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Tag Oil - O&G Investment bulletin - 2010 04

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Tag Oil - O&G Investment bulletin - 2010 04 Powered By Docstoc
					Dear Reader,

Below is one of my regular reports that I provide to my subscribers on high growth oil and gas
stocks in Canada and the US.

And here’s why you want to read this report...I can’t make the incredible opportunity any clearer
to oil and gas investors than this: The industry can now profitably get oil out of rock. For the last
125 years, since the age of oil began, oil and gas have come from underground sand formations.

This new revolution means there will be dozens and dozens and dozens of highly profitable new
discoveries around the world. I have found one junior producer with millions of acres covering a
shale oil formation that is proven to have oil – in fact, independent estimates suggest several
billion recoverable barrels are there for the taking! No analysts follow this undiscovered gem yet
– just yours truly. If this producer hits what I expect them to, my math says the company could
be a 25-bagger!

Thank you for signing up to receive the following in-depth, 9 page report that sifts through the
pros and cons of this investment opportunity. Also, towards the end of this report you will find a
25% off subscription offer to the Oil & Gas Investments Bulletin, for a limited time only.

I hope you find my research valuable and profitable!

        ORIGINALLY PUBLISHED AS ISSUE # 13 – JANUARY 27 2010

                                 UPDATED APRIL 6 2010

                                    TAG OIL – TAO-TSXv
The premise for this investment is simple: Tag Oil has a 100% working interest (WI) over 2.4
million acres that covers a highly prospective shale oil formation in New Zealand. It has similar
characteristics to the prolific Bakken shale play in North Dakota and Saskatchewan (except the
NZ formations are much thicker and more porous!).




www.oilandgas-investments.com                                                                 Page 1
Management will likely test it in Q3 2010. An independent geological consultant has estimated
it may hold up to 12 billion barrels of original oil in place (OOIP).

This large shale oil play is a drill punt, but there is a lot of geological evidence backing it up. Tag
Oil also has other, existing production - 350 barrels of oil per day (bopd) of light oil. Other
positives include $10 million net cash, and management owns 11,000,000 of the 30,000,000
shares out.

With a tight share structure and massive land position, the capital gains potential here is huge.
I know of two oil & gas stocks that went from $1 - $100 per share: Niko (NKO-TSX) and Ultra
Petroleum (UP-AMEX). As my math will show, I believe Tag Oil has that kind of potential.

Trading Symbols:           TAO-TSXv
Share Price                $2.74 (Apr 6)
Current Production:        317 bopd
Shares Outstanding:        29,879,445 --Insider shares (32%): 9,641,501
Fully Diluted:             31,767,515
Market Cap:                $81,869,679.3
Net CASH:                  $10 million
Enterprise Value:          $71,869,679.3
www.tagoil.com

POSITIVES
       2.4 million acres in a shale formation that is similar to the prolific Bakken oil shale that
       straddles the North Dakota/Saskatchewan border
       It has independent report estimating it could contain as much as 12 billion barrels OOIP
       Tight share structure (= leverage)
       Undiscovered company – no research – I am early; before Bay Street or Wall Street
       Their 320 bopd is now in a development stage field (Cheal) that can grow to over 2000
       bopd with low risk
       Just valuing the potential reserves at $20/bbl at Cheal supports the current stock price
       Good cash position
       New Zealand has Anglo Saxon rule of law

NEGATIVES
       The two shale formations are drill punts – and even if it is oil bearing, there’s no
       guarantee the chemistry will allow for economic completion (i.e. proper fracking may
       take a long time to figure out)
       Illiquid stock will make for volatile trading
       The first horizontals might not get drilled until Q4 this year or Q1 2011


www.oilandgas-investments.com                                                                   Page 2
       Management does not have any big discoveries or stock market wins under their belt
       yet

PROPERTIES
The Shale Formations - Waipawa and Whangai shales, East Coast Basin
I’m starting here – not with the production at Cheal - because this is the big prize – if it works.
An independent technical report dated September 2008 by AJM Petroleum Consultants -
written in remarkably simple English (as is the whole website) - states the potential for this
property. (All emphasis, in underlines and bolding, is mine-KS.)




The Waipawa shale lies overtop of the Whangai shale, on the east coast of the north island of
New Zealand. Three historical wells have been drilled – one in 1967 hit 734 m of Whangai shale
at 1469 metres depth. Another well in 1985 hit 392 m of Whangai shale at 1990 m. A well in
2001 hit 323 m Whangai shale at 2764 m. The overlying Waipawa appears to be only 30-70 m
thick.

