TAG Oil’s latest operational update triggered a 25% plunge in the stock price. The production numbers came in at 2,700 boed, way below the expected 5,000 boe/d management was guiding for after the completion of the infrastructure expansion. Is the stock an opportunity to buy a value stock or simply a drill punt? There’s no clear answer, it depends from which side you look at it!
Tag Oil is a New Zealand focused E&P company with a large land package distributed across 3 basins.
- Taranaki, East Coast & Canterbury basin with roughly 4 million net acres
The Taranaki Basin is a proven producing basin with more than 130,000 boepd of production. It offers both shallow conventional opportunities and deep high impact condensate rich tight gas prospects in 46,000+ net acres.
With over 2.5 million net acres the East Coast Basin is an unconventional play (a tight oil play), the size of the prize is estimated at +14 billion barrel of OOIP (Pie in the sky, no way of telling how much is commercially viable)
Canterbury Basin: 1.2 million net acres of exploration.
The stabilized production rate was the catalyst the market was waiting for following a major infrastructure build. It was a clear disappointment; only 2,700 boed following the tie-in of 20 of 26 wells tied in at the Cheal Facility. That leaves only 6 wells to be tied in by the end of June which could lift production to 3,300 boe/d and then average 3,000 boe/d for the rest of the year bar any further drilling success (10 more wells will be drilled by the end of the year).
The elephant in the room here is the steep decline rate!
Reminds me of New Zealand Energy Corp (NZEC) NZ.V 0.255 [+0.015]. NZEC’s share price has been decimated as its wells declined steeply. The company also needs to find some cash to close their infrastructure acquisition and resume drilling.
NZEC’s last quarterly report acknowledged the declines citing waxing could be the problem:
While a decline in production is expected over time, it is possible that the higher decline rates may be due not to reservoir conditions but rather to mechanical issues, including wax buildup downhole. The company has conducted a number of tests to resolve this issue and has found that flow from the wells improves following condensate washes, which dissolve wax that has formed around the pump. The team is analyzing the results of condensate washes conducted to date in order to identify the optimal interval between each wash. In addition, the company has engaged an independent reservoir management company to investigate the cause of and identify remedies to these issues in an effort to optimize oil production. Such remedies may include stimulation of well flow with condensate washes, modified pumping mechanisms or other forms of reservoir stimulation.
Getting back to TAO, there are 2 outstanding issues the market hates right now:
- Obviously, the decline rates. The market will not want to invest in a company that’s unable to show a high growth rate in production. Should waxing be actually the problem, it will require some time to identify and fine tune the remedies.
- Management, which was able to command a premium valuation for the past 2 years, registered a miss. This means it usually takes a few quarters before they regain the confidence of the market.
Based on the 2 points above, the stock right now is a drill punt for 2 reasons:
- We should be getting news from the East Coast basin; a production test could be forthcoming in a month or so.
A success in the East Coast Basin would be HUGE and provide a major uplift to the stock. It’s as if the Bakken has just been discovered! Let’s not kid ourselves though, it doesn’t look like the stock will garner any speculative premium leaving investors with a binary outcome. Even if the drilling witnessed oil and gas shows, the key questions here is: Will the formation be able to produce and at what rate?
- Two Deep exploration prospects coming in the second half of the year with the first one expected to spud by July.
The “Cardiff” is a deep liquids rich natural gas prospect at 4,000m depth located on the Cheal permit in the Taranaki Basin.
So we’ve got our drill punt case covered in a mixture of deep exploration wells and massive shale POTENTIAL on the East Coast Basin.
But what about the value territory?
TAG controls about $100 million in infrastructure and has some $60 million in cash. At 3,000 boe average production (46% oil, 54% gas), the remaining capex for the year is fully covered by CF. The $60 million or $1 per share isn’t going anywhere any-time soon.
So what’s the stock worth? Let’s take a quick stab:
(Infra + Cash) $160M / 60M shares = $2.66 per share. At $3.40 per share, that leaves less than $0.80 per share or $48 million for production! That’s a little bit low for more than $35 million in annualized cash flow (using $105 per barrel of oil Brent and $5 per mcf for gas).
Let’s ignore $100M in infrastructure….
The question here is: what is a decent CF multiple for international producers? If we apply a 4x multiple and add the cash we get $200 million /60M OS = $3.33 per share leaving everything else and all upcoming catalysts for free.
On an EV/BOE basis, TAO is trading at around $50k per flowing boe, not excessive at all give the premium they realize on their pricing compared to NA.
NZ offers great netbacks for both oil ($73/b) and gas ($3.88/mcf) but I am having trouble picking my side. On one hand I already have a drill punt stock NKF/DXE and I wouldn’t want to have more than one. On the other, I would prefer to wait until NZ or TAO get a better handle on waxing. While you can’t fight the geology, if waxing is partially responsible for the decline rates maybe they might be able to optimize each well for a better production profile. Finally, if any of the catalysts mentioned above is a hit, the stock will quickly exit the penalty box.
Where do you stand on Tag Oil?