in the form of some mining concession and/or trade bargain abroad, and raise capital in the financial arena to make it materialise. For investors, there is the barometer on the stock exchange which tells them, day to day, hour to hour, how much (or how little) their paper is worth. For them, ultimate gains are not the immediate goal. Only their outlook needs to remain solid with a necessary momentary fluctuation margin in order to keep stock attractive bo buy and still profitable for the seller.

Tangible assets involved in the game tend to be as far-fetched (both figuratively and literally speaking) in colonial times as they often are today. Few speculators on shares deep in the heart of Texas or on the sunney beaches of California could probably imagine the sight of the salt, bald and barren plains bordering the Caspian Sea to its east. Little but dry grass grows there, though enough to keep some herds of sheep and horses alive. Scant and scattered townships and villages in the area show off little more than sheer poverty and desolation: a few shops among the crumbling, basic concrete structures betray the presence of modern life. Supermarkets, restaurants, boutiques and other ways to spend money will be looked for in vain – for the simple reason that nobody has any money to speak of.

Yet, it is exactly in these forsaken lands that Kazakhstan makes more than half of its income on external trade by pumping up the oil which hides in quantities beyond imagination under this moonscape-like part of its territory. Apart from its prize-winning field of Tengiz, which produces about half of the country’s crude oil and remains under firm control of America’s global giants Chevron and ExxonMobil, Russia’s largest private-held oil enterprise Lukoil and Kazakhstan’s state oil and gas company Kazmunaygaz, there are numerous other fields in Kazakhstan’s western provinces of lesser size but still attractive enough to take on exploitation. One of them, located not too far from Tengiz, lies Yuzhd-Alibek, the property, though now under suspension, of a company located in Houston, in the south of Texas on the Gulf of Mexico on the other side of the globe.

The man at the centre of the enterprise was, and to some extent still is, a US national by the name of Lawrence (“Lorrie”) Olivier, whose company Transmeridian used to trade on the American Stock Exchange. It was back in late 2007 when Transmeridian, employing some 200 people in all, started producing and delivering its heavy, sour crude through a self-built pipe link to the region’s main trunk pipeline through which the black gold is carried to the Russian Black Sea of Novorossysk, from where tankers ship it westbound – mainly to North Sea terminals. At the time, oil prices on international markets were around 100 US dollar per barrel and due to peak in the end around $150 per barrel in the middle of the upcoming summer. It was on the back of this trend that shareholders in Transmeridian had every reason to rejoice, as the stock they had increased in value by the day.

From the start of its production phase in late summer 2007, Transmeridian pumped up and sold in the order of $60 million worth in oil: 776,000 barrels at the price of the Caspian benchmark Urals, which trades at a discount on key benchmark North Sea Brent because of its lesser quality. The outlook of being technically capable of producing several million barrels through the upcoming year, bringing gross revenue topping a quarter billion dollar within reach, seems to have gone to Lorrie’s head. That very winter, he offered shareholders a management buy-out, which, given the generous premium of more than 20 per cent on top of the market price, was gladly accepted. But in April 2008, it appeared that Olivier had not managed to gather enough liquidity to pay off, and the investors had no choice but to stick to their paper. They had little reason, at least for the moment, to be too worried: oil prices kept surging and in August peaked at $150 a barrel.

It was thanks to this that over the summer a white knight appeared on the scene for troubled Transmeridian in the form of a Hong Kong-based enterprise named United Energy. They promptly transferred a $215 million “infusion” to Transmeridian’s bank account, taking 90 per cent of the common stock as collateral, with the option to purchase the remaining shares, priced at $76 per share for both common and preferred stock. The end of the tunnel seemed in sight. “United Energy Group has extended its $76-a-share offer for Transmeridian’s remaining outstanding 15 percent senior redeemable convertible preferred stock, 20 percent junior redeemable convertible preferred stock and senior preferred stock multiple times — most recently to Nov. 14,” the Houston Business Journal wrote on November 17. But clouds were hanging low in the sky. “Meanwhile, Transmeridian’s stock is trading at 6 cents Monday in late afternoon trading, down 5 cents or 44 percent for the day,” the news report added.