From independent AJM report:

“The Waipawa and Whangai shales represent an unconventional development similar to that
of the Bakken Formation within the Willesden Basin in southern Saskatchewan and North
Dakota. The area has several oil and natural gas seeps that clearly indicate the area is
prospective for hydrocarbons. Prior to any defined development, additional drilling, sampling
and testing will be required to further quantify the hydrocarbon potential in the area.




www.oilandgas-investments.com                                                               Page 3
“The company has plans to drill an exploratory well on each of the permits. The cost of the
each well is estimated to be $CDN 1,500,000. This capital will allow for the drilling of a 1,500 m
vertical test that will recover significant core. In addition, each well will have a modern well log
suite run to allow for the optimal review and characterization of the shale zones. As per the
exploration permit requirements, these wells should be drilled and tested by the end of the
third quarter of 2009. AJM’s long term forecast for light oil is $US 100.00/bb WTI.

“New Zealand has an active market for petroleum products, and the exploration permits are
close to a major ocean port in Napier. As a result, it is expected that any future development in
the area will have access to markets and transportation infrastructure.”

Below is the chart from the AJM report that estimates Original Hydrocarbons in Place:




“The best estimate (P50) hydrocarbon in place volume of 12.6 billion barrels is the total
available volume.”

Things like recovery factor (how much of that oil they could actually produce) are still unknown.
(Though the report estimates 180 million recoverable barrels!) The company makes a case, and
the independent report echoes this, that it is very similar to the Bakken and Barnett shales
(which is a bit promotional, as in my non-technical mind the Bakken and Barnett are quite
different). Here is a chart from the Tag Oil website:

www.oilandgas-investments.com                                                                Page 4
While there is a lot of initial data that supports this theory, the reality is that it could take
months or years on a property that size to find an economic zone or determine an economic
fracking completion technology. Or it could happen on the first hole!

At first blush, Whangai has been independently verified to be thick enough and porous enough
to get me very excited that management could create unbelievably large economic resource.
But I do want to say again, it might not be economic.

East Coast Basin
Throughout much of the 2.4 million acres is an even shallower potential oil zone – at only 200
metres - the Miocene, that management is testing now with three wells. This is oil that has
seeped up from the shales, and management will test if they can find it in shallower reservoir
traps above. This is essentially a free play for investors; if it doesn’t hit, it doesn’t really affect
the big shale oil target beneath it; it just means that not enough oil has seeped out to make a
low cost shallow play above it.

Drilling in the early 1900s reported ongoing production from this shallow Miocene zone of high
quality (50 degree API) crude oil. This is early stage, but with low costs of $400,000 per well,
even at 20 bopd per well, production could yield a highly profitable oil field (think of the
shallow and cheap heavy oil wells in western Canada that produce only 35-40 bopd and have
very high recycle ratios between 6 and 11; recycle ratios being the profit per barrel divided over
cost to get it out of the ground)

Cheal
Tag has two adjoining properties at Cheal, on the west side of the north island of New Zealand,
totalling 23 sections. There are currently 6 wells producing a total of 350-400 bopd of 50
degree API oil; very light oil that receives a premium to WTI, or West Texas Intermediate, the
global benchmark pricing.

www.oilandgas-investments.com                                                                   Page 5
Cheal represents a fairly small opportunity compared to the shale play on the east coast, but
management says they can get 4 wells per section, which would make 92 potential wells. The
oil is shallow and finding costs are low so far – about $19/bbl.

They bought the remaining 69% of the 2000 bopd processing facility at Cheal it didn’t own in
2009 for $2 million cash and a 25% royalty on the first 500,000 bbl production there, going
down to 7.5% after that. The facility cost US$36 million.

Management at Tag Oil believe they can optimize the wells to increase both production and
overall recovery. If they can prove this to be so over the coming quarters, I think the stock
would respond positively, and quickly. It is a relatively low risk, low cost play that will get paid
out of ongoing cash flow. Infrastructure is already set to take increased production.

FINANCIALS
The latest financials report $9.445 million cash and $11.7 million working capital, which is up
from $6.5 million at September 30. Expenses are up, mostly in shareholder communications –
which is working as the stock has gone from 15 cents to $3.

In October 2009 they completed the purchase of the Cheal facility, which clearly had a positive
impact on cash flow. The financials released at the end of February are the first out since the
merger.

