wellington west: tag oil initiate report

8/8/2019 Wellington West: TAG Oil Initiate Report

http://slidepdf.com/reader/full/wellington-west-tag-oil-initiate-report 1/26

Please see disclaimers on the last two pages of this report.

International Energy

TAG Oil Ltd. (TAO-V, $2.45)

September 20, 201

Recommendation: Speculative Buy

Kevin Shaw, P.Eng. (403) 781-2715; [email protected] Ronald Cheung, CFA (403) 781-2718; [email protected]

All values in C$ unless otherwise noted.

New Zealand “Pure Play” w/ Big Conventiona& Unconventional Oil Resource Potential

Proven-producing Taranaki basin estimated at ~100 mmboe OOIPCheal asset is currently producing ~490 boe/d net; prod‟n could easreach 1,000+ boe/ d within 3 to 4 months w/ current „10 drill program.

E. Coast basin Waipawa/Whangai oil: call option on 14+ Bboe OOIPBasin offers 1.7 billion bbls OOIP conventional & 12.7 billions bbls OO

unconventional play (shale compares to Bakken & Paris Basin Liassic).

Sept. kick-off of Taranaki drills, workovers & 1 st hztl multi-stage fracSet to spud expl‟n test (Sidewinder -1) on Broadside block targeting MMessenger zone, then 1st hztl multi-stage frac test at Cheal (Cheal-BH-1)

Initiating coverage with Spec Buy & $3.80 target; key attributes are…2+ mm acres, no debt, & $26mm w/c. Target based on 2P NPV, riskNPV (Taranaki scenario), EMV/sh (incl. expl‟n upside), & FY‟12 DACF

Current Price $2.45Target Price (12-Month) $3.80Implied Capital Gain 55%

Changes Old New

Production (boe/d) F „11ECFPS FD FY 2011E

Production (boe/d) F „12ECFPS FD FY 2012E

n.a.n.a.n.a.n.a.

649$0.171,675$0.62

Recommendation n.a. Spec.

BuyTarget Price n.a. $3.80

Company Profile

TAG Oil Ltd. (TAO) is an emerginginternational exploration and productioncompany operating in New Zealand‟s East

Coast and Taranaki basins. The company hasthree permits in the East Coast basin (~14billion bbls OOIP) and two permits in theTaranaki basin (~100 million boe OOIP).TAG is currently producing ~490 boe/d fromthe Cheal initial discovery / pool in theTaranaki basin with 2P reserves of 0.7

million boe, although we expect significantresource upside in these two areas.

Financial Summary39.0 52-Week Trading Range $0.40-$3.71

$98 Average Weekly Volume 557,358

(26) Market Float (mm) $72

$72 Risked EMV/Share $13.32

Forecasts FY 2009* FY 2010* FY 2011E* FY 2012E*

135 201 649 1,675

0% 0% 0% 0%

Modeled WTI Oil Price (US$/bbl) $61.56 $70.49 $80.23 $83.75

$0.88 $0.98 $0.95 $0.95

Realized Oil Price (C$/boe) $44.14 $82.64 $68.28 $73.17

$4.9 $6.5 $16.4 $44.7Cashflow (C$mm) $2.0 $0.3 $6.5 $24.4

$2.0 $0.3 $6.5 $24.4

$2.5 $2.3 $19.5 $30.0

($1.05) ($0.08) $0.05 $0.30

CFPS (FD TSM) $0.11 $0.01 $0.17 $0.62

Valuation 2011E 2012E

12.7x 3.6x

$127,949 $52,891

51.4x 8.2x20.5x 5.7x

EV/BOE/d (per unit production)

P/ETarget EV/DACF

DACF (C$mm)

Capex (C$mm)

EPS (FD TSM)

EV/DACF

Shares FY 2011 O/S (mm, FD TSM)

Market Capitalization (C$mm)

Net Debt (C$mm)

Modeled US$/CAD$ Exchange Rate

Revenues (C$mm)

Enterprise Value (C$mm)

Production (boe/d)

% gas

* Fiscal year ends on March 31 each year

Source: Company reports, Wellington West Capital Markets Inc.

Price Chart

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

S e p - 0

9

N o v - 0

9

J a n - 1

0

M a r - 1 0

M a y - 1

0

J u l - 1 0

S e p - 1

0

P r i c e ( C $ )

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

D a

i l y V o l u m e

Source: Thomson One

mailto:[email protected]










TAG Oil Ltd.

Kevin Shaw, P.Eng, (403)781-2715; [email protected] September 20, 2010- 2

Investment Summary and Outlook

TAG Oil (TAG) is a “pure play” New Zealand based exploration andproduction company positioned to exploit over 2 million prospective acres &14+ billion barrels of original oil in place (OOIP), offering both high impact

exploration and lower risk development upside. TAG offers a mix of risk andreward opportunity across a combination of large oil-in-place conventionalreservoirs and emerging unconventional resource plays. The Taranaki basin inNorth New Zealand is a mature proven-producing basin yet remains highlyunderexplored as compared to other mature basins around the world like thosefound in North America. The lower risk Taranaki basin offers significant growthpotential across two acreage blocks (or permits) which holds an estimated 100million bbls OOIP and is 100% owned by TAG. The company‟s near-term (Q42010 / Q1 2011) focus is to delineate reserves and boost corporate oil productionvia an estimated ~$20 million work program on its Taranaki permits. The EastCoast basin offers “game changing” upside for TAG throughout the prove-up andcommerciality of multiple oil shale zones which have similar technical

characteristics to both the North Dakota Bakken & emerging Paris Basin Liassicresource plays. Both the Taranaki and East Coast basins are prime candidates forapplication of North American based multi-stage frac technology with TAG setto implement the first uses of this technology in 2010 / 2011. TAG has alsorecently acquired 100% of the overlapping gas-condensate rights & an initialliquids-rich gas discovery on one of its Taranaki permits where the companycontrols the facility infrastructure.

