Oil & Gas: Producer / Explorer

Transcription

1 Oil & Gas: Producer / Explorer TAP.asx Speculative Buy Tap Oil Ltd (TAP) TAP OIL LTD (TAP) The New TAP Salamander Energy 2.0 Tap Oil Limited ( Tap or the Company ) is in the process of shifting direction towards a South East Asian Hub strategy, focused on lower risk development opportunities in select basins that also offer near field exploration upside. The drive behind this change is the new management team who are trying to replicate their strategy from Salamander Energy plc. They are being backed by two significant Asian based investors who have accumulated their current shareholdings in the Company, primarily on market, at significantly higher levels than the current share price. The Legacy Tap Provides the Foundation for Growth Tap is now close to being debt free and production from the Manora project should generate circa US$30-40m of free cash over the next 3-4 years. While the Company has inherited some legacy restoration obligations, this cashflow will still provide the Company with the initial capital required to pursue its new strategy. Manora and surrounding acreage also offers upside potential and fits with the new Hub Strategy. There is also an Australian portfolio of offshore discoveries, amounting to over 200PJ of gas which could be monetised. The New Tap - South East Asian Hub Strategy Leveraging from the prior experience of management and their major shareholders, Tap is actively seeking new opportunities in South East Asia (onshore or shallow water) that fit their Hub Strategy. Despite the low oil price, market conditions are favourable to access quality assets, with host Governments seeking new investment to arrest production declines and Major Oil companies selling assets as they rationalise their portfolios. Valuation and Investment Case Our A$0.10 per share valuation is based on our base case NPV10 valuation of the remaining 2P reserves in Manora, a modest exit value for the Australian portfolio minus net debt and restoration costs. The current market valuation seems to subscribe little or no value to the Australian assets nor for the new management team and potential opportunities they intend to pursue. A Key Chart: Tap Oil Net Cash Forecasts Share Price: Valuation 19 Jun 2017 $0.06 $0.10 Hartleys Brief Investment Conclusion TAP currently owns a 30% interest in the Manora Oil Field and a number of (mainly gas) assets offshore WA. New Management intend to pursue a revised S.E.A. focused strategy. Board of Directors: James Menzies Executive Chairman Andrea Hall Non Executive Director Peter Mansell Non Executive Director Frank S Sreesangkom Non Executive Director Tom Soulsby Non Executive Director Substantial Shareholders: Northern Gulf Petroleum 22.6% RISCO 21.6% M&G 9.0% Company Address: Level 1, 47 Colin Street West Perth, WA 6005 Issued Capital: 425.0m - fully diluted 433.5m Market Cap: $25.9m - fully diluted $26.4m Net Debt (current est): -$0.1m Valuation Summary A$ m cps Manora (2P)+Corporate rd Party Gas Sales Australia Current Net Debt + Rest Source: Hartleys Research A$ 3. M Jun-16 Tap Oil Limited Oct-16 Feb Jun-17 Volume - RHS Source: IRESS TAP Shareprice - LHS Sector (S&P/ASX SMALL RESOURCES) - LHS Authors: Aiden Bradley Energy Analyst Ph: E: aiden.bradley@hartleys.com.au Source: Hartleys Research Hartleys Limited ABN (AFSL ) 141 Page St Georges 1 of 34 Terrace, Perth, Western Australia, 6000 Hartleys does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Further information concerning Hartleys regulatory disclosures can be found on Hartleys website

