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Stocktalk 2-10-10 TAG Oil

Stocktalk 2-10-10 TAG Oil

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Published by: JPCrandor on Feb 11, 2010
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e-mail: debbie.lewis@canaccord.com
February 10, 2010
e-mail: david.pescod@canaccord.comAN INTERVIEW WITH CLIVE STOCKDALEVP CANACCORD(As of February 6, 2010)
David Pescod: Clive the last time we spent a lot of timehounding you for information, it was about an unconven-tional gas story-Ultra Petroleum-close to a decade ago andwho would have thought that would have become a 100bagger! Any thoughts on that unconventional gas storylooking back and how technology has changed in the lastdecade?Clive Stockdale: That technology has evolved is indisput-able-with increasing momentum and the sea change that ithas brought, not surprisingly, is still a science not settled-for example the impact medium and long term on naturalgas prices and energy substitution. You mention Ultra Pe-troleum, and that certainly was an overwhelming introduc-tion to the new potential of hitherto marginal plays and,just as success, as opposed to failure, has been said tohave many parents, so there have been numerous claim-ants to the title "Son of Ultra"The consensus embedded in the market right now is thatthere is room for all the natural gas. That was the message,more or less, presented to the U.S. Congress by the ProjectCoordinator for the proposed Alaskan Gas Pipeline andZiff's recent prediction of 20BCF/day of shale gas produc-tion in the North American Market ten year's from nowwould suggest ample room for other sources. I have somenagging reservations, based on maybe being overly im-pressed by U.S. technical know how, and especially relat-ing 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) NewZealand and there are two parts to it. One is a shale playwhich is unconventional and one which is the stuff we kindof know as standard oil and gas that could grow. But if youcould take a look at that and more importantly, your takeon the potential for what some suggest is a Bakken look-a-like.
C.S: New Zealand probably doesn't look like the end of theworld to the Asian Giants. But, yes, TAG Oil is in the oil andgas business in New Zealand with, broadly speaking, con-ventional and shale oil and gas plays in the Northern Is-land.
Tag Oil
Page 2
David Pescod 780-408-1750 Debbie Lewis 780-408-1748 Fax: 780-408-1501
In the west in the Taranaki Basin the Company has a100% working interest in the Cheal oil pool and it is cur-rently carrying reserves of 530,000 barrels to that inter-est It’s quite a complex play in the sense that faultinghas brought compartmentalization, and that complexityhas been absorbed by the Company in the school ofhard knocks. It has expanded its acreage position from5800 acres to 16000 acres and, given the pool size distri-bution in the basin, looks for potential reserves net tothe Company of 10 million barrels.To elaborate a little, now the Company has a 100% inter-est at Cheal it is moving ahead to optimize productionfrom current wells and this could increase production to600bbls/day in the near term without even drilling a well.Development drilling is aimed at adding two million bar-rels of new reserves and step-out drilling into new faultblocks within the Cheal mining permit brings substantialupside potential that has yet to be estimated by the Com-pany or by the Company’s reserve evaluator. The situa-tion is dynamic; a 7910 acre Winchester permit is theirmost recent acquisition and here, based on 3D seismic,they consider that they have six drill-ready prospects onthe west side of the permit, and at least that number ofleads. In house estimates of the six-drill ready prospectsset a target of 19 million barrels of oil in place.The unconventional play is in the eastern part of theNorth Island and involves source rocks called the Wa-paiwa and Whangai shales and analogies with the Bak-ken shale can in my opinion trip one up. Some of theshales preliminarily look better, some worse since, afterall, we are dealing with 2.4 million acres.D.P: The significance is that little TAG Oil, with only 30million shares outstanding does have 2.4 million acres.And, in Saskatchewan and North Dakota, if you have acouple of thousand acres, you’re considered lucky. Howcarried away should one get with all this?C.S: That’s up to you Dave. Hopefully one can appraiseit in the context of a risk investment and attempt the cal-culation of a risk-reward profile. But, before even doingthis it's of some comfort to find that such speculation isnot confined to the extreme fringe. What piqued my inter-est was seeing a European bank investment reportevaluating a U.S. senior oil and gas company, specifi-cally concentrating on its stealthy acquisition of NorthAmerican unconventional oil play acreage, valuing as abase case that acreage at $8.6 billion.
To receive the Late Edition and be on our daily circulation simply e-mail Debbie atDebbie_lewis@canaccord.com and give your address, phone number and e-mail and we’ll have youon the list tonight.
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David Pescod 780-408-1750 Debbie Lewis 780-408-1748 Fax: 780-408-1501
