the interview
It was two years ago that ex-oil and
gas analyst Clive Stockdale suggested TAG Oil would become the
story of the day for its unconventional oil play and its potential in New
Zealand. The company has taken a
while to get going, but the huge surprise has been their extreme success
with conventional oil. Some time in
April, they will get around to that unconventional oil, but in the meantime,
it has been one of the star performers.
We have with us, Garth Johnson, CEO with TAG Oil.
David Pescod: Garth, what have you found to be the key
differences between working and exploring in New Zealand
versus operating in Canada?
Garth Johnson: We have been hard at it in New Zealand for
over 15 years now and we love it. The New Zealand government is supportive, the royalty regime is very attractive,
and our New Zealand team, consisting of both Kiwis and
North Americans, is fantastic. Combine that with the vast
majority of New Zealanders being very supportive of the
way TAG is conducting its business makes for a great environment to work within. New Zealand has also offered TAG
the ability to acquire permits without a large upfront acquisition fee that you would encounter in North America. We
have secured all the services and equipment necessary to
aggressively explore and develop our permits, we sell all
our oil produced at a premium to Brent, and there is a
strong and burgeoning local demand for gas in the country.
The biggest challenge outside of the technical aspects of
the geology in New Zealand is not having all services or
inventory items available within a few hours as they are in
North America. Knowing that, we have to be extra diligent
planning ahead to make sure we have what we need to keep
going.
That requires a commitment from our board and sometimes
patience from our shareholders because even though we
are breaking New Zealand records related to time from discovery to cash flow, sometimes we can’t move quite as fast
as we are used to in North America. We build our plan, review it constantly, and execute in a way that adds reserves
and increases daily production rates and we have a track
record of doing what we say we are going to do while minimizing dilution to our shareholders.
DP: You have been able to run up production in an unbelievably short order of time from zero to
4000 barrels a day plus. Just how were you able to do this?
GJ: Perseverance and hard work over many years has been
the foundation for TAG’s success. This is combined with a
commitment to drill an ongoing Taranaki program at a pace
that in my experience has never been seen before in New
Zealand. We have drilled 11 straight successful wells in a
basin that was averaging about a 10% success rate before
we took over at Cheal and Sidewinder. We’ve had some
good luck along the way but 11 wells in a row suggests our
technical team have made great strides in understanding
the tough geological setting in New Zealand. I truly think
our team is the best; our goals are aligned with those of our
shareholders, and our results to date have shown that. The
“TAG Team” enjoys working together and we have a lot of
pride in our perseverance and our creativity when it comes
to our corporate and technical work, our drilling efficiency,
our safety and environmental efforts, and our acquisition
abilities.
DP: Do you have any idea yet of what to expect for decline
rates on your wells?
GJ: A typical Taranaki oil well will decline on a hyperbolic
curve, similar to most oil wells in the world. That means the
greatest decline rate is in the first year, which in Taranaki
may be 20% to 30%, but we enjoy comparatively shallow
declines, as we have facilities at Cheal that are capable of
addressing the waxy Taranaki crude. After that, a 10% to
15% decline can be expected for the next few years, and
flattening out to single digit decline rates after that. We
have analog wells offsetting our pools that have produced
for over 25 years and are still on production today. Our production at TAG is in the initial 0-3 years, so we can look
forward to decades of oil production from our existing discoveries, with more to come as we continue drilling. Similarly, our gas wells behave like most gas wells in the world,
still a hyperbolic decline curve, but a steeper initial decline.
We can expect up to a 40% to 50% decline the first year of
production from our gas wells, but then flattening off more
quickly than oil wells, also providing long-term forecasted
gas production.
Interview part2
DP: You have an interesting line up over the next few months of conventional wells. Seeing as some of them have been
absolutely enormous over the last few quarters, what should one expect from the next handful?
