International Energy

TAG Oil Ltd. (TAO-V, $6.62)

Recommendation: Speculative Buy
Kevin Shaw, P.Eng. (403) 781-2715; kshaw@wwcm.com
Ronald Cheung, CFA (403) 781-2718; rcheung@wwcm.com
December 15, 2010

All values in C$ unless otherwise noted.

Current Price $6.62 Acquired Stake in Offshore Permit in Main
Target Price (12-Month)
Implied Capital Gain
$9.50
44%
Taranaki Fairway Adds Exploration Upside
Changes
Old New  20% W.I. of Kaheru prospect in offshore Taranaki is strategic to TAG
Production (boe/d) F ‘11E 758 Unch. Gross prospective resource is ~350 bcf gas w/ 10 mmbbl condensate; 8 km
CFPS FD FY 2011E $0.09 Unch. from shore & close proximity to existing infrastructure for easy tie-ins.
Production (boe/d) F ‘12E 2,008 Unch.
CFPS FD FY 2012E $0.37 Unch.  Test result of the 1st htzl well in New Zealand coming in January ’11
Recommendation Spec. Unch. Testing & clean-up flow continues as oil, gas & frac fluids are recovered
Buy from the hztl; we look for an initial rate of 500+ boe/d & a high oil cut.
Target Price $9.50 Unch.
Company Profile  Driving forward in ’11 at Taranaki and high impact East Coast basins
TAG Oil Ltd. (TAO) is an emerging Financed for ‘11 to drill multiple wells on Cheal & Broadside permits (new
international exploration and production drilling to resume in February); E. Coast exploration wells also planned.
company operating in New Zealand’s East
Coast and Taranaki basins. The company has  Offshore potential adds $2.10 unrisked or $0.21 risked to our EMV/sh
three permits in the East Coast basin (~14 Spec Buy with a $9.50 target; conservative risked EMV/sh of ~$12 w/
billion bbls OOIP) and two permits in the steady drilling & catalysts from Taranaki and high impact E. Coast in 2011.
Taranaki basin (~100 million boe OOIP).
TAG is currently producing ~570 boe/d from
the Cheal initial discovery / pool in the
Taranaki basin with 2P reserves of 0.7
million boe, although we expect significant
resource upside in these two areas.

Price Chart Financial Summary

Shares FY 2011 O/S (mm, FD TSM) 52.1 52-Week Trading Range $1.53-$6.90
Price (C$) Volume ('000s) Market Capitalization (C$mm) $345 Average Weekly Volume 881,723
8.00
.
1,400,000
Net Debt (C$mm) (81) Market Float (mm) $255
Enterprise Value (C$mm) $264 Risked EMV/Share $12.15
7.00 1,200,000 Forecasts FY 2009* FY 2010* FY 2011E* FY 2012E*
Production (boe/d) 135 201 758 2,008
6.00
1,000,000 % gas 0% 0% 36% 41%
Modeled WTI Oil Price (US$/bbl) $61.56 $70.38 $80.74 $83.75
5.00
800,000 Modeled US$/CAD$ Exchange Rate $0.88 $0.99 $0.95 $0.95
4.00 Realized Oil Price (C$/boe) $44.14 $82.64 $60.38 $56.35
600,000 Revenues (C$mm) $4.9 $6.5 $15.9 $41.9
3.00 Cashflow (C$mm) $2.0 $0.3 $4.8 $19.5
400,000 DACF (C$mm) $2.0 $0.3 $4.8 $19.5
2.00
Capex (C$mm) $2.5 $2.3 $19.5 $56.4
1.00 200,000 EPS (FD TSM) ($1.05) ($0.08) $0.03 $0.24
CFPS (FD TSM) $0.11 $0.01 $0.09 $0.37
0.00 0 Valuation 2011E 2012E
Dec‐09

Feb‐10

Apr‐10

Jun‐10

Aug‐10

Oct‐10

Dec‐10

EV/DACF 58.4x 16.1x

EV/BOE/d (per unit production) $367,371 $156,985
Source: Thomson One P/E 206.2x 27.3x
Target EV/DACF 89.8x 23.8x
* Fiscal year ends on March 31 of each year
Source: Company Reports, Wellington West Capital Markets Inc.
Please see disclaimers on the last two pages of this report.
TAG Oil Ltd.