2 SUMMARY MODEL Tap Oil Limited Share Price June 2017 TAP $0.06 Speculative Buy Key Market Information Directors Company Information Share Price $0.06 James Menzies Executive Chairman Market Capitalisation $26m Andrea Hall Non Executive Director 52 Week High-Low $ $0.11 Peter Mansell Non Executive Director Issued Capital 425.0m Frank S Sreesangkom Non Executive Director Issued Capital (fully diluted inc. ITM options) 433.5m Tom Soulsby Non Executive Director Options / Performance Rights 8.5m Net Debt US$ m -0.1m A$ m -0.1m Substantial Shareholders m shares % 1 EV $26m Northern Gulf Petroleum Valuation $0.10 RISCO Month Price Target $0.10 M&G Upside/Downside 60% 5 6 Manora Reserves (Net to TAP) 1P 2P 2C Financial Performance Unit 14A 15A 16A 17F 18F 7 US$ m 8 Developed (mmbbl) Net Revenue Undeveloped (mmbbl) Gross Profit # Margin Total (mmbbl) Other Income / Expenses (8.7) (5.4) (13.3) (6.0) (6.0) EBITDA Australian Resources (Net to TAP) 1P 2P 2C DD&A (4.0) (35.0) (24.9) (21.9) (21.9) EBIT (1.1) 4.3 (1.6) Oil (mmbbl) 2.30 Interest (2.2) (7.3) (3.0) (0.1) 0.3 Condensate (mmboe) 0.80 PBT (0.6) 14.0 (4.1) 4.2 (1.3) Gas (PJ) Tax (0.2) 0.2 (3.0) (2.1) 0.7 NPAT (0.7) 14.1 (7.1) 2.1 (0.7) Total (mmboe) Abnormals (42.0) (68.6) (7.9) Reported (42.7) (54.5) (14.9) Oil Price Forecast Balance Sheet Oil (Realised) Cash Other Assets Share Price Valuation (NAV) A$ m $/share Exploration Assets PP&E Manora (2P)+Corporate Total Assets rd Party Gas Sales Debt Australia Other Liabilities Current Net Debt + Restoration Costs (26.9) (0.06) Shareholders Equity Cash Flow Assets Starting Cash Operations EXPLORATION PERMITS Tap % Operator Investing (91.1) (16.8) (11.3) (9.0) (9.0) Financing 61.2 (32.1) (23.3) (8.9) 0.0 Western Australia Net Inc (Dec) (24.2) 3.4 (7.2) TP/ Quadrant FX (0.7) (1.8) (2.0) (3.2) 0.0 WA-8-L Santos End Cash WA-290-P Quadrant WA-320-P 9.78 Quadrant Ratio Analysis Unit 14A 15A 16A 17F 18F WA-155-P (Part II) 6.56 Quadrant WA-515P 100 TAP Free Cash Flow / share A (19.7) WA-516P 100 TAP Cashflow Multiple X (0.3) Earnings Per Share A (0.2) 3.3 (1.7) 0.5 (0.2) Myanmar Price to Earnings Ratio X (34.7) 1.8 (3.7) 12.4 (39.5) M TAP EV / EBIT X (24.8) 6.1 (16.3) EV / EBITDA X RETENTION PERMITS Interest Cover X na Western Australia Net debt / Equity % 37% 37% 6% na na WA-33-R Quadrant WA-34-R ENI WA-49-R Quadrant WA-72-R BHPP PRODUCTION LICENCES Western Australia TL/ Quadrant WA-22-L ENI WA-25-L ENI Thailand G1/ Mubadala Analyst: Aiden Bradley Phone: Last Update: 19 June 2017 Sources: IRESS, Company Information, Hartleys Research Page 2 of 34

3 HIGHLIGHTS Tap Oil is in the process of shifting strategy and focus from its history as predominantly a wild cat Australian focused explorer towards becoming a South East Asian hub and spoke field developer. The drive behind this change is the new management team who are going to try and replicate the success they achieved with a similar strategy at Salamander Energy plc. They are being backed by two Asian based investors who have accumulated their current stakes in the Company, primarily on market, at significantly higher levels than the current share price. Tap is now close to being debt free and its current producing asset (Manora) not only offers its own near field ( hub and spoke ) potential but also is set to generate significant free cash flow to aid the funding of this new strategy. A potential exit of their legacy Australian portfolio could provide additional capital as well as increasing the focus on the new areas of operation and strategy. The current market valuation seems to subscribe little or no value to the Australian assets and much more importantly similarly little to the new management team and potential opportunities they intend to pursue. Fig. 1: NAV Table Share Price Valuation (NAV) A$ m $/share Manora (2P)+Corporate rd Party Gas Sales Australia Current Net Debt + Restoration Costs (26.9) (0.06) Source: Hartleys THE LEGACY TAP Tap Oil has had an interesting history as an explorer and then developer in basins offshore Western Australia. After listing on the ASX in 1996 the Company acquired a % stake in the Harriet oil and gas field from Marubeni Oil in Also in 1997, it farmed into WA- 234-P and participated in the Woollybutt oil discovery, which came into production in 2003 and produced close to 29 million barrels of oil. These two assets alongside 3 rd Party Gas sales (secured from John Brookes JV in 2005) underpinned the Company for the best part of the next decade. On the back of these three revenue streams the Company s share price reached a peak of A$2.59 per share in August Unfortunately, under a succession of prior management teams the cash generated from these assets has recycled into a series of largely unsuccessful exploration ventures in Australia and various basins across Asia and Africa. In the face of declining production, the Company acquired a stake in the Manora Oil Field offshore Thailand from Northern Gulf Petroleum (NGP, one of the current significant shareholders). Post the completion of Third Party Gas Sales in 1Q17, Manora is now Tap s only remaining cash flow generating asset. Page 3 of 34

4 Fig. 2: Manora Revenue Source: Hartleys Estimates for Production Volumes and Realised Oil Prices We value the remaining 2P reserves at Manora at circa A$64m. Although this is subject to a broad range of recoverable reserves (we assume current 2P is recoverable), production (current economic limit estimated to be circa 3,000bopd (which we assume), although the Company hopes this can be reduced to 2,000bopd through further cost cutting) and oil price assumptions (see range below). Fig. 3: Manora Reserves Manora Reserves (Net to TAP) 1P 2P 2C Developed (mmbbl) Undeveloped (mmbbl) Total (mmbbl) Source: Tap Oil and Hartleys Fig. 4: NPV for Manora & Corporate at Differing Oil Prices Source: Hartleys Page 4 of 34

