TAG Oil
(TAO.V, TAOIF) Asymmetrical risk:reward opportunity headed by excellent executive team. Imminent IP30 results provides chance for early confirmation of commerciality.
Quick Facts:
Brownfield unconventional development project in Egypt’s Western Desert
Bringing North American fraccing expertise to the deserts of Egypt
90% CoC (as assessed by RPS Energy)
Field Development Plan NPV10 of US$423.8 (CAD $565.4) unrisked
33.7m recoverable barrels over initial, conservative FDP as per RPS
FDP only accounts for 1/3 of TAG’s OIIP, and uses conservative well spacing
Per barrel NPV10 risked value of $14.12
Recent Egyptian Medium Oil M&A places value at CAD$10.67/barrel
Currently awaiting imminent IP30 results from first vertical re-entry well.
Original Dec. 2, 2022 JRI interview can be seen here
JRI May 25th Update Interview can be seen here
This one is one of my favourites.
The team is excellent. CEO Toby Pierce is a strong, professional executive with experience in a variety of industry roles. He has been CEO of TAG Oil for over 8 years. TAG caught the market’s attention, though, when Abby Badwi was announced as its Executive Chair in the fall of 2020. Badwi has decades of experience increasing production, shareholder, and M&A value to his name, and is a proven commodity in this sector. His presence in a leadership role with TAG is a legitimate strength.
Badwi and TAG joined forces at an opportune time. Just prior to his arrival, TAG had hit the reset button, selling off assets in New Zealand to find a new play with. Soon after, TAG settled on a project in Egypt’s Badr Oil Field, specifically the Abu Roash “F” (ARF) horizon, and the drill target perfectly matches Badwi’s considerable knowledge and experience.
TAG’s target is by no means new. This is brownfield work on a field discovered by Shell back in 1982 and exhausted of conventional oil about 20 years ago. This means of course that the field is well known (over 60 wells have been drilled into it) greatly reducing exploration risk. We know the oil is there. The question is whether it will commercially flow. RPS Energy has TAG assigned presently at a 90% CoC. TAG’s working thesis, then, is actually rather simple – they are bringing the unconventional fraccing boom of North America 15 years ago to Egypt. The logic goes that this field was conventionally exhausted by Shell in the 1990s and that macro events caused this asset to become distressed and lost in the shuffle somewhat – Egypt’s Arab Spring, low oil prices, and then COVID. Enter TAG.
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And the prize TAG is chasing? Their initial Field Development Plan (FDP) covers just 1/3 of their total OIIP and has them targeting 531.5 million OIIP barrels of Egyptian Medium oil (which generally trades at a few % discount to Brent). That makes their overall P50 OIIP an estimated 1.58BBO.
At TAG’s estimated 15.1% recovery rate, that works out to 26.9mbo for their FDP or 80.2mbo for the whole BED-1 concession.
Geologically, TAG is consistently making the comparison to Texas’ Eagle Ford Play, which means they are obviously optimistic about how ARF will take to fraccing. And frankly, from where I am standing, so am I. TAG’s story - and its potential - is pretty darn compelling. I am going to drop some charts and the numbers I am working with here to show you valuation ranges assuming commercial success and meet you on the other side( please note that all numbers are my own independent work and I cannot guarantee their accuracy. I do not speak for TAG with these efforts and nor do they reflect any internal TAG numbers):
My Math:
1. OIIP – FDP for BED-1-7 vs. BED-1 Full Field
The RPS report1 estimates a P50 total ARF Horizon OIIP to be 531.5MMBO. The current Field Development Plan (FDP) is to drill 20 wells targeting 178.3MMBO, or 33.55% of the known resource.
2. Per Barrel Valuation Using Recent M&A Numbers
One potential valuation is based off the EV/barrel value of a recent corporate share-based M&A action involving heavy Egyptian oil2. That number works out to CAD$10.67/barrel. Note that this was a P50 number for proven & probable reserves. Thus I am obviously assuming commercial success for TAG, who at present has a contingent resource. This deal was done during the time of $100+ oil last summer, but I am not assigning a proportionate discount. However, I will lower the EV/barrel number to CAD$10, even if just for simplicity.
Recovery Rates
Recovery rates: TAG is calculating using a 15.1% recovery rate. I will also provide numbers using a range of numbers – 5%, 7.5%, 10%, and 12.5% - in a bid to conservatively model realistic base case. These numbers are also more in line with average horizontal shale recovery rates from American basins of 4-7/5-8%, including the Eagle Ford Play, which TAG specifically identifies as a geological analogue.
4. Recovery Rate Valuations3
5. NPV Valuation
Junior o+g producers can generally expect to trade in a range of 0.4-0.5 of their NPV. Below provides a range of potential values based on that ratio:
As is made obvious from the above numbers, if TAG does indeed manage to upgrade their 2P Contingent Resources into Reserves, there is considerable upside from present valuations ($116M mc).
Another key detail to note that has not yet been properly introduced is that TAG’s proposed well spacing – some 400 meters – is quite sparse for horizontal fraccing. So any numbers in the charts above have even more blue-sky potential – perhaps even doubled – by simply increasing the well count to densities still reasonable in an unconventional field.
The first step towards understanding just exactly what’s down there is a vertical reentry well being done as a test program for their fraccing process. The well was completed end of April and IP30 numbers are imminent during time of writing (June 15). Flow rates in the range of 100-150 BPD for the vertical well would be considered economic, as that would translate to the roughly 2000-2500 BPD (from 15ish fracs) Tag is targeting for its horiztonal frac flow rates. So while it is still very early – awaiting the IP30 rates of the maidan spud of the first stage of a proposed 3 stage program that would in theory drill a conservative 20 well program targeting 1/3 of the total OIIP – the imminent flowrate update nevertheless will provide a critical piece of data for TAG’s commercial prospects. Hard not to get excited when a path to a 5X – or more – can begin to be understood in just a few days time. And this is discounting totally further accretive M&A
Fundamentally, TAG Oil is exactly the type of play you look for in the junior explorer sector: an asymmetrical risk:reward ratio. Based on my own numbers, there is a real chance at a 5X or even 10X from present valuations, even accounting for some further dilution through financings for accelerated exploration or expansion. And yet, with so much upside, there is relatively little in the way of heavy risk. Egypt is a slow-but-reliable o+g jurisdiction. The field is known with a high degree of confidence. There is oil and it will flow, the only question is how much, a fact which reduces the risk of a total zeroing of the share price. Based on Abby’s track record, and a very plausible working thesis, and the fact that truly revealing knowledge about the potential of this play is just days away, this makes this an extremely compelling story for me. It may yet take a few years to play out, but the first steps of that trajectory will be known in a very short time.
https://tagoil.com/2022/11/22/tag-oil-announces-resources-evaluation-report-abu-roash-f-badr-oil-field-western-desert-egypt-and-reserves-evaluation-report-royalty-interest-new-zealand/
https://www.trans-globe.com/news/news-details/2022/Business-Combination-of-VAALCO-and-TransGlobe/default.aspx
Netback ratio set at 61.1%, calculated using TAG’s 15.1% ratio of 16.5mmbo net/26.9mmbo gross
