TAG OIL—TAO:TSX—TAOIF-OTCQX (Written Feb 20, 2012)

TAG issued its quarterly financials last week, showing that it is rapidly increasing production and cash flow. Nine month revenue for fiscal 2012 was $26.2 million compared to $8 million in the nine months last year.

Net operating cash inflow was $4.84 million for the first nine months this year, vs $464,000 last year. Costs were down significantly this year--$6.94 per boe for the quarter compared to $16.57 last year—as a result of amortizing costs over a larger number of barrels. Their DD&A—Depletion, Depreciation and Amortization—costs, which is the number analysts use to determine what the overall costs are to find and produced a barrel of oil for a company—was $7.84 per barrel for the first nine months this year. This is fantastic—most western Canadian producers are 2-4 times that number.

Production was only 2000 bopd (their December powerpoint on the website says 4000 bopd; which must include what is "behind pipe"; oil/gas that has been discovered but not tied in to production yet) but that should ramp to close to 5500 bopd over the coming two months as the Sidewinder discoveries from last year get brought on stream. Cheal A-1, A-7, A-8, B-1, B-2, B-6, B-7, and C-2 wells are behind pipe now. Management says there are a total of 16 wells producing or capable of producing at Cheal and 4 wells producing or capable of producing at Sidewinder.

This requires millions in infrastructure spending but with $67 million in working capital, TAG has more than enough cash to handle those needs.

Other positives include the upcoming production tests of B6 and B7 wells at Cheal, which is considered "oilier" than Sidewinder. They have already reported that they hit commercial amounts of pay on these wells; we just don't have flow rates yet. The B7 well is targeting the same structure as the B5 that hit 1700 bopd at Cheal, and is still producing over 1000 bopd $$$$. Most Cheal wells are 300-350 bopd. Cheal B9 and B10 will get drilled shortly; a total of 10 more Cheal wells are on tap this calendar year.

The company has now hit 12 wells in a row. (Sure beats the junior mining game doesn't it?)

So with a production ramp, lots of cash and activity about to get underway with Apache on the east coast Whangai (pronounced FUN-GUY) shale, the stock should continue to have a good bid.

However, there are a couple things I'll be watching. TAG said they're only getting $4/mcf on their gas; in previous discussions with management and on the website they say they're getting $6. I'm not sure yet if this discrepancy is spot prices vs contract pricing or what, but it's always disconcerting to see one set of numbers on the website and another in the quarterly.

The netback, or profit per barrel, on gas production therefore is very small—it will be much like western Canadian levels. From a valuation point of view, that puts a little more pressure on Cheal to be oily. Oil netbacks are incredible—likely around $85-$90, and overall, company wide netbacks are now $46, which is down slightly from last quarter's $49 as gas production was slightly higher this quarter. So they are 2/3rds oil for the year but were only 45% oil for the quarter.

I have been keeping tabs on the local opposition to drilling the east coast shales. It never gets mentioned up here but, like everywhere else in the world where fracking is used, there is a controversy. As part of their community relations, TAG and Apache just paid for 12 town councillors from the east coast of the North Island to come to Canada for a "fact finding mission" on fracking, whatever that means.

As yet I don't see that lobby as being so organized and powerful for me to worry about them stopping drilling. And it's clear TAG and Apache are doing what they can to engage and communicate with them.

Four vertical wells will be drilled into the east coast shales in Q2. TAG/Apache haven't said if these will be drilled so that they COULD go horizontal if they wanted to.

And as I've mentioned before, New Zealand Energy (NZ-TSXv; NZERF-PINK) is also completing core holes on the east coast shales which may (likely will) come out before TAG/Apache—and the results from this will have a big impact on TAG's share price. If, by chance, analysis on the NZ Energy core of the Whangai shales showed they would not likely hold economic amounts of oil or gas, the stock would take a beating.

But data from other historical holes TAG has found indicate the rock characteristics are similar enough to the Bakken in the US that there is a very good likelihood it will be economic—but only time will tell for sure. (Don't forget what happened to PetroFrontier...)

It's going to be a very exciting six months for TAG. I still think TAG and New Zealand Energy could be the International Oil Play of the Year.
Subscribers will notice New Zealand Energy's stock has been on fire, doubling from $1.30 to $2.60 in four weeks—and on great volume.

