Oil Co. Completes Drilling of Horizontal Fracking Well

In the Western Desert of Egypt, TAG Oil Ltd. (TAO:TSX.V; TAOIF:OTCQX) is developing the unconventional heavy oil Abu Roash F (ARF) formation in the Badr oil field (BED-1). The new well is situated in BED4-T100, part of the 26,000-acre concession secured via a Production Services Agreement (PSA) with Badr Petroleum Company (BPCO).

TAG Oil's phase 1 development program for the ARF reservoir has already reestablished production at the site, and the new horizontal well is designed to increase it.

Company subsidiaries include TAG Energy International Ltd., TAG Petroleum Egypt Ltd. (Cyprus), TAG Petroleum Egypt Ltd. (Egypt Branch), TAG Oil (NZ) Limited, Trans-Orient Petroleum Ltd, and others.

The Catalyst: New Well Drilling Stage Completed

On March 18, TAG Oil announced the successful completion of the drilling phase for the BED4-T100 horizontal well in the ARF, noting that the well has penetrated an over pressured reservoir with regions of exceptional porosity and permeability.

During drilling, there were clear signs of free oil flowing into the wellbore and to the surface, accompanied by consistently elevated gas readings across the ARF formation. The company projects that the high pressure and potentially high gas-to-oil ratio in the ARF zone will enhance the T100 well's production capabilities.

As a safety measure, the engineers adjusted the well's lateral length to 308 meters (1,000 feet) due to notably higher reservoir pressure and gas readings observed during drilling.

"With the potential for 60-80+ locations in the company's Badr concession area, the company is poised for substantial growth in the coming years," wrote Malcolm Shaw of Hydra Capital.

The drill team is now optimizing the multistage hydraulic fracture completion design, poised to maximize the stimulated reservoir volume of the wellbore.

The quality of the encountered reservoir section presents what the company deems "an exciting prospect, offering the potential for robust oil production performance following the hydraulic fracture stimulation of the ARF horizontal well." 

The company reports that "preparations for the completion stage, necessary to commence fracture stimulation, are well underway. The 4-1/2" liner with the packers assembly required for the completion has been installed, and the drilling rig is in the process of being released."

Tag's release states, "The completion surface equipment and personnel will be mobilized to the T100 well location, and the Company expects to start stimulating the well by the middle of April."

According to the agreement in place, on production from the BED-100 concession, TAG will receive about 62% of revenue as a service fee, given the Brent oil price is between US$70 and US$90 a barrel.

Why This Sector? Oil as a Hedge Against International Conflict

While green tech may be all the rage, nothing (other than highly hazardous nascent nuclear technologies) can match the sheer energy density that oil and oil-derived fuels provide. With that in mind, it's easy to understand why so much of current green thinking involves replacing oil and using it in more environmentally friendly ways. 

A 2023 Economist Intelligence report explains, "Global energy consumption will grow by just 1.3% in 2023, amid a slowing economy and high energy prices. Waning gas supplies and extreme weather events will force many countries to fall back on fossil fuels, delaying the green energy transition."

In addition, the ongoing war in Ukraine and its accompanying sanctions on Russian petrochemical products have created a tighter and more profitable market for non-Russian producers.

Research Capital analyst Bill Newman wrote on January 3 that "TAG is hopeful that with the upgrades to the drilling rig and using an oil-based mud system, the company should have drilling success with the third lateral."

As GEP reports, "After Russia invaded Ukraine in February 2022, the U.S. government [banned] imports of Russian oil, natural gas, and coal."

"The United Kingdom followed suit, announcing its intention to ban hydrocarbon products from Russia. The European Union also said it would cut Russian oil imports by two-thirds. Both the invasion of Ukraine and the series of reactions from Western countries sent oil and gas prices soaring."

"The demand for hydrocarbons has increased as economies reopen and enter recovery phases.

Hydrocarbon output before the invasion of Ukraine by Russia was stagnant due to low demand and stalled economic activity as a result of the COVID-19 pandemic."

"A global disruption in oil and gas supply due to the Russia-Ukraine war affected not only the prices of these commodities but also every economic activity reliant on hydrocarbons. Stock exchanges in different markets also sank, including exchanges in Germany and France, the FTSE 100 in London, and the Dow Jones and S&P 500 in the U.S."

As Malcolm Shaw of Hydra Capital Partners explained in a March 15 Streewise article, "Oil and natural gas stocks remain cheap relative to other sectors."

