tap commentary

Stocks in Detail | High Stakes
Tap Oil swings at Northern Gulf
18 Oct 10 | Issue 307

By Gaurav Sodhi
Tap has been shopping for assets and to the market for fresh capital. Gaurav Sodhi considers the latest deal.


Key points
Tap Oil is raising money to acquire 75% of an unlisted exploration company



We recommend taking up your entitlement in the issue



A buying opportunity may well emerge


In Tap Oil begins to flow, we suggested that Tap Oil was perhaps too conservative. The company has responded with one of its most assertive actions in years, making an offer for 75% of unlisted explorer Northern Gulf Petroleum.


The technical information we need to properly assess the deal is yet to be released but the intention is clear; Tap is no longer an explorer of modest ambition. It now aims to be more silverback than chimp.


Northern Gulf?s most attractive asset is a 40% stake in Manora, a recently discovered onshore oil field in Thailand thought to contain about 24m barrels of oil (emphasis on ?thought?). Northern Gulf also has stakes in other large, advanced Thai exploration blocks waiting to be drilled. Tap expects to increase reserves by a factor of three within 12 months and there could be up to 200m barrels of oil in the new tenements. At this stage, though, it has bought potential rather than reserves.


Tap will pay US$25m in cash and issue US$12.5m of new shares at 95c to the seller, leaving it it with about 8% of the company. A final tranche depends on future reserves but the maximum Tap is up for is an additional US$37m.


Flush with cash, steady production and an attractive array of opportunities, this looks to be a good time for Tap to be purchasing assets; it has also made new gambits in Ghana.


New raising

Accompanying the acquisition will be a rare capital raising. Management must really like these assets because the last time Tap put its hand out for shareholder funds, the scariest letters in the English language were ?Y2K?.


The retail component of the raising will be a non-renounceable 1-for-2 rights issue at 81 cents, meaning shareholders can buy an additional share for every two they already hold, at 81c each. The retail offer opens on the 21st of October with Tap?s largest shareholder already indicating it will take up its entitlement.


The money raised by the share issue?about $82m all up?will be used to fund US$62m of pre-production drilling and top up Tap?s cash position; a wise move as it still faces the prospect of paying out perhaps $25m in legal damages (discussed in Tap?s dance turns to funk). The dilution is significant but, if there is as much oil as the company is expecting, so is the opportunity.

Even if we ascribe no value at all to the newly acquired assets and account for the dilution of the offer, we think Tap is worth at least 80c a share. That makes a powerful case for existing shareholders to take up their entitlement at 81c. Is there an opportunity for those not yet aboard? Almost. Tap?s share price has fallen almost 9% since 14 Oct 10 (Hold - $0.94). With a little luck and a little lower price, we may get our chance. For now, HOLD.