Tangiers requests trading halt ahead of TAO-1 exploration well results

Published at Aug 1, 2014, in Energy

Tangiers Petroleum Ltd (ASX: TPT, LON:TPET) has requested its shares be suspended from trading in both London and Australia pending the release of results from its TAO-1 well offshore Morocco.

The trading halt request comes just three days after Tangier’s TAO-1 well intersected its secondary objective – Assaka – and found no significant oil shows.

TAO-1 is widely considered to be a company making well for Tangiers and its progress is being closely watched by the markets. The well spudded on the 26th of June and is targeting three stacked objectives located within a proven hydrocarbon system.

Trading halt for Tangiers

Tangiers says its securities – which are traded on both the London Stock Exchange and the Australian Stock Exchange – will be placed in Trading Halt Session State until Monday the 4th of August 2014 or until it makes an announcement regarding the latest results from the TAO-1 exploration well.

No luck at Assaka

The objective known as Assaka is the shallowest target for the TAO-1 well and Tangiers says it has been intersected. However, no hydrocarbon shows have been detected so far. Tangiers say a full petrophysical evaluation of the Assaka objective will be carried out at the section known as TD.

Drilling operations at TAO-1 are continuing and Tangiers says the focus has shifted to the primary and largest objective known as Trident. The TAO-1 exploration well has been designed to test this larger objective at its optimal location and Tangiers says success at Trident is not co-dependent on the results from Assaka.

A third target called TMA will be drilled depending on the results at Trident/Assaka. In line with the trading halt that’s just been announced, the next well result from TAO-1 is expected to be released by Tangiers on Monday, 4th of August.

Progress of the TAO-1 exploration well

Tangiers says the newly spudded TAO-1 exploration well at its Tarfaya block offshore Morocco is progressing steadily and has no major operational issues. Tangiers says the TAO-1 well has been designated as “tight” so no information related to depth or formations will be publicised during the drilling, beyond normal reporting requirements.

Since intersecting the secondary Assaka objective, the TAO-1 Well is now focused on the objective known as Trident. A third target called TMA will be drilled depending on the results at Trident/Assaka. Tangiers says the dry hole costs will total US$73M, a figure which is in line with its previous estimates, allowing Tangiers to fully cover its 33% share of the costs with current cash on hand.

Tangiers says the Ralph Coffman jack-up rig drilling the TAO-1 well is expected to intersect both the Assaka and Trident objectives within 60 days from spud. Tangiers is targeting 1.6BN barrels of oil at the Tarfaya Block and recent seismic surveys of the area have shown promising results.

The TAO-1 exploration well itself is aiming for a best estimate net resource potential of 190 mmbbl of oil and its success or failure will greatly influence the wider development of the block. Depending on results of the TAO-1 appraisal well, the Block could produce up to100,000 bbls/day of capacity according to Tangiers, with an estimated OPEX of US$8-10/Bbl.

Due to the shallow waters over the Tarfaya Block, if commercial oil is encountered, a floating storage and offloading system could be implemented, with the design benefits of a central production platform, FSO vessel and shuttle tankers to move the product to markets.

TPT’s Managing Director, Dave Wall, says the spud of the TAO-1 Well is a large milestone for the company which has been preparing the programme for five years.

“The company would like to thank shareholders for their continued support and appreciates that many have been involved since that time,” he says. “We believe that we have one of the best exploration prospects to be drilled by a junior explorer in recent times and look forward to sharing the results of the drilling program in the near future.”

Tangiers plan for Morocco

Tangiers holds a 25% stake in the Tarfaya Block with Galp Energia holding 50% and Morocco’s National Office of Hydrocarbons and Mines (ONHYM) owning the remaining 25%. Tangiers is working with energy operator Galp in a farm-out, and the operator will be covering US$33M of the company’s costs under the deal.

The TAO-1 well within the block is situated in an area offshore Morocco with a proven petroleum system and sits next to Cairn Energy’s Cap Juby heavy oil discovery. That well hit oil flowing at around 2,400 bbl/day, however as heavy oil is more difficult to extract and transport, the Cap Juby discovery was less commercially appealing.

Other nearby areas, such as the Foum Assaka well, also have had good oil shows. Both Foum Draa-1 and the Juby Maritime field are both showing working petroleum systems.

All of these wells, including Tangier’s TAO-1, are located on the Jurassic carbonate fairway in offshore Morocco, an ancient geological formation that is geologically linked to oil fields as far away as Canada. The area under Tangier’s control is proven to have oil potential, as previous tests of the area have shown overlying Cretaceous sediment and an absence of salt in the area, meaning it’s unlikely the drill results will produce heavy oil.

