TAG Oil's (TAOIF) CEO Toby Pierce on Q4 2017 Results - Earnings Call Transcript

TAG Oil Ltd. (OTCQX:TAOIF) Q4 2017 Results Earnings Conference Call July 6, 2017 4:30 PM ET

Executives

Toby Pierce - CEO

Analysts

Operator

Good day, ladies and gentlemen, and welcome to the Q4 Fiscal 2017 TAG Oil Earnings Conference Call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer-session and instructions will be given at that time. [Operator Instructions] As a reminder, today’s conference call is being recorded.

I would now like to turn the call over to Mr. Toby Pierce, Chief Executive Officer. Sir, you may begin.

Toby Pierce

Thanks, Shelby. Before we begin today’s conference call, I’d like to read the following disclosure statements. Today’s conference call may contain forward-looking statements within the meaning of applicable securities laws. The company cautions that such forward-looking statements are necessarily based on certain assumptions, which are subject to various risks and uncertainties that could cause actual results to differ materially from those indicated today.

There is no representation by the company that the actual results realized in the future will be the same in whole or in part as those presented today. For further information on these risk factors, please refer to the Company’s SEDAR filings located at www.sedar.com, namely TAGs annual filings for fiscal 2017. Also the Company undertakes no obligation except as otherwise required by law to update these forward-looking statements in the event that management beliefs, estimates or opinions or other factors change.

So with that, I’d just like to welcome everyone to the call today. We had a number of questions mailed in, so I will basically start with the line of where the company is at, briefly discuss our results report and where our production is at and then start answering some of the questions that have come in.

So at the moment, we are doing approximately 1,350 BOE per day of production that includes Cheal EA-12 the well. We are optimizing, we are putting it on pump, it’s been our natural flow over the last while, so we’ll likely see some uplift there. We are about to start drilling Cheal D-1, that’s our exploration well. Activity should start around or about July 11, with the expected results in early August and that well is targeting a new pool north of our existing acreage. We are currently injecting approximately 4000 barrels a day of water at the moment into our waterflood and we are actively trying to increase that ofcourse going forward.

Our reserves numbers, we are quite pleased with where our reserves came in. The reserves numbers we went from what is quite an aggressive resource calculation [Indiscernible] to a very conservative firm by ERC Equipoise and our reserves came in around 4.1 million BOE and that’s up from 3.6 million BOE.

In addition, our reserves evaluation was up about 70% to 82 million, approximately 82 million NPV 10 on a 2P per barrel basis. With that, I’ll start with the questions that people held in, and go forward.

Question-and-Answer Session

Q - Toby Pierce

So one of the key questions is when do you expect the waterflood to start working? And the second question, we’ve done a number of calculations, it’s bit of, it’s a bit of a trial and error to be asked.

Toby Pierce

It’s – we’ve produced almost 3 million barrels to date at our fields, so we need to replace a good portion before the actual production uplift or start. So we are thinking anywhere from 6 to 12 additional months from now. So the waterflood should start to work towards the end of this fiscal year and of course our fiscal year is March 31 yearend.

Toby Pierce

Can you give more – one of the other questions was, can you give us more background on your reserve support? And what do you expect next year?

Toby Pierce

That’s a harder question to answer. The – what I do see is that Cheal E-8 was a successful well and that was not included in this year’s reserve support. So, that will be added. We have a number of locations that we plan to do to reperforate perhaps even co-mingle [ph] production and that’s obviously not included in this year’s report either, as last year’s report either.

A lot of it depends really on how the waterflood comes through, but we expect to atleast replace our production and perhaps even as we did this year perhaps even double our reserves replacement 200% reserves replacement would be about right and it’s sort of what we are aiming for going forward. Of course exploration wells could change that markedly.

Toby Pierce

One of the other questions we had, why haven’t we taken on debt, and why do we choose to use equity instead and do [Indiscernible]?

