"We are maintaining our Strong Buy on the shares of Meridian Resource, with a 12-month target of $9," says Joseph Allman, vice president, equity research, and E&P analyst for RBC Dominion Securities (which will soon take over Dain Rauscher Wessels) in Houston. Based in Houston, The Meridian Resource Corp. is an independent E&P company with core operations along the Louisiana Gulf Coast and in the Gulf of Mexico. Of its 365 billion cu. ft. equivalent of proved reserves at year-end 1999, onshore and offshore reserves were split 90% and 10%, respectively. However, through its 1997 merger with Cairn Energy USA and a 1998 transaction with Shell, the bulk of Meridian Resource's highly prospective acreage is offshore Louisiana. In fact, of its 126,000 net undeveloped acres, mostly covered by 3-D seismic, 96,000 acres are offshore. "These are interesting times at Meridian Resource," says Allman. "While some observers see only the past decline in its share price, we see a much-improved company with the potential for a very bright future. In a universe where good exploration prospects are rare, the company has put together an enviable domestic exploration program." From year-end 1996 to year-end 1999, Meridian Resource increased its net acreage position in the Gulf of Mexico and along the Gulf Coast by 914%, from just under 18,000 total net acres (16,000 undeveloped) to roughly 180,000 net acres (126,000 undeveloped). In 1999, the first full year of Meridian Resource's operations on the properties it acquired from both Cairn and Shell, the company had a drilling success rate of 71%-adding reserves at $5.58 per equivalent bbl. (93 cents per Mcfe). Assuming finding costs at, or even slightly above, last year's level; its $85-million 2000 capital expenditure budget; and RBC Dominion's projected budget for next year, the company could replace production and add meaningfully to its reserve base, Allman says. "With its substantial undeveloped acreage and inventory of 28 near-term prospects and 59 additional leads, Meridian Resource offers significant growth potential." Management appears intent on improving the company's balance sheet through a combination of selling assets and using cash flow to reduce debt, he adds. Also, the company recently announced an agreement with Shell that could remove a financial hurdle that has held back the stock's valuation. The agreement gives Meridian Resource the option to buy back from Shell, at a discount, preferred TMR shares that represent about 20% of the company's enterprise value, along with 5 million of its common shares, also owned by Shell. "The agreement represents an excellent opportunity for Meridian Resource to remove the overhang of the preferred on its common stock, and eliminate the preferred dividend and 5 million common shares, all of which is accretive to earnings," says Allman. "We believe that the company is at a critical stage in its evolution," says the analyst. "If reserve and production growth continues and the company is able to reduce debt and restructure its balance sheet, the stock could command higher multiples of earnings and cash flow." Note: Analysis took place 8-18-00 when TMR closed at $5.88 and was reaffirmed 10-2 when $7.56. Currently, some 47.7 million shares are outstanding. The recent 52-week price range was $7.81-$2.56.