macquarie report

Tap Oil

Further optionality around WA-351-P

Event

 TAP has exercised its pre-emptive rights over WA-351-P after ROC announced the sale of its 20% interest to WPL for US$15.75m in December 2010. This will see the company?s interest in the block increase to 45%.

Impact

 WPL?s endorsement adds credibility: WPL?s initial interest in the block is a clear endorsement of its prospectivity from arguably one of the most experienced explorers in the Carnarvon Basin. This should provide further creditability to the 2?3tcf of estimated mean recoverable gas from over 10 leads that the JV estimated following recent interpretation of 3D seismic data.

 Logical trade given the high cost of drilling: Given the company?s risk tolerance, we expect that TAP will look to farm-down this large equity interest.

Any success here could see TAP carried through the capital-intensive drilling phase with a 20%+ interest in a transformational gas block. Given the infrastructure being put in place by WPL and Chevron and the increasing competition for third-party gas resources, we suspect TAP will have little trouble on this front.

 Transformational opportunity however drilling some time away: While the work program calls for a commitment well to be drilled prior to 2013, TAP remains confident that a well could be drilled in late-2011. However, given the need to farm down its higher interest and BHP Billiton?s lack of commitment to drill thus far, there could potentially be some slippage to planned drilling schedules.

 Exploration progresses elsewhere in the portfolio: TAP is currently drilling the Zola 1 well in the Carnarvon Basin. Following a delay due to cyclone concerns, operations have continued, with the well 400m from the primary target. The well is targeting risked mean gas resources of 1tcf and could add ~30Acps to our valuation under a success case. TAP has also brought forward the acquisition of a 1,200 sq km. 3D seismic survey in the Accra Block in Ghana will assess additional potential in deeper sections of the Block.

Earnings and target price revision

 We have made minor downgrades to earnings in 2011 and have lowered our NAV by 2% to A$1.56/sh.

Price catalyst

 12-month price target: A$1.50 based on a DCF methodology.

 Catalyst: We expect the Zola-1 exploration well to reach the primary target in the coming weeks.

Action and recommendation

 We maintain an Outperform rating and an A$1.50/sh target. The share price continues to value producing assets, third-party contracts and existing cash and discount near-term growth projects and exploration. Management (under the helm of new CEO Troy Hayden) appears to be increasingly focused on the growth opportunities in the portfolio, including the Manora development in Thailand and the transformational exploration opportunities in offshore Ghana and WA-351-P.