Toby Pierce

Well that’s a tougher question. As we looked at all the options, and specifically in March timeframe when prices were – oil prices were more robust, they were in the $55 a barrel Brent range. We anticipated the market to stay flat or oil prices to stay about mind you or they increase and obviously we were wrong on that point. So we are actually quite happy that we use that raised equity instead of debt. Debt in an oil and gas company can be very detrimental if you get the timing wrong.

In addition, I have to say you definitely need to hedge out any depositions, most reserves based lenders are most debt providers. We’ll require you to hedge out a portion if not all of the debt and that can make, that sort of sets your price and your price floor, so you don’t get to experience the upside in the oil price if you hedge out. We took the opportunity at the time to raise capital to focus on incremental drilling and to really get our cost per barrel down and so move the oil company forward.

So the decision wasn’t taken lightly. Management and insiders prior to the raise owned about 15% of the shares of the company and post the raise owned approximately 15% of the shares of the company. So the insiders and management did participate in the raise and were onside for the most part on the raise. But going forward we may choose to take on debt, but only if we have a development scenario for production kits for tying in production and such. And the reason being is we can definitely see how that money will be paid back, you know loans and debt need to be paid back overtime and otherwise you can do with the company and the balance sheet significantly.

Toby Pierce

One of the other set of questions we had was why is the share price underperforming and specifically around news releases that look positive, and that’s an interesting question.

Toby Pierce

There was two reasons it’s not surely for the share price and their performance. Oil prices, they are down almost 10 bucks from where we raised. In addition, and unfortunately as much as I would like, I can’t do anything about the operations, but the second is we have some selling. Specifically, Fidelity has sold a major portion according to debt online records on [Indiscernible]. Fidelity has sold down a significant portion in that position.

And in when I asked the Fidelity team about my contact at Fidelity, it is purely just we’re no longer a TAG Oil well, a respected company by their group is no longer a core position for them. So we’ve had some selling and that’s depressed the share price.

And going forward we have an active marketing program and I’ve been in touch with several larger buyers that are quite interested in their stock, but they are also quite sophisticated as well. So they are prepared to take their time and quietly build a position over several months especially as oil prices are underperforming they feel that there is no rush to really build large positions quickly.

So, I am confident that in the next three to nine months, say we will continue to clean up the share price and well clean up the selling and that will be reflected in the share price.

Toby Pierce

And one of the other questions we had was are you looking at further acquisitions and expansion?

Toby Pierce

We always keep an eye open for acquisitions. We made two acquisitions in the recent downturn. First was in New Zealand. We bought an asset at a bankruptcy for quarter of a million dollars Kiwi and we plan to drill a well on that in October timeframe of this year.

We also picked up the Australian acquisition and that we’re shooting 3-D seismic on it currently. I am pleased to say that production there is over 22 barrels a day out of one well and 8 barrels a day out of another, so we have 30 barrels a day, very small, but just to -- just by the work we’ve done we manage to increase production. Of course when we have that 3-D we’ll be in a much better spot to expand that.

Are we going to do more acquisitions? It’s very hard to say. It’s a great deal presents itself. We’ll definitely consider it. In this type of market and sideways market, more distressed sellers may occur, may emerge. And we do have our sites on two or three, but we’re very patient and we’re not going to over pay. We believe that growing organically and growing inorganically through acquisitions is prudent and so we’ll follow that strategy.

Toby Pierce

And one of the other questions was what is your biggest challenged for the next 12 to 24 months?

Toby Pierce

Frankly oil prices and management of what is a limited amount of operating cash flow at $45 Brent, we expect to generate about 5 million operating cash flow, so really not too much extra cash to do too much. If we stay at $45 oil we’ll have to look at curtailing some of our exploration program to see if cash for a time when oil prices do recovers, get back at it.