5 While the Company is on the verge of paying off the last of its debt, it has disclosed potential restoration costs of circa US$25m (we have included this at a discount to the booked value in our valuation). Fig. 5: Tap Oil Net Cash Forecasts Source: Hartleys Fig. 6: Restoration Cost Provisions Source: Tap Oil and Hartleys The final legacy which new management has inherited is a portfolio of as yet uncommercial discoveries offshore Western Australia. While the development timetable for these assets remains uncertain, it does represent over 200PJ of resource net to Tap. We value this resource at circa A$28m based on a potential sale or separate listing value for this discovered resource. There is obviously quite a range of upside and downside risks around this valuation given the current level of development uncertainty. Page 5 of 34

6 Fig. 7: Tap Oil Australian Carnarvon Basin Assets Source: Tap Oil Tap Oil has participated in the discovery of over 200PJ of Gas net to them in the Carnarvon and Bonaparte Basins. This portfolio is likely now non-core and may be restructured or sold. The potential plans of their partner Quadrant Energy in WA-49- R, WA-290-P and WA-33-R to IPO in 2017/18 may provide a potential catalyst for at least some of these projects to move forward. Fig. 8: Australian Portfolio 2C Gas Resources Source: Tap Oil and Hartleys Page 6 of 34

7 Tap Oil also has over 3mmboe of booked 2C oil and condensate resource. Fig. 9: Australian Portfolio 2C Oil Resources Source: Tap Oil and Hartleys As mentioned the potential plans of Quadrant Energy to IPO in 2017/18 may provide a catalyst for at least some of these projects to move forward. Quadrant Energy operates WA-49-R, WA-290-P and WA-33-R, which contain the Maitland, Zola, Bianchi and the Antiope discoveries (over 112PJ of net gas). 1: WA-33-R (Maitland) Tap Oil 22.47% - Operator Quadrant Energy WA-33-R is a Retention Lease containing the Maitland Gas Field in the offshore Carnarvon Basin and covers an area of 319 square km. WA-33-R was renewed for a further 5 years and commenced on 29 September Tap Oil did not participate in the Spartan-1 well drilled by Quadrant Energy, which looks to have been a commercial discovery close to Barrow Island and the gas processing facilities at Varanus Island. When Spartan-1 is combined with Maitland, and the previous success at Davis-1 it could provide the future supply for Varanus Island next decade replacing the depleting resource of the John Brookes Field (which commenced production in 2005). Quadrant Energy refers to this as the Outer Barrow Project Area, and as such this Tap resource has perhaps the best chase of being commercialised within a reasonable time frame (and hence has the most value). Page 7 of 34

8 Fig. 10: WA-33-R at center of the Outer Barrow Project Area Source: Quadrant Energy The second area of overlap with Quadrant Energy is in WA-49-R and WA-290-P, further West of Barrow Island and the East Spar Field in deeper water. Fig. 11: Location of WA-290-P and WA-33-R relative to existing Quadrant Energy infrastructure Source: Quadrant Energy 2: WA-49-R (Zola, Bianchi and Antiope) Tap Oil 10% - Operator Quadrant Energy There have been three discoveries in the block, Zola (37.2PJ net to Tap), Bianchi (16PJ net) and Antiope (10.6PJ net). Page 8 of 34

9 Tap estimates the total gross 2C contingent resource in the retention lease is 638 PJ, making it also a potential tie back option (although more expensive) at a later date. We believe the gas overlapping with Quadrant Energy has the highest probability of commercial success, given the requirement by Quadrant to replace the depleting feedstock on Varanus Island. This gas largely underpins (my means of a sales value ($0.20/GJ)) our valuation of Tap s Australian portfolio. Fig. 12: WA-49-R (Zola, Bianchi and Antiope) Source: Tap Oil Further afield Tap Oil also has circa 95PJ of net gas resource partnered with ENI in the Bonaparte Basin and BHP Petroleum (BHPP) in deeper water in the Carnarvon Basin (even further west of Barrow Island). 3: WA-34-R (Prometheus/Rubicon Gas) Tap Oil 12% - ENI Operator WA-34-R is a retention lease in the Bonaparte Basin. The retention lease contains the Prometheus/Rubicon Gas fields and covers 418 square km. Tap estimates a total gross 2C contingent resource of 377 PJ (45 PJ net to Tap). A Retention Lease Renewal application was submitted to NOPTA and was granted by the Authority on 23 December The renewal lasts for five years to 22 December The commercial potential for a smallish resource of this size is challenging. However as outlined mainly by Santos there is a growing supply gap to fill at Darwin and Prometheus/Rubicon are located right on the INPEX gas pipeline. This gas is much more commercially challenged than the resource overlapping with Quadrant but it may hold some longer term strategic value for the LNG Plant Operators at Darwin. Page 9 of 34

