Tag Oil’s Horizontal Really Wants to Flow

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Disclosure: The following represents my opinions only. I am long TAO.V (Image credit to Zbynek Burival on Unsplash)

I don’t do “one off” notes very often, but when it comes to something like Tag Oil (TAO.V, last at $0.45), I know that writing a quick note will save me a lot of phone time, so here you go.

TAO just provided an update on the BED4-T100 horizontal well and a few things caught my eye. The drilling phase of the well has been completed, with a 4-and-a-half-inch liner installed in the hole with the packers assembly, meaning that the well is now behind pipe and ready for completion. As I type this, the rig is in the process of being taken down and moved off the well in preparation for the completion and testing phase, which is welcome news. The other bit of welcome news is that TAO encountered high pressure, free oil flowing to surface, elevated gas readings, and regions of “exceptional porosity and permeability” in the targeted ARF interval. As a safety measure, the horizontal section was kept to a length of one thousand feet — the translation being that the well was trying so hard to flow to surface that drilling further could have risked a blow-out. In layman’s terms, the pressure and deliverability of the well was hard enough to control that TAO risked a “Spindletop moment” — so they cased the horizontal section and are getting ready for well completions and testing in mid-April.

It turns out that the natural fracturing that made the BED4-T100 such a pain in the ass to drill, was both a curse and a blessing. It may have made the well harder to drill, but the reward is that there is a a lot of porosity and permeability there, which is exactly the kind of thing that enhances flow rates.

For me, there’s little to do now but wait for a test result, but this is the kind of news that should get the market into a real speculation cycle. The pressure in the ARF reservoir is substantial (>7,500 PSI) and gas shows encountered along with the oil while drilling could have a positive read through for flow rates — i.e., not only are the reservoir’s physical properties (natural fracturing and high porosity) conducive to “honking” flow potential, but gas coming out of solution could also serve to push oil out of the reservoir and up the wellbore at high rates.

With the drilling operations phase finally behind them, TAO will send the rig away and get ready for additional wells after testing is complete at the BED4-T100 well. Recall that the company believes it has 60-80 locations on the lands already evaluated by RPS Energy, with only 20 wells modelled into anyone’s economics at this stage (with an unrisked NPV of around C$550 million as per the RPS report). When TAO does come back to drilling additional wells, you can be sure they’ll be prepared in light of what they’ve learned here (i.e., in terms of equipment specs and operational procedures — so they won’t bring a knife to a gunfight next time). In the meantime, the market should enjoy speculating on just what this oil well could flow. I’m not going to make a guess on it, but I’m prepared to be pleasantly surprised given the indications provided today. The oil is dying to come out of the ARF and TAO is just about ready to let it do just that — and when it does, the oil will flow into existing facilities and pipes that are ready and able to take the oil… a clear advantage relative to typical exploration plays.

Happy hunting.