TAG Oil (TSE:TAO) (OTCMKTS:TAOIF) is well positioned to ride out the storm, says M Partners, which rated the oil and gas producer as one of its top picks for 2015 earlier this week.
The company, which has assembled a New Zealand-focused land package totaling 2.8 million acres over three basins, is now in the process of bringing additional production onstream at its Cheal-E field, while re-entry of the Cardiff deep gas prospect nearby is anticipated in several months.
So far, TAG's production has come from shallow oil and gas discoveries in the Taranaki Basin, with production averaging 1,990 barrels of oil equivalent per day (boed) in October.
Its focus has been to materially grow high netback oil production while minimizing risk and working capital spent on non-producing assets, seeking alternative ways to fund high risk drilling. The decision to focus on its core Cheal operations was taken after its move to plug and abandon its Waitangi Valley-1 well in the East Coast Basin after encountering some extreme drilling conditions in September. At the time, it also postponed other higher risk work commitments to fiscal year 2016/2017.
M Partners said that flexible timing with respect to its high impact exploration program should allow the company to maintain a strong balance sheet of $41 million in cash as of September 30 and no debt.
At current prices, the capital markets firm estimates TAG is generating $35 per boe netbacks, which at 2,200 boed, translates into an annual cash flow run rate of approximately $20 million.
"Assuming a 15% corporate decline rate, we expect two shallow wells at a cost of $8MM should be sufficient to sustain production," wrote M Partners analyst David Buma in a note released January 5.
"In addition, the timing of the vast majority of the company’s exploration work is flexible."
He said the company is poised for significant upside as oil prices recover, and is well positioned to ride out an extended period of volatile prices given its "sound financing footing and low-cost initiatives planned in the near term".
As part of its low-cost drilling efforts, Buma noted that TAG recently reported that Cheal-E6 well averaged 325 boed over an 11-day test, while testing of the E7 well should begin early this year. The company is also due to begin recompletion work on Cheal-E2 around the same time, followed by a sidetrack at E3.
TAG is expected to begin construction of a pipeline from Cheal E to A next month so as to monetize the gas production there. Later in the spring, it is poised to re-enter the 5.5 million barrel condensate Cardiff prospect, which is already connected to the Cheal-A processing facilities.
M Partners said that given its situation, TAG's shares are attractively priced, with the market ignoring the exploration upside.
"TAG shares currently trade at 1.5x EV/EBITDA (calendar 2015), a significant discount to its Southeast Asian/Australasian comps at 3.2x, despite the strong balance sheet and low-risk development program underway," Buma said.
"Given the current valuation, defensive positioning and significant exploration upside once oil prices recover, we believe the shares present an attractive risk/reward opportunity."
M Partners has a buy rating on the oil and gas producer, and a $4.00 price target. The firm sees the next major catalyst for TAG in April, with the re-entry of Cardiff-3.
TAG Oil has adopted the standard of six thousand cubic feet of gas to equal one barrel of oil when converting natural gas to "BOEs." BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 6Mcf: 1 Bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
Cautionary Note Regarding Forward-Looking Statements:
Statements contained in this news release that are not historical facts are forward-looking statements that involve various risks and uncertainty affecting the business of TAG. Such statements can be generally, but not always, be identified by words such as "expects", "plans", "anticipates", "intends", "estimates", "forecasts", "guidance", "schedules", "prepares", "potential" and similar expressions, or that events or conditions "will", "would", "may", "could" or "should" occur. All estimates and statements that describe the Company's objectives, goals, forecasts, guidance, production rates, test rates, optimization, timing of operations, increased pace of drilling, statements regarding prospects being drill ready and/or future plans with respect to the drilling and field optimization work in the Taranaki Basin are forward-looking statements under applicable securities laws and necessarily involve risks and uncertainties including, without limitation: risks associated with oil and gas exploration, development, exploitation and production, geological risks, marketing and transportation, availability of adequate funding, volatility of commodity prices, environmental risks, competition from other producers, and changes in the regulatory and taxation environment. Actual results may vary materially from the information provided in this release, and there is no representation by TAG Oil that the actual results realized in the future would be the same in whole or in part as those presented herein.
Other factors that could cause actual results to differ from those contained in the forward-looking statements are also set forth in filings that TAG and its independent evaluator have made, including TAG's most recently filed reports in Canada under NI 51-101, which can be found under TAG's SEDAR profile at www.sedar.com. TAG undertakes no obligation, except as otherwise required by law, to update these forward-looking statements in the event that management's beliefs, estimates or opinions, or other factors change.