We are initiating coverage with a $3.80 target price and a Speculative Buyrating. Given TAG is an early-stage exploration and development company andis just starting to become active with its initial drilling & frac operations in Q42010, we focus our valuation on the company‟s exploration upside shown by our

net risked EMV/sh of ~$13.32. Our EMV/sh is driven by a risked recoverableresource potential of up to ~52 mmbbls vs. unrisked of ~455 mmbblsrecoverable. As the company executes high impact exploration, makesdiscoveries, and tests North American based technologies to commercialize its

potentially “game-changing” oil shale assets, we believe significant shareholdervalue could be unlocked across TAG‟s 2+ million net undeveloped acres and 14+billion bbl OOIP “prize”. We believe TAG shares represent a compellingopportunity for investors looking to gain exposure to a well financed NewZealand “explore-co” with a mix of lower risk plays in the medium-term andhigher risk, higher reward plays over the longer-term.

Investment Highlights Huge Land Position, 100% W.I. & Ready to Exploit Over 14 Billion Barrels of OOIP

TAG has two highly prospective areas (100% working interest) coveringmore than 2 million acres in New Zealand located in the emerging EastCoast basin and the proven-producing Taranaki basin. The East Coast basinoffers both conventional and unconventional opportunities on acreage originallyacquired through a transaction with Trans-Orient Energy (details to follow).According to two independent engineering evaluations by Sproule and AJM,



TAG Oil Ltd.


these two basins have 14 billion barrels OOIP indentified on less than 10% of thecompany‟s existing land base. Currently, TAG has three permits in the EastCoast basin and two permits in the Taranaki basin. We see the East Coast basinas a free call option on recoverable resource potential of possibly over 1 billionbarrels.

Ramping Oil Production and Cashflow - Taranaki Basin Production Positioned to Double in 3 Months to 6 Months

TAG’s initial Cheal oil pool is already producing at ~490 boe/d and isexpected to reach 1,000+ boe/d within several months and 1,500+ boe/d inmid 2011. Following a relatively recent $20mm financing, TAG is initiating“sizeable” work programs in 2010 & 2011 for the Cheal & Broadside blockswithin the Taranaki basin. TAG‟s strategy is focused on building oil production& cashflow on lower risk development and exploration plays prior to conductingexploration activities in the East Coast basin in 2011. The Taranaki basin offersan estimated 100 mmboe of OOIP with TAG expected to further test the Urenui& Mt. Messenger formations (i.e. known oil producing zones in New Zealand)

and utilize technology advancements both in horizontal multi-stage fracs as wellas downhole heater systems to enhance production rates, increase recoveryfactors, and add new reserves. Leveraging relatively lower risk development of Taranaki producing assets into a cashflow “engine” to fund the company‟splanned East Coast basin exploration, we believe, is a solid strategy to buildshareholder value.

East Coast Basin – Call Option on a BIG Oil Resource Play & a PrimeCandidate for Horizontal Multi-Stage Fracs

99% of the company’s OOIP is in the East Coast basin which contains oilshale which appears analogous to the Bakken and Paris Basin Liassic OilShale, and could offer tremendous upside to TAG. The East Coast basin is ahigh impact area with more than 2 million acres of unexplored lands. Hundredsof drilling prospects at depths between 250 meters and 2,000 meters have beenidentified with only 38 test “holes” drilled on the acreage since 1955. Within theEast Coast basin, there is potential for three separate play types, including: 1.Shallow conventional oil in the Waitangi formation (i.e. 200 meters to 300meters in depth; 2. Deep conventional oil targets (i.e. less than 1,500 metersdeep) in the Miocene sandstones offering 2 mmbbl to 10 mmbbl reserve targetsper prospect; and, 3. Unconventional oil-shale which is widespread regionally(i.e. less than 2000 meters deep) and could prove similar to the North AmericanBakken and emerging Paris Basin Liassic plays. The East Coast basin is a primecandidate for horizontal multi-stage frac technology within two knownunconventional fractured shale plays in source rocks known as the Waipawa &Whangai. Reserves have not yet been booked for any of the conventional orunconventional zones of interest included in the East Coast‟s 14 billon OOIPresource estimate.

New Zealand: Stable, Fiscally Attractive, and Underexplored

All of TAG’s assets are in New Zealand, an economically and politicallystable country. An investment in TAG provides investors with the opportunityto invest in an international exploration company with relatively low “in country”



TAG Oil Ltd.


risks (i.e. geo-political, threat of wars, corruption, etc.) which exist in manyhydrocarbon rich countries in other parts of the world. New Zealand‟s permittingregime and fiscal terms are highly ranked among the world. Specifically, policyframework promotes the discovery of petroleum with a competitive fiscalregime. The royalty rate for TAG is 5% for oil and 1% for gas sales and a 15%accounting profits royalty for an onshore discovery for the first NZ$250 millionsales and 20% thereafter. The Taranaki & East Coast basins are expected toyield high netbacks with oil revenues fetching WTI benchmark pricing.

Strong Balance Sheet, Fully Financed for Taranaki Drill Program

With $26mm in working capital and no debt, TAG is in a strong financialposition to move forward with an initial Taranaki basin development &exploration program. The company has sufficient capital to fund its currentcapital program within the Taranaki basin and further ramp oil production uponsuccess. Upon success of multiple wells in late 2010 or early 2011, we anticipateTAG requiring additional capital either via equity and/or debt to finance futuredevelopment within the Taranaki basin and kick-off high impact exploration

drilling on the East Coast.

Attractive Valuation Based on our Risked NPV/sh & Risked EMV/sh

TAG is trading at 0.2X our risked EMV/sh estimate of $13.32 and 0.9Xour risked NPV/sh estimate of $2.67. With our risked NPV/sh based solelyon the company’s initial Taranaki potential, there is significant upside asnew exploration and resource development plays within the East Coast basinmove from the “testing / prove-up” stage to development. We believe TAG isa Speculative Buy as the company begins its initial capital program in onshoreNew Zealand in 2010 and works to delineate new reserves & apply horizontaltechnology.



TAG Oil Ltd.