10 Fig. 13: WA-34-R (Prometheus/Rubicon Gas) Source: Santos The final 49PJ of gas was discovered at Tallaganda with BHP Petroleum. 4: WA-72-R (Tallaganda) Tap Oil 20% - BHPP Operator The Tallaganda-1 well was drilled in WA-351-P (4,365m MDRT) in March Tap has booked 49 PJ as a 2C contingent resource for the WA-351-P portion of the Tallaganda structure. The Tallaganda discovery did at least confirm an active petroleum system within the acreage and proved the Triassic Mungaroo play on block. There are a number of follow up undrilled prospects identified. Given the size and location of this gas it will likely require further follow up exploration and an upswing in LNG contracting for it to attract additional interest and hence value. Page 10 of 34

11 Fig. 14: WA-72-R (Tallaganda) Source: Tap Oil THE NEW TAP = SALAMANDER ENERGY 2.0 The legacy Manora Project does provide the Company with some underlying cash flow and we do ascribe a value to its Australian gas resource. However, the key investment theme for current (or prospective) investors in Tap Oil is whether the new management team can replicate or exceed their success at Salamander Energy at Tap, while following largely the same strategy. A related consideration is how to evaluate the influence of the two major shareholders and whether the influence of these two Groups will be to the benefit of other minority shareholders or not. The new Tap Oil Management Team and Board; 1: James Menzies, Executive Chairman Founder & CEO of Salamander Energy plc, sold to Ophir Energy Feb 2015 for US$845mn. Extensive experience of building & monetising asset portfolio in Thailand, Indonesia & Malaysia. 2: Tom Soulsby (Risco representative) CEO of Risco Energy. Page 11 of 34

12 Risco Energy Advisory Management is an upstream energy investment company realising new possibilities in South East Asia based in Singapore and Jakarta. Risco s upstream business focuses on production and development opportunities that contain both appraisal and exploration upside. Successfully built a South East Asian asset portfolio in Indonesia and Philippines, sold to Kufpec in Over 25 years sector experience in investment banking, business development & financial management. Non-executive Director of Lion Energy Ltd. 2: Chris Newton (Risco alternate) 25 years in South East Asia, including MD of Fletcher Challenge, Brunei. Former President of Santos Indonesia. Former CEO of Jakarta-listed Energi Mega Persada. Director of Indonesian Petroleum Association. Currently Oil & Gas advisor to the Castle Group in Indonesia. Director of Lion Energy Ltd. 3: Frank Sreesangkom (NGP representative) Senior Advisor to Northern Gulf Petroleum Pte Ltd. Northern Gulf Petroleum is a private E&P based in Thailand controlled by Thai entrepreneur Chatchai Yenbamroong. 4: Pantaporn Panyaporn (NGP alternate, to be appointed) Chief Operating Officer, Northern Gulf Petroleum Co Ltd. Previously Manora Subsurface Team Leader, Mubadala. Senior Reservoir Engineer, PTT Exploration & Production. 5: Peter Mansell, Independent Non-Executive Director Over 15 years experience as a listed company director including Chair of Zinifex Limited and West Australian Newspapers Holdings Limited. Currently Chair of Energy Resources of Australia Ltd and director of Aurecon Group Pty Ltd. Tap Oil s current Board is an amalgamation of three distinct Groups (Salamander, RISCO and NGP), each with a successful track record in the E&P sector in South East Asia. Page 12 of 34

13 Tap Oil Strategy; The new Board have outlined the strategy they intend to pursue at Tap Oil. Naturally it is very similar to what was core at Salamander Energy and also matches RISCO s stated upstream investment focus (i.e. production and development opportunities that contain both appraisal and exploration upside in South East Asia). Key features are maintaining a geographical and size focus on core development / appraisal assets with low risk step out exploration upside. Importantly as seen at Salamander, the management are not primarily driven by retaining assets purely to maintain a Company as a going concern, but actively trade assets (or the whole Company if desirable) to release value for shareholders. Fig. 15: Tap Oil Strategy - How E&P Companies Can Add Value Source: Tap Oil A key to success at Salamander was the Hub Strategy they pursued and this is the intended approach at Tap Oil. Through their expertise, focus and experience they intend to access discovered assets that can be developed / redeveloped which then provides the potential to be a hub for low risk step out exploration. Fig. 16: Tap Oil Strategy - Hub Strategy Source: Tap Oil Page 13 of 34

14 Also, as at Salamander the strategy is narrowly focused on just a few basins in South East Asia to leverage of the experience of the key stakeholders and management. Fig. 17: Tap Oil Strategy - Strategic Focus and Key Targets Source: Tap Oil Page 14 of 34