GJ: We have recently received consent for 18 more Cheal wells and have drilled one called Cheal-B6 so far. We’ve had
some great results at Cheal and Sidewinder over the past year and I don’t know if we can say we will continue to see
such great results well after well, however, I can tell you we will try our best. Considering an average Miocene oil well in
Taranaki might produce initially at 250 bbls/day and decline to a 100-150 bbl/day well in the long term, TAG’s recent IP at
Cheal-B5 of 1700 bbls/day, and our forecast for B5 to decline only to around the 1000bbl/day mark later this year is phenomenal. We have the infrastructure ready and we are putting the B5 well on permanent production to ensure we can
address the wax challenges associated with Taranaki oil.
Similarly, the highest rate gas well drilled in the Miocene in Taranaki that I recall was around 3-4mmcf/d and TAG has
now drilled 6 gas wells capable of at least doubling that or more. We’ve heard a lot of people in the New Zealand industry
ask, “Where did those wells come from?” and we are a lot closer to answering that question after each well we drill, but
we definitely know we’ll keep doing what has been working. We are still learning and we’ve had some success but we
have really just scratched the surface of our permits in Taranaki and in the East Coast so we may drill some dry holes,
we may encounter some puzzling results, and we are currently tackling the challenges related to the timing of infrastructure upgrades at Cheal due to the quick increase in production rates that we have experienced, but we are very confident
and excited about our ongoing drilling program in Taranaki.
As mentioned, we just TD’d our Cheal-B6 well that was primarily a Urenui target and we are moving the rig to spud the
Cheal-B7 well very shortly as a direct follow-up to our Cheal-B5 well that came on at 1700 barrels of oil per day. We are
planning on testing Cheal-B6 and Cheal-B7 together once drilling is complete and we have no plans to slow down; our
technical team has dozens of drill ready locations, so we’ll keep going in Taranaki as we approach a new drilling program in the East Coast tight-oil play!
DP: What kind of an exit rate for production would you predict just on conventional oil for this year? I realize that would
be a real guessing match, but is there an in-house target you might have?
GJ: We do have some aggressive production goals, but if I say what they are I will have to include a lot of forward looking statement information. I do think we can increase our production materially with the program we have underway and
we are confident we can continue to do a good job. We are not so much exploring in Taranaki as we are developing and
exploiting, so this reduces our drilling risk considerably. We expect good results, we have consent to drill 17 more wells
at Cheal and we also expect to be drilling more wells at Sidewinder this year and that will be exciting. With that amount
of drilling, combined with drilling results to date, your readers/our shareholders can get a good idea of a possible daily
production number based on upcoming activity. All of us can then speculate on what our four big wells in the East Coast
Basin will do!
DP: You expect a new rig on site for the big unconventional play by April, what else should we know about that drilling,
its timing and how soon you would expect information.
GJ: We are VERY excited about this drilling program as this could be another game changer not only for TAG but for
New Zealand as well. It’s not often a company the size of TAG has a legitimate shot at changing the entire economy of a
country, but the resource potential on our lands could do exactly that for New Zealand. These vertical wells will be the
first true wells targeting the tight oil play of the East Coast Basin. We have made comparisons to successful source rock
plays in North America such as the North Dakota Bakken but we feel we have a few “extras” that give us even more encouragement than these North American plays. East Coast source rocks are quartz rich (brittle) source rocks –they are
mudstones and siltstones with high in situ porosity (20-25%), but low permeability – a true tight oil play. As well, the entire sedimentary section of the East Coast Basin is immensely over-pressured. Combine these first two factors with the
gasoline-like 50 degree API oil that is gurgling out of the ground in our permits such as at Waitangi Hill, and we could
see significant commercial production rates upon discovery. We expect drilling to begin in April 2012 after seismic acquisition is complete and the data is analyzed. TAG is operating the drilling of the first four wells on the East Coast on
behalf of our joint venture with Apache, so any material change to TAG will be announced.
DP: You are starting to attract analyst coverage from around the world now. What all are they saying about you that we
should know?
