Following the CY2020 exploration program newsflow, I have been running some broad-based back of the envelope numbers to understand what we could be looking in terms of the the "equity realisation" associated with selling down interests in our producing assets and exploration targets.
Management released this plan a few weeks ago now, which was unexpected (for me) in terms of selling down a proportion our producing assets and exploration targets. Managements justification is now that the NGP has connected Central to the East Coast gas market, it has been derisked the assets, resulting in an uplift in the equity value that is not reflected by the market in our shareprice. I think we all tend to agree on this.
In advance, I've been running some numbers I have been running some numbers on what we can & may expect:
- We are to maintain operatorship : This is a given as stated by management. No indication of % to be sold down have been provided and assumptions have had to be made below. - Farmdown all producing assets : I believe this is also a given since we want to fully funded for Mereenie Stairway re-appraisal, Palm Valley Deep and Dingo prospects:
Mereenie assets : I expect MQ will also be keen to sell down to release value and this would be more attractive for any farmin partner as they can obtain greater exposure; it wouldn't really be worth their time if we were to farm down only 30% of our 50% to them...however if it could also get 30% of MQ's 50%, the split would be a more attractive 35/35/30 with Central remaining operator.
PV and Dingo assets & Mamlambo : We currently own 100% and I expect we could comfortably farmdown 30%- 35% to release value.
- Price achieved per 2P for Mereenie of $2 GJ. This could be considered high, however, 1P reserves total 71 PJ of the 81 PJ of 2P reserves and would command a higher value. - Price achieved per 2P for PV and Dingo of $1.50 GJ, to reflect lower 1P reserves proportion and Dingo being majorly contracted for take-or-pay arrangements at lower ex-field values. - Price achieved for remaining 2C resource of $0.5 GJ for Mereenie, PV and Dingo.
Using these metrics, it looks like the following:
In total, Central would sell down ~32% of reserves and receive $98m in cash giving implied total value to our producing fields of $306m. This compares to Centrals current Enterprise Value of c$220m ($130m equity and $90m net debt). I have included our prepaid gas and take-or-pay commitments in the net debt figure.
It shows we could make a pro-rata debt repayment of $25m (i.e 32% of our $75m gross bank debt at Jun-20) and retain c$70m cash for funding Range and other QLD CSG permits in the pipeline.
It worth while to sell down on this basis? Probably not in my opinion. We will lose leverage to fund corporate overhead and also some of our prepaid gas agreements, such as MQ and take-or-pay. These would need careful consideration IMO.
However, there is the added kicker of the CY2020 exploration program:
On the basis of a $51m drilling program, we would be carried for an equity value of c$34m. Note, I have allocated some costs to the target areas but given they're broadly similar %, it wouldn't make much difference on how the costs are allocated.
Of course, we just don't want a $34m equity carry on the prospects, we want hydrocarbons. On a risked basis, we are still looking at 135 PJ of gas and 6 mmbls oil net to Central. On a mean recoverable basis, we would be looking at 366 PJ of gas and 19mmbls of oil.....take these with a grain of salt but these are exciting prospects none the less given their potential.
Overall, I think it's a good strategy employed by management: 1. We would release equity value which would be in excess of our market cap for minority interests - hopefully translate to our shareprice. 2. We would drill some exciting targets that we couldn't otherwise drill ourselves. 3. Mereenie and PV West are appraisals and therefore relatively lower risk - these would go some way to replacing our farmed down producing interests. 4 The cash consideration would provide us the ability to make a pro-rated debt payment and put us in a comfortable position to fund Range and hopefully other QLD CSG tenements we are in the mix for. 5. If successful, the transaction itself would be great marketing for Central shareholders. it would provide an accurate look-through value of Mereenie, PV and Dingo that the market can interpret easily.
In summary, Central could release $98m + $34m = $132m in value (basically Central's current market capitalisation or over half Central's EV) with a good chance of producing the same amount of gas at the end of CY2020 from the appraisal targets with the kicker of some meaty wild-cat prospects. It would also leave Central with significant net cash to pursue development of QLD CSG. Sounds good to me.
Interested in comments. Especially on perceived metrics used such as $/GJ and % of interest farmed down. I may be off piste here, but I don't think the numbers would make sense for any less? To me, the numbers don't seem silly compared to the original purchases in 2014 of Magellan's ($35m) and 2015 Santos' Mereenie ($125m to $145m by originally structuring as purchase of 50% + free carry program + bonus NEGI payments). I.e. $160m to $180m in total and we now 5 years down the road and connected the NGP when that was not guaranteed at the time of acquisition.
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