TAP Oil (TAP) did not capitalise on this year’s record oil prices due to production disruptions at their key operations. The disruptions look set to continue through to at least the end of the year. This has contributed to a breakdown in the charts and the possibility of a protracted deterioration in the company’s stock price.

TAP’s balance sheet remains in good health and there is the potential for exploration success to re-invigorate the share price. However, we believe the company’s risk reward profile is no longer favourable and recommend Members sell TAP, switching the proceeds to Australian Worldwide Exploration (AWE).

Tap Oil

Tap’s revenue for the six months to 30 June 2008 fell 41% in comparison to the same period last year. The top line weakness translated into a loss of $1.3 million for the period, compared to a loss of $0.40 million in 2007. However, the loss would have been far greater had it not been for a tax benefit of $7.3 million.

As Members may recall, the Varanus Island gas explosion shut down production at the Harriet joint venture in early June. Tap hold a 12.2% interest in the project and expectations are for production to resume in December 2008.

Given that the incident occurred in June, Varanus Island cannot shoulder the blame for the company’s weak first half performance though. As shown on the table below, Western Australia’s Woollybutt project was responsible for the majority of Tap’s production shortfall in comparison to the same period last year.

Operations at Woollybutt were suspended in January due to problems associated to the emergency shutdown equipment. Cyclone activity in the area served to prolong the initial shutdown, leaving Woollybutt offline for much of the first half. In fact, production did not resume until June.

The development of Woollybutt South has resulted in the field’s production resuming at around 12,000 barrels per day. This represents growth of 50% in comparison to pre-shutdown production.

Nevertheless, there has been a sharp deterioration in the charting outlook for TAP in recent months. As shown on the chart below, since reaching a high of $2.21 in May, prices have more than halved. Tap is now trading below $1 for the first time since 2001.

As marked on the daily chart, rally attempts are likely to struggle with substantial resistance at $1.40. With a base yet to form, we cannot rule out a deeper decline in the months ahead.

Australian Worldwide Exploration



As we discussed in FAT387, Australian Worldwide Exploration (AWE) benefited from oil’s price strength through the continued outperformance of their Tui project, offshore New Zealand.

Tui is set to enter natural decline next year though and AWE is reliant on exploration success in order to drive production growth. On this front, the completion of the ARC Energy acquisition last month has served to boost AWE’s exploration prospects.

Given that both companies share low-risk production assets in Australia and New Zealand, ARC Energy’s assets are a good fit with AWE. The deal therefore enhances AWE’s scale and competitiveness through additional production and exploration tenements.

Specifically, AWE now holds a larger share (and control) of the Cliff Head oil project offshore Western Australia. This is in addition to a combined 42.5% stake in the BassGass natural gas project, offshore Victoria.

AWE has also gained access to mature production in Western Australia’s Perth Basin, as well as additional exploration tenements in Yemen and Texas. Meanwhile, proven and probable reserves have increased to 78 million barrels of oil equivalent (boe), compared to AWE’s previous 61 million boe.

From a charting perspective, the longer-term upward trend in AWE remains intact despite the recent correction. As marked on the daily chart, prices remain above support at $2.77, indicated by the major lows throughout 2007 and 2008. While above this level, we favour an eventual revival in upward momentum.