Tap Oil starts production

No longer can Tap Oil be called an oil business that produces no oil. With the first two wells sunk at the company's Manora oil project, off the coast of Thailand, Tap is finally a producer. Although production is currently just 9,000 barrels a day, it is expected to ramp up to 15,000 barrels a day by next year, of which 4,500 barrels a day will accrue to Tap.

It is a shame that the project was delayed six months. If it had started on time, Tap could have generated a bonanza of cash flow and rapidly repaid debt with oil prices above US$100 a barrel. At US$80 a barrel, Tap should still generate operating cash flow of about $35m a year but no excess profit. The project should remain profitable at prices above US$50 a barrel but returns decline with oil prices.

Along with existing gas contracts, we estimate Tap should generate operating profits of about $40m a year for the next two years when its gas contracts expire. Following that, all revenues will come from Manora. The company also has stakes in discovered gas fields Zola and Tallaganda, both off the coast of Western Australia, that it plans to sell. Neither will be developed for at least a decade so selling now is the best plan for a business this size.  

With $70m of franking credits sitting on Tap's balance sheet, management will surely be tempted to pay a dividend to long suffering shareholders, although we would prefer debt repayments to take priority. Lower oil prices have crimped returns at Manora and, although our investment case is working nicely, we're lowering our buy price slightly to reflect lower expected profits. The share price has fallen 19% since Tap Oil: Interim result 2014 and we're sticking with SPECULATIVE BUY.