Research Pit

[ariadndndough]

westeffer here is a tidbit of that report on tag oil impressive numbers to say the least




AN INTERVIEW WITH CLIVE STOCKDALE
VP CANACCORD
(As of February 6, 2010)

David Pescod:Clive the last time we spent a lot of time hounding you forinformation, it was about an unconventional gas story-UltraPetroleum-close to a decade ago and who would have thought that wouldhave become a 100 bagger! Any thoughts on that unconventional gas storylooking back and how technology has changed in the last decade?

Clive Stockdale:That technology has evolved is indisputable-with increasing momentumand the sea change that it has brought, not surprisingly, is still ascience not settled-for example the impact medium and long term onnatural gas prices and energy substitution. You mention Ultra Petroleum,and that certainly was an overwhelming introduction to the newpotential of hitherto marginal plays and, just as success, as opposed tofailure, has been said to have many parents, so there have beennumerous claimants to the title "Son of Ultra"

Theconsensus embedded in the market right now is that there is room forall the natural gas. That was the message, more or less, presented tothe U.S. Congress by the Project Coordinator for the proposed AlaskanGas Pipeline and Ziff's recent prediction of 20BCF/day of shale gasproduction in the North American Market ten year's from now wouldsuggest ample room for other sources. I have some nagging reservations,based on maybe being overly impressed by U.S. technical know how, andespecially relating to Western Canadian prices, the proximity of majorEastern shale plays to markets-location is all.

D.P:We are now looking at a play in (of all places) New Zealand and thereare two parts to it. One is a shale play which is unconventional and onewhich is the stuff we kind of know as standard oil and gas that couldgrow. But if you could take a look at that and more importantly, yourtake on the potential for what some suggest is a Bakken look-a-like.

C.S:New Zealand probably doesn't look like the end of the world to theAsian Giants. But, yes, TAG Oil is in the oil and gas business in NewZealand with, broadly speaking, conventional and shale oil and gas playsin the Northern Island.

Inthe west in the Taranaki Basin the Company has a 100% working interestin the Cheal oil pool and it is currently carrying reserves of530,000 barrels to that interest It’s quite a complex play in the sensethat faulting has brought compartmentalization, and that complexity hasbeen absorbed by the Company in the school of hard knocks. It hasexpanded its acreage position from 5800 acres to 16000 acres and, giventhe pool size distribution in the basin, looks for potential reservesnet to the Company of 10 million barrels.

Toelaborate a little, now the Company has a 100% interest at Cheal it ismoving ahead to optimize production from current wells and this couldincrease production to 600bbls/day in the near term without evendrilling a well. Development drilling is aimed at adding two millionbarrels of new reserves and step-out drilling into new fault blockswithin the Cheal mining permit brings substantial upside potential thathas yet to be estimated by the Company or by the Company’s reserveevaluator. The situation is dynamic; a 7910 acre Winchester permit istheir most recent acquisition and here, based on 3D seismic, theyconsider that they have six drill-ready prospects on the west side ofthe permit, and at least that number of leads. In house estimates of thesix-drill ready prospects set a target of 19 million barrels of oil inplace.

Theunconventional play is in the eastern part of the North Island andinvolves source rocks called the Wapaiwa and Whangai shales andanalogies with the Bakken shale can in my opinion trip one up. Some ofthe shales preliminarily look better, some worse since, after all, weare dealing with 2.4 million acres.

D.P:The significance is that little TAG Oil, with only 30 million sharesoutstanding does have 2.4 million acres. And, in Saskatchewan and NorthDakota, if you have a couple of thousand acres, you’re considered lucky.How carried away should one get with all this?

C.S:That’s up to you Dave. Hopefully one can appraise it in the context of arisk investment and attempt the calculation of a risk-reward profile.But, before even doing this it's of some comfort to find that suchspeculation is not confined to the extreme fringe. What piqued myinterest was seeing a European bank investment report evaluating a U.S.senior oil and gas company, specifically concentrating on its stealthyacquisition of North American unconventional oil play acreage, valuingas a base case that acreage at $8.6 billion.

