TAG Oil: Waiting on the Well to Deliver
TAG is weeks into drilling its potentially first full hz well. Results are expected in just a few short months that could transform this company.
tl;dr:
TAG Oil has spud their second well - but first hz - with results just a few short months away. Hope is high for positive results to fuel further growth through acquisition for TAG.
Original JRI #16 interview with TAG from last winter can be viewed by clicking here.
Update JRI #29 interview from this spring here.
June 19th TAG Oil Article: https://juniorresourceinvesting.substack.com/p/tag-oil
Table of Contents
Intro
Initial Results from BED1-7
Corporate Update Webinar
The Financing
What’s Next
Part 1: Intro
The market finally got the news it had been waiting for from TAG – as of Aug. 22 their BED4-T100 (“T100”) has been spud. That is naturally the news that people were most excited to hear, as TAG is looking to start to unlock 530+ mm OIIP barrels with this well. However, even aside from the spudding, TAG Oil has hardly been standing still this past summer. Rather, the market has had a long list of updates roll in from TAG, including some critical milestones. A brief list of what has gone on to get TAG to their recent spudding:
Encouraging well results from their vertical re-entry,
Announcement of the well location for their second well,
FY2023 docs, a corporate webinar, and
A strongly-backed, $11.8M financing that has been announced closed as of Aug. 24.
One gets the feeling that pieces are starting to fall into place for TAG as it transitions focus from preparatory and boardroom work to the act of actually drilling what has the potential to be a high impact well in the life of this Company. I am watching with excitement as TAG takes steps to confirm what it has beneath its feet and begin to build itself into a serious producer.
Part 2: Initial Results from BED1-7
First, let’s revisit the well results. Now, prior to the spudding of their first well BED1-7, TAG had stated publicly (as per my first interview with them) that they had a general target of 100-150 bopd for their vertical re-entry. Fast forward to July 31’s MD&A, and some quiet but critical information was reported: The flow rate for 1-7 eventually stabilised at roughly 140 bopd of 23-degree API oil (a slightly higher API than they were anticipating, mind you).
So, while a headline number of 140 bopd isn’t going to drive a lot of chatter, it represents an important proof-of-concept confirmation moment for TAG where results were on the positive side of hoped outcomes.
That stabilised production rate for 1-7 also bodes well for the success of TAG’s second T100 well that’s just been spud. Extrapolated daily production targets see numbers ranging from 1000-1500 as potential outcomes, depending of course on a whole host of variables.
That number, if TAG is indeed successful, might be the headline grabbing number that sees the market start to give TAG more credit for what it is building. There’s always risk of course – even this high-data horizon isn’t a geological certainty – but all things considered, I like TAG’s odds. From my perspective, all available data points to large potential for future success
.
Part 3: Corporate Update Webinar
On July 6th, TAG held a corporate webinar with the C-Suite present to discuss and take questions. Here are my notes in roughly chronological order: (link here: https://t.co/JLJ8qqE54r)
2024 goal as per – ~3-4 horizontal wells
Vertical Re-entry: 110 tonnes slick water & natural sand frac used in vertical reentry well
Electric submersible pump stabilising around 140 bopd in vertical well
1000-1500 bopd potential expectation from T100
OOIP, East Central block: 178mmbo; Recoverable 15%, or 27mmbo
These first 2 wells may help them to potentially upgrade resources to reserves.
20 IDed development wells, but there are plans to extend the 20 well plan to explore and potentially 350mm+ OOIP barrels can be added around the rest of the concession.
Stated desire to add “one or more blocks” in the area.
T100: # of stages: 25-35 stages of fracs
30 – 60 tons per stage. = 1000-1800 tons of fraccing sand, ~9-16X the amount used in their vertical well.
Obviously lots to talk about here:
For one thing, an additional potential 4-5 wells flowing and producing cash in the next 12 months is awfully enticing. TAG’s cash flow could potentially increase significantly as these wells come online. Other Egyptian producers in the region see healthy $30+ fcf/barrel at $80ish Brent, so there is a fairly well-established sense of what TAG’s economics will be, setting aside the risk of cost overruns. The simple fact is that TAG is not that far off from meaningful cash flow and production (and revaluation) if things go according to plan. Check the charts below for a sense of the value at play here.
The potential upgrade to reserves will also of course improve their $/barrel valuations the market will offer as well. Ultimately there is lots to like in the short term from a valuation rerating perspective here.
Note how their frac stage plans have also changed since their vertical well was completed and data collected. 10-15 fracs are now 25-30. With more individual fracs, you wonder if the rocks need a little more work to them to get them to flow. Or, on the flipside, maybe TAG is optimistic they can extract more oil from more tightly-spaced fracs. Or maybe both. Production results and decline rates will of course ultimately tell the tale. Notably, even if results end up on the weaker side of projections from their vertical well, there remains upside from here.
Regardless, the team sounded firmly focused on development into the future, with repeated discussion of future events and plans. Again, this bodes well for where this company sees itself in 1, 3, or 5 years. Given management, I am inclined to believe them.
Part 4: The Financing
The recently closed financing is also noteworthy. Announced and quickly raised from $10 to $11.7M, the financing was set at about a 12% discount to current SP when announced. Important, though, is the fact that it was done with no warrant, which is an obvious sign of strength. The financing amounts to about 11% dilution for the pro forma share count. TAG reported $19.5M in cash as of YE March 31, so take off a couple million in expenses since then to get to today, and after this financing there will be something to the tune of roughly $25-$27M CAD in the kitty.
According to the MD&A:
“The net proceeds of the Offering will be used to accelerate a multi-well horizontal drilling program of the Abu Roash “F” reservoir in the Badr Oil Field, … pursue potential strategic acquisition opportunities in Egypt and the broader Middle East and North Africa region, and for general working capital purposes.”
So it seems pretty clear that this cash looks to be of strategic use to accelerate the process of securing accretive value for TAG. It could come in the form of further acquisitions by TAG – something in TAG’s current neighbourhood would certainly perk my ears. But if TAG were to secure another rig or otherwise confirm further, faster drilling, that would just gets the cash flow generating all the more quickly. Regardless of what it ends up used for, I know I will be keenly waiting for more development on this front.
Part 5: What’s Next
August has been a bit of a transition month for TAG – financing closed, first hz well spud – and as the dilution is absorbed and initial results march ever closer, I imagine some zip will begin to flow back into this story for the market. Initial production rates – maybe in November? – will make for a potentially exciting end of year. TAG has also of course discussed the potential of adding acreage before end of year.
TAG really is in a sweet spot for people new to the story (or people, like me, still adding). A lot of risk has been shed from TAG, but it still hasn’t really grabbed the market’s attention. Add on some temporary downward pressure from the financing and right now could be a perfectly-timed entry with a company-defining well in progress, results expected before end of year, and plans – and the cash – for further growth.
TAG has quietly derisked its way all the way up to initial production (!) while still trading at just a small fraction of its unrisked NPV (as per the charts above and below). Eventually the market will catch up to this story if TAG has what they think they do, it is just a matter of when. Those hz well results in just a few short months time might be exactly what current investors of TAG are waiting for. In the meantime, my first buy for TAO was at $0.42 and I am still chipping away. And like I said at the beginning here: I like my odds.
The below charts are from my previous article on TAG. The $10/barrel number comes from recent heavy oil M&A - source in my original article.
