Tap Oil
Recommendation
Tap Oil has confirmed it is selling the Zola and Tallaganda discoveries, both off the coast of Western Australia. An internal sales process is underway and expected to take six months to complete. Zola has long been targeted for sale but little news from Tallaganda has been released since drilling earlier in the year.
BHP Billiton, the operator at Tallaganda, has been investigating core samples taken from the exploration well and is showing growing confidence about its prospects; it has named Tallaganda its most significant discovery this year. Although flow rates are still unknown and early data suggest less than ideal reservoir conditions, that BHP is excited about the prospect bodes well for Tap as it attempts to sell the asset.
Both Zola and Tallaganda are significant discoveries and are likely to be fed into regional LNG projects at some stage. For a minnow like Tap, the long delay (it could take a decade to develop these fields) and high capital requirements make the choice to sell now a sensible decision, saving shareholders from dilution and uncertainty. Significantly, Tap holds more than $100m in cash and no debt so it can wait patiently for the right price. It is no forced seller.
We’ve estimated that Zola is worth about 20c per share to Tap. Without production data or an indication of resource size, it’s impossible to guess what Tallaganda might be worth. But a large reservoir has been mapped and it could be at least as large as Zola. Our estimate of value for Tap, outlined in Tap Oil upgraded on 18 May 12 (Speculative Buy – $0.645) may yet prove conservative. Tap’s share price has increased 18% since 03 Sep 12 (Speculative Buy – $0.68) and it’s on the cusp on being downgraded. For now, we’re sticking with SPECULATIVE BUY.
Note: The Growth portfolio owns shares in Tap Oil.