C.S: I don't think disappointment is warranted. Only badweather is delaying the start of a three well shallow oilwell program on the eastern acreage and early Marchshould see the beginning of optimization work on Chealtargeting three wells initially. Success at the shallow 250meter cored drilling will not result in substantial produc-tion increases. These wells are following up on a 100year old discovery where a 600’ well recorded productionof 20 to 50 bbls/day of 50 API sweet oil. This oil wastested and confirmed as having the underlying Whangaiand Waipawa shales as the source. The three shallowcored wells will provide TAG with information to deter-mine if there are economics to develop a shallow oil playand on a success case, TAG will plan a multi-well follow-up program to establish commercial production in theBasin which will significantly enhance the basin’s profileand prospectivity. Production is anticipated to be of theorder of 20 to 50 barrels per day per well, but I would ex-pect it to have market impact focusing, as it should, theinvestor’s attention on the Sproule report and the con-cept of free hydrocarbons within the shale formations.Again, successful optimization progress at Cheal willsupport the idea of expansion of the Taranaki play andthat also should increase investor interest. So instead ofbeing a disappointment, these near term activities couldwell act as a curtain raiser for the more significant showstarting later in the year. Presently this includes theBroadside #1 well in August/September bordering on the10 million barrel Ngatoro oil field with success accelerat-ing drilling, notably at Winchester. Again, later this yearthey plan to drill a serious test of the shale play. TheBoar Hill well is scheduled to go to 2000 meters and issignificant enough to warrant heightened investor inter-est.D.P: TAG has a bit of interesting history over the lastwhile with the merging of a few companies and stock rollback, but it looks like its got good leverage with fewshares out and money in the bank. Comments?
C.S: It does have an interesting history and I would referyou to the Company’s web-site where it is well set out.What comes through here is that TAG has had its ups anddowns, but it has stuck to the job and it has rationalizedits interests in an efficient manner and that includes 30million shares outstanding.D.P: Are there any things we should know about New Zea-land considering it is probably the last place in the worldmany of us thought one should be looking for oil. Or thefact that it even had any production?
Using its parameters for TAG resulted in the astronomicalfigure of well over $100.00 per share. The point is that therising tide of unconventional plays is leading to evalua-tions that were at the extreme risk fringe moving into themain stream. Once again, however, analogies cause moreproblems than they solve, so, while piquing interest, it isno substitute for specific information.D.P: Clive, I realize there are some huge numbers beingthrown about by companies doing exploration, suggestingthat they might have a billion barrels here or a billionthere. But when TAG is suggesting in some research re-ports 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 andgas potential. The first done by Sproule in March 2008gives a figure of 1.7 billion barrels in place, and the analy-sis identifies 56 leads or prospects-as grassroots as that.Main target reservoirs cited being Miocene sandstonesand Pliocene limestone formations. This is an assessmentof conventional oil and gas potential. The second report,dated September 2008, by AJM Petroleum Consultantscontains the figure of 12.7 billion barrels to which youalluded. In fact its best estimate is 12.7 billion barrels forestimated total original hydrocarbons in place combiningboth shale potentials with -wait for it- a high estimate of40billion barrels. This estimate of original oil in place byAJM is based on 187,470 acres of the 2.4 million acres.More interesting to me, however, is a second table of esti-mates "Prospective Hydrocarbons in Place-Free Hydro-carbons" which has a mean estimate of 6.1 billion barrelsgoing to a high figure of 13.3 billion barrels. That meanfigure, employing the bank technique referred to above,i.e. a recovery rate of 2.2% and $6.24 a barrel would give amean figure of $28.00 per share. However, the consultantsgive further direction by estimating recoverable hydrocar-bons which, on the mean instance, they assess at 182million barrels-value that at $6.24 per barrel and then thefigure becomes $40 per share.What would carried away mean? Going to the best esti-mate of 12 billion could be one avenue or maybe to the 40billion! Changing the recovery rate on the eastern conven-tional plays is another way to go. Additionally, using thehigh estimate for recoverable hydrocarbons on the shaleplay could increase the upside to $60 per share. And, ofcourse, we could go with the bank approach.D.P: One of the most important things here is the timing ofthis play and it’s unfortunate that they won’t be doingtheir vertical wells until the summer and doing the all-important horizontals until the third quarter of this yearand even then, we know nothing in the oil and gas busi-ness happens on time. This is disappointing, isn’t it?

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