The Reason Taipan Will Succeed is EXPERIENCED MANAGEMENT.
Taipan Resources: An Oil Explorer Creating Value Through "Solid Science"
Feb. 19, 2014 11:11 AM ET | About: TAIPF
Disclosure: I am long TAIPF. (More...)
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Taipan Resources (OTC:TAIPF) is a junior oil explorer operating in Kenya. The company's management has done an outstanding job positioning the company for success as it embarks on its exploration drilling program this year. Before we get into the detail of this second follow up article on the company, readers can read our first two articles introducing the company to Seeking Alpha subscribers and readers here and here. In the first article we gave an overview of Taipan. In the second article, we explained how micro-cap oil explorers like Taipan Resources have the potential for their share price to increase by multiples in the time frame leading up to the commencement of the company's exploration drilling program.
In this third article we will be discussing the progress the company's CEO Max Birley is having with respect to positioning the company for success ahead of the commencement of the long awaited drilling program.
Quality Seismic is a highly important ingredient
In January 2013, Max Birley, CEO of Taipan Resources, sat down in a hotel in Nairobi Kenya and gave an interview with OilPrice.com. The standard questions were asked, including: "What makes you come to Kenya, how do you find working with the Ministry?" About three-quarters through the interview the interviewer asked about Birley's plans for the Taipan-operated Block 2B. Max broke from the 'broad-brush' protocol and began detailing a geological plan that would change the fortunes of the small oil explorer in the year ahead.
"We will be acquiring world class seismic data with an extremely high fold in Block 2B. We may record data with fold as high as 540 (other operators in Kenya usually only record at 60 fold). We will do this so that we get excellent signal to noise ratio and seismic data improvement. This will then enable us to predict with some certainty the areas that have high shale to sand ratios. This in turn will indicate where the Tertiary lakes sediments were deposited. This will dramatically increase the chances of drilling a successful oil well."
For the majority of readers and the OilPrice interviewer, Max had just embarked on a level of detail probably best quarantined at the geological society of London. For Max, it was the only way he knew - the foundation of the company was going to be on solid science. Roll on two months and Max had ARKeX shooting an aerial 12,173 kilometre FTG (Full Tensor Gravity) survey over Block 2B. The FTG proved Max's theory that the Lagh-Bogal bounding fault running through Block 2B had the required rugosity to have some potential big oil reservoirs sealed in against it. The seismic, completed by BGP China, was the first ever 540-fold seismic to be acquired in Kenya. Geochemical studies then found good evidence that the source rocks that generated the seven discoveries in the Lokichar Basin are of broadly the equivalent age and type to source rocks found in Block 2B. Geochemical modeling indicated that these same source horizons will likely be present and mature for oil around the many drillable structures adjacent to the main basin-bounding fault on Block 2B.
Attracting quality exploration partners has been crucial
Having completed the science, Max needed to turn his attention to the peer review. He knew it all would be in vain if he could not convince his peers likewise. The third party verification of his theories materialized on October 3rd last year, when the $2 billion dollar Premier Oil Plc (PMO.L) farmed into 55% of the Block in exchange for paying for a $29.5 million dollar exploration programme which involved drilling the Pearl-1 exploration well. Curiously on the eve of the farm-in, Paul Logan, the former oil geologist at Heritage Oil ,who made multi-billion barrel discoveries in similarly aged Tertiary basins in Uganda was in Max's words, "attracted to Taipan", so whatever Premier saw in the seismic, Paul Logan saw it too.