Valuation and Summary Recommendation

We are initiating coverage on TAG Oil with a Speculative Buy rating and a$3.80 target. We believe TAG offers investors exposure to significant upsidethrough lower risk development and exploration on its two Taranaki basin

blocks, with high impact “game changing” opportunities in the East Coast basin.TAG offers exposure to big oil upside via horizontal technology applicationswithin both proven producing assets and new “frontier” higher risk acreage,where multiple zones of interest have been identified. Until a number of TAG‟sinitial plays are further proved-up, TAG carries a higher overall risk rating likemany emerging “explore-cos”, however the investment risk is somewhatmitigated given TAG has existing oil production (i.e. operates 490 boe/d withassociated gas) and is expected to increase production volumes over the mediumterm to 1,000+ boe/d without leveraging the balance sheet.

We estimate a risked NPV/sh of $2.01 (not including cash) on TAG’s

Taranaki basin potential with a risked EMV/sh of $13.32 which includes

both further exploration within Taranaki, the high impact plays on the EastCoast and working capital. TAG‟s huge upside can be seen in our EMV/shvaluation and is driven by the East Coast basin with an unrisked recoverableresource estimate of 455 mmbbls accounting for only a 3% recovery factor on the14+ billion bbl OOIP prize. Our risked EMV/sh holds ~52 mmbbls of recoverable resource. If proved successful, the East Coast basin could supporthundreds of vertical and horizontal development locations both targetingconventional & unconventional oil plays.

Exhibit 1: WWCM Risked NPV/sh Valuation – Possible Scenario for Initial Taranaki Assets Alone

Prospect/Field

WWCM Unrisked

Resource Estimate

(mmbbls, net)

COS(%)

WWCM Risked

Resource Estimate

(mmbbls, net)

UnriskedNPV/sh

RiskedNPV/sh

Taranaki 6.0 60% 3.6 $3.35 $2.01

Cash (Net Debt) $0.66 $0.66

Total 6.0 3.6 $4.01 $2.67 Source: Wellington West Capital Markets Inc.



TAG Oil Ltd.


Exhibit 2: WWCM Risked EMV/sh Valuation Breakdown – Including Exploration & DevelopmentUpside for Both Taranaki & East Coast Basins

Prospect/Field

WWCM Unrisked

Resource

(Gross, mmboe)

Working

Interest

(%)

COS

(%)

WWCM Risked

Resource

(Net, mmboe)

Net Risked

EMV/sh

East Coast Basin Conventional 87.0 100% 10% 8.7 $2.65

Waipawa Oil Shale 175.0 100% 10% 17.5 $3.56

Whangai Oil Shale 175.0 100% 10% 17.5 $3.56

Taranaki Basin

Cheal - Mt. Messenger 7.0 100% 55% 3.9 $1.44

Cheal - Urenui 5.0 100% 35% 1.8 $0.61

Broadside - Mt. Messenge 4.0 100% 55% 2.2 $0.73

Broadside - Urenui 2.0 100% 35% 0.7 $0.10

Cash (Net debt) $0.66

Total 455.0 52.2 $13.32 Source: Company reports, Wellington West Capital Markets Inc.

Exhibit 3: Summary Valuation Table – Drives our Target of $3.80

Valuation Matrix Forecast Target Multiple Value Weighting Weighted Value

Core 2P NPV10 $ 1.41 1.0 $ 1.41 35% $ 0.49Risked NPV/sh. (Taranaki Assets only) $ 2.67 1.0 $ 2.67 35% $ 0.93

Asset EMV/share $ 13.32 1.0 $ 13.32 15% $2.002011E DACF (Fiscal Yr. 2012) $ 0.62 4.0 $ 2.50 15% $ 0.37

12-month derived target price $ 3.80 Source: Wellington West Capital Markets Inc. estimates

Operating Areas – New Zealand

TAG is a “pure play” focused solely on oil and gas exploration andproduction in New Zealand’s Taranaki and East Coast basins. With two keytarget areas, TAG has a portfolio of low risk and high risk plays. The Taranakibasin in North Island New Zealand has been producing for many years, yet it isstill relatively underexplored. The East Coast basin is expected to hold asignificantly larger resource potential, although will require more explorationwork (see Exhibit 9). The lower risk Taranaki basin will be the company‟s focus in the near-term to ramp production, while the East Coast basin could generatesignificant shareholder value over the longer-term.



TAG Oil Ltd.


Exhibit 4: TAG’s Taranaki Basin and East Coast Basin Acreage – Locatedon North Island of New Zealand

Source: Company reports

Taranaki Basin – Lower Risk, Historically Undercapitalized & Highly Prospective

TAG has two permits with 100% interests in the proven but underexploredTaranaki basin (see Exhibit 5). Although the basin covers 100,000 squarekm‟s, only 175 wildcats have been drilled since 1955. Hence, it offers significantopportunity to expand reserves through exploration and development. Theproven basin thus far has 600 million barrels of oil and 7 trillion cubic feet of recoverable gas reserves. Currently, the basin is producing 53,700 bbl/d of oil

and 397 mmcf/d of gas. TAG has already indentified more than 30 initial drillinglocations within the Taranaki basin to further explore and develop its two keyland permits.



TAG Oil Ltd.


Exhibit 5: Taranaki Basin: TAG’s Cheal and Cardiff Discoveries, 2 Permitsand Operated Facilities are in the Middle of Increasing Industry Activity

Source: Company reports, Wellington West

TAG has 100% working interests in Cheal and is producing ~490 boe/d(approx. 86% oil). Permit 38156-S, where the initial Cheal discovery is located,covers 7,487 acres and has 3-D seismic coverage over the area. The Cheal A andB blocks (see Exhibit 6) were the first developed and hold an estimated 10mmbbls OOIP with recovery factors (RF‟s) in the 8% to 12% range. These RF‟sare expected to increase via the implementation of downhole heater systems andhorizontal development. Moreover, there are several undeveloped blocks to theNE and NW of the current development area (Blocks A and B) which have thepotential to increase the company‟s existing 2P reserves (initial bookings of ~0.7mmbbls) by 4 to 10 times. TAG has identified up to 20 additional horizontallocations among the undeveloped blocks with the potential to achieve rates up to1,000 boe/d per horizontal. With TAG kicking-off its initial drilling activities in

Q4 2010, we expect the company to further delineate the undeveloped Chealblocks offset to blocks A&B.



