macquarie report - $1.45 price target

Tap Oil Limited

Tapping in to Thailand

Event

* Tap is looking to raise up to A$82m via an institutional placement and entitlement offer to fund the acquisition of 75% of private company Northern Gulf Petroleum. We estimate this deal will add 9% to our Tap NAV.

Impact

* What's Tap buying?: Tap is effectively buying a 30% stake in the recent Manora oil discovery offshore Thailand, which is estimated to contain 24mbbls (in shallow water, where development costs should be reasonable). Tap will also gain 30% of the un-appraised Rossukon discovery, where resource estimates have yet to be defined but flow rates suggest a less exciting development. Finally Tap will get exposure to near-term exploration targeting a net 60mmbbl of medium-to-high risk prospects.

* What's Tap paying? : Tap is making up-front payments of U$25m in cash and U$12.5m in shares. On top of this Tap is set to make several milestone payments contingent on further appraisal success and also pay an estimated U$60m for its share of field development costs. Ascribing no value to Rossukon or the exploration, these numbers imply an acquisition multiple of U$5.2/bbl for the initial resource, U$11.4/bbl for undeveloped 2P reserves or U$19.7/bbl developed 2P reserves. This compares to only U$11.5/bbl paid last year for largely developed reserves in the same region; however, that asset did not offer the exploration and appraisal upside of Tap's new acreage, and the price was also likely to have been influenced by the GFC.

* What's it worth? : We estimate that this deal adds 9% to our Tap NAV, taking our overall valuation to A$1.57/sh. That said this uplift is largely due to our long-term oil price assumption of U$85/bbl, which presumably is higher than that used by Tap in assessing this deal. Conversely we estimate that this deal is NAV neutral at an oil price of ~U$65/bbl, suggesting that Tap broadly paid fair value, which is in keeping with the competitive bid process (we understand Tap out bid 5 or 6 other potential suitors, suggesting a quality asset but one which is unlikely to have been sold at a discount).

Earnings and target price revision

* We have downgraded EPS by 16% in FY11 to reflect the dilution from the capital raising. However our NAV has increased by 9% to A$1.57/sh.

Price catalyst

* 12-month price target: A$ 1.45 based on a DCF methodology.

* Catalyst: Aside from the new Thailand drilling, the Tap share price will be driven by news from the important Zola-1 well, which is due to spud in November, and the ongoing testing of the Markisa-1 discovery in Brunei.

Action and recommendation

* Maintain Outperform rating and A$1.45 price target: Overall this looks like a sensible deal. Specifically it is in line with Tap's stated strategy, adds development assets to the portfolio that were arguably lacking previously, aligns Tap with an experienced operator in the region, offers near-term upside potential via exploration and appraisal drilling and is NAV accretive under our oil price forecasts.

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