Investment Summary and Outlook

TAG Oil (TAG) is a “pure play” New Zealand-based exploration and
production company positioned to exploit over 2 million prospective acres &
14+ billion barrels of original oil in place (OOIP), offering both high impact
exploration and lower risk development upside. TAG offers a mix of risk and
reward opportunities across a combination of large oil-in-place conventional
reservoirs and emerging unconventional resource plays. The Taranaki basin in
North New Zealand is a mature proven-producing basin yet remains highly
underexplored as compared to other mature basins around the world like those
found in North America. The lower risk Taranaki basin offers significant growth
potential across two acreage blocks (or permits) that hold an estimated 100
million bbl OOIP and are 100% owned by TAG. The company’s fiscal 2012
(ends March 31, 2012) focus is to delineate reserves and boost corporate oil
production. The East Coast basin offers “game changing” upside for TAG
throughout the prove-up and commerciality of multiple oil shale zones that have
similar technical characteristics to both the North Dakota Bakken & emerging
Paris Basin Liassic resource plays. Both the Taranaki and East Coast basins are
prime candidates for application of North American based multi-stage frac
technology. TAG has also recently acquired an initial liquids-rich gas discovery
and has entered the offshore space both within the proven-producing Taranaki
basin. Being fully financed for 2011, TAG is expected to drive forward its
development and exploration programs with steady drilling planned at both the
Taranaki and East Coast basins in the coming year.

Taranaki Offshore Basin – Macro Picture

Untapped Exploration Potential with Multiple Prospects
While most current producing fields are located onshore, the offshore basin
accounts for more than two-thirds of the potentially recoverable petroleum
reserves in New Zealand. The Taranaki Basin houses all of New Zealand ~20
producing oil and gas fields that range in size from approximately 10 mmboe up
to 3.4 tcf of original gas reserves. The giant offshore Maui gas-condensate field
that has been a mainstay since the early 1980’s and currently accounting for more
than 75% of the hydrocarbon production in country. The Maui field is now in
decline mode and is expected to only be partially replaced by the offshore
Pohokura and Kupe fields, which are likely to come into production over the next
few years.

Kevin Shaw, P.Eng, (403)781-2715; kshaw@wwcm.com December 15, 2010- 2

Ronald Cheung, CFA (403) 781-2718; rcheung@wwcm.com
TAG Oil Ltd.

Exhibit 1: New Zealand’s Offshore Portion of Taranaki Basin

Source: 2010 New Zealand Petroleum Basin Report

Taranaki Offshore Basin – Acquisition Potential

Acquires 20% Interest in Prospective Exploration Permit Along Fairway
The Kaheru Prospect is the primary structure and target with mean
prospective resources estimated to be ~350 bcf of gas and 10 mmbbl of
associated condensate immediately adjacent to Origin Energy’s Rimu-Kauri
fields. The prospect lies beside two of the most recently discovered producing
oil and gas fields, Rimu (32 bcf and 2.5 mmbls recoverable) and Kauri (1.3
mmbls recoverable), and is a sub-thrust anticline south of an extensive onshore
hydrocarbon trend and immediately to the south of the proven Tarata Thrust
trend and to the east of the Kupe Field (288 bcf and 27mmboe in recoverables).
The acreage is also covered by both 2D and 3D seismic, is in shallow water

Kevin Shaw, P.Eng, (403)781-2715; kshaw@wwcm.com December 15, 2010- 3

Ronald Cheung, CFA (403) 781-2718; rcheung@wwcm.com
TAG Oil Ltd.

(drilling depth of 20-30 meters) and is operated by Roc Oil, a well-proven off-
shore operator with extensive experience, (i.e. active in New Zealand, UK,
Africa, etc.) which in our view adds to the attractiveness of the prospect for
TAG.
TAG and company partners are likely to spud the first off-shore tests
between 2011 and May of 2013 at a cost of ~ $6mm net to TAG. The
company will also participate in the processing of 3D seismic data at a net cost of
~$225k over the first two years.

Exhibit 2: Kaheru Prospect - In Close Proximity to Existing Offshore Fields

Maui Rimu/
Kauri

Kaheru
Kupe
Prospect

Source: Company Report, Wellington West Capital Markets Inc.

Valuation and Summary Recommendation

We maintain a $9.50 target price and a Speculative Buy rating. Given TAG
is an early-stage exploration and development company and is just starting to
become active with initial drilling & frac operations after a recent equity
financing, we focus our valuation on the company’s exploration upside shown by
our net risked EMV/sh of ~$12.15. Our EMV/sh is driven by a risked
recoverable resource potential of up to ~57 mmboe vs. unrisked of ~526 mmboe
recoverable. The Kaheru offshore potential is an early stage exploration play yet
provides another great call option on the company. We conservatively estimate
that the acquisition adds a risked $0.21 to our EMV/sh with a 10% COS (i.e. the
unrisked potential for the Kaheru prospect is ~$2.10/sh). In 2011, TAG has a

Kevin Shaw, P.Eng, (403)781-2715; kshaw@wwcm.com December 15, 2010- 4

Ronald Cheung, CFA (403) 781-2718; rcheung@wwcm.com
TAG Oil Ltd.

number of development and exploration activities which include horizontal and

vertical drilling on the Cheal and Broadside permits and launching the
company’s East Coast program with an estimated 5 exploration wells focused
initially on shallow conventional oil targets.

Exhibit 3: WCM Risked EMV/sh Valuation Breakdown – Including Exploration & Development Upside
for Both Taranaki (now Onshore & Offshore) and East Coast Basins
WWCM Unrisked Working WWCM Risked
COS Net Risked
Prospect/Field Resource Interest Resource
(%) EMV/sh
(Gross, mmboe) (%) (Net, mmboe)
East Coast Basin
Conventional 87.0 100% 10% 8.7 $1.99
Waipawa Oil Shale 175.0 100% 10% 17.5 $2.67
Whangai Oil Shale 175.0 100% 10% 17.5 $2.67
Taranaki Basin
Cheal - Mt. Messenger 7.0 100% 65% 4.6 $1.29
Cheal - Urenui 5.0 100% 35% 1.8 $0.46
Broadside - Mt. Messenger 7.0 100% 65% 4.6 $1.24
Broadside - Urenui 2.0 100% 35% 0.7 $0.08
Kaheru 68.3 20% 10% 1.4 $0.21
Cash (Net debt) $1.55
Total 526.3 56.6 $12.15
Source: Company Reports, Wellington West Capital Markets Inc.

Exhibit 4: Summary Valuation Table

Valuation Matrix Forecast Target Multiple Value Weighting Weighted Value

Core 2P NPV10 $ 2.11 1.0 $ 2.11 10% $ 0.21
Asset EMV/share $ 12.15 1.0 $ 12.15 75% $9.11
2011E DACF (Fiscal Yr. 2012) $ 0.37 5.0 $ 1.87 15% $ 0.28
12-month derived target price $ 9.60
Source: Wellington West Capital Markets Inc.

Kevin Shaw, P.Eng, (403)781-2715; kshaw@wwcm.com December 15, 2010- 5

Ronald Cheung, CFA (403) 781-2718; rcheung@wwcm.com
TAG Oil Ltd.

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Kevin Shaw, P.Eng, (403)781-2715; kshaw@wwcm.com December 15, 2010- 6

Ronald Cheung, CFA (403) 781-2718; rcheung@wwcm.com
TAG Oil Ltd.

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Company Name Ticker Symbol Applicable Disclosure

TAG Oil Ltd. TAO-V 1,2

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Kevin Shaw, P.Eng, (403)781-2715; kshaw@wwcm.com December 15, 2010- 7

Ronald Cheung, CFA (403) 781-2718; rcheung@wwcm.com