TAG Oil Ltd.


Exhibit 6: Taranaki Basin – Existing Cheal Pools and Undeveloped Blocksw/ Potential to Increase 2P Reserves by 4 to 10x


Horizontal development “tests” are planned for both the Mt. Messenger andUrenui formations. The Mt. Messenger formation is about 1,800 m deepwhereas the Urenui is ~1,400 m. Exhibit 7, which shows an outcrop photographfrom New Zealand, demonstrates that the Mt. Messenger formation is comprisedof multiple thin (~1m) individual sandstone beds. Each lobe is 150-200 m acrossand the sandstone beds are separated by shale. Each Mt. Messenger pool is madeup of hundreds of overlapping lobes covering an area of multiple kilometers.The company plans to test the development of this known producing formation(i.e. on offset acreage) using horizontal multi-stage frac execution with theconcept of applying this North American based technology to intercept hundredsof lobes with a single horizontal wellbore (i.e. vertical wells can only intercept 5-10 individual lobes per well). Successful horizontal tests could significantly

increase the 2P reserves for TAG, given the Mt. Messenger reserves at Taranakiare currently modestly booked with respect to recovery factors from verticalwells only.



TAG Oil Ltd.


Exhibit 7: Taranaki Basin: Mt. Messenger Formation – Prime Candidate forHorizontal Multi-Stage Frac Technology


The Urenui formation is present in all 11 Cheal wells drilled to date. ThisMiocene-aged formation is well defined on 3D seismic and is ~1,400 m deep.Strong hydrocarbon shows on mudlogs were evident in 10 of 11 wells drilled inthe permit and three wells actually tested oil and gas with no water. With theapplication of cost effective downhole heaters, the ultimate recovery factors andreserve values for the Urenui formation could significantly increase, as noprevious reserves have been booked to this formation. Wax technology (i.e.downhole heaters) was applied to two vertical wells in May / June „10 to pilotdifferent downhole completion designs to enhance overall productivity. The prizegoing forward is to sustain much higher well rates from the known Urenui

formation which if successful, could support development drilling across theTaranaki assets.

Broadside (Permit 38748) is strategically located in the heart of theTaranaki fairway and is highly complimentary to Cheal. It covers 7,910acres (100% TAG) and is located to the north of Cheal. Sharing many of thesame geotechnical characteristics as Cheal, Broadside will benefit from theexploration and development experience executed on the Cheal blocks. The firstexploration well is expected to be drilled by TAG in Q4 2010 on the Broadsideacreage and is targeting the Mt. Messenger and Urenui oil formations which are



TAG Oil Ltd.


producing at Cheal and/or have been identified on surrounding blocks. To start,five drillable prospects have been indentified with another five to ten wells tofollow upon initial success. The first well is expected to be drilled in September / October 2010 to put this new permit into play.

Exhibit 8: Taranaki Basin: Broadside Permit – A New Exploration Area inthe “Heart” of the Fairway


East Coast Basin – The “ Free” Call Option

Massive upside potential in the East Coast basin exists and could be “game changing” to TAG who owns 100% working interest in three permitscovering more than 2 million acres of undeveloped land. Unlike the Taranakibasin, the East Coast basin is higher risk, but offers significant upside for aninvestor who takes a longer-term view. The permits were acquired through atake-over of Trans-Orient in December 2009. TAG is planning on exploring &developing the basin with conventional and unconventional methods while thelatter is expected to be the main focus for this basin. Even though it is still earlydays for the widespread unconventional oil shales which have been identified onthese permits, the East Coast basin can be compared to both the Bakken shale



TAG Oil Ltd.


play in North America and the Paris Basin Liassic (see Exhibit 12). As a result,TAG offers a unique opportunity for investors to gain exposure to an unexploited“Bakken type” oil-shale on the international circuit, within New Zealand‟s

fiscally attractive and stable environment.

The huge OOIP offers both conventional and unconventional opportunities.The East Coast basin has 14+ billion barrels of OOIP which, as estimated by twoindependent qualified engineers. As shown in Exhibit 9, 12.65 billion barrels of unconventional OOIP have been assessed by AJM while 1.74 billion barrels of conventional OOIP have been estimated by Sproule. Geotechnical work to datehas identified a number of conventional and unconventional prospects at depthsbetween 250 and 2,000 m.

Exhibit 9: TAG’s OOIP Breakdown


TAG has indentified three approaches to explore and develop the East Coastbasin. Exhibit 10 identifies the stratigraphy of the basin and the multi-zonepotential within 3 distinct resource play types. We believe that horizontal multi-stage frac technology will be key to unlocking this big oil opportunity tocommercialize the large in-place reserves within a widespread hydrocarboncharged source rock. Hence, the company is taking steps to utilize proventechnology for shale plays in North America and apply them to the East Coastbasin with the first vertical and horizontal “test” wells expected into this play in2011 (i.e. post an initial work program within the Taranaki basin). Exhibits 10and 11 identify historical activity, resource estimates, and future activitiesplanned given specific reservoir characteristics.



TAG Oil Ltd.