Tag Oil merged with another public company, Trans-Orient, in 2009 – there were common
shareholders with properties in the same area and it just did not make sense for them to have
two companies. Trans-Orient shareholders received 1 TAG share for every 2.8 Trans-Orient.
Before that, early in 2009, Tag Oil did a 5:1 rollback, or reverse split of its shares.

VALUATION
There are several ways to potentially value Tag Oil. One of the easiest ones I use is price per
flowing barrel, dividing the company enterprise value (market cap + debt or market cap – cash)
over production per day. Generally, for companies as small as Tag, that’s not always the best
way, but it would be $71.8 million / 320 boed=$224,375 per flowing boe. The average
valuation for international junior or intermediate producers is $60,000 - $70,000 (and they vary
widely).

But we need a valuation model that fits the speculative nature of this investment. So consider
this:




www.oilandgas-investments.com                                                                Page 6
The independent report comes up with a recoverable oil resource of just over 180 million
barrels (By the way, the report is on their website, free and open for everyone to review).

Even valuing this resource at $3 per recoverable barrel in the ground ($3/bbl), this is how my
math works:

$3/bbl x 180 M bbl =$540,000,000 / 30,000,000 shares = $18/share

A more realistic version would be a $12/bbl valuation

$12/bbl x 180 M bbl=$2.16 Billion / 30 M shares=$72/share

Long time subscribers know that when I do valuations, I try to keep one foot firmly planted in
the air. So an optimistic valuation (but realistic, especially if oil is $80/bbl as production draws
near) is $20 per recoverable barrel in the ground. North American producers get this valuation,
and New Zealand is a Western country, so this asset could quite easily get this valuation in a
bull market:

$20 x 180 M = $3.6 B / 30 m shares = $120/sh. That’s the perfect world scenario.

STOCK CHART




www.oilandgas-investments.com                                                                Page 7
Tag Oil stock is now consolidating after a powerful run up from 15 cents to $3 per share.
Technically speaking, the chart is in “no-man’s land”, with no clear direction. In the spring of
2010 I expect drilling results from both the Cheal workovers in the west side of the North
Island, and the shallow Miocene drilling on the East Coast Basin.

CONCLUSION
In my public speeches and in the website, I have repeated many times that the dynamic duo
technologies of horizontal drilling and fracking – originally used to crack open North American
shale gas plays – will spread around the globe over the next decade, creating dozens and
dozens of lucrative investment opportunities for investors.

This is one of them, and potentially a huge one. With drilling and completion success, I think
there is an excellent opportunity for this stock to be $75 a share. There is definitely oil in the
shales, it’s just a question if chemistry and completion techniques can make it economic.

As drilling on the shales won’t happen until the Q4 2010 timeframe, there is a lot of time for a
(larger) speculative premium to balloon into the stock. That could offer me the potential to get
my investment cost out before results on the shale wells are known. Plus, the first two wells
are likely to be lower cost vertical wells, just to get a sense of the chemistry and composition of
the shale. The first horizontals might not get drilled until Q4 this year or even Q1 next year. So
I could be a bit early here.

At this price level, the low risk development of the Cheal field, and cashed up treasury give me
some downside protection. Should the Cheal workovers not meet expectations I would likely
reduce my position, despite the shale potential.

I own 30,000 shares at $2.35 average, making it the largest investment ever for the subscriber
portfolio.

www.tagoil.com


These are the types of energy companies I find for subscribers...and there are several more
current portfolio stocks that are enjoying exploration success and being rewarded by the
market.

Become an Oil & Gas Investments Bulletin subscriber today – for 25% off our regular rates
(LIMITED TIME OFFER) – and feel secure in the value of your investments, and enjoy the profit
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www.oilandgas-investments.com                                                               Page 8
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About Oil & Gas Investments Bulletin

Keith Schaefer, Editor and Publisher of Oil & Gas Investments Bulletin, writes on oil and natural gas markets - and
stocks - in a simple, easy to read manner. He uses research reports and trade magazines, interviews industry
experts and executives to identify trends in the oil and gas industry - and writes about them in a public blog. He
then finds investments that make money based on that information. Company information is shared only with Oil
& Gas Investments subscribers in the Bulletin - they see what he’s buying, when he buys it, and why.

The Oil & Gas Investments Bulletin subscription service finds, researches and profiles fast growing oil and gas
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www.oilandgas-investments.com                                                                              Page 9

				
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