15 Tap Oil Strategy Manora fits the model Tap Oil s legacy asset Manora is potentially a good fit itself to implement the Hub strategy as outlined in Figure 16. Fig. 18: Location Map of Manora and G1/48 Source: Tap Oil The existing asset can potentially be worked harder to further lower costs and hence improve potential reserve recovery. Additional upside on the existing development can also be identified through the application of new technology (or just a new set of eyes!). Potential upside 1 of 4: Up-Dip Attic Oil Attractive un-drilled locations identified by Tap, up-dip of current well locations. Additional probable reserves and contingent resources identified by independent reserve auditor Netherlands and Sewell. Page 15 of 34

16 Fig. 19: Up-Dip Attic Oil Source: Tap Oil The next step out is to try and leverage of the existing infrastructure through drilling low risk satellite or step out prospects can be targeted at a low cost. Potential upside 2 of 4: Step Out Exploration from the Platform Small prospects drillable from the existing platform. Low cost to drill and quick to bring on-line upon success. Fig. 20: Step Out Exploration from the Platform Source: Tap Oil Page 16 of 34

17 After capturing the low hanging fruit (i.e. maximising reserves at the existing discovery and low risk step out potential) further exploration is undertaken in the surrounding acreage if warranted (and fundable through existing production). Potential upside 3 of 4: Near Field Exploration e.g. Manora Footwall Prospect Large area of closure on the up-thrown side of the Manora field bounding fault. Larger than the existing Manora field, over 500ft of vertical relief. Fig. 21: Manora Footwall Prospect Source: Tap Oil If the lower risk near field exploration is successful the Hub may be extended to neighbouring licenses and acreage chasing similar plays within the same basin (now leveraging of proprietorial knowledge gained of the play). Potential upside 4 of 4: Prospects in surrounding acreage e.g. Flexural Margin Prospects Within G1/48 Large follow up targets, located to receive charge. Several large structures mapped in the south of G1/48 licence. Page 17 of 34

18 Fig. 22: Flexural Margin Prospects Within G1/48 Source: Tap Oil Shareholder Alignment; Tap Oil has two major shareholders in Northern Gulf Petroleum NGP (22.6%) and RISCO (21.6%). While it is not always possible to judge the intentions of large shareholders (and how this may impact minority shareholders) it would seem that both are supportive of the Salamander Energy 2.0 Strategy and will provide James Menzies the freedom and support to try and achieve a similar or better outcome. It is worth highlighting in this regard that both Northern Gulf and RISCO have both acquired the majority of their stock through on market purchases (note Northern Gulf received an initial allocation as part payment from the original sale of a stake in the Manora Project to Tap). It is also worth flagging that both Groups have not only continued to purchase shares consistently over time but that their average entry prices are now significantly above the current share price. Page 18 of 34

19 Fig. 23: NGP and RISCO Stock Purchases Over Time Source: IRESS and Hartleys Fig. 24: NGP and RISCO Average and High/Low Entry Prices Source: IRESS and Harlteys Given the importance of the new strategy the next three sections provide an overview of: 1: A brief history of Salamander Energy (Tap Oil s Executive Chairman is the former co-founder of Salamander and Tap will largely follow their strategy). 2: An overview of the current state of the E&P sector in South East Asia (the area of focus now for Tap Oil). 3: Increased access to opportunities; a look at what type of opportunities (beyond expanding Manora into a Hub) will Tap Oil be able to access. Page 19 of 34

20 1: SALAMANDER ENERGY 2.0 Salamander Energy was co-founded in September 2006 as a public limited company in the UK by James Menzies (current Executive Chair of Tap Oil) and was listed on the London Stock Exchange in November. The Strategy was similar to that currently outlined for Tap Oil. Their core stated strategy was - Our Core asset portfolio is made up of hub positions with discovered hydrocarbons, step-out exploration potential, and new acreage opportunities within the same basin. Salamander had operations across South East Asia, with the principal assets located in Indonesia and Thailand and they also held a number of licenses in Malaysia and Laos. The portfolio has been established through a series of asset and company transactions, as well as organic license round entries. Fig. 25: Salamander Energy Map of Operations Source: Salamander Energy The assets portfolio while geographically focused and revolved around the hub concept extended across conventional oil and gas (if close to markets) and onshore and shallow water. Page 20 of 34

21 Fig. 26: Salamander Energy Assets Source: Salamander Salamander ended 2014 with production of circa 14,200 boepd, the majority of which came from the Bualuang oil field (averaged nearly 12,500 boepd in 2014). Total 2P reserves as at the start of 2014 were 65.3mmboe with a further 110mmboe of 2C resources. Fig. 27: Overview of Salamander s independently certified reserves and resources (net working interest) Source: Ophir Page 21 of 34

22 2: SOUTH EAST ASIA E&P Tap Oil s new strategy is exclusively focused on opportunities in South East Asia, in an attempt to leverage of the combined experience of their ex Salamander Energy management team and their two major shareholders. Operating in the E&P sector in South East Asia is however not without its challenges as evidenced by the collapse in offshore rig count in (South East Asia witnessed the largest percentage collapse with the oil price). Fig. 28: Global Offshore Rig Count Decline by Region, December 2014 to December 2015 Source: IHS Large tracts of the sector are controlled by National Oil Companies ( NOC s ) and Government Take can be high versus other regions. Fig. 29: Government Take and Investor IRR Source: Empyrean Energy Plc Corporation Presentation 2Q17 As a result of these challenges the breakeven price for undeveloped projects (generally) in South East Asia is also among the highest globally. Page 22 of 34