Usingits parameters for TAG resulted in the astronomical figure of well over$100.00 per share. The point is that the rising tide of unconventionalplays is leading to evaluations that were at the extreme risk fringemoving into the main stream. Once again, however, analogies cause moreproblems than they solve, so, while piquing interest, it is nosubstitute for specific information.

D.P:Clive, I realize there are some huge numbers being thrown about bycompanies doing exploration, suggesting that they might have a billionbarrels here or a billion there. But when TAG is suggesting in someresearch reports that they might have up to 12 billion barrels (if notmore) how much credibility should a person give to this?

C.S:TAG has two reports on the East Coast Basin oil and gas potential. Thefirst done by Sproule in March 2008 gives a figure of 1.7 billionbarrels in place, and the analysis identifies 56 leads or prospects-asgrassroots as that. Main target reservoirs cited being Miocenesandstones and Pliocene limestone formations. This is an assessment ofconventional oil and gas potential. The second report, dated September2008, by AJM Petroleum Consultants contains the figure of 12.7 billionbarrels to which you alluded. In fact its best estimate is 12.7 billionbarrels for estimated total original hydrocarbons in place combiningboth shale potentials with -wait for it- a high estimate of 40billionbarrels. This estimate of original oil in place by AJM is based on187,470 acres of the 2.4 million acres. More interesting to me, however,is a second table of estimates "Prospective Hydrocarbons in Place-FreeHydrocarbons" which has a mean estimate of 6.1 billion barrels going to ahigh figure of 13.3 billion barrels. That mean figure, employing thebank technique referred to above, i.e. a recovery rate of 2.2% and $6.24a barrel would give a mean figure of $28.00 per share. However, theconsultants give further direction by estimating recoverablehydrocarbons which, on the mean instance, they assess at 182 millionbarrels-value that at $6.24 per barrel and then the figure becomes $40per share.

Whatwould carried away mean? Going to the best estimate of 12 billion couldbe one avenue or maybe to the 40 billion! Changing the recovery rate onthe eastern conventional plays is another way to go. Additionally,using the high estimate for recoverable hydrocarbons on the shale playcould increase the upside to $60 per share. And, of course, we could gowith the bank approach.

D.P:One of the most important things here is the timing of this play andit’s unfortunate that they won’t be doing their vertical wells until thesummer and doing the all-important horizontals until the third quarterof this year and even then, we know nothing in the oil and gas businesshappens on time. This is disappointing, isn’t it?

C.S:I don't think disappointment is warranted. Only bad weather is delayingthe start of a three well shallow oil well program on the easternacreage and early March should see the beginning of optimization work onCheal targeting three wells initially. Success at the shallow 250 metercored drilling will not result in substantial production increases.These wells are following up on a 100 year old discovery where a 600’well recorded production of 20 to 50 bbls/day of 50 API sweet oil. Thisoil was tested and confirmed as having the underlying Whangai andWaipawa shales as the source. The three shallow cored wells will provideTAG with information to determine if there are economics to develop ashallow oil play and on a success case, TAG will plan a multi-wellfollow-up program to establish commercial production in the Basin whichwill significantly enhance the basin’s profile and prospectivity.Production is anticipated to be of the order of 20 to 50 barrels per dayper well, but I would expect it to have market impact focusing, as itshould, the investor’s attention on the Sproule report and the conceptof free hydrocarbons within the shale formations.

Again,successful optimization progress at Cheal will support the idea ofexpansion of the Taranaki play and that also should increase investorinterest. So instead of being a disappointment, these near termactivities could well act as a curtain raiser for the more significantshow starting later in the year. Presently this includes the Broadside#1 well in August/September bordering on the 10 million barrel Ngatorooil field with success accelerating drilling, notably at Winchester.Again, later this year they plan to drill a serious test of the shaleplay. The Boar Hill well is scheduled to go to 2000 meters and issignificant enough to warrant heightened investor interest.