Exhibit 10: East Coast Basin: Stratigraphy & Three Targets of Interest

Source: Company reports, Wellington West

Exhibit 11: Summary of the Approaches for the East Coast Basin

Shallow Conventional Targets First of three Cored Strat wells now complete at WaitangiHill – shallow oil and gas at high pressure discovered

1912 Bore Hole still bubbling 50 degree API, sweet crudeoil and gas today

Oil geochemically typed to Waipawa/Whangai source rocks

Potential to drill 15 wells on Waitangi Hill aloneDeep Conventional Targets Potential for stacked conventional targets, as well

4-way dip closure on Miocene through Paleoceneformations

Sproule estimates 1.74 billion barrels OOIP of conventionaloil

Extremely over pressured Basin (3,100 psi at 1,000m),impenetrable seal

Naturally fractured and 50 degree API oilUnconventional Targets Oil-and gas-rich Waipawa and Whangai fractured shale

system widespread & thickly developed across TAG‟s

holdings

Improved horizontal, multi-stage fracturing technology

optimizes extraction Comparable in total organic carbon content and oil and gas

maturity level to Bakken Shale

AJM undiscovered resource potential of 12.65 billionbarrels of unconventional OOIP

Boar Hill -1, Kawakawa-1, Waitangi Deep-1: all high-graded potential deep tests


Paris Basin Liassic



TAG Oil Ltd.


Exhibit 12: How Does TAG’s Oil Shale Stack -up: Waipawa / Whangai vs.Bakken / Paris Basin Liassic

North DakotaBakken

Waipawa Paris Basin

Liassic

Whangai

Depth (m) 2,700 – 3,500 0 – 5,000 1,650 – 1,850 0 – 5,000

Net Thick (m) 10 – 50 10 – 60 1 – 40 300 – 600+

Primary Perm(microdarcies)

40 – 50 10 – 200 50 10 – 110

Tmax (C) 420 – 450 430 – 445 445 420 – 445

TOC % 1.1 – 12 3.0 – 12 4.5 0.2 – 1.7

Quartz Content % 20 – 68 40 – 80 26 – 58 40 – 80

Vit Refl R 0.3 – 1.2 0.3 – 0.4 1.0 – 1.3 0.1 – 1.4

Total Porosity % 8 – 12 9 – 23 4 – 5 16 -31

Source Rock / OilGravity (API)

Type II/42 Type II/50 Type II/38 Type II/50


Recent Entry into Gas Exploration – AnotherCall Option for TAG

On September 15, TAG strategically announced that it has acquired a 100%interest in a condensate-rich deep gas discovery and the gas hydrocarbonrights which overlap TAG’s existing Cheal oil acreage. There are 16 gasfields in the country where the production is dominated by three key fields (seeExhibit 13). The offshore 3.4 Tcf Maui gas field was discovered in 1969 and wasthe crown jewel of the oil and gas industry in New Zealand. However, since

initial production in 1979, the field has more recently been declining at arelatively steep rate. As a result, the price of natural gas in New Zealand hasbeen increasing at a rather steep rate. Domestic gas prices have increased fromUS$1.36/mcf in 2000 to US$5.29/mcf in 2008 (see Exhibit 14).



TAG Oil Ltd.


Exhibit 13: New Zealand Historical Natural Gas Production by Fields

0

100

200

300

400

500

600

700

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

P r o d u c t i o n ( m m c f / d )

Maui Kapuni Pohokura Other Source: Ministry of Economic Development

Exhibit 14: New Zealand Historical Gas Price – Trending Upwards

$0

$1

$2

$3

$4

$5

$6

2000 2001 2002 2003 2004 2005 2006 2007 2008

U S $ / m c f

Source: Ministry of Economic Development

The acquisition of the Cardiff gas/condensate discovery (Permit 38156-D)fits strategically with its Cheal asset (see Exhibit 15). It is located withinPermit 38156-S and the acquisition ends the split rights of the area allowing TAGto control 100% of Permit 38156. Gas with rich condensate was discoveredwithin the upper Kapuni zone with 12m of net pay flowing at over 3 mcf/d and100 bbl/d of condensate (light oil) from a vertical alone. Significant potentialmay exists in the deeper K1A and K3E zones where strong gas shows wereencountered over a gross interval of 600 m. Cardiff gas can easily be sold to the



TAG Oil Ltd.


North Island gas market given its close proximity to existing gas infra0structurewhich is controlled by TAG on its oil operations in the area.

Exhibit 15: Cardiff Gas Discovery Location


Near-term Catalysts and 2010 Program

TAG recently announced their upcoming work program focused in theTaranaki basin, which includes new exploration and development drills,workover optimization operations, and the first horizontal multi-stage frac “test”. The program kicks off mid September 2010 with an exploration well,Sidewinder-1, on the Broadside permit which is planned to reach a totalmeasured depth of 1,457 m in approximately 10 days targeting the Mt.Messenger Formation. Depending on the results, TAG has the option to drill one

or more additional follow-on exploration prospects for further delineation of Mt.Messenger oil within the Broadside permit. Following this initial explorationwell, the rig will move to the existing Cheal production permit to drill the Cheal-BH-1 horizontal well into the proven producing area of the Cheal “A” block directly offsetting vertical producers in the area. A 600 m horizontal leg is

planned for this first “test” development well at a TVD of 2,325 m. This will bean important well completion as a multi-stage fracture treatment has not as yetbeen deployed in New Zealand.



TAG Oil Ltd.


Exhibit 16: Lots of Catalysts in 2010 with Focus on Taranaki Basin &Building Oil Cashflow; High Impact East Coast Basin to Follow in 2011

Property Operation Cost($mm)

Taranaki Basin - 2010 Focus - Building Production & Cashflow; Delineating New Development Reserves

Broadside 1st of multiple exploration targets; "Sidewinder-1" to be spud ~mid Sept. '10 $2.5

Cheal BH-1 Mt. Messenger Well - Horizontal Mult i-Stage Frac (Development well - lower risk) $3.5

Cheal Optimize B3 & B1 Wells – frac & potential dual completion $1.5

Cheal Urenui Well with Horizontal Mul ti-Stage Frac $3.5

Broadside Mt. Messenger Well – Vertical with Frac $2.5Cheal 1st of multiple Cheal "Step-Outs" star ting with B5 - Hor izontal Multi-Stage Frac $3.5

Cheal Cheal B-4 Side-Track $2.5

East Coast Basin - 2011 Focus

TBD Shallow Strat Wells for Data Gathering TBDTBD Vertical/Horizontal Pilot Program Testing Oilshale Potential TBD


Operating and Financial Forecasts As the company executes their phased exploration and field development

plan within the Taranaki basin focused at Cheal and on the Broadsidepermit, we expect (with success) TAG’s production to increase from ~490boe/d to ~1,200 boe/d by end of fiscal 2011 (March 2011). A key developmentto watch for is the horizontal drilling planned for late October or early Novemberthis year. Cash flows generated from the Cheal operations and work program areexpected to be key to help fund future exploration and development activitiesboth within the Taranaki basin and on the East Coast.

