GMP puts $225 target on TAO oil play
10/16/2010 3:28:37 PM | Peter Kennedy
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“The oil is there – it’s just a matter of unlocking it ,’’ GMP analysts said in briefing.
Resource analysts at GMP Securities Europe LLP are clearly optimistic about the outlook for Tag Oil Ltd. (TSX: V.TAO, Stock Forum), a junior oil and gas firm with operations in New Zealand.
In an email to Stockhouse, GMP’s U.K. analyst Peter Nicol insisted that the investment firm has no formal rating on TAG and has not completed any official research on the company.
However, in an April 21 internal sales briefing obtained by Stockhouse, Nicol and fellow GMP analyst Toby Pierce estimated that TAG would have an un-risked value of approximately $225 per share if the company can unlock the potential of its unconventional oil shale plays on New Zealand’s North Island.
“The oil is there – it’s just a matter of unlocking it,’’ the analysts said.
On the same day (April 21), TAG revealed that GMP was leading an underwriting syndicate that aimed to raise $17.4 million from the sale of 6.7 million $2.60 units, each of which was comprised of one common share of TAG and one-half of one common share purchase warrant.
The warrants are exercisable at $3.60 each and entitle the holder to acquire one common share for a period of 18 months following completion of the offering on May 5. When the over-allotment options were taken up, proceeds of the financing reached $20 million.
After closing on Friday at $4.38, TAG shares trade in a 52-week range of $4.64 and 64 cents, giving the company a market value of $165 million, based on the 37 million shares outstanding.
Based in Vancouver, TAG is a company that specializes in extracting oil from finely-layered soft rock or mud. This kind of environment is known as fractured shales because in many areas the layers are largely shattered or ‘fractured material.’
The TAG operations are centred on New Zealand’s North Island. They are comprised of oil and gas production and exploration in the Taranaki Basin on the west side of the island, and exploration activities on the East Coast Basin on the east.
TAG has 2.2 million acres across its five permits and 490 barrels per day net of production in this area.
According to two independent engineering evaluations by Calgary firms Sproule International Ltd. and AJM Petroleum Consultants, the two basins have 14 billion barrels of original oil in place (OOIP) identified on less than 10% of the company’s land base. It is this that is attracting attention in investment industry circles.
In the April briefing, GMP’s Nicol and Pierce gave their top three reasons to own the share. They include:
Prospective acreage and billions of barrels in place in the region.
TAG’s wide varied portfolio, ranging from low risk development to higher risk exploitation and exploration.
Upcoming activity, including future drilling in the Taranaki and East Coast basins.
“On very conservative numbers, we estimate that TAG will have a core NAV (following the May financing) of roughly $1.44, which consists of approximately 74 cents in cash and proven and probable reserves/resources of roughly 77 cents,’’ the GMP analysts said, adding that these reserves are currently in production.
The analysts went on to say that their risked value per share of TAG is roughly $14.82 following the $20 million May financing. But if TAG can unleash the potential of its unconventional oil shale plays, their unrisked value per share is worth over $225, the analysts said.
Meanwhile, Kevin Shaw of Wellington West Capital Markets Inc., initiated coverage of TAG on September 20 with a speculative buy rating and a $3.80 target price.
After closing its recent financing, Shaw said the company is gearing up for sizeable work programs in the next two years in the Taranaki Basin.
“With $26 million in working capital and no debt, TAG is in a strong financial position to move forward with an initial Taranaki basin development and exploration program,’’ Shaw said.
In the three months ended June 30, 2010, TAG reported production revenue of $1.8 million, an increase from $588,818 a year earlier. Net income in the quarter was $119,439, or $0.00 per share compared to year earlier loss of $170,055 or $0.01 per share.
The company’s production revenues are generated by producing wells in the Cheal oil field in the Taranaki Basin, which produced an average of 294 barrels per day during the quarter ended June 30, 2010.
In the short term, the Taranaki basin is expected to be the primary focus for TAG as it bids to ramp up production revenue. It covers an area of about 100,000 square kilometres and remains relatively under explored, with only 125 wildcat being drilled since 1955.
TAG has already identified more than 30 initial drilling locations in Taranaki to further explore and develop its two key land permits, Shaw noted in his report.
However, analysts say the potential for the discovery of resources in the future is expected to be much greater in the East Coast Basin, where TAG has a 100% working interest in three permits covering two million acres of undeveloped land.
“Even though it is still early days for the widespread unconventional oil shales which have been identified on these permits, the East Coast basin can be compared with both the Bakken shale play in North American and the Paris Basin Liassic [in France],’’ said Shaw.
ABOUT THE AUTHOR
Peter Kennedy is a Stockhouse reporter and web content editor
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