Tap Oil: Interim result 2013

As has been the case in recent years, Tap Oil’s interim result was a modest and profit free affair. Revenue fell 44% to $14m and, after including $20m in exploration write-offs, the company reported a net loss of $13.6m, compared to a profit of $3.1m last year.

A look at this result in isolation may provoke mild or even severe panic. Tap produced no oil or gas; revenues fell wildly; gross profits were wee; and a noticeable net loss was recorded. Writing the company off based on those facts, however, would be a mistake. Today’s dire sounding result is an opportunity for patient investors, not a reason to fret.

The company’s sole source of revenue at the moment is a small amount of contracted gas, from which it generates about $15m in gross profit, enough to pay corporate costs. Tap also holds net cash of $75m, with which it is developing projects that could contribute substantial cash flow.

The most important of these is the Manora oil field, offshore Thailand, which should start production next year, with Tap’s 30% stake worth about 5,000 barrels of oil equivalent per day (boepd). With a production life of 11 years, Tap’s position as a production free oil producer will change spectacularly.

Exploration success

Then there are assets held but not yet monetised: the Tallaganda and Zola gas discoveries off the Western Australian coast are both likely to be sold. Zola is still being tested and, with recent exploration success, will grow larger before being offloaded. Zola and Tallaganda could bring $30–50m in a sale.

Tap will soon draw on a $50m debt facility to complete financing for Manora which, like almost all new projects, has run over budget by $10m. That cost overrun will be funded from cash reserves and has prompted a small reduction in our recommendation guide. The company will have a small debt position by year end but, with cash flows from Manora started late next year, it should be quickly repaid.

The company is a splendid example of why investment by numbers alone is unwise. Looking past the interim result reveals the potential on offer. Manora alone is likely worth about 50 cents per share; asset sales, which management have already committed to, could generate a further 50 cents per share. Subtracting debt and corporate costs suggests Tap has an asset value of about 80 cents per share, which makes today’s share price an attractive proposition, albeit one dependent on the successful development of Manora next year.

The share price reflects none of this, having fallen 30% since 07 Mar 13 (Speculative Buy – $0.66). SPECULATIVE BUY.

Note: Our model Growth portfolio owns shares in Tap Oil.