euroz update

Increase target to 1.42 (they include 10 million liability for Burup fertilisers)due to gas contract changes

I would expect a similar upgratde by Macquarie and Pattersons pushing the price targets to the mid 160s

Tap Oil (TAP $1.14) Buy



Price Target: $1.42/sh



Reason For Update: Company Update



What We Know:

Tap has executed a Petroleum Agreement to explore offshore Ghana.

Tap has restructured its third party gas contracts increasing the NPV (10% nom) of these contracts by $16m to $75m.

Woollybutt is producing at 8,000 bopd following extended planned downtime.



What We Think:

Tap will hold and operate a 36% interest in the Offshore Accra Contract Area in Ghana, West Africa. The permit is on trend with the large Jubilee oil discovery (>1 bn bbls) and has numerous >100 mmbbl oil prospects based on 3D seismic.



We rate Taps Ghana permit as highly attractive exploration acreage with relatively low commitments (seismic + 1 well in 2.5 years, say US$5-10m Tap share). Tap should drill its first well in Ghana in the FY12 - initial wells will likely target proven play types (on trend) in shallow water.



Ghana, like its WA-351P gas permit, is a world class position which will provide Tap with company making opportunities in 2011/12.



Following the restructure of Taps third party gas contracts we have upgraded our NPV and price target by $0.10/sh to $1.42/sh. The restructure infers a new gas sales price received of >$8/mcf vs ~A$7/mcf previously.



The third party gas contracts are a consequence of an option exercised in 2007 by Tap whereby it secured 31 bcf at 2005 prices (A$2-3/mcf) to sell between 2008 and 2016 from the John Brookes JV. Rising WA gas prices have made it a very profitable annuity for Tap.



Woollybutt oil production (Tap 15%) is back to expected levels following the recently completed life extension work we expect Woollybutt will continue to produce until 2013 from its remaining 10 mmbbls.



We are forecasting cash flow of ~$30m will largely fund Taps exploration program this CY.



Investment Case:

Tap is fundamentally undervalued with the potential for large upside from its drilling program.



This CY is shaping up to be a big year for Tap on the exploration and appraisal front with up to 10 high impact wells on the schedule.



A two well program is scheduled to commence in June in Brunei Block M (Tap 39%) aimed at appraising the 8-64 mmbbl (gross recoverable) Belait field. The first well Mawar-1 will target a 9 mmbbl compartment and the second well is currently being chosen. Value potential from 20 mmbbls gross recoverable if successfully appraised is ~$0.50/sh for Tap, with the cost of each well is estimated at $3-4m (Tap share).



The remainder of the drilling program this year (outside WA-351-P and Brunei) will be mostly a mixture of large oil and gas prospects on the North West Shelf, Bass Basin and Philippines. We expect some farm outs will eventuate to give a CY10 exploration budget in the order of our forecast of $35m. We note that most of the drilling activity planned is not commitment driven allowing discretion to fit to its budget.



Tap provides exposure to strong WA gas prices through its resale of gas from the John Brookes JV. This will net Tap ~$20m / yr cash flow for up to 10 years supporting a base load exploration spend.