Last week Tap Oil announced that it had paid US$15.75m to buy out partner Roc Oil?s 20% interest in the highly anticipated WA-351-P exploration permit in the Carnarvon Basin.
This is a curious transaction. It?s surprising that Roc so easily parted with what we consider to be a jewel in its exploration crown. But as Roc transforms for the worse, Tap appears to be changing for the better.
Want to know more? For more information about Tap Oil, we recommend reading Tap Oil begins to flow and Tap Oil swings at Northern Gulf.
This is a necessarily bold move for Tap, which must grow a reserve base that has been bleeding slowly for years, and that means taking intelligent risks.
As far as drilling gambles go, WA-351-P is a particularly good one. Detailed, high quality 3D seismic surveys have been completed and show several enticing structures that, in our opinion, appear well worth the risk of drilling.
The permit has the potential to hold recoverable gas of between 2-3 trillion cubic feet, and success would be worth several dollars per share to Tap.
Just to the north of WA-351-P, US energy firm Hess Corporation has had sensational success from rocks of similar age, making 13 discoveries from 16 holes.
The permit operator, BHP Billiton, holds 55% of the target with Tap owning the remaining 45%. The purchase was funded from Tap?s cash reserves, and the company remains debt free.
Recent purchases of oil properties in Ghana, Thailand and now this large stake in the Carnarvon Basin have given Tap its best exploration prospects for years. Tap continues to generate consistent, low risk cash from gas sales and drilling in these three frontier geographies seems a sensible bet with that money.
Recommendation guide Speculative Buy Up to $0.85
Hold Up to $1.20
Sell Above $1.20
Though this is a highly speculative situation dependent on exploration success, at current prices the risk-reward ratio remains attractive. We estimate Tap?s existing production and cash is worth about $0.80 per share, so with the share price down marginally since 4 Nov 10 (Speculative Buy - $0.81), Tap Oil remains an attractive SPECULATIVE BUY for 2% of a risk tolerant portfolio.
TAP Price at posting:
78.0¢ Sentiment: Buy Disclosure: Held