It could not last – and it would not. “On December 15, 2008, Transmeridian failed to make its regularly scheduled interest payment on account of its 12 per cent Senior Secured Notes due 2010 in the amount of approximately 8.7 million,” a report dated January 12 this year by a netnews wire called Globe Newswire read. The 30-day grace period to make the payment expires on January 15, 2009. If Transmeridian fails to make the payment prior to the expiration of the grace period, holders of senior notes will have the right to exercise various remedies against Transmeridian and its subsidiaries. In light of Transmeridian’s current circumstances, it is not likely that the holders of any Transmeridian equity securities would receive any recovery on their investment.”

Part of what was to follow became clear on March 24 this year, when the Houston Business Journal wrote a brief report that read: “Transmeridian Exploration Inc. and two of its subsidiaries, Transmeridian Exploration Inc. (BVI) and Bramex Management Inc., have filed for Chapter 11 bankruptcy protection. In the March 20 voluntary petition in the U.S. Bankruptcy Court for the Southern District of Texas, the Houston energy company listed assets of $377.9 million and liabilities of $451.7 million. Transmeridian said it had 40 million shares of common stock held by 8,000 entities and 1.1 million shares of preferred stock held by 17 entities. The company’s largest unsecured creditors include investment firm Jefferies & Co. Inc.’s Los Angeles office; Houston law firm Akin Gump Strauss Hauer & Feld LLP; Houston-based San Felipe Plaza LP; print company RR Donnelley’s Dallas office; and Houston law firm Thomson & Knight LLP.” In other words: Transmeridian had close to half a billion dollar in unpaid bills for their lawyers, their office rent, their glossy brochures and “investments” – all of which together represented some 125 per cent of all the company was supposed to be worth. Did the assets include the money sent from Hong Kong, or was it included in the liabilities? Mystery.

The next news came on June this year, as Transmeridian, pending a court rule over its bankruptcy, asked the Texas court of law for permission to sell off its Kazakh license for the trifle of $35 million to Ufex Advisors Corp., indicating that the price was based on the availability of 30 to 50 million barrels of crude – meaning based on a value in the order of one dollar per barrel. Ufex can be traced back to RR Donnelley – which happens to be the second-largest commercial printing company in the USA by gross revenue. Will they come to Kazakhstan and complete the oil exploitation of Yuzhd-Alibek? Case of severe doubt. After a vain attempt by Donelley’s owners to offer the enterprise, which has outstanding debts to various creditors totaling $735 million in loans and another $184 to providers of equipment and services, to Canadian rival Quebecor World Inc. for the price of $150 million.

The latest news is about the final attempt to secure the oil field of Yuzhd-Alibek by a Kazakh businessman named Yerlan Sagadiyev, who stepped in as the sole candidate to finance a “reorganisation plan” due to be presented by Transmeridian before a US court of law on June 24 this year – in exchange for IOUs by the Kazakh worth close to 35 million. “Unless a higher bid appears at auction for the interest in the field in Kazakhstan, the buyer is to be a Kazakhstan company affiliated with an individual named Erlan Sagadiev, who was retained to provide consulting and management services for the operations in Kazakhstan,” Bloomberg wrote in a report dated June 11. “The company originally intended to sell the operations in Kazakhstan before confirmation of a reorganization plan until the bankruptcy judge in Houston ruled that the sale only could occur as part of a plan. [Transmeridian] filed a plan and explanatory disclosure statement at the end of May. In exchange for their $300 million in secured claims, the noteholders are to receive the $35 million in notes from the sale, less the $700,000 in financing that Sagadiev provided for the reorganization effort. “ It will mean that investors, including those of Hong Kong, are likely to see the bulk of their money go up in smoke. Whether it is going to make a difference for the poverty-stricken inhabitants of western Kazakhstan’s desolate plains, remains to be watched…


period 2007 Q1-3’08 Q3’08
net profit margin -169.30% -106.29% -162.30%
operating margin -60.35% -20.40% -46.29%
return on average assets -15.14% -13.52% -17.40%
return on average equity -1326.18%

source: company data

(in USD cent unless otherwise indicated)

closing prices as of 31/12’07 31/12’08 19/06’09
Brent crude spot (barrel) 9444 4559 6845
Brent ICC crude 1-month contract (barrel) 9385 4559 6919
Euro natural gas spot (therm in pence) 52.75 65.58 26.90
unleaded petrol (tonne) 86100 29000 69000
jet fuel (tonne) 89500 22500 62800
diesel (tonne) 87000 24000 58300

source: Reuters/FT