Tap Oil's trifecta
Recommendation
After the sale of its share in the Finucane oilfield and the proposed sale of the Zola gas discovery, Tap Oil is also now selling its stake in the Harriet Joint Venture (HJV), an oil and gas operation in Western Australia. Such a rapid turnover of deals makes Tap look like an asset flipper, but it is anything but.
The company mounted a compelling case for each sale. Hope and hurt at Tap Oil on 02 Nov 11 (Speculative Buy – $0.72) explained how the Zola gas discovery was larger than expected and came with huge capital commitments. Instead of funding a project that may take a decade to develop, Tap sold out, realising less value but freeing capital for emerging opportunities (of which more later).
Key Points
- Selling third asset in four months but each with a compelling case
- Tallaganda could be worth 15-50 cents a share
- Downgrading to Hold
The case for selling Finucane was equally strong. Tap would have incurred tolling fees to process oil that were so high returns would have been close to zero. As explained on 18 Jan 12 (Speculative Buy – $0.62), Tap sold Finucane to Santos, the infrastructure owners, extracting a price of 9 cents per share—well within our estimate of fair value.
The latest deal is the most surprising. Tap will sell its 12.2% stake in the HJV for $10m to partner Apache, one of the smartest dealmakers in the industry. Does this sale make sense, too?
There are a couple of reasons why it might. First, the sale removes the threat of litigation hanging over the company (see Tap’s dance turns to funk on 1 Sep 10 (Hold – $0.93)). Management time, said chief executive Troy Hayden, was being eaten by legal rumblings rather than exploration and development. Although the probability of a significant loss was small, legal action could have lasted years. The sale eliminates this risk.
Second, HJV was approaching the end of its productive life. At closure, Tap would be liable for the $30m cost of closing the facility. Like the threat of legal action, that liability is now gone. The sale price, equating to just 4 cents per share, is well below our assessment from 2 Nov 11 of 8-10 cents per share.
It does, however, spare Tap from outlaying cash on a waning asset. Capital released from HJV can now be better employed. Once again, Tap’s turn as dealmaker has delivered, although that has come at the expense of a cheap sale.
The bad news
A risk with the sale is that, for the first time in living memory, Tap is without any producing oil reserves. It will continue to generate revenue of $30m a year from contracted gas sales up to 2016, but its largest producing asset has now gone.
It’s hardly a great loss. New production from the Thai-based Manora oilfields will begin in 2014. Most crucially, Tap can now focus on exciting new developments.
The WA-351-P permit is finally being drilled, targeting a prospect known as Tallaganda, one of the most anticipated wells in the region. The pre-drill data is excellent, operator BHP Billiton is well credentialled and Tap won’t pay a cent for the drilling. With a probability of success of about 60%, a discovery at Tallaganda would be worth between 15-50 cents per share.
We’ll report results from Tallaganda as they arrive but anticipation and approval has sent the company’s share price soaring—it’s up 27% since 18 Jan 12 (Speculative Buy – $0.62). For the time being, we’re downgrading to HOLD.
Note: The Growth portfolio owns shares in Tap Oil.