Vancouver-based oil and gas producer TAG Oil (TSE:TAO) (OTCQX:TAOIF) is returning its focus to its core "bread and butter play" as Chief Operating Officer Drew Cadenhead puts it, after making some tough decisions on the unconventional Waitangi Valley-1 well in the East Coast Basin of New Zealand.
The company on Tuesday decided to plug and abandon its Waitangi Valley-1 well after encountering some extreme drilling conditions, saying it was met with unprecedented high pressure hydrocarbon zones at very shallow depths.
Chief Executive Officer Garth Johnson, on a conference call following the announcement, said that while the news is disappointing, "success does not come easily [in this business]."
The CEO emphasized TAG's "well thought-out, methodical business plan", which works to balance risk by assessing potential negative outcomes, asserting still that "one success can change the valuation of TAG many times over."
TAG's 2015 fiscal drilling program combined high risk, unconventional drilling in the East Coast Basin with low risk shallow development drilling in the Taranaki Basin of New Zealand.
"Our realistic approach has helped us balance potential successes and those that may fail," Johnson said on the call.
Indeed, the company is now mobilizing its Nova-1 drilling rig back to the Taranaki Basin to focus on its core oil-producing assets at Cheal, where it drilled and tested two successful development wells in its first fiscal quarter ending June 30, producing a combined average of 351 barrels of oil equivalent per day (boe/d) during testing.
"We will resume our bread and butter play at Cheal back in the Taranaki," said Cadenhead. "We have a list of over 70 prospects, over 60 of which are new reserve targets for us.”
"We are serious about trying to accelerate [our shallow] drilling program and are excited about getting the rig back to the Cheal area, where some of the last few wells were our best oil wells ever."
The Chief Operating Officer said that the focus now would be on follow-up in this area, giving the company the ability to "get its cash flow machine working and stay financially strong."
"We're not going to blow ourselves out trying to force through a well when we see difficulties in front of us," added Cadenhead.
"We will involve experts from around the world and plan as best we can before we have another go of it," he said, referring to the company's plans to re-engineer the Waitangi Valley-1 well before making another attempt to reach total planned depth, while churning out cash from its core Cheal operations.
TAG said that its riskier plays such as Waitangi in the East Coast Basin are characterized by a lack of drilling in the basin historically, and that the company needs to be prepared to drill a number of wells here over many years, taking a long-term approach.
COO Cadenhead also noted that the Waitangi Valley-1 well "is anything but [a dry hole]", and that the drilling confirmed there was high quality oil there, but with extreme operational issues.
"The review of data and the reengineering will take some time, but we will find a way to get down to depth. The key is to have the will, the staying power and financial capability to keep on drilling."
"We have a strong plan in front of us that will help us fund operations for many, many years," Johnson added.
TAG noted on Tuesday that its previous fiscal 2015 year guidance did not include any expected production or cash flow from the Waitangi Valley-1 well, and that it is not revising its guidance as a result, with production continuing to hold strong at Cheal.
The drilling is part of TAG's $60 million capital program this year, which is fully funded from forecasted cash flow and working capital on hand in fiscal 2015. Fiscal Q1 cash flow from operating activities increased by 329 percent from the fiscal fourth quarter of 2014, to $7.2 million.
To listen to the company conference call from Tuesday, please click on the link below:
TAG Oil has adopted the standard of six thousand cubic feet of gas to equal one barrel of oil when converting natural gas to “BOEs.” BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 6Mcf: 1 Bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
Cautionary Note Regarding Forward-Looking Statements:
Statements contained in this news release that are not historical facts are forward-looking statements that involve various risks and uncertainty affecting the business of TAG. Such statements can be generally, but not always, identified by words such as “expects,” “plans,” “anticipates,” “intends,” “estimates,” “forecasts,” “schedules", “prepares,” “potential,” and similar expressions, or that events or conditions “will,” “would,” “may,” “could,” or “should” occur. All estimates and statements that describe the Company’s growth in baseline reserves, future guidance on production and cashflow, expected results of development drilling, resource potential, new production and discoveries and other objectives, goals, production rates, test rates, hydraulic fracture operations, optimization, infrastructure capacity, timing of operations, work-over results, and or future plans with respect to the drilling at TAG’s various permits in the Taranaki, and East Coast Basins are forward-looking statements under applicable securities laws and necessarily involve risks and uncertainties including, without limitation: risks associated with oil and gas exploration, development, exploitation and production, geological risks, marketing and transportation, availability of adequate funding, volatility of commodity prices, environmental risks, competition from other producers, and changes in the regulatory and taxation environment. Actual results may vary materially from the information provided in this release, and there is no representation by TAG Oil that the actual results realized in the future would be the same in whole or in part as those presented herein.
Other factors that could cause actual results to differ from those contained in the forward-looking statements are also set forth in filings that TAG and its independent evaluator have made, including TAG's most recently filed reports in Canada under NI 51-101, which can be found under TAG's SEDAR profile at www.sedar.com. TAG undertakes no obligation, except as otherwise required by law, to update these forward-looking statements in the event that management's beliefs, estimates or opinions, or other factors change.