Disclosure: The following represents my opinions only. I am long TAO.V (Image credit to NASA)
In outer space, a star is born when a giant cloud of gas and dust collapses under its own gravity. Eventually enough matter, heat, and pressure builds up in the centre of a collapsing disc that hydrogen fusion begins, after which the newly-born star blows away the remaining dust, perhaps to become a point of light in someone’s night sky. If you think about it, that’s not totally unlike the process of a micro/small cap company making the transition from the market fringe to the mainstream. Once in a while, years of relationships, data, persistence, and a touch of serendipity coalesce to make a new story worthy of broader market attention; and I think that’s what I’m witnessing today with Tag Oil’s (TAO.V, last at $0.75) update from its first frack within the Abu Roash F (ARF) formation in Egypt’s Western Desert.
TAO’s proof-of-concept BED 1-7 well has delivered a choked-back stabilized production rate of 140 bopd, a rate which the company’s engineers believe will allow for maximum oil recovery under optimal flowing conditions (at 140 bopd there is a significant fluid column above the ESP). To be clear, TAO could’ve pulled harder on this well if they wanted to, but the BED 1-7 well test is about getting real flow data that can actually be extrapolated to the upcoming horizontal well. The fact that the well is stable at 140 bopd after a month of production suggests that the ARF is indeed acting like its American cousin; the venerable Eagle Ford shale. That is some good company. The Eagle Ford is one of the most profitable oil plays in North America and remains the focus of many of the leading companies in the industry. Heck, even Berkshire’s Charlie Munger grudgingly appreciates the economics of the Eagle Ford. For reference, if you did a single vertical frack in the oil-prone region of the Eagle Ford shale, you might expect an initial production rate similar to what TAO just reported today (in Canada’s Montney, you might get 50-100 bopd). In other words, the test rate reported today from the single frack at the BED 1-7 well is more than enough to extrapolate some eye-catching flow rates in the 15-20 stage horizontal well that will soon follow — which is exactly why I’m willing to bet that TAO will shine even brighter in the months and years ahead.