Based on extensive geological research, Tangiers believes the area the TAO-1 well is targeting within the Tarfaya Block is part of the same trend as Cap Juby but could have large concentrations of lighter crude which can support a commercial well.

In 2009, before offshore Morocco became attractive to other oil companies who have since bought into acreage there, Tangiers acquired the Tarfaya Offshore Block and began reprocessing old 2D seismic data. It also began shooting and processing 680km2 of new 3D seismic surveying which firmed up drilling targets and added value to the license, paving the way for the TAO-1 exploration well that is hoped will confirm the block’s potential.

During Tangier’s period of seismic acquisition and analysis, four large Jurassic carbonate prospects were discovered and all have been determined as structural four-way dip closures. Any success at TAO-1 will push Tangiers and its project partners to widen their exploration programme.

New funds for Tangiers

Tangiers says it has raised enough funds to cover its forthcoming drilling operations in Morocco and, along with its existing cash reserves, will have enough money for the project.

Tangiers raised AUS$4M by placing 25M shares on the ASX for 16c a share. In May the company also raised an additional $5M though another share placement, also at 16c a share.

Tangiers has also received a US$3M bank guarantee from its Moroccan government project partner ONHYM. This cash, along with US$7.5M in back costs that was owed to Tangiers from Galp as per the two companies’ farm-in deal in December 2012, means Tangiers has significant cash reserves and can cover its share of costs for any drilling.

With favourable weather conditions in the area and a shallow drilling depth, Tangiers says TAO-1 is unlikely to run over schedule, but if it does it has financial headroom for any cost overruns.

Analysts and investors buzzing about Tangiers

The spud of TAO-1 is being seen as a potentially company-making development for Tangiers and a number of market analysts are predicting gains for the company if the drilling is a success.

Australian stockbrokers Foster Stockbroking published a report estimating a price target of $0.70 AUD / 38p prior to spud results. Foster says its prediction is influenced by the fact the TAO-1 well shows a presence of proven petroleum systems, revealed during the Cap Juby discovery, and it’s the only area in the region with a proven play type. Foster says internal analysis carried out by the company also shows heavy oil isn’t expected in Tarafaya.

But Fosters tempers its analysis by saying its valuations of Tangiers and its prospects are arbitrary until a result from TAO-1 is known. Fosters says success or failure for Tangier’s will bring a binary result – striking oil could see the value increase by multiples whilst finding nothing could result in a share price close to cash backing.

London-based analyst RFC Ambrian published a report along similar lines and added that the Moroccan fiscal regime is ‘one of the most favourable in the world’. It believes that for a 400 MMbbl oil field development, the NAV/bbl is US$20/bbl, making it twice as high as the valuation given to most oil discoveries today. RFC also points out that Tangiers’ main targets are located in shallow water, making its potential developments a lot cheaper than discoveries from other oil firms in deeper waters. RFC published a target price for Tangiers of $0.87 AUD / 48.2p, higher than Fosters evaluation.

But RFC balances these views with a warning about the ‘high-risk’ nature of investing in an oil explorer like Tangiers. The main potential downside RFC highlights is the risk of cost over runs on the TAO-1 well. It says Tangiers is ‘on the hook’ for 33% of the well’s cost – and if it came at $90M then RFC estimates most of Tangier’s cash reserves will be used up paying the bill.

Finally, international analysts Edison has also released a report on Tangiers describing it as a ‘very high impact’ company that it expects will make money in the mid to long-term. Edison’s opinion on a fair price for TANGIERS was $0.70 AUD / 39p, prior to well results. However, Edison also notes that Tangiers is a single asset company and that a failure in the drilling of TAO-1 would mean a ‘very significant downside to the shares.’

Edison estimates the budget Tangiers has put aside for the TAO-1 well to be generous because petroleum company Foum Draa took 57 days to drill 1,000m deeper than TAO-1’s target, and TAO-1 has been given 50 days for this small job in comparison.

What’s next for Tangiers

The TAO-1 exploration has already intersected its shallowest and secondary objective Assaka and drilling is now targeted at the main objective Trident. Tangiers is expected to announce more well results from TAO-1 on Monday the 4th of August when it’s also expected to come out of its requested trading halt in Australia and London.

Once the Assaka and Trident drilling targets have been explored, Tangiers and their joint venture partners will decide whether to deepen the well to the TMA objective.

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