Fortunately, we spent the bulk of fiscal 2017 working on our water-flood, and that should pay dividends through the year and slowly see production increases. The other challenge we face is retaining staff in a market, market like this retaining people is a key concern for us, especially in New Zealand where there is a very small labor pool. We don't have the ability to pay, give pay increases, we don’t the ability to pay large bonuses or any such thing, so retention of staff is key in my mind and oil prices.

Toby Pierce

Now, another one of the questions that we received is where do you see oil prices headed over the next year?

Toby Pierce

That was a tough one. My personal viewpoint, of course we sort of don't manage the company this way. We manage for the downside risk. But my personal view is we will probably edge back in the $6 range by the end of calendar 2017. I think it will be in the high 50s, low 60s. And the reason I believe this is the amount -- the physical amount of spending that has come out of the market, the Permian has been a great success and has added a lot of barrels, but the amount of capital that’s actually come out of spending programs, globally depends on who you read, but its on the order of $1 trillion to $2 trillion, and that capital is not being reinvested in. It will start to cause declines with some point.

So while we do have production growth in the Permian and it's a fantastic resource, I do believe that the supply and the things will have a supply crunch at some point and we’ll see high oil prices. That’s my personal view. We manage our tax portfolio as I said for the downside and all are scenario planning is running $45 oil Brent and $50 Brent going forward.

Toby Pierce

I’ll say that there’s one other question, I’ll say before the very end, but its -- are you happy with where TAG Oil is currently, and not that your 24 months in the role?

Toby Pierce

I’ll say that right at the end as I sort of wind everything but, Shelby, if there are any questions, outside questions, please let me know and we can answer them now.

Operator

[Operator Instructions]. And I'm showing no further questions at this time. I would now like to turn the call back to Mr. Toby Pierce for any closing remarks.

Toby Pierce

Thank you. So I’ll answer the last question that we received basically was are you happy with where TAG Oil is currently had now path at the moment and now that you’re 24 months in the role? I am moderately happy to say. To be honest I’m very happy with our team and how everybody is working together. We inherited a large portfolio of assets that were put together in a different oil environment. Oil was north of $100 a barrel. Lot of the decisions made at $100 a barrel, make a lot of sense for the time. And unfortunately as oil prices trended toward $30 we had to makes some tougher decisions and drop significant portion -- portions of some of our exploration acreage. So that was necessary but it's also unsatisfying for me.

I am very happy with our shareholders. They’ve been quite supportive to what has been a long track it down cycle. I personally own 390,000 shares approximately of TAG Oil and plan to continue buying in the future as a shareholder and as management I do take under performance of shares to heart. And – but going forward is that an excellent platform to grow off of. I know people have been frustrated. We have not been able to tackle the bulk of our program that would provide a significant amount the upside. I am as well, but we’re in defensive mode at the moment. And until we get a clear line on where oil prices are going the markets going to stay down longer than and we could spend money.

So I got to be prepared to do just surge [ph] forward, do the best we can, adding as much production as we can and focus on building reserves, focus on building production where possible, stripping out costs, although I will say over the last 12 months we've driven everything down. It’s just about as low as we go, short of laying off staff for which we do not plan to do. We don't have any ability or wiggle room to really cut our G&A further and over the last year we knocked about 700 grand for G&A growth and to 5.5 million. So I'm quite happy with,

Beyond that though you know the reasons I joined TAG still hold. The core asset base supports the company nicely. We obviously have to grow and we do need to get bigger whether that through acquisitions being acquired organically through drill bit or all the above we need to maximize the returns for shareholders and in the only way to do that is by growing in this case.

And fortunately oil prices really can't go – I’m going to template here, but they can’t go that much lower in our eyes and so the oil markets will sort themselves out and I do believe we’ll have higher oil prices in the future and that will go a long ways to returning as positive cash flow and more of a momentum in growth store.

And with that, I’ll probably end the call there. And just like to thank everyone for joining. And as always please feel free to reach out at any time to the TAG Oil and pull [ph] line or through one of the other contacts are Chris Beltgens or Ashley Garnot on our press release et cetera. And thanks Chelsea.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.