“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 insistedthat the investment firm has no formal rating on TAG and has notcompleted any official research on the company.
However, in an April 21 internal sales briefing obtained byStockhouse, Nicol and fellow GMP analyst Toby Pierce estimated thatTAG would have an un-risked value of approximately $225 per share if thecompany can unlock the potential of its unconventional oil shale playson 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 anunderwriting syndicate that aimed to raise $17.4 million from the saleof 6.7 million $2.60 units, each of which was comprised of one commonshare of TAG and one-half of one common share purchase warrant.
The warrants are exercisable at $3.60 each and entitle the holder toacquire one common share for a period of 18 months following completionof 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 rangeof $4.64 and 64 cents, giving the company a market value of $165million, based on the 37 million shares outstanding.
Based in Vancouver, TAG is a company that specializes in extractingoil from finely-layered soft rock or mud. This kind of environment isknown as fractured shales because in many areas the layers are largelyshattered or ‘fractured material.’
The TAG operations are centred on New Zealand’s North Island. Theyare comprised of oil and gas production and exploration in the TaranakiBasin on the west side of the island, and exploration activities on theEast 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 firmsSproule International Ltd. and AJM Petroleum Consultants, the twobasins have 14 billion barrels of original oil in place (OOIP)identified on less than 10% of the company’s land base. It is thisthat 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 coreNAV (following the May financing) of roughly $1.44, which consists ofapproximately 74 cents in cash and proven and probablereserves/resources of roughly 77 cents,’’ the GMP analysts said, addingthat these reserves are currently in production.
The analysts went on to say that their risked value per share of TAGis roughly $14.82 following the $20 million May financing. But if TAGcan unleash the potential of its unconventional oil shale plays, theirunrisked 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 ratingand a $3.80 target price.
After closing its recent financing, Shaw said the company is gearingup for sizeable work programs in the next two years in the TaranakiBasin.
“With $26 million in working capital and no debt, TAG is in a strongfinancial position to move forward with an initial Taranaki basindevelopment and exploration program,’’ Shaw said.
In the three months ended June 30, 2010, TAG reported productionrevenue of $1.8 million, an increase from $588,818 a year earlier. Netincome in the quarter was $119,439, or
.00 per share compared to yearearlier loss of $170,055 or
.01 per share.
The company’s production revenues are generated by producing wells inthe Cheal oil field in the Taranaki Basin, which produced an average of294 barrels per day during the quarter ended June 30, 2010.
In the short term, the Taranaki basin is expected to be the primaryfocus for TAG as it bids to ramp up production revenue. It covers anarea of about 100,000 square kilometres and remains relatively underexplored, with only 125 wildcat being drilled since 1955.
TAG has already identified more than 30 initial drilling locations inTaranaki to further explore and develop its two key land permits, Shawnoted in his report.
However, analysts say the potential for the discovery of resources inthe future is expected to be much greater in the East Coast Basin,where TAG has a 100% working interest in three permits covering twomillion acres of undeveloped land.
“Even though it is still early days for the widespread unconventionaloil shales which have been identified on these permits, the East Coastbasin can be compared with both the Bakken shale play in NorthAmerican and the Paris Basin Liassic [in France],’’ said Shaw.