Tethys Petroleum: Navigating Near-Term Headwinds to Unlock Multi-Billion Reserves

Tethys Petroleum Limited (TET) has delivered a striking turnaround in its Q1 2025 results, showcasing a 104% revenue surge to $4.0 million—yet its shares remain undervalued due to lingering operational challenges. For contrarian investors, this presents a rare opportunity: a company with $560 million in proved reserves and a clear path to unlock its full potential through infrastructure upgrades and exploration. Let's dissect the risks and rewards.

The Revenue Surge: A Baseline for Growth

Tethys' Q1 revenue explosion—driven by the resumption of oil sales after a 2023 production hiatus—is a stark reversal of its $1.9 million loss in Q1 2024. While gas sales paused (due to contractual disputes), oil revenue hit $4.0 million, boosting profitability to $0.3 million and pushing adjusted EBITDA to $1.5 million. This turnaround underscores management's ability to pivot strategically, such as retaining its Preparatory Period contract to avoid state-mandated production discounts.

Near-Term Risks: Logistical Hurdles and Price Pressures

Despite the progress, two critical challenges loom:
1. Logistical Bottlenecks:
- Road Damage: Spring thaw disrupted trucking and rail transport, delaying oil shipments.
- Buyer Constraints: Mini-refineries, Tethys' primary buyers, face cash flow issues due to a $6/barrel price drop caused by a naptha export ban.
- Gas Utilization Limits: High gas-to-oil ratios forced production cuts to 250 tons/day—well below permitted capacity.

1. Market Headwinds:
2. Domestic oil prices have collapsed to $25/barrel (from $50 in 2021), squeezing margins.
3. Regulatory hurdles, such as Kazakh export rules and inflation (~20% annually), add uncertainty.

Note: Volatility may reflect market skepticism about its operational challenges.

The Long-Term Upside: A $560M Reserve Play

Beneath the noise lies a strategic exploration pipeline with transformative potential:
- Aral-4 Block: A 1,000 km seismic program (cost: $2.2 million) could unlock a 2026 exploration well, targeting unproven reserves.
- Diyar Block: A completed 346 km seismic survey is being processed, with drilling potential by 2026.

Combined with its 85.6 million BOE of 2P reserves (valued at $560 million NPV), success here could double Tethys' resource base. Meanwhile, infrastructure upgrades—like expanded gas utilization capacity by late 2025—will resolve production bottlenecks, enabling full utilization of its 46.9 million BOE of proved reserves.

Why Now? The Contrarian Case

• Cash-Flow Positive: Tethys holds $4.5 million in cash (up 146% year-over-year) and no debt, providing a buffer to weather short-term storms.
• Arbitration Win: A recent ruling awarded the company $29,800 and canceled dilutive shares, further strengthening its balance sheet.
• Gas Sales Resumption: April 2025 saw gas sales restart, targeting $700k/month—a critical revenue stream.

While risks exist, they are manageable and temporary. The company's focus on infrastructure upgrades and exploration aligns with its low-cost, high-reward reserve profile, positioning it to thrive once logistics stabilize.

Investment Thesis

Tethys is a buy at current levels for investors with a 12–18 month horizon. Key catalysts:
1. Gas Utilization Expansion (H2 2025): Enables production ramp-up to 485 tons/day, unlocking trapped value.
2. Aral-4/Diyar Exploration Results (2026): Positive data could trigger a valuation re-rating.
3. Stabilized Oil Prices: If domestic prices rebound to $35+/barrel (as inflation eases), margins will expand sharply.

Final Call

Tethys Petroleum is a contrarian gem with $560 million in proven reserves and a clear path to resolve its short-term operational hurdles. While logistical and regulatory risks are valid, the company's financial discipline, exploratory pipeline, and underappreciated reserve value make it a high-reward, low-debt bet for investors willing to look past the noise. Act now before the market catches on.

JR Research