23 Fig. 30: Average Brent Breakeven Price for Non-sanctioned Projects per Region (US$/bbl) Source: Rystad Energy Since 2010 major discoveries have predominantly occurred in Malaysia and Indonesia and they continue to attract the largest share of investment. Overall investment has declined with the oil price, from US$43bn in 2014 to US$34bn in 2015 and just US$27bn in A recovery in spend will likely be highly dependent on commodity price levels. Fig. 31: Upstream Capital Investment Outlook for South East Asia (bn USD) Source: Rystad Energy Overall exploration activity remains highly correlated to oil prices. The discovered resource in 2015 was at the lowest level since before 2005, a result of low oil prices and weak International gas markets (especially LNG). Page 23 of 34

24 Fig. 32: South East Asia Discovered Resources versus Brent Oil Price (mn boe) Source: Rystad Energy The number of projects sanctioned (so previously discovered) in 2016 did reach respectable levels (circa 1,835mmboe). Fig. 33: 2016 and Potential 2017 sanctioned volumes in Australia and South East Asia (mmboe) Source: Rystad Energy Although this was heavily skewed towards gas and was driven mainly (75% of the total approvals) by two gas megaprojects (Tangguh expansion in Indonesia and the Block B-O Mon project offshore Vietnam) with most projects sanctioned within shallow water depths (up to 125m). Consultancy Rystad Energy forecasts that projects totalling 512mmboe of recoverable liquids and gas resources could potentially reach final investment decisions (FIDs) within Australia and South-East Asia during So, while there remain many challenges facing the sector in South East Asia, decent quality projects are still getting developed and underlying fundamentals (oil price, changing asset ownership structures, declining domestic supplies, strong growth in regional energy demand etc.) should provide quality opportunities for suitably qualified and experienced players. Page 24 of 34

25 Fig. 34: Potential 2017 sanctioned hydrocarbon volumes Source: Rystad Energy 3: INCREASING ACCESS TO OPPORTUNITIES While many challenges face the Independent E&P sector in South East Asia, relative to many other regions there are also a growing number of opportunities available for new entrants wishing to grow a quality asset base in the region. These positive drivers include: A. Very strong energy demand in the region, resulting in support for oil exploration (to reduce the reliance on imports) and strong demand and prices for Natural Gas. B. Increased Government support for exploration which is providing incentives for qualified Independents to access licenses and assets under improving terms. C. A large number of smaller conventional discoveries onshore and in shallow water that are too small for the Majors but still require technical and financial expertise to mature. D. The International Oil Companies (IOC s) due to lower commodity prices are selling non-core assets and refocusing on their base operations. This will result in an increasing number of asset sales and disposals from them in South East Asia. A: Strong Regional Energy Demand and Imports As widely flagged South East Asia is one of the fastest growing (economically) regions in the World. Going hand in hand with this is very rapid growth in demand for Energy. Historically the industry was dominated by the National Oil and Gas Companies of the respective countries in the region and they have not been able to grow production to meet this demand, resulting in increasing net energy imports and hence a net cost to regional Governments. Weaker oil and gas prices have accelerated the decline in production and has put increasing pressure on regional Governments to attract new investment to arrest this decline. Page 25 of 34

26 Total liquids production from the South East Asian region was around 2.4mmboe/d in 2015 according to consultants Rystad Energy and they expect it to decline to 2.14mmboe/d by Increases in output from Malaysia and Brunei cannot offset declines from Indonesia and Vietnam. Fig. 35: South East Asia Liquids Production ( 000boe/d) Source: Rystad Energy Even though the NOC s have focused on Gas exploration over the past two decades (oil finds according to consultants Wood Mackenzie made up just one-quarter of total hydrocarbons discovered in Asia since 1990) in the near-term gas production is also likely to continue to decline. The natural gas production from Southeast Asia was estimated by Rystad Energy at around 21 Tcf/d in 2015 and is projected to decrease to 18 Tcf/d by 2020 on the back of the decline in output from mature fields in this region. Fig. 36: South East Asia Natural Gas Production (Tcf/d) Source: Rystad Energy Page 26 of 34

