Company: Tap Oil

Stock code: TAP

Share Price: $0.635 (as at close Friday 14th October 2011)

Market Cap: $153,000,000

Broker Calls

Macquarie – BUY, Price Target $1.60

Patersons – BUY, Price Target $1.45

InvestorFirst Securities – Low Risk BUY, Price Target $1.14 (short term), $1.50-$2.00 (longer term)

 

Chart: Share price over the year versus ASX200 (XJO)

Stock code: TAP

Charts: Tap Oil Limited

More news: Tap Oil Limited

Tap Oil (TAP) has had a difficult run. Despite all the hype, the oil & gas explorer simply hasn’t been able to deliver. Over the past five years Tap has spent hundreds of millions of dollars in an attempt to increase reserves – but came up empty. This has left investors frustrated, with the company’s share price sagging while other companies have soared. The table below highlights how it has performed compared to its peers.

Number Company Code  Share Price 12-month movement
 1 Neon Energy NEN $0.32 110%
 2 Aurora Oil and Gas AUT $2.75 96%
 3 Adelaide Energy ADE $0.13 24%
 4 Texon Petroleum TXN $0.68 8%
 5 Cooper Energy COE $0.44 -4%
 6 Oil Search OSH $5.97 -7%
 7 ROC Oil Company ROC $0.32 -26%
 8 Central Petroleum CTP $0.05 -27%
 9 AWE AWE $1.15 -28%
 10 Tap Oil TAP $0.64 -33%
 11 Eureka Energy EKA $0.18 -40%
 12 Horizon Oil HZN $0.19 -44%
   ASX 200 Energy XEJ  13,519.3 -13%

 

While it’s true that only four companies boast gains and half of the companies sport losses of more than 25%, it hasn’t exactly been a stellar year for investors – the All Ords is down 10% and the ASX200 Energy index is down 13% over the past year. Still, half of the companies beat the index, but whichever way you look at it, 10th out of 12 oil companies isn’t great going.

Despite the rocky past the future may be looking brighter for this oil minnow with two back-to-back discoveries – the massive Zola gas find in the Carnarvon basin (near Gorgon) where it has a 10% stake, and the more modest find at the Finucane South oil field. The company is also undertaking further gas exploration off the coast of WA as well as oil stgelopment and exploration in Ghana and Thailand.

Description

Tap Oil is an independent oil and gas exploration and production company, headquartered in Perth, WA, with a broad portfolio of interests in Australia, South East Asia and Africa. The asset portfolio includes three production based assets and several high impact exploration and stgelopment projects.

As is to be expected, these assets are at different stages of stgelopment:

Source: “Near Term Events To Provide Catalysts for Growth”, Tap Oil Investor Presentation, October 3rd 2011

New management is aggressively seeking opportunities to grow the company and increase the share price, with CEO Troy Hayden recently announcing to the market that the company’s Zola stake was up for sale after the independent resource evaluation on Zola indicated even higher numbers that TAP had predicted. “The RPS report on the Greater Zola Structure confirms resource potential significantly greater than the upper end of our pre-drill estimate of 1-2 Tcf. We will now work through various options for extracting the most value for Tap shareholders from the Zola asset,” he said.

According to the company it has recently received several enquiries from large overseas industry players about Tap’s plans for Zola. And there are certainly some big players around. Apart from fellow joint partners Santos, Apache and Nippon Oil Exploration, Chevron is also a player in the area. Chevron is stgeloping the nearby Wheatstone gas field (Apache is also a JV in that project) where it has just sanctioned stgelopment of a two-train 8.9 million tonne a year LNG operation.

“It is appropriate for a company of Tap’s size and funding capabilities to consider monetising an asset like Zola prior to the incurrence of the large scale LNG stgelopment costs which are likely required to bring the asset into production,” Tap said in its investor update earlier this month. “Tap is confident that it can maximise the value of Zola by monetising the asset on attractive terms at the right time.”

Brokers are certainly sitting up and taking notice, with Macquarie and Patersons both placing buys and price targets that are a significant premium to the current share price. Macquarie has a price target of $1.60, a 150% premium to the current share price, while Patersons has a $1.45 target, a 127% premium.