With no debt and $26mm in working capital, TAG is positioned for growthby investing in five 100% controlled permit areas within the Taranaki andEast Coast basins. The Taranaki basin could generate cash flows of $6.5mmand $24.4mm in fiscal 2011 and 2012, respectively, depending on execution

results from the initial work programs. Even though it is early days, the EastCoast basin has the potential to add significant value for shareholders over thelonger-term and is a great call option on what could be BIG international oil.Our risked EMV for the East Coast basin is $9.77/sh.

Overall, we view TAG as an attractive early stage play on what could shift froman emerging “explore-co” and early development E&P to a larger scale

“manufacturing” story (i.e. upon success on one of the company‟s conventionaland unconventional oil resource plays).



TAG Oil Ltd.


History and Management

TAG Oil has assembled a highly focused management team and Board of Directors with international oil and gas experience. Key management and

technical team members have been together for 7+ years focusing on NewZealand and the company has added key technical staff over the last fewmonths as TAG begins to get active with the drill bit in Q4 2010. Thecompany has focused efforts on the Taranaki Basin since 2003, and has beenacquiring additional permits and acreage in the country. In December of 2009,TAG Oil acquired 100% interests in Trans-Orient Petroleum, which heldexploration rights in the East Coast Basin. Led by Garth Johnson, CEO &Director, the management team has extensive experience in New Zealand andsome members have held previous roles with Trans-Orient. Management,together with the Board of Directors, holds 26% of the shares outstanding.

Exhibit 17: TAG Management Team and Board of Directors

Management Team

Garth Johnson, CEO & Director

Mr. Johnson joined TAG Oil as the corporate accountant in 1997. Mr. Johnson is a CertifiedGeneral Accountant who has extensive experience in executive management, acquisitions,corporate finance, accounting and regulatory reporting for public companies in the oil and gasindustry and has been instrumental in developing junior companies from start-up to listing onthe TSX and AMEX exchanges for the last 14 years. Mr. Johnson is also a corporate businessexecutive and has focused, primarily in New Zealand and Papua New Guinea. Currently, Mr.Johnson is the Chief Executive Officer and a director of TAG Oil and has previously served as adirector and officer of Trans-Orient, Austral and AMG.

Blair Johnson, CFO & Director

Mr. Johnson currently serves as the Chief Financial Officer of TAG Oil. Mr. Johnson, holds a

Bachelor of Management Studies with First Class Honors in Accounting and Marketing and hasworked with TAG Oil for the last four years. Mr. Johnson’s responsibilities with TAG Oil have included corporate governance and accounting functions for TAG Oil’s New Zealand subsidiaries. Mr. Johnson is a member of the Chartered Institute of Management Accountants(UK), and a member of the Institute of Chartered Accountants of New Zealand. Prior to joining25 TAG Oil, Mr. Johnson was Finance Director for Bridge Petroleum Limited (NZ) and has anextensive track record of managing operational risk in highly regulated industries.

Drew Cadenhead, COO & Director

Mr. Cadenhead currently serves as the Chief Operating Officer of TAG Oil. Mr. Cadenheadobtained his B.SC. in Geology from the University of Calgary and began his career in the oiland gas exploration business in 1979. Mr. Cadenhead has extensive technical and operationalexperience in Western Canada and New Zealand and he has gained an in-depth knowledge ofboth international and domestic oil and gas exploration and development. Mr. Cadenhead has

worked for Canadian Hunter Exploration, and also worked in various leadership capacities for anumber of other Canadian-based companies including Ulster Petroleum, Selkirk Energy andSummit Resources. At Summit Resources, Mr. Cadenhead was responsible for identifying andleading the company into the Gunnell area of B.C. to test the Upper Devonian Jean MarieFormation where multi-TCF gas deposits were subsequently discovered. Mr. Cadenheadgained his New Zealand experience with Fletcher Challenge Energy Taranaki, leading a teamof geoscientists, engineers and technical support staff into a successful multi-well drillingprogram and secondary recovery implementation before joining TAG Oil in 2003. Mr.Cadenhead is also a member of APEGGA.



TAG Oil Ltd.


Board of Directors

Alex Guidi, Director

Mr. Guidi has been a director of TAG Oil since December 16, 2009. Mr. Guidi has over 30 yearsof experience as a self-employed investor and financier and has enjoyed success in havingfounded a number of oil and gas companies focused on Western Canada and Australasia. InNew Zealand, Mr. Guidi was the founder of Austral, Trans-Orient and TAG Oil which, for many

years, 24 have made, and continue to make, a significant contribution to exploration anddevelopment activity in New Zealand and Papua New Guinea’s Foreland region. In NorthAmerica, Mr. Guidi was a founder of Walking Stick Oil and Gas Ltd. as well as the majorshareholder in a company that participated in the development of the Karr gas field in WestCentral Alberta. Mr. Guidi’s extensive career has also involved successful entrepreneurialendeavors in technology and real estate development. Mr. Guidi has previously served as adirector and officer of TAG Oil, Austral and AMG.

John Vaccaro, Director

Mr. Vaccaro has been a director of TAG Oil since June 11, 2008. Mr. Vaccaro has over 20years of experience in the financial services industry where he directed and providedinvestment consulting to high net worth individuals as well as corporate and institutional clients.He acted as a senior investment executive with CIBC Wood Gundy from January 2002 toMarch 2007. Mr. Vaccaro has since established a private client consulting practice in the

financial services sector, Yield Management Consultants, and acts as Managing Partner and aconsultant for the practice. Mr. Vaccaro is also an active member of the Fellowship of theCanadian Securities Institute and holds a degree from the University of British Columbia inUrban Land Economics with double Majors.

