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http://www.theage.com.au/business/tap-oils-lucky-hand-20110606-1fodp.html
Oil's lucky hand
Nathan Bell
June 6, 2011
Poker aficionados know that luck plays a part in success. They also know that the best players take advantage of chance and manipulate probabilities to their benefit. That's what makes poker a game of skill rather than luck.
Hunting for oil and gas is much the same. Luck plays its part in the outcome of an individual prospect but, over time, the skill of the driller is more important.
Over the past five years, Tap Oil has lacked luck and skill, spending almost $200 million trying to increase its reserves without much success. The share price has sagged as a consequence.
Now a new management and improved exploration teams are reinvigorating the company. Modest ambition and extreme conservatism - appropriate in most industries except this one - have been replaced with aggression and élan.
Tap has so far made two significant acquisitions, ventured into new turf and, most recently, done what many imagined was beyond it - made new discoveries.
In February the company confirmed gas at Zola, a large structure it was drilling with US-based Apache in the Carnarvon Basin off Western Australia. Pre-drill estimates suggest it could hold between 1 and 2 trillion cubic feet (Tcf) of gas which, to be technical, is a lot.
According to management, Zola holds reserves at the larger end of pre-drill estimates. But even at 1Tcf it would be worth about 44 cents per share. At the moment, the market isn't attributing anywhere near that much to the discovery.
If Zola turns out to be commercial, it will be a genuine company changer. The gas could be quickly plugged into nearby LNG developments or fed into the lucrative WA gas market. It also bodes well for other areas in the exploration portfolio.
Good luck has struck not once, but twice. Tap and its partners have made a small oil discovery known as Finucane South. Although it's only perhaps 8 million barrels, it could add a further 10-15 cents to Tap's share price.
Better days
These two new discoveries alone justify some excitement but Tap's exploration portfolio adds a little extra. The company recently purchased additional equity in a Carnarvon Basin prospect with the rather dull moniker of WA-351-P.
Operated by BHP Billiton, it's one of the most attractive prospects in the lucrative waters off the coast of Western Australia. High quality seismic surveys and nearby success for US energy giant Hess suggests this is as good as offshore drilling gets.
In fact, BHP itself has swooped in to buy the additional equity from Tap, gifting the smaller company a quick profit and highlighting the excitement that surrounds the permit, of which Tap now owns a 20 per cent stake.
Tap has also secured new exploration ground off the coast of West Africa, where several large oil discoveries have been made by other explorers. The targets here are relatively big - up to 200 million barrels of oil - but a good dose of luck and skill will be required for Tap to make something of them. This area will be risky drilling but the potential is exciting.
So why is the market discounting Zola when energy prices are soaring? One explanation is that it's located next door to the giant Gorgon gasfield, where a high level of carbon dioxide has delayed development for 30 years. A similar problem may stifle the development of Zola.
Similarly, WA-351-P may look sensational on paper, but Tap's old foe - luck - may decide the final outcome. Tap's fortunes might have changed but the laws of risk and reward haven't.
Legal dispute
A legal dispute also weighs on the company's fortunes. Tap is part of a joint venture being sued by customers for failure to deliver gas following the Varanus Island gas explosion in 2008. Tap could find itself liable for tens of millions of dollars in damages.
Despite these woes, this is a company in better shape now than it has been for years. Assuming a favourable outcome at Zola, the share price could go much higher and the threat of legal action is more than offset by new discoveries and exploration potential.
This small oil and gas explorer, despite its patchy past, is worth a look, but only for those willing to bear all the usual risks that accompany oil and gas exploration.
This article contains general investment advice only (under AFSL 282288).
Nathan Bell is research director of The Intelligent Investor. BusinessDay readers can enjoy a free trial offer. For more Intelligent Investor articles click here.
Read more: http://www.theage.com.au/business/tap-oils-lucky-hand-20110606-1fodp.html#ixzz1ObM8gpWf
Oil's lucky hand
Nathan Bell
June 6, 2011
Poker aficionados know that luck plays a part in success. They also know that the best players take advantage of chance and manipulate probabilities to their benefit. That's what makes poker a game of skill rather than luck.
Hunting for oil and gas is much the same. Luck plays its part in the outcome of an individual prospect but, over time, the skill of the driller is more important.
Over the past five years, Tap Oil has lacked luck and skill, spending almost $200 million trying to increase its reserves without much success. The share price has sagged as a consequence.
Now a new management and improved exploration teams are reinvigorating the company. Modest ambition and extreme conservatism - appropriate in most industries except this one - have been replaced with aggression and élan.
Tap has so far made two significant acquisitions, ventured into new turf and, most recently, done what many imagined was beyond it - made new discoveries.
In February the company confirmed gas at Zola, a large structure it was drilling with US-based Apache in the Carnarvon Basin off Western Australia. Pre-drill estimates suggest it could hold between 1 and 2 trillion cubic feet (Tcf) of gas which, to be technical, is a lot.
According to management, Zola holds reserves at the larger end of pre-drill estimates. But even at 1Tcf it would be worth about 44 cents per share. At the moment, the market isn't attributing anywhere near that much to the discovery.
If Zola turns out to be commercial, it will be a genuine company changer. The gas could be quickly plugged into nearby LNG developments or fed into the lucrative WA gas market. It also bodes well for other areas in the exploration portfolio.
Good luck has struck not once, but twice. Tap and its partners have made a small oil discovery known as Finucane South. Although it's only perhaps 8 million barrels, it could add a further 10-15 cents to Tap's share price.
Better days
These two new discoveries alone justify some excitement but Tap's exploration portfolio adds a little extra. The company recently purchased additional equity in a Carnarvon Basin prospect with the rather dull moniker of WA-351-P.
Operated by BHP Billiton, it's one of the most attractive prospects in the lucrative waters off the coast of Western Australia. High quality seismic surveys and nearby success for US energy giant Hess suggests this is as good as offshore drilling gets.
In fact, BHP itself has swooped in to buy the additional equity from Tap, gifting the smaller company a quick profit and highlighting the excitement that surrounds the permit, of which Tap now owns a 20 per cent stake.
Tap has also secured new exploration ground off the coast of West Africa, where several large oil discoveries have been made by other explorers. The targets here are relatively big - up to 200 million barrels of oil - but a good dose of luck and skill will be required for Tap to make something of them. This area will be risky drilling but the potential is exciting.
So why is the market discounting Zola when energy prices are soaring? One explanation is that it's located next door to the giant Gorgon gasfield, where a high level of carbon dioxide has delayed development for 30 years. A similar problem may stifle the development of Zola.
Similarly, WA-351-P may look sensational on paper, but Tap's old foe - luck - may decide the final outcome. Tap's fortunes might have changed but the laws of risk and reward haven't.
Legal dispute
A legal dispute also weighs on the company's fortunes. Tap is part of a joint venture being sued by customers for failure to deliver gas following the Varanus Island gas explosion in 2008. Tap could find itself liable for tens of millions of dollars in damages.
Despite these woes, this is a company in better shape now than it has been for years. Assuming a favourable outcome at Zola, the share price could go much higher and the threat of legal action is more than offset by new discoveries and exploration potential.
This small oil and gas explorer, despite its patchy past, is worth a look, but only for those willing to bear all the usual risks that accompany oil and gas exploration.
This article contains general investment advice only (under AFSL 282288).
Nathan Bell is research director of The Intelligent Investor. BusinessDay readers can enjoy a free trial offer. For more Intelligent Investor articles click here.
Read more: http://www.theage.com.au/business/tap-oils-lucky-hand-20110606-1fodp.html#ixzz1ObM8gpWf