Management had to put out a press release saying it didn't know why its shares were trading up so strong. The market is clearly anticipating good results from Copper Moki 2, and sees Copper Moki 3 as an "in the bag" winner before it's even spud.

NZ is all oil; they do have gas prospects but aren't drilling them. Should Moki-2 come in as good or better than Moki-1 (500 bopd) the market sees great and growing cash flow, and a reduced need for equity, as cash flow and potentially debt (even if it's expensive mezzanine debt for a short time) bridge any funding gap needed for expansion capital.

The stock has performed way beyond my expectations, and should either Moki-2 come in or positive results from Whangai core testing come out; the stock will have the fundamentals to back it up. The stock right now has a $260 million market cap with 500 bopd production.

February 23, 2012
TAG OIL (T-TAO) $9.05 -0.12
NEW ZEALAND ENERGY (V-NZ) $3.04 -0.11
We starting writing about the potential for oil and gas in
New Zealand almost two years ago...because Clive Stockdale
told us to...not because we wanted to. At the time we wondered
just how exciting could oil and gas exploration be in
tiny New Zealand...seeing as it has to import much of its own
oil and well, we just didn’t think it ranked up there with the
potential pizzazz of plays in the North Sea, Alberta, Saskatchewan
and hey, just about anywhere else.
Who would have thought that we would be seeing places
like Argentina, which not too long ago was a bankrupt country
that still has a questionable government and tiny New Zealand
becoming front-page news in the oil and gas patch.
Yesterday TAG Oil and New Zealand Energy both hit new
highs and yet unconventional exploration has yet to start.
The conventional exploration results have simply been that
surprisingly successful.
In the morning yesterday, Mackie Research brought a follow-
up report by rating the latest results from the company.
They write, “CM-2 tests 1,000 bbl/d: The Copper Moki-2 (“CM-
2”) exploration well drilled on the Eltham Permit (100% W.I.) is
currently flowing 1,000 bbl/d of 42° API oil and 820 mcf/d of
natural gas through a 24/64th choke. The CM-2 has been tied
into the Copper Moki-1 (“CM-i”) production facilities and the
produced oil is trucked to a nearby facility and is sold at a
premium to Brent. Field netbacks are currently over US$90/
bbl. The well was drilled to a total depth of 2,080 metres and
encountered 12 metres of net pay in the targeted Mt. Messenger
formation which is equivalent to the net pay in the CM-i
well. Drilling logs also indicate that the shallower Urenui formation
has the potential for oil and gas and will be tested with
a separate well.”
Mackie had raised their target on the company from $2.25
to $2.95 based mainly on expectations that the company
would produce an average of 880 boe/d of oil this year. But
later in the day, New Zealand Energy had a conference call for
analysts and followers and suggested that they expected to
exit the year at 2000 boe/d production.
That perked the market up and simply blew through the
new Mackie target. Again, the unconventional results are yet
to come.
Meanwhile, TAG Oil was setting records of its own. The
folks at Canaccord’s Instant Coffee wrote, “What’s driving
TAG—Pending News from Cheal-B6, B7 or A9?
How about ALL THE ABOVE. At last update on February

15, 2012, TAG reported that completion and testing
operations were being conducted on Cheal-B6 and B7
while new drilling has shifted back to the Cheal-A Site with
the recent spud of Cheal-A9, followed immediately by the
A10 well; each well is expected to take ~15 days to reach
total depth. So news pending? Meantime, Cheal-B5 continues
to flow at rates ranging between 1,000-1,600 bbls/d
depending on the production configuration; optimization
work continues to maximize the value of this anomolously
high rate oil well. With 12 successful Taranaki wells now
drilled in succession, TAG has initiated planning, engineering
and procurement of new and additional infrastructure
to add to TAG's existing Cheal and Sidewinder facilities.
The anomalous recent high rate results, from Cheal-
C2 (gas well) and Cheal-B5 (oil well), have surpassed the
company's forecasted production rates materially, and
necessitated the immediate expansion of oil lifting capacity,
enhanced compression, LPG and liquid hydrocarbon
stripping facilities, and pipelines linking all TAG production
together to be completed by mid to late-2012. This
plan will also allow for drilling success at TAG's $$$$$$$$$$
deep prospects such as Cardiff and Hellfire to accelerate
commercialization in the event of a discovery.”
Yes, there is little doubt that the excitement continues,
although stock valuations are no longer cheap. But once
again, if the unconventional oil hits, this play is still
young.