Tap Oil

Tap Oil’s share price took a bath last week, falling 10% the day joint venture partner BHP Billiton announced a gas discovery in the hotly anticipated Tallaganda well. Early indications suggest that, although gas is present, the reservoir may not produce commercial rates of flow.

The Carnarvon Basin is notorious for reservoir complexity; rocks beneath the surface twist and deform to create complex structures that can affect flow rates crucial to commercial production. Tap and BHP have punched a hole 4km through the surface of the earth. Crowning it with production and processing hardware could cost up to $100m, an endeavour only possible if enough oil and gas can be extracted to pay for it. That is what the joint venture partners now have to determine.

As evidenced by Tap’s share price, the early signs aren’t good, but there is enough promise for BHP to spend millions of dollars on further analysis. That work could take several months and fleeing speculative cash is forcing the share price lower. Success at Tallaganda could be worth between 15-50 cents per share to Tap and the fact that gas was confirmed bodes well for regional exploration. But the share price fall doesn’t automatically trigger an upgrade. We're happy to wait for the stock to fall further below our buy price before acting. Our valuation, outlined in Hope and hurt at Tap Oil on 2 Nov 11 (Speculative Buy - $0.72), still stands and so does the recommendation. HOLD. 

Note: The Growth portfolio owns shares in Tap Oil.