Financials

 

2009A 2010A 2011F*

 Sales Revenue ($m)

 58.0 71.4  70.8

 EBITDA ($m)

 42.9 -38.2 20.8

 EBIT ($m)

 20.22 -65.9  3.3

 Reported NPAT ($m)

 6.7 -61.4  2.0

 Price/Earnings

 8.3 48.2 98.0

 Dividend Yield (%)

 0 0 0

 ROE (%)

 8.5  0.9

 Net Debt/Equity (%)

 –

*Forecasts from Patersons Securities, from Patersons Oil & Gas Review May 2011

Link to company Earnings Report: Half Year Earnings Report – to June 30th, 2011

Oil & gas prices

Forecasting commodity prices can be fraught with danger at the best of times. So in tumultuous times there’s no shortage of differing views as to which direction a particular commodity may move. Crude oil is a case in point. While one analyst predicts price increases, another will forecast falls. And a major global event will push the crude oil price one way or the other.

From a demand and supply point of view, George Sakellariou, of Investorfirst Securities, is bullish about the crude oil price outlook, predicting a 20 per cent rise within the next year and up to 50 per cent within two years. Sakellariou says Chinese oil demand increased by about 1.2 million barrels a day in the 2011 first quarter compared to the same quarter last year. He says India’s oil demand is also expected to grow by 200,000 barrels a day this year.

Goldman Sachs senior commodities analyst Allison Nathan is also bullish on oil, saying that the bank expects Brent Crude to reach $130 within the next year. At a press briefing she said that the growth in stgeloped economies is likely to be weak, however emerging economies will make up for any weakness in demand.

Nathan sees strong growth in China and the BRICS (Brazil, Russia, India, China and South Africa), which will be aided further by the decline in production from non-OPEC countries. Gas prices appear to have a weaker outlook, although demand from Asia is expected to continue to 2020 and beyond.

Over the past year oil prices have increased in Australian dollar terms despite the surging Australian dollar.

Source: IMF

Meanwhile gas prices have been relatively stable.

Source: IMF

Analysts’ views

Macquarie reiterated its buy recommendation and increased its price target to $1.60 this week following the independent confirmation (mentioned earlier) of the size of the Zola gas discovery, in which TAP has a 10% stake.

Meanwhile George Sakellariou of Investorfirst Securities also has a buy on TAP. Sakellariou has been keep on Tap for some time, seeing it as a low risk buy. “There’s initial upside potential to resistance at $1.14, but a break above this level would suggest a price of between $1.50-to-$2 is achievable over the longer term,” he says.

Patersons is a third broker with not only a buy, but also a healthy price target of $1.45 on the oil explorer. In Patersons Oil and Gas Review in May this year, Patersons said that it liked TAP on the basis that it is a growth stock that is leveraged to funded exploration programs, and is backed by cash and producing assets. “The key challenge for driving success at any oil and gas producer is the ability to provide growth, typically achieved via the early stage entry of prospective acreage, work-up and farmout for a low risk carry through potentially company changing exploration,” it says. “In the previous oil and gas review we highlighted TAP as a key BUY, given its improved portfolio of opportunities and were rewarded with the Zola gas discovery.”

Patersons mentions that TAP is underpinned by $63m in cash, two producing assets plus a lucrative 3rd party gas sales agreement. What’s more, it is leveraged to the ongoing appraisal of the Zola-1 gas discovery plus a maturing and exciting growth portfolio across the Carnarvon Basin, Thailand and Ghana.

“TAP remains one of our key small cap stocks, continuing its successful run in 2011. Recent highlights include the Zola gas discovery, the re-sale of a high value stake in WA-351, completion of 3D across the deepwater of its Ghana exploration acreage and progression of prospects for drilling in WA-351 in late 2011,” it says. 

According to Reuters consensus data among seven analysts covering Tap Oil Limited five have buys and two have holds. There are no sells.

Conclusion

Wallowing near all-time lows that it hit after the GFC, Tap Oil is down. But not out, according to brokers. In fact, recent discoveries mean that it’s well positioned to drag itself out of the slump it has been in, allowing the company to put the last five years behind it. Tap Oil has promised much in the past but hasn’t delivered, due to a mix of poor choices and bad luck. And luck certainly has its part to play in this business where huge investments are made into potential oil and gas fields before knowing whether there’s anything to find. New management, a change in fortune and a bullish outlook for oil all bode well for Tap. Whether it can capitalise on this opportunity or whether it will drop the ball remains to be seen.

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