In this article I will review Tag Oils recent 2013 fiscal year end conference call and fiscal 2014 drilling plan. Tag has let us speculators down as the management had given the impression that after the infrastructure upgrades were complete on its producing properties that they would be producing nearly 5000 boe/d. When the results came in less than this, the market was not happy and took the stock down. Management therefore has a credibility issue that will take several quarters of delivering on goals to erase. Having said that here is my review from the transcript available on Seeking Alpha:
We ended fiscal-year 2013 in great financial shape with $69 million in cash, $68 million in working capital, and we carry no debt. We have approximately $100 million in 100% owned infrastructure. On that sort of valuation, my personal opinion is, we can support a $6 share price just with those assets leaving a free option on our big plays coming this year that we'll talk about shortly.
At the current date, after the vast majority of our infrastructure and drilling costs have been paid, we have over $60 million in the bank, we still carry no debt. We've established baseline production that generates cash flow from operations on a go-forward basis of approximately $3 million per month.
One thing to keep in mind is that Tag is currently profitable with its current operations. It has no debt and will be able to fund all drilling from cashflow. In addition, New Zealand has relatively generous terms for oil producers which leads to nifty netbacks on production.
Yesterday, we have produced about 2,660 barrels of oil equivalent, 1,406 of that being oil. We still have a couple of wells behind pipe. We'll bring those on to production shortly.
Current prodcution is 2,660 boe/d with a couple of wells left to bring on line. That is only half of what we thought earlier this year.
So what is the drilling plan?
We've contracted four rigs to be working simultaneously to drill a minimum of nine shallow Taranaki wells, two deep Kapuni wells in Taranaki, and at least one more East Coast unconventional well in the next six to nine months with a cost to TAG of approximately $39 million. It is fully funded using cash flow on our strong balance sheet.
We look at the nine shallow Taranaki wells to be drilled by the end of calendar 2013 as an opportunity to increase our reserves, maintain and possibly grow our baseline production and cash flow, and continue this for many, many years at relatively low risk. It also allows us to add deep drilling and more focus to our East Coast operations, and we have brought in a JV partner in East West Petroleum to our shallow Taranaki program that allows to focus on the deeper and the East Coast plays, and we also have a carry on those initial Taranaki plays up to $10 million, which mitigates a little bit of risk on that shallow play.
What about the blue sky East Coast drilling?
We're also advancing our East Coast unconventional play where we have drilled one well to date called Ngapaeruru-1, and we encountered 155 meters of potential tight oil and gas play while drilling. We've collected a huge amount of unconventional data, and that data is being assessed now and results to-date look very promising. Again, Drew will talk us through some of the details and the timing on the go forward there, but I think the data we have collected will help us better understand the long-term feasibility of the East Coast opportunity shortly.
At the same time, looking forward to our next East Coast well that is expected to be drilled in December-January, we recently signed an access agreement at our number one location for drilling in our northern permit in East Coast called Waitangi Hill. This is where an old 1910 wellbore was drilled approximately 200 meters and TAG found full to the brim, a 50 degree API oil with gas (inaudible) through it today. We can't wait to get at this; it's been our number one target. It was one of the reasons our ex-partner really was attracted to the play. It's got 50 degree API oil above and through it, and that oil has been tight that's coming from the source rocks.
Ok so what is my take? I have always been involved in Tag because of the potential for "Bakken" like results in the East Coast acreage. The lower risk Taranaki acreage was a way, in my view, to fund the blue sky drilling without having to dilute the shares. So far so good in my view. I have been following this company for several years and the progress has been in fits and starts. Nevertheless if the East Coast comes in anything like a legitimate shale play and is productive the stock will soar. Please remember it is going to take a couple of years to find out what they have. These next few wells are basically science projects as they drill and take cores and analyze the samples. In the meantime there should be enough news flow from the Taranaki drilling to move the stock around. However the management definitely needs to under promise and over deliver. Any more misfires on production guidance will take the stock price down. This stock is for more risk averse people and it will be volatile over the next year or so. I continue to like it due to the potential for a big payoff if the shale play comes in like I think it might.
Disclosure: I am long OTCQX:TAOIF.