Issue link: http://resourceworld.uberflip.com/i/134727
BROK ER 'S P I C K S Alf S te wa rt Tag Oil – Time to be unconventional Tag Oil Ltd. [TAO-TSX] has been my favorite oil and gas company, on and off for over three years. Although oil and gas are not my forte, I spent a few years doing corporate finance work on the sector from a base in Vancouver. This was difficult as the oil and gas industry is based in Calgary, and the few participants not based there are at a bit of a disadvantage by not being part of the Calgary network. On the other hand, if a Vancouver-based oil and gas company is particularly attractive, it can be quite neglected by the investment community, because of its head office location. Additionally, if its assets are located outside of Canada, it can be ignored by the Oil Patch since Canadian oil and gas activity is centred on the Western Canadian Sedimentary Basin, and only in that basin. Tag Oil has headquarters in Vancouver, and oil and gas operations in New Zealand. Its assets are both conventional and unconventional in nature, and, I believe, deserve a great deal more attention than they have received in Canada. Why? The conventional oil and gas operations are attractive because the netbacks, flow rates, discovery potential and selling prices are superior to those in Canada. New Zealand is a politically low risk country, if somewhat "green" in its environmental policy. It is an importer of oil, despite its domestic production, and has a natural gas distribution network that needs new gas supplies. Its unconventional potential has not been tapped at all, and so the so-called shale revolution, which is occurring in Canada and the US, has not yet happened in New Zealand, even though experts have estimated a very large potential in the country, and on Tag's lands in particular. The market has not been kind to Tag over the last year. The stock has traded as high as $10.45 and as low as $3.32 over the last 12 months. It has had a joint venture partner walk away and has had declining production and cash flow during that time. However, the company is now drilling its first well on its unconventional East Coast Basin acreage on New Zealand's North Island and it has completed a $30 million production facility upgrade, which will put the company back on track to growing its conventional production. My assessment is that Tag Oil may be a timely stock pick for the appropriate investor due to forecasted increased production and cash flow from its Taranaki Basin acreage. I estimate it is currently trading at five times cash flow, has a net back of $33 per barrel of oil equivalent and has no debt, with a treasury of over $60 million. The East Coast unconventional drilling may hit or miss and still the value is there to back-stop the share price. Throughout the past volatile year, exploration success has been a strong point for the 22 www.resourceworld.com Throughout the past volatile year, exploration success has been a strong point for the company. company. It has drilled over 23 consecutive conventional wells, and has barely touched some of its bigger structures such as the Cardiff anticline, which is over 12 km long and 3 km wide, and has an identified tight gas potential as well as un-assessed deeper potential. Management has taken a prudent and measured approach to risk taking and continues to demonstrate a conservative approach, which I believe will yield long-term success for the company. New Zealand may be considered an unconventional investment opportunity for oil and gas by some pundits but I submit it is time to get unconventional. n This article expresses the opinions of author, and not necessarily those of Raymond James Ltd. Statistics and factual data and other information are from sources RJL believes to be reliable but their accuracy cannot be guaranteed. As Tag Oil is not suitable for all investors, a recommendation would only be made after a personal review of an individual's financial objectives. Raymond James Ltd. is member Canadian Investor Protection Fund. JUNE 2013