Tangiers Petroleum - Farmouts done, Share price down


Tangiers Petroleum (LSE:TPET) has been in for a rough few weeks following the completion of its farmouts in Australia and North Africa. Its share price has fallen sharply from ~30p to a current price of 20.25p predominantly led by transferred selling pressure on its Australian listed stock. The blog last reviewed Tangiers in October when the share price was 22.88p with an initial short-term target of 30p equating to around 32% profit. This was fulfilled, but the sharp drop that followed looks to have opened up another potentially decent buying opportunity with a current market capitalisation of £24.82m.

This article is a follow-on from the below post. For full context and information, read this article first:

It would appear that recently Tangiers completed a double bottom at under 20p/share with the matching bottom achieved near the start of October. The share is currently not in a prevailing downward channel, and has bounced sharply on Friday afternoon to a close of 20.25p having marked the bottom earlier in the day at  18.88p. Consequently, the 5% rise may help boost the prospect of a successful double bottom as opposed to a false one where the low is retested and broken through. The previous rise up to 30p proves the validity of the uptrend and that there is underlying buying pressure albeit this has eased off recently. Should lows be broken through, the downward resistance would turn to lowering support although I believe this is an unlikely scenario.

Update - January 2013: TPET has completed its double bottom formation with a top at 26.25p/share equating to yet another strong gain totalling ~30% following the review. Well done to anyone who traded TPET successfully.

Since the last review in October, Tangiers has released the following news. In late October the company released its Quarterly Operating Report which updated investors on all the company's activities. This included that Moroccan 3D seismic would be completed for late November and that farmout activities were progressing and were expected to be completed before the end of 2012, noting 'substantial interest'. In addition, the farmout of its Australian assets had begun. As at the end of October Tangiers had respective 75% and 90% interests in these assets.

Having relinquished an immaterial block (in comparison to the overall portfolio) in Queensland, Tangiers released news regarding the two farmouts on December 3.

The farmout of the Western Australian & Northern Territory (90% WI) acreage was to CWH.
'Under the terms of the Heads of Agreement, CWH will fund AUD $35 million in exploration activities to earn a 70 per cent interest in blocks WA-442-P and NT/P81, located in the southern Bonaparte Basin, 250 km south-west of Darwin. As part of the agreement Tangiers will maintain a significant 27 per cent interest in the Joint Venture and Ansbachall, which is a joint venture partner in the permits, will hold a 3 per cent interest. Under the agreement, CWH will assume the operatorship of the permits. The offer is subject to execution of a fully-termed agreement, due diligence and any necessary government approvals.'
courtesy of freedigitalphotos.net

The terms of the agreement seem rather harsh from Tangiers perspective. Effectively losing 63% of the working interest for ~£23m seems steep as it only values the license at £36.5m despite it containing multiple TCF and multiple million barrels of oil potential.

Tangiers farmed out its Moroccan acreage to a well known multi-national in the form of Galp Energia. In the deal, Tangiers would surrender 45% of its interests, retaining 25%.

Under the terms of this agreement, Galp Energia will expend US$41 million [£25.51m] which will include up to US$7.5 [£4.67m) million in back costs reimbursable to Tangiers and the cost of an exploration well, limited by a cap, to be drilled within the Tarfaya Offshore area. This will fulfil the work program commitment for the First Extension Period for the Tarfaya Offshore block.

The deal will significantly boost Tangiers' balance sheet thus bodes well for the company going forward as Tangiers will not have to pay for its share of the first exploration well, making it almost risk-free. Exploration wells will likely cost between $25m-$35m thus taking a mid interest of 26% gives an average cost per well of just $7.8m. In addition, this cost will only be incurred once the expenditure of the partners is completed thus Tangiers will enjoy several free wells before incurring any drilling costs. Considering the prospects being drilled, this may leave Tangiers' share price at a much higher level (assuming success) which would be more suited to raising money via placings. Tangiers is also likely to be prone to a rising share price on the back of speculation once the drills begin. The flip side is that failure will not hurt Tangiers as much as before due to no money being spent by the company itself. Consequently, the risk-reward profile for the next drills in both locations looks good. The Trident prospect alone (in Morocco) has a primary target of 450 mmbbl with a COS of 21% as it stands. Another prospect is named Nova (in Australia) which has a mean unrisked resource estimated of 3.46TCF.

Ultimately, the market's reaction to the farmout deals seems rather short-sighted despite Tangiers giving away significant percentages of its asset. Through this the company has ensure that it will be fully funded throughout 2013 and most of 2014 when the Moroccan back-costs are paid. The only eventuality that would invalidate this is if the company does pursue onshore/shallow water interest acquisitions. This would lead to fund-raising further along the pipeline.

As per my last article I noted how Tangiers was a high risk, potentially very high reward exploration play. In light of the developments it would be fair to adjust this to medium risk, potentially very high reward, with lower expenditure/working interests and having a world class operator like Galp reducing the risk inherent with Tangiers' forward work plans. Should the double-bottom hold the short-term outlook is favourable although note that the chart pattern is not replicated on the ASX stock. Moving forward the company also hopes to farm out another block in Australia entitled NT/P83, and drill three wells with its respective partners. Tangiers is now a medium-long term prospect (with the work plan to be completed within 18 months) that retains an attractive exploration portfolio.