GJ: We have had some great coverage from analysts who have done a lot of DD on TAG. I think the most common comment I get relates to how our West Coast Taranaki Basin operations have exceeded expectations. The analysts doing
their modeling have come to the realization these drilling results not only support our current share price, but with the
success we’ve had, actually support a considerably higher share price.
That makes the Apache-funded East Coast opportunity pretty much a free option for our shareholders. We then add our
deep gas plays at Cardiff and Hellfire (both 100% TAG - drilling in 2012) and our 20% interest in a very prospective shallow water (less than 20 meters) offshore play called Kaheru (anticipated drilling in 2013), and analysts are quite bullish
about what our share price may do.
DP: We note on Bullboards that there is some concern that insiders have been sellers of stock. We assume that someone has had a big Christmas shopping list…or a mortgage to pay off….or….. What would those shareholders want to
know?
GJ: I’m glad you asked about this. I’m quite happy to say that the people I talk to daily, whether they are an analyst covering TAG, a shareholder, or a potential shareholder doing some DD, all have been very supportive of insiders monetizing stock options that were granted at market prices years ago.
We didn’t issue ourselves tens of millions of shares of stock at $.0001 right off the starting line (which still happens
these days believe it or not); we have always sought to maintain the integrity of TAG’s share structure and we will continue to do so. We all have incentive via recently granted options to take TAG to the next level and we are all working
hard to continue to execute our plans.
The feedback I get is that shareholders see the long-term picture and understand the hard work it takes to grow companies and stock options are a big part of aligning our team’s goals with those of shareholders. Yes there is a small
amount of dilution upon exercise but we have worked hard to keep all dilution minimal as evidenced by our share structure.
In June 2011 I saw an interesting interview by the former CEO of General Electric, Jack Welch on CNN and as part of the
interview he mentioned stock options at GE being a “turn on” and I looked up the transcript and he said:
“Making other people -- seeing other people get money is the biggest turn on in the world. We used to get the stock option sheets on Friday night in our company. We'd see a guy making 80,000 dollars, an engineer, cashing in stock for
275,000 or 400,000. We'd say what a h**l of a weekend they're going to have. And that is the turn-on, to get everybody to
grow. And that's what we got to do in America. That's what we did for 100 and some years.”
That’s what TAG is always trying to do, make money for everyone. Right now it’s on a smaller scale of course but we are
constantly trying to increase that scale.
Recently we have built a brand new Sidewinder Facility in less than a year from discovery, secured the Ensign rig on an
ongoing basis, we helped finance a state-of-the art rig to come to New Zealand (that includes a ROFR to TAG for all drilling use) that will minimize our footprint and make sure we can keep on drilling in Taranaki and then moving to the East
Coast, we have $60 million in the bank (no debt), growing cash flow, great deep gas prospects to be drilled in Taranaki
this year, a great offshore play in shallow water and we have done so with just 54.7 million shares outstanding, approaching a $500 million market cap and we have the East Coast drilling a few months away.
DP: There’s lots of people on oil and gas prices with very different ideas of whether oil will be $80 a barrel or $120 a barrel. What would you suggest as your expectations for oil prices going forward and in the oil and gas business, is there
another junior that you would pick or recommend to a good friend?
GJ: I am confident oil prices will remain in the $100 range and higher in TAG’s part of the world where we sell at a premium to Brent. Asia’s hunger for oil will continue even if there is a bit of a pull back on growth.
I don’t see many other juniors that stand out to me other than ShaMaran and Africa Oil (AOI) that look quite interesting
due to the size of the prizes. A lot of the other juniors out there need to spend some time to work on cash flow, reserves,
infrastructure and maintaining a proper share structure before I would invest. I’m pretty conservative so for any other
recommendation I would have to go with a large cap such as Apache Corp as they are a great partner and will be experiencing the upside of drilling the most prospective East Coast Basin acreage New Zealand has very soon!
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