Why This Company? Ready to Pump

Shaw continues, "TAG Oil's drilling campaign in Egypt, targeting the Abu Roash F formation, has generated significant interest among specialist investors, but drilling delays have meant that the stock is in a holding pattern as the market waits for test results from its first horizontal well," he wrote.

"It's worth noting that the Abu Roash F formation is an oil source rock that is analogous to the prolific Eagle Ford play in the southern United States."

"With the potential for 60-80+ locations in the company's Badr concession area, the company is poised for substantial growth in the coming years should its pending well test show commercial rates. Anything over 1,000 barrels of oil per day as an initial production rate should be viewed as a success. With flow test results expected in early April, TAG Oil represents a timely and interesting speculation," Shaw concludes.

Shaw's analysis echoes that of Research Capital analyst Bill Newman, who wrote on January 3 that "TAG is hopeful that with the upgrades to the drilling rig and using an oil-based mud system, the company should have drilling success with the third lateral."

Moving along, Tag will aim to "drill a third lateral from the intermediate cased section of the well at ~2,650 meters using an oil-based mud system (versus water-based), with flow test results now expected in March," Newman wrote.

TAG Oil's leadership team all have extensive experience in the oil and gas industry. For instance, Executive Chairman Abby Badwi most recently was the president and chief executive officer (CEO) and led the sale of Kuwait Energy, an exploration and production company with operations in Egypt, Iraq, and Oman.

TAG's CEO, Toby Pierce, brings to the table 25 years' worth of knowledge and understanding of oil and gas operations, capital markets, investment banking, and mergers and acquisitions.

Why Now? Drilling Done, Technique Proving Profitable

Adam Gill of Echelon Capital Markets is also bullish on the stock. "The growth and value creation potential [of horizontal fracking] is very high," he noted in an Echelon Capital Markets February 26 research note.

"We see solid upside potential in the stock," Gill wrote. "We believe TAG Oil is currently providing a very attractive risk-reward proposition."

He discussed how TAG Oil could achieve significant growth using multifrack drilling and completion design on horizontal wells. Although the technology has rarely been employed in the region, TAG Oil enjoyed success last year using it on vertical well BED 1-7.

"While the stock has been heavy on the back of drilling complications, the potential in the ARF remains as it was before the delays," Gill wrote. "With that, we like the setup going forward."

If successful, the analyst pointed out that BED4-T100 would be the first of many producing wells, as the company had identified 20 potential well locations "backed by vertical wells targeting the lower formations" on the BED-1 concession.

Gill highlighted that by multifracking wells in these 20 spots, TAG Oil could initially produce 27,000,000 barrels of recoverable oil, based on resource estimates prepared by RPS Energy Canada. The infrastructure TAG will need to produce oil from the concession already exists, including facilities on site that can process 25 Mbbl/d. 

Ownership and Share Structure

TAG is currently in a solid financial position. The company is well cashed up to complete the first horizontal well, noted the analyst, having CA$24.9 million (CA$24.9M) of working capital, CA$23M of cash on hand, no debt, and a monthly burn rate of CA$400,000 as of the end of Q3/23.

"This will allow TAG to focus capital on drilling without infrastructure taking up a meaningful portion of the budget," wrote Gill.

Refinitiv provided a breakdown of the company's ownership and share structure, where management and insiders own approximately 4.05% of the company. According to Refinitiv, CEO Toby Robert Pierce owns 1.03% of the company with 1.64 million shares, COO Suneel Gupta owns 0.99% of the company with 1.59 million shares, CFO Barry MacNeil owns 0.85% of the company with 1.36 million shares, Director Gavin Hugh Lothian Wilson owns 0.72% of the company with 1.15 million shares, Director Keith C. Hill owns 0.25% of the company with 0.40 million shares, Director Thomas Hickey owns 0.17% of the company with 0.26 million shares, and Corporate Secretary Giuseppe Perone owns 0.04% of the company with 0.06 million shares.

Refinitiv reports that institutions own approximately 2.95% of the company, as Purpose Investments Inc. owns 2.09% of the company with 3.33 million shares, Novum Asset Management A.G. owns 0.64% of the company with 1.02 million shares, and Palos Management Inc. owns 0.22% of the company with 0.35 million shares.

According to Refinitiv, there are 159.74 million shares outstanding and 98.79 million free float traded shares, while the company has a market cap of CA$45.1 million shares and trades in the 52-week period between CA$0.34 and CA$0.78.

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