Recently I was asked to look into a particular stock by a couple of clients.  It was a sort of “whisper” stock – the kind you heard from a reliable source that this is a good thing because…  Sometimes rumors pan out, but more often than not, they don’t.  That doesn’t mean they shouldn’t be looked into though.  So, with that being said, the stock in question my clients mentioned to me is TransAtlantic Petroleum (ticker:  TAT) and the source (as far as my clients were concerned) was their colleague’s broker who heard that T. Boone Pickens was buying shares.  I actively encourage my clients to bring ideas to me and I promise them I will research their suggestions.  This blog provides a forum to follow up on the research for all to read.

First, let me give you a little background on the company.  TransAtlantic Petroleum is what is known in the business as an E & P company – exploration and production.  The company is in the business of drilling oil wells and bringing them into production.  They sell the oil to refineries rather than refining the oil themselves.  They have wells in four major areas – Morocco, Romania, Turkey and California.  Yeah, that last one threw me for a loop, too.

The company has only recently undergone a fundamental shift in strategy.  TAT previously was involved in finding oil in “countries that are under-explored and have low corporate tax and royalty rates and established petroleum systems”.  In late 2008, the company underwent a shift in focus when they sold a 56% interest in the company to N. Malone Mitchell 3rd through a number of firms he owns or controls.  As a result of Mr. Mitchell’s taking control of the firm, the company has purchased Longe Energy from Longfellow Energy, a company that is indirectly owned by Mr. Mitchell.  TransAtlantic also bought 100% of an Australian oil company, Incremental Petroleum, including purchasing just over 15 million shares of Incremental owned by, you guessed it, N. Malone Mitchell 3rd.

The tangled web that Mr. Mitchell has spun throughout TransAtlantic seems a bit troubling.  To his credit, Mitchell does have a good track record.  He started a company called Riata Energy.  He sold a majority interest in Riata to Tom Ward, a co-founder of Chesapeake Energy, for about $500 million back in 2006.  Riata was then renamed SandRidge Energy and its stock trades on the NYSE.  SandRidge is an oft-rumored takeover target and Mr. Mitchell still owns a significant portion of that company.  A bit troubling is the fact that Mr. Mitchell purchased Longfellow Energy from Sandridge (back when it was still Riata) by exchanging 2.5% of the shares outstanding for 100% ownership in Longfellow.  Since none of the directors of Sandridge at that time were independent and Mitchell had a majority ownership in the company, it’s impossible to say whether he got a steal or if it was a fair deal.  It’s certainly obvious that it was not an “arm’s length” transaction.

That all being said, we now come back to TransAtlantic.  This is the oil company that is now largely owned and run by Mr. Mitchell.  So what makes this company so attractive and to whom?  One thing that stands out as a potential attraction is the access to more “exotic” locales.  When one thinks of oil, rarely does Morocco or Romania pop into mind.  Indeed, in the most recent annual report, there were no oil assets listed in either of those countries.  In fact, the only assets of interest were in Turkey.  The company is relying heavily on Turkey as the make or break place to drill.  Current production is somewhat limited in Turkey, The company is required to estimate the amount of oil and gas they could find in their known fields and to assess a ‘net present value’ to their oil reserves.  In the most recent annual report, the value they assigned – all to their Turkish reserves – amounted to $250 million.

In their press release, they went a step further, revealing not only their “proved” reserves (an estimate of the amount from wells currently in production), but also provided a “probable” amount of reserves that effectively doubled their proved reserves and, for good measure, added a “possible” estimate that was 150% of proved reserves.  In other words, the company is estimating they have 12 million barrels of oil, with another 11 million barrels of oil probable and 15 million barrels of oil “possible”.  If we assume a best case scenario in which all of this oil production comes true and the company gets the price they estimate, the current value of all of this future oil production would amount to about $750 million.  Now, match that up against the company’s current market value of $900 million and it appears the firm is at least fairly valued if not overvalued a bit.

Now, with that “back of the envelope” analysis out of the way, just who is interested in TransAtlantic Petroleum and why?  Well, the one “who” that seems to have generated some interest is relatively easy to answer.  As I mentioned at the outset, T. Boone Pickens – he of Mesa Petroleum fame – bought shares.  Actually, his investment company, BP Capital, bought shares in the fourth quarter of 2009.  So how many shares did Pickens snap up?  He bought a whopping 2 million shares, or just over one-half of one percent.

Actually, there is another person of some interest who bought a significant interest in the firm.  A company called MSD Energy Investments, LP, who bought nearly 16 million shares in the fourth quarter of 2009.  What?  You say you’ve never heard of MSD Energy Investments?  Well, that’s simply one part of Michael Dell’s – yes the Michael Dell of Dell Computers – fortune being invested.  I wouldn’t put much stock (pardon the pun) in his buying a large percentage of the company.  And Boone Pickens seems to be just nibbling at the stock.  Perhaps he admires Mr. Mitchell’s work (his BP Capital also owns shares in SandRidge Energy).

So is this company a keeper in terms of investments?  Probably not, because the company is rife with risks.  From the multiple and tangled “related party transactions” to the huge loss (over $62 million in 2009) and negative cash flow, this company has red multiple red flags.  There are some long-term potentials in Turkey, but it would be more prudent to see if new wells can be brought on line and production ramped up to the level the company rosily predicts.

That being said it may, however, be an interesting short-term trade.  From a purely technical standpoint, the stock has broken above its 50-day moving average.  This is one popular signal that folks who stare at charts for insight look for in a stock.  So, if someone is interested in trading in this stock – and recognizes the need to sell if the stock price falls below its moving average line – this could be an intriguing play.

Since 2007, there have been five times when the price has moved above a 55-day moving average.  This is significant only because the infamous “Turtle traders” used a 55-day moving average as a trading signal.  Of these five “buy” signals, all were profitable, though one only barely so (up $0.03 in two weeks).  Most of the signals lasted for extended periods of time. The average length of each trade was 90 days or about three months.  If you feel like following in the footsteps of Boone Pickens, this could be an interesting trade, but it would be wise to watch the moving average and bail out if the stock price dips back below the 55-day moving average.  Happy hunting!

Disclosure:  Aerie is long a small position in TAT for clients.