27 B: Government support for increased exploration As a result of rapidly growing energy demand across the region, and the inability of the NOC s to grow domestic supplies, Governments have been slowly opening up their Oil & Gas sectors to new players and providing greater incentives to try and boost exploration. The International Energy Agency has estimated that the oil sector in the ASEAN countries will attract close to US$200bn and US$460bn of oil and gas investment respectively between 2013 and Approximately 80% of this will be directed towards the upstream. Fig. 37: ASEAN Cumulative Investment Required ( ) Source: IEA This effort is starting to pay dividends with a recent report by Wood Mackenzie identifying 20 pre-fid projects across the Asia Pacific region targeting sanction before These 20 projects represent total associated capital expenditure of US$66bn with shallow water gas projects dominating, especially in Malaysia (which is a key area of focus for Tap Oil). Key for Tap Oil is that it remains difficult to qualify as an operator of projects in many countries across the region, so the influence and experience of their management team and key shareholders will be a key differentiator and potential competitive advantage for them over other junior oil and gas companies. Regional governments however still have a lot to do to improve the investment environment for new and existing players. We saw earlier the relatively high Government Take across the region and high costs (some of the latter relate to regulations rather than pure operating issues). Additionally, the Wood Mackenzie report highlighted that the average lead time from discovery to estimated FID date in the Asian region is 15 years, highlighting in their opinion the region's many regulatory and fiscal challenges. Malaysia as outlined is expected to lead the region in terms of FID s over the next few years. This is the result of regulatory and fiscal changes over the past decade. Page 27 of 34

28 Fig. 38: Malaysian Oil & Gas Fields Source: Petronas These changes have resulted in a number of new players entering Malaysia over the last decade, with circa 17 different operators now active. Fig. 39: Malaysia Industry Overview Source: Petronas As mentioned Malaysia is likely to be a key target for Tap Oil and the Exploration PSC with developed fields is an ideal package to match their strategy. Page 28 of 34

29 Fig. 40: Malaysia Exploration Opportunities Source: Petronas C: Government support for increased exploration and access to abundant resources As a result of the rapidly growing energy demand across the region and the inability of the NOC s to grow domestic supplies, Governments have been slowly opening up their Oil & Gas sectors to new players and providing greater incentives to try and boost exploration. Figure 41 shows the remaining recoverable resources for South East Asian countries. The collective oil and gas resources are approximately 40bn boe with gas nearly 65% of the total. Indonesia dominates followed by Malaysia and then Thailand and Vietnam. The majority of the resources are located offshore in shallow water. Fig. 41: South East Asia Liquids and Gas Recoverable Resources (bn boe) Source: Rystad Energy Page 29 of 34

30 Without further increases in investment the longer-term outlook for liquids production in particular is negative. This provides an opportunity for smaller players who can technically qualify to access smaller assets that are perhaps too small individually to be of interest to the NOC s and as we shall see the Majors. Fig. 42: ASEAN Oil & Gas Production to 2035 Source: IEA D: Increased supply of assets from the IOC s As a result of lower oil and international gas prices a number of Major Oil Companies have restructured to focus on fewer assets and regions. This has resulted in an increase in the number of assets for sale by the Majors across Asia. Consultancy Wood Mackenzie has estimated that up to US$40bn of assets may be sold by the Majors in Asia, especially smaller and maturing assets that still require significantly capital expenditure. Fig. 43: Mature and mid-life assets held by the Majors in Asia- Pacific region Source: Wood Mackenzie The upstream portfolios of the top 10 International Oil Companies (IOC s) in South East Asia account for US$84bn (or 43%) of the region's remaining present value, according to Wood Mackenzie. Page 30 of 34

31 For the top ten IOCs, their producing projects hold around 8.9bn boe of remaining reserves, with an additional 2.4bn boe held within projects which are under development or pre-fid. Fig. 44: Major Producers Asia-Pacific Assets Source: Wood Mackenzie Page 31 of 34

32 RECOMMENDATION & RISKS INVESTMENT THESIS & RECOMMENDATION Tap Oil is in the process of shifting strategy and focus from its history as predominantly a wild cat Australian focused explorer towards becoming a South East Asian hub and spoke field developer. The drive behind this change is the new management team who are going to try and replicate the success they achieved with a similar strategy at Salamander Energy plc. They are being backed by two significant Asian Groups who have accumulated their current stakes in the company, primarily on market, at significantly higher levels than the current share price. Tap is now close to being debt free and its current producing asset (Manora) not only offers its own near field ( hub and spoke ) potential but also is set to generate significant free cash flow to aid the funding of this new strategy. A potential exit of their legacy Australian portfolio could provide additional capital as well as increasing the focus on the new areas of operation and strategy. The current market valuation seems to subscribe little or no value to the Australian assets and more importantly similarly little to the new management team and potential opportunities they intend to pursue. SIMPLE S.W.O.T. TABLE Strengths Weaknesses Opportunities Threats Source: Hartleys Research New experienced management team Two supportive shareholder groups Debt free and existing production Requires access to further equity capital Competition for new assets Declining current production Upside from the Manora Project Potential sale of Australian portfolio Access to new opportunities in S.E.A. Macro environment Restoration costs Delays in accessing new projects Production and exploration risk at Manora VALUATION We value the remaining 2P reserves at Manora at circa A$64m. Although this is subject to a broad range of recoverable reserves (we assume current 2P is recoverable), production (current economic limit estimated to be circa 3,000bopd (which we assume), although the Company hopes this can be reduced to 2,000bopd through further cost cutting) and oil price assumptions. While the Company is on the verge of paying off the last of its debt, it has disclosed potential restoration costs of circa US$25m (we have included this at a discount to the booked value in our valuation). The final legacy which new management has inherited is a portfolio as of yet uncommercial discoveries located offshore Western Australia. While the development timetable for these assets remains uncertainty, it does represent over 200PJ of resource net to Tap. We value this resource at circa A$28m based on a potential sale or separate listing value for this discovered resource. There is obviously quite a range Page 32 of 34