Ronald Bertuzzi, Director

Mr. Bertuzzi has been a director of TAG Oil since December 16, 2009. Mr. Bertuzzi holds aBachelor of Economics from the University of British Columbia and he has more than 20 yearsof executive, board and committee experience with U.S. and Canadian junior listed companiesfocused primarily in the oil and gas industry that are doing business in Australasia. Mr.Bertuzzi’s experience covers various stages of company development beginning with initialstart-up and initial public offerings, acquiring and exploring significant exploration acreages andending in discovery, facility development and commercial production of oil and gas. Mr. Bertuzzihas previously served as a director of Trans-Orient and Austral.

Michael Hart, Director

Mr. Hart has been a director of the Company since December 16, 2009. Mr. Hart is a long-timeinvestor in natural resources and has experience with public companies in the oil and gasindustry. Mr. Hart has previously worked in the financial markets’ sector with a number of financial institutions where he acted as an account executive and financial consultant. Since1995, Mr. Hart has worked with an investment-banking group responsible for taking projectsfrom startup to the public markets. Mr. Hart is currently the Corporate Secretary and a directorof Entourage and has previously served as a director and officer of Trans-Orient and AMG.

Garth Johnson, Director, See bio in Management Team section.




TAG Oil Ltd.


Exhibit 18: Consolidated Statement of Income

(stated in C$000's, except per share amounts) 2008 2009 2010 2011E 2012E

Revenue

Oil and Gas Revenues 4,104 4,924 6,528 16,379 44,666 Royalties 209 249 1,875 2,294 5,360

3,895 4,675 4,652 14,085 39,306

Interest and Other Income 427 159 67 99 100 4,321 4,833 4,719 14,184 39,406

Expenses

Operating 1,814 1,874 1,655 5,216 12,224 General and Administrative 2,110 1,545 2,114 2,686 2,800 Stock Based Compensation 80 20 303 229 300 Depletion and Depreciation, and Accretion 1,349 1,374 923 4,401 12,224

Foreign Exchange Loss (gain) 864 (355) 702 (248) - Write-off of Impaired Assets 6,763 19,565 64 - - Legal Settlement (471) (182) (27) - -

Interest and Bank Charges - - - - - Loss (gain) on disposition of oil and gas properti (208) (132) 1,560 - - Risk Management (gain) - - - - - Non-cash items - - 27 - -

12,301 23,708 7,320 12,284 27,548

Income before taxes (7,980) (18,875) (2,601) 1,901 11,858

Current taxes - - - - - Capital taxes - - - - - Future taxes - - - - -

- - - - -

Net income (7,980) (18,875) (2,601) 1,901 11,858

Dividends on common shares - - - - -

Net income to common (7,980) (18,875) (2,601) 1,901 11,858

Retained earnings, beginning of period (30,663) (38,643) (57,518) (60,118) (58,218)

Redemption of shares - - - - -

Retained earnings, end of period (38,643) (57,518) (60,118) (58,218) (46,360)

Earnings per common share ($0.07) ($1.05) ($0.09) $0.05 $0.31

Earnings per fully diluted common share ($0.07) ($1.05) ($0.08) $0.05 $0.30

EBITDA 132 2,064 (1,614) 6,302 24,082

EBITDA per common share $0.00 $0.12 ($0.05) $0.17 $0.64

EBITDA per fully diluted common share $0.00 $0.12 ($0.05) $0.16 $0.62 Source: Company reports



TAG Oil Ltd.


Exhibit 19: Consolidated Balance Sheet


Assets

Current Assets

Cash and Cash Equivalents 6,553 7,385 9,967 14,818 9,200

Accounts Receivable & Prepaids 1,537 193 357 493 493 Inventory 1,016 779 713 949 949

9,106 8,357 11,037 16,260 10,642

Restricted Cash - - - 121 121Plants, Properties and Equipment 29,382 4,548 9,490 24,479 42,255 Other Assets - 218 601 697 697

29,382 4,765 10,091 25,297 43,073

38,488 13,123 21,128 41,557 53,715

697 Liabilities

Current Liabilities

Accounts Payable and Accrued Liabilities 1,595 485 1,467 1,294 1,294 Asset Retirement Obligation - - 348 345 345

1,595 485 1,815 1,639 1,639

Long-term Loan - - - - - Future Income Tax 4,145 - - - - Asset Retirement Obligation 514 813 1,949 1,871 1,871

4,659 813 1,949 1,871 1,871

6,254 1,297 3,764 3,510 3,510

Shareholders Equity

Share Capital 69,980 69,645 76,228 94,804 94,804 Contributed Surplus 898 918 1,219 1,448 1,748 Retained Earnings (38,643) (57,518) (60,118) (58,218) (46,360)

32,234 13,044 17,328 38,034 50,192 Accumulated Other Comprehensive Loss (1,219) 36 13 13

38,488 13,123 21,128 41,557 53,715

Book Value 32,234 11,826 17,364 38,047 50,205

Book Value per share (common) $0.29 $0.66 $0.58 $1.01 $1.33Book Value per share (diluted) $0.29 $0.66 $0.56 $0.97 $1.29




TAG Oil Ltd.


