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May 20, 2003 TRANSMERIDIAN EXPLORATION INC (TMXNE.OB) Quarterly Report (SEC form 10QSB) Item 2. Management’s Discussion and Plan of Operations Transmeridian Exploration, Inc. (the “Company”) was incorporated in the State of Delaware in April 2000. We are a development stage company organized to acquire and develop oil and gas properties. Our primary oil and gas property is License 1557 and the related Exploration Contract for the development of the South Alibek Field (the “Field”) in Kazakhstan. The primary emphasis since our formation in 2000 has been the exploration and development of the Field. Our operations in the Republic of Kazakhstan are conducted through a wholly owned subsidiary, Caspi Neft TME (“Caspi Neft”). SEE DISCUSSION OF RISK FACTORS IN ITEM 1 OF THE DECEMBER 31, 2002 ANNUAL REPORT ON FORM 10-KSB. Critical Accounting Policies We have identified the policies below as critical to our business operations and the understanding of our financial statements. The impact of these policies and associated risks are discussed throughout Management’s Discussion and Analysis and Plan of Operations where such policies affect our reported and expected financial results. A complete discussion of our accounting policies is included in Note 1 of the December 31, 2002 Notes to Consolidated Financial Statements. Development Stage and Going Concern We are a development stage company and have not yet commenced our primary revenue-generating activities, which are the production and sales of oil and gas. Our ability to realize the carrying value of our assets is dependent on being able to produce and sell oil from the South Alibek Field. Our financial statements have been presented on the basis that we are a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have accumulated losses totaling $7.5 million and have incurred a significant amount of debt in the development phase of our operations. To fully develop the Field and achieve positive cash flow, we will require substantial additional funding. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities which might be necessary should the Company be unable to continue in existence. Principles of Consolidation Our consolidated financial statements include all of our consolidated subsidiaries. Our most significant wholly-owned subsidiary is Caspi Neft, which holds License 1557 and the related Exploration Contract for the South Alibek Field. Except for the drilling rig, which is owned by the parent company, the assets and results of operations of Caspi Neft represent substantially all of our consolidated assets and operations. In February 2002, we granted Kazstroiproekt, Ltd. (“KSP”) a two-year option to acquire a 50% equity interest in Caspi Neft, the subsidiary which holds our interest in the South Alibek Field. KSP must meet certain financial commitments to exercise its option, including paying $15 million of Caspi Neft’s bank debt and arranging an additional $30 million in bank financing for Caspi Neft. KSP has until February 2004 to exercise its option. If KSP exercises its option, we may no longer be eligible to fully consolidate Caspi Neft, which would materially affect our financial statements. The resulting accounting treatment would be dependent on the degree of management control we retain over Caspi Neft and other factors related to the economic substance of our arrangement with KSP. Additionally, our net interest in the oil and gas reserves of the Field would be proportionally reduced to reflect the new ownership structure. Oil and Gas Reserve Information The information regarding our oil and gas reserves, the changes thereto and the estimated future net cash flows are dependent upon engineering, price and other assumptions used in preparing our annual reserve study. A qualified independent petroleum engineer was engaged to prepare the estimates of our oil and gas reserves in accordance with applicable engineering standards and in accordance with Securities and Exchange Commission guidelines. However, there are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and the timing of development expenditures. Changes in prices and cost levels, as well as the timing of future development costs, may cause actual results to vary significantly from the data presented. Our oil and gas reserve data represent estimates only and are not intended to be a forecast or fair market value of our assets. Our oil and gas reserve data and estimated future net cash flows have been prepared assuming we are successful in negotiating a commercial production contract which will allow production for the expected 25-year term of the contract. A conservative rate of 10% has been used to calculate the government royalty. Production contracts are customarily awarded upon determination that the field is capable of commercial rates of production and that the applicant has complied with the other terms of its license and exploration contract. However, we are not guaranteed the right to a production contract. If we were not successful in negotiating a production contract on acceptable terms, it would materially change our oil and gas reserve data and estimated future net cash flows. Successful Efforts Method of Accounting We follow the successful efforts method of accounting for our investments in oil and gas properties, as more fully described in Note 1 of the December 31, 2002 Notes to Consolidated Financial Statements. This accounting method has a pervasive effect on our reported financial position and results of operations. The well that we were drilling at December 31, 2002 and March 31, 2003, the South Alibek #1, is classified as exploratory under SEC and GAAP requirements, as it is outside the boundaries of our current proved reserves. Under the successful efforts method of accounting, the costs of this well have initially been capitalized pending the determination of whether the well increases proved reserves. If it were not successful in adding proved reserves, these drilling costs would be charged to expense. Capitalized Interest Costs We capitalize interest costs on oil and gas projects under development, including the costs of unproved leasehold and property acquisition costs, wells in progress and related facilities. We also capitalized interest on our drilling rig in 2002 during the time it was being prepared for its intended use. During the three month periods ended March 31, 2003 and 2002, we capitalized $607,100 and $141,500, respectively, of interest costs, which reduced our reported net interest expense to $186,200 and $61,300, respectively. Because most of our emphasis in 2002 and 2003 has been on the exploration and development of our Kazakhstan property, the resulting interest capitalized was significant. This capitalized interest becomes part of the capitalized costs of our properties which will be amortized as a part of depreciation, depletion and amortization or charged to expense if the results of our drilling should prove unsuccessful. Review of Operations and Capital Transactions Our two primary sources of funding have been private placements of common stock and borrowings under our $20 million credit facility with a Kazakhstan bank. Through March 31, 2003, we have received a total of $6.4 million in net cash proceeds from sales of common stock. We have also issued approximately 12.9 million shares, valued at $1.8 million, in exchange for products or services provided. Our cumulative proceeds from all