Tag Oil (OTCQX:TAOIF, TAO.TSX) is a TSX listed oil and gas explorer operating in New Zealand also trading OTCMKT:TAOIF. Its a small name with little coverage but running a fully funded drill programme that punches well above its $166mln USD ($181 CAD) mktcap.
Tag sold off from above $2.80 USD ($3.00 CAD) to $2.36 USD ($2.60 CAD) only to start to climb back Thursday to close at $2.73 USD.
I have laid out the base case investment for Tag based on no exploration upside, current production and cash generation in this article and find a valuation underpinning the company at $2.75 USD ($3 CAD). For that $2.75 USD ($3 CAD) you get a solid profitable operation based on low-risk shallow drilling in New Zealand and exposure to some big impact drilling targets as Tag enters its 2nd year of its New Zealand drill programme. Any one of the deeper drills could cause a major revaluation but this article seeks to focus on the cause of the recent dip down to $2.36 USD ($2.60 CAD) and why this is a screaming buy for me.
Tag completed its drill at Cardiff-3 to a depth of 4,853m in late December 2013 targeting gas and condensate zones in the Kapuni-sands formation and intersected 230m of tight-sand formations in 3 zones. The deepest of which, the K3E sands, were tested and results were issued 7th May causing the recent weakness in the share price. Test results show the presence of hydrocarbons but the well failed to flow at the commercial rates the data would indicate. The company believes it's down to a poor cement job - it happens.
The market appears to have written off Cardiff as a dud but the conference call held by management on the 14th May indicated a much more upbeat tone.
- Data suggests the presence of commercial hydrocarbons and the company may attempt to re-drill the K3E in the future. This target would need 3 wells to bring to full production and that plan has not changed.
- The Kapuni formation has a proven producers elsewhere in New Zealand but no operator has ever produced from the K3E. In fact all commercial production comes from the upper 2 horizons yet to be flow tested.
- The workover rig is due to return later this year once all permits are in place regarding Cardiff. The New Zealand government while supportive of its energy industry does have some very stringent procedures in place that Tag must and does adhere. The Kiwis are not quite as keen on oil drilling as some are.
- There are still 2 more opportunities for this well to prove commercial and the story is far from over.
- Tag are well position to commercialize any discovery since this deep target sits below their local shallow drilling operation and the production facility is near on hand to market any gas or condensate that is produced - all dressed up and ready to go.
- The drill programme continues with 2 more shallow wells, 1 East Coast drill, completion of the upper 2 horizons on Cardiff and then a further East Coast well.
- The 3 East Coast wells will then be tested together for efficiency and this is another truly massive opportunity - the East Coast represents a company making development for Tag but I will delve into this asset in the future - my current recommendation ignores this potential and only looks at just 2 aspects of Tag's operation; the shallow production underpinning the stock and Cardiff upside.
Its my belief that this stock under $2.75 USD ($3 CAD) is a buy based only on the current EV/EBITDA forward ratio of x3.29 and current production. Never mind the growing production, reserves, revenue and profit. The end of June will bring the 31 March 2014 end of year results and a reserve upgrade based on strong production over and beyond what 3rd party auditors previously assigned.
The upside far outweighs the downside and I believe buying under $2.75 USD ($3 CAD) gives investors exposure to a great company with an exciting drill programme and some truly transformation targets over the next 6-18 months.
Disclosure: I am long TAOIF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am actually long the TSX listed security TAO.
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