D.P:TAG has a bit of interesting history over the last while with themerging of a few companies and stock roll back, but it looks like itsgot good leverage with few shares out and money in the bank. Comments?

C.S:It does have an interesting history and I would refer you to theCompany’s web-site where it is well set out. What comes through here isthat TAG has had its ups and downs, but it has stuck to the job and ithas rationalized its interests in an efficient manner and that includes30 million shares outstanding.

D.P:Are there any things we should know about New Zealand considering it isprobably the last place in the world many of us thought one should belooking for oil. Or the fact that it even had any production?

C.S:Don’t underestimate the value of the New Zealand setting and it’s notjust the point that they are really good at sailing and rugby... Theyenjoy, if that's the right word, the rule of law, Anglo-Saxon law, and,going on memory, I think they are number one in a published listcompiled to show various degrees of corruption faced by businesses,where the lower you go on the list the more corruption you encounter.Just in case I haven't said that clearly, in the context of doingbusiness and avoiding corruption they are the best. They are the mosthonest. Not only that, as I said earlier, they are well placed for theAsian markets.

D.P: We hear too frequently some people suggesting that some company with a high risk/reward play will be either a $50 stock or a
.50 stock. How appropriate would this be when considering TAG Oil.

C.S:I don't flinch from that at all. From the previous comments the upsideshould be clear, so I'll concentrate on the risk aspect. My view of thematter in the beginning was that taking into account present reservesat Taranaki and adding in working capital of $11 million the company wasworth $1.00 per share. So the recent move in the stock price reflectsthe markets growing awareness of the possible growth in reserves atTaranaki and the huge potential in the shales. Dividing the premiumequally between the two it would seem to me that the current priceembodies the idea of a 20% chance that the Taranaki development willdevelop its full potential leaving a $1.00 per share for the shale playand the associated conventional play, or maybe we could lump the easternconventional play in with Taranaki and suggest that the premiumembodies an overall chance of success of seven percent for success inthe conventional plays, assessing the eastern conventional play at a2.2% chance of developing recoverable reserves based on the estimate ofoil in place in the Sproule report, using the bank approach again.though that was used for shale oil. So, the $1.00 per share premium nowapplies only to the shale play and that, with the shares outstanding,amounts to $30 million.

D.P: How does that sit?

C.S:Is that out of line? There's no point in going back to the upsideconsiderations since we've gone over that, so one is thrown back onanalogies. Another of the companies which I like is CGX Energy which youhave advocated throughout the piece. Now with 140 million sharesoutstanding that company's market value is $226 million and I'mmesmerized by it because of its huge potential in the enormous AtlanticBasin deep water play. But it’s on the come. Similarly, TAG has hugepotential, but it is trading with a market valuation of $90 million.Investors are prepared to accept risk premiums and your investors havehad the experience of knowing that such high potentials will supportpremiums in the market over substantial time. Consider the outstandingtenacity of the management of CGX in the face of country border disputesand despite dry holes offshore and frustrating results onshore yet themarket supports it because it appreciates both its growingsophistication in analyzing the offshore play and because of thedeveloping deep water play itself. Similarly the market is, via theBakken successes gaining a greater appreciation of the growingsophistication in unlocking shale oil and the people involved in TAGhave also shown impressive tenacity. Now I have probably offended bothcompanies.

D.P: That’s true.

C.S:From my own experience, when I started in the business, the Cardium wasregarded as a really skinny play and I remember participating in wellsin the eighties that were regarded as a failure because they only foundoil in the Bakken. It bears remembering that one should keep an openmind to developing technology. Again New Zealand is not at the end ofthe world with its favorable position near to the Asian economies. Thereare some large players looking at shale plays with fresh eyes and thatwas not the situation before. A recent news release that three majorsare reported to have signed confidential agreements with ToreadorResources to do due diligence on its shale deposits in the Paris Basinis a sign of the times.

D.P: Thank you Clive!