borrowings, net of repayments, have amounted to $18.0 million since inception. These proceeds have been used to fund the purchase of the South Alibek Field, at an initial acquisition cost of $4.0 million, and to fund expenditures for remedial work on South Alibek Well #29, drilling of the South Alibek #1 and costs of support and production facilities. Our cumulative capitalized costs attributable to the South Alibek Field as of March 31, 2003 were $23.2 million, including $1.7 million of capitalized interest. In February 2002, we secured a $20 million credit facility to fund operations in the South Alibek Field. As of March 31, 2003, we had borrowings of $19.0 million outstanding under the facility and had $0.8 million of letters of credit outstanding. The available capacity under this Facility was fully utilized in April 2003 through additional borrowings. A portion of this facility, approximately $2.2 million, is due in August 2003, with the remaining principal balance payable in 12 monthly installments beginning in February 2004. In 2002, we invested approximately $33,000 to acquire two U.S. properties, which are prospective for natural gas. These projects are ready for drilling operations, pending availability of funds. We purchased a drilling rig in December 2001 for $5.3 million and spent an additional $0.5 million on refurbishments and modifications to make it suitable for use in our operations in the South Alibek Field. The acquisition cost of the rig was financed with a $3.3 million note payable and $2.0 million in common stock subject to mandatory redemption. The rig has been drilling the South Alibek #1 since October 2002. Our operating and administrative costs during the period from inception through March 31, 2003, have totaled $6.0 million. Interest expense, net of amounts capitalized totaled $1.5 million. These are the primary components of our cumulative loss attributable to common shareholders of $7.5 million. Revenues from test production of oil have been relatively insignificant. We are considered a development stage company until we establish commercial production and revenues. Plan of Operations Our primary near-term objective is to generate sufficient commercial production from the South Alibek Field to fund ongoing development and operating costs of the Field and allow us to service our debt in accordance with its terms. Our current field development plans include an initial program of seven wells to identify the productive limits of the field. The first of these wells, the South Alibek #1, reached total depth of 12,435 feet on May 2, 2003, and we have begun the completion and testing phase. The remaining six wells are expected to cost approximately $3.5 million each to drill, or $21 million in total. To accelerate this development plan, we plan to contract for a second drilling rig. This will be dependent on securing our additional financing for development of the Field. Ultimately, the first phase of field development may require as many as 44 wells. In addition, we expect to incur approximately $5-6 million for production facilities over the next 12-18 months Our longer-term strategic plan is to acquire and exploit other mid-sized fields in the Caspian Sea Region. We consider this an excellent area for oil and gas development and we are actively evaluating new opportunities to build our reserve base in the area. Outlook for 2003 Credit Facility and Exercise of Option by KSP In February 2002, we obtained $20.0 million in debt financing from a bank in Kazakhstan. As of March 31, 2003, the Company had borrowings of approximately $19.0 million and letters of credit of $0.8 million outstanding under this facility, resulting in approximately $0.2 million in available borrowing capacity. The available capacity under this facility was fully utilized during April 2003 through additional borrowings. KSP has indicated that it intends to exercise its option to purchase 50% of Caspi Neft in exchange for a $15 million equity contribution (to be applied toward the outstanding debt of Caspi Neft) and the arrangement of $30 million in additional debt financing at market rates. The Company and KSP are negotiating the commercial terms of this financing with our current bank. In April 2003, the bank extended $1.5 million in interim financing pending completion of the larger facility. We are very encouraged by this interim financing and have a reasonable expectation that KSP has the ability and intent to arrange the full $30 million facility. However, completion of this process is outside our control. Continued Development of South Alibek Field We are dependent on significant additional funding to continue development of the South Alibek Field. Our near-term goal is to develop sufficient revenues from production to fund continuing capital expenditures and debt service requirements. The amount of capital needed is dependent on many factors outside our control, including the costs and results of drilling operations, the ability to find and develop sufficient reserves and rates of production, the ability to effectively bring its future crude oil production to market and the level of future world oil prices. Management believes that $30 million of additional financing should be sufficient to bring the Field to positive cash flow from operations and provide for the servicing of the Company’s debts. The most likely source of this $30 million is the additional financing that KSP is required to provide in order to exercise its option to acquire 50% of Caspi Neft. However, we are continuing to explore other options to obtain this funding. We believe that we will be able to secure the necessary funding to continue development of the Field, but many of the factors required to execute our plans are outside our control. U.S. Operations and Funding of Overhead We have limited options to fund our U.S. overhead costs on a continuing basis. Current expenditures for U.S. personnel, occupancy and administrative costs total between $100,000 and $110,000 per month. Proceeds from borrowings in Kazakhstan are not available to the U.S. parent company to fund its U.S. operations, nor is it able to charge an overhead recovery or management fee. The U.S. parent company owns the drilling rig used by Caspi Neft for operations in the South Alibek Field and receives net cash flow from Caspi Neft of approximately $18,000 per month after debt service attributable to the rig. During 2002, we realized proceeds of approximately $100,000 from the private placement of common stock and proceeds of approximately $200,000 from the issuance of convertible debentures. Additionally, certain shareholders and related parties loaned us $248,000 in 2002. In the three months ended March 31, 2003, we have issued 3.2 million shares of common stock for products and services valued at $351,400 providing cash for the parent company or minimizing cash outflow. We have taken steps to limit or reduce our U.S. overhead costs and believe that we will be able to continue to secure funding for these costs from the sale of common stock or additional borrowings until we achieve positive cash flow from operations and such cash flow becomes available to fund our U.S. operations. José |
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| aus der Diskussion: | Transmeridian Exploration - Kürzel : TMXN |
| Autor (Datum des Eintrages): | JosedelaVega (20.05.03 22:49:35) |
| Beitrag: | 82 von 3,850 (ID:9511024) |
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