Resource estimate has increased by nearly 400%
Last Thursday 13th February, Sproule consultants announced a spectacular 388% increase in the mean gross prospective resource on Block 2B to 1.6 billion barrels. It's quite an increase from the previous 387 mmbbl estimate which at the time, gave no allowance for the Tertiary -page 58 of the previous report read "No estimates of prospective resources were made for the Tertiary sandstones". The saying "What a difference a day makes" can be tweaked slightly for Taipan by substituting "day" with "540-fold seismic survey" as again, whatever Premier and Paul Logan saw in the seismic, Sproule are seeing the same potential - they actually have a higher mean estimate for Pearl at 251 mmbbl than the Taipan management at 200 mmbbl. So does it mean that the Taipan Multi-Bagging-potential we talked about in our previous article is a slam dunk? Absolutely not, exploration is inherently risky and not for the faint-hearted, but the more quality shots you have, the more that exploration risk is mitigated. On the October 28th conference call, Max Birley talked statistics:
"We've proven that we can do this, and we want to roll this model out again. And over the next two to three years, we want to get the company exposed to at least five exploration wells, because this is a statistical game, and we need to have the pipe full of exploration targets."
De-risking of Block 1 now the priority
This to us highlights the importance of Taipan's other Block in Kenya, Block 1. Taipan has a 20% interest in the Block and it is operated by multi billion market cap Afren Plc (OTC:AFRNY). It is being drilled in Quarter 3 this year. The main reason why Taipan's market cap is only $30 million as opposed to its risked NPV for the Pearl prospect on Block 2B plus the Khorof prospect on Block 1 of a combined $220 M, is that the market is wondering where they will find the cash for Block 1. Taipan will need to raise about $6 million to cover the cost of drilling Block 1. For shareholders the most favourable scenario is to try farm out Block 2B a little further, this time for cash (as Premier are already paying for the drilling) and use the cash to participate in Block 1. Another option is to raise cash through a private placement which would be short term pain, but.... "the importance of getting a portfolio of drill opportunities together to reduce the overall risk, cannot be understated and that's why the second drill on Block 1 is also important."
The chance of an oil discovery is improving
The odds say that one in four or five of these 'wildcat' drills will work, and the more different sandstone horizons you can target in each drill, the more the risk reduces further. The un-risked potential for Pearl-1 with a 45% stake is $1 billion or $667 million with a 30% stake, but this has no bearing on the current share price - the former is a multiple of 33 and the latter is a multiple of 22 from the current market cap of $30 million. But what will have a big influence on the share price is Taipan securing the funding (through farm out or cash raising) to participate in its second chance at the oil in Quarter 3 this year, on Block 1. The more chances, the better the probability.
Risks to the investment
Besides the risks articulated in the first two articles, the main risk for Taipan is that they hit dry wells in Q3 which would result in a big decrease in share price. Geopolitical tensions are also a concern although the Kenyan authorities have proved capable to date in dealing with disputes, especially in Turkana where seven discoveries have been made to date. There is also a risk of dilution if the company chooses to raise additional funds on the capital markets through an equity issue, rather than opt for the further farm down route.
Conclusion
Taipan is ticking off the catalysts one by one. They are doing the science on the ground, promoting it to farminees, getting carried for drilling and getting third party verification from numerous sources (Premier - Paul Logan -Sproule). The share price rose 82% from 25c to 47c in four days following the Thursday 13th February Sproule report. But even at this level, it is still a multiple of seven times off its risked net present value and about 40 times off its unrisked net present value (in the event of discoveries of the expected size). Risked NPV, although arbitrary, generally means the value of the assets even after the chance of failure is added in.
Yes it is risky, but how risky is it to bet on the team, to bet on Max Birley and Paul Logan and their proven formula for adding value through working up early stage exploration blocks and farming them out, while protecting shareholders by maintaining operatorship? They've already farmed out twice to Afren and Premier and have stated their desire to repeat the formula in other early stage exploration acreages. Many exploration companies have started on team-based-pre-money valuations of $50 million or more, never mind having any acreages to back it up, while Taipan stands at $30 million with two Kenyan drills this Quarter 3 and a proven team that can get the job done on the ground and execute farm ins when needed. And the heading of our article? It comes from a recent Proactive Investors interview with Birley on YouTube where the interviewer asks him, "How do you tell investors oil discoveries could happen?" To which the CEO replies, "Our approach is based on solid science." What a difference a 540 fold seismic survey makes!
Additional disclosure: This article was written in conjunction with Robert Whelan of Resource HQ
