July 24, 2012 - 11:38pm EST by
2012 2013
Price: 6.79 EPS $0.97 $1.45
Shares Out. (in M): 62 P/E 7.0x 4.6x
Market Cap (in $M): 420 P/FCF 7.0x 3.5x
Net Debt (in $M): -105 EBIT 68 142
TEV ($): 315 TEV/EBIT 4.6x 2.2x

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  • Canada
  • Small Cap
  • E&P


Small cap oil producer Tag Oil is overlooked.  Tag Oil (TSX: TAO) produces light oil in New Zealand where it has drilled 15 consecutive successful wells, is rapidly growing reserves, and has a strong exploration partner in Apache.  
Their assets are on the north island of New Zealand in two primary areas.  In the west are some relatively shallow producing assets.  In the east is a large exploration area, where they have a farmout with Apache.  Their existing production will fund a sizeable exploration program, so, in contrast to many early stage E&P companies, equity dilution to fund drilling will be limited.  New Zealand is an under-explored area with less than 200 wells drilled since 1955.
The market cap is $420m with 62.1 fully diluted shares out.  There is $105m of cash on hand, and no debt.
Production:  Currently they are producing approx 2500 boe/day and expect to reach 5000/day in six to nine months.  All the current production comes from 10 wells.  They have an additional 12 wells which have already been successfully drilled and are awaiting infrastructure to be put on production.  This is 4000 boe/day 'behind pipe' and assures continued near term production growth.  All of this comes from TAO's western lands which are 100% working interest.
Cash flow:  They produce light oil (50 degree API) which commands a premium to Brent allowing them high netbacks.  Annualized run rate cash flow based on last quarter is ~$40m and is expected to ramp to ~$100m in 18 months as infrastructure is installed and the drilling program progresses.  Their capex plan is for $44m this year and ~$60m next year.   All of this could be funded from current cash on hand, and it will be replenished by their cash flow from production without any balance sheet damage or dilution. 
Apache (APA):   Oil major Apache has farmed into TAO's Eastern acreage via a multi stage deal.  Tag currently has 100% WI and will be carried by Apache on the expediture of the first $100m (seismic and four wells), followed by a multi well program through which Apache can earn 25%, then in a subsequent $500m program Apache can earn up to 50%.  There is a very large potential prize on the eastern lands with widespread oil shows at surface over millions of acres.  A well drilled in 1912 is still bubbling with 50 degree API oil and associated gas. Because of the technology at the time, it was drilled only to under 200m.  Reserve Engineers Sprule and AJM have given hundreds of drilling locations at 250m to 2000m depths with a P50 of 1.74 billion barrels of conventional and 12 billion barrels of unconventional.  The TOC (total organic content), porosity and permeability compare favorably to the major North American basins, and the Eastern lands are a sandstone which tends toward better flow rates.  So, they might just have an entire Bakken-like shale play of over 1.7 million acres under the hood but excluded from current reserves.
Reserves:  The March 31 reserves statement issued in the past few weeks showed a 300% increase.  Proven & Probables are 6.62m BOE (82% oil), and this value is based on only a minor portion of the western area known as the Taranaki Basin:  approx 24% of the acreage at Cheal and 2.5% of the acerage at Sidewinder with an arbitrary cut-off at 2000m depth, so it excludes higher impact, deep liquids-rich gas that they will be drililng for this year.  Nothing is in the reserves for the Eastern blocks.  I suspect they are at the beginning of a multi year reserves expansion where they have the potential to show similarly large percentage increases. 
Jurisdiction:  Queen Elizabeth II is the Queen of New Zealand, and the country has the full British legal system and a Democratic Parliamentary Government.  I consider it a first world country, especially from a standpoint of political risk, property rights, and the sanctity of contracts.  Something you'll find in many first world contries that New Zealand lacks is an organized 'green' opposition.
A May equity raise at $10.45 per share (50% above current price) has put them in a strong cash position.  Because they didn't really need this funding, I suspect they may plan to buy a competitor.  There are two:  New Zealand Energy (NZ CN) and a private player.  My guess is the private one.


-  Continued production increases
-  Progress with Apache on the Eastern lands
-  Deeper Condensate discoveries
-  A general thaw in investors currently cold attitude toward small cap E&P players
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