33 of upside and downside risks around this Australian valuation given the current level of development uncertainty. Fig. 1: Sum of Parts Valuation Share Price Valuation (NAV) A$ m $/share Manora (2P)+Corporate rd Party Gas Sales Australia Current Net Debt + Restoration Costs (26.9) (0.06) Source: Hartleys Research RISKS The key risks for Tap (like most oil & gas exploration companies) is making an economic discovery and obtaining the funding for ongoing exploration. Other risks include delays, key person risk, country/sovereign risk, weather, JV partner obligations, cost inflation. Investing in explorers is very risky given the exploration value of the company in essence assumes that the market will recognise a portion of potential value before the results of an exploration program are known, conscious that the ultimate chance of success is low (typically 1%-20%) and that failure is much more likely, in most cases. Other risks are production and earnings disappointments given the industry is volatile and earnings can disappoint due to cost overruns, project delays, cost inflation, environmental regulations, resource estimate errors and management performance and contract negotiation skills. High financial leverage (if it exists at that time) would add to the problem. Page 33 of 34

34 HARTLEYS CORPORATE DIRECTORY Research Trent Barnett Head of Research Mike Millikan Resources Analyst John Macdonald Resources Analyst Paul Howard Resources Analyst Aiden Bradley Research Analyst Michael Scantlebury Junior Analyst Janine Bell Research Assistant Corporate Finance Dale Bryan Director & Head of Corp Fin. Richard Simpson Director Ben Crossing Director Ben Wale Associate Director Stephen Kite Associate Director Scott Weir Associate Director Scott Stephens Associate Director Rhys Simpson Manager Registered Office Level 6, 141 St Georges TcePostal Address: PerthWA 6000 GPO Box 2777 Australia Perth WA 6001 PH: FX: info@hartleys.com.au Note: personal addresses of company employees are structured in the following manner:firstname.lastname@hartleys.com.au Hartleys Recommendation Categories Buy Accumulate Neutral Reduce / Take profits Sell No Rating Speculative Buy Share price appreciation anticipated. Share price appreciation anticipated but the risk/reward is not as attractive as a Buy. Alternatively, for the share price to rise it may be contingent on the outcome of an uncertain or distant event. Analyst will often indicate a price level at which it may become a Buy. Take no action. Upside & downside risk/reward is evenly balanced. It is anticipated to be unlikely that there will be gains over the investment time horizon but there is a possibility of some price weakness over that period. Significant price depreciation anticipated. No recommendation. Share price could be volatile. While it is anticipated that, on a risk/reward basis, an investment is attractive, there is at least one identifiable risk that has a meaningful possibility of occurring, which, if it did occur, could lead to significant share price reduction. Consequently, the investment is considered high risk. Institutional Sales Carrick Ryan Justin Stewart Simon van den Berg Chris Chong Digby Gilmour Tia Hall Wealth Management Nicola Bond Bradley Booth Adrian Brant Nathan Bray Sven Burrell Simon Casey Tony Chien Tim Cottee David Cross Nicholas Draper John Featherby Ben Fleay James Gatti John Goodlad Andrew Gribble David Hainsworth Neil Inglis Murray Jacob Gavin Lehmann Shane Lehmann Steven Loxley Andrew Macnaughtan Scott Metcalf David Michael Jamie Moullin Chris Munro Michael Munro Ian Parker Matthew Parker Charlie Ransom Mark Sandford David Smyth Greg Soudure Sonya Soudure Dirk Vanderstruyf Samuel Williams Jayme Walsh Disclaimer/Disclosure The author of this publication, Hartleys Limited ABN ( Hartleys ), its Directors and their Associates from time to time may hold shares in the security/securities mentioned in this Research document and therefore may benefit from any increase in the price of those securities. Hartleys and its Advisers may earn brokerage, fees, commissions, other benefits or advantages as a result of a transaction arising from any advice mentioned in publications to clients. Any financial product advice contained in this document is unsolicited general information only. Do not act on this advice without first consulting your investment adviser to determine whether the advice is appropriate for your investment objectives, financial situation and particular needs. Hartleys believes that any information or advice (including any financial product advice) contained in this document is accurate when issued. Hartleys however, does not warrant its accuracy or reliability. Hartleys, its officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. Page 34 of 34