Exhibit 20: Consolidated Statement of Cash Flows


Operating Activities

Net income (7,980) (18,875) (2,601) 1,901 11,858

Items not involving cash

Depletion and Depreciation 1,349 1,374 923 4,401 12,224 Stock Based Compensation 80 20 303 229 300

Write-off of Impaired Assets 6,562 19,565 64 - -

Write-down of Inventory 201 (132) 127 - -

Realized Loss on Investment 1,432 - -

Foreign Exchange Loss (Gain) - - - - -

Other 2 - -

Other non-cash - - - - -

212 1,952 250 6,531 24,382

Change in Non-cash Working Capital Items (1,713) 1,743 (65) (517) -

(1,500) 3,695 185 6,014 24,382

Financing Activities

Issue of Common Shares, net of costs - - 93 18,534 -

Restricted Cash - - - (121) -

Shares Purchased and Returned to Treasury - (335) (42) - -

Share capital from exercised options 42

Change in non-cash Working Capital - - - - -

- (335) 51 18,454 -

Cash Available for Investing Activities (1,500) 3,360 236 24,469 24,382

Investing Activities

Oil and Gas Properties (5,372) (2,524) (2,303) (19,500) (30,000)

Investments - (4) (194) - -

Cash Assumed on Acquisition 4,843 - -

Proceeds from Sale of Properties - - - - -

Purchase of shares (118) - Change in Non-cash Working Capital Items - - - - -

(5,372) (2,528) 2,346 (19,618) (30,000)

Increase (Decrease) in Cash (6,873) 832 2,582 4,850 (5,618) Cash and Short-term Deposits - Beginning of Period 13,426 6,553 7,385 9,967 14,818

Cash and Short-term Deposits - End of Period 6,553 7,385 9,967 14,818 9,200

Cash Flow per Common Share $0.00 $0.11 $0.01 $0.17 $0.65

Cash Flow per Fully Diluted Share $0.00 $0.11 $0.01 $0.17 $0.62




TAG Oil Ltd.


Disclaimers

The particulars contained herein were obtained from sources that we believe to bereliable, but are not guaranteed by us and may be incomplete or inaccurate. Theopinions expressed are based upon our analysis and interpretation of theseparticulars and are not to be construed as a solicitation of offer to buy or sell thesecurities mentioned herein. Wellington West Capital Markets Inc. (“WWCM”)may act as financial advisor, fiscal agent or underwriter for certain of thecompanies mentioned herein, and may receive remuneration for its services.WWCM and/or its principals, officers, directors, representatives, and associatesmay have a position in the securities mentioned herein and may make purchasesand/or sales of these securities from time to time in the open market or otherwise.This report may not be reproduced in whole or in part, or further distributed orpublished or referred to in any manner whatsoever nor may the information,opinions or conclusions contained herein be referred to without in each case theprior written consent of WWCM.

U.S. Institutions may conduct business through our affiliate Wellington WestCapital Markets (USA) Inc. Wellington West Capital Markets (USA) Inc. acceptsthe contents of this research report, however, the company that prepared this reportmay not be subject to U.S. rules regarding the preparation of research reports andthe independence of research analysts.

This report will be forwarded to our affiliate Wellington West Capital Inc.(“WWCI”). Subject to WWCI management review and approval, this report maybe distributed to clients of WWCI. WWCI and WWCM are members of theCanadian Investor Protection Fund (“CIPF”).

Wellington West Capital Markets Stock Rating SystemThe rating system is based on the stock‟s expected absolute total return over thenext 12 months. Generally, Strong Buy rating is expected to produce a totalreturn of 25% or more, Buy a total return of 10% to 25%, Market Perform a totalreturn of 0% to 10% and Underperform a negative total return. Speculative Buyrating is expected to produce a total return of 25% or more, but is based onfactors and forecasts that have high degrees of uncertainty. The distribution of the recommendations for the last three-month period and their relationship withinvestment banking business are available on request by emailing [email protected].

Analyst CompensationResearch analysts receive compensation based on a number of factors asdetermined by WWCM‟s management. Compensation is affected by all of thefirm‟s business activities, including revenue generated from capital markets andinvestment banking. No part of the compensation of the analyst who authoredthis report is based on the specific recommendation or views expressed in thisreport.



TAG Oil Ltd.

Analyst Trading

WWCM permits analysts to own and trade in the securities and/or derivatives of those companies under their coverage, subject to the following restrictions: notrades can be executed in anticipation of the initiation of coverage; no trades canbe executed for five days after dissemination of launching coverage or a materialchange in recommendation; and no trades can be executed against an analyst‟srecommendation. Exceptions require prior approval of the Head of Research andcan only be executed for a reason unrelated to the outlook of the stock.

Dissemination of Research

WWCM endeavors to make all reasonable efforts to provide research,simultaneously and electronically to all eligible clients and potential clients.

Company Name Ticker Symbol Applicable Disclosure

TAG Oil Ltd. TAO-V -

Applicable Disclosure Details

1) In the last 12 months, WWCM, or its affiliates, have managed or co-managed

an offering of securities by the subject issuer.2) In the last 12 months, WWCM, or its affiliates, have received compensation

for investment banking and related services from the subject issuer.3) The research analyst or a member of the research analyst‟s household, or any

associate or individual preparing the report, has a long position in the sharesand/or the options of the subject issuer.

4) The research analyst or a member of the research‟s household, or anyassociate or individual preparing the report, has a short position in the sharesand/or the options of the subject issuer.

5) WWCM or its affiliates is a market maker, or is associated with the specialistthat makes a market in the securities of the subject issuer.

6) WWCM or its affiliates own more than 1% of any class of common equity of the subject issuer.

7) WWCM has a conflict of interest with the subject issuer.

8) The research analyst(s) has a conflict of interest with the subject issuer.

9) Over the last 12 months, the research analyst has received compensation basedon a specific investment banking transaction relative to the subject issuer.

10) The research analyst or a member of the research analys t‟s household serves asa Director or Officer or Advisory Board Member of the subject issuer.

11) The research analyst(s) has viewed the material operations of the issuer.

12) A portion of the travel expenses of the analyst were paid or reimbursed bythe issuer.

Analyst Certification

Each analyst of WWCM whose name appears in this research report herebycertifies that (i) the recommendations and opinions expressed in the researchreport accurately reflect the research analyst‟s personal views about any and allof the securities or issuers discussed herein that are within the analyst‟s coverageuniverse and (ii) no part of the research analyst‟s compensation was, is, or willbe, directly or indirectly related to the provision of specific recommendations orviews expressed by the research analyst in the research report.

wellington west: tag oil initiate report

Documents