To debt, or not to debt, that is the question

Will Harmon of Simply Wall Street recently wrote an article on TAG Oil titled “Is TAG Oil Ltd (TSX:TAO) As Financially Strong As Zero-Debt On Its Balance Sheet Indicates?”

The article focuses on how, up until now, TAG Oil has kept its balance sheet free of any debt.  Harmon, a stock market veteran, describes some of the positives and negatives of having zero debt:

  1. On the one hand, he feels that adding debt to our capital structure at low interest rates would improve capital returns and receive higher valuations.
  2. On the other hand, he goes on to write that rate hikes are imminent—and higher interest rates means higher cost of the debt.  

Having no debt has helped TAG remain in a stronger cash position than other debt holding companies, especially during down cycles of oil prices.  During the past two years, we have seen several companies in financial strain trying to pay the debt they have accumulated, with some having to shut their doors (or should we say, wells). TAG Oil’s short-term obligations indicate we have sound liquidity with our liquid assets far exceeding those obligations.

The article does voice a concern, which is if TAG is growing fast enough to value financial flexibility over adding debt. Harmon feels that at our market cap, yes, TAG is right to choose financial flexibility. But when calculating our revenue growth over the past 12 months he changes his tune. 

As a company, although we have chosen up until now to remain debt free, we are not philosophically debt adverse.  We simply haven’t felt that it was the right time to add debt to our balance sheet.  If at some point, we do decide to add debt, it will be once our reserves are larger.  Having zero debt through this down cycle has allowed TAG to strategically build reserves through several appealing acquisitions, with high-value exploration acreage and production permits